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, see the MD&A for the fiscal year ended December 31, 2011 contained in our Annual Report on Form 10-K (the "2011 10-K") filed with the SEC on March 12, 2012, 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 2011 10-K. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our 2011 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
JMP Group Inc., together with its subsidiaries (collectively, the "Company", "we" or "us"), is a full-service investment banking and asset management firm headquartered in San Francisco, California. We have a diversified business model with a focus on small and middle-market companies and provide:
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investment banking, including corporate finance, mergers and acquisitions and other strategic advisory services, to corporate clients;
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●
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sales and trading, and related brokerage services to institutional investors;
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●
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proprietary equity research in our four target industries;
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●
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asset management products and services to institutional investors, high net-worth individuals and for our own account;
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●
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management of collateralized loan obligations; and
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●
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small business lending.
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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 and small business lending 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 capital market transactions 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, selling concessions and realized and unrealized net gains and losses on equity positions held in inventory for a period of time to facilitate the completion of certain underwritten transactions. 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 in 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 Capital Market and other Revenues
We earn agency capital market and other 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, 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 for hedge funds, hedge funds of funds, private equity funds and Harvest Capital Credit LLC ("HCC") include base management fees and incentive fees earned from managing investment partnerships sponsored by us. Earned base management fees are generally based on the fair value of assets under management or aggregate capital commitments and the fee schedule for each fund and account. We also earn incentive fees based upon the performance of investment funds and accounts. For most of the funds, 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. For private equity funds, incentive fees are based on a specified percentage of realized gains from the disposition of each portfolio investment in which each investor participates, and we earn after returning contributions by the investors for that portfolio investment and for all other portfolio investments in which each such investor participates that have been disposed of at the time of distribution.
As of September 30, 2012, the contractual base management fees earned from each of these investment funds ranged between 1% and 2% of assets under management or were 2% of aggregate committed capital. The contractual incentive fees were generally (i) 20%, subject to highwater marks, for the hedge funds; (ii) 5% to 20%, subject to high-water marks or a performance hurdle rate, for the funds of funds; (iii) 20%, subject to high-water marks, for Harvest Growth Capital LLC ("HGC"). 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. As we consolidate HCC and HGC, the management fees earned at HCS from HCC and HGC are eliminated on consolidation.
Asset management fees for the collateralized loan obligations ("CLOs") we manage currently consist only of senior and subordinated base management fees. We recognize base management fees for the CLOs on a monthly basis over the period in which the collateral management services are performed. The base management fees for the CLOs are calculated as a percentage of the average aggregate collateral balances for a specified period. As we consolidate Cratos CLO, the management fees earned at JMP Credit Advisors LLC ("JMPCA") from Cratos CLO are eliminated on consolidation in accordance with accounting principles generally accepted in the United States ("GAAP"). At September 30, 2012, the contractual senior and subordinated base management fees earned from the CLO were 0.50% of the average aggregate collateral balance for a specified period.
The following tables present certain information with respect to the investment funds managed by HCS and CLOs managed by JMPCA:
(In thousands)
|
|
Assets Under Management
(1)
at
|
|
Company's Share of Assets Under Management at
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Funds Managed by HCS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Harvest Opportunity Partners II (2)
|
|
$
|
104,657
|
|
|
$
|
74,953
|
|
|
$
|
4,662
|
|
|
$
|
3,931
|
|
Harvest Small Cap Partners
|
|
|
283,795
|
|
|
|
324,453
|
|
|
|
5,143
|
|
|
|
5,112
|
|
Harvest Franchise Fund
|
|
|
80,271
|
|
|
|
-
|
|
|
|
1,797
|
|
|
|
-
|
|
Harvest Agriculture Select (2)
|
|
|
28,981
|
|
|
|
12,149
|
|
|
|
2,447
|
|
|
|
1,995
|
|
Harvest Technology Partners (2)
|
|
|
91,539
|
|
|
|
58,712
|
|
|
|
115
|
|
|
|
113
|
|
Harvest Diversified Partners
|
|
|
23,986
|
|
|
|
23,637
|
|
|
|
14,207
|
|
|
|
12,921
|
|
Private Equity Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harvest Growth Capital LLC (3)
|
|
|
43,486
|
|
|
|
23,691
|
|
|
|
1,988
|
|
|
|
1,195
|
|
Funds of Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JMP Masters Fund
|
|
|
51,187
|
|
|
|
52,853
|
|
|
|
105
|
|
|
|
102
|
|
REITs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York Mortgage Trust
|
|
|
31,391
|
|
|
|
34,056
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harvest Capital Credit (3)
|
|
|
27,350
|
|
|
|
10,674
|
|
|
|
9,452
|
|
|
|
5,124
|
|
HCS Totals
|
|
$
|
766,643
|
|
|
$
|
615,178
|
|
|
$
|
39,916
|
|
|
$
|
30,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLOs by JMPCA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cratos CLO (3)
|
|
|
470,997
|
|
|
|
474,138
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Other (4)
|
|
|
-
|
|
|
|
107,274
|
|
|
|
N/A
|
|
|
|
N/A
|
|
JMPCA Totals
|
|
$
|
470,997
|
|
|
$
|
581,412
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JMP Group Inc. Totals
|
|
$
|
1,237,640
|
|
|
$
|
1,196,590
|
|
|
$
|
39,916
|
|
|
$
|
30,493
|
|
(1)
|
For hedge funds, private equity funds and funds of funds, assets under management represent the net assets of such funds. For NYMT, assets under management represent the portion of the net assets of NYMT that is subject to the incentive fee calculation. In connection with its investment in NYMT, in January 2008, we entered into an advisory agreement between HCS and NYMT. The advisory agreement was amended effective July 26, 2010. Under the amended advisory agreement, HCS managed certain assets of NYMT, which were subject to the base advisory fee and incentive fee calculations, and received an annual consulting fee equal to $1.0 million. On December 31, 2011, the amended advisory agreement was terminated, pending certain contingent advisory obligations. For CLOs, assets under management represent the sum of the aggregate collateral balance and restricted cash to be reinvested in collateral, upon which management fees are earned.
|
(2)
|
Harvest Opportunity Partners II ("HOP II"), Harvest Agriculture Select ("HAS"), and Harvest Technology Partners ("HTP") include managed accounts in which the Company has neither equity investment nor control. These are included as they follow the respective funds' strategies and earn fees.
|
(3)
|
HGC, HCC and Cratos CLO were consolidated in the Company’s Statements of Financial Condition at September 30, 2012 and December 31, 2011.
|
(4)
|
The CLO within Other initiated liquidation proceedings in December 2011. The remaining assets were distributed in 2012.
|
(In thousands)
|
|
Three Months Ended September 30, 2012
|
|
|
Three Months Ended September 30, 2011
|
|
|
|
Company's Share of Change in Fair Value
|
|
|
Management Fee
|
|
|
Incentive Fee
|
|
|
Company's Share of Change in Fair Value
|
|
|
Management Fee
|
|
|
Incentive Fee
|
|
Hedge Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harvest Opportunity Partners II (1)
|
|
$
|
231
|
|
|
|
185
|
|
|
|
290
|
|
|
$
|
(91
|
)
|
|
$
|
164
|
|
|
$
|
-
|
|
Harvest Small Cap Partners
|
|
|
91
|
|
|
|
1,275
|
|
|
|
883
|
|
|
|
258
|
|
|
|
1,378
|
|
|
|
3,068
|
|
Harvest Franchise Fund
|
|
|
(193
|
)
|
|
|
241
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Harvest Agriculture Select (1)
|
|
|
113
|
|
|
|
64
|
|
|
|
101
|
|
|
|
(253
|
)
|
|
|
21
|
|
|
|
-
|
|
Harvest Technology Partners (1)
|
|
|
1
|
|
|
|
268
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
179
|
|
|
|
-
|
|
Harvest Diversified Partners
|
|
|
507
|
|
|
|
42
|
|
|
|
57
|
|
|
|
(764
|
)
|
|
|
73
|
|
|
|
-
|
|
Private Equity Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harvest Growth Capital LLC (2)
|
|
|
(131
|
)
|
|
|
167
|
|
|
|
190
|
|
|
|
(149
|
)
|
|
|
203
|
|
|
|
-
|
|
Funds of Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JMP Masters Fund
|
|
|
1
|
|
|
|
119
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
152
|
|
|
|
-
|
|
REITs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York Mortgage Trust
|
|
|
-
|
|
|
|
-
|
|
|
|
235
|
|
|
|
(283
|
)
|
|
|
255
|
|
|
|
102
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harvest Capital Credit (2)
|
|
|
N/A
|
|
|
|
78
|
|
|
|
131
|
|
|
|
N/A
|
|
|
|
1
|
|
|
|
-
|
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cratos CLO (2)
|
|
|
N/A
|
|
|
|
594
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
594
|
|
|
|
-
|
|
Other (3)
|
|
|
N/A
|
|
|
|
-
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
296
|
|
|
|
-
|
|
Totals
|
|
$
|
620
|
|
|
$
|
3,033
|
|
|
$
|
1,887
|
|
|
$
|
(1,288
|
)
|
|
$
|
3,316
|
|
|
$
|
3,170
|
|
(1)
|
HOP II, HAS and HTP include managed accounts in which the Company has neither equity investment nor control. These are included with the funds, as they follow the respective strategies and earn fees.
|
(2)
|
Revenues earned from HGC, HCC, and Cratos are consolidated and then eliminated in consolidation in the Company’s Statements of Operations, net of non-controlling interest.
|
(3)
|
The CLO within Other initiated liquidation proceedings in December 2011. The remaining assets were distributed in 2012.
