Edgar Filing: JMP Group Inc.

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33448

JMP Group Inc.

(Exact name of registrant as specified in its charter)

Delaware

20-1450327

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

600 Montgomery Street, Suite 1100, San Francisco, California 94111

(Address of principal executive offices)

Registrant’s telephone number: (415) 835-8900

Securities registered pursuant to Section 12(b) of the Act:


(Title of Each Class)		(Name of Each Exchange on Which Registered)
Common Stock, par value $0.001 per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨ Smaller Reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the common stock held by non-affiliates of the registrant on the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price of the registrant’s common stock on June 30, 2011 as reported on The New York Stock Exchange was $110,507,487.

As of February 29, 2012 there were 22,060,241 shares of the registrant’s common stock outstanding.

Documents incorporated by reference:

Portions of the registrant’s definitive proxy statement to be delivered to stockholders in connection with the 2012 annual meeting of stockholders to be held in June 2012 are incorporated by reference in this Form 10-K.

TABLE OF CONTENTS


PART I

Item 1.	Business	7

Item 1A.	Risk Factors	17

Item 1B.	Unresolved Staff Comments	34

Item 2.	Properties	34

Item 3.	Legal Proceedings	34

Item 4.	Mine Safety Disclosures	34

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	35

Item 6.	Selected Financial Data	38

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	80

Item 8.	Financial Statements and Supplementary Data	82

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	137

Item 9A.	Controls and Procedures	137

Item 9B.	Other Information	137

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	138

Item 11.	Executive Compensation	138

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	138

Item 13.	Certain Relationships and Related Transactions, and Director Independence	138

Item 14.	Principal Accountant Fees and Services	138

PART IV

Item 15.	Exhibits and Financial Statement Schedules	139

Signatures		140

Exhibit Index		141

EX-31.1: CERTIFICATION

EX-31.2: CERTIFICATION

EX-32.1: CERTIFICATION

EX-32.2: CERTIFICATION

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make forward-looking statements, as defined by the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, in this Form 10-K that are subject to risks and uncertainties. When we use the words “could,” “will likely result,” “if,” “in the event,” “may,” “might,” “should,” “shall,” “will,” “believe,” “expect,” “anticipate,” “plan,” “predict,” “potential,” “project,” “intend,” “estimate,” “goal,” “objective,” “continue,” or similar expressions, we intend to identify forward-looking statements. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. They also include statements concerning anticipated revenues, income or loss, capital expenditures, dividends, capital structure or other financial terms. The statements we make regarding the following subject matters are forward-looking by their nature:

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the opportunity to grow our investment banking and sales and trading businesses because of the prevalent demand for our services in our four target industries;

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the opportunity to increase our representation of corporate clients as buyers and to grow our mergers and acquisitions and strategic advisory businesses;

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our belief that market conditions in the specialty financial services and real estate industries may work to our advantage if we are able to leverage our expertise to gain new business;

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the performance of our investment banking and sales and trading businesses because of declining demand for our services or a decline in the market for securities of companies in our four target industries;

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the possibility of generating stable or growing investment banking revenues due to our ability to engage in multiple types of transactions;

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our ability to succeed as a strategic advisor due to our ability to structure and execute complex transactions;

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the growth of our mergers and acquisitions and other strategic advisory business derived from our positions as a lead manager or senior co-manager of public and private securities offerings;

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our plans to continue to provide our equity research and sales and trading products and services to smaller and middle-market companies to benefit institutional investors;

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the characteristics of the asset management business, including its comparatively high margins, the recurring nature of its fee-based revenues, and its dependence on intellectual capital and our belief that this makes the asset management business less susceptible to competitive threats from larger financial institutions;

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a heightened demand for alternative asset management products and services;

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our ability to increase assets under management and develop new asset management products;

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our plans to generate principal investing opportunities from our investment banking and asset management relationships;

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our ability to attract, incentivize and retain top professionals and to retain valuable relationships with our clients;

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plans to grow our businesses both through internal expansion and through strategic investments, acquisitions, or joint ventures;

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our expectations regarding the impact of the trend toward alternative trading systems and downward pricing pressure in the sales and trading business on trading commissions and spreads;

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the nature of the competition faced in the investment banking and financial services industries and our expectations regarding trends and changes with respect to competing entities;

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our belief that continued future growth will require implementation of enhanced communications and information systems and the training of personnel or the hiring of an outsourced provider to operate such systems;

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the impact of changes in interest rates on the value of interest-bearing assets in which we invest;

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our plans for the use of the principal restricted cash at JMP Credit to buy additional loans or pay down collateralized loan obligation (“CLO”) notes;

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that the past performance of our funds are not indicative of our future performance;

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the emergence of investment opportunities that offer attractive risk-adjustment returns on our investable assets;

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our ability to take advantage of market opportunities as they arise in 2012 based on the strength of our capital position and the low level of leverage that we have traditionally employed in our business model;

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our ability to satisfy our funding needs with existing internal and external financial sources;

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the ability of our funds to raise capital in the long and short term;

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our ability to depend on follow-on offerings, PIPEs and registered direct offerings to generate corporate finance revenues;

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our ability to realize revenues through gain on sale and payoff of loans and gain on repurchase of asset-backed securities;

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our ability to avoid restrictions imposed by the Investment Company Act of 1940;

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that we do not anticipate any tax adjustments that will result in a material adverse affect on the our financial condition;

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the impact of bonus compensation payments to our employees on our cash position;

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the potential for unfunded commitments to expire and their impact on future cash requirements;

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the impact of additional rulemaking by the Securities and Exchange Commission (the “SEC”) with respect to soft dollar practices on our brokerage or asset management business;

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our expectations regarding the likelihood of increased scrutiny of financial services firms from regulators;

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the impact of recent pronouncements by the Financial Accounting Standards Board (the “FASB”) on our financial position or operations;

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the impact of existing claims and currently known threats against us on our business or financial condition;

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our intention to declare dividends, our ability to do so without borrowing funds and our expected dividend rate; and

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that we believe that our available liquidity and current level of equity capital will be adequate to meet our liquidity and regulatory capital requirements for the next twelve months.

The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These forward-looking statements 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 upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the numerous risks provided under Item 1A— “Risk Factors” in this Form 10-K, including but not limited to the following factors:

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the impact of multiple book runners, co-managers and multiple financial advisors on our revenues;

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our ability to remain competitive against larger investment banks that provide commercial financing;

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the impact of conditions in the global financial markets, such as the level and volatility of interest rates, investor sentiment, the availability and the cost of credit, the U.S. mortgage market, the U.S. real estate market, volatile energy prices, consumer confidence, unemployment, and geopolitical issues on our business and revenues;

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the potential for volatility and weakness in the equity markets to adversely impact our sales and trading business, investment banking business, and ability to manage exposure to market risks;

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the impact of worsening market conditions on our ability to serve as underwriter or placement agent;

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the potential for uncertainty related to creditworthiness, volatility in the equity markets, and diminished access to financing to impact our merger, acquisition and advisory services;

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our expectations regarding the effect of a market downturn on transaction volume, and therefore, our revenues;

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the impact of securities related write-downs on our securities trading revenues;

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the impact of the inability of companies to repay their borrowings on our principal investments;

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our expectations regarding the impact of bankruptcies on our investment banking revenues;

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the impact of a market downturn on management fees;

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the potential for market declines to lead to an increase in litigation and arbitration claims;

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our ability to pursue business opportunities in an environment of increased legislative or regulatory initiatives;

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the potential effect of governmental fiscal and monetary policy to have a negative impact on our business;

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the impact of any deterioration in the business environment of our target sectors on our revenues;

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our expectation that the ability to recruit and retain professionals impacts our reputation, business, results of operations and financial condition;

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the impact of larger firms on our ability to grow our business;

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the impact of increased competition in the middle-market investment banking space on our market share and revenues;

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the possibility of market and non-market factors to impact our stock price;

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fluctuations in our stock price related to the performance of our investment banking division;

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the impact of certain institutional, sales and trading client pricing arrangements on brokerage revenues;

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the potential for larger and more frequent capital commitments in our trading and underwriting business to increase losses;

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the potential for increased competition in the asset management sector to affect our ability to raise capital and generate positive economic results;

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the impact of investment performance and redemptions on our asset management business;

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the potential for fluctuations in the global credit markets to affect our CLO investments;

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the impact of principal investment activities on our capital base;

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exposure to volatile and illiquid securities and their impact on our business;

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the ongoing fluctuations in the credit markets, including reduced access to capital and liquidity, and the costs of credit;

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the impact of SEC, Financial Industry Regulatory Authority (“FINRA”), and various other self-regulatory organization requirements on our business;

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the potential for risks related to infrastructure and operations to impact our business;

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the potential for risks related to our investment in New York Mortgage Trust, Inc. to adversely impact our business;

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the potential for increased scrutiny of financial services firms to adversely impact our business;

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the business risks posed by, potential conflicts of interest, employee misconduct, and business partner misconduct;

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the challenges posed when valuing non-marketable investments; and

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the risk that sales of substantial amounts of our common stock in the public markets, or the perception that such sales might occur, could reduce the price of our common stock.

The foregoing list of risks is not exhaustive. Other sections of this Form 10-K may include additional factors which could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risks, nor can we assess the impact of all factors or the effect which any factor, or combination of factors, may have on our business. Actual results may differ materially from those contained in any forward-looking statements.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not rely upon forward-looking statements as predictions of future events. We undertake no duty to update any of these forward-looking statements after the date of this Form 10-K to conform prior statements to actual results or revised expectations unless otherwise required by law.

Item 1.

Business

Overview

JMP Group, Inc., together with its subsidiaries (collectively, “the Company”, “we” or “us”), is a full-service investment banking and asset management firm. We provide investment banking, sales and trading, and equity research services to corporate and institutional clients, and alternative asset management products and services to institutional investors and high net-worth individuals. In addition, we manage and invest in corporate credit instruments through collateralized loan obligations and direct investments.

We focus our efforts on small and middle-market companies in the following four growth industries: financial services, healthcare, real estate, and technology. Our specialization in these areas has enabled us to develop recognized expertise and to cultivate extensive industry relationships. As a result, we have established our firm as a key advisor for our corporate clients, a trusted resource for institutional investors, and an effective investment manager for our asset management clients. We currently operate from our headquarters in San Francisco and from additional offices in New York, Boston, Chicago, Minneapolis and Alpharetta, GA.

We provide our corporate clients with a wide variety of services, including strategic advice and capital raising solutions, sales and trading support, and equity research coverage. We provide institutional investors with capital markets intelligence and objective, informed investment recommendations about individual equities that are not widely followed. We believe that our concentration on small and middle-market companies, as well as our broad range of product offerings, positions us as a leader in what has traditionally been an underserved and high-growth market.

The selection of our four target industries, the development of multiple products and services and the establishment of our four revenue-producing business lines—investment banking, sales and trading, equity research and asset management—has created a diversified business model, especially when compared to that of our more specialized competitors. We have been able to balance somewhat volatile revenue streams from our investment banking activities and incentive-based asset management fees with more stable revenue streams from our sales and trading commissions and base asset management fees. In addition, our target industries have historically performed, in certain respects, counter-cyclically to one another, allowing us to win business and generate revenues in various economic and capital markets conditions. In 2009, as part of our ongoing efforts to diversify our asset management business, we acquired a corporate credit business that operates as a manager of collateralized loan obligations. In 2011, we launched a specialty finance company that provides customized financing to small and midsized businesses.

