jmp_10q-033113.htm
 
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 March 31, 2013 OR
   
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from       to       
 
Commission File Number: 001-33448 
 
JMP Group Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
  
20-1450327
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
 
600 Montgomery Street, Suite 1100, San Francisco, California 94111
(Address of principal executive offices)
 
Registrant’s telephone number: (415) 835-8900
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
 
Accelerated filer
 
x
       
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨   No  x
 
The number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding as of April 30, 2013 was 22,536,109. 
 
 
 
 
 
 TABLE OF CONTENTS
 
 
 
 
Page
PART I.
  
FINANCIAL INFORMATION
4
     
Item 1.
  
Financial Statements - JMP Group Inc.
4
   
Consolidated Statements of Financial Condition - March 31, 2013 and December 31, 2012 (Unaudited)
5
   
Consolidated Statements of Operations - For the Three months Ended March 31, 2013 and 2012 (Unaudited)
6
   
Consolidated Statements of Comprehensive Income - For the Three months Ended March 31, 2013 and 2012 (Unaudited)
7
   
Consolidated Statement of Changes in Equity - For the Three months Ended March 31, 2013 (Unaudited)
7
   
Consolidated Statements of Cash Flows - For the Three months Ended March 31, 2013 and 2012 (Unaudited)
8
   
Notes to Consolidated Financial Statements (Unaudited)
10
Item 2.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3.
  
Quantitative and Qualitative Disclosures About Market Risk
52
Item 4.
  
Controls and Procedures
53
     
PART II.
  
OTHER INFORMATION
53
     
Item 1.
  
Legal Proceedings
53
Item 1A.
  
Risk Factors
53
Item 2.
  
Unregistered Sales of Equity Securities and Use of Proceeds
54
Item 3.
  
Defaults Upon Senior Securities
54
Item 4.
  
Mine Safety Disclosures
54
Item 5.
  
Other Information
54
Item 6.
  
Exhibits
54
   
SIGNATURES
55
   
EXHIBIT INDEX
56
 
 
- 2 -
 
 
AVAILABLE INFORMATION
 
JMP Group Inc. is required to file current, annual and quarterly reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with the Securities and Exchange Commission (the "SEC"). You may read and copy any document JMP Group Inc. files with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at http://www.sec.gov, from which interested persons can electronically access JMP Group Inc.’s SEC filings.
 
JMP Group Inc. provides its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large stockholders, and any amendments to those documents filed or furnished pursuant to the Exchange Act free of charge on the Investor Relations section of its website located at http://www.jmpg.com. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
 
JMP Group Inc. also makes available, in the Investor Relations section of its website and will provide print copies to stockholders upon request, (i) its corporate governance guidelines, (ii) its code of business conduct and ethics, and (iii) the charters of the audit, compensation, and corporate governance and nominating committees of its board of directors. These documents, as well as the information on the website of JMP Group Inc., are not intended to be part of this quarterly report.
 
 
- 3 -
 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1.      Financial Statements
 
 JMP Group Inc.
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except per share data)
 
   
March 31, 2013
    
December 31, 2012
  
             
Assets
            
Cash and cash equivalents
   $ 41,451     $ 67,075  
Restricted cash and deposits (includes cash on deposit with clearing broker of $150 at both March 31, 2013 and December 31, 2012)
     69,125       69,813  
Receivable from clearing broker
     1,270       1,117  
Investment banking fees receivable, net of allowance for doubtful accounts of zero at March 31, 2013 and December 31, 2012
     9,660       5,148  
Marketable securities owned, at fair value
     17,829       14,347  
Incentive fee receivable
     4,059       2,945  
Other investments (of which $119,559 and $80,945 are recorded at fair value at March 31, 2013 and December 31, 2012, respectively)
     119,858       81,161  
Loans held for sale
     2,528       3,134  
Small business loans
     40,375       38,934  
Loans collateralizing asset-backed securities issued, net of allowance for loan losses
     404,319       401,003  
Interest receivable
     1,387       1,229  
Fixed assets, net
     2,542       2,663  
Deferred tax assets
     12,200       13,087  
Other assets
     23,350       8,206  
Total assets
   $ 749,953     $ 709,862  
                 
Liabilities and Equity
                
Liabilities:
                
Marketable securities sold, but not yet purchased, at fair value
   $ 12,289     $ 11,567  
Accrued compensation
     9,234       20,256  
Asset-backed securities issued
     424,699       415,456  
Interest payable
     1,216       588  
Note payable
     6,552       10,486  
Line of credit
     22,227       28,227  
Bond payable
     46,000       -  
Deferred tax liability
     5,289       9,775  
Other liabilities
     30,494       26,203  
Total liabilities
     558,000       522,558  
                 
Redeemable Non-controlling Interest
     161       161  
Commitments and Contingencies
                
JMP Group Inc. Stockholders' Equity
                
Common stock, $0.001 par value, 100,000,000 shares authorized; 22,780,052 shares issued at both March 31, 2013 and December 31, 2012; 22,609,370 and 22,591,649 shares outstanding at March 31, 2013 and December 31, 2012
     23       23  
Additional paid-in capital
     129,118       128,318  
Treasury stock, at cost, 170,682 and 188,403 shares at March 31, 2013 and December 31, 2012, respectively
     (926 )     (1,007 )
Accumulated other comprehensive loss
     (41 )     (55 )
Accumulated deficit
     (2,936 )     (408 )
Total JMP Group Inc. stockholders' equity
     125,238       126,871  
Nonredeemable Non-controlling Interest
     66,554       60,272  
Total equity
     191,792       187,143  
Total liabilities and equity
   $ 749,953     $ 709,862  
 
See accompanying notes to consolidated financial statements. 