|
(In thousands)
|
|
Nine Months Ended September 30, 2012
|
|
|
Nine Months Ended September 30, 2011
|
|
|
|
Company's Share of Change in Fair Value
|
|
|
Management Fee
|
|
|
Incentive Fee
|
|
|
Company's Share of Change in Fair Value
|
|
|
Management Fee
|
|
|
Incentive Fee
|
|
Hedge Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harvest Opportunity Partners II (1)
|
|
$
|
453
|
|
|
|
473
|
|
|
|
401
|
|
|
$
|
34
|
|
|
$
|
516
|
|
|
$
|
96
|
|
Harvest Small Cap Partners
|
|
|
193
|
|
|
|
4,174
|
|
|
|
1,624
|
|
|
|
535
|
|
|
|
3,939
|
|
|
|
5,467
|
|
Harvest Franchise Fund
|
|
|
(203
|
)
|
|
|
595
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Harvest Agriculture Select (1)
|
|
|
353
|
|
|
|
144
|
|
|
|
200
|
|
|
|
(180
|
)
|
|
|
64
|
|
|
|
31
|
|
Harvest Technology Partners (1)
|
|
|
(8
|
)
|
|
|
692
|
|
|
|
618
|
|
|
|
9
|
|
|
|
427
|
|
|
|
508
|
|
Harvest Diversified Partners
|
|
|
1,229
|
|
|
|
128
|
|
|
|
120
|
|
|
|
(80
|
)
|
|
|
225
|
|
|
|
118
|
|
Private Equity Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harvest Growth Capital LLC (2)
|
|
|
394
|
|
|
|
493
|
|
|
|
266
|
|
|
|
(49
|
)
|
|
|
609
|
|
|
|
-
|
|
Funds of Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JMP Masters Fund
|
|
|
3
|
|
|
|
365
|
|
|
|
-
|
|
|
|
-
|
|
|
|
455
|
|
|
|
-
|
|
REITs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York Mortgage Trust
|
|
|
87
|
|
|
|
500
|
|
|
|
663
|
|
|
|
6
|
|
|
|
795
|
|
|
|
1,566
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harvest Capital Credit (2)
|
|
|
N/A
|
|
|
|
157
|
|
|
|
298
|
|
|
|
N/A
|
|
|
|
1
|
|
|
|
-
|
|
CLOs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cratos CLO (2)
|
|
|
N/A
|
|
|
|
1,787
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
1,778
|
|
|
|
-
|
|
Other (3)
|
|
|
N/A
|
|
|
|
24
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
886
|
|
|
|
-
|
|
Totals
|
|
$
|
2,501
|
|
|
$
|
9,532
|
|
|
$
|
4,190
|
|
|
$
|
275
|
|
|
$
|
9,695
|
|
|
$
|
7,786
|
|
(1)
|
HOP II, HAS and HTP include managed accounts in which the Company has neither equity investment nor control. These are included with the funds, as they follow the respective strategies and earn fees.
|
(2)
|
Revenues earned from HGC, HCC, and Cratos are consolidated and then eliminated in consolidation in the Company’s Statements of Operations, net of non-controlling interest.
|
(3)
|
The CLO within Other initiated liquidation proceedings in December 2011. The remaining assets were distributed in 2012.
|
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. Principal transaction revenues also include unrealized gains and losses on the private equity securities owned by HGC, a private equity fund managed by HCS which is consolidated in our financial statements, as well as unrealized gains and losses on the investments in private companies sponsored by HCS and JMP Capital LLC ("JMP Capital").
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 ("JMP Credit"). Gains are recorded when the proceeds exceed our carrying value of the loan. Gain on sale and payoff of loans also consists of lower of cost or market adjustments arising from loans held for sale. Losses are recorded when the carrying value exceeds fair value.
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. Other income also includes
non-recurring revenues associated with the conclusion of HCS's advisory relationship with NYMT. Refer to Note 2 in the Company's 2011 10-K for additional information regarding the termination of the advisory agreement between HCS and NYMT.
Interest Income
Interest income primarily consists of interest income earned on loans collateralizing asset backed securities issued, small business loans, 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 note payable. Interest expense on asset-backed securities is the stated coupon payable as a percentage of the principal amount as well as amortization of 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
Provision for loan losses includes provision for losses recognized on our loan notes and non-revolving credit agreements at JMP Capital (collectively, loans held for investment), on loans collateralizing ABS at JMP Credit, and on small business loans at HCC to record them at their estimated net realizable value. We maintain an allowance for loan losses that is intended to estimate loan losses inherent in our 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. Our estimate of each allowance component is based on observable information and on market and third party data that we believe are reflective of the underlying loan losses being estimated.
An allowance is provided for loans that are considered impaired. A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. We measure 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 our 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, we provide an allowance on a loan by loan basis at JMP Credit for loans that were purchased after the Cratos acquisition. We employ 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. We perform periodic detailed reviews of our loan portfolio to identify risks and to assess the overall collectability of loans.
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, travel and business development, communications and technology, professional fees, impairment loss on purchased management contract and other expenses. A significant portion of our expense base is variable, including compensation and benefits, brokerage clearing and exchange fees, travel and business development and communication and technology 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 clear our securities transactions through J.P. Morgan Clearing Corp. Changes in brokerage, clearing and exchange fees fluctuate largely in line with the volume of sales and trading activity.
Travel and Business Development
Travel and business development expense is net of expenses reimbursed by clients.
Communications and Technology
Communications and technology expense primarily relates to communication and information processing as well as the subscription of certain market data.
Professional Fees
Professional fees primarily relate to legal and accounting professional services.
Impairment Loss on Purchased Management Contract
Impairment loss on purchased management contract relates to a CLO management contract we purchased from Princeton Advisory Group, Inc. on September 8, 2010 for $3.8 million. Because a single investor had previously acquired control of the right to transfer the management contract without cause at any time with 90 days’ notice, we initially recorded an impairment charge of $2.8 million for the quarter ended September 30, 2010 and an additional impairment charge of $0.7 million in the quarter ended March 31, 2011. The CLO began liquidation proceedings in December 2011. The remaining assets will be distributed in 2012. See Note 9 in the 2011 10-K for further information.
Other Expenses
Other operating expenses primarily include occupancy, depreciation and CLO administration expense at JMP Credit.
Non-controlling Interest
Non-controlling interest for nine months ended September 30, 2012 includes the interest of third parties in Cratos CLO, HGC, and HCC, partially-owned subsidiaries consolidated in our financial statements. Non-controlling interest for the nine months ended September 30, 2011 includes the interest of third parties in Cratos CLO and HGC, partially-owned subsidiaries consolidated in our financial statements.
We follow 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 limited liability company agreements of HGC do not provide for the right of the members to remove the manager by a simple majority vote of the non-affiliated members and therefore the manager (with a minority interest in the limited liability company) is deemed to control HGC. As a result, we consolidated HGC from its inception on April 1, 2010.
On August 6, 2010, along with individual employee security holders (the “Unitholders”) of JMP Credit, we entered into an Exchange Agreement providing for, among other things, an offer to buy the minority interest units and shares in JMP Credit held by the Unitholders in exchange for a combination of (i) restricted common stock of the Company par value $.001 per share, (ii) cash and (iii) certain Cratos CLO subordinated notes. In connection with the Exchange Agreement, we issued an aggregate of 381,310 shares of restricted stock and transferred 109 subordinated notes to the Unitholders and we received all the remaining units and shares of JMP Credit that we did not previously own. The restricted stock and the Cratos CLO notes are subject to limitations on transfer and our repurchase rights in the event of certain terminations of the Unitholder’s employment with the Company or its affiliates through June 1, 2013. As a result of the aforementioned transaction, we own 100% of JMP Credit and approximately 94% of the subordinated notes of Cratos CLO.
On August 18, 2011, HCS entered into an investment management and advisory agreement with HCC. HCC makes direct investments in the form of subordinated debt and, to a lesser extent, senior debt and minority equity investments, in privately-held U.S. small to mid-size companies. HCC commenced operations in September 2011. HCS acts as its investment advisor, earning a base management fee equal to 2% annually of the gross assets acquired with equity. HCS does not charge a base management fee on assets funded through the Company's line of credit. JMP Credit Advisors provides HCC with its administrative services, and is reimbursed its expenses, including the allocable percentage of the compensation costs for the employees performing services under the agreement. The Company consolidates HCC into its consolidated financial statements.
Results of Operations
The following table sets forth our results of operations for the three and nine months ended September 30, 2012 and 2011 and is not necessarily indicative of the results to be expected for any future period.
(In thousands)
|
|
Three Months Ended
September 30,
|
|
|
Change from
2011 to 2012
|
|
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
12,218
|
|
|
$
|
10,048
|
|
|
$
|
2,170
|
|
|
|
21.6
|
%
|
Brokerage
|
|
|
5,371
|
|
|
|
6,898
|
|
|
|
(1,527
|
)
|
|
|
-22.1
|
%
|
Asset management fees
|
|
|
3,755
|
|
|
|
5,694
|
|
|
|
(1,939
|
)
|
|
|
-34.1
|
%
|
Principal transactions
|
|
|
(1,955
|
)
|
|
|
(6,290
|
)
|
|
|
4,335
|
|
|
|
-68.9
|
%
|
Gain on sale and payoff of loans
|
|
|
204
|
|
|
|
1,373
|
|
|
|
(1,169
|
)
|
|
|
-85.1
|
%
|
Net dividend (expense) income
|
|
|
(2
|
)
|
|
|
322
|
|
|
|
(324
|
)
|
|
|
-100.6
|
%
|
Other income
|
|
|
365
|
|
|
|
1,026
|
|
|
|
(661
|
)
|
|
|
-64.4
|
%
|
Non-interest revenues
|
|
|
19,956
|
|
|
|
19,071
|
|
|
|
885
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
8,333
|
|
|
|
7,451
|
|
|
|
882
|
|
|
|
11.8
|
%
|
Interest expense
|
|
|
(10,087
|
)
|
|
|
(9,024
|
)
|
|
|
(1,063
|
)
|
|
|
11.8
|
%
|
Net interest expense
|
|
|
(1,754
|
)
|
|
|
(1,573
|
)
|
|
|
(181
|
)
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(71
|
)
|
|
|
(123
|
)
|
|
|
52
|
|
|
|
-42.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues after provision for loan losses
|
|
|
18,131
|
|
|
|
17,375
|
|
|
|
756
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
17,358
|
|
|
|
15,970
|
|
|
|
1,388
|
|
|
|
8.7
|
%
|
Administration
|
|
|
1,645
|
|
|
|
2,246
|
|
|
|
(601
|
)
|
|
|
-26.8
|
%
|
Brokerage, clearing and exchange fees
|
|
|
902
|
|
|
|
1,275
|
|
|
|
(373
|
)
|
|
|
-29.3
|
%
|
Travel and business development
|
|
|
746
|
|
|
|
1,107
|
|
|
|
(361
|
)
|
|
|
-32.6
|
%
|
Communication and technology
|
|
|
909
|
|
|
|
1,013
|
|
|
|
(104
|
)
|
|
|
-10.3
|
%
|
Professional fees
|
|
|
967
|
|
|
|
806
|
|
|
|
161
|
|
|
|
20.0
|
%
|
Other
|
|
|
1,108
|
|
|
|
1,071
|
|
|
|
37
|
|
|
|
3.5
|
%
|
Total non-interest expenses
|
|
|
23,635
|
|
|
|
23,488
|
|
|
|
147
|
|
|
|
0.6
|
%
|
Loss before income tax expense
|
|
|
(5,504
|
)
|
|
|
(6,113
|
)
|
|
|
609
|
|
|
|
-10.0
|
%
|
Income tax benefit
|
|
|
(894
|
)
|
|
|
(1,410
|
)
|
|
|
516
|
|
|
|
-36.6
|
%
|
Net loss
|
|
|
(4,610
|
)
|
|
|
(4,703
|
)
|
|
|
93
|
|
|
|
-2.0
|
%
|
Less: Net loss attributable to non-controlling interest
|
|
|
(2,934
|
)
|
|
|
(3,080
|
)
|
|
|
146
|
|
|
|
-4.7
|
%
|
Net loss attributable to JMP Group Inc.
