Edgar Filing: JMP Group Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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 March 31, 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 April 30, 2010 was 21,676,457.

TABLE OF CONTENTS


		Page Number
PART I.	FINANCIAL INFORMATION	4

Item 1.	Financial Statements - JMP Group Inc.	4
	Consolidated Statements of Financial Condition - March 31, 2010 and December 31, 2009 (Unaudited)	4
	Consolidated Statements of Operations - For the Three Months Ended March 31, 2010 and 2009 (Unaudited)	5
	Consolidated Statement of Changes in Equity - For the Three Months Ended March 31, 2010 (Unaudited)	6
	Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 2010 and 2009 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53

PART II.	OTHER INFORMATION	54

Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	(Removed and Reserved)	55
Item 5.	Other Information	55
Item 6.	Exhibits	55

SIGNATURES		56

EXHIBIT INDEX		57

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)


	March 31, 2010			December 31, 2009
Assets
Cash and cash equivalents	$	27,703		$	75,680
Restricted cash and deposits (includes cash on deposit with clearing broker of $255 at March 31, 2010 and December 31, 2009)		37,166			36,628
Receivable from clearing broker		1,881			1,609
Investment banking fees receivable, net of allowance for doubtful accounts of $0 at March 31, 2010 and December 31, 2009		2,425			2,706
Marketable securities owned, at fair value		21,083			5,899
Incentive fee receivable		291			2,631
Other investments (of which $52,725 and $57,190 at fair value at March 31, 2010 and December 31, 2009, respectively)		56,275			59,190
Loans held for investment, net of allowance for loan losses		1,517			1,592
Loans collateralizing asset-backed securities issued, net of allowance for loan losses		343,976			327,967
Interest receivable		1,006			1,046
Fixed assets, net		1,413			1,345
Deferred tax assets		47,067			51,499
Other assets		9,689			6,929

Total assets	$	551,492		$	574,721

Liabilities and Equity
Liabilities:
Marketable securities sold, but not yet purchased, at fair value	$	12,220		$	1,047
Accrued compensation		4,787			43,026
Asset-backed securities issued		330,216			326,632
Interest payable		489			525
Note payable		9,045			9,045
Deferred tax liability		45,132			48,220
Other liabilities		21,055			20,575

Total liabilities		422,944			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 March 31, 2010 and December 31, 2009; 21,676,457 and 21,533,583 shares outstanding at March 31, 2010 and December 31, 2009, respectively		22			22
Additional paid-in capital		126,052			126,125
Treasury stock, at cost, 393,284 and 536,158 shares at March 31, 2010 and December 31, 2009, respectively		(3,192	)		(4,360	)
Retained earnings (accumulated deficit)		348			(1,152	)

Total JMP Group Inc. stockholders’ equity		123,230			120,635
Noncontrolling Interest		5,318			5,016

Total equity		128,548			125,651

Total liabilities and equity	$	551,492		$	574,721

See accompanying notes to consolidated financial statements.

JMP Group Inc.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)


	Three Months Ended March 31,
	2010			2009
Revenues
Investment banking	$	5,469		$	4,116
Brokerage		7,670			8,539
Asset management fees		2,891			8,466
Principal transactions		1,421			2,890
Gain on sale and payoff of loans		3,479			—
Net dividend income		616			434
Other income		498			267

Non-interest revenues		22,044			24,712

Interest income		11,578			291
Interest expense		(8,240	)		(81	)

Net interest income		3,338			210

Provision for loan losses		(164	)		(725	)

Total net revenues after provision for loan losses		25,218			24,197

Non-interest Expenses
Compensation and benefits		15,521			18,801
Administration		1,022			1,121
Brokerage, clearing and exchange fees		1,352			1,250
Travel and business development		920			337
Communications and technology		1,073			863
Occupancy		651			581
Professional fees		975			956
Depreciation		168			197
Other		128			4

Total non-interest expenses		21,810			24,110

Income before income tax expense		3,408			87
Income tax expense		1,388			52

Net income		2,020			35
Less: Net income attributable to noncontrolling interest		302			1

Net income attributable to JMP Group Inc.	$	1,718		$	34

Net income attributable to JMP Group Inc. per common share:
Basic	$	0.08		$	0.00
Diluted	$	0.08		$	0.00
Dividends declared per common share	$	0.01		$	0.01
Weighted average common shares outstanding:
Basic		21,612			20,500
Diluted		22,484			20,702

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			Common Treasury Stock Amount			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Noncontrolling Interest		Total Equity
	Shares	Amount		Common Treasury Stock Amount			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Noncontrolling Interest		Total Equity
Balance, December 31, 2009	22,070	$	22	$	(4,360	)	$	126,125		$	(1,152	)	$	5,016	$	125,651
Net income	—		—		—			—			1,718			302		2,020
Additional paid-in capital - stock-based compensation	—		—		—			(87	)		—			—		(87	)
Additional paid-in capital - excess tax benefit related to stock-based compensation	—		—		—			(98	)		—			—		(98	)
Cash dividends paid to shareholders	—		—		—			—			(217	)		—		(217	)
Purchases of shares of common stock for treasury	—		—		(790	)		—			—			—		(790	)
Reissuance of shares of common stock from treasury	—		—		1,958			112			(1	)		—		2,069

Balance, March 31, 2010	22,070	$	22	$	(3,192	)	$	126,052		$	348		$	5,318	$	128,548

See accompanying notes to consolidated financial statements.

JMP Group Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Three Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net income	$	2,020		$	35
Adjustments to reconcile net income to net cash (used in) provided by in operating activities:
Provision for doubtful accounts		—			4
Provision for loan losses		164			725
Accretion of deferred loan fees		(388	)		(11	)
Amortization of liquidity discount, net		1,249			—
Gain on sale and payoff of loans		(3,479	)		—
Change in other investments:
Fair value		(674	)		(3,003	)
Incentive fees reinvested in general partnership interests		(300	)		(4,243	)
Depreciation and amortization of fixed assets		168			197
Stock-based compensation expense		903			1,373
Deferred income taxes		1,343			(717	)
Net change in operating assets and liabilities:
Decrease in interest receivable		40			3
Decrease (increase) in receivables		2,349			(155	)
Decrease (increase) in marketable securities		(15,184	)		3,341
(Increase) decrease in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets		(14,595	)		1,696
Decrease (increase) in marketable securities sold, but not yet purchased		11,173			(1,104	)
Decrease in interest payable		(36	)		(14	)
Decrease in accrued compensation and other liabilities		(36,679	)		(8,972	)

Net cash used in operating activities		(51,926	)		(10,845	)

Cash flows from investing activities:
Purchases of fixed assets		(236	)		(25	)
Purchases of other investments		(16,691	)		(4,114	)
Sales of other investments		21,280			3,859
Funding of loans collateralizing asset-backed securities issued		(67,540	)		—
Funding of loans held for investment		—			(2	)
Sale and payoff of loans collateralizing asset-backed securities issued		34,186			—
Principal payments on loans collateralizing asset-backed securities issued		26,858			—
Principal payments on loans held for investment		75			9
Net change in restricted cash reserved for lending activities		10,597			—
Cash transferred from consolidated subsidiary to non-consolidated hedge fund		—			(2,730	)

Net cash provided by (used in) investing activities		8,529			(3,003	)

Cash flows from financing activities:
Proceeds from issuance of note payable		—			2,100
Repayment of note payable		—			(434	)
Repayment of asset-backed securities issued		(3,475	)		—
Cash dividends paid to stockholders		(217	)		(205	)
Purchases of shares of common stock for treasury		(790	)		(262	)
Excess tax benefit related to stock-based compensation		(98	)		—

Net cash (used in) provided by financing activities		(4,580	)		1,199

Net decrease in cash and cash equivalents		(47,977	)		(12,649	)
Cash and cash equivalents, beginning of period		75,680			46,262

Cash and cash equivalents, end of period	$	27,703		$	33,613

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	1,216		$	92
Cash paid during the period for taxes	$	650		$	—

Non-cash investing and financing activities:
Reissuance of shares of common stock from treasury related to vesting of restricted stock units	$	1,168		$	469

See accompanying notes to consolidated financial statements.

JMP GROUP INC.

Notes to Consolidated Financial Statements

March 31, 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 its wholly-owned subsidiary, JMP Securities LLC (“JMP Securities”), its asset management business through its wholly-owned subsidiary, Harvest Capital Strategies LLC (“HCS”), its corporate credit business through its majority-owned indirect subsidiary, JMP Credit Corporation (“JMP Credit”), and certain principal investments through its wholly-owned subsidiary JMP Capital LLC (“JMP Capital”). JMP Securities is a U.S. registered broker-dealer under the Securities Exchange Act of 1934, as amended, and is a member of the Financial Industry Regulatory Authority (“FINRA”). JMP Securities operates as an introducing broker and does not hold funds or securities for, or owe any money or securities to, customers and does not carry accounts for customers. All customer transactions are cleared through another broker-dealer on a fully disclosed basis. HCS is a registered investment advisor under the Investment Advisers Act of 1940, as amended, and provides investment management services for sophisticated investors in investment partnerships and other entities managed by HCS. Effective April 7, 2009, through its majority-owned subsidiary JMP Credit, the Company completed the acquisition of 100% of the membership interests of Cratos Capital Partners, LLC and its subsidiaries, including Cratos Capital Management, LLC (collectively, “Cratos”), a manager of collateralized loan obligations, together with certain securities of Cratos CLO I, Ltd. (the “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 and HCS, the indirectly majority-owned subsidiaries, JMP Credit (effective April 7, 2009) and Harvest Mortgage Opportunities Partners (“HMOP”) (effective May 1, 2009), the indirectly wholly-owned subsidiary, JMP Capital, and the partially-owned subsidiaries, JMP Realty Trust (“JMPRT”) (through January 1, 2009) and 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. 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 and concluded that the CLO managed by Cratos is a VIE and that JMP Credit, which owns 100% 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 ABS issued.

Noncontrolling interest on the consolidated statements of financial condition at March 31, 2010 and December 31, 2009 relates to the interest of third parties in JMP Credit and HMOP, indirectly majority-owned subsidiaries consolidated on our books.

JMPRT is a real estate investment trust that was formed in June 2006. As of December 31, 2008, the Company owned 49.5% of JMPRT and certain employees owned 20.1%. Because of its ownership and management position, the Company consolidated JMPRT and recorded a noncontrolling interest through December 31, 2008. On January 2, 2009, all of the assets and liabilities within JMPRT were transferred to HMOP, a hedge fund managed by HCS. HMOP is a Delaware limited partnership organized for the purposes of investing in real estate-related assets which may include investments in residential or commercial mortgages or loans, real estate and other assets, loans and participation in

loans of all types, other specialty mortgage products, and securities. HCS is the general partner of HMOP. 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.

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

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 March 31, 2010, JMP Group Inc. owned approximately 6.3% of NYMT’s common stock. In addition, JMP Group Inc. and affiliated entities collectively owned 1.0 million shares of NYMT’s Series A Preferred Stock at March 31, 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 22 for the summarized financial information of NYMT.

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

Use of Estimates

The preparation of consolidated financial statements in conformity with 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. 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 consist of base management fees and incentive fees. The Company recognizes base management fees on a monthly basis over the period in which the investment services are performed. Base management fees earned by the Company are generally based on the fair value of assets under management and the fee schedule for each fund and account. Base management fees are calculated at the investor level using their quarter-beginning capital balance adjusted for any contributions or withdrawals. The Company also earns incentive fees that are based upon the performance of investment funds and accounts. Such fees are either a specified percentage of the total investment return of a fund or account or a percentage of the excess of an investment return over a specified highwater mark or hurdle rate over a defined performance period. For most funds, the highwater mark is calculated using the greatest value of a partner’s capital account as of the end of any performance period, 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.

Principal transactions

Principal transaction revenues include realized and unrealized net gains and losses resulting from our principal investments in equity and other securities for the Company’s account and in equity-linked warrants received from certain investment banking assignments, as well as limited partner investments in private funds managed by third parties and our investment in NYMT. Principal transaction revenues also include earnings (or losses) attributable to investment partnership interests held by our asset management subsidiary, HCS, which are accounted for using the equity method of accounting.