 
- 4 -
 
 
JMP Group Inc.
Consolidated Statements of Financial Condition - (Continued)
(Unaudited)
(Dollars in thousands, except per share data)
 
Assets and liabilities of consolidated variable interest entities ("VIE") included in total assets and total liabilities above:
 
   
March 31, 2013
    
December 31, 2012
  
             
Restricted cash
   $ 55,329     $ 56,968  
Loans held for sale
     2,528       3,134  
Loans collateralizing asset-backed securities issued, net of allowance for loan losses
     404,319       401,003  
Interest receivable
     1,021       1,062  
Deferred tax assets
     3,444       3,387  
Other assets
     19       32  
Total assets of consolidated VIE
   $ 466,660     $ 465,586  
                 
Asset-backed securities issued
     424,699       415,456  
Interest payable
     508       542  
Deferred tax liability
     5,021       8,437  
Other liabilities
     3,823       3,573  
Total liabilities of consolidated VIE
   $ 434,051     $ 428,008  
 
The asset-backed securities issued (“ABS”) by the VIE are limited recourse obligations payable solely from cash flows of the loans collateralizing them and related collection and payment accounts pledged as security. Accordingly, only the assets of the VIE can be used to settle the obligations of the VIE.
 
See accompanying notes to consolidated financial statements.
 
 
- 5 -
 
 
 JMP Group Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)

   
Three Months Ended March 31,
  
   
2013
    
2012
  
             
Revenues
            
Investment banking
   $ 12,107     $ 16,659  
Brokerage
     5,194       5,492  
Asset management fees
     6,751       3,474  
Principal transactions
     1,917       6,484  
Gain on sale and payoff of loans and mark-to-market of loans
     1,089       1,047  
Net dividend expense
     (8 )     (14 )
Other income
     288       736  
Non-interest revenues
     27,338       33,878  
                 
Interest income
     8,158       7,458  
Interest expense
     (11,299 )     (9,608 )
Net interest expense
     (3,141 )     (2,150 )
                 
Provision for loan losses
     (949 )     (93 )
                 
Total net revenues after provision for loan losses
     23,248       31,635  
                 
Non-interest expenses
                
Compensation and benefits
     19,605       21,771  
Administration
     1,331       1,250  
Brokerage, clearing and exchange fees
     887       896  
Travel and business development
     958       702  
Communications and technology
     853       908  
Occupancy
     804       817  
Professional fees
     1,024       639  
Depreciation
     226       198  
Other
     83       265  
Total non-interest expenses
     25,771       27,446  
(Loss) income before income tax expense
     (2,523 )     4,189  
Income tax (benefit) expense
     (812 )     381  
Net (loss) income
     (1,711 )     3,808  
Less: Net income attributable to nonredeemable non-controlling interest
     8       3,432  
Net (loss) income attributable to JMP Group Inc.
   $ (1,719 )   $ 376  
                 
Net (loss) income attributable to JMP Group Inc. per common share:
                
Basic
   $ (0.08 )   $ 0.02  
Diluted
   $ (0.08 )   $ 0.02  
                 
Dividends declared per common share
   $ 0.035     $ 0.030  
                 
Weighted average common shares outstanding:
                
Basic
     22,607       22,180  
Diluted
     22,607       23,273  
 
See accompanying notes to consolidated financial statements.
 
 
- 6 -
 
 
  JMP Group Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)

   
Three Months Ended March 31,
  
   
2013
    
2012
  
             
Net (loss) income
   $ (1,711 )   $ 3,808  
Other comprehensive income (loss)
                
Unrealized gain on cash flow hedge, net of tax
     14       8  
Comprehensive (loss) income
     (1,697 )     3,816  
Less: Comprehensive income attributable to non-controlling interest
     8       3,432  
Comprehensive (loss) income attributable to JMP Group Inc.
   $ (1,705 )   $ 384  



JMP Group Inc.
Consolidated Statement of Changes in Equity
(Unaudited)
(In thousands)
 
   
JMP Group Inc. Stockholders' Equity
              
   
Common Stock
    
Treasury
    
Additional
Paid-In
    
Accumulated
    
Accumulated
Other
Comprehensive
    
Nonredeemable
Non-controlling
        
   
Shares
    
Amount
    
Stock
    
Capital
    
Deficit
    
Loss
    
Interest
    
Total Equity
  
Balance, December 31, 2012
   22,780     $ 23     $ (1,007 )   $ 128,318     $ (408 )   $ (55 )   $ 60,272     $ 187,143  
Net loss
   -       -       -       -       (1,719 )     -       8       (1,711 )
Additonal paid-in capital - stock-based compensation
   -       -       -       726       -       -       -       726  
Dividends and dividend equivalents declared on common stock and restricted stock units
   -       -       -       -       (809 )     -       -       (809 )
Purchases of shares of common stock for treasury
   -       -       (82 )     -       -       -       -       (82 )
Reissuance of shares of common stock from treasury
   -       -       163       74       -       -       -       237  
Distributions to non-controlling interest holders
   -       -       -       -       -       -       (1,780 )     (1,780 )
Unrealized gain on cash flow hedge, net of tax
   -       -       -       -       -       14       -       14  
Capital contributions from non-controlling interest holders (1)
   -       -       -       -       -       -       8,054       8,054  
Balance, March 31, 2013
   22,780     $ 23     $ (926 )   $ 129,118     $ (2,936 )   $ (41 )   $ 66,554     $ 191,792  
 
     (1) Excludes $160.7 thousand attributable to redeemable non-controlling interest.
 
See accompanying notes to consolidated financial statements.
 