|
|
$
|
(1,676
|
)
|
|
$
|
(1,623
|
)
|
|
$
|
(53
|
)
|
|
|
3.3
|
%
|
(In thousands)
|
|
Nine Months Ended
September 30,
|
|
|
Change from
2011 to 2012
|
|
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
38,010
|
|
|
$
|
40,332
|
|
|
$
|
(2,322
|
)
|
|
|
-5.8
|
%
|
Brokerage
|
|
|
16,275
|
|
|
|
19,370
|
|
|
|
(3,095
|
)
|
|
|
-16.0
|
%
|
Asset management fees
|
|
|
10,721
|
|
|
|
14,893
|
|
|
|
(4,172
|
)
|
|
|
-28.0
|
%
|
Principal transactions
|
|
|
12,309
|
|
|
|
(106
|
)
|
|
|
12,415
|
|
|
|
N/A
|
|
Gain on sale and payoff of loans
|
|
|
2,643
|
|
|
|
14,981
|
|
|
|
(12,338
|
)
|
|
|
-82.4
|
%
|
Net dividend (expense) income
|
|
|
(25
|
)
|
|
|
870
|
|
|
|
(895
|
)
|
|
|
-102.9
|
%
|
Other income
|
|
|
3,507
|
|
|
|
2,536
|
|
|
|
971
|
|
|
|
38.3
|
%
|
Non-interest revenues
|
|
|
83,440
|
|
|
|
92,876
|
|
|
|
(9,436
|
)
|
|
|
-10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
24,051
|
|
|
|
25,799
|
|
|
|
(1,748
|
)
|
|
|
-6.8
|
%
|
Interest expense
|
|
|
(29,573
|
)
|
|
|
(26,460
|
)
|
|
|
(3,113
|
)
|
|
|
11.8
|
%
|
Net interest expense
|
|
|
(5,522
|
)
|
|
|
(661
|
)
|
|
|
(4,861
|
)
|
|
|
735.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(1,812
|
)
|
|
|
(477
|
)
|
|
|
(1,335
|
)
|
|
|
279.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues after provision for loan losses
|
|
|
76,106
|
|
|
|
91,738
|
|
|
|
(15,632
|
)
|
|
|
-17.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
55,833
|
|
|
|
66,218
|
|
|
|
(10,385
|
)
|
|
|
-15.7
|
%
|
Administration
|
|
|
4,604
|
|
|
|
5,060
|
|
|
|
(456
|
)
|
|
|
-9.0
|
%
|
Brokerage, clearing and exchange fees
|
|
|
2,656
|
|
|
|
3,552
|
|
|
|
(896
|
)
|
|
|
-25.2
|
%
|
Travel and business development
|
|
|
2,435
|
|
|
|
2,568
|
|
|
|
(133
|
)
|
|
|
-5.2
|
%
|
Communication and technology
|
|
|
2,642
|
|
|
|
2,929
|
|
|
|
(287
|
)
|
|
|
-9.8
|
%
|
Professional fees
|
|
|
2,324
|
|
|
|
2,311
|
|
|
|
13
|
|
|
|
0.6
|
%
|
Impairment loss on purchased management contract
|
|
|
-
|
|
|
|
700
|
|
|
|
(700
|
)
|
|
|
-100.0
|
%
|
Other
|
|
|
3,276
|
|
|
|
3,088
|
|
|
|
188
|
|
|
|
6.1
|
%
|
Total non-interest expenses
|
|
|
73,770
|
|
|
|
86,426
|
|
|
|
(12,656
|
)
|
|
|
-14.6
|
%
|
Income before income tax (benefit) expense
|
|
|
2,336
|
|
|
|
5,312
|
|
|
|
(2,976
|
)
|
|
|
-56.0
|
%
|
Income tax (benefit) expense
|
|
|
(1,547
|
)
|
|
|
2,354
|
|
|
|
(3,901
|
)
|
|
|
-165.7
|
%
|
Net income
|
|
|
3,883
|
|
|
|
2,958
|
|
|
|
925
|
|
|
|
31.3
|
%
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
|
6,832
|
|
|
|
(475
|
)
|
|
|
7,307
|
|
|
|
N/A
|
|
Net (loss) income attributable to JMP Group Inc.
|
|
$
|
(2,949
|
)
|
|
$
|
3,433
|
|
|
$
|
(6,382
|
)
|
|
|
-185.9
|
%
|
Three months ended September 30, 2012, Compared to Three months ended September 30, 2011
Overview
Total net revenues after provision for loan losses increased $0.7 million, or 4.4%, from $17.4 million for the quarter ended September 30, 2011 to $18.1 million for the quarter ended September 30, 2012, driven by an increase in non-interest revenues of $0.9 million.
Non-interest revenues increased $0.9 million, or 4.6%, from $19.1 million for the quarter ended September 30, 2011 to $20.0 million in the same period in 2012. This increase was primarily due to a $4.3 million decrease in principal transaction losses and a $2.2 million increase in investment banking revenues, partially offset by a $1.9 million decrease in asset management revenues, a $1.5 million decrease in brokerage revenues, and a $1.2 million decrease in the sale and payoff of loans.
Net interest expense increased $0.2 million, or 11.5%, from $1.6 million for the quarter ended September 30, 2011 to $1.8 million for the same period in 2012. The increase was primarily related to the net interest expense of JMP Credit, which increased from $1.6 million for the quarter ended September 30, 2011 to $2.7 million for the quarter ended September 30, 2012 as a result of increased net liquidity discount amortization. This increase in net interest expense was partially offset by an increase of net interest income at HCC, which increased from a net expense of $3.9 thousand to net income of $0.8 million for the quarters ended September 30, 2011 and 2012, respectively.
Provision for loan losses remained at $0.1 million for both the quarters ended September 30, 2011 and 2012.
Total non-interest expenses increased $0.1 million, or 0.6%, from $23.5 million for the quarter ended September 30, 2011 to $23.6 million for the quarter ended September 30, 2012, primarily due to an increase in compensation and benefits of $1.4 million, partially offset by a $0.6 million decrease in administration expenses, $0.4 million decrease in brokerage, clearing and exchange increases, and $0.4 million decrease in travel and business development.
Net loss attributable to JMP Group Inc. increased $0.1 million, or 3.3%, from a $1.6 million loss after income tax benefit of $1.4 million for the quarter ended September 30, 2011 to a $1.7 million loss after income tax benefit of $0.9 million for the quarter ended September 30, 2012.
Revenues
Investment Banking
Investment banking revenues increased $2.2 million, or 21.6%, from $10.0 million for the quarter ended September 30, 2011 to $12.2 million for the quarter ended September 30, 2012. As a percentage of total net revenues after provision for loan losses, investment banking revenues increased from 57.8% for the quarter ended September 30, 2011 to 67.4% for the quarter ended September 30, 2012. Public equity underwriting revenues increased $2.0 million, or 27.7%, from $7.3 million for the quarter ended September 30, 2011 to $9.3 million for the quarter ended September 30, 2012. We executed 28 and 13 public equity underwriting transactions in the quarters ended September 30, 2012 and 2011, respectively. We acted as a lead manager on seven transactions in the quarter ended September 30, 2012 compared to four in the same period in 2011. Private capital markets and other transaction revenues increased $0.8 million, or 297.4%, from $0.2 million for the quarter ended September 30, 2011 to $1.0 million for the same period in 2012. We executed two transactions related to private capital markets and other transactions in the quarter ended September 30, 2012 compared to zero in the same period in 2011. Our strategic advisory revenues decreased $0.5 million, or 21.1%, from $2.1 million for the quarter ended September 30, 2011 to $1.6 million for the quarter ended September 30, 2012. We executed three strategic advisory transactions in both the quarters ended September 30, 2012 and 2011. Our debt and convertible revenues decreased $0.1 million, or 33.7%, from $0.4 million for the quarter ended September 30, 2011 to $0.3 million for the quarter ended September 30, 2012. We executed three debt and convertible transactions in the quarter ended September 30, 2012 compared to one in the same period in 2011.
Brokerage Revenues
Brokerage revenues decreased $1.5 million, or 22.1%, from $6.9 million for the quarter ended September 30, 2011 to $5.4 million for the quarter ended September 30, 2012. The decrease was primarily the result of reduced trading volume. Brokerage revenues decreased as a percentage of total net revenues after provision for loan losses, from 39.7% for the quarter ended September 30, 2011 to 29.6% for the quarter ended September 30, 2012.