Principal Business Lines

The Company conducts its primary business activities through three wholly-owned or majority-owned subsidiaries: JMP Securities LLC (“JMP Securities”), our broker-dealer operation; Harvest Capital Strategies LLC (“HCS”), our asset management arm, which is an investment adviser registered with the SEC; and JMP Credit Advisors LLC (“JMP Credit Advisors”), our corporate credit operation.

JMP Securities is a U.S. registered broker-dealer under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is a member of the FINRA. JMP Securities operates as an introducing broker and does not hold funds or securities for, or owe any money or securities to, customers and does not carry accounts for customers. All customer transactions are cleared through another broker-dealer on a fully disclosed basis. JMP Securities provides equity research, sales and trading to institutional brokerage clients and capital raising and strategic advisory services to corporate clients. As of December 31, 2011, JMP Securities had 174 full-time employees, including 38 in equity research, 50 in sales and trading, 53 in investment banking and 33 in operations and administration.

HCS is a registered investment advisor under the Investment Advisers Act of 1940, as amended, and provides investment management services for sophisticated investors through investment partnerships and other entities managed by HCS. HCS launched Harvest Capital Credit LLC (“HCC”) on August 18, 2011 to make direct investments in the form of subordinated debt and, to a lesser extent, senior debt and minority equity investments, in small to mid-size U.S. companies. During the fiscal year ended December 31, 2011, HCS actively managed a family of five hedge funds, one hedge fund of funds, one private equity fund, one externally advised real estate investment trust (“REIT”), and HCC. The advisory agreement with the externally advised REIT was terminated on December 31, 2011. As of December 31, 2011, HCS had 29 full-time employees.

Effective April 7, 2009, through our wholly-owned subsidiary JMP Credit Corporation (“JMP Credit”), we completed the acquisition of 100% of the membership interests of Cratos Capital Partners, LLC (which changed its name to JMP Credit Advisors LLC on July 12, 2010) and its subsidiaries, including Cratos Capital Management, LLC (collectively, “Cratos”), a manager of CLOs, together with certain securities of Cratos CLO I, Ltd. (“Cratos CLO”). During the fiscal year ended December 31, 2011, JMP Credit Advisors actively managed Cratos CLO and another CLO that resulted from the acquisition of a management contract in June 2010. The non Cratos CLO began liquidation proceedings in December 2011. As of December 31, 2011, JMP Credit Advisors had 14 full-time employees.

Investment Banking

Our investment banking professionals provide capital raising, mergers and acquisitions transaction and other strategic advisory services to corporate clients. Dedicated industry coverage groups serve each of our four target industries, enabling our investment bankers to develop expertise in specific markets and to form close relationships with corporate executives, private equity investors, venture capitalists and other key industry participants. We offer our clients a high level of attention from senior personnel and have designed our organizational structure so that the investment bankers who are responsible for securing and maintaining client relationships also actively participate in providing all related transaction execution services to those clients.

By focusing consistently on our target industries—financial services, healthcare, real estate, and technology—we have developed a comprehensive understanding of the unique challenges and demands involved in executing corporate finance and strategic advisory assignments in these sectors. A significant portion of our corporate finance revenues is earned from small and mid-capitalization public companies, and the balance is earned from private companies. Some of our clients retain us for our advisory and capital raising capabilities during an accelerated growth phase as a private company and then continue to work with us through an initial public offering or company sale process. We maintain exceptional client focus both during and following a transaction, leading to a true advisory relationship and a pattern of assisting companies with multiple transactions.

Corporate Finance

We assist our publicly traded and privately held corporate clients with capital raising activities, which include the underwriting of a wide range of equity and debt securities, including common, preferred and convertible securities. Our public equity underwriting capabilities include initial public offerings and follow-on equity offerings. We also act as an agent in private placements of equity and debt securities and arrange private investments in public equity (“PIPE”) transactions as well as privately negotiated, registered direct stock offerings on behalf of our public company clients. We typically place securities with our client base of institutional investors, private equity and venture capital funds and high net-worth individuals.

Because our corporate clients are generally considered high-growth companies, they are frequently in need of new capital. Many of our client relationships develop early, when a client company is still private, in which case we may facilitate private placements of the clients’ securities. Thereafter, if our client prepares for an initial

public offering, we are generally considered to act as an underwriter of that stock offering. Our ability to structure innovative private offerings and to identify the likely buyers of such offerings makes us a valuable advisor for many small and middle-market companies, as does our industry specialization. We expect that, while the environment for initial public offerings may not be consistently favorable in the future, we should be able to depend on follow-on offerings, PIPEs, registered direct offerings and private placements to continue to generate corporate finance revenues.

Mergers and Acquisitions and Other Strategic Advisory

We work with corporate clients on a broad range of key strategic matters, including mergers and acquisitions, divestitures and corporate restructurings, valuations of businesses and assets, and fairness opinions and special committee assignments. Because we serve a variety of corporate clients—from emerging growth companies to mature private and public companies—the values of these transactions range in size.

We provide our advice to senior executives and boards of directors of client companies in connection with transactions that are typically of significant strategic and financial importance to these companies. We believe that our success as a strategic advisor stems from our ability to structure and execute complex transactions that create long-term stockholder value.

Because of our focus on innovative and fast-growing companies, we are most often an advisor in company sale transactions, although we are taking steps to create equilibrium in our advisory business and expect, in addition, to increasingly represent corporate clients as buyers over time. We believe that our position as a lead manager or senior co-manager of public and private equity offerings will facilitate the growth of our mergers and acquisitions and strategic advisory businesses, as companies that have been issuers of securities become more mature and pursue acquisitions or other exit events for their investors.

Sales and Trading

Our sales and trading operation distributes our equity research product and communicates our proprietary investment recommendations to our institutional investors. In addition, our sales and trading staff executes equity trades on behalf of our institutional clients and markets the securities of companies for which we act as an underwriter.

We have established a broad institutional client base rooted in longstanding relationships, which have been developed through a consistent focus on the investment and trading objectives of our clients. Our sales and trading professionals work closely with our equity research staff to provide insight and differentiated investment advice to approximately 500 institutional clients nationwide.

We believe that our sales and trading clients turn to us for timely, informed investment advice. Our equity research features proprietary themes and actionable ideas about industries and companies that are not widely evaluated by many other research providers. Many peer firms focused on small capitalization stock have shut down or have been bought out in the last year. Additionally, with the failure or consolidation of several very large investment banking firms, the amount of market-making activity, liquidity and research coverage provided by broker-dealers for smaller stocks has significantly decreased. However, we continue to commit sales and trading resources to smaller-capitalization companies with the belief that institutional investors require and value such specialized knowledge and service.

Our sales and trading personnel are also central to our ability to market equity offerings and provide after-market support. Our capital markets group manages the syndication, marketing, execution and distribution of the security offerings we manage. Our syndicate activities include coordinating the marketing and order-taking process for underwritten transactions and conducting after-market stabilization and initial market-making. Our syndicate staff is also responsible for developing and maintaining relationships with the syndicate departments of other investment banks.

Equity Research

Our research department is charged with developing proprietary investment themes, anticipating sector and cyclical changes, and producing action-oriented reports that will assist our clients with their investment decisions. Our analysts cultivate primary sources of information in order to refine their quantitative and qualitative assessments. Our objective is to provide clients with a clear understanding of industry-specific and company-specific issues that can impact their portfolio returns.

Our equity research focuses on our four target industries—financial services, healthcare, real estate and technology—and on the following sectors underlying each industry:

Financial Services

• Commercial Banks

• Consumer Finance

• Financial Processing and Outsourcing

• Investment Banks & Brokers

• Market Structure

• Mortgage Finance

• Specialty Finance

• Specialty Insurance

Healthcare

• Biotechnology

• Healthcare Facilities

• Healthcare IT

• Healthcare Services

• Medical Devices

Real Estate

• Housing

• Housing Supply Chain

• Land Development

• Lodging

• Property Services

• Real Estate Technology

• REITs

Technology

• Clean Technology

• Communications Equipment

• Industrial Technology

• Internet Security

• Semiconductors

• Software

As of December 31, 2011, our research department included 24 publishing research analysts providing investment recommendations on 342 public companies. Approximately 44% of the stocks under coverage had market capitalizations of less than $1.0 billion and were divided among our target sectors as follows:

LOGO

While many larger firms have restructured their research departments due to economic and regulatory pressures and have significantly reduced coverage of companies below certain market-capitalization thresholds, we continue to devote the majority of our resources to smaller-capitalization companies. The number of investment funds and the total assets under management committed to small-cap and mid-cap stocks has grown considerably during the last decade. However, managers of these funds are now presented with fewer sources of independent investment research. We continue to provide objective investment recommendations on small and middle-market companies, and we believe that our institutional investor clients depend on us for this informed, fundamental research.

Asset Management

Through HCS, we actively managed a family of five hedge funds, one hedge fund of funds, one private equity fund, one externally advised REIT, and one entity formed to provide small business loans in 2011. As of December 31, 2011, we had a total of $584.7 million in client assets under management (including assets of employees and portfolio managers) and had an additional $30.5 million of our own capital invested in these vehicles. In addition, as of December 31, 2011 we had invested $2.6 million in funds managed by third parties.

NYMT to manage certain non-agency assets. JMPRT’s investment in NYMT was transferred to Harvest Mortgage Opportunity Partners (“HMOP”) on January 2, 2009. In addition, JMP Group, Inc. invested $4.5 million in the common stock of NYMT on February 14, 2008 via a private investment in public equity (“PIPE”) transaction. The Series A Preferred Stock was convertible into shares of NYMT’s common stock based on a conversion price of $8.00 per share of common stock, which represents a conversion rate of two and one-half (2 1/2) shares of common stock for each share of Series A Cumulative Redeemable Convertible preferred stock. On December 31, 2010, all of the 1.0 million shares of Series A Cumulative Redeemable Convertible preferred stock of NYMT owned by JMP Group Inc. and certain of its affiliates matured and were redeemed at a price per share of $20.00 for a total of $20.0 million. The advisory agreement was terminated effective July 26, 2010 upon execution of an amended and restated advisory agreement between HCS and NYMT. 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. Under the amended advisory agreement, in order to maintain certain rights under the agreement, we were required to have a minimum $10.0 million of investment commitment in NYMT’s common stock, subject to certain adjustments for variations in NYMT’s stock price subsequent to the effective date of the agreement. This advisory agreement was terminated December 31, 2011, pending certain contingent advisory obligations. At December 31, 2011, we had an investment in NYMT’s common stock of $10.3 million which represented 10.3% of NYMT’s outstanding shares of common stock. Because of its current ownership and management position, the Company does not consolidate NYMT into its consolidated financial statements.

The objective of our multiple strategies is to diversify both revenue and risk while maintaining the attractive economics of the alternative asset management model. We view asset management as an attractive business due to its high margins and the recurring nature of its fee-based revenues as well as its dependence on intellectual capital, which we believe is less susceptible to competitive threats from larger financial institutions.

In the course of advising clients on strategic or private capital raising transactions, our investment bankers may identify instances in which we could commit our own capital to transactions for which we are acting as an agent. In addition, opportunities to deploy equity and debt capital are frequently brought to the attention of our asset management professionals. As a result, in the past we have made, and expect that in the future we may make, principal investments in selected cases and may be able to earn attractive returns on the capital committed.