 
- 7 -
 
 
JMP Group Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

   
Three Months Ended March 31,
  
   
2013
    
2012
  
Cash flows from operating activities:
            
Net (loss) income
   $ (1,711 )   $ 3,808  
Adjustments to reconcile net income to net cash used in operating activities:
                
Provision for loan losses
     949       93  
Accretion of deferred loan fees
     (701 )     (386 )
Amortization of liquidity discount, net
     8,740       7,176  
Amortization of debt issuance costs
     31       -  
Interest paid in kind     (351 )     (64 )
Gain on sale and payoff of loans
     (999 )     (990 )
Change in other investments:
                
Fair value
     (1,093 )     (5,025 )
Incentive fees reinvested in general partnership interests
     (3,312 )     (414 )
Change in fair value of small business loans
     (90 )     (57 )
Realized gain on other investments
     (167 )     (180 )
Depreciation and amortization of fixed assets
     226       198  
Stock-based compensation expense
     964       180  
Deferred income taxes
     (3,599 )     381  
Net change in operating assets and liabilities:
                
Increase in interest receivable
     (158 )     (1 )
Increase in receivables
     (4,813 )     (5,600 )
(Increase) decrease in marketable securities
     (3,482 )     202  
Increase in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets
     (14,248 )     (4,091 )
Increase in marketable securities sold, but not yet purchased
     722       8,967  
Increase (decrease) in interest payable
     628       (10 )
Decrease in accrued compensation and other liabilities
     (6,733 )     (24,335 )
Net cash used in operating activities
     (29,197 )     (20,148 )
                 
Cash flows from investing activities:
                
Purchases of fixed assets
     (105 )     (74 )
Purchases of other investments
     (41,952 )     (11,487 )
Sales of other investments
     7,612       4,219  
Funding of loans collateralizing asset-backed securities issued
     (46,161 )     (45,786 )
Funding of small business loans
     (1,000 )     (6,335 )
Sale and payoff of loans collateralizing asset-backed securities issued
     38,293       39,027  
Principal receipts on loans collateralizing asset-backed securities issued
     6,413       8,484  
Net change in restricted cash reserved for lending activities
     1,455       (1,744 )
Net cash used in investing activities
     (35,445 )     (13,696 )
 
See accompanying notes to consolidated financial statements.
 
 
- 8 -
 
 
JMP Group Inc.
Consolidated Statements of Cash Flows - (Continued)
(Unaudited)
(In thousands)

Cash flows from financing activities:
            
Proceeds from bond issuance
     46,000       -  
Payments of debt issuance costs
     (1,694 )     -  
Repayments of borrowing on line of credit
     (6,000 )     7,737  
Repayment of note payable
     (3,934 )     (2,184 )
Dividends and dividend equivalents declared on common stock and restricted stock units
     (809 )     (684 )
Purchases of shares of common stock for treasury
     (82 )     (4,227 )
Capital contributions of redeemable non-controlling interest holders
     -       36  
Capital contributions of nonredeemable non-controlling interest holders
     7,317       12,146  
Distributions to non-controlling interest shareholders
     (1,780 )     (2,648 )
Net cash provided by financing activities
     39,018       10,176  
Net decrease in cash and cash equivalents
     (25,624 )     (23,668 )
Cash and cash equivalents, beginning of period
     67,075       70,363  
Cash and cash equivalents, end of period
   $ 41,451     $ 46,695  
                 
Supplemental disclosures of cash flow information:
                
Cash paid during the period for interest
   $ 1,436     $ 1,561  
Cash paid during the period for taxes
   $ 2,848     $ 671  
                 
Non-cash investing and financing activities:
                
Issuance of shares of common stock from treasury related to vesting of restricted stock units and exercises of stock options
   $ 163     $ 7,238  
 
See accompanying notes to consolidated financial statements. 
 
 
- 9 -
 
 
 JMP GROUP INC.
Notes to Consolidated Financial Statements
March 31, 2013
(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. The Company conducts its brokerage business through JMP Securities LLC (“JMP Securities”), its asset management business through Harvest Capital Strategies LLC (“HCS”), its corporate credit business through JMP Credit Corporation (“JMP Credit”), JMP Credit Advisors LLC (“JMPCA”), Harvest Capital Credit LLC ("HCC"), and certain principal investments through JMP Capital LLC (“JMP Capital”). The above entities are wholly-owned subsidiaries, with the exception of HCC, which is a partly-owned subsidiary. JMP Securities is a U.S. registered broker-dealer under the 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 JMP Credit, the Company completed the acquisition of 100% of the membership interests of Cratos Capital Partners, LLC (which changed its name to JMP Credit Advisors LLC on July 12, 2010) and its subsidiaries, including Cratos Capital Management, LLC (collectively, “Cratos”), a manager of collateralized loan obligations (“CLO”), together with certain securities of Cratos CLO I, Ltd. (“Cratos CLO”). For further details regarding the ownership of Cratos CLO, see Note 2 - Summary of Significant Accounting Policies in the Company's annual report for year ended December 31, 2012 (the "2012 10-K"). On December 26, 2012, HCC filed a registration statement on Form N-2 with the SEC in connection with a proposed initial public offering as a Business Development Company ("BDC") under the Investment Company Act of 1940.
 
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 2012 10-K. These consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for the fair statement of the results for the interim periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for a full year.
 
The consolidated accounts of the Company include the wholly-owned subsidiaries, JMP Securities, HCS, JMP Capital, JMP Credit, JMPCA, and the partly-owned subsidiaries Harvest Growth Capital LLC (“HGC”), Cratos CLO, HCC, and Harvest Growth Capital II LLC (“HGC II”) (effective October 1, 2012). All material intercompany accounts and transactions have been eliminated in consolidation. Non-controlling interest on the Consolidated Statements of Financial Condition at March 31, 2013 and December 31, 2012 relate to the interest of third parties in the partly-owned subsidiaries.
 
See Note 2 - Summary of Significant Accounting Policies in the Company's 2012 10-K for the Company's significant accounting policies.
 
3. Recent Accounting Pronouncements
 
Accounting Standards Update ("ASU") 2011-11: Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities requires disclosures about financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement to enable financial statement users to understand the effect of those arrangements on the entity’s financial position. ASU 2013-01: Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities limits the scope of the new balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement. The adoption of ASU 2011-11 and ASC 2013-01 on January 1, 2013 did not have any impact on its financial statement disclosures.
 
ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, was issued to improve the reporting of reclassifications out of accumulated other comprehensive income of various components. The standard requires an entity to present either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income.The adoption of ASU 2013-02 on January 1, 2013 did not have a material impact on its financial statement disclosures.
 