Asset Management Fees
Asset management fees decreased $1.9 million, or 34.1%, from $5.7 million for the quarter ended September 30, 2011 to $3.8 million for the quarter ended September 30, 2012. Asset management fees include base management fees and incentive fees for funds and CLOs under management. Base management fees were $2.5 million and $2.2 million for the quarters ended September 30, 2011 and September 30, 2012. Incentive fees decreased $1.6 million from $3.2 million for the quarter ended September 30, 2011 to $1.6 million for the same period in 2012, primarily related to a decrease of $
2.2 million in incentive fees earned at Harvest Small Cap Partners, partially offset by increases of $0.3 million earned at HOP II and $0.2 million at HGC. As a percentage of total net revenues after provision for loan losses, asset management fees decreased from 32.8% for the quarter ended September 30, 2011 to 20.7% for the same period in 2012.
Principal Transactions
Principal transaction losses decreased $4.3 million, or 68.9%, from a $6.3 million loss for the quarter ended September 30, 2011 to a $2.0 million loss for the same period in 2012. The difference primarily reflects fewer losses from equity and other securities, and higher revenues from investment partnerships. Losses from equity and other securities decreased $2.2 million from a $4.5 million loss for the quarter ended September 30, 2011 to a $2.3 million loss for the same period in 2012, driven by an increase of $2.1 million revenue related to our principal investment portfolio. Revenues from our family of hedge funds and funds of funds increased $1.6 million, from a $0.9 million loss for the quarter ended September 30, 2011 to a $0.7 million gain for the quarter ended September 30, 2012. This increase primarily reflects a $1.3 million increase related to HDP and a $0.4 million increase related to HAS. Losses from our warrants and other investments decreased $0.6 million from a $1.0 million loss for the quarter ended September 30, 2011 to a $0.4 million loss for the quarter ended September 30, 2012. As a percentage of total net revenues after provision for loan losses, principal transaction revenues decreased from 36.2% for the quarter ended September 30, 2011 to 10.8% for the same period in 2012.
Gain on Sale and Payoff of Loans
Gain on sale and payoff of loans decreased $1.2 million, or 85.1% from $1.4 million for the quarter ended September 30, 2011 to $0.2 million for the same period in 2012, with all of the gain generated at JMP Credit. The 2012 gains included a $0.4 million gain reflecting fair value adjustments of the loan held for sale. A $0.2 million net gain resulted from 16 loan payoffs, where the borrowers repaid the loans at par, which was a premium to our carrying value. Partially offsetting this gain, 12 loans were sold, resulting in a total net loss of $0.4 million. The $0.2 million net loss of the sale and payoff of loans was primarily the result of activity from the loans acquired subsequent to the 2009 acquisition of Cratos. A gain of $45.5 thousand related to loans acquired in the acquisition. While we expect gains in future periods, these revenues are highly unpredictable as we are not actively marketing the loans collateralizing asset-backed securities for sale and the remaining amount of discount from the 2009 acquisition continues to be reduced by the loan liquidity discount accretion even if there are no further gains to be recognized. As a percentage of total net revenues after provision for loan losses, gain on sale and payoff of loans decreased from 7.9% for the quarter ended September 30, 2011 to 1.1% for the same period in 2012.
Net Dividend Income
Net dividend income was a loss of $1.5 thousand and income of $0.3 million for the quarters ended September 30, 2012 and 2011, respectively. For the quarter ended September 30, 2011, dividend income was primarily comprised of dividend income from our investments in NYMT and in our principal investment portfolio.
Other Income
Other income decreased $0.6 million, or 64.4%, from $1.0 million for the quarter ended September 30, 2011 to $0.4 million for the quarter ended September 30, 2012. For both quarters 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.
Interest Income
Interest income increased $0.8 million, or 11.8%, from $7.5 million for the quarter ended September 30, 2011 to $8.3 million for the same period in 2012. The increase primarily related to HCC, which recorded interest income of $12.7 thousand and $1.0 million for the quarters ended September 30, 2011 and 2012. JMP Credit recorded interest income of $7.2 million for both quarters ended September 30, 2012 and 2011. As a percentage of total net revenues after provision for loan losses, interest income increased from 42.9% for the quarter ended September 30, 2011 to 46.0% for the quarter ended September 30, 2012.
The following table sets forth components of net interest expense for the quarters ended September 30, 2012 and 2011:
(In thousands)
|
|
Three Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Cratos CLO loan contractual interest income
|
|
$
|
5,474
|
|
|
$
|
5,379
|
|
Cratos CLO ABS issued contractual interest expense
|
|
|
(1,311
|
)
|
|
|
(1,118
|
)
|
Net Cratos CLO contractual interest
|
|
|
4,163
|
|
|
|
4,261
|
|
|
|
|
|
|
|
|
|
|
Cratos CLO loan liquidity discount accretion
|
|
|
1,099
|
|
|
|
1,305
|
|
Cratos CLO ABS liquidity discount amortization
|
|
|
(8,556
|
)
|
|
|
(7,639
|
)
|
Net Cratos CLO liquidity discount amortization
|
|
|
(7,457
|
)
|
|
|
(6,334
|
)
|
|
|
|
|
|
|
|
|
|
HCC interest income
|
|
|
1,017
|
|
|
|
13
|
|
HCC interest expense
|
|
|
(220
|
)
|
|
|
(17
|
)
|
Total net interest income (expense)
|
|
$
|
797
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Other interest income
|
|
|
743
|
|
|
|
754
|
|
Other interest expense
|
|
|
-
|
|
|
|
(250
|
)
|
Total net interest expense
|
|
$
|
(1,754
|
)
|
|
$
|
(1,573
|
)
|
Total net interest expense increased from $1.6 million for the quarter ended September 30, 2011 to $1.8 million for the quarter ended September 30, 2012 primarily due to reduced loan liquidity discount accretion, offset by an increase in interest income related to HCC. As loans acquired in the 2009 acquisition of Cratos are sold or paid off, the remaining loan liquidity discount to accrete is reduced, thereby lowering the discount accretion and total net interest income.
The following tables set forth contractual interest income and expense related to Cratos CLO loans and ABS issued and their weighted average contractual interest rates:
(In thousands)
|
|
Three Months Ended September, 2012
|
|
|
|
Interest Income (Expense)
|
|
|
Average CLO Loan (CLO ABS Issued) Balance
|
|
|
Weighted Average Contractual Interest Rate
|
|
|
Weighted Average LIBOR
|
|
|
Spread to Weighted Average LIBOR
|
|
Cratos CLO loan contractual interest income
|
|
$
|
5,474
|
|
|
$
|
428,186
|
|
|
|
5.00
|
%
|
|
|
0.45
|
%
|
|
|
4.55
|
%
|
Cratos CLO ABS issued contractual interest expense
|
|
|
(1,311
|
)
|
|
|
431,003
|
|
|
|
1.19
|
%
|
|
|
0.45
|
%
|
|
|
0.74
|
%
|
Net Cratos CLO contractual interest
|
|
$
|
4,163
|
|
|
$
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
(In thousands)
|
|
Three Months Ended September, 2011
|
|
|
|
Interest Income (Expense)
|
|
|
Average CLO Loan (CLO ABS Issued) Balance
|
|
|
Weighted Average Contractual Interest Rate
|
|
|
Weighted Average LIBOR
|
|
|
Spread to Weighted Average LIBOR
|
|
Cratos CLO loan contractual interest income
|
|
$
|
5,379
|
|
|
$
|
444,420
|
|
|
|
4.74
|
%
|
|
|
0.28
|
%
|
|
|
4.46
|
%
|
Cratos CLO ABS issued contractual interest expense
|
|
|
(1,118
|
)
|
|
|
431,003
|
|
|
|
1.02
|
%
|
|
|
0.28
|
%
|
|
|
0.74
|
%
|
Net Cratos CLO contractual interest
|
|
$
|
4,261
|
|
|
$
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
At JMP Credit, for the quarter ended September 30, 2012, total interest income of $7.2 million was comprised of contractual interest earned on Cratos CLO loans of $5.5 million, purchase discounts and other deferred fee amortization of $0.6 million and non-cash liquidity discount accretion of $1.1 million. Contractual interest was earned on the performing loans held by Cratos CLO. The non-cash liquidity discount accretion of $1.1 million included a $0.1 million adjustment to previously recognized accretion due to unscheduled principal payments. The annualized weighted average contractual interest rate (excluding the liquidity discount accretion) on the performing loans was 5.00% with a spread to weighted average LIBOR of 4.55% for the quarter ended September 30, 2012. The Company recognized $40.1 thousand of interest income, other than the accretion of liquidity discounts on those loans deemed impaired at the acquisition of Cratos, for the two impaired loans with an aggregate weighted average loan balance of $1.5 million that were on non-accrual status during the quarter.
At JMP Credit, for the quarter ended September 30, 2011, total interest income of $7.2 million was comprised of contractual interest earned on Cratos CLO loans of $5.4 million, purchase discounts and other deferred fee amortization of $0.5 million and non-cash liquidity discount accretion of $1.3 million. Contractual interest was earned on the performing loans held by Cratos CLO. The non-cash liquidity discount accretion of $1.3 million included a $0.2 million adjustment to previously recognized accretion due to unscheduled principal payments. The annualized weighted average contractual interest rate (excluding the liquidity discount accretion) on the performing loans was 4.74% with a spread to weighted average LIBOR of 4.46% for the quarter ended September 30, 2011. The Company recognized $37.7 thousand of interest income, other than the accretion of liquidity discounts on those loans deemed impaired at the acquisition of Cratos, for the three impaired loans with an aggregate weighted average loan balance of $14.3 million that were on non-accrual status during the quarter.
Interest Expense
Interest expense increased $1.1 million, or 11.8%, from $9.0 million for the three months ended September 30, 2011 to $10.1 million for the same period in 2012. The increase was primarily related to JMP Credit, which recorded interest expense of $9.9 million and $8.8 million for the three months ended September 30, 2012 and 2011, respectively.