The Company’s principal transaction revenues for these categories for the three-month periods ended March 31, 2010 and 2009 are as follows:


(In thousands)	Three Months Ended March 31,
	2010			2009
Equity and other securities	$	1,343		$	65
Warrants and other investments		218			(79	)
Investment partnerships		(140	)		2,904

Total principal transaction revenues	$	1,421		$	2,890

Gain on Sale and Payoff of Loans

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

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 March 31, 2010 and December 31, 2009:


(In thousands)	March 31, 2010		December 31, 2009
Principal and interest payments held as collateral for asset-backed securities issued	$	23,806	$	33,349
Cash collateral supporting standby letters of credit		248		1,340
Proceeds from short sales		12,220		1,047
Deposit with clearing broker		255		255
Deposits for operating leases		637		637

	$	37,166	$	36,628

Receivable from Clearing Broker

The Company clears customer transactions through another broker-dealer on a fully disclosed basis. At both March 31, 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 March 31, 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 5 of the Notes to the consolidated financial statements for the disclosures related to the fair value of our marketable securities and other investments.

Most of the Company’s financial instruments, other than loans collateralizing asset-backed securities issued, loans held for investment, asset-backed securities issued and investment in HuaMei Capital Company, Inc. and Sanctuary Wealth Services LLC, 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. and Sanctuary Wealth Services LLC.

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

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

The Company follows the authoritative guidance included in GAAP on the fair value option which provides companies with an option to report selected financial assets and financial liabilities at fair value. 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 the three months ended March 31, 2010 and 2009 on NYMT stock of $0.6 million and $0.2 million, respectively, were recorded in net dividend income on our Consolidated Statements of Operations. For the three months ended March 31, 2010 and 2009, the Company recorded unrealized gains of $0.2 million and $1.2 million, respectively, on the above investments in NYMT primarily due to the improved performance of NYMT’s stock during the period. The unrealized gains on our investments in NYMT are reported in Principal Transactions in the Consolidated Statements of Operations.

Loans Held for Investment

Loans held for investment are carried at their unpaid principal balance, net of any allowance for credit losses or deferred loan origination or commitment fees. For loans held for investment, we establish and maintain an allowance for credit losses based on management’s estimate of credit losses in our loans as of each reporting date. The Company records the allowance against loans held for investment on a specific identification basis. Loans are charged off against the reserve for credit losses if the principal is deemed not recoverable within a reasonable timeframe. Loan origination and commitment fees are deferred and recognized into Interest income in the Consolidated Statements of Operations over the life of the related loan. The Company does not accrue interest on loans which are in default for more than 90 days and loans which we expect full principal payments may not be received.

Loans Collateralizing Asset-Backed Securities Issued

Loans collateralizing asset-backed securities issued are commercial loans securitized and owned by the 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) and, to the extent necessary, any liquidity discounts for the loans established after its acquisition for the increase in the present value of cash flows expected to be collected. Then the Company will recalculate the amount of accretable yield for the loan as the excess of the revised cash flows expected to be collected over the sum of (a) the initial investment less (b) cash collected less (c) write-downs plus (d) amount of yield accreted to date. The Company will adjust the amount of accretable yield by reclassification from nonaccretable discount. The adjustment is accounted for as a change in estimate, with the amount of periodic accretion adjusted over the remaining life of the loan. The resulting yield is then used as the effective interest rate in any subsequent accounting.

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

Allowance for Loan Losses

The Company maintains an allowance for loan losses that is intended to estimate loan losses inherent in its loan portfolio. A provision for loan losses is charged to expense to establish the allowance for loan losses. The allowance for loan losses is maintained at a level, in the opinion of management, sufficient to off set estimated losses inherent in the loan portfolio as of the date of the financial statements. The appropriateness of the allowance and the allowance components are reviewed quarterly. The Company’s estimate of each allowance component is based on observable information and on market and third party data that the Company believes are reflective of the underlying loan losses being estimated.

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

In addition, 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 the CLO when the CLO structure formed in 2007. The Company consolidates the CLO for financial reporting purposes as of the April 7, 2009 acquisition date. At the acquisition date, the ABS were recorded at fair value which comprised principal balance outstanding less liquidity discount. The liquidity discount will be amortized into interest expense over the expected remaining lives of the ABS using the interest method.

Fixed Assets

Fixed assets represent furniture and fixtures, computer and office equipment, certain software costs and leasehold improvements, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line basis over the estimated useful lives of the respective assets, ranging from three to five years.

Leasehold improvements are capitalized and amortized over the shorter of the respective lease terms or the estimated useful lives of the improvements.

The Company capitalizes certain costs of computer software developed or obtained for internal use and amortizes the amount over the estimated useful life of the software, generally not exceeding three years.

Income Taxes

The Company 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. Please see Note 21 for the effect of reclassifications on segments.

3. Recent Accounting Pronouncements

Accounting Standards Update (“ASU”) 2009-17, Consolidation (Topic 810): Improvements to Financial Reporting by Enterprises Involved in Variable Interest Entities. In December 2009, the Financial Accounting Standards Board (the “FASB”) issued ASU 2009-17 which amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 is effective for annual and interim periods beginning after November 15, 2009. As described below, the effective date of the above amendments was deferred for a reporting entity’s interest in certain investment companies. As a result, the Company’s is not required to apply the above amendments to its investments in the hedge funds and funds of funds managed by HCS. The Company’s adoption of ASU 2009-17 did not have an impact on our consolidated financial position or results of operations.

ASU 2010-10, Consolidation (Topic 810): Amendments for Certain Investment Funds. In February 2010, the FASB issued ASU 2010-10 which defers the effective date of the amendments to the consolidation requirements resulting from the issuance of FASB Statement No. 167 to 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 measurement principles that are consistent with those followed by investment companies. The hedge funds and funds of funds managed by HCS meet the criteria to qualify for the deferral, and therefore, the Company is not required to apply the Statement No. 167 amendments to its investments in such funds. The Company’s adoption of ASU 2010-10 did not have an impact on our consolidated financial position or results of operations.

ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. In February 2010, the FASB issued ASU 2010-09 which amends certain provisions of the current guidance, including the removal of the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. The Company’s adoption of ASU 2010-09 did not have an impact on our consolidated financial position or results of operations.

ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. In January 2010, the FASB issued ASU 2010-06 which provides amendments to ASC Subtopic 820-10 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements and (4) the transfers between Levels 1, 2, and 3. ASU 2010-06 is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity on a gross basis which is effective for annual periods beginning after December 15, 2010 and for interim periods within those fiscal years. The Company’s adoption of ASU 2010-06 did not have an impact on our consolidated financial position or results of operations.

ASU 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. In December 2009, the FASB issued ASU 2009-16 which amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. The amendments in this ASU improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. ASU 2009-16 is effective for annual and interim periods beginning after November 15, 2009. The Company’s adoption of ASU 2009-16 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 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

•

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

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

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


	Assets at Fair Value as of
	March 31, 2010
(In thousands)	Level 1		Level 2		Level 3		Total
Financial instruments owned, at fair value:
Marketable securities owned:
Equity securities	$	21,083	$	—	$	—	$	21,083

Total marketable securities owned	$	21,083	$	—	$	—	$	21,083

Other investments:
General partner investment in hedge funds	$	—	$	28,656	$	—	$	28,656
General partner investment in funds of funds		—		—		3,018		3,018

Total general partner investment in funds		—		28,656		3,018		31,674
Limited partner investment in private equity fund		—		—		2,544		2,544
Limited partner investment in mortgage fund		—		—		584		584
Investment in NYMT convertible preferred stock		—		—		15,000		15,000
Warrants		—		—		233		233
Private equity securities		—		—		2,690		2,690

Total other investments	$	—	$	28,656	$	24,069	$	52,725


	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


	Liabilities at Fair Value as of
	March 31, 2010
(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	$	12,220	$	—	$	—	$	12,220


	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 March 31, 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 March 31, 2010		Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds	$	2,933	$	—		$	85		$	—	$	3,018	$	85
Limited partner investment in private equity fund		2,476		(9	)		77			—		2,544		77
Limited partner investment in mortgage fund		1,147		(712	)		149			—		584		—
Investment in NYMT convertible preferred stock		15,000		—			—			—		15,000		—
Warrants		—		—			233			—		233		233
Private equity securities		2,321		—			369			—		2,690		369

Total Level 3 assets	$	23,877	$	(721	)	$	913		$	—	$	24,069	$	764


(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 March 31, 2009		Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds	$	3,678	$	—		$	31		$	—	$	3,709	$	31
Limited partner investment in private equity fund		2,516		—			(137	)		—		2,379		(137	)
Investment in NYMT convertible preferred stock		11,687		(7,791	) (1)		249			—		4,145		249
Warrants		307		—			(55	)		—		252		(55	)

Total Level 3 assets	$	18,188	$	(7,791	)	$	88		$	—	$	10,485	$	88

(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.

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 months ended March 31, 2010 and 2009. In addition, there were no transfers in/out of Level 1 or Level 2 during the three months ended March 31, 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 March 31, 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 an annual coupon of 14.0% and is 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 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 March 31, 2010.

5. Loans Held for Investment

Loans held for investment at March 31, 2010 is comprised of principal investments in the form of one loan note and advances on 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 March 31, 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 and $0.1 million in the fourth quarter of 2009. Recovery of the loan is being sought through bankruptcy court proceedings from which the Company believes it will be able to recover at the net realizable value of the loan.

In addition, in the third quarter of 2008, the Company made a $4.2 million loan to a private commercial mortgage originator in the form of a note and warrants. 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.

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

4). As of March 31, 2010 and December 31, 2009, the Company had a $1.2 million and $1.3 million advance, respectively, on a $2.0 million original non-revolving commitment, $0.7 million of which expired in October 2009. The advance bears interest at rate of 16.0% per annum and is due in June 2011. As of March 31, 2010 and December 31, 2009, the Company had no remaining credit commitments.

At March 31, 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 March 31, 2010 and December 31, 2009:


(In thousands)	March 31, 2010			December 31, 2009
Loans held for investment	$	2,045		$	6,057
Allowance for loan losses		(528	)		(4,285	)
Deferred loan fees		—			(180	)

Total loans held for investment, net	$	1,517		$	1,592

A summary of the activity in the allowance for loan losses for the three months ended March 31, 2010 and 2009 was as follows:


(In thousands)	Three Months Ended March 31,
(In thousands)	2010			2009
Balance at beginning of period	$	(4,285	)	$	(2,896	)
Provision for loan losses		—			(725	)
Loans charged off, net of recoveries		3,757			—

Balance at end of period	$	(528	)	$	(3,621	)

The Company determined the fair value of loans held for investment to be $1.7 million as of March 31, 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 the CLO. The loans consist of those loans within the CLO securitization structure at the acquisition date of Cratos and loans purchased or originated into the CLO subsequent to the Cratos acquisition date. The following table presents the components of loans collateralizing asset-backed securities issued at March 31, 2010:


(In thousands)	March 31, 2010
Loans collateralizing asset-backed securities	$	469,121
Allowance for loan losses		(2,158	)
Liquidity discount		(84,771	)
Credit discount		(33,119	)
Deferred loan fees, net		(5,097	)

Total loans collateralizing asset-backed securities, net	$	343,976

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 $59.8 million of impaired loans as of March 31, 2010, with allocated specific reserves of $1.6 million and credit discount of $33.1 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 March 31, 2010 on non-impaired loans.