 
- 10 -
 
 
4. Fair Value Measurements
 
The following tables provide fair value information related to the Company’s financial instruments at March 31, 2013 and December 31, 2012:
 
   
At March 31, 2013
  
(In thousands)
  
Carrying Value
    
Fair Value
  
         
Level 1
    
Level 2
    
Level 3
    
Total
  
Assets:
                              
Cash and cash equivalents
   $ 41,451     $ 41,451     $       $       $ 41,451  
Restricted cash and deposits
     69,125       69,125                       69,125  
Marketable securities owned
     17,829       17,829       -       -       17,829  
Other investments
     119,858       633       59,375       59,551       119,559  
Loans held for sale
     2,528       -       2,617       -       2,617  
Small business loans
     40,375       -       3,552       36,823       40,375  
Loans collateralizing asset-backed securities issued, net of allowance for loan losses
     404,319       -       411,688       4,836       416,524  
Long term receivable
     1,298       -       -       1,585       1,585  
Total assets:
   $ 696,783     $ 129,038     $ 477,232     $ 102,795     $ 709,065  
                                         
Liabilities:
                                        
Marketable securities sold, but not yet purchased
   $ 12,289     $ 12,289     $ -     $ -     $ 12,289  
Asset-backed securities issued
     424,699       -       412,681       -       412,681  
Bond payable
     46,000               46,000               46,000  
Note payable
     6,552       -       6,552       -       6,552  
Line of credit
     22,227       -       22,227       -       22,227  
Total liabilities:
   $ 511,767     $ 12,289     $ 487,460     $ -     $ 499,749  
 
   
At December 31, 2012
  
(In thousands)
  
Carrying Value
    
Fair Value
  
         
Level 1
    
Level 2
    
Level 3
    
Total
  
Assets:
                              
Cash and cash equivalents
   $ 67,075     $ 67,075     $ -     $ -     $ 67,075  
Restricted cash and deposits
     69,813       69,813                       69,813  
Marketable securities owned
     14,347       14,347       -       -       14,347  
Other investments
     81,161       865       28,137       51,943       80,945  
Loans held for sale
     3,134       -       3,134       -       3,134  
Small business loans
     38,934       -       3,487       35,447       38,934  
Loans collateralizing asset-backed securities issued, net of allowance for loan losses
     401,003       -       406,313       5,716       412,029  
Long term receivable
     1,342       -       -       1,647       1,647  
Total assets:
   $ 676,809     $ 152,100     $ 441,071     $ 94,753     $ 687,924  
                                         
Liabilities:
                                        
Marketable securities sold, but not yet purchased
   $ 11,567     $ 11,567     $ -     $ -     $ 11,567  
Asset-backed securities issued
     415,456       -       404,341       -       404,341  
Note payable
     10,486       -       10,486       -       10,486  
Line of credit
     28,227       -       28,227       -       28,227  
Total liabilities:
   $ 465,736     $ 11,567     $ 443,054     $ -     $ 454,621  
 
 
- 11 -
 
Recurring Fair Value Measurement
The following tables provide information related to the Company’s assets and liabilities carried at fair value on a recurring basis at March 31, 2013 and December 31, 2012:
 
(In thousands)
  
March 31, 2013
  
   
Level 1
    
Level 2
    
Level 3
    
Total
  
                         
Marketable securities owned
   $ 17,829     $ -     $ -     $ 17,829  
Small business loans
     -       3,552       36,823       40,375  
Other investments:
                                
Investments in hedge funds managed by HCS
     -       59,375       -       59,375  
Investments in funds of funds managed by HCS
     -       -       117       117  
Total investment in funds managed by HCS
     -       59,375       117       59,492  
Limited partner investment in private equity fund
     -       -       2,558       2,558  
Warrants and other held at JMPS
     -       -       296       296  
Warrants and equity securities held at HCC
     -       -       3,102       3,102  
Equity securities in HGC, HGC II and JMP Capital
     633       -       48,478       49,111  
Forward purchase contract
     -       -       5,000       5,000  
Total other investments
     633       59,375       59,551       119,559  
Total assets:
   $ 18,462     $ 62,927     $ 96,374     $ 177,763  
                                 
Marketable securities sold, but not yet purchased
     12,289       -       -       12,289  
                                 
Total liabilities:
   $ 12,289     $ -     $ -     $ 12,289  
 
(In thousands)
  
December 31, 2012
  
   
Level 1
    
Level 2
    
Level 3
    
Total
  
                         
Marketable securities owned
   $ 14,347     $ -     $ -     $ 14,347  
Small business loans
     -       3,487       35,447       38,934  
Other investments:
                                
Investments in hedge funds managed by HCS
     -       27,907       -       27,907  
Investments in funds of funds managed by HCS
     -       -       109       109  
Total investment in funds managed by HCS
     -       27,907       109       28,016  
Limited partner investment in private equity fund
     -       -       2,332       2,332  
Warrants and other held at JMPS
     -       -       413       413  
Warrants and equity securities held at HCC
     -       -       2,577       2,577  
Equity securities in HGC, HGC II and JMP Capital
     865       230       41,075       42,170  
Forward purchase contract
     -       -       5,437       5,437  
Total other investments
     865       28,137       51,943       80,945  
Total assets:
   $ 15,212     $ 31,624     $ 87,390     $ 134,226  
                                 
Marketable securities sold, but not yet purchased
     11,567       -       -       11,567  
                                 
Total liabilities:
   $ 11,567     $ -     $ -     $ 11,567  
 
The Company holds a limited partner investment in a private equity fund. This fund aims to achieve medium to long-term capital appreciation by investing in a diversified portfolio of technology companies that leverage the growth of Greater China.
 
The Company's Level 2 assets held in other investments consist of small business loans, investments in hedge funds managed by HCS, and equity securities in HGC, HGC II and JMP Capital. The fair value of the Level 2 small business loans are calculated using the average market bid and ask quotation obtained from a loan pricing service. The fair value of the investment in hedge funds is calculated using the net asset value. These assets are considered Level 2, as the underlying hedge funds are mainly invested in publicly traded stocks whose value is based on quoted market prices. The Level 2 equity securities in HGC, HGC II and JMP Capital reflect investments in public securities, where the Company is subject to a lockup period. The fair value of the Level 2 equity securities in HGC, HGC II and Capital is calculated by applying a discount rate to the quoted market price.
 