At JMP Credit, for the quarter ended September 30, 2012, interest expense of $9.9 million was comprised of interest expense on ABS issued of $1.3 million and non-cash amortization of the liquidity discount on the ABS issued of $8.6 million. The annualized weighted average cost of funds (excluding the liquidity discount amortization) for the ABS issued during the quarter was 1.19% with a spread to weighted average LIBOR of 0.74%.
At JMP Credit, for the quarter ended September 30, 2011, interest expense of $8.8 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 $7.6 million. The annualized weighted average cost of funds (excluding the liquidity discount amortization) for the ABS issued during the quarter was 1.02% with a spread to weighted average LIBOR of 0.74%.
Provision for Loan Losses
We recorded a reversal of general reserves of $0.1 million and a provision of $0.1 million during the quarters ended September 30, 2012 and September 30, 2011, both recorded as a general reserve against performing loans.
Expenses
Compensation and Benefits
Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions, as well as equity-based compensation to our employees and managing directors, increased $1.4 million, or 8.7%, from $16.0 million for the quarter ended September 30, 2011 to $17.4 million for the quarter ended September 30, 2012.
Employee payroll, taxes and benefits, and consultant fees were $8.5 million for both the quarters ended September 30, 2011 and 2012, respectively.
Performance-based bonus and commission increased $1.2 million, or 16.2%, from $7.4 million for the quarter ended September 30, 2011 to $8.6 million for the quarter ended September 30, 2012. The increase was primarily due to the increase in total net revenues after provision for loan losses from $17.4 million for the quarter ended September 30, 2011 to $18.1 million for the same period in 2012.
Equity-based compensation was $0.1 million and $0.2 million for the quarters ended September 30, 2011 and 2012, respectively. The total equity-based compensation expense for the quarter ended September 30, 2011 and 2012 included $0.1 million and $0.2 million, respectively, recognized for RSUs granted after the IPO.
Compensation and benefits as a percentage of revenues increased from 91.9% of total net revenues after provision for loan losses for the quarter ended September 30, 2011 to 95.7% for the same period in 2012. Approximately $3.2 million and $4.2 million of the unrealized loss on HGC for the quarters ended September 30, 2011 and 2012, respectively, was attributable to non-controlling interest holders and therefore, did not have associated performance-based bonus expense, resulting in the higher percentages for these periods.
Administration
Administration expense decreased $0.6 million from $2.2 million for the quarter ended September 30, 2011 to $1.6 million for the quarter ended September 30, 2012. As a percentage of total net revenues after provision for loan losses, administration expense decreased from 12.9% for the quarter ended September 30, 2011 to 9.1% for the same period in 2012.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees were $1.3 million and $0.9 million for the quarters ended September 30, 2011 and September 30, 2012, respectively. As a percentage of total net revenues after provision for loan losses, our brokerage, clearing and exchange fees decreased from 7.3% for the quarter ended September 30, 2011 to 5.0% for the same period in 2012.
Travel and Business Development
Travel and business development expense decreased from $1.1 million for the quarter ended September 30, 2011 to $0.7 million for the same period in 2012. As a percentage of total net revenues after provision for loan losses, travel and business development expense decreased from 6.4% for the quarter ended September 30, 2011 to 4.1% for the same period in 2012.
Communications and Technology
Communications and technology expense decreased from $1.0 million for the quarter ended September 30, 2011 to $0.9 million for the same period in 2012. As a percentage of total net revenues after provision for loan losses, communications and technology expense decreased from 5.8% for the quarter ended September 30, 2011 to 5.0% for the same period in 2012.
Professional Fees
Professional fees were $0.8 million and $1.0 million for the quarters ended September 30, 2011 and September 30, 2012, respectively. As a percentage of total net revenues after provision for loan losses, professional fees increased from 4.6% for the quarter ended September 30, 2011 to 5.3% for the same period in 2012.
Other Expenses
Other expenses were $1.0 and $1.1 million for the quarters ended September 30, 2011 and 2012, respectively. As a percentage of total net revenues after provision for loan losses, other expenses were 6.2% and 6.1% for the quarters ended September 30, 2011 and 2012, respectively.
Net Income (Loss) Attributable to Non-controlling Interest
Net loss attributable to non-controlling interest decreased from $3.1 million for the quarter ended September 30, 2011 to $2.9 million for the quarter ended September 30, 2012. Non-controlling interest for the quarter ended September 30, 2012 includes the interest of third parties in Cratos CLO, HCC and HGC, partially-owned subsidiaries consolidated in our financial statements. Non-controlling interest for the quarter ended September 30, 2011 includes the interest of third parties in Cratos CLO, and HGC, partially-owned subsidiaries consolidated in our financial statements.
Provision for Income Taxes
For the quarter ended September 30, 2011 and 2012, we recorded income tax benefits of $1.4 million and of $0.9 million, respectively. The effective tax rates for the quarters ended September 30, 2011 and 2012 were 23.1% and 16.2%, respectively. The 6.9% change in the effective tax rate for the quarter ended September 30, 2012 compared to same period in 2011 was primarily attributable to the income associated with HGC which is consolidated for financial reporting purposes but not for tax purposes.
Nine months ended September 30, 2012, Compared to Nine months ended September 30, 2011
Overview
Total net revenues after provision for loan losses decreased $15.6 million, or 17.0%, from $91.7 million for the nine months ended September 30, 2011 to $76.1 million for the nine months ended September 30, 2012, driven by a decrease in non-interest revenues of $9.4 million as well as a decrease in net interest income of $4.9 million.
Non-interest revenues decreased $9.5 million, or 10.2%, from $92.9 million for the nine months ended September 30, 2011 to $83.4 million in the same period in 2012, primarily due to a $12.3 million decrease in the sale and payoff of loans, a $4.2 million decrease in asset management fee, a $3.1 million decrease in brokerage revenues, partially offset by an increase of $12.4 million in the principal transaction revenues.
Net interest expense increased $4.8 million, from $0.7 million for the nine months ended September 30, 2011 to $5.5 million for the same period in 2012. The increase primarily related to the net interest expense of JMP Credit, which increased from $0.7 million for the nine months ended September 30, 2011 to $7.6 million for the nine months ended September 30, 2012 as a result of increased net liquidity discount amortization. This increase in net interest expense was partially offset by an increase in net interest income at HCC from a $3.9 thousand net interest expense for the nine months ended September 30, 2011 to net interest income of $1.8 million for the nine months ended September 30, 2012.
Provision for loan losses increased $1.3 million, or 279.9%, from $0.5 million for the nine months ended September 30, 2011 to $1.8 million for the same period in 2012, primarily attributed to a specific reserve recorded against a non-performing loan purchased with the Cratos acquisition.
Total non-interest expenses decreased $12.6 million, or 14.6%, from $86.4 million for the nine months ended September 30, 2011 to $73.8 million for the nine months ended September 30, 2012, primarily due to a decrease in compensation and benefits of $10.4 million compared to the nine months ended September 30, 2011.
Net income attributable to JMP Group Inc. decreased $6.3 million, or 185.9%, from $3.4 million after income tax expense of $2.4 million for the nine months ended September 30, 2011 to a loss of $2.9 million after income tax benefit of $1.5 million for the nine months ended September 30, 2012.
Revenues
Investment Banking
Investment banking revenues decreased $2.3 million, or 5.8%, from $40.3 million for the nine months ended September 30, 2011 to $38.0 million for the same period in 2012. As a percentage of total net revenues after provision for loan losses, investment banking revenues increased from 44.0% for the nine months ended September 30, 2011 to 49.9% for the nine months ended September 30, 2012. Our debt and convertible revenues decreased $3.9 million, or 61.8% from $6.3 million in the nine months ended September 30, 2011 to $2.4 million for the nine months ended September 30, 2012. We executed 13 debt and convertible transactions in the nine months ended September 30, 2012 compared to seven in the same period in 2011. Public equity underwriting revenues decreased $0.6 million, or 2.5%, from $25.7 million for the nine months ended September 30, 2011 to $25.1 million for the nine months ended September 30, 2012. We executed 67 and 53 public equity underwriting transactions in the nine months ended September 30, 2012 and 2011, respectively. We acted as lead manager on nine and 13 transactions in the nine months ended September 30, 2011 and 2012, respectively. Our strategic advisory revenues increased $1.6 million, or 36.1%, from $4.7 million for the nine months ended September 30, 2011 to $6.3 million for the nine months ended September 30, 2012. We executed nine strategic advisory transactions in the nine months ended September 30, 2012 compared to 10 in the nine months ended September 30, 2011. Private capital markets and other revenues increased $0.5 million, or 13.6%, from $3.7 million for the nine months ended September 30, 2011 to $4.2 million for the same period in 2012. We executed five transactions related to private capital markets and other in the nine months ended September 30, 2011 and seven transactions in the same period in 2012.
Brokerage Revenues
Brokerage revenues decreased $3.1 million, or 16.0%, from $19.4 million for the nine months ended September 30, 2011 to $16.3 million for the nine months ended September 30, 2012. The decrease was primarily the result of reduced trading volume. Brokerage revenues decreased as a percentage of total net revenues after provision for loan losses, from 21.1% for the nine months ended September 30, 2011 to 21.4% for the nine months ended September 30, 2012.
Asset Management Fees
Asset management fees decreased $4.2 million, or 28.0%, from $14.9 million for the nine months ended September 30, 2011 to $10.7 million for the nine months ended September 30, 2012. Asset management fees include base management fees and incentive fees for funds and CLOs under management. Base management fees were $7.1 million for both the nine months ended September 30, 2011 and 2012. Incentive fees decreased from $7.8 million for the nine months ended September 30, 2011 to $3.6 million for the same period in 2012. The decrease in incentive fees primarily related to a decrease of $3.8 million due to incentive fees earned at Harvest Small Cap Partners and a decrease of $0.9 million of incentive fees earned at NYMT. As a percentage of total net revenues after provision for loan losses, asset management fees decreased from 16.2% for the nine months ended September 30, 2011 to 14.1% for the same period in 2012.