Corporate Credit

JMP Credit Advisors serves as the investment manager to Cratos CLO which had a diversified portfolio of 213 corporate loans with an aggregate par amount of $441.6 million and restricted cash available to lend of $32.3 million as of December 31, 2011. For the year ended December 31, 2011, JMP Credit Advisors earned management fees of $2.4 million or 50 bps annualized on gross assets under management from Cratos CLO. As we consolidate Cratos CLO, in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), the management fees earned from it are eliminated on consolidation. In addition, during 2010, JMP Credit Advisors purchased a management contract for another CLO which had a diversified portfolio of 72 corporate loans with an aggregate par amount of $87.2 million and restricted cash available to lend of $17.3 million as of December 31, 2011. For the year ended December 31, 2011, JMP Credit Advisors earned management fees of $1.2 million or 40 bps annualized on gross assets under management from the purchased CLO management contract. By a supplemental indenture dated December 6, 2011, the equity noteholders to this CLO were allowed to direct a liquidation of the collateral and redemption of the notes at any time. The CLO began liquidation proceedings in December 2011.

HCC was launched on August 18, 2011 to make direct investments in the form of subordinated debt and, to a lesser extent, senior debt and minority equity investments, primarily in privately-held small to mid-size U.S. companies. As of December 31, 2011, the HCC portfolio consisted of three loans with an aggregate par amount of $8.0 million. 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. Because we consolidate HCC in accordance with GAAP, these fees are eliminated on a consolidated basis.

Industry Concentration in Financial Services and Real Estate Sectors

Although we have taken significant steps to diversify and broaden our industry focus, two of the Company’s core franchises remain centered on the specialty finance and real estate industries. These two industries have suffered considerably since the second half of 2007 as turmoil in the U.S. and global economy negatively impacted the financial services and real estate sectors, in particular. Nevertheless, we believe that we have been negotiating this difficult period effectively and believe that market conditions in these sectors may work to our advantage if we are able to leverage our expertise to gain new business in the future.

In 2011, 48% of investment banking revenues were derived from the financial services and real estate sectors. Our additional focus on healthcare and technology sectors has counterbalanced our efforts in our original industry groups. In addition to broadening our industry concentration, we have worked in recent years to expand our investment banking product offerings so that we are not solely dependent on the public capital markets for our business opportunities. In 2011, we derived 42% of investment banking revenues from sources other than the public capital markets, including M&A and strategic advisory fees and private capital raising fees.

Competition

All areas of our business are subject to a high level of competition. The principal competitive factors influencing our business include the ability of our professionals, our industry expertise, client relationships, business reputation, market focus and product capabilities, and quality and price of our products and services.

Since the mid-1990s, there has been substantial consolidation among U.S. and global financial institutions. In particular, a number of large commercial banks, insurance companies and other diversified financial services firms have merged with other financial institutions or have established or acquired broker-dealers. During 2008, the failure or near-collapse of a number of very large financial institutions led to the acquisition of several of the most sizeable U.S. investment banking firms, consolidating the financial industry to an even greater extent. Currently, our competitors are other investment banks, bank holding companies, brokerage firms, merchant banks and financial advisory firms. Our focus on our four target industries also subjects us to direct competition from a number of specialty securities firms and smaller investment banking boutiques that specialize in providing services to these industries.

The industry trend toward consolidation has significantly increased the capital base and geographic reach of many of our competitors. Although our larger and better-capitalized competitors have suffered from the turmoil in the financial services sector, they may be more able than we are to respond to changes in the investment banking industry, to recruit and retain skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally. Many of these firms have the ability to offer a wider range of products than we do, including loans, deposit-taking and insurance, in addition to brokerage, asset management and investment banking services, all of which may enhance their competitive position relative to us. These firms also have the ability to support investment banking and securities products with commercial banking, insurance and other financial services revenues in an effort to gain market share, which could result in downward pricing pressure in our businesses. In particular, the trend in the equity underwriting business toward multiple book runners and co-managers has increased the competitive pressure in the investment banking industry and has placed downward pressure on average transaction fees.

As we seek to expand our asset management business, we face competition in the pursuit of investors for our investment funds, in the identification and completion of investments in attractive portfolio companies or securities, and in the recruitment and retention of skilled asset management professionals.

Net interest income from our corporate credit business depends, in large part, on our ability to acquire loans with yields that exceed our borrowing costs. A number of entities compete with us to make the types of investments which we make. We compete with other CLO managers, business development companies, public and private funds, commercial and investment banks and commercial finance companies. Some competing entities may have investment objectives that overlap with ours, which may create competition for investment opportunities. Some competitors may have a lower cost of funds than us and access to financing sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us.

Employees

As of December 31, 2011, we had 217 employees, including 81 managing directors. We believe that our managing directors and other professionals have been attracted to our firm because of our entrepreneurial culture, our focused industry coverage and our dedication to providing growth companies and growth investors with exceptional client service, objective advice and innovative solutions. None of our employees are subject to any collective bargaining agreements, and we believe our relationship with our employees to be satisfactory.

Risk Management and Compliance

As an investment bank, risk is an inherent part of our business. Global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. The principal risks we face are market, liquidity, credit, legal, reputational and operational risks. We believe that we apply quantitative analysis and sound practical judgment before engaging in transactions to ensure that appropriate risk mitigants are in place. We accomplish this objective by carefully considering the amount of capital allocated to each of our businesses, establishing trading limits, setting credit limits for individual counterparties and, to the extent that we make principal investments, committing capital to transactions where we believe we have the advantage of industry or company-specific expertise. As part of our corporate credit and principal investment activities, we conduct due diligence before making any significant capital commitment in order to assess the risk inherent in a transaction and all significant investments must be approved by our investment committee and/or board of directors. All of our participations in underwritten offerings are evaluated and approved by a committee of key capital markets, investment banking, compliance and legal professionals. Our focus is balancing risk and return. We seek to achieve adequate returns from each of our businesses commensurate with the risks they assume. Nonetheless, the effectiveness of our approach to managing risks can never be completely assured. For example, unexpected large or rapid movements or disruptions in one or more markets or other unforeseen developments could have an adverse effect on our results of operations and financial condition. The consequences of these developments can include losses due to adverse changes in our principal investments and marketable security values, decreases in the liquidity of trading positions, increases in our credit exposure to customers and counterparties, and increases in general systemic risk.

Regulation

As a participant in the financial services industry, we are subject to complex and extensive regulation of most aspects of our business by U.S. Federal and state regulatory agencies, self-regulatory organizations and securities exchanges. The laws, rules and regulations comprising the regulatory framework are constantly changing, as are the interpretation and enforcement of existing laws, rules and regulations. The effect of any such changes cannot be predicted and may direct the manner of our operations and affect our profitability.

Our broker-dealer subsidiary, JMP Securities, is subject to regulations governing every aspect of the securities business, including the execution of securities transactions; capital requirements; record-keeping and reporting procedures; relationships with customers, including the handling of cash and margin accounts; the experience of and training requirements for certain employees; and business interactions with firms that are not members of regulatory bodies.

JMP Securities is registered as a securities broker-dealer with the SEC and is a member of the FINRA. The FINRA is a self-regulatory body composed of members such as our broker-dealer subsidiary that have agreed to abide by the rules and regulations of the FINRA. The FINRA may expel, fine and otherwise discipline member firms and their employees. JMP Securities is also licensed as a broker-dealer in each of the 50 states in the U.S., requiring us to comply with the laws, rules and regulations of each state. Each state may revoke the license to conduct securities business, fine and otherwise discipline broker-dealers and their employees.

JMP Securities is also subject to the SEC’s Uniform Net Capital Rule, Rule 15c3-1, which may limit our ability to make withdrawals of capital from our broker-dealer subsidiary. The Uniform Net Capital Rule sets the minimum level of net capital a broker-dealer must maintain and also requires that a portion of its assets be relatively liquid. In addition, JMP Securities is subject to certain notification requirements related to withdrawals of excess net capital.

We are also subject to the USA PATRIOT Act of 2001, which imposes obligations regarding the prevention and detection of money-laundering activities, including the establishment of customer due diligence and customer verification, and other compliance policies and procedures. The conduct of research analysts is also the subject of rule-making by the SEC, the FINRA and the federal government through the Sarbanes-Oxley Act. These regulations require certain disclosures by, and restrict the activities of, research analysts and broker-dealers, among others. Failure to comply with these requirements may result in monetary, regulatory and, in the case of the USA PATRIOT Act, criminal penalties.

Our asset management subsidiary, HCS, is an SEC-registered investment adviser, and accordingly subject to regulation by the SEC. Requirements under the Investment Advisors Act of 1940 include record-keeping, advertising and operating requirements, and prohibitions on fraudulent activities.

Various regulators, including the SEC, the FINRA and state securities regulators and attorneys general, are conducting both targeted and industry-wide investigations of certain practices relating to the financial services industry, including marketing, sales practices, valuation practices, asset managers, and market and compensation arrangements. These investigations, which have been highly publicized, have involved mutual fund companies, broker-dealers, hedge funds, investors and others.

In addition, the SEC staff has conducted studies with respect to soft dollar practices in the brokerage and asset management industries and proposed interpretive guidance regarding the scope of permitted brokerage and research services in connection with soft dollar practices.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted. The Dodd-Frank Act institutes a wide range of reforms that will impact financial services firms and requires significant rule-making. In addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action. Many of the provisions of the Dodd-Frank Act are subject to further rulemaking procedures and studies and will take effect over several years. As a result, we cannot assess the impact of these new legislative and regulatory changes on our business at the present time.

Accounting, Administration and Operations

Our accounting, administration and operations personnel are responsible for financial controls, internal and external financial reporting, compliance with regulatory and legal requirements, office and personnel services, management information and telecommunications systems and the processing of our securities transactions. We use a third-party service provider for payroll processing and servicing of asset-backed securities issued, and our clearing operations are currently performed by J.P. Morgan Clearing Corp., changed from Penson Worldwide, Inc. effective February 23, 2011. All of our data processing functions are performed by our management information systems personnel. We believe that our continued future growth will require implementation of new and enhanced communications and information systems and training of our personnel or the hiring of an outsourced provider to operate such systems. Any difficulty or significant delay in the implementation or operation of new systems or the training of personnel could harm our ability to manage growth.

Available Information

JMP Group Inc. is required to file current, annual and quarterly reports, proxy statements and other information required by the Exchange Act, with the SEC. You may read and copy any document JMP Group Inc. files with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at http://www.sec.gov, from which interested persons can electronically access JMP Group Inc.’s SEC filings.

JMP Group Inc. provides its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large stockholders, and any amendments to those documents filed or furnished pursuant to the Exchange Act free of charge on the Investor Relations of its website located at http://www.jmpg.com. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

JMP Group Inc. also makes available, in the Investor Relations section of its website and will provide print copies to stockholders upon request, (i) its corporate governance guidelines, (ii) its code of business conduct and ethics, and (iii) the charters of the audit, compensation, and corporate governance and nominating committees of its board of directors. These documents, as well as the information on the website of JMP Group Inc., are not intended to be part of this annual report.

Item 1A.

Risk Factors

Risks Related to Our Business

Difficult conditions in the global financial markets have negatively impacted and may continue to negatively impact our ability to generate business and revenues and may cause significant fluctuations in our stock price.