The tables below provide a reconciliation of the beginning and ending balances for the assets held at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2013 and 2012.
 
(In thousands)
  
Balance as of
December 31, 2012
    
Purchases
    
Sales
    
Total gains (losses) - realized and unrealized included in earnings (1)
    
Transfers out of Level 3
    
Balance as of March 31, 2013
    
Unrealized gains/(losses) included in earnings related to assets still held at reporting date
  
General partner investment in funds of funds
   $ 109       -       -       8       -     $ 117     $ 8  
Limited partner investment in private equity fund
     2,332       -       -       226       -       2,558       226  
Warrants and other held at JMPS
     413       -       -       (117 )     -       296       (117 )
Warrants and other held at HCC
     2,577       100       -       425       -       3,102       425  
Small business loans
     35,447       1,389       (43 )     30       -       36,823       30  
Equity securities in HGC, HGC II and JMP Capital
     41,075       7,782       -       (379 )     -       48,478       (379 )
Forward purchase contract
     5,437       -       -       (437 )     -       5,000       (437 )
Total Level 3 assets
   $ 87,390     $ 9,271     $ (43 )   $ (244 )   $ -     $ 96,374     $ (244 )
 
(1) No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.
 
 
- 12 -
 
 
(In thousands)
  
Balance as of
December 31, 2011
    
Purchases
    
Sales
    
Total gains (losses) - realized and unrealized included in earnings (1)
    
Transfers in/(out) of Level 3
    
Balance as of March 31, 2012
    
Unrealized gains/(losses) included in earnings related to assets still held at reporting date
  
General partner investment in funds of funds
   $ 102     $ -     $ -     $ 3     $ -     $ 105     $ 3  
Limited partner investment in private equity fund
     2,585       -       -       40       -       2,625       40  
Warrants and other held at JMPS
     617       -       -       188       -       805       188  
Small business loans
     3,902       4,450       (109 )     (44 )             8,199       (44 )
Equity securities in HGC and JMP Capital
     20,707       4,402       -       2,767       (913 )     26,963       2,767  
Forward purchase contract
     -       5,000       -       -       -       5,000       -  
Total Level 3 assets
   $ 27,913     $ 13,852     $ (109 )   $ 2,954     $ (913 )   $ 43,697     $ 2,954  
 
(1) No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.
 
Purchases and sales of Level 3 assets shown above were recorded at fair value at the date of the transaction.
 
Total gains and losses included in earnings represent the total gains and/or losses (realized and unrealized) recorded for the Level 3 assets and are reported in Principal Transactions in the accompanying Consolidated Statements of Operations.
 
Transfers between levels of the fair value hierarchy result from changes in the observability of fair value inputs used in determining fair values for different types of financial assets and are recognized at the beginning of the reporting period in which the event or change in circumstances that caused the transfer occurs.
 
There were no transfers in/out of Level 1 during the three months ended March 31, 2013 and 2012. There were transfers into Level 2 from Level 3 of $0.9 million for the three months ended March 31, 2012, as a result of the observability of fair value associated with the equity securities in HGC and JMP Capital. There were no other transfers in or out of Level 2 or Level 3 during the three months ended March 31, 2013 and 2012.
 
The amount of unrealized gains and losses included in earnings attributable to the change in unrealized gains and losses relating to Level 3 assets still held at the end of the period are reported in Principal Transactions in the accompanying Consolidated Statements of Operations.
 
Included in other investments are investments in partnerships in which one of the Company’s subsidiaries is the investment manager and general partner. The Company accounts for these investments using the equity method as described in Note 2 - Summary of Significant Accounting Policies in the Company's 2012 annual report. The Company’s proportionate share of those investments is included in the tables above. In addition, other investments include warrants and investments in funds managed by third parties. The investments in private investment funds managed by third parties are generally not redeemable at the option of the Company. As of March 31, 2013, the Company had unfunded investment commitments of $0.1 million related to private investment funds managed by third parties.
 
The Company used the following valuation techniques with unobservable inputs when estimating the fair value of the Level 3 assets:
 
Dollars in thousands
  
Fair Value at
March 31, 2013
  
Valuation Technique
  
Unobservable Input
    
Range
(Weighted Average)
                         
Investments in Funds of Funds managed by HCS (1)
   $ 117  
Net Asset Value
   N/A       N/A    
Limited Partner in Private Equity Fund (1)
   $ 2,558  
Net Asset Value
   N/A       N/A    
Warrants and other held at JMPS
   $ 296  
Black-Scholes Option Model
  
Annualized volatility of credit
     16.5% - 30.1% (17.0%)
             
Risk adjusted discount factor
     0.0% - 75.0% (4.8%)
Warrants and equity held at HCC
   $ 3,102  
Market comparable companies
  
EBITDA multiples
     1.2x - 9.6x (5.8x)
         
Income
  
Weighted average cost of capital
     8.0% - 20.0% (16.2%)
Small business loans
   $ 36,823  
Bond yield
  
Risk adjusted discount factor
     8.5% - 19.2% (13.5%)
         
Market comparable companies
  
EBITDA multiples
     1.2x - 9.6x (5.8x)
         
Income
  
Weighted average cost of capital
     8.0% - 20.0% (16.2%)
             
Expected principal recovery
       100%    
Equity securities in HGC, HGC II and JMP Capital
   $ 48,478  
Market comparable companies
  
Revenue multiples
     2.0x - 8.3x (4.5x)
             
EBITDA multiples
     9.5x - 26.0x (17.9x)
             
Discount for lack of marketability
     30% - 40% (33%)
         
Market transactions
  
Revenue multiples
     3.2x - 6.7x (4.8x)
             
EBITDA multiples
     11.7x - 19.5x (15.9x)
             
Control premium
       25%    
Forward purchase contract
   $ 5,000  
Market comparable companies
  
Revenue multiples
     7.2x - 8.8x (7.8x)
             
Billing multiples
     6.4x - 7.8x (7.0x)
             
Discount for lack of marketability
       30 %    
         
Market transactions
  
Revenue multiples
       6.3x    
             
Control premium
       25%    
 
(1) The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of the investments in funds of funds managed by HCS and limited partner investment in private equity funds.
 