Principal Transactions
Principal transaction revenues increased $12.4 million, from a $0.1 million loss for the nine months ended September 30, 2011 to $12.3 million for the same period in 2012. The increase reflects higher revenues from our investments in equity and other securities. Revenues from equity and other securities increased $9.3 million from $0.2 million for the nine months ended September 30, 2011 to $9.5 million for the same period in 2012, driven primarily by a $7.5 million increase in gains in our HGC investments and a $1.7 million increase in gains related to our principal investment portfolio. Revenues from our family of hedge funds and funds of funds increased $1.7 million, from $0.3 million for the nine months ended September 30, 2011 to $2.0 million for the same period in 2012, driven primarily from a $1.3 million increase in our HDP investments. Revenues from our warrants and other investments increased $1.4 million from a $0.6 million loss for the nine months ended September 30, 2011 to a $0.8 million gain for the same period in 2012, driven primarily by a $0.9 million gain in redemptions from Sanctuary. As a percentage of total net revenues after provision for loan losses, principal transaction revenues increased from 0.1% for the nine months ended September 30, 2011 to 16.2% for the same period in 2012.
Gain on Sale and Payoff of Loans
Gain on sale and payoff of loans decreased $12.4 million from $15.0 million for the nine months ended September 30, 2011 to $2.6 million for the same period in 2012, all of which was generated at JMP Credit. During the nine months ended September 30, 2012, 67 loans were sold or paid off, resulting in a total net gain of $2.4 million. Of the $2.4 million net gain, $1.7 million resulted from loans acquired in the 2009 acquisition of Cratos and $0.7 million was the result of activity from the loans acquired subsequent to the acquisition. An additional $0.2 million gain was recorded to reflect fair value adjustments of the loan held for sale. $2.7 million of the net gain was related to 46 loan payoffs, where the borrowers repaid the loans at par, which was a premium to our carrying value. While we expect further gains in future periods, these revenues are highly unpredictable as we are not actively marketing the loans collateralizing asset-backed securities for sale and the remaining amount of discount from the 2009 acquisition continues to be reduced by the loan liquidity discount accretion even if there are no further gains to be recognized. As a percentage of total net revenues after provision for loan losses, gain on sale and payoff of loans decreased from 16.3% for the nine months ended September 30, 2011 to 3.5% for the same period in 2012.
Net Dividend Income
Net dividend income was income of $0.9 million and a loss of $25.0 thousand for the nine months ended September 30, 2011 and 2012, respectively. For the nine months ended September 30, 2011, dividend income was primarily comprised of dividend income from our investments in NYMT and in our principal investment portfolio. Refer to Note 2 in the Company's 10-K for additional information regarding the termination of the advisory agreement between HCS and NYMT.
Other Income
Other income increased $1.0 million, or 38.3%, from $2.5 million for the nine months ended September 30, 2011 to $3.5 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2012 other income included $1.7 million revenues associated with the conclusion of HCS's advisory relationship with NYMT. Refer to Note 2 in the Company's 2011 10-K for additional information regarding the termination of the advisory agreement between HCS and NYMT.
Interest Income
Interest income decreased $1.7 million from $25.8 million for the nine months ended September 30, 2011 to $24.1 million for the same period in 2012. The decrease related to JMP Credit, which recorded interest income of $35.6 million and $21.3 million for the nine months ended September 30, 2011 and 2012, respectively. The decrease was partially offset by increases related to HCC, which recorded interest income of $12.7 thousand and $2.4 million for the nine months ended September 30, 2011 and 2012, respectively. As a percentage of total net revenues after provision for loan losses, interest income increased from 28.1% for the nine months ended September 30, 2011 to 31.6% for the same period in 2012.
The following table sets forth components of net interest expense for the nine months ended September 30, 2012 and 2011:
(In thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Cratos CLO loan contractual interest income
|
|
$
|
16,276
|
|
|
$
|
16,305
|
|
Cratos CLO ABS issued contractual interest expense
|
|
|
(3,974
|
)
|
|
|
(3,352
|
)
|
Net Cratos CLO contractual interest
|
|
|
12,302
|
|
|
|
12,953
|
|
|
|
|
|
|
|
|
|
|
Cratos CLO loan liquidity discount accretion
|
|
|
3,275
|
|
|
|
7,530
|
|
Cratos CLO ABS liquidity discount amortization
|
|
|
(24,905
|
)
|
|
|
(22,397
|
)
|
Net Cratos CLO liquidity discount amortization
|
|
|
(21,630
|
)
|
|
|
(14,867
|
)
|
|
|
|
|
|
|
|
|
|
HCC interest income
|
|
|
2,429
|
|
|
|
13
|
|
HCC interest expense
|
|
|
(664
|
)
|
|
|
(17
|
)
|
Total net interest income
|
|
$
|
1,765
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Other interest income
|
|
|
2,071
|
|
|
|
1,951
|
|
Other interest expense
|
|
|
(30
|
)
|
|
|
(694
|
)
|
Total net interest income
|
|
$
|
(5,522
|
)
|
|
$
|
(661
|
)
|
Total net interest expense increased from $0.7 million for the nine months ended September 30, 2011 to $5.5 million for the same period in 2012, primarily due to reduced loan liquidity discount accretion, offset by an increase in interest income related to HCC. As loans acquired in the 2009 acquisition of Cratos are sold or paid off, the remaining loan liquidity discount to accrete is reduced, thereby lowering the discount accretion and total net interest income.
The following tables set forth contractual interest income and expense related to Cratos CLO loans and ABS issued and their weighted average contractual interest rates:
(In thousands)
|
|
Nine Months Ended September 30, 2012
|
|
|
|
Interest Income (Expense)
|
|
|
Average CLO Loan (CLO ABS Issued) Balance
|
|
|
Weighted Average Contractual Interest Rate
|
|
|
Weighted Average LIBOR
|
|
|
Spread to Weighted Average LIBOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cratos CLO loan contractual interest income
|
|
$
|
16,276
|
|
|
$
|
431,112
|
|
|
|
4.96
|
%
|
|
|
0.47
|
%
|
|
|
4.49
|
%
|
Cratos CLO ABS issued contractual interest expense
|
|
|
(3,974
|
)
|
|
|
431,003
|
|
|
|
1.21
|
%
|
|
|
0.47
|
%
|
|
|
0.74
|
%
|
Net Cratos CLO contractual interest
|
|
$
|
12,302
|
|
|
$
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
(In thousands)
|
|
Nine Months Ended September 30, 2011
|
|
|
|
Interest Income (Expense)
|
|
|
Average CLO Loan (CLO ABS Issued) Balance
|
|
|
Weighted Average Contractual Interest Rate
|
|
|
Weighted Average LIBOR
|
|
|
Spread to Weighted Average LIBOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cratos CLO loan contractual interest income
|
|
$
|
16,305
|
|
|
$
|
445,293
|
|
|
|
4.83
|
%
|
|
|
0.29
|
%
|
|
|
4.54
|
%
|
Cratos CLO ABS issued contractual interest expense
|
|
|
(3,352
|
)
|
|
|
431,003
|
|
|
|
1.03
|
%
|
|
|
0.29
|
%
|
|
|
0.74
|
%
|
Net Cratos CLO contractual interest
|
|
$
|
12,953
|
|
|
$
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
At JMP Credit, for the nine months ended September 30, 2012, total interest income of $21.3 million was comprised of contractual interest earned on Cratos CLO loans of $16.3 million, purchase discounts and other deferred fee amortization of $1.7 million and non-cash liquidity discount accretion of $3.3 million. Contractual interest was earned on the performing loans held by Cratos CLO. The non-cash liquidity discount accretion of $3.3 million included a $0.1 million adjustment to previously recognized accretion due to unscheduled principal payments. The annualized weighted average contractual interest rate (excluding the liquidity discount accretion) on the performing loans was 4.96% with a spread to weighted average LIBOR of 4.49% for the nine months ended September 30, 2012. The Company recognized $126.4 thousand of interest income, other than the accretion of liquidity discounts on those loans deemed impaired at the acquisition of Cratos, for the three impaired loans with an aggregate weighted average loan balance of $2.3 million that were on non-accrual status during the nine months ended September 30, 2012.
At JMP Credit, for the nine months ended September 30, 2011, total interest income of $25.1 million was comprised of contractual interest earned on Cratos CLO loans of $16.3 million, purchase discounts and other deferred fee amortization of $1.3 million and non-cash liquidity discount accretion of $7.5 million. Contractual interest was earned on the performing loans held by Cratos CLO. The non-cash liquidity discount accretion of $7.5 million included a $0.4 million adjustment to previously recognized accretion due to unscheduled principal payments. The annualized weighted average contractual interest rate (excluding the liquidity discount accretion) on the performing loans was 4.83% with a spread to weighted average LIBOR of 4.54% for the nine months ended September 30, 2011. The Company recognized $163.6 thousand of interest income, other than the accretion of liquidity discounts on those loans deemed impaired at the acquisition of Cratos, for the four impaired loans with an aggregate weighted average loan balance of $11.8 million that were on non-accrual status during the nine months ended September 30, 2011.
Interest Expense
Interest expense increased $3.1 million, or 11.8%, from $26.5 million for the nine months ended September 30, 2011 to $29.6 million for the same period in 2012. The increase was primarily related to JMP Credit, which recorded interest expense of $25.8 million and $28.9 million for the nine months ended September 30, 2011 and 2012, respectively.
At JMP Credit, for the nine months ended September 30, 2012, interest expense of $28.9 million was comprised of interest expense on ABS issued of $4.0 million and non-cash amortization of the liquidity discount on the ABS issued of $24.9 million. The annualized weighted average cost of funds (excluding the liquidity discount amortization) for the ABS issued during the nine months ended September 30, 2012 was 1.21% with a spread to weighted average LIBOR of 0.74%.
At JMP Credit, for the nine months ended September 30, 2011, interest expense of $25.8 million was comprised of interest expense on ABS issued of $3.4 million and non-cash amortization of the liquidity discount on the ABS issued of $22.4 million. The annualized weighted average cost of funds (excluding the liquidity discount amortization) for the ABS issued during the nine months ended September 30, 2011 was 1.03% with a spread to weighted average LIBOR of 0.74%.