All of our businesses have been in the past and may in the future be materially affected by conditions in the financial market and general economic conditions, such as the level and volatility of interest rates, investor sentiment, the availability and the cost of credit, the U.S. mortgage market, the U.S. real estate market, volatile energy prices, consumer confidence, unemployment, and geopolitical issues. Financial markets have experienced extreme volatility and disruption since mid-2007. In particular, during the fourth quarter of 2008, market volatility and disruption reached unprecedented levels. While financial markets have become more stable and have generally improved since 2009, there remains a significant amount of uncertainty about a global economic recovery. In particular, recent events relating to European debt markets, combined with uncertainty about the global economic outlook, have led to volatility and challenging economic conditions.

Weakness or disruption in equity markets and diminished trading volume of securities have adversely impacted our sales and trading business in the past and could continue to do so in the future. Industry-wide declines in the size and number of underwritings and mergers and acquisitions transactions have also had an adverse effect on our revenues. Reductions in the trading prices for equity securities tend to reduce the transaction value of investment banking transactions, such as underwriting and mergers and acquisitions transactions, which in turn may reduce the fees we earn from these transactions. Market conditions may also affect the level and volatility of securities prices and the liquidity and value of investments in our funds and managed accounts, and we may not be able to manage our investment management business’s exposure to these market conditions. In addition to these factors, deterioration in the financial markets or economic conditions in the United States and elsewhere in the world could materially affect our business in other ways, including the following:

The worsening of current market conditions may cause us to face some or all of the following risks:

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Our opportunity to act as underwriter or placement agent could be adversely affected by a reduction in the number and size of capital raising transactions or by competing government sources of equity.

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The number and size of mergers and acquisitions transactions or other strategic advisory services where we act as adviser could be adversely affected by continued uncertainties in valuations related to asset quality and creditworthiness, volatility in the equity markets, and diminished access to financing.

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Market volatility could lead to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in the revenue we receive from commissions and spreads.

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We may experience losses in securities trading activities, or as a result of write-downs in the value of securities that we own, as a result of deteriorations in the businesses or creditworthiness of the issuers of such securities.

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We may experience losses or write downs in the realizable value of our principal investments due to the inability of companies we invest in to repay their borrowings.

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Our access to liquidity and the capital markets could be limited, preventing us from making principal investments and restricting our sales and trading businesses.

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We may incur unexpected costs or losses as a result of the bankruptcy or other failure of companies for which we have performed investment banking services to honor ongoing obligations such as indemnification or expense reimbursement agreements.

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Sudden sharp declines in market values of securities can result in illiquid markets and the failure of counterparties to perform their obligations, which could make it difficult for us to sell securities, hedge securities positions, and invest funds under management.

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As an introducing broker to clearing firms, we are responsible to the clearing firm and could be held liable for the defaults of our customers, including losses incurred as the result of a customer’s failure to meet a margin call. Although we review credit exposure to specific customers, default risk may arise from events or circumstances that are difficult to detect or foresee. When we allow customers to purchase securities on margin, we are subject to risks inherent in extending credit. This risk increases when a market is rapidly declining and the value of the collateral held falls below the amount of a customer’s indebtedness. If a customer’s account is liquidated as the result of a margin call, we are liable to our clearing firm for any deficiency.

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Competition in our investment banking, sales, and trading businesses could intensify as a result of the increasing pressures on financial services companies and larger firms competing for transactions and business that historically would have been too small for them to consider.

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Market volatility could result in lower prices for securities, which may result in reduced management fees calculated as a percentage of assets under management.

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Market declines could increase claims and litigation, including arbitration claims from customers.

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Our industry could face increased regulation as a result of legislative or regulatory initiatives. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

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Government intervention may not succeed in improving the financial and credit markets and may have negative consequences for our business.

It is difficult to predict how long current financial market and economic conditions will continue, whether they will deteriorate and if they do, which of our business lines will be adversely affected. If one or more of the foregoing risks occurs, our revenues are likely to decline and, if we were unable to reduce expenses at the same pace, our profit margins would erode.

We focus principally on specific sectors of the economy, and deterioration in the business environment in these sectors or a decline in the market for securities of companies within these sectors could harm our business.

We focus principally on four target industries: financial services, healthcare, real estate, and technology. Volatility in the business environment in these industries or in the market for securities of companies within these industries could adversely affect our financial results and the market value of our common stock. The business environment for companies in some of these industries has been subject to high levels of volatility in recent years, and our financial results have consequently been subject to significant variations from year to year. Over the last seven years, the mix of our investment banking revenues has shifted from over 70% combined in financial services and real estate (slightly weighted in favor of the real estate sector) to 48% of total investment banking revenues in financial services and real estate in 2011. The healthcare sector has risen to 29% of total investment banking revenues in 2011 with the remaining 23% derived from the technology sector. The market for securities in each of our target industries may also be subject to industry-specific risks. For example, we have research, investment banking and principal investments focused in the areas of financial services, real estate and mortgage-related securities. These sectors have been impacted negatively by disruption in the financial markets and downturn in the general economy and the real estate market. Since 2008, a number of banks and securities firms in the United States and elsewhere have failed or have been acquired by other financial institutions, often in distressed sales. In addition, declines in the housing market, with falling home prices and increasing foreclosures, have adversely affected the credit performance of mortgage loans and have resulted in material write downs of asset values by financial institutions.

As an investment bank focused principally on specific growth sectors of the economy, we also depend significantly on private company transactions for sources of revenues and potential business opportunities. Most

of these private company clients are initially funded and controlled by venture capital funds and private equity firms. To the extent that the pace of these private company transactions slows or the average transaction size declines due to a decrease in venture capital and private equity financings, difficult market conditions in our target industries or other factors, our business and results of operations may be harmed.

Underwriting and other corporate finance transactions, strategic advisory engagements and related sales and trading activities in our target industries represent a significant portion of our business. This concentration of activity in our target industries exposes us to the risk of declines in revenues in the event of downturns in these industries.

Our ability to retain our senior professionals and recruit additional professionals is critical to the success of our business, and our failure to do so may adversely affect our reputation, business, results of operations and financial condition.

Our people are our most valuable resource. Our ability to obtain and successfully execute the transactions that generate a significant portion of our revenues depends upon the reputation, judgment, business generation capabilities and project execution skills of our senior professionals, particularly our managing directors and the members of our executive committee. The reputations and relationships of our senior professionals with our clients are a critical element in obtaining and executing client engagements. Turnover in the investment banking industry is high and we encounter intense competition for qualified employees from other companies in the investment banking industry as well as from businesses outside the investment banking business, such as hedge funds and private equity funds. To the extent we continue to have annual compensation and benefits expense targets, we may not be able to retain our professionals or recruit additional professionals at compensation levels that are within our target range for compensation and benefits expense. If we were to lose the services of any of our investment bankers, senior equity research, sales and trading professionals, asset managers, or executive officers to a new or existing competitor or otherwise, we may not be able to retain valuable relationships and some of our clients could choose to use the services of a competitor instead of our services. If we are unable to retain our senior professionals or recruit additional professionals, our reputation, business, results of operations and financial condition will be adversely affected. Further, new business initiatives and efforts to expand existing businesses generally require that we incur compensation and benefits expense before generating additional revenues.

We face strong competition from larger firms, some of which have greater resources and name recognition than we do, which may impede our ability to grow our business.

The investment banking industry is intensely competitive, and we expect it to remain so. We compete on the basis of a number of factors, including client relationships, reputation, the abilities of our professionals, market focus and the relative quality and price of our services and products. We have experienced intense price competition in our various businesses. Pricing and other competitive pressures in investment banking, including the trends toward multiple book runners, co-managers and multiple financial advisors handling transactions, could adversely affect our revenues, even if the size and number of our investment banking transactions may increase.

We are a relatively small investment bank with 174 employees as of December 31, 2011. Many of our competitors have a broader range of products and services, greater financial and marketing resources, larger customer bases, greater name recognition, more senior professionals to serve their clients’ needs, greater global reach and more established relationships with clients than we have. These larger and better capitalized competitors may be better able to respond to changes in the investment banking industry, compete for skilled professionals, finance acquisitions, fund internal growth and compete for market share generally. These firms have the ability to support investment banking with commercial banking, insurance and other financial services in an effort to gain market share, which has resulted, and could further result, in pricing pressure in our businesses. In particular, the ability to provide commercial financing has become an important advantage for some of our larger competitors and, because we do not provide such financing, we may be unable to compete as

effectively for clients in a significant part of the investment banking industry. In addition, if the number of capital markets and financial advisory transactions continues to decline in response to current economic conditions, larger investment banking firms may seek to enter into engagements with smaller companies and for smaller transactions that traditionally would have been considered too small for these firms.

If we are unable to compete effectively with our competitors, our business, results of operations and financial condition will be adversely affected.

We face strong competition from middle-market investment banks.

We compete with specialized investment banks to provide financial and investment banking services to small and middle-market companies. Middle-market investment banks provide access to capital and strategic advice to small and middle-market companies in our target industries. We compete with those investment banks on the basis of a number of factors, including client relationships, reputation, the abilities of our professionals, market focus and the relative quality of our products and services. Competition in the middle-market may further intensify if larger Wall Street investment banks expand their focus to this sector of the market. Increased competition could reduce our market share from investment banking services and our ability to generate fees at historical levels.

Our stock price has been volatile and it may continue to be volatile in the future.

The market price of our common stock could be subject to significant fluctuations due to factors such as:

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changes in book value due to principal investment valuations;

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actual or anticipated fluctuations in our financial condition or results of operations;

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failure to meet the expectations of securities analysts;

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a decline in the stock prices of peer companies;

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a discount in the trading multiple of our common stock relative to that of common stock of certain of our peer companies due to perceived risks associated with our smaller size;

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the success or failure of potential acquisitions, our operating strategies and our perceived prospects and those of the financial services industry in general;

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the realization of any of the other risks described in this section;

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sales of substantial amounts of our common stock by our employees or other stockholders, or the possibility of such sales; and

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changes in our dividend policy.

We currently have on file with the SEC an effective “universal” shelf registration statement on Form S-3, which enables us to sell, from time to time, our common stock and other securities covered by the registration statement in one or more public offerings. Sales of substantial amounts of our common stock or other securities covered by the registration statement may adversely affect the price of our common stock. Declines in the price of our common stock may adversely affect our ability to recruit and retain key employees, including our managing directors and other key professional employees. In addition, we may not be able to access the capital markets for future principal transactions.

Our financial results from investment banking activities may fluctuate substantially from period to period, which may impair our stock price.

We have experienced, and expect to experience in the future, significant variations from period to period in our revenues and results of operations from investment banking activities. Future variations in investment

banking revenues may be attributable in part to the fact that our investment banking revenues are typically earned upon the successful completion of a transaction, the timing of which is uncertain and beyond our control. In most cases, we receive little or no payment for investment banking engagements that do not result in the successful completion of a transaction. As a result, our business is highly dependent on market conditions as well as the decisions and actions of our clients and interested third parties. For example, a client’s acquisition transaction may be delayed or terminated because of a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents or board or stockholder approvals, failure to secure necessary financing, adverse market conditions or unexpected financial or other problems in the business of a client or a counterparty. If the parties fail to complete a transaction on which we are advising or an offering in which we are participating, we will earn little or no revenue from the contemplated transaction. In addition, we pay significant expenses related to a contemplated transaction regardless of whether or not the contemplated transaction generates revenues. This risk may be intensified by our focus on growth companies in the financial services, healthcare, real estate and technology industries, as the market for securities of these companies has experienced significant variations in the number and size of equity offerings. In addition, our investment banking revenues are highly dependent on the level of mergers and acquisition and capital raising activity in the U.S. which fluctuates substantially from period to period. According to data from Dealogic, a provider of global investment banking analysis and systems, the number of mergers and acquisition transactions in the U.S. varied from approximately 5,000 in 2009 ($373.0 billion in deal value) to approximately 5,600 in 2010 ($427.3 billion in deal value) and approximately 6,150 in 2011 ($486.8 billion in deal value). The number of capital raising transactions varied from 702 in 2009 (raising $201.2 billion) to 772 in 2010 (raising $166.1 billion) and 654 in 2011 (raising $164.5 billion). Our investment banking revenues would be adversely affected in the event that the number and size of mergers and acquisitions and capital raising transactions decline. As a result, we may not achieve steady and predictable earnings on a quarterly basis, which could in turn adversely affect our stock price.