 
- 13 -
 
 
Dollars in thousands
  
Fair Value at
December 31, 2012
  
Valuation Technique
  
Unobservable Input
    
Range
(Weighted Average)
                         
Investments in Funds of Funds managed by HCS (1)
   $ 109  
Net Asset Value
   N/A       N/A    
Limited Partner in Private Equity Fund (1)
   $ 2,332  
Net Asset Value
   N/A       N/A    
Warrants and Other held at JMPS
   $ 413  
Black-Scholes Option Model
  
Annualized volatility of credit
     16.2% - 28.9% (16.8%)
Warrants and equity held at HCC
   $ 2,577  
Market comparable companies
  
EBITDA multiples
     3.8x - 9.3x (8.5x)
         
Income
  
Weighted average cost of capital
     10.0% - 18.0% (15.6%)
Small business loans
   $ 35,447  
Bond yield
  
Risk adjusted discount factor
     8.5% - 16.2% (13.2%)
         
Market comparable companies
  
EBITDA multiples
     3.8x - 9.3x (8.5x)
         
Income
  
Weighted average cost of capital
     10.0% - 18.0% (15.6%)
             
Expected principal recovery
     0.0% - 100.0% (100.0%)
Equity securities in HGC and JMP Capital
   $ 41,075  
Market comparable companies
  
Revenue multiples
     2.1x - 7.3x (3.5x)
             
EBITDA multiples
     8.8x - 22.9x (15.8x)
             
Discount for lack of marketability
     30% - 40% (34%)
         
Market transactions
  
Revenue multiples
     3.2x - 11.7x (5.2x)
             
EBITDA multiples
     11.7x - 19.8x (15.4x)
             
Control premium
       25%    
Forward purchase contract
   $ 5,437  
Market comparable companies
  
Revenue multiples
     6.7x - 8.1x (7.3x)
             
Billing multiples
     6.0x - 7.2x (6.5x)
             
Discount for lack of marketability
       30%    
         
Market transactions
  
Revenue multiples
       6.3x    
             
Control premium
       25%    
 
(1) The Company uses the reported net asset value per share as a practical expedient to estimate the fair value of the investments in funds of funds managed by HCS and limited partner investment in private equity funds.
 
The significant unobservable input used in the fair value measurement of the warrants held at JMPS is the annualized volatility of credit. Significant increases in the rate would result in a significantly higher fair value measurement.
 
The significant unobservable input used in the fair value measurement of the warrants and equity held at HCC are EBITDA multiples and weighted average cost of capital. Significant increases in the multiples in isolation would result in a significantly higher fair value measurement. Increases in the discounts in isolation would result in decreases to the fair value measurement.
 
The significant unobservable input used in the fair value measurement of the small business loans held are risk adjusted discount factors, EBITDA multiples, weighted average cost of capital and expected principal recoveries. Significant increases in the multiples and expected principal recovery rates in isolation would result in a significantly higher fair value measurement. Increases in the discounts in isolation would result in decreases to the fair value measurement.
 
The significant unobservable inputs used in the fair value measurement of the equity securities in HGC, HGC II and JMP Capital and the forward purchase contract are Revenue, EBITDA and Billing multiples, discount for lack of marketability, and control premiums. Significant increases in the multiples in isolation would result in a significantly higher fair value measurement. Increases in the discounts and premium in isolation would result in decreases to the fair value measurement.
 
Non-recurring Fair Value Measurements
 
The Company's assets that are measured at fair value on a non-recurring basis result from the application of lower of cost or market accounting or write-downs of individual assets. The following tables provide information related to the Company’s assets carried at fair value on a non-recurring basis at March 31, 2013 and 2012:
 
   
Fair Value
    
Gains (Losses) Three Months Ended
  
(In thousands)
  
March 31, 2013
    
December 31, 2012
    
March 31, 2013
    
March 31, 2012
  
Assets:
                        
Nonaccrual loans
   $ 880     $ 5,716     $ (870 )   $ -  
Loans held for sale
     2,617       3,134       88       (365 )
Total assets:
   $ 3,497     $ 8,850     $ (782 )   $ (365 )
 
The fair value for the loan held for sale was calculated using the average market bid and ask quotation obtained from a loan pricing service. Such loans are identified as Level 2 assets. The nonaccrual loan is a Level 3 asset. The fair value of the nonaccrual loan was calculated using the expected recovery of the loan. The significant unobservable input used in its fair value measurement was the loss severity rate of 75%. Increases in this rate would result in decreases in the fair value measurement.
 
Small Business Loans
 
Small business loans represent the secured subordinated debt extended by HCC to small to mid-sized companies. At inception, the loans were carried 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. Any discount from the principal amount of purchased loans was accreted into interest income as a yield adjustment over the contractual life of the loan using the interest method. An allowance for credit losses was established based on continuing review and the quarterly evaluation of the Company's loan portfolio.
 
 
- 14 -
 
 
HCC reports all investments, including debt investments, at market value or, in the absence of a readily available market value, at fair value, with unrealized gains and losses recorded in Gain on sale, payoff and mark-to-market on the Consolidated Statements of Operations. The Company recorded unrealized gains of $0.1 million relating to the fair value adjustment of small business loans in both the three months ended March 31, 2013 and 2012, respectively.
 