Provision for Loan Losses
Provision for loan losses increased from $0.5 million for the nine months ended September 30, 2011 to $1.8 million for the same period in 2012. For the nine months ended September 30, 2012, $1.0 million was recorded as a specific reserve against a non-performing loan that was purchased with the Cratos acquisition. The remainder was recorded as a general reserve against performing loans.
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 $10.4 million, or 15.7%, from $66.2 million for the nine months ended September 30, 2011 to $55.8 million for the nine months ended September 30, 2012.
Employee payroll, taxes and benefits, and consultant fees, increased $0.3 million, or 1.3%, from $25.6 million for the nine months ended September 30, 2011 to $25.9 million for the same period in 2012, primarily due to the effect of base pay increases and promotions made in the first quarter.
Performance-based bonus and commission decreased $10.2 million, or 25.7%, from $39.5 million for the nine months ended September 30, 2011 to $29.3 million for the nine months ended September 30, 2012. The decrease was primarily due to the decrease in total net revenues after provision for loan losses from $91.7 million for the nine months ended September 30, 2011 to $76.1 million for the same period in 2012.
Equity-based compensation decreased $0.5 million, or 48.8%, from $1.1 million for the nine months ended September 30, 2011 to $0.6 million for the nine months ended September 30, 2012 primarily due to a $0.8 million reduction in the amortization expense for RSUs granted in connection with the IPO. The total equity-based compensation expense for the nine months ended September 30, 2011 and 2012 included $0.8 million and zero, respectively, recognized for RSUs granted in connection with the IPO and $0.4 million and $0.7 million recognized for RSUs granted after the IPO, respectively.
Compensation and benefits as a percentage of revenues increased from 72.2% of total net revenues after provision for loan losses for the nine months ended September 30, 2011 to 73.4% for the same period in 2012.
Administration
Administration expenses decreased $0.5 million, or 9.0%, from $5.1 million for the nine months ended September 30, 2011 to $4.6 million for the nine months ended September 30, 2012. As a percentage of total net revenues after provision for loan losses, administration expense increased from 5.5% of total net revenues after provision for loan losses for the nine months ended September 30, 2011 to 6.0% for the same period in 2012.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees decreased $0.9 million, or 25.2%, from $3.6 million for the nine months ended September 30, 2011 to $2.7 million for the nine months ended September 30, 2012. The decrease was primarily due to a decrease in trading volume. As a percentage of total net revenues after provision for loan losses, our brokerage, clearing and exchange fees decreased from 3.9% for the nine months ended September 30, 2011 to 3.5% for the same period in 2012.
Travel and Business Development
Travel and business development expense were $2.6 million and $2.4 million for the nine months ended September 30, 2011 and September 30, 2012, respectively. As a percentage of total net revenues after provision for loan losses, travel and business development expense increased from 2.8% for the nine months ended September 30, 2011 to 3.2% for the same period in 2012.
Communications and Technology
Communications and technology expense decreased from $2.9 million for the nine months ended September 30, 2011 to $2.6 million for the nine months ended September 30, 2012. As a percentage of total net revenues after provision for loan losses, communications and technology expense increased from 3.2% for the nine months ended September 30, 2011 to 3.5% for the same period in 2012.
Professional Fees
Professional fees were $2.3 million for the nine months ended September 30, 2011 and 2012. As a percentage of total net revenues after provision for loan losses, professional fees increased from 2.5% for the nine months ended September 30, 2011 to 3.1% for the same period in 2012.
Impairment Loss on Purchased Management Contract
Impairment loss on purchased management contract relates to a CLO management contract we purchased from Princeton Advisory Group, Inc. on September 8, 2010 for $3.8 million. Because a single investor had previously acquired control of the right to transfer the management contract without cause at any time with 90 days’ notice, we initially recorded an impairment charge of $2.8 million for the quarter ended September 30, 2010 and an additional impairment charge of $0.7 million in the three months ended March 31, 2011. The CLO began liquidation proceedings in December 2011.
Other Expenses
Other expenses were $3.1 million and $3.3 million for the nine months ended September 30, 2011 and 2012, respectively. As a percentage of total net revenues after provision for loan losses, other expenses increased from 3.4% for the nine months ended September 30, 2011 to 4.3% for the same period in 2012.
Net Income (Loss) Attributable to Non-controlling Interest
Net income attributable to non-controlling interest increased $7.3 million from a $0.5 million loss for the nine months ended September 30, 2011 to $6.8 million for the nine months ended September 30, 2012. Non-controlling interest for the nine months ended September 30, 2012 includes the interest of third parties in Cratos CLO, HCC and HGC, partially-owned subsidiaries consolidated in our financial statements. Non-controlling interest for the nine months ended September 30, 2011 includes the interest of third parties in Cratos CLO, and HGC, partially-owned subsidiaries consolidated in our financial statements.
Provision for Income Taxes
For the nine months ended September 30, 2011 and 2012, we recorded tax expense of $2.4 million and tax benefit of $1.5 million, respectively. The effective tax rates for the nine months ended September 30, 2011 and 2012 was 44.3% and a negative 66.3%, respectively. The 110.6% change in the effective tax rates was primarily attributable to the income associated with HGC which is consolidated for financial reporting purposes but not for tax purposes. Income attributed to HGC non-controlling interest increased from $0.9 million for the nine months ended September 30, 2011 to $6.0 million for the same period in 2012.
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 resources and liquidity for the three and nine months ended September 30, 2012 to demonstrate where our capital is invested and the financial condition of the Company.
Overview
As of September 30, 2012, we had net liquid assets of $49.7 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 non-controlling interest. We have satisfied our capital and liquidity requirements primarily through the net proceeds from the IPO and internally generated cash from operations. Most of our financial instruments, other than loans collateralizing asset-backed securities issued, small business loans, and asset-backed securities issued, are recorded at fair value or amounts that approximate fair value. At September 30, 2012 and December 31, 2011, the Company carried Level 3 assets (financial instruments whose fair value was determined using significant unobservable inputs that are not corroborated by market data) of $45.1 million and $24.0 million, respectively, at fair value, which represented 6.6% and 3.6% of total assets, respectively. Level 3 assets increased $21.1 million, due to the purchased new assets (primarily private equity securities) of $17.3 million, the unrealized gain of $5.1 million, partially offset by the transfers of certain private equity securities into Level 2 of $1.2 million. The $5.1 million unrealized gain from Level 3 assets primarily reflected the gains in the comparable public companies used in the valuation of private equity securities. The transfers into Level 2 were a result of the observability of fair value associated with the equity securities in HGC and JMP Capital.
Liquidity Considerations Related to Cratos CLO
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. In December 2009, we repurchased the contingent consideration for $1.8 million. The Company's ownership of Cratos CLO subordinated securities decreased from 100% to approximately 94% effective August 6, 2010. As we own approximately 94% 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 undistributed CLO earnings related to JMP Credit since the acquisition date. However, for U.S. federal tax purposes, Cratos 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.
Cratos 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 the manager of Cratos CLO, 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 were in compliance with all OC tests on the seven most recent quarterly determination dates, on the quarterly determination dates in February 2010, August and November 2009, Cratos 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 Cratos CLO were to violate the Class E test, or any more senior tests, we would be required to pay down the most senior notes with the residual cash flows until the violation was 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 of all principal and interest outstanding on the notes.
For financial reporting purposes, the loans and asset-backed securities of Cratos CLO 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 September 30, 2012, we had $402.2 million of loans collateralizing asset-backed securities, net, $3.2 million of loans held for sale, $50.8 million of restricted cash and $1.2 million of interest receivable funded by $406.5 million of asset-backed securities issued, net, and interest payable of $0.6 million. These assets and liabilities represented 66.8% of total assets and 79.7% of total liabilities respectively, reported on our consolidated statement of financial condition at September 30, 2012.
The tables below summarize the loans held by Cratos CLO grouped by range of outstanding balance, industry and Moody’s Investors Services, Inc. rating category as of September 30, 2012.
(Dollars in thousands)
|
As of September 30, 2012
|
|
Range of Outstanding Balance
|
|
Number of Loans
|
|
Maturity Date
|
|
Total Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0
|
-
|
$500
|
|
|
29
|
|
8/2015
|
-
|
8/2019
|
|
|
12,205
|
|
$500
|
-
|
$2,000
|
|
|
135
|
|
12/2012
|
-
|
8/2019
|
|
|
177,119
|
|
$2,000
|
-
|
$5,000
|
|
|
74
|
|
3/2013
|
-
|
9/2019
|
|
|
212,868
|
|
$5,000
|
-
|
$10,000
|
|
|
4
|
|
2/2013
|
-
|
7/2017
|
|
|
21,866
|
|
|
Total
|
|
|
|
242
|
|
|
|
|
|
$
|
424,058
|
|
(Dollars in thousands)
|
|
As of September 30, 2012
|
|
Industry
|
|
Number of Loans
|
|
|
Outstanding Balance
|
|
|
% of Outstanding Balance
|
|
Healthcare, Education & Childcare
|
|
|
25
|
|
|
|
52,344
|
|
|
|
12.3
|
%
|
Retail Store
|
|
|
17
|
|
|
|
31,882
|
|
|
|
7.4
|
%
|
Diversified/Conglomerate Service
|
|
|
21
|
|
|
|
30,328
|
|
|
|
7.1
|
%
|
Chemicals, Plastics and Rubber
|
|
|
16
|
|
|
|
29,928
|
|
|
|
7.0
|
%
|
Electronics
|
|
|
14
|
|
|
|
26,318
|
|
|
|
6.2
|
%
|
Telecommunications
|
|
|
11
|
|
|
|
24,672
|
|
|
|
5.8
|
%
|
Beverage, Food & Tobacco
|
|
|
13
|
|
|
|
23,609
|
|
|
|
5.6
|
%
|
Leisure , Amusement, Motion Pictures & Entertainment
|
|
|
10
|
|
|
|
20,963
|
|
|
|
4.9
|
%
|
Personal &Non-Durable Consumer Products
|
|
|
10
|
|
|
|
18,028
|
|
|
|
4.3
|
%
|
Hotels, Motels, Inns and Gaming
|
|
|
6
|
|
|
|
16,975
|
|
|
|
4.0
|
%
|
Aerospace & Defense
|
|
|
11
|
|
|
|
16,379
|
|
|
|
3.9
|
%
|
Utilities
|
|
|
7
|
|
|
|
15,561
|
|
|
|
3.7
|
%
|
Personal, Food & Misc Services
|
|
|
10
|
|
|
|
12,480
|
|
|
|
2.9
|
%
|
Diversified/Conglomerate Mfg
|
|
|
9
|
|
|
|
11,063
|
|
|
|
2.6
|
%
|
Automobile
|
|
|
7
|
|
|
|
10,495
|
|
|
|
2.5
|
%
|
Broadcasting & Entertainmt.