Further, because a significant portion of our revenue is derived from investment banking fees and commissions, severe market fluctuations, weak economic conditions, a decline in stock prices, trading volumes or liquidity could cause our financial results to fluctuate from period to period as a result of the following, among other things:

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the number and size of transactions for which we provide underwriting and merger and acquisition advisory services may decline;

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the value of the securities we hold in inventory as assets, which we often purchase in connection with market-making and underwriting activities, may decline; and

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the volume of trades we would execute for our clients may decrease.

To the extent our clients, or counterparties in transactions with us, are more likely to suffer financial setbacks in a volatile stock market environment, our risk of loss during these periods would increase.

Our corporate finance and strategic advisory engagements are singular in nature and do not generally provide for subsequent engagements.

Our investment banking clients generally retain us on a short-term, engagement-by-engagement basis in connection with specific corporate finance, merger and acquisition transactions (often as an advisor in company sale transactions) and other strategic advisory services, rather than on a recurring basis under long-term contracts. As these transactions are typically singular in nature and our engagements with these clients may not recur, we must seek new engagements when our current engagements are successfully completed or are terminated. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in any subsequent period. If we are unable to generate a substantial number of new engagements that generate fees from new or existing clients, our business, results of operations and financial condition could be adversely affected.

Pricing and other competitive pressures may impair the revenues of our sales and trading business.

We derive a significant portion of our revenues from our sales and trading business, which accounted for 23%, 20% and 23% of our net revenues for the years ended December 31, 2011, 2010 and 2009, respectively. Along with other investment banking firms, we have experienced intense price competition and trading volume reduction in this business in recent years. In particular, the ability to execute trades electronically and through alternative trading systems has increased the downward pressure on trading commissions and spreads. We expect these trends toward alternative trading systems and downward pricing pressure in the business to continue. We believe we may experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by competing on the basis of price or by using their own capital to facilitate client trading activities. In addition, we face pressure from our larger competitors, which may be better able to offer a broader range of complementary products and services to clients in order to win their trading business. As we are committed to maintaining and improving our comprehensive research coverage in our target sectors to support our sales and trading business, we may be required to make substantial investments in our research capabilities to remain competitive. If we are unable to compete effectively in these areas, the revenues of our sales and trading business may decline, and our business, results of operations and financial condition may be harmed.

Some of our large institutional sales and trading clients in terms of brokerage revenues have entered into arrangements with us and other investment banking firms under which they separate payments for research products or services from trading commissions for sales and trading services, and pay for research directly in cash, instead of compensating the research providers through trading commissions (referred to as “soft dollar” practices). In addition, we have entered into certain commission sharing arrangements in which institutional clients execute trades with a limited number of brokers and instruct those brokers to allocate a portion of the commission directly to us or other broker-dealers for research or to an independent research provider. If more of such arrangements are reached between our clients and us, or if similar practices are adopted by more firms in the investment banking industry, it may further increase the competitive pressures on trading commissions and spreads and reduce the value our clients place on high quality research. Conversely, if we are unable to make similar arrangements with other investment managers that insist on separating trading commissions from research products, volumes and trading commissions in our sales and trading business also would likely decrease.

Larger and more frequent capital commitments in our trading and underwriting businesses increase the potential for significant losses.

There is a trend toward larger and more frequent commitments of capital by financial services firms in many of their activities. For example, in order to win business, investment banks are increasingly committing to purchase large blocks of stock from publicly traded issuers or significant stockholders, instead of the more traditional marketed underwriting process in which marketing is typically completed before an investment bank commits to purchase securities for resale. We may participate in this trend and, as a result, we may be subject to increased risk. Conversely, if we do not have sufficient regulatory capital to so participate, our business may suffer. Furthermore, we may suffer losses as a result of the positions taken in these transactions even when economic and market conditions are generally favorable for others in the industry.

We may increasingly commit our own capital as part of our trading business to facilitate client sales and trading activities. The number and size of these transactions may adversely affect our results of operations in a given period. We may also incur significant losses from our sales and trading activities due to market fluctuations and volatility in our results of operations. To the extent that we own assets, i.e., have long positions, in any of those markets, a downturn in the value of those assets or in those markets could result in losses. Conversely, to the extent that we have sold assets we do not own, i.e., have short positions, in any of those markets, an upturn in those markets could expose us to potentially large losses as we attempt to cover our short positions by acquiring assets in a rising market.

The asset management business is intensely competitive.

Over the past several years, the size and number of asset management funds, including hedge funds and private equity funds, has continued to increase. If this trend continues, it is possible that it will become increasingly difficult for our funds to raise capital. More significantly, the allocation of increasing amounts of capital to alternative investment strategies by institutional and individual investors leads to a reduction in the size and duration of pricing inefficiencies. Many alternative investment strategies seek to exploit these inefficiencies and, in certain industries, this drives prices for investments higher, in either case increasing the difficulty of achieving targeted returns. In addition, if interest rates were to rise or there were to be a prolonged bull market in equities, the attractiveness of our funds relative to investments in other investment products could decrease. Competition is based on a variety of factors, including:

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investment performance;

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investor perception of the drive, focus and alignment of interest of an investment manager;

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quality of service provided to and duration of relationship with investors;

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business reputation; and

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level of fees and expenses charged for services.

We compete in the asset management business with a large number of investment management firms, private equity fund sponsors, hedge fund sponsors and other financial institutions. A number of factors serve to increase our competitive risks, as follows:

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investors may develop concerns that we will allow a fund to grow to the detriment of its performance;

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some of our competitors have greater capital, lower targeted returns or greater sector or investment strategy specific expertise than we do, which creates competitive disadvantages with respect to investment opportunities;

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some of our competitors may perceive risk differently than we do which could allow them either to outbid us for investments in particular sectors or, generally, to consider a wider variety of investments;

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there are relatively few barriers to entry impeding new asset management firms, and the successful efforts of new entrants into our various lines of business, including former “star” portfolio managers at large diversified financial institutions as well as such institutions themselves, will continue to result in increased competition; and

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other industry participants in the asset management business continuously seek to recruit our best and brightest investment professionals away from us.

These and other factors could reduce our earnings and revenues and adversely affect our business. In addition, if we are forced to compete with other alternative asset managers on the basis of price, we may not be able to maintain our current base management and incentive fee structures. We have historically competed primarily on the performance of our funds, and not on the level of our fees relative to those of our competitors. However, there is a risk that fees in the alternative investment management industry will decline, without regard to the historical performance of a manager, including our managers. Fee reductions on our existing or future funds, without corresponding decreases in our cost structure, would adversely affect our revenues and distributable earnings.

Poor investment performance may decrease assets under management and reduce revenues from and the profitability of our asset management business.

Revenues from our asset management business are primarily derived from asset management fees. Asset management fees are comprised of base management and incentive fees. Management fees are typically based on assets under management, and incentive fees are earned on a quarterly or annual basis only if the return on our

managed accounts exceeds a certain threshold return, or “highwater mark,” for each investor. We will not earn incentive fee income during a particular period, even when a fund had positive returns in that period, if we do not generate cumulative performance that surpasses a highwater mark. If a fund experiences losses, we will not earn incentive fees with regard to investors in that fund until its returns exceed the relevant highwater mark.

In addition, investment performance is one of the most important factors in retaining existing investors and competing for new asset management business. Investment performance may be poor as a result of the current or future difficult market or economic conditions, including changes in interest rates or inflation, terrorism or political uncertainty, our investment style, the particular investments that we make, and other factors. Poor investment performance may result in a decline in our revenues and income by causing (i) the net asset value of the assets under our management to decrease, which would result in lower management fees to us, (ii) lower investment returns, resulting in a reduction of incentive fee income to us, and (iii) investor redemptions, which would result in lower fees to us because we would have fewer assets under management.

To the extent our future investment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability of our asset management business will likely be reduced and our ability to grow existing funds and raise new funds in the future will likely be impaired.

The historical returns of our funds may not be indicative of the future results of our funds.

The historical returns of our funds should not be considered indicative of the future results that should be expected from such funds or from any future funds we may raise. Our rates of returns reflect unrealized gains, as of the applicable measurement date, which may never be realized due to changes in market and other conditions not in our control that may adversely affect the ultimate value realized from the investments in a fund. The returns of our funds may have also benefited from investment opportunities and general market conditions that may not repeat themselves, and there can be no assurance that our current or future funds will be able to avail themselves of profitable investment opportunities. Furthermore, the historical and potential future returns of the funds we manage also may not necessarily bear any relationship to potential returns on our common stock.

Our asset management clients may generally redeem their investments, which could reduce our asset management fee revenues.

Our asset management fund agreements generally permit investors to redeem their investments with us after an initial “lockup” period during which redemptions are restricted or penalized. However, any such restrictions may be waived by us. Thereafter, redemptions are permitted at quarterly or annual intervals. If the return on the assets under our management does not meet investors’ expectations, investors may elect to redeem their investments and invest their assets elsewhere, including with our competitors. Our management fee revenues correlate directly to the amount of assets under our management; therefore, redemptions may cause our fee revenues to decrease. Investors may decide to reallocate their capital away from us and to other asset managers for a number of reasons, including poor relative investment performance, changes in prevailing interest rates which make other investments more attractive, changes in investor perception regarding our focus or alignment of interest, dissatisfaction with changes in or a broadening of a fund’s investment strategy, changes in our reputation, and departures or changes in responsibilities of key investment professionals. For these and other reasons, the pace of redemptions and corresponding reduction in our assets under management could accelerate. In the future, redemptions could require us to liquidate assets under unfavorable circumstances, which would further harm our reputation and results of operations.

We invest our own principal capital in equities and debt that expose us to a significant risk of capital loss.

We use a portion of our own capital in a variety of principal investment activities, each of which involves risks of illiquidity, loss of principal and revaluation of assets. At December 31, 2011, our gross principal investments included $51.7 million invested in other investments, of which $24.3 million was related to our

family of funds, $0.4 million to equity securities of a private company and $2.6 million to funds managed by third-parties. We also had $24.3 million invested in marketable securities in long positions, which includes our investments in NYMT common stock of $10.3 million and $10.9 million invested through short positions on marketable securities. In addition, we have investments in private companies through loans and lines of credit, which as of December 31, 2011, are carried at zero net of reserves for credit losses. The companies in which we invest may rely on new or developing technologies or novel business models, or concentrate on markets which are or may be disproportionately impacted by pressures in the financial services and/or mortgage and real estate sectors, have not yet developed and which may never develop sufficiently to support successful operations, or their existing business operations may deteriorate or may not expand or perform as projected. As a result, we have suffered losses in the past and we may suffer losses from our principal investment activities in the future.