Investments at Cost
On February 11, 2010, the Company made a $1.5 million investment in Class D Preferred Units of Sanctuary. Sanctuary provides a turnkey platform that allows independent wealth advisors to establish an independent advisory business without the high startup costs and regulatory hurdles. The Class D Preferred Units entitle the Company to receive a preferred dividend with units that are convertible into equity of Sanctuary at the option of the Company prior to the maturity date, February 11, 2013. During the fourth quarter of 2010, the Company determined that its investment in Sanctuary was fully impaired and recorded an impairment loss of $1.5 million, which was included in Principal Transactions on the Consolidated Statements of Operations. On April 3, 2012, the Company purchased a $2.3 million receivable from Sanctuary for $1.4 million. The $1.4 million was composed of cash consideration of $0.5 million and $0.9 million applied to the redemption of 60 Class D Preferred Units owned by the Company. The Company recognized the $0.9 million as a gain in Principal Transactions, and the $2.3 million receivable in Other Assets. The carrying value of the Company’s investment in Sanctuary remained at zero at March 31, 2013. The carrying value of the long-term receivable was $1.3 million as of March 31, 2013. The Company determined the fair value of the long-term receivable to be $1.6 million as of March 31, 2013, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate. Significant increases in the market credit adjusted interest rate in isolation would result in decreases to the fair value measurement.
 
Derivative Financial Instruments
On May 29, 2010, the Company entered into an interest rate cap with City National Bank (the “Lender”) to effectively lock in or fix the interest rate on its revolving line of credit and term loan from July 1, 2010 through maturity. The interest rate cap will allow the Company to receive payments from the Lender in the event that LIBOR plus 2.25% exceeds 3.75%, limiting the interest rate on the outstanding balance of the line of credit and term loan to such rate. On July 1, 2010, the Company designated the interest rate cap as a cash flow hedge of the interest rate risk of a total of $27.1 million of outstanding borrowings with the Lender as of that date. The notional principal amount of the cap was $6.6 million at March 31, 2013. See Note 6 for information pertaining to the Company's borrowing from the Lender.
 
The interest rate cap is recorded at fair value in other investments on the Consolidated Statements of Financial Condition, with unrealized gains and losses recorded as other comprehensive income. For the three months ended March 31, 2013, the Company recorded $8 of other comprehensive loss representing unrealized loss on the interest rate cap, respectively. In addition, for the three months ended March 31, 2013, $13,674 was reclassified from accumulated other comprehensive income into interest expense as amortization of the interest cap.
 
The Company entered into a forward purchase contract to secure the acquisition of shares of a privately-held company. The contract incorporates downside protection for up to two years, for a cost basis of $5.0 million. In January 2012, the Company exchanged $5.0 million for physical custody of the shares. For one year beginning December 1, 2012, the Company may, at its discretion, become the beneficial and record holder of the shares. If the Company has not yet exercised its option at December 1, 2013, the shares will be assigned automatically to the Company. This contract is recorded in Other Investments in the Consolidated Statements of Financial Condition at fair value. The Company records changes in the fair value of this forward contract as unrealized gain or loss in Principal Transactions. For the three months ended March 31, 2013, the Company recorded $0.4 million unrealized loss. Once the shares are in the Company's name, the shares will be accounted for as equity securities, remaining in Other Investments in the Consolidated Statements of Financial Condition.
 
 
- 15 -
 
 
5. Loans Collateralizing Asset-backed Securities Issued and Loans Held for Sale
 
Loans collateralizing asset-backed securities issued and loans held for sale are commercial loans securitized and owned by Cratos CLO. The loans consist of those loans within the CLO securitization structure at the acquisition date of Cratos and loans purchased by the CLO subsequent to the Cratos acquisition date. The following table presents the components of loans collateralizing asset-backed securities issued and loans held for sale at March 31, 2013 and December 31, 2012: 
(In thousands)
  
Loans Collateralizing Asset-backed Securities
    
Loans Held for Sale
  
   
March 31, 2013
    
December 31, 2012
    
March 31, 2013
    
December 31, 2012
  
Loans
   $ 417,199     $ 414,000     $ 3,686     $ 4,686  
Allowance for loan losses
     (4,076 )     (3,127 )     -       -  
Liquidity discount
     (2,505 )     (3,052 )     (1,006 )     (1,279 )
Deferred loan fees, net
     (6,299 )     (6,818 )     (123 )     (156 )
Valuation allowance
     N/A       N/A       (29 )     (117 )
Total loans, net
   $ 404,319     $ 401,003     $ 2,528     $ 3,134  
 
Loans recorded upon the acquisition of Cratos at fair value reflect a liquidity discount and a credit discount. In addition, most loans purchased subsequent to the acquisition were purchased at a discount to their principal value, reflecting deferred loan fees. The tables below summarize the activity in the loan principal, allowance for loan losses, liquidity discount, credit discount, deferred loan fees and carrying values, net for the impaired loans and non-impaired loans as of and for the three months ended March 31, 2013:
   
Three Months Ended March 31, 2013
  
(In thousands)
  
Principal
    
Allowance for Loan Losses
    
Liquidity Discount
    
Credit Discount
    
Deferred Loan Fees
    
Carrying Value,
Net
  
Impaired Loans
                                    
Balance at beginning of period
   $ 3,517     $ (1,022 )   $ (720 )   $ -     $ (16 )   $ 1,759  
Repayments
     (11 )     -       -       -       -       (11 )
Accretion of discount
     -       -       -       -       2       2  
Provision for loan losses
     -       (870 )     -       -       -       (870 )
Balance at end of period
   $ 3,506     $ (1,892 )   $ (720 )   $ -     $ (14 )   $ 880  
                                                 
Non-impaired Loans
                                                
Balance at beginning of period
   $ 410,483     $ (2,105 )   $ (2,332 )   $ -     $ (6,802 )   $ 399,244  
Purchases / funding
     46,968       -       -       -       (807 )     46,161  
Repayments
     (6,402 )     -       -       -       -       (6,402 )
Accretion of discount
     -       -       504       -       699       1,203  
Provision for loan losses
     -       (79 )     -       -       -       (79 )
Sales and payoff
     (37,356 )     -       43       -       625       (36,688 )
Balance at end of period
   $ 413,693     $ (2,184 )   $ (1,785 )   $ -     $ (6,285 )   $ 403,439  
 
The tables below summarize the activity in the loan principal, allowance for loan losses, liquidity discount, credit discount, deferred loan fees and carrying values, net for the impaired loans and non-impaired loans as of and for the three months ended March 31, 2012:
 
   
Three Months Ended March 31, 2012
  
(In thousands)
  