A summary of the activity in the allowance for loan losses for the three month ended March 31, 2010 is as follows:


(In thousands)	Three Months Ended
(In thousands)	March 31, 2010
Balance at beginning of period	$	(1,994	)
Provision for loan losses:
Specific reserve		—
Pooled reserve		(164	)
Reversal due to sale, payoff or repayment of loans		—

Balance at end of period	$	(2,158	)

Loans recorded upon the acquisition of Cratos at fair value reflect a liquidity discount and a credit discount. In addition, most loans purchased subsequent to the acquisition were purchased at discount to their principal value, reflecting deferred loan fees. The tables below summarize the activity in the loan principal, liquidity discount, credit discount and deferred fees for the impaired loans and non-impaired loans for the three months ended March 31, 2010:

Impaired loans:


(In thousands)	Three Months Ended March 31, 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
Purchases / funding		426			—			—			—			426
Repayments		(3,087	)		—			—			155			(2,932	)
Accretion of discount		—			—			318			—			318
Provision for loan losses		—			—			—			—			—
Sales and payoff		—			—			—			—			—
Transfers to/from non-impaired loans, net		(11,869	)		—			5,286			1,831			(4,752	)

Balance at end of period	$	59,839		$	(1,581	)	$	(12,807	)	$	(33,119	)	$	12,332

Non-impaired loans:


(In thousands)	Three Months Ended March 31, 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		68,266			—			—			(1,152	)		67,114
Repayments		(23,926	)		—			—			—			(23,926	)
Accretion of discount		—			—			5,492			388			5,880
Provision for loan losses		—			(164	)		—			—			(164	)
Sales and payoff		(34,753	)		—			3,530			516			(30,707	)
Transfers to/from impaired loans, net		12,605			—			(7,853	)		—			4,752

Balance at end of period	$	409,282		$	(577	)	$	(71,964	)	$	(5,097	)	$	331,644

The Company determined the fair value of loans collateralizing asset-backed securities to be $406.6 million and $374.5 million as of March 31, 2010 and December 31, 2009, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.

At March 31, 2010 and December 31, 2009, $59.8 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 10 impaired loans with a weighted average loan balance of $71.3 million that were on non-accrual status during the three months ended March 31, 2010.

7. Fixed Assets

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


(In thousands)	March 31, 2010			December 31, 2009
Furniture and fixtures	$	1,633		$	1,620
Computer and office equipment		3,981			3,771
Leasehold improvements		2,387			2,374
Software		540			540
Less: accumulated depreciation		(7,128	)		(6,960	)

Total fixed assets, net	$	1,413		$	1,345

Depreciation expense was $0.2 million for both the three months ended March 31, 2010 and 2009.

8. Note Payable

Note payable consists of the revolving and term loans related to the Company’s credit facility with City National Bank (the “Lender”) entered into on August 3, 2006. The Company had a revolving loan of $2.1 million and a term loan of $6.9 million outstanding at both March 31, 2010 and 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 (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 remains available under the revolving portion of the Credit Agreement and the annual interest rate provisions of the Credit Agreement are increased from the prime rate minus 1.25% to the prime rate and from LIBOR plus 1.25% to LIBOR plus 2.25%. The Lender will continue to provide revolving loans of up to $21.0 million through December 31, 2010, on which date the then existing revolving loans will convert into term loans.

The Company had undrawn amounts of $18.9 million under the revolving line of credit with the Lender at March 31, 2010 and 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 March 31, 2010:


(In thousands)	March 31, 2010
2010	$	1,736
2011		1,736
2012		1,736
2013		1,737
2014		—
Thereafter		—

	$	6,945

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 March 31, 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.

9. Asset-backed Securities Issued

On May 17, 2007, the 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 all of the unsecured subordinated notes and $13.7 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 March 31, 2010 and December 31, 2009.


(In millions)	Notes Originally Issued		Outstanding Principal Balance March 31, 2010			Liquidity Discount March 31, 2010			Net Outstanding Balance March 31, 2010			Interest Rate Spread to LIBOR	Ratings (Moody’s/ S&P) (1)
Class A Senior Secured Floating Rate Revolving Notes due 2021	$	326.0	$	315.7		($	35.8	)	$	279.9		0.26%–0.29%	Aaa/AAA
Class B Senior Secured Floating Rate Notes due 2021		30.0		30.0			(8.9	)		21.1		0.50%	Aa2/AA
Class C Senior Secured Deferrable Floating Rate Notes due 2021		35.0		35.0			(21.3	)		13.7		1.10%	Baa1/A
Class D Secured Deferrable Floating Rate Notes due 2021		34.0		34.0			(21.1	)		12.9		2.40%	Ba1/BBB
Class E Secured Deferrable Floating Rate Notes due 2021		30.0		30.0			(20.1	)		9.9		5.00%	B3/CCC-

Total secured notes sold to investors	$	455.0	$	444.7		($	107.2	)	$	337.5
Unsecured subordinated notes due 2021		45.0		45.0			(39.9	)		5.1

Total notes for the CLO I offering	$	500.0	$	489.7		($	147.1	)	$	342.6
Consolidation elimination		N/A		(58.7	)		46.3			(12.4	)

Total asset-backed securities issued		N/A	$	431.0		($	100.8	)	$	330.2

(1)	These ratings are unaudited and were the current ratings as of March 31, 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 March 31, 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. 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 months ended March 31, 2010 was $8.2 million, which comprised cash coupon of $1.1 million and liquidity discount amortization of $7.1 million. As of March 31, 2010 and December 31, 2009, accrued interest payable on the Notes was $0.5 million.

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 months ended March 31, 2010 comprised the following:


(In thousands)	Three Months Ended March 31, 2010
(In thousands)	Principal			Liquidity Discount			Net
Balance at beginning of period	$	434,478		$	(107,846	)	$	326,632
Repayments		(3,475	)		—			(3,475	)
Amortization of discount		—			7,059			7,059

Balance at end of period	$	431,003		$	(100,787	)	$	330,216

The Company determined the fair value of asset-backed securities issued to be $368.3 million and $361.1 million as of March 31, 2010 and December 31, 2009, respectively.

10. 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. During the three months ended March 31, 2010 and 2009, the Company repurchased 98,428 and 57,832 shares, respectively, of the Company’s common stock at an average price of $8.03 per share and $4.53 per share, respectively, for an aggregate purchase price of $0.8 million and $0.3 million, respectively. All of the shares repurchased during the three months ended March 31, 2010 and 30,372 of the shares repurchased during the three months ended March 31, 2009 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.

11. 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 three months ended March 31, 2010:


	Three Months Ended March 31, 2010
	Shares Subject to Option		Weighted Average Exercise Price
Balance, beginning of year	1,938,315		$	11.28
Granted	—			—
Exercised	—			—
Forfeited	—			—
Expired	(69,250	)		12.17

Balance, end of period	1,869,065		$	11.25

Options exercisable at end of period	1,856,565		$	11.24


	As of March 31, 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	1,869,065	4.71	$	11.25	$	—	1,856,565	4.72	$	11.24	$	—

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 $1,468 and $5,278 for the three months ended March 31, 2010 and 2009, respectively.

As of March 31, 2010, there was $1,876 of unrecognized compensation expense related to stock options expected to be recognized over a weighted average period of 0.34 years.

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.

The following table summarizes the RSU activity for the three months ended March 31, 2010:


	Three Months Ended March 31, 2010
	Restricted Stock Units		Weighted Average Grant Date Fair Value
Balance, beginning of year	1,392,551		$	9.59
Granted	897,921			7.96
Vested	(109,961	)		9.01
Forfeited	(34,013	)		8.30

Balance, end of period	2,146,498		$	8.96

The aggregate fair value of RSUs vested during the three months ended March 31, 2010 was $0.9 million.

The Company recognizes compensation expense over a graded vesting period using the accelerated attribution method. For the three months ended March 31, 2010 and 2009, the Company recorded compensation expense of $0.7 million and $1.0 million, respectively, related to RSUs awarded in connection with the initial public offering. In addition, for the three months ended March 31, 2010 and 2009, the Company recorded compensation expense of $0.2 million and $0.4 million, respectively, for RSUs granted after the initial public offering. The Company recognized income tax benefits related to RSUs of $0.4 million and $0.6 million for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, there was $3.3 million of unrecognized compensation expense related to RSUs expected to be recognized over a weighted average period of 1.99 years.

12. 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 months ended March 31, 2010 and 2009 are shown in the tables below:


(In thousands, except per share data)	Three Months Ended March 31,
(In thousands, except per share data)	2010		2009
Numerator:
Net income	$	1,718	$	34

Denominator:
Basic weighted average shares outstanding		21,612		20,500
Effect of potential dilutive securities:
Restricted stock units		872		202

Diluted weighted average shares outstanding		22,484		20,702

Net (loss) income per share
Basic	$	0.08	$	0.00
Diluted	$	0.08	$	0.00

Stock options to purchase 1,902,694 and 2,084,421 shares of common stock for the three months ended March 31, 2010 and 2009, 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 1,505,429 shares of common stock for the three months ended March 31, 2010 and 2009, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding.

13. 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 months ended March 31, 2010 and 2009.

14. Income Taxes

The Company is subject to U.S. federal and state income taxes. For the three months ended March 31, 2010 and 2009, the Company recorded a total tax expense of $1.4 million and $0.1 million, respectively.

The components of the Company’s income tax expense for the three months ended March 31, 2010 and 2009 are as follows:


(In thousands)	Three Months Ended March 31,
(In thousands)	2010			2009
Federal	$	54		$	591
State		(9	)		178

Total current income tax expense		45			769

Federal		1,063			(550	)
State		280			(167	)

Total deferred income tax expense (benefit)		1,343			(717	)

Total income tax expense	$	1,388		$	52

A reconciliation of the statutory U.S. federal income tax rate to the Company’s effective tax rate for the three months ended March 31, 2010 and 2009 are as follows:


	Three Months Ended March 31,
	2010		2009
Tax at federal statutory tax rate	35.00	%	35.00	%
State income tax, net of federal tax benefit	5.75	%	5.75	%
Adjustment for permanent items	0.81	%	19.43	%

Rate before one-time events	41.56	%	60.18	%
Deferred tax asset written off related to options and RSUs	0.00	%	0.66	%
Adjustment for prior year taxes	0.00	%	-0.14	%
California state enterprise zone tax credit	-0.83	%	—

Effective tax rate (benefit)	40.73	%	60.70	%

The Company determined that a valuation allowance against deferred tax assets was not necessary as of March 31, 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 2006 through 2009 for federal income tax purposes and 2005 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 March 31, 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.

15. 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 March 31, 2010 and 2009 was $0.7 million and, $0.6 million, respectively.

The California, Chicago and New York leases included a period of free rent at the start of the lease for seven months, six 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)	March 31, 2010
2010	$	2,352
2011		2,708
2012		218
2013		54
2014		55
Thereafter		5

	$	5,392

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 March 31, 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 March 31, 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 both March 31, 2010 and December 31, 2009, the Company had unfunded commitments of $3.4 million in the Corporate Credit segment.

16. 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 $17.2 and $45.3 million, which were $15.4 and $43.7 million in excess of the required net capital of $1.8 and $1.6 million at March 31, 2010 and December 31, 2009, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.60 to 1 and 0.26 to 1 at March 31, 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.

17. Related Party Transactions

The Company earns base management fees and incentive fees from serving as investment advisor for various entities, including corporations, partnerships and offshore investment companies. The Company also owns an investment in most of these entities. As of March 31, 2010 and December 31, 2009, the aggregate fair value of the Company’s investments in these entities was $51.2 million and $55.5 million, respectively, which consisted of general partner investments in hedge funds of $28.7 million and $33.3 million, respectively, general partner investments in funds of funds of $3.0 million and $2.9 million, respectively, and investments in NYMT convertible preferred and common stock of $19.5 million and $19.3 million, respectively. Base management fees earned from these entities were $2.3 million and $2.0 million for the three months ended March 31, 2010 and 2009, respectively. Also, the Company earned incentive fees of $0.6 million and $6.5 million from these entities for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010 and December 31, 2009, the Company had incentive fees receivable from these entities of $0.3 million and $2.6 million, respectively.

18. 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 March 31, 2010 and December 31, 2009 had settled with no resulting material liability to the Company. For the three months ended March 31, 2010 and 2009, the Company had no material loss due to counterparty failure, and has no obligations outstanding under the indemnification arrangement as of March 31, 2010 and December 31, 2009.

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

19. Litigation

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

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

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

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

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

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

In connection with the 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 $3.4 million at March 31, 2010 and December 31, 2009 and standby letters of credit of $0.7 million and $1.8 million, at March 31, 2010 and December 31, 2009, respectively.

21. 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. With the disclosure of this new segment, the results of operations of JMP Capital, which for the three months ended March 31, 2009 were reported in the Asset Management segment, are now reported in the Corporate Credit segment as they are more closely aligned with those newly acquired operations. For the comparative three month period ended March 31, 2010 shown below JMP Capital has therefore been included in the Corporate Credit segment.