We have made and may make principal investments in relatively high-risk, illiquid assets that often have significantly leveraged capital structures, and we may fail to realize any profits from these activities for a considerable period of time or lose some or all of the principal amount we invest in these activities.

We may purchase equity securities and, to a lesser extent, debt securities, in venture capital, seed and other high risk financings of early-stage, pre-public or “mezzanine stage”, distressed situations and turnaround companies, as well as funds or other collective investment vehicles. We risk the loss of capital we have invested in these activities.

We may use our capital, including on a leveraged basis in principal investments in both private company and public company securities that may be illiquid and volatile. The equity securities of a privately-held entity in which we make a principal investment are likely to be restricted as to resale and may otherwise be highly illiquid. In the case of fund or similar investments, our investments may be permanently illiquid. We expect that there will be restrictions on our ability to resell the securities of any such company that we acquire for a period of at least six months after we acquire those securities. Thereafter, a public market sale may be subject to volume limitations or dependent upon securing a registration statement for an initial and potentially secondary public offering of the securities. We may make principal investments that are significant relative to the overall capitalization of the investee company and resales of significant amounts of these securities might be subject to significant limitations and adversely affect the market and the sales price for the securities in which we invest. In addition, our principal investments may involve entities or businesses with capital structures that have significant leverage. The large amount of borrowing in the leveraged capital structure increases the risk of losses due to factors such as rising interest rates, downturns in the economy or deteriorations in the condition of the investment or its industry. In the event of defaults under borrowings, the assets being financed would be at risk of foreclosure, and we could lose our entire investment.

Even if we make an appropriate investment decision based on the intrinsic value of an enterprise, we cannot assure you that general market conditions will not cause the market value of our investments to decline. For example, an increase in interest rates, a general decline in the stock markets, or other market and industry conditions adverse to companies of the type in which we invest and intend to invest could result in a decline in the value of our investments or a total loss of our investment.

We may experience write downs of our investments and other losses related to the valuation of our investments and volatile and illiquid market conditions.

We have exposure to volatile or illiquid securities, including investments in companies which have and may hold mortgage-related products, such as residential and commercial mortgage-backed securities, mortgage loans, and other mortgage and real estate-related securities. We continue to have exposure to these markets and products and as market conditions continue to evolve the fair value of these mortgage-related instruments could deteriorate.

In addition, in our principal investment activities, our concentrated holdings, illiquidity and market volatility may make it difficult to value certain of our investment securities. Subsequent valuations, in light of factors then

prevailing, may result in significant changes in the values of these securities in future periods. In addition, at the time of any sales and settlements of these securities, the price we ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value. Any of these factors could require us to take write downs in the value of our investment and securities portfolio, which may have an adverse effect on our results of operations in future periods.

Our businesses, profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe us money, securities or other assets or whose securities or obligations we hold.

The amount and duration of our credit exposures have been increasing over the past year, as have the breadth and size of the entities to which we have credit exposures. We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Declines in the market value of securities can result in the failure of buyers and sellers of securities to fulfill their settlement obligations, and in the failure of our clients to fulfill their credit obligations. During market downturns, counterparties to us in securities transactions may be less likely to complete transactions. In addition, particularly during market downturns, we may face additional expenses defending or pursuing claims or litigation related to counterparty or client defaults.

Our businesses may be adversely affected by the disruptions in the credit markets, including reduced access to credit and liquidity and higher costs of obtaining credit.

Historically, we have satisfied our need for funding from internally generated funds, the net proceeds from our 2007 initial public offering, and our revolving credit facility with City National Bank. As a result of the low level of leverage that we have traditionally employed in our business model, we have not been forced to significantly curtail our business activities as a result of lack of credit sources and we believe that our capital resources are currently sufficient to continue to support our current business activities. In the event existing internal and external financial resources do not satisfy our needs, we would have to seek additional outside financing. The availability of outside financing will depend on a variety of factors, such as our financial condition and results of operations, the availability of acceptable collateral, market conditions, the general availability of credit, the volume of trading activities, and the overall availability of credit to the financial services industry.

Widening credit spreads, as well as significant declines in the availability of credit, could adversely affect our ability to borrow on an unsecured basis. Disruptions in the credit markets could make it more difficult and more expensive to obtain funding for our businesses. If our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtail our business activities and increase our cost of funding, both of which could reduce our profitability, particularly in our businesses that involve investing and taking principal positions.

Liquidity, or ready access to funds, is essential to financial services firms, including ours. Failures of financial institutions have often been attributable in large part to insufficient liquidity. Liquidity is of particular importance to our sales and trading business, and perceived liquidity issues may affect the willingness of our clients and counterparties to engage in sales and trading transactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects our sales and trading clients, third parties or us. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time.

Our clients engaging us with respect to mergers and acquisitions often rely on access to the secured and unsecured credit markets to finance their transactions. The lack of available credit and the increased cost of credit could adversely affect the size, volume and timing of our clients’ merger and acquisition transactions—particularly large transactions—and adversely affect our investment banking business and revenues.

We are subject to net capital and other regulatory capital requirements; failure to comply with these rules would significantly harm our business.

JMP Securities LLC, our broker-dealer subsidiary, is subject to the net capital requirements of the SEC, the FINRA, and various self-regulatory organizations of which it is a member. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also mandate that a significant part of its assets be kept in relatively liquid form. Failure to maintain the required net capital may subject a firm to limitation of its activities, including suspension or revocation of its registration by the SEC and suspension or expulsion by the FINRA and other regulatory bodies, and ultimately may require its liquidation. Failure to comply with the net capital rules could have material and adverse consequences, such as:

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limiting our operations that require intensive use of capital, such as underwriting or trading activities; or

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restricting us from withdrawing capital from our subsidiaries, when our broker-dealer subsidiary has more than the minimum amount of required capital. This, in turn, could limit our ability to implement our business and growth strategies, pay interest on and repay the principal of our debt and/or repurchase our shares.

In addition, a change in the net capital rules or the imposition of new rules affecting the scope, coverage, calculation, or amount of net capital requirements, or a significant operating loss or any large charge against net capital, could have similar adverse effects.

Furthermore, JMP Securities LLC is subject to laws that authorize regulatory bodies to block or reduce the flow of funds from it to JMP Group Inc. As a holding company, JMP Group Inc. depends on dividends, distributions and other payments from its subsidiaries to fund dividend payments and to fund all payments on its obligations, including debt obligations. As a result, regulatory actions could impede access to funds that JMP Group Inc. needs to make payments on obligations, including debt obligations, or dividend payments. In addition, because JMP Group Inc. holds equity interests in the firm’s subsidiaries, its rights as an equity holder to the assets of these subsidiaries may not materialize, if at all, until the claims of the creditors of these subsidiaries are first satisfied.

There are contractual, legal and other restrictions that may prevent us from paying cash dividends on our common stock and, as a result, you may not receive any return on investment unless you sell your common stock for a price greater than the price for which you paid.

Although we have paid a quarterly dividend on our common stock since our initial public offering, there can be no assurance that in the future sufficient cash will be available to pay such dividends, and our board of directors may at any time modify or revoke our current dividend policy. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. We do not intend to borrow funds in order to pay dividends. In addition, JMP Group Inc., the entity from which we make our dividend payments, is a holding company that does not conduct any business operations of its own, and therefore, it is dependent upon cash dividends and other transfers from our subsidiaries to make dividend payments on its common stock. The amounts available to us to pay cash dividends are restricted by existing and future debt agreements. In general, under the credit agreement governing our revolving lines of credit and term loans with City National Bank, JMP Group LLC is restricted under certain circumstances from paying dividends or making other distributions to us if an event of default has occurred under that agreement. SEC regulations also provide that JMP Securities may not pay cash dividends to us if certain minimum net capital requirements are not met. In addition, Delaware law permits the declaration of dividends only to the extent of our surplus (which is defined as total assets at fair market value minus total liabilities, minus statutory capital), or if there is no surplus, out of our net profits for the then current and/or immediately preceding fiscal years. In the event we do not pay cash dividends on our common stock as a result of these restrictions, you may not receive any return on an investment in our common stock unless you sell your common stock for a price greater than the price for which you paid.

We may incur losses as a result of ineffective risk management processes and strategies.

We seek to monitor and control our risk exposure through operational and compliance reporting systems, internal controls, management review processes and other mechanisms. Our investing and trading processes seek to balance our ability to profit from investment and trading positions with our exposure to potential losses. While we employ limits and other risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate economic and financial outcomes or the specifics and timing of such outcomes. Thus, we may, in the course of our investment and trading activities, incur losses, which may be significant.

In addition, we are investing our own capital in our funds and funds of funds as well as principal investing activities, and limitations on our ability to withdraw some or all of our investments in these funds or liquidate our investment positions, whether for legal, reputational, illiquidity or other reasons, may make it more difficult for us to control the risk exposures relating to these investments.

Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risks.

Our risk management strategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk.

We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, and breach of contract or other reasons. We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances. As an introducing broker, we could be held responsible for the defaults or misconduct of our customers. These may present credit concerns, and default risks may arise from events or circumstances that are difficult to detect, foresee or reasonably guard against. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect us. If any of the variety of instruments, processes and strategies we utilize to manage our exposure to various types of risk are not effective, we may incur losses.

Our operations and infrastructure and those of the service providers upon which we rely may malfunction or fail.

Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across diverse markets, and the transactions we process have become increasingly complex. The inability of our systems to accommodate an increasing volume of transactions could constrain our ability to expand our businesses. If any of these systems do not operate properly or are disabled, or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer impairments, financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage.

We have outsourced certain aspects of our technology infrastructure, administration and general service providers, including data centers, disaster recovery systems, and wide area networks, as well as some trading applications. We are dependent on our providers to manage and monitor those functions. A disruption of any of the outsourced services would be out of our control and could negatively impact our business. We have experienced disruptions on occasion, none of which has been material to our operations and results. However, there can be no guarantee that future disruptions with these providers will not occur.

We also face the risk of operational failure or termination of relations with any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and to manage our exposure to risk.

In addition, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which we are located. This may affect, among other things,

our financial, accounting or other data processing systems. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with which we conduct business, whether due to fire, earthquakes or other natural disasters, power or communications failure, act of terrorism or war or otherwise. Nearly all of our employees in our primary locations in San Francisco, New York City, Boston and Chicago work in close proximity to each other. Although we have a formal disaster recovery plan in place, if a disruption occurs in one location and our employees in that location are unable to communicate with or travel to other locations, our ability to service and interact with our clients may suffer, and we may not be able to implement successfully contingency plans that depend on communication or travel.

Our operations also rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required to expend significant additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications, and we may be subject to litigation and financial losses that are either not insured or not fully covered through any insurance maintained by us.

We are subject to risks in using prime brokers and custodians.

Our asset management subsidiary and its managed funds depend on the services of prime brokers and custodians to settle and report securities transactions. In the event of the insolvency of a prime broker or custodian, our funds might not be able to recover equivalent assets in whole or in part as they will rank among the prime broker’s and the custodian’s unsecured creditors in relation to assets which the prime broker or custodian borrows, lends or otherwise uses. In addition, cash held by our funds with the prime broker or custodian will not be segregated from the prime broker’s or custodian’s own cash, and the funds will therefore rank as unsecured creditors in relation thereto.

We may be required to make payments under certain indemnification agreements.