Principal
    
Allowance for Loan Losses
    
Liquidity Discount
    
Credit Discount
    
Deferred Loan Fees
    
Carrying Value,
Net
  
Impaired Loans
                                    
Balance at beginning of period
   $ 10,538     $ (2,277 )   $ (5,924 )   $ (1,335 )   $ (54 )   $ 948  
Purchases / funding
     5       -       -       -       -       5  
Repayments
     (23 )     -       -       -       -       (23 )
Accretion of discount
     -       -       17       -       -       17  
Balance at end of period
   $ 10,520     $ (2,277 )   $ (5,907 )   $ (1,335 )   $ (54 )   $ 947  
                                                 
Non-impaired Loans
                                                
Balance at beginning of period
   $ 426,416     $ (1,922 )   $ (8,535 )   $ -     $ (6,137 )   $ 409,822  
Purchases / funding
     47,496       -       -       -       (1,715 )     45,781  
Repayments
     (8,461 )     -       -       -       -       (8,461 )
Accretion of discount
     -       -       863       -       560       1,423  
Provision for loan losses
     -       (93 )     -       -       -       (93 )
Sales and payoff
     (39,063 )     -       963       -       421       (37,679 )
Balance at end of period
   $ 426,388     $ (2,015 )   $ (6,709 )   $ -     $ (6,871 )   $ 410,793  
 
 
- 16 -
 
 
Allowance for Loan Losses
 
The Company recorded reserves of $0.1 million during both quarters ended March 31, 2013 and 2012, on non-impaired loans.
 
A summary of the activity in the allowance for loan losses for loans collateralizing asset-backed securities for the three months ended March 31, 2013 and 2012 is as follows:
 
(In thousands)
  
Three Months Ended March 31,
  
   
2013
    
2012
  
Balance at beginning of period
   $ (3,127 )   $ (4,199 )
Provision for loan losses:
                
General reserve
     (79 )     (93 )
Specific reserve
     (870 )     -  
Balance at end of period
   $ (4,076 )   $ (4,292 )
 
Impaired Loans
 
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. As of both March 31, 2013 and December 31, 2012, $2.8 million of recorded investment amount of loans collateralizing asset-backed securities issued were individually evaluated for impairment. The remaining $405.6 million and $401.3 million of recorded investment amount of loans collateralizing asset-backed securities issued were collectively evaluated for impairment, as of March 31, 2013 and December 31, 2012 respectively.
 
The tables below present certain information pertaining to the impaired loans at March 31, 2013 and December 31, 2012:
 
(In thousands)
  
Recorded Investment
    
Unpaid Principal Balance
    
Related Allowance
  
March 31, 2013
                  
Impaired loans with an allowance recorded
   $ 2,772     $ 3,517     $ 1,893  
Impaired loans with no related allowance recorded
     -       -       -  
    $ 2,772     $ 3,517     $ 1,893  
December 31, 2012
                        
Impaired loans with an allowance recorded
   $ 2,781     $ 3,517     $ 1,022  
Impaired loans with no related allowance recorded
     -       -       -  
    $ 2,781     $ 3,517     $ 1,022  
 
(In thousands)
  
Three Months Ended March 31,
  
   
2013
    
2012
  
Average recorded investment
   $ 2,773     $ 3,223  
Interest income recognized
   $ -     $ 37  
 
Non-Accrual, Past Due Loans and Restructured Loans
 
As of March 31, 2013 and December 31, 2012, the Company classified all its loans as Cash Flow loans, as their funding decisions were all driven by the revenues of the borrower. At both March 31, 2013 and December 31, 2012, one loan with an aggregate principal amount of $3.5 million and recorded investment amount of $2.7 million was on non-accrual status. The Company recorded no interest income, other than the accretion of liquidity discounts, for the impaired loans with a weighted average loan balance of $2.8 million that were on non-accrual status during the three months ended March 31, 2013. The Company recognized $36.9 thousand in interest income, other than the accretion of a liquidity discount, for the impaired loan with a weighted average loan balance of $3.2 million that was on non-accrual status during the three months ended March 31, 2012.
 
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. At December 31, 2012, one non-accrual loan in the amount of $2.7 million was over 90 days past due. No loans were past due at March 31, 2013.
 
At December 31, 2012, the Company's impaired loans included two Cash Flow loans, with an aggregate recorded investment balance of $2.0 million, whose terms were modified in a troubled debt restructuring ("TDR"). Concessions for these TDRs included a below market interest rate and a reduction in the loan principal balance. Subsequently, one loan was paid off, and the other loan was sold. At March 31, 2013, the Company held no loans whose terms were modified in a TDR.
 
Credit Quality of Loans
The Company, at least on a quarterly basis, reviews each loan and evaluates the credit quality of the loan. The review primarily includes the following credit quality indicators with regard to each loan: 1) Moody's rating, 2) current internal rating and 3) performance. The tables below present, by credit quality indicator, the Company's recorded investment in loans collateralizing asset-backed securities issued at March 31, 2013 and December 31, 2012.
 
 
- 17 -
 
 
(In thousands)
    
Loans Collateralizing Asset-Backed
Securities Issued -
Cash Flow
    
Held for Sale -
Cash Flow (CF)
  
     
March 31,
    
December 31,
    
March 31,
    
December 31,
  
      2013    
2012
    
2013
    
2012
  
                           
Moody's rating:
                          
Baa1 - Baa3
     $ 10,901     $ 5,883     $ -     $ -  
Ba1 - Ba3
       119,531       129,796       -       -  
B1 - B3       273,335       263,390       -       -  
Caa1 - Caa3
       4,628       5,061       -       3,134  
Ca
       -       -       2,528       -  
Total:
     $ 408,395     $ 404,130     $ 2,528     $ 3,134  
                                   
Internal rating:
                                  
2     $ 398,860     $ 392,208     $ -     $ -  
3       1,874       11,922       -       -  
4 (1)       4,889       -       2,528       3,134  
5 (1)       2,772       -       -       -  
Total:
     $ 408,395     $ 404,130     $