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

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

The Company’s segment information for the three months ended March 31, 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:


(In thousands)	Three Months Ended March 31,
(In thousands)	2010			2009
Broker-Dealer
Net revenues after provision for loan losses	$	14,383		$	12,699
Non-interest expenses		15,483			14,017

Segment (loss) before income tax expense	$	(1,100	)	$	(1,318	)

Segment assets	$	69,946		$	69,691
Asset Management
Net revenues after provision for loan losses	$	3,533		$	12,031
Non-interest expenses		3,334			10,000

Segment income before income tax expense	$	199		$	2,031

Segment assets	$	57,579		$	62,911
Corporate Credit
Net revenues after provision for loan losses	$	7,302		$	(533	)
Non-interest expenses		2,993			93

Segment income (loss) before income tax expense	$	4,309		$	(626	)

Segment assets	$	423,967		$	4,311
Consolidated Entity
Net revenues after provision for loan losses	$	25,218		$	24,197
Non-interest expenses		21,810			24,110

Income before income tax expense	$	3,408		$	87

Total assets	$	551,492		$	136,913

22. 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.


(In thousands)	March 31, 2010		December 31, 2009
(In thousands)	Net Assets		Net Assets
Harvest Opportunity Partners II	$	69,593	$	73,895
Harvest Small Cap Partners		338,018		336,083
Harvest Consumer Partners		7,691		12,117
Harvest Technology Partners		20,939		22,395
Harvest Global Select Partners		5,412		5,559
Harvest Diversified Partners		30,403		—


(In thousands)	Three Months Ended March 31, 2010						Three Months Ended March 31, 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	$	1,447		$	(269	)	$	122	$	(12	)
Harvest Small Cap Partners		(11,138	)		(2,922	)		38,823		(5,658	)
Harvest Consumer Partners		(393	)		(66	)		499		(28	)
Harvest Technology Partners		(264	)		(105	)		1,403		(57	)
Harvest Global Select Partners		593			(53	)		—		—
Harvest Diversified Partners		744			(143	)		—		—

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


	Three Months Ended March 31,
(In thousands)	2010			2009
Statement of Operations Data:
Interest income - investment securities and loans held in securitization trusts	$	6,221		$	8,585
Interest expense - investment securities and loans held in securitization trusts		1,392			3,130
Provision for loan losses		(2	)		(629	)
Impairment loss on investment securities		—			(119	)
Realized gain on investment securities		807			123
Income from continuing operations		2,357			1,899
Net income		2,668			2,054


(In thousands)	March 31, 2010			December 31, 2009
Statement of Financial Condition Data:
Investment securities - available for sale at fair value (including pledged assets of $80,358 and $91,071 at March 31, 2010 and December 31,2009, respectively)	$	167,446		$	176,691
Mortgage loans held in securitization trusts (net)		259,073			276,176
Total assets		463,868			488,814
Financing arrangements, portfolio investments		75,799			85,106
Collateralized debt obligations		249,816			266,754
Convertible preferred debentures (net)		19,888			19,851
Total liabilities		399,002			425,827

23. Subsequent Events

On May 4, 2010, the Company’s board of directors declared a cash dividend of $0.015 per share of common stock for the first quarter of 2010 to be paid on June 4, 2010, to common stockholders of record on May 21, 2010.

On April 1, 2010, the Company made an investment in Harvest Growth Capital LLC (“HGC”), an investment company that invests in private equity securities. HCS is the manager of HGC. Because of the Company’s economic interest in HGC and its ability to direct HGC’s activities, the Company is deemed the primary beneficiary, and therefore, consolidates HGC effective April 1, 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. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual report on Form 10-K, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. We undertake no duty to update any of these forward-looking statements after the date of filing of this report to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law.

Overview

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

•

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

•

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

•

proprietary equity research in our six target industries;

•

asset management products and services to institutional investors, high net-worth individuals and for our own account; and

•

management of collateralized loan obligations.

Components of Revenues

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

Investment Banking

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

Underwriting Revenues

We earn underwriting revenues from securities offerings in which we act as an underwriter, such as initial public offerings and follow-on equity offerings. Underwriting revenues include management fees, underwriting fees and selling concessions. We record underwriting revenues, net of related syndicate expenses, at the time the underwriting is completed. In syndicated underwritten transactions, management estimates our share of transaction-related expenses incurred by the syndicate, and we recognize revenues net of such expense. On final settlement by the lead manager, typically 90 days from the trade date of the transaction, we adjust these amounts to reflect the actual transaction-related expenses and our resulting underwriting fee. We receive a higher proportion of total fees in underwritten transactions in which we act as a lead manager.

Strategic Advisory Revenues

Our strategic advisory revenues primarily include success fees on closed merger and acquisition transactions, as well as retainer fees, earned in connection with advising both buyers’ and sellers’ transactions. We also earn fees for related advisory work and other services such

as providing fairness opinions and valuation analyses. We record strategic advisory revenues when the transactions or the services (or, if applicable, separate components thereof) to be performed are substantially completed, the fees are determinable and collection is reasonably assured.

Private Placement Revenues

We earn agency placement fees in non-underwritten transactions such as private placements of equity securities, private investments in public equity (“PIPE”) transactions, Rule 144A private offerings and trust preferred securities offerings. We record private placement revenues on the closing date of these transactions.

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

Brokerage Revenues

Our brokerage revenues include commissions paid by customers from brokerage transactions in exchange-listed and over-the-counter (“OTC”) equity securities. Commissions are recognized on a trade date basis. Brokerage revenues also include net trading gains and losses that result from market-making activities and from our commitment of capital to facilitate customer transactions. Our brokerage revenues may vary between periods, in part depending on commission rates, trading volumes and our ability to continue to deliver research and other value-added services to our clients. The ability to execute trades electronically, through the Internet and through other alternative trading systems has increased pressure on trading commissions and spreads. We expect this trend toward alternative trading systems and pricing pressures in our brokerage business to continue. We are, to some extent, compensated through brokerage commissions for the value of research and other value added services we deliver to our clients. These “soft dollar” practices have been the subject of discussion among regulators, the investment banking community and our sales and trading clients. In particular, commission sharing arrangements have been adopted by some large institutional investors. In these arrangements, these institutional investors concentrate their trading with fewer “execution” brokers and pay a fixed amount for execution with an additional amount set aside for payments to other firms for research or other brokerage services. Accordingly, we may experience reduced (or eliminated) trading volume with such investors but may be compensated for our research and sales efforts through allocations of the designated amounts. Depending on the extent to which we adopt this practice and depending on our ability to reach arrangements on terms acceptable to us, this trend would likely impair the revenues and profitability of our commission business by negatively affecting both volumes and trading commissions in our commission business.

Asset Management Fees

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

As of March 31, 2010, the contractual base management fees earned from each of these investment funds ranged between 1% and 2% of assets under management. The contractual incentive fees were generally (i) 20%, subject to high-water marks, for the hedge funds; (ii) 5% to 20%, subject to high-water marks or a performance hurdle rate, for the funds of funds; and (iii) 25%, subject to a performance hurdle rate, for Harvest Mortgage Opportunities Partners (“HMOP”) and New York Mortgage Trust, Inc. (“NYMT”).

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

The following tables present certain information with respect to the investment funds managed by Harvest Capital Strategies (“HCS”):


(In thousands)	Net Assets at				Company’s Share of Net Assets at
(In thousands)	March 31, 2010		December 31, 2009		March 31, 2010		December 31, 2009
Funds Managed by HCS:
Hedge Funds:
Harvest Opportunity Partners II	$	69,593	$	73,895	$	4,111	$	10,438
Harvest Small Cap Partners		338,018		336,083		8,437		8,741
Harvest Consumer Partners		7,691		12,117		101		5,590
Harvest Technology Partners		20,939		22,395		109		7,457
Harvest Mortgage Opportunities Partners (1)		10,813		10,544		7,287		7,090
Harvest Global Select Partners		5,412		5,559		203		1,086
Harvest Diversified Partners		30,403		—		15,694		—
Funds of Funds:
JMP Masters Fund		76,460		97,931		3,018		2,933
REITs:
New York Mortgage Trust (2)		48,414		48,414		N/A		N/A

Total funds managed by HCS	$	607,743	$	606,938	$	38,960	$	43,335

(1)	The Company’s share of net assets in HMOP was consolidated in the Company’s Statement of Financial Condition at March 31, 2010 and December 31, 2009.

(2)	The portion of the net assets of NYMT that is subject to the management fee calculation. In connection with its investment in NYMT, in January 2008, the Company entered into an advisory agreement between HCS and NYMT.


(In thousands)	Three Months Ended March 31, 2010
(In thousands)	Company’s Share of Change in Fair Value			HCS Management Fee		HCS Incentive Fee
Hedge Funds:
Harvest Opportunity Partners II	$	(4	)	$	163	$	94
Harvest Small Cap Partners		(304	)		1,622		—
Harvest Consumer Partners		(223	)		20		—
Harvest Technology Partners		(239	)		58		10
Harvest Mortgage Opportunities Partners (1)		234			39		53
Harvest Global Select Partners		56			17		99
Harvest Diversified Partners		475			56		120
Funds of Funds:
JMP Masters Fund		85			177		1
REITs:
New York Mortgage Trust		—			163		282

Totals	$	80		$	2,315	$	659

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


(In thousands)	Three Months Ended March 31, 2009
(In thousands)	Company’s Share of Change in Fair Value		HCS Management Fee		HCS Incentive Fee
Hedge Funds:
Harvest Opportunity Partners II	$	36	$	159	$	—
Harvest Small Cap Partners		1,558		1,300		6,422
Harvest Consumer Partners		207		8		21
Harvest Technology Partners		659		15		71
Harvest Mortgage Opportunities Partners		414		59		—
Funds of Funds:
JMP Masters Fund		7		220		—
JMP Emerging Masters Fund		24		24		—
REITs:
New York Mortgage Trust		1,192		182		—

Totals	$	4,097	$	1,967	$	6,514

With the acquisition of Cratos, we earn management fees at JMP Credit as the asset manager of collateralized loan obligations. During the three months ended March 31, 2010, we earned management fees of $0.6 million or 50 bps annualized on gross assets under management. At March 31, 2010, gross assets under management were $492.2 million. As we consolidate the CLO, the management fees are eliminated on consolidation in accordance with U.S. GAAP.

Principal Transactions

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

Gain on Sale and Payoff of Loans

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

Net Dividend Income

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

Other Income

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

Interest Income

Interest income primarily consists of interest income earned on loans collateralizing asset backed securities issued and loans held for investment. 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. Interest income is recorded on the accrual basis in accordance with the terms of the respective loans unless such loans are placed on non-accrual status.

Interest Expense

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

Provision for Loan Losses

Loans held for investment are net of reserves recognized on our loan notes and non-revolving credit agreements at our JMP Capital LLC subsidiary (collectively loans held for investment) and loans collateralizing ABS (at JMP Credit) to record them at their estimated net realizable value. The Company maintains an allowance for loan losses that is intended to estimate loan losses inherent in its loan portfolio. A provision for loan losses is charged to expense to establish the allowance for loan losses. The allowance for loan losses is maintained at a level, in the opinion of management, sufficient to offset estimated losses inherent in the loan portfolio as of the date of the financial statements. The appropriateness of the allowance and the allowance components are reviewed quarterly. The Company’s estimate of each allowance component is based on observable information and on market and third party data that the Company believes are reflective of the underlying loan losses being estimated.

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, this reduction is recognized as a specific reserve in the current quarter in accordance with above. For those loans deemed impaired subsequent to the acquisition date, if the net realizable value is lower than the current carrying value then the carrying value is reduced and the difference is booked as provision for loan losses. If the total discount from unpaid principal balance to carrying value is larger than the expected loss at the date of assessment, no provision for loan losses is recognized.

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

Components of Expenses

We classify our expenses as compensation and benefits, administration, brokerage, clearing and exchange fees and other expenses. A significant portion of our expense base is variable, including compensation and benefits, brokerage and clearance, communication and technology and travel and business development expenses.