Prior to our initial public offering and the corporate reorganization, we entered into agreements that provide for the indemnification of our members, managing directors, executive officers and certain other persons authorized to act on our behalf against certain losses that may arise out of our initial public offering or the corporate reorganization, certain liabilities of our managing directors relating to the time they were members of JMP Group LLC, and certain tax liabilities of our members that may arise in respect of periods prior to this offering when we operated as a limited liability company. We may be required to make payments under these indemnification agreements, which could adversely affect our financial condition.

Strategic investments or acquisitions and joint ventures, or our entry into new business areas, may result in additional risks and uncertainties in our business.

We intend to grow our core businesses both through internal expansion and through strategic investments, acquisitions or joint ventures. When we make strategic investments, acquisitions or enter into joint ventures, we face numerous risks and uncertainties in combining or integrating the relevant businesses and systems. In addition, conflicts or disagreements between us and the other members of a venture may negatively impact our businesses. In addition, future acquisitions or joint ventures may involve the issuance of additional shares of our common stock, which may dilute your ownership in our firm. Furthermore, any future acquisitions of businesses or facilities by us could entail a number of risks, including:

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problems with the effective integration of operations;

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the inability to maintain key pre-acquisition business relationships and integrate new relationships;

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increased operating costs;

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exposure to unanticipated liabilities;

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risks of misconduct by employees not subject to our control;

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difficulties in realizing projected efficiencies, synergies and cost savings; and

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exposure to new or unknown liabilities.

Any future growth of our business, such as further expansion of our asset management or principal investment activities, may require significant resources and/or result in significant unanticipated losses, costs or liabilities. In addition, expansions, acquisitions or joint ventures may require significant managerial attention, which may be diverted from our other operations. These capital, equity and managerial commitments may impair the operation of our businesses.

Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could reduce the price that our common stock might otherwise attain.

On April 21, 2011, we entered into an Equity Distribution Agreement (the “Distribution Agreement”) with Keefe, Bruyette & Woods, Inc. and Sandler O’Neill & Partners, L.P. (collectively, the “Placement Agents”). Pursuant to the Distribution Agreement, the Company may offer and sell up to 3,000,000 shares of its common stock, $0.001 par value per share, from time to time through the Placement Agents, as the Company’s agents for the offer and sale of the securities, or to the Placement Agents for resale. The sales, if any, of the securities under the Distribution Agreement will be made in “at the market” offerings as defined in Rule 415 of the Securities Act of 1933, including sales made directly on the NYSE, on any other existing trading market for the Securities or to or through a market maker. Sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate.

Risks Related to Our Industry

Financial services firms have been subject to increased scrutiny over the last several years, increasing the risk of financial liability and reputational harm resulting from adverse regulatory actions.

Firms in the financial services industry have been operating in a difficult regulatory environment which we expect will become even more stringent in light of recent well-publicized failures of regulators to detect and prevent fraud. The industry has experienced increased scrutiny from a variety of regulators, including the SEC, the NYSE, the FINRA and state attorneys general. Penalties and fines sought by regulatory authorities have increased substantially over the last several years. This regulatory and enforcement environment has created uncertainty with respect to a number of transactions that had historically been entered into by financial services firms and that were generally believed to be permissible and appropriate. We may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of financial services, including, but not limited to, the authority to fine us and to grant, cancel, restrict or otherwise impose conditions on the right to carry on particular businesses. For example, a failure to comply with the obligations imposed by the Exchange Act, as amended, on broker-dealers and the Investment Advisers Act on investment advisers, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, or by the Investment Company Act of 1940, could result in investigations, sanctions and reputational damage. We also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or the FINRA or other self-regulatory organizations that supervise the financial markets. Substantial legal liability or significant regulatory action against us could have adverse financial effects on us or cause reputational harm to us, which could harm our business prospects.

In addition, financial services firms are subject to numerous conflicts of interests or perceived conflicts. The SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest. We have adopted various policies, controls and procedures to address or limit actual or perceived conflicts and regularly review and update our policies, controls and procedures. However, appropriately addressing conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to appropriately address conflicts of interest. Our policies and procedures to address or limit actual or perceived conflicts may also result in increased costs and additional operational personnel. Failure to adhere to these policies and procedures may result in regulatory sanctions or litigation against us. For example, the research operations of investment banks have been and remain the subject of heightened regulatory scrutiny which has led to increased restrictions on the interaction between equity research analysts and investment banking professionals at securities firms. Several securities firms in the U.S. reached a global settlement in 2003 and 2004 with certain federal and state securities regulators and self-regulatory organizations to resolve investigations into the alleged conflicts of interest of research analysts, which resulted in rules that have imposed additional costs and limitations on the conduct of our business.

Asset management businesses have experienced a number of highly publicized regulatory inquiries which have resulted in increased scrutiny within the industry and new rules and regulations for mutual funds, investment advisors and broker-dealers. Although we do not act as an investment advisor to mutual funds, we are registered as an investment advisor with the SEC and the regulatory scrutiny and rulemaking initiatives may result in an increase in operational and compliance costs or the assessment of significant fines or penalties against our asset management business, and may otherwise limit our ability to engage in certain activities. In addition, the SEC staff has conducted studies with respect to soft dollar practices in the brokerage and asset management industries and proposed interpretive guidance regarding the scope of permitted brokerage and research services in connection with soft dollar practices. The SEC staff has indicated that it is considering additional rulemaking in this and other areas, and we cannot predict the effect that additional rulemaking may have on our asset management or brokerage business or whether it will be adverse to us. For example, the SEC recently instituted a permanent ban on “naked” short sales. In addition, Congress is currently considering imposing new requirements on entities that securitize assets, which could affect our credit activities. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.

Recently enacted financial reforms and related regulations may negatively affect our business activities, financial position and profitability.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) institutes a wide range of reforms that will impact financial services firms and requires significant rule-making. In addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action. For example, in January 2011 the SEC released its mandated study on the effectiveness of current legal and regulatory standards for broker-dealers and investment advisers, which may result in the imposition of fiduciary duties on broker-dealers. The legislation and regulation of financial institutions, both domestically and internationally, include calls to increase capital and liquidity requirements; limit the size and types of the activities permitted; and increase taxes on some institutions. The FINRA’s oversight over broker-dealers and investment advisors may be expanded, and new regulations on having investment banking and securities analyst functions in the same firm may be created. Many of the provisions of the Dodd-Frank Act are subject to further rule making procedures and studies and will take effect over several years. As a result, we cannot assess the impact of these new legislative and regulatory changes on our business at the present time. However, these legislative and regulatory changes could affect our revenue, limit our ability to pursue business opportunities, impact the value of assets that we hold, require us to change certain of our business practices, impose additional costs on us, or otherwise adversely affect our businesses. If we do not comply with current or future legislation and regulations that apply to our operations, we may be subject to fines, penalties or material restrictions on our businesses in the jurisdiction where the violation occurred. Accordingly, such new legislation or regulation could have an adverse effect on our business, results of operations, cash flows or financial condition.

Governmental fiscal and monetary policy could adversely affect our small business lending activities, financial position and profitability.

Our small business lending sector is affected by the fiscal and monetary policies of the federal government and its agencies. The Federal Reserve Board regulates the supply of money and credit in the U.S. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations, (b) changing the discount rates of borrowings of depository institutions, and (c) changing reserve requirements against depository institutions’ deposits. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. Its policies determine in large part our cost of funds for lending, investing and capital raising activities and the return we earn on those loans and investments, both of which affect our net interest margin.

Our exposure to legal liability is significant, and damages and other costs that we may be required to pay in connection with litigation and regulatory inquiries, and the reputational harm that could result from legal action against us, could adversely affect our businesses.

Many aspects of our business subject us to substantial risks of potential liability to customers and to regulatory enforcement proceedings by state and federal regulators. We face significant legal risks in our businesses and, in recent years, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial institutions have been increasing. Dissatisfied clients regularly make claims against securities firms and their brokers and investment advisers for, among others, negligence, fraud, unauthorized trading, suitability, churning, failure to supervise, breach of fiduciary duty, employee errors, intentional misconduct, unauthorized transactions, improper recruiting activity, and failures in the processing of securities transactions. These types of claims expose us to the risk of significant loss. Acts of fraud are difficult to detect and deter, and we cannot assure investors that our risk management procedures and controls will prevent losses from fraudulent activity. Additional risks include potential liability under securities or other laws for materially false or misleading statements made in connection with securities offerings and other transactions, employment claims, potential liability for “fairness opinions” and other advice we provide to participants in strategic transactions and disputes over the terms and conditions of complex trading arrangements. Generally, pursuant to applicable agreements, investors in our funds do not have legal recourse against us or HCS for underperformance or errors of judgment in connection with the funds, nor will any act or omission be a breach of duty to the fund or limited partner unless it constituted gross negligence or willful violation of law. At any point in time, the aggregate amount of existing claims against us could be material. While we do not expect the outcome of any existing claims against us to have a material adverse impact on our business, financial condition, or results of operations, we cannot assure you that these types of proceedings will not materially and adversely affect us. We do not carry insurance that would cover payments regarding these liabilities, with the exception of fidelity coverage with respect to certain fraudulent acts of our employees. In addition, our by-laws provide for the indemnification of our officers, directors, and employees to the maximum extent permitted under Delaware law. In the future, we may be the subject of indemnification assertions under these documents by our officers, directors or employees who have or may become defendants in litigation. These claims for indemnification may subject us to substantial risks of potential liability.

As an investment banking and asset management firm, we depend to a large extent on our reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with our services, it may be more damaging to our business than to other businesses. Moreover, our role as advisor to our clients on important underwriting or mergers and acquisitions transactions involves complex analysis and the exercise of professional judgment, including rendering “fairness opinions” in connection with mergers and acquisitions and other transactions. Therefore, our activities may subject us to the risk of significant legal liabilities to our clients and aggrieved third parties, including stockholders of our clients who could bring securities class actions against us. Our investment banking engagements typically include broad indemnities from our clients and provisions to limit our exposure to legal claims relating to our services, however, there can be no assurance that these provisions will protect us or be enforceable in all cases. As a result, we may incur significant legal and other expenses in defending against litigation and may be required to pay substantial damages for

settlements and adverse judgments. We have in the past been, currently are and may in the future be subject to such securities litigation. Substantial legal liability or significant regulatory action against us could harm our results of operations or cause reputational harm to us, which could adversely affect our business and prospects. In addition to the foregoing financial costs and risks associated with potential liability, the defense of litigation has increased costs associated with attorneys’ fees. The amount of outside attorneys’ fees incurred in connection with the defense of litigation could be substantial and might materially and adversely affect our results of operations as such fees occur. Securities class action litigation in particular is highly complex and can extend for a protracted period of time, thereby substantially increasing the costs incurred to resolve this litigation.

Our failure to deal appropriately with conflicts of interest could damage our reputation and adversely affect our business.

As we have expanded the number and scope of our businesses, we increasingly confront potential conflicts of interest relating to our and our funds’ and clients’ investment and other activities. Certain of our funds have overlapping investment objectives, including funds which have different fee structures, and potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities among ourselves and those funds. For example, a decision to acquire material non-public information about a company while pursuing an investment opportunity for a particular fund gives rise to a potential conflict of interest when it results in our having to restrict the ability of the Company or other funds to take any action.

In addition, there may be conflicts of interest regarding investment decisions for funds in which our officers, directors and employees, who have made and may continue to make significant personal investments in a variety of funds, are personally invested. Similarly, conflicts of interest may exist or develop regarding decisions about the allocation of specific investment opportunities between the Company and the funds.