|
|
|
6
|
|
|
|
9,218
|
|
|
|
2.2
|
%
|
Banking
|
|
|
6
|
|
|
|
8,739
|
|
|
|
2.1
|
%
|
Machinery (Non-Agriculture,Non-Construction & Non-Electronic)
|
|
|
4
|
|
|
|
7,446
|
|
|
|
1.7
|
%
|
Insurance
|
|
|
2
|
|
|
|
5,779
|
|
|
|
1.4
|
%
|
Printing & Publishing
|
|
|
2
|
|
|
|
5,653
|
|
|
|
1.3
|
%
|
Personal Transportation
|
|
|
3
|
|
|
|
5,580
|
|
|
|
1.3
|
%
|
Grocery
|
|
|
3
|
|
|
|
5,385
|
|
|
|
1.3
|
%
|
Finance
|
|
|
5
|
|
|
|
5,185
|
|
|
|
1.2
|
%
|
Buildings and Real Estate
|
|
|
2
|
|
|
|
4,997
|
|
|
|
1.2
|
%
|
Ecological
|
|
|
4
|
|
|
|
4,919
|
|
|
|
1.2
|
%
|
Farming & Agriculture
|
|
|
2
|
|
|
|
3,735
|
|
|
|
0.9
|
%
|
Textiles & Leather
|
|
|
4
|
|
|
|
3,615
|
|
|
|
0.9
|
%
|
Cargo Transport
|
|
|
2
|
|
|
|
3,473
|
|
|
|
0.8
|
%
|
Containers, Packaging and Glass
|
|
|
3
|
|
|
|
2,480
|
|
|
|
0.6
|
%
|
Oil & Gas
|
|
|
3
|
|
|
|
1,935
|
|
|
|
0.5
|
%
|
Diversified Natural Resources, Precious Metals and Minerals
|
|
|
1
|
|
|
|
1,536
|
|
|
|
0.4
|
%
|
Home and Office Furnishings, Housewares and Durable Consumer Products
|
|
|
1
|
|
|
|
1,497
|
|
|
|
0.4
|
%
|
Mining, Steel, Iron and Non-Precious Metals
|
|
|
1
|
|
|
|
1,365
|
|
|
|
0.3
|
%
|
Personal and Non-Durable Consumer Products (mfg only)
|
|
|
1
|
|
|
|
496
|
|
|
|
0.1
|
%
|
Total
|
|
|
242
|
|
|
$
|
424,058
|
|
|
|
100.0
|
%
|
(Dollars in thousands)
|
|
As of September 30, 2012
|
|
Moody's Rating Category
|
|
Number of Loans
|
|
|
Outstanding Balance
|
|
|
% of Outstanding Balance
|
|
Baa3
|
|
|
1
|
|
|
|
4,930
|
|
|
|
1.2
|
%
|
Ba1
|
|
|
10
|
|
|
|
21,739
|
|
|
|
5.1
|
%
|
Ba2
|
|
|
16
|
|
|
|
32,218
|
|
|
|
7.6
|
%
|
Ba3
|
|
|
40
|
|
|
|
75,205
|
|
|
|
17.7
|
%
|
B1
|
|
|
76
|
|
|
|
122,001
|
|
|
|
28.8
|
%
|
B2
|
|
|
81
|
|
|
|
131,661
|
|
|
|
31.0
|
%
|
B3
|
|
|
13
|
|
|
|
25,640
|
|
|
|
6.0
|
%
|
Caa1
|
|
|
1
|
|
|
|
1,950
|
|
|
|
0.5
|
%
|
Caa2
|
|
|
1
|
|
|
|
2,302
|
|
|
|
0.5
|
%
|
Caa3
|
|
|
3
|
|
|
|
6,412
|
|
|
|
1.6
|
%
|
Total
|
|
|
242
|
|
|
$
|
424,058
|
|
|
|
100.0
|
%
|
Other Liquidity Considerations
As of September 30, 2012 the Company had two term loans with City National Bank (“CNB”) in the aggregate amount of $12.7 million under the Credit Agreement entered into on 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, Amendment Number Two to Credit Agreement, dated as of March 27, 2008, Amendment Number Three (the "Third Amendment"), dated as of December 31, 2008, Amendment Number Four to Credit Agreement and Waiver, dated as of January 28, 2010, Amendment Number Five (the "Fifth Amendment") on April 8, 2011, and Amendment Number Six (the "Sixth Amendment"), dated as of August 24, 2011 (collectively, the "Credit Agreement").
On December 31, 2010, pursuant to the provisions of the Third Amendment, the outstanding revolving loan of $21.0 million was converted into a single term loan of $21.0 million which will fully mature on December 31, 2013. The outstanding balance on this term loan was $10.5 million as of September 30, 2012. The Company also had $2.2 million outstanding on its other term loan with CNB as of September 30, 2012.
Both term loans bear interest at LIBOR plus 2.25%. On May 29, 2010 the Company entered into an interest rate cap with the lender to effectively lock in or fix the interest rate on its revolving line of credit and term loan from July 1, 2010 through maturity. The interest rate cap will allow the Company to receive payments from the counterparty in the event that LIBOR plus 2.25% exceeds 3.75%, limiting the interest rate on the outstanding balance of the line of credit and term loan to such rate. The cap had an initial notional principal amount of $27.1 million (as the remaining balance available under the revolving line of credit was drawn down on July 1, 2010), indexed to LIBOR and amortizes in accordance with the amortization of the revolving line of credit and term loan. The notional principal amount of the cap was $12.7 million at September 30, 2012, with a recorded fair value of $0.1 thousand. Changes in the fair value are recorded in other comprehensive income.
Under the Fifth Amendment, JMP Securities entered into a $20.0 million revolving line of credit with CNB to be used for regulatory capital purposes during its securities underwriting activities. Draws on the revolving line of credit bear interest at the rate of prime and were available through April 8, 2012 on which date, if there were an existing outstanding amount, it would convert to a loan maturing on April 8, 2013. On May 24, 2012, the line of credit conversion date was extended from April 8, 2012 to May 24, 2014. There was no borrowing on this line of credit as of September 30, 2012.
Under the Sixth Amendment, JMP Group LLC, a wholly-owned subsidiary of JMP Group Inc., entered into a new line of credit of up to $30.0 million to the extent the aggregate outstanding balance of all facilities does not exceed $55.0 million. The new line of credit will remain available through August 24, 2013. On such date, any outstanding amount converts into a term loan. The term loan will be repaid in quarterly installments of 3.75% of funded debt for the first two years, 5.00% of funded debt for the next two years, and the remainder due at maturity on August 24, 2017. The Amendment also was amended to permit additional investments. The Company anticipates that the proceeds will be used to fund certain commitments to Harvest Capital Credit LLC, to repurchase Company stock and other permitted investments, and for other general working capital purposes. The Company's outstanding balance on this line of credit was $10.0 million as of September 30, 2012.
Subsequent to the quarter end, on October 11, 2012, JMP Group LLC entered into an amended and restated credit agreement with CNB, which increased the allowable aggregate outstanding balances of all facilities from $55.0 million to $58.5 million, while reducing the revolving subordinated line of credit from $20.0 million to $10.0 million. Pursuant to this amendment, CNB also has agreed to extend a $15.0 million term loan within the allowable aggregate outstanding balances to JMP Group on or prior to March 31, 2013. This term loan would be repaid in quarterly installments of $1.2 million beginning March 31, 2013 and continuing through September 30, 2016, with a final payment of $1.3 million on December 31, 2016.
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 the first two months of 2012, we paid out $35.5 million of cash bonuses for 2011, 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 2012, the Company’s board of directors declared and paid a quarterly cash dividend of $0.03 per share, for the fourth quarter of 2011. In April 2012, the Company's board of directors declared and paid a quarterly cash dividend of $0.035 per share, for the first quarter of 2012. In August 2012, the Company's board of directors declared and paid a quarterly cash dividend of $0.035 per share, for the second quarter of 2012.
During the three and nine months ended September 30, 2012, the Company repurchased 58,936 and 702,579 shares of the Company’s common stock at an average price of $5.57 per share and $6.89 per share for an aggregate purchase price of $0.3 million and $4.8 million, respectively. 7,336 and 588,564 shares repurchased during the three and nine months ended September 30, 2012, respectively, were deemed to have been repurchased in connection with employee stock plans, whereby the Company's shares were issued on a net basis to employees for the payment of applicable statutory withholding taxes and therefore such withheld shares are deemed to be purchased by the Company. The remaining shares repurchased in the nine months ended September 30, 2012 were repurchased in the open market.
We had total restricted cash of $63.5 million comprised primarily of $50.8 million of restricted cash at JMP Credit on September 30, 2012. This balance comprised of $3.9 million in interest received from loans in the CLO and $46.9 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.
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 and current level of equity capital, combined with the net proceeds to us from the IPO 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. If circumstances required it, we could improve our liquidity position by discontinuing repurchases of the Company’s common stock, halting cash dividends on our common stock and reducing cash bonus compensation paid.
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 $34.0 million and $38.0 million, which were $33.0 million and $37.0 million in excess of the required net capital of $1.0 million at September 30, 2012 and December 31, 2011, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.19 to 1 and 0.26 to 1 at September 30, 2012 and December 31, 2011.
A condensed table of cash flows for the nine months ended September 30, 2012 and 2011 is presented below.