Compensation and Benefits

Compensation and benefits is the largest component of our expenses and includes employees’ base pay, performance bonuses, sales commissions, related payroll taxes, medical and benefits expenses, as well as expenses for contractors, temporary employees and equity-based compensation. Our employees receive a substantial portion of their compensation in the form of individual performance-based bonuses. As is the widespread practice in our industry, we pay bonuses on an annual basis, which for senior professionals typically make up a large portion of their total compensation. Bonus payments may have a greater impact on our cash position and liquidity in the periods in which they are paid than would otherwise be reflected in our Consolidated Statements of Operations. We accrue for the estimated amount of these bonus payments ratably over the applicable service period.

Compensation is accrued using specific ratios of total compensation and benefits to total revenues based on revenue categories, as adjusted if, in management’s opinion, such adjustments are necessary and appropriate to maintain competitive compensation levels.

Administration

Administration expense primarily includes the cost of hosted conferences, non-capitalized systems and software expenditures, insurance, business tax (non-income), office supplies, recruiting and regulatory fees.

Brokerage, Clearing and Exchange Fees

Brokerage, clearing and exchange fees include the cost of floor and electronic brokerage and execution, securities clearance, and exchange fees. We currently clear our securities transactions through Ridge Clearing. Changes in brokerage, clearing and exchange fees fluctuate largely in line with the volume of sales and trading activity.

Other Expenses

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

Noncontrolling Interest

Noncontrolling interest for three months ended March 31, 2010 includes the interest of third parties in JMP Credit and Harvest Mortgage Opportunities Partners (“HMOP”), majority-owned subsidiaries consolidated on our books. Noncontrolling interest for three months ended March 31, 2009 includes the interest of third parties in HMOP and Opportunity Acquisition Corp. (“SPAC”), partially-owned subsidiaries consolidated on our books. SPAC was liquidated on December 31, 2009 with no distribution of assets to the noncontrolling interest holders due to its accumulated loss. The partnership agreements for HMOP provide for the right of the limited partners to remove the general partners by a simple majority vote of the non-affiliated limited partners. The Company follows the authoritative guidance under GAAP regarding the determination of whether a general partner, or the general partners as a group, controls a limited partnership or similar entity when the limited partners have certain rights. Such guidance applies when a general partner controls a limited partnership and is required to consolidate the limited partnership in its financial statements. Under the guidance, the general partner in a limited partnership is presumed to control the limited partnership regardless of the extent of the general partners’ ownership interest in the limited partnership. If the limited partners have either (a) the substantive ability to liquidate the limited partnership or otherwise remove the general partner without cause or (b) substantive participating rights, the general partner does not control the limited partnership. The partnership agreements for HMOP provide for the right of the limited partners to remove the general partner by a simple majority vote of the non-affiliated limited partners. Because of these substantive kick-out rights, the Company, as the general partner, did not control HMOP and therefore did not consolidate HMOP from January 2, 2009 through April 30, 2009. During the quarter ended June 30, 2009, several non-affiliated limited partners redeemed their interest in HMOP, and the remaining limited partners were no longer deemed to have substantive kick-out rights. As a result, the Company consolidated HMOP in its consolidated financial statements effective May 1, 2009.

Results of Operations

The following table sets forth our results of operations for the three month periods ended March 31, 2010 and 2009 and is not necessarily indicative of the results to be expected for any future period.


(Dollars in thousands)	Three Months Ended March 31,						Change from 2009 to 2010
(Dollars in thousands)	2010			2009			$			%
Revenues
Investment banking	$	5,469		$	4,116		$	1,353		32.9	%
Brokerage		7,670			8,539			(869	)	-10.2	%
Asset management fees		2,891			8,466			(5,575	)	-65.9	%
Principal transactions		1,421			2,890			(1,469	)	-50.8	%
Gain on sale and payoff of loans		3,479			—			3,479		N/A
Net dividend income		616			434			182		41.9	%
Other income		498			267			231		86.5	%

Non-interest revenues		22,044			24,712			(2,668	)	-10.8	%

Interest income		11,578			291			11,287		N/A
Interest expense		(8,240	)		(81	)		(8,159	)	N/A

Net interest income		3,338			210			3,128		N/A

Provision for loan losses		(164	)		(725	)		561		-77.4	%

Total net revenues after provision for loan losses		25,218			24,197			1,021		4.2	%

Non-interest Expenses
Compensation and benefits		15,521			18,801			(3,280	)	-17.4	%
Administration		1,022			1,121			(99	)	-8.8	%
Brokerage, clearing and exchange fees		1,352			1,250			102		8.2	%
Other		3,915			2,938			977		33.3	%

Total non-interest expenses		21,810			24,110			(2,300	)	-9.5	%

Income before income tax expense		3,408			87			3,321		N/A
Income tax expense		1,388			52			1,336		N/A

Net income		2,020			35			1,985		N/A
Less: Net income attributable to noncontrolling interest		302			1			301		N/A

Net income attributable to JMP Group Inc.	$	1,718		$	34		$	1,684		N/A

Three Months Ended March 31, 2010, Compared to Three Months Ended March 31, 2009

Overview

Total net revenues after provision for loan losses increased $1.0 million, or 4.2%, from $24.2 million for the quarter ended March 31, 2009 to $25.2 million for the quarter ended March 31, 2010, driven by an increase in net interest income of $3.1 million and a decrease in provision for loan losses of $0.6 million, offset by a decrease in non-interest income of $2.7 million.

Non-interest revenues decreased $2.7 million, or 10.8%, primarily due to a $5.6 million decrease in asset management revenues, a $1.5 million decrease in principal transaction revenues and a $0.9 million decrease in brokerage revenues, offset by a $3.5 million increase in gain on sales and payoff of loans and a $1.4 million increase in investment banking revenues.

Net interest income increased $3.1 million, from $0.2 million for the quarter ended March 31, 2009 to $3.3 million for the same period in 2010. The increase was primarily due to the acquisition of Cratos which resulted in $3.3 million of net interest income recorded at JMP Credit.

Provision for loan losses decreased from $0.7 million for the quarter ended March 31, 2009 to $0.2 million for the quarter ended March 31, 2010 primarily due to a $0.7 million decrease in provision recorded against loans held for investment.

Total non-interest expenses decreased $2.3 million, or 9.5%, from $24.1 million for the quarter ended March 31, 2009 to $21.8 million for the quarter ended March 31, 2010, primarily due to a decrease in compensation and benefits of $3.3 million, offset by an increase in other expenses of $1.0 million.

Net income attributable to JMP Group Inc. increased $1.7 million from $33,945 for the quarter ended March 31, 2009 to $1.7 million for the quarter ended March 31, 2010, primarily as a result of the aforementioned increase in net revenues after provision for loan losses and decrease in non-interest expenses of $2.3 million, partially offset by an increase in income tax expense of $1.3 million.

Revenues

Investment Banking

Investment banking revenues increased $1.4 million, or 32.9%, from $4.1 million for the quarter ended March 31, 2009 to $5.5 million for the same period in 2010, and increased as a percentage of total net revenues after provision for loan losses from 17.0% to 21.7%, respectively. The increase in revenues reflects a higher level of activity in our public equity underwriting and private placement business, partially offset by decreased activity in our strategic advisory businesses. Public equity underwriting revenues increased by $1.6 million, from $1.1 million for the quarter ended March 31, 2009 to $2.7 million for the quarter ended March 31, 2010. We executed six public equity underwriting transactions in the quarter ended March 31, 2010 compared to two in the quarter ended March 31, 2009. We acted as a lead manager on one transaction in the quarter ended March 31, 2010 and none in the same period in 2009. Private placement revenues increased $0.1 million from $0.3 million for the quarter ended March 31, 2009 to $0.4 million for the quarter ended March 31, 2010. We executed one private placement transaction in both quarters ended March 31, 2010 and 2009. Our strategic advisory revenues decreased $0.3 million, or 11.9%, from $2.7 million for the quarter ended March 31, 2009 to $2.4 million for the quarter ended March 31, 2010. We executed three strategic advisory transactions in both quarters ended March 31, 2010 and 2009.

Brokerage Revenues

Brokerage revenues decreased from $8.5 million for the quarter ended March 31, 2009 to $7.7 million for the quarter ended March 31, 2010. The decrease was the result of lower gross commissions. Brokerage revenues decreased as a percentage of total net revenues after provision for loan losses, from 35.3% for the quarter ended March 31, 2009 to 30.4% for the quarter ended March 31, 2010.

Asset Management Fees

Asset management fees decreased $5.6 million, or 65.9%, from $8.5 million for the quarter ended March 31, 2009 to $2.9 million for the quarter ended March 31, 2010. Asset management fees include base management fees and incentive fees for our funds under management. Base management fees increased from $2.0 million for the quarter ended March 31, 2009 to $2.3 million for the same period in 2010. Incentive fees decreased from $6.5 million for the quarter ended March 31, 2009 to $0.6 million for the same period in 2010. The increase in base management fees was the result of an increase in client assets under management from $502.0 million as of March 31, 2009 to $568.8 million as of March 31, 2010. The decrease in incentive fees reflects a decline of $6.4 million related to Harvest Small Cap Partners, partly offset by increased fees from NYMT and Harvest Opportunity Partners II. In addition, we earned a combined $0.2 million of incentive fees in the quarter ended March 31, 2010 from Harvest Global Select Partners and Harvest Diversified Partners, both of which were launched subsequent to the quarter ended March 31, 2009. As a percentage of total net revenues after provision for loan losses, asset management fees decreased from 35.0% for the quarter ended March 31, 2009 to 11.5% for the same period in 2010.

Principal Transactions

Principal transaction revenues decreased $1.5 million, or 50.8%, from $2.9 million for the quarter ended March 31, 2009 to $1.4 million for the same period in 2010. The decrease was primarily due to a decrease in revenues from our family of hedge funds and funds of funds from

a gain of $2.9 million for the quarter ended March 31, 2009 to a loss of $0.1 million for the same period in 2010. The decrease in revenues from our family of hedge funds and funds of funds was partly offset by an increase in revenues from equity and other securities of $1.3 million and warrants and other investments of $0.3 million. The increase in equity and other security transaction revenues was primarily attributable to a $1.9 million increase in unrealized gain on our marketable equity securities from a loss of $1.1 million for the quarter ended March 31, 2009 to a gain of $0.8 million for the same period in 2010. In addition, unrealized gain on private equity securities increased from zero for the quarter ended March 31, 2009 to $0.4 million for the same period in 2010. These increases were partly offset by a decrease in unrealized gain on our convertible preferred security and equity security investments in NYMT from $1.2 million for the quarter ended March 31, 2009 to $0.2 million for the same period in 2010.

Gain on Sale and Payoff of Loans

Gain on sale and payoff of loans increased $3.5 million from zero for the quarter ended March 31, 2009 to $3.5 million for the same period in 2010, with all of the gain generated at JMP Credit. During the quarter ended March 31, 2010, 11 loans were sold or paid off, resulting in a total gain of $3.5 million. Of the total net gain of $3.5 million, $2.9 million was related to 10 loan payoffs, where the borrowers repaid the loans at a premium to our carrying value. The remaining $0.6 million was related to one loan which was sold at a premium to our carrying value. We expect further gains in future periods; however, these revenues are highly unpredictable as we are not actively marketing the loans collateralized by asset-backed securities for sale.

Net Dividend Income

Net dividend income increased $0.2 million or 41.9% from $0.4 million for the quarter ended March 31, 2009 to $0.6 million for the quarter ended March 31, 2010. The increase was primarily due to higher net dividends in our NYMT investment.

Other Income

Other income increased from $0.3 million for the quarter ended March 31, 2009 to $0.5 million for the quarter ended March 31, 2010. For the quarter ended March 31, 2009, other income was primarily comprised of revenues from fee sharing arrangements with, and fees earned to raise capital for, third-party investment partnerships or funds. For the quarter ended March 31, 2010, other income was comprised of the aforementioned revenues plus administrative agency fees at JMP Credit.

Interest Income

Interest income increased $11.3 million from $0.3 million for the quarter ended March 31, 2009 to $11.6 million for the same period in 2009. The increase was primarily due to the acquisition of Cratos which resulted in $11.5 million of interest income at JMP Credit for the quarter ended March 31, 2010.

At JMP Credit, total interest income of $11.5 million was mainly comprised of interest earned on our 122 performing loans of $5.2 million, amortization of purchase discounts and other deferred fees of $0.5 million and the non-cash amortization of the liquidity discounts on our loans of $5.8 million. The annualized weighted average interest rate on the loans was 5.11% with a spread to weighted average LIBOR of 4.85% for the quarter ended March 31, 2010. The Company did not recognize any interest income, other than the accretion of liquidity discounts, for 10 impaired loans with an aggregate weighted average loan balance of $71.3 million that were on non-accrual status during the quarter.

Interest Expense

Interest expense increased $8.1 million from $0.1 million for the quarter ended March 31, 2009 to $8.2 million for the same period in 2010. The increase was due to the acquisition of Cratos which resulted in $8.2 million of interest expense at JMP Credit.

At JMP Credit, interest expense of $8.2 million was comprised of interest expense on ABS issued of $1.1 million and non-cash amortization of the liquidity discount on the ABS issued of $7.1 million. The annualized weighted average cost of funds for the ABS issued during the quarter was 1.00% with a spread to weighted average LIBOR of 0.73%.

Provision for Loan Losses

Provision for loan losses decreased from $0.7 million for the quarter ended March 31, 2009 to $0.2 million for the same period in 2010. The decrease was primarily due to a decrease in provision against loans held for investment from $0.7 million for the quarter ended March 31, 2009 to zero for the quarter ended March 31, 2010, offset by an increase in provision against loans collateralizing ABS issued from zero for the quarter ended March 31, 2009 to $0.2 million for the quarter ended March 31, 2010. The provision against loans collateralizing ABS issued of $0.2 million was recorded as pooled reserve against performing loans that were purchased after the Cratos acquisition.

Expenses

Compensation and Benefits

Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions as well as equity-based compensation to our employees and managing directors, decreased $3.3 million, or 17.4%, from $18.8 million for the quarter ended March 31, 2009 to $15.5 million for the quarter ended March 31, 2010.

Employee payroll, taxes and benefits, and consultant fees, increased $1.0 million, or 14.6%, from $7.3 million for the quarter ended March 31, 2009 to $8.3 million for the quarter ended March 31, 2010 due to headcount increases which were partly attributable to the acquisition of Cratos on April 7, 2009.

Performance-based bonus and commission decreased $3.9 million, or 38.1%, from $10.2 million for the quarter ended March 31, 2009 to $6.3 million for the quarter ended March 31, 2010 primarily due to lower asset management revenues in 2010. Asset management revenues decreased from $8.5 million for the quarter ended March 31, 2009 to $2.9 million for the same period in 2010. In particular, incentive fees, for which we accrue performance-based bonuses at a higher rate than other types of revenues, decreased from $6.5 million for the quarter ended March 31, 2009 to $0.6 million for the same period in 2010.

Equity-based compensation decreased $0.5 million, or 34.2%, from $1.4 million for the quarter ended March 31, 2009 to $0.9 million for the quarter ended March 31, 2010 primarily due the acceleration of the vesting of 1,295,000 restricted stock units (“RSUs”) on November 2, 2009 as well as the scheduled vesting of 25% of RSUs granted in connection with the initial public offering on May 10, 2009. As a result of the acceleration on November 2, 2009, the Company recognized $4.7 million of amortization expense from future periods in the year ended December 31, 2009, thus eliminating the amortization expense on those RSUs that would have been recognized in the future periods, including the quarter ended March 31, 2010. The total equity-based compensation expense for the quarter ended March 31, 2010 and 2009 included $0.7 million and $1.0 million, respectively, recognized for RSUs granted in connection with the initial public offering and $0.2 million and $0.4 million, respectively, recognized for RSUs granted after the initial public offering.

Compensation and benefits as a percentage of revenues decreased from 77.7% of total net revenues after provision for loan losses for the quarter ended March 31, 2009 to 61.5% for the same period in 2010. This was primarily due to a decrease in asset management incentive fees, for which we accrue performance-based bonuses at a higher rate than other types of revenues, from the quarter ended March 31, 2009 to the same period in 2010. Excluding expense from RSU’s granted in connection with the initial public offering of $1.0 million and $0.7 million for the quarters ended March 31, 2009 and 2010, respectively, compensation and benefits as a percentage of total net revenues after provision for loan losses decreased from 73.7% for the quarter ended March 31, 2009 to 58.9% for the same period in 2010.

Administration

Administration expenses decreased $0.1 million, or 8.8%, from $1.1 million for the quarter ended March 31, 2009 to $1.0 million for the quarter ended March 31, 2010. As a percentage of total net revenues after provision for loan losses, administration expense decreased from 4.6% of total net revenues after provision for loan losses for the quarter ended March 31, 2009 to 4.1% for the same period in 2010.

Brokerage, Clearing and Exchange Fees

Brokerage, clearing and exchange fees increased $0.1 million, or 8.2%, from $1.3 million for the quarter ended March 31, 2009 to $1.4 million for the quarter ended March 31, 2010. The increase was primarily due to an increase in expenses related to trading systems and higher execution costs per share. As a percentage of total net revenues after provision for loan losses, our brokerage, clearing and exchange fees increased from 5.2% for the quarter ended March 31, 2009 to 5.4% for the same period in 2010.

Other Expenses

Other expenses increased $1.0 million, or 33.3%, from $2.9 million for the quarter ended March 31, 2009 to $3.9 million for the quarter ended March 31, 2010. The increase was primarily due to an increase in travel and entertainment expense of $0.6 million, an increase in market data expense of $0.2 million and an increase in administrative expense related to the CLO at JMP Credit of $0.1 million. As a percentage of total net revenues after provision for loan losses, other expenses increased from 12.1% for the quarter ended March 31, 2009 to 15.5% for the same period in 2010.

Net Income (Loss) Attributable to Noncontrolling Interest

Net income attributable to noncontrolling interest increased $0.3 million from net loss of $1 thousand for the three months ended March 31, 2009 to $0.3 million for the three months ended March 31, 2010. Noncontrolling interest for the three months ended March 31, 2010 includes the interest of third parties in JMP Credit and HMOP, majority-owned subsidiaries consolidated on our books. Noncontrolling interest for the three months ended March 31, 2009 relates to the interest of third parties in Opportunity Acquisition Corp. (“SPAC”). SPAC was liquidated on December 31, 2009. Because of the limited partners’ substantive kick-out rights, HMOP was not consolidated from January 2, 2009 through April 30, 2009. During the quarter ended June 30, 2009, several non-affiliated limited partners redeemed their interest in HMOP, and the remaining limited partners were no longer deemed to have substantive kick-out rights. As a result, the Company consolidated HMOP in its consolidated financial statements effective May 1, 2009.

Provision for Income Taxes

For the three months ended March 31, 2010 and 2009, we recorded tax expense of $1.4 million and $0.1 million, respectively. The effective tax rate for the three months ended March 31, 2010 and 2009 was 40.7% and 60.7%, respectively.

Financial Condition, Liquidity and Capital Resources

In the section that follows, we discuss the significant changes in the components of our balance sheet, cash flows and capital and liquidity for the three months ended March 31, 2010 to demonstrate where our capital is invested and the financial condition of the Company.

As of March 31, 2010, we had net liquid assets of $72.6 million, consisting of cash and cash equivalents, proceeds from short sales on deposit, receivable from clearing broker, marketable securities owned, and general partner investments in hedge funds managed by HCS, net of marketable securities sold but not yet purchased, accrued compensation, note payable and noncontrolling interest. We had an undrawn $18.9 million revolving line of credit with City National Bank (the “Lender”) at March 31, 2010.

Prior to our initial public offering, we satisfied our capital and liquidity requirements primarily through member contributions from our managing directors and internally generated cash from operations. Since our initial public offering, we have satisfied our capital and liquidity requirements primarily through the net proceeds from the initial public offering and internally generated cash from operations. Most of our financial instruments, other than loans collateralizing asset-backed securities issued, loans held for investment and asset-backed securities issued, are recorded at fair value or amounts that approximate fair value. At March 31, 2010 and December 31, 2009, the Company had Level 3 assets (assets whose fair value was determined using unobservable inputs that are not corroborated by market data) of $24.1 million and $23.9 million, respectively, which represented 4.3% and 4.2% of total assets, respectively.

On April 7, 2009, we invested $4.0 million of cash and granted $3.0 million original par amount, with a $2.3 million estimated fair value, of contingent consideration (a zero coupon note) to acquire 100% of the membership interests and net assets of $7.5 million of Cratos. As we own 100% of the subordinated securities of the CLO, in accordance with the authoritative guidance under GAAP on accounting for consolidation of variable interest entities, we are the primary beneficiary and are required to consolidate all of the assets and liabilities of the CLO securitization structure even though it is a bankruptcy remote entity with no recourse to us.

Our maximum exposure to loss of capital on the Cratos acquisition is the original April 7, 2009 investment of $4.0 million plus the $1.8 million paid to repurchase the contingent consideration, plus any earnings related to JMP Credit since the acquisition date. However, for U.S. federal tax purposes, the CLO is treated as a disregarded entity such that the taxable income earned in the CLO is taxable to us. If the CLO is in violation of certain coverage tests, mainly any of its overcollateralization ratios, residual cash flows otherwise payable to us as owners of the subordinated notes would be required to be used to buy additional collateral or repay indebtedness senior to us in the securitization. This could require us to pay income tax on earnings prior to the residual cash flow distributions to us.

The CLO must comply with certain asset coverage tests, such as tests that restrict the amount of discounted obligations and obligations rated “CCC” or lower it can hold. During any time the CLO exceeds such a limit, our ability, as CLO manager, to sell assets and reinvest available principal proceeds into substitute assets is restricted. In addition, defaulted obligations, discounted assets (those purchased below 85% of their par value) and assets rated “CCC” or lower in excess of applicable limits in the CLO’s investment criteria are not given full par credit for purposes of calculation of the CLO overcollateralization (“OC”) tests. Even though we believe it will be in compliance with all OC tests on the upcoming determination date in May 2010, on the quarterly determination dates in August 2009, November 2009 and February 2010, the CLO was in violation of its Class E OC test. In order to remedy the deficiency, we were required to use $10.2 million of the CLO’s residual cash flows to pay down Class A note holders, rather than distribute the funds to us as owners of the CLO’s subordinated notes. If the CLO continues to violate the Class E test, or any more senior tests, we will continue paying down the most senior notes with the residual cash flows until the violation is cured. In the most extreme case, if the CLO were in violation of the most senior OC test, the Class A note holders would have the ability to declare an event of default and cause an acceleration all principal and interest outstanding on the notes.

For financial reporting purposes, the loans and asset-backed securities are consolidated on our balance sheet. The loans are reported at their cost adjusted for amortization of liquidity discount and credit reserves, both of which were recorded at the Cratos acquisition date, purchase discounts and allowance for loan losses. The asset-backed securities are recorded net of liquidity discount only. At March 31, 2010, we had $344.0 million of loans collateralizing asset-backed securities, net, $24.0 million of restricted cash and $1.0 million of interest receivable funded by $330.2 million of asset-backed securities issued, net, and interest payable of $0.5 million. These assets and liabilities represented 66.9% of total assets and 78.2% of total liabilities respectively, reported on our consolidated statement of financial condition at March 31, 2010.

The tables below summarize the loans held by the CLO grouped by range of outstanding balance, industry and Moody’s Investors Services, Inc. rating category as of March 31, 2010.


(Dollars in thousands)	As of March 31, 2010
Range of Outstanding Balance	Number of Loans	Maturity Date		Total Principal
$0 - $500	8		12/2011 - 03/2017	$	3,551
$501 - $2,000	21		12/2012 - 03/2017		29,553
$2,001 - $5,000	61		05/2011 - 04/2016		219,332
$5,001 - $10,000	26		08/2011 - 02/2015		185,940
+$10,001	3		12/2009 - 10/2012		33,350

Total	119			$	471,726


(Dollars in thousands)	As of March 31, 2010
Industry	Number of Loans	Outstanding Balance		% of Outstanding Balance
Healthcare, Education & Childcare	13	$	52,739		11.2	%
Personal, Food & Misc Services	7		43,108		9.1	%
Electronics	8		30,413		6.4	%
Beverage, Food & Tobacco	7		28,973		6.1	%
Printing & Publishing	5		24,251		5.1	%
Hotels, Motels, Inns and Gaming	5		23,010		4.9	%
Telecommunications	8		22,887		4.9	%
Retail Store	6		21,675		4.6	%
Personal & Non-Durable Consumer Products	5		20,368		4.3	%
Chemicals, Plastics and Rubber	6		20,204		4.3	%
Aerospace & Defense	6		20,054		4.3	%
Utilities	5		15,633		3.3	%
Broadcasting & Entertainment	3		14,631		3.1	%
Insurance	2		14,502		3.1	%
Cargo Transport	2		13,802		2.9	%
Diversified/Conglomerate Service	2		13,615		2.9	%
Finance	4		13,155		2.8	%
Leisure, Amusement, Motion Pictures & Entertainment	4		12,497		2.6	%
Ecological	4		11,716		2.5	%
Farming & Agriculture	1		9,675		2.1	%
Machinery (Non-Agriculture, Non-Construction & Non-Electronic)	2		8,774		1.9	%
Oil and Gas	1		7,119		1.5	%
Personal Transportation	2		6,373		1.4	%
Diversified/Conglomerate Mfg	2		6,199		1.3	%
Other	9		16,353		3.5	%

Total	119	$	471,726		100.0	%


(Dollars in thousands)	As of March 31, 2010
Moody’s Rating Category	Number of Loans	Outstanding Balance		% of Outstanding Balance
Baa3	3	$	11,924		2.5	%
Ba1	8		22,601		4.8	%
Ba2	11		37,700		8.0	%
Ba3	17		52,298		11.1	%
B1	22		57,237		12.1	%
B2	28		107,165		22.7	%
B3	18		101,619		21.5	%
Caa1	5		24,459		5.2	%
Caa2	5		45,712		9.7	%
Caa3	1		385		0.1	%
Ca	1		10,626		2.3	%

Total	119	$	471,726		100.0	%

The timing of bonus compensation payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees and managing directors are generally paid semi-monthly during the year, bonus compensation, which makes up a larger portion of total compensation, is generally paid once a year during the first two months of the following year. In February 2010, we paid out $38.7 million of cash bonuses for 2009, excluding employer payroll tax expense.

The Company currently intends to declare quarterly cash dividends on all outstanding shares of common stock. The Company currently does not plan to pay dividends on unvested shares of restricted stock. In March 2010, the Company’s board of directors declared a quarterly cash dividend of $0.01 per share of common stock which the Company paid in April 2010, for the fourth quarter of 2009.

During the three months ended March 31, 2010, the Company repurchased 98,428 shares of the Company’s common stock at an average price of $8.03 per share for an aggregate purchase price of $0.8 million. The repurchases made during the year ended March 31, 2010 included 689,428 shares 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.

We had total restricted cash of $37.2 million comprised primarily of $24.0 million of restricted cash at JMP Credit on March 31, 2010. This balance was comprised of $3.6 million in interest received from loans in the CLO and $20.4 million in principal cash. The interest and fees will be restricted until the next payment date to note holders of the CLO. The principal restricted cash will be used to buy additional loans or pay down CLO notes.

Because of the nature of our investment banking and sales and trading businesses, liquidity is important to us. Accordingly, we regularly monitor our liquidity position, including our cash and net capital positions. We believe that our available liquidity, including undrawn $18.9 million line of credit, and current level of equity capital, combined with the net proceeds to us from the initial public offering and funds anticipated to be provided by our operating activities, will be adequate to meet our liquidity and regulatory capital requirements for at least the next twelve months.

JMP Securities, our wholly-owned subsidiary and a registered securities broker-dealer, is subject to the net capital requirements of the SEC’s Uniform Net Capital Rule. We use the basic method permitted by the Uniform Net Capital Rule to compute net capital, which generally requires that the ratio of aggregate indebtedness to net capital shall not exceed 15 to 1. SEC regulations also provide that equity capital may not be withdrawn or cash dividends paid if certain minimum net capital requirements are not met. JMP Securities had net capital of $17.2 million and $45.3 million, which were $15.4 million and $43.7 million in excess of the required net capital of $1.8 million and $1.6 million at March 31, 2010 and December 31, 2009, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.60 to 1 and 0.26 to 1 at March 31, 2010 and December 31, 2010, respectively.

A condensed table of cash flows for the three months ended March 31, 2010 and 2009 is presented below.


(Dollars in thousands)	Three Months Ended March 31,						Change from 2009 to 2010
(Dollars in thousands)	2010			2009			$			%
Cash flows used in operations	$	(51,926	)	$	(10,845	)	$	(41,081	)	-378.8	%
Cash flows provided by (used in) investing activities		8,529			(3,003	)		11,532		N/A
Cash flows (used in) provided by financing activities		(4,580	)		1,199			(5,779	)	N/A

Total cash flows	$	(47,977	)	$	(12,649	)	$	(35,328	)	-279.3	%


(Dollars in thousands)	Three Months Ended March 31,						Change from 2008 to 2009
(Dollars in thousands)	2009			2008			$			%
Cash flows used in operations	$	(10,845	)	$	(16,082	)	$	5,237		32.6	%
Cash flows used in investing activities		(3,003	)		(19,013	)		16,010		84.2	%
Cash flows provided by financing activities		1,199			4,201			(3,002	)	-71.5	%

Total cash flows	$	(12,649	)	$	(30,894	)	$	18,245		59.1	%

Cash Flows for the Three Months Ended March 31, 2010

Cash decreased by $48.0 million during the three months ended March 31, 2010, primarily as a result of cash used in operating activities.

Our operating activities used $51.9 million of cash from the net income of $2.0 million adjusted for the cash used in the change in operating assets and liabilities of $52.9 million, partly offset by non-cash revenue and expense items of $1.0 million. The decrease in cash from the change in operating assets and liabilities was primarily related to the bonus payout of $38.7 million. The non-cash revenue and expense items included gain on sale and payoff of loans of $3.5 million and net accretion expense of liquidity discount of $1.2 million.

Our investing activities provided $8.5 million of cash, which primarily due to cash provided by sales and payoff of loans collateralizing ABS of $34.2 million, repayments on loans collateralizing ABS of $26.9 million, net change in restricted cash reserved for lending activities of $10.6 million and sales of other investments of $21.3 million, offset by cash used in funding of loans collateralizing ABS of $67.5 million and purchases of other investments of $16.7 million.

Our financing activities used $4.6 million of cash primarily due to repayment of asset- backed securities issued of $3.5 million and repurchase of our common stock for treasury of $0.8 million.

Cash Flows for the Three Months Ended March 31, 2009

Cash decreased by $12.6 million during the three months ended March 31, 2009, primarily as a result of cash used in operating and investing activities.

Our operating activities used $10.8 million of cash from the net income of $34.5 thousand adjusted for the cash used in the change in operating assets and liabilities of $5.2 million and non-cash revenue and expense items of $5.6 million. The decrease in operating assets and liabilities was primarily due to the payout of $18.9 million in 2008 bonuses in February 2009.

Our investing activities used $3.0 million, which consisted mostly of $0.3 million of net purchases of other investments and $2.7 million in cash reduction attributable to the transfer of assets and liabilities from JMPRT, a consolidated subsidiary, to HMOP, a nonconsolidated hedge fund. During the three months ended March 31, 2009, we invested $2.0 million in HuaMei and $2.0 million in a mortgage fund as a limited partner and redeemed $3.8 million of our investment in the hedge funds managed by HCS.

Our financing activities provided $1.2 million of cash primarily due to a draw down on our revolving note with City National Bank of $2.1 million in the three months of 2009, offset by a repayment of term note payable of $0.4 million, our cash dividends paid to stockholders of $0.2 million and the repurchases of our common shares for treasury of $0.3 million.

Contractual Obligations

Our contractual obligations have not materially changed from those reported in our Annual Report on Form 10-K for the year ended December 31, 2009.

Off-Balance Sheet Arrangements

In connection with the CLO, the Company had unfunded commitments to lend of $3.4 million and standby letters of credit of $0.7 million as of March 31, 2010.

We had no other material off-balance sheet arrangements as of March 31, 2010. However, as described below under “Qualitative and Quantitative Disclosures About Market Risk—Credit Risk,” through indemnification provisions in our clearing agreements with our clearing broker, customer activities may expose us to off-balance sheet credit risk, which we seek to mitigate through customer screening and collateral requirements.

Qualitative and Quantitative Disclosures About Market Risk

Market Risk

Market risk represents the risk of loss that may result from the change in value of a financial instrument due to fluctuations in its market price. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is directly related to our role as a financial intermediary in customer trading and to our market making and investment activities. Market risk is inherent in financial instruments.

Even though we trade in equity securities as an active participant in both listed and OTC markets and we make markets in over two hundred stocks, we typically maintain very few securities in inventory overnight to minimize market risk. In addition, we act as agent rather than principal whenever we can and may use a variety of risk management techniques and hedging strategies in the ordinary course of our trading business to manage our exposures. Historically, in connection with our principal investments in publicly-traded equity securities, we have engaged in short sales of equity securities to offset the risk of purchasing other equity securities. In the future, we may utilize other hedging strategies such as equity derivative trades, although we have not engaged in derivative transactions in the past.

In connection with our sales and trading business, management evaluates the amount of risk in specific trading activities and determines our tolerance for such activities. Management monitors risks in its trading activities by establishing limits for the trading desk and reviewing daily trading results, inventory aging, and securities concentrations. Typically, market conditions are evaluated and transaction details and securities positions are reviewed. These activities seek to ensure that trading strategies are within acceptable risk tolerance parameters. Activities include price verification procedures, position reconciliations and reviews of transaction bookings. We believe these procedures, which stress timely communications between traders, trading management and senior management, are important elements of the risk management process.

Equity Price Risk

Equity price risk represents the potential loss in value due to adverse changes in the level or volatility of equity prices. We are exposed to equity price risk through our trading activities in both listed and OTC equity markets and security positions in our principal investment portfolio. We attempt to reduce the risk of loss inherent in our inventory of equity securities by establishing position limits, monitoring inventory turnover and entering into hedging transactions designed to mitigate our market risk profile.

Interest Rate Risk

Interest rate risk represents the potential loss from adverse changes in market interest rates. As we may hold U.S. Treasury securities and other fixed income securities and may incur interest-sensitive liabilities from time to time, we are exposed to interest rate risk arising from changes in the level and volatility of interest rates and in the shape of the yield curve.

Credit Risk

Our broker-dealer subsidiary places and executes customer orders. The orders are then settled by an unrelated clearing organization that maintains custody of customers’ securities and provides financing to customers.

Through indemnification provisions in our agreement with our clearing organization, customer activities may expose us to off-balance-sheet credit risk. We may be required to purchase or sell financial instruments at prevailing market prices in the event a customer fails to settle a trade on its original terms or in the event cash and securities in customer margin accounts are not sufficient to fully cover customer obligations. We seek to control the risks associated with brokerage services for our customers through customer screening and selection procedures as well as through requirements that customers maintain margin collateral in compliance with governmental and self-regulatory organization regulations and clearing organization policies.

Credit risk also includes the risk that we will not fully collect the principal we have invested in loans held for investment and loans collateralizing asset-backed securities issued due to borrower defaults. While we feel that our origination and underwriting of these loans will help to mitigate the risk of significant borrower defaults on these loans, we cannot assure you that all borrowers will continue to satisfy their payment obligations under these loans, thereby avoiding default.

Inflation Risk

Because our assets are generally liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation and communications charges, which may not be readily recoverable in the prices of services we offer. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our combined financial condition and results of operations in certain businesses.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting periods. We base our estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. The use of different estimates and assumptions could produce materially different results. For example, if factors such as those described in “Risk Factors” cause actual events to differ from the assumptions we used in applying the accounting policies, our results of operations, financial condition and liquidity could be adversely affected.

Our significant accounting policies are summarized in Note 2 to our consolidated financial statements included elsewhere in this report. On an ongoing basis, we evaluate our estimates and assumptions, particularly as they relate to accounting policies that we believe are most important to the presentation of our financial condition and results of operations. We regard an accounting estimate or assumption to be most important to the presentation of our financial condition and results of operations where:

•

the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

•

the impact of the estimate or assumption on our financial condition or operating performance is material.

Using the foregoing criteria, we consider the following to be our critical accounting policies:

Valuation of Financial Instruments

The Company adopted the amended accounting principles related to fair value measurements as of January 1, 2008, which establishes a consistent framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures with respect to fair value measurements. The amended accounting principles related to fair value measurement apply 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.

Most of our financial instruments, other than loans collateralizing asset-backed securities issued, loans held for investment and asset-backed securities issued, are recorded at fair value or amounts that approximate fair value. Marketable securities owned, Other investments, including warrant positions and investments in partnerships in which HCS is the general partner, and Marketable securities sold, but not yet purchased, are stated at fair value, with related changes in unrealized appreciation or depreciation reflected in the line item Principal transactions in the accompanying Consolidated Statements of Operations.

Fair value our financial instruments is generally obtained from quoted market prices, broker or dealer price quotations, or alternative pricing methodologies that we believe 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, we estimate the fair value of these instruments using various pricing models and the information available to us that we deem most relevant. Among the factors considered by us 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 OTC equity securities, as well as quasi-government agency securities. Other investments consist principally of investments in private investment funds managed by us or our affiliates, as well as cash paid for a subscription in a private investment fund. Such investments held by non-broker-dealer entities are accounted for under the equity method based on our share of the earnings (or losses) of the investee. The financial position and operating results of the private investment funds are generally determined on an estimated fair value basis as set forth in the AICPA Audit and Accounting Guide : Investment Companies. Generally, securities are valued (i) at their last published sale price if they are listed on an established exchange or (ii) if last sales prices are not published, at the highest closing “bid” price (for securities held “long”) and the lowest closing “asked” price (for “short” positions) as recorded by the composite tape system or such principal exchange, as the case may be. Where the general partner determines that market prices or quotations do not fairly represent the value of a security in the investment fund’s portfolio (for example, if a security is a restricted security of a class that is publicly traded) the general partner may assign a different value. The general partner will determine the estimated fair value of any assets that are not publicly traded.

Also included in other investments are NYMT convertible preferred stock and warrants on public and private common stock. The valuation of 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 unrealized gains and losses until realized. Estimated fair value is determined using the Black-Scholes Options Valuation methodology adjusted for active market and other considerations on a case-by-case basis.

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

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

•

Investment in NYMT convertible preferred stock; and

•

Investment in NYMT common stock

During the quarter ended March 31, 2010, the Company recorded unrealized gain of $0.2 million on the above investments in NYMT primarily in response to the improved performance of NYMT’s stock during the period.

In certain cases, we may continue to apply the equity method of accounting to those investments which are strategic in nature or are closely related to our principal business activities, where we have a significant degree of involvement in the cash flows or operations of the investee.

Asset Management Investment Partnerships

Investments in partnerships include our general partnership interests in investment partnerships. Such investments are held by our asset management subsidiary and are accounted for under the equity method based on our proportionate share of the earnings (or losses) of the investment partnership. In accordance with the AICPA Audit and Accounting Guide for investment companies, these interests are carried at estimated fair value based on our capital accounts in the underlying partnerships. The net assets of the investment partnerships consist primarily of investments in marketable and non-marketable securities. The underlying investments held by such partnerships are valued based on quoted market prices or estimated fair value if there is no public market. Such estimates of fair value of the partnerships’ non-marketable investments are ultimately determined by our affiliate in its capacity as general partner. Due to the inherent uncertainty of valuation, fair values of these non-marketable investments may differ from the values that would have been used had a ready market existed for these investments, and the differences could be material. Adjustments to carrying value are made, as required by GAAP, if there are third-party transactions evidencing a change in value. Downward adjustments are also made, in the absence of third-party transactions, if the general partner determines that the expected realizable value of the investment is less than the carrying value.

We earn base management fees from the investment partnerships that we manage generally based on the net assets of the underlying partnerships. In addition, we are entitled to allocations of the appreciation and depreciation in the fair value of the underlying partnerships from our general partnership interests in the partnerships. Such allocations are based on the terms of the respective partnership agreements.

We are also entitled to receive incentive fee allocations from the investment partnerships when the return exceeds a specified highwater mark or hurdle rate over a defined performance period. Incentive fees are recorded after the quarterly or annual investment performance period is complete and may vary depending on the terms of the fee structure applicable to an investor.

Loans Collateralizing Asset-backed Securities Issued

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

Loans acquired during the purchase and resulting consolidation of Cratos were recorded at their fair value as of the acquisition date, which then became the new basis of the loans. Any unamortized deferred fees or costs 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 unpaid principal balance to fair value consists of a nonaccretable credit discount and an accretable liquidity (or market value) discount. For the remaining loans acquired through the purchase of Cratos the discount to fair value was all accretable liquidity discount as the discount was not attributable to credit quality. For both types of loans the accretable portion of the discount is recognized into interest income as an adjustment to the yield of the loan over the contractual life of the loan using the interest method.

The Company continues to estimate the cash flows expected to be collected over the life of the loans acquired through the purchase of Cratos. If, upon subsequent evaluation, the Company believes it is unable to collect all cash flows expected at the acquisition date plus additional cash flows expected to be collected arising from changes in estimate after the acquisition, the loan is considered impaired for purposes of applying the authoritative guidance under GAAP on loss contingencies or, if applicable, the authoritative guidance under GAAP on loan impairment. Loans considered impaired at the acquisition date of Cratos can only 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 valuation allowance (or allowance for loan losses) for the loan 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 into the CLO 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 nonrefundable loan fees and related direct costs associated with the origination or purchase of loans are deferred and included in loans. The net deferred fees or costs are recognized as an adjustment to interest income over the contractual life of the loans using a method which approximates the interest method. Remaining amounts are recognized into income when the related loans are paid off or sold. Any discount from purchased loans is accreted into interest income as a yield adjustment over the contractual life of the loan.

The accrual of interest on loans is discontinued when principal or interest payments are 90 days or more past due or when, in the opinion of management, reasonable doubt exists as to the full collection of principal and/or interest. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Any reversals of income from previous years are recorded against the allowance for loan losses. When the Company receives a cash interest payment on a non-accrual loan, it is applied as a reduction of the principal balance. Non-accrual loans are returned to accrual status when the borrower becomes current as to principal and interest and have demonstrated a sustained period of payment performance. The amortization of loan fees is discontinued on nonaccrual loans and may be considered for write-off. Depending on the terms of the loan, a fee may be charged upon a prepayment which is recognized in the period of the prepayment. Syndication and structuring fees are recognized in the period the service is completed as non-interest income.

Allowance for Loan Losses

The Company maintains an allowance for loan losses that is intended to estimate loan losses inherent in its loan portfolio. A provision for loan losses is charged to expense to establish the allowance for loan losses. The allowance for loan losses is maintained at a level, in the opinion of management, sufficient to 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.

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

In accordance with the authoritative guidance under GAAP on loan impairment, any required impairment allowances are included in the allowance for loan losses. A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company measures impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral securing the loan if the loan is collateral dependent, depending on the circumstances and the Company’s collection strategy. For those loans held by Cratos at the date of acquisition by JMP Credit, and deemed impaired at that date or a subsequent date, loan loss provisions are calculated considering two further factors. For loans deemed impaired at the date of acquisition if there is a further decline in expected future cash flows, this reduction is recognized as specific loan loss provision 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 that reduction from the carrying value is booked as provision for loan losses. Therefore at the date of assessment, if the total discount from unpaid principal balance to carrying value is larger than the expected loss, no provision for loan losses is recognized for those loans acquired at Cratos but deemed impaired subsequent to their acquisition.

Loans which are deemed to be uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries on loans previously charged off are added to the allowance.

Asset-backed Securities Issued

Asset-backed securities issued (ABS) were issued to third parties from the CLO securitization structure which the Company consolidates for financial reporting purposes as of the April 7, 2009 acquisition date. At the acquisition date, the ABS were recorded at fair value with a liquidity discount from the principal balance outstanding to the fair value recorded. The liquidity discount is amortized into interest expense over the maturity of the ABS using the interest method.

Legal and Other Contingent Liabilities

We are involved in various pending and potential complaints, arbitrations, legal actions, investigations and proceedings related to our business from time to time. Some of these matters involve claims for substantial amounts, including claims for punitive and other special damages. The number of complaints, legal actions, investigations and regulatory proceedings against financial institutions like us has been increasing in recent years. We have, after consultation with counsel and consideration of facts currently known by management, recorded estimated losses in accordance with ASC 450-10 Accounting for Contingencies, to the extent that a claim may result in a probable loss and the amount of the loss can be reasonably estimated. The determination of these reserve amounts requires significant judgment on the part of management and our ultimate liabilities may be materially different. In making these determinations, management considers many factors, including, but not limited to, the loss and damages sought by the plaintiff or claimant, the basis and validity of the claim, the likelihood of successful defense against the claim and the potential for, and magnitude of, damages or settlements from such pending and potential complaints, legal actions, arbitrations, investigations and proceedings, and fines and penalties or orders from regulatory agencies.

If a potential adverse contingency should become probable or resolved for an amount in excess of the established reserves during any period, our results of operations in that period and, in some cases, succeeding periods, could be adversely affected.

Income Taxes

The Company accounts for income taxes in accordance with the authoritative guidance under GAAP on income taxes which requires the recognition of deferred tax assets and liabilities based upon the temporary differences between the financial reporting and tax bases of 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.

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures about market risk are set forth under the caption “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk.”

ITEM 4.

Controls and Procedures

Our management, with the participation of the Chairman and Chief Executive Officer and the Chief Financial Officer, has evaluated our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1.

Legal Proceedings

We are 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. We 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. However, we do not believe that we have any material legal or regulatory proceedings currently pending or threatened against us.

We review 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.

ITEM 1A.

Risk Factors

The risk factors included in our December 31, 2009 annual report on Form 10-K continue to apply to us, and describe risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statements contained in this Quarterly Report. There have not been any material changes from the risk factors previously described in our December 31, 2009 annual report on Form 10-K.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to purchases made by or on behalf of JMP Group Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the quarter ended March 31, 2010.


Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1, 2010 to January 31, 2010	42,149	(2)	$	7.78	42,149	644,845
February 1, 2010 to February 28, 2010	56,279	(2)	$	8.21	56,279	588,566
March 1, 2010 to March 31, 2010	—		$	—	—	588,566

Total	98,428				98,428

(1)

A 1.5 million share repurchase program authorized in August and November 2007 was fully executed as of January 18, 2008. On March 10, 2008 and March 3, 2009, the Company’s board of directors authorized the repurchase of an additional 2.0 million shares during the subsequent eighteen months and the repurchase of an additional 0.5 million shares during the subsequent twelve months, respectively.

(2)

For certain restricted stock units, the number of shares issued upon settlement of the restricted stock units was net of the statutory tax withholding requirements that we paid on behalf of our employees. The total number of shares purchased during the three months ended March 31, 2010 represents the net shares that were not issued to employees in connection with the settlement of restricted stock units, and therefore such shares were deemed to have been purchased by the Company.

ITEM 3.

Defaults Upon Senior Securities

None.

ITEM 4.

(Removed and Reserved)

ITEM 5.

Other Information

None.

ITEM 6.

Exhibits

See Exhibit Index.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 6, 2010


JMP Group Inc.

By:		/s/ JOSEPH A. JOLSON
Name:		Joseph A. Jolson
Title:		Chairman and Chief Executive Officer

By:		/s/ RAYMOND S. JACKSON
Name:		Raymond S. Jackson
Title:		Chief Financial Officer

EXHIBIT INDEX


Exhibit Number		Description
10.13.6		Form of Restricted Stock Unit Award Agreement

10.14		Summary of Compensation Arrangements with Executive Officers

10.17		Amendment Number Four to Credit Agreement (CNB)

31.1		Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.