We also have potential conflicts of interest with our investment banking and institutional clients including situations where our services to a particular client or our own proprietary or fund investments or interests conflict or are perceived to conflict with a client. It is possible that potential or perceived conflicts could give rise to investor or client dissatisfaction or litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest would have a material adverse effect on our reputation, which would materially adversely affect our business in a number of ways, including as a result of redemptions by our investors from our hedge funds, an inability to raise additional funds and a reluctance of counterparties to do business with us.

Misconduct by our employees or by the employees of our business partners could harm us and is difficult to detect and prevent.

There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur at our firm. For example, misconduct could involve the improper use or disclosure of confidential information, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter misconduct and the precautions we take to detect and prevent this activity may not be effective in all cases. Our ability to detect and prevent misconduct by entities with whom we do business may be even more limited. We may suffer reputational harm for any misconduct by our employees or those entities with whom we do business.

If we were deemed an investment company under the Investment Company Act of 1940, applicable restrictions could make it impractical for us to continue our business as contemplated and could have an adverse effect on our business.

We are not an investment company under the Investment Company Act of 1940. However, if we were to cease operating and controlling the business and affairs of JMP Securities and HCS or if either of these

subsidiaries were deemed to be an investment company, our interest in those entities could be deemed an investment security for purposes of the Investment Company Act of 1940. We intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the Investment Company Act of 1940, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and would harm our business and the price of our common stock.

Our historical financial information may not permit you to predict our costs of operations.

Some of the historical consolidated financial information in this Form 10-K do not reflect the added costs that we expect to incur as a public company or the resulting changes that have occurred in our capital structure and operations. Because we historically operated through partnerships and limited liability companies prior to our transition to a corporation in connection with our initial public offering, we paid little or no taxes on profits and experienced lower expenses related to regulatory and reporting requirements.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

We occupy four principal offices, with our headquarters located in San Francisco, other offices in New York, Boston and Chicago, and additional space in Minneapolis and in the state of Georgia, all of which are leased. Our San Francisco headquarters is located at 600 Montgomery Street and comprises approximately 37,810 square feet of leased space, pursuant to lease agreements expiring in 2019 and 12,270 square feet of leased space, pursuant to lease agreements expiring in 2013. In New York, we lease approximately 20,570 square feet at 450 Park Avenue pursuant to a lease agreement expiring in 2018. Our Boston office is located at 265 Franklin Street and consists of approximately 2,490 square feet of leased space pursuant to a lease agreement expiring in 2016. In Chicago, we lease approximately 4,500 square feet at 190 South LaSalle Street pursuant to a lease agreement expiring 2015. In Minneapolis, we lease approximately 200 square feet at 80 South 8th Street pursuant to a sublease agreement expiring 2014. In the state of Georgia, we lease approximately 150 square feet in Atlanta at 3340 Peachtree Road NE pursuant to a sublease agreement expiring in 2012 and lease approximately 21,920 square feet in Alpharetta at 3440 Preston Ridge Road pursuant to a lease agreement expiring in 2012. We sublease 15,130 square feet of the total space in Alpharetta and 4,700 square feet in San Francisco to third parties.

Item 3.

Legal Proceedings

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

Item 4.

Mine Safety Disclosures

Not Applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Dividend Policy

Our common stock is traded on the NYSE under the symbol “JMP.” The following table sets forth, for the years ended December 31, 2011 and 2010, the high and low sales prices per share of our common stock, as quoted on the NYSE.


	Sales Price
	High		Low
Year Ended December 31, 2011
First quarter	$	8.66	$	7.35
Second quarter		8.55		5.80
Third quarter		7.42		5.78
Fourth quarter		7.49		5.36


	Sales Price
	High		Low
Year Ended December 31, 2010
First quarter	$	9.81	$	7.62
Second quarter		8.46		6.19
Third quarter		7.43		5.73
Fourth quarter		7.98		6.07

As of December 31, 2011, there were approximately 150 holders of record of our common stock.

The Company currently intends to pay quarterly cash dividends on all outstanding shares of common stock. We do not plan to pay dividends on unvested shares of restricted stock.

The Company’s board of directors declared the following dividends in the years ended December 31, 2011 and 2010:

Year Ended December 31, 2011


Declaration Date	Dividend Per Share		Record Date	Total Amount		Payment Date
March 11, 2011	$	0.020	March 18, 2011	$	441,679	April 1, 2011
May 3, 2011	$	0.025	May 20, 2011	$	559,691	June 3, 2011
August 2, 2011	$	0.030	August 19, 2011	$	672,289	September 2, 2011
November 1, 2011	$	0.030	November 18, 2011	$	658,492	December 2, 2011


Year Ended December 31, 2010
Declaration Date	Dividend Per Share		Record Date	Total Amount		Payment Date
March 2, 2010	$	0.010	March 19, 2010	$	216,765	April 2, 2010
May 4, 2010	$	0.015	May 21, 2010	$	329,862	June 4, 2010
August 3, 2010	$	0.015	August 20, 2010	$	325,974	September 3, 2010
November 2, 2010	$	0.015	November 19, 2010	$	326,008	December 3, 2010

Issuer Purchases of Equity Securities

The following table summarizes the stock repurchases for the fourth quarter of 2011:


Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
October 1, 2011 to October 31, 2011		122,369	$	6.22		122,369		189,540
November 1, 2011 to November 31, 2011		84,030	$	6.71		84,030		1,105,510
December 1, 2011 to December 31, 2011		31,772	$	6.64		31,772		1,073,738

Total		238,171				238,171

(1)

A 1.5 million share repurchase program authorized in August and November 2007 was fully executed as of January 18, 2008. On March 10, 2008, March 3, 2009, May 4, 2010, May 3, 2011 and November 2011, the Company’s board of directors authorized the repurchase of an additional 2.0 million shares during the subsequent eighteen months, the repurchase of an additional 0.5 million shares during the subsequent twelve months, the repurchase of an additional 1.0 million shares during the subsequent eighteen months, the repurchase of an additional 0.5 million shares during the subsequent twelve months, and the repurchase of an additional 1.0 million shares during the subsequent eighteen months, respectively.

Information relating to compensation plans under which our equity securities are authorized for issuance is set forth in Part III, Item 12 of this Form 10-K.

Stock Performance Graph

The following graph compares the cumulative total stockholder return on our common stock with the cumulative total return on the Russell 2000 Index and a peer group index for the period from May 11, 2007 to December 31, 2011. The graph and table below assume that $100 was invested on the starting date and that dividends, if any, were reinvested on the date of payment without payment of any commissions. The performance shown in the graph and table represents past performance and should not be considered an indication of future performance.

LOGO


	5/11/07		6/30/07		9/30/07		12/31/07		3/31/08		6/30/08		9/30/08		12/31/08		3/31/09		6/30/09
JMP Group Inc		100.00		84.96		76.49		69.59		57.86		54.97		44.00		47.25		41.04		65.71
Russell 2000 Index		100.00		100.68		97.58		93.11		83.90		84.39		83.45		61.65		52.43		63.28
Peer Group Index		100.00		93.93		90.29		74.82		59.97		54.20		72.31		52.59		46.93		71.17


	9/30/09		12/31/09		3/31/10		6/30/10		9/30/10		12/31/10		3/31/11		6/30/11		9/30/11		12/31/11
JMP Group Inc		82.62		83.22		72.86		53.17		52.52		65.84		74.49		61.02		50.65		62.62
Russell 2000 Index		75.48		78.40		85.34		76.88		85.56		99.46		107.36		105.64		82.54		95.31
Peer Group Index		90.86		83.96		79.04		67.80		70.37		85.30		87.03		68.75		40.24		45.13

Our peer group index includes the following companies in the broker-dealer industry: Cowen Group, Inc.; FBR Capital Markets Corporation; Gleacher & Co, Inc.; Jefferies Group Inc.; KBW, Inc.; Oppenheimer Holdings, Inc.; Piper Jaffray Companies, Inc.; Rodman & Renshaw Capital Group, Inc.; and Stifel Financial Corp. The total return calculations reflected in the foregoing graph and table were performed by Morningstar.

The information provided above under the heading “Stock Performance Graph” shall not be considered “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Item 6.

Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial and other data of JMP Group Inc. should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and accompanying notes included elsewhere in this Form 10-K.

The selected consolidated statements of financial condition data as of December 31, 2011 and 2010 and the selected consolidated statements of operations data for each of the three years in the period ended December 31, 2011 have been derived from our audited consolidated financial statements and accompanying notes included elsewhere in this Form 10-K and should be read together with those consolidated financial statements and accompanying notes.

The selected consolidated statements of financial condition data as of December 31, 2009, 2008 and 2007 and the selected consolidated statement of operations data for the periods from January 1, 2007 through May 15, 2007 and from May 16, 2007 through December 31, 2007 have been derived from audited consolidated financial statements not included in this Form 10-K.

Prior to May 16, 2007, the Company had conducted its business through a multi-member Delaware limited liability company, JMP Group LLC, or the Predecessor, pursuant to its Third Amended and Restated Limited Liability Company Operating Agreement dated as of August 18, 2004, as amended, or the Operating Agreement. One of JMP Group LLC’s members, JMP Holdings Inc., was established in August 2004 to enable investors to invest through a corporate entity in the membership interests of JMP Group LLC. Shares of common stock of JMP Holdings were issued in a private offering in August 2004. JMP Holdings’ only significant asset until May 16, 2007 was its investment in JMP Group LLC, comprised of the member interests of JMP Group LLC purchased with the net proceeds received from issuance of JMP Holdings’ common stock.

In connection with its initial public offering, JMP Holdings changed its name to JMP Group Inc., and effective May 16, 2007, members of JMP Group LLC exchanged the outstanding membership interests of JMP Group LLC for shares of common stock of JMP Group Inc. As a result of the exchange, JMP Group LLC became JMP Group Inc.’s wholly-owned subsidiary and JMP Group Inc., or the Successor, completed its initial public offering on May 16, 2007.


	December 31,												January 1, 2007 through May 15, 2007			May 16, 2007 through December 31, 2007
(In thousands, except per share data and selected data and operating metrics)	2011			2010			2009			2008			January 1, 2007 through May 15, 2007			May 16, 2007 through December 31, 2007
	Successor			Successor			Successor			Successor			Predecessor			Successor
Statement of Operation Data
Revenues
Investment banking	$	46,114		$	45,577		$	39,924		$	27,249		$	16,055		$	33,222
Brokerage		25,461			28,259			34,004			35,731			12,987			21,835
Asset management fees		19,785			12,231			20,148			11,369			1,218			3,830
Principal transactions		1,615			3,421			18,517			(4,657	)		541			2,404
Gain on sale and payoff of loans		17,020			39,363			22,268			0			0			0
Gain on repurchase of asset-backed securities issued		0			0			4,705			0			0			0
Gain on bargain purchase		0			0			1,179			0			0			0
Net dividend income		1,365			2,248			2,521			3,174			399			1,449
Other income		4,336			3,466			2,593			1,158			326			534

Non-interest revenues		115,696			134,565			145,859			74,024			31,526			63,274

Interest income		33,356			45,162			35,370			2,392			732			2,007
Interest expense		(35,747	)		(33,687	)		(25,924	)		(408	)		(570	)		(160	)

Net interest income		(2,391	)		11,475			9,446			1,984			162			1,847

Provision for loan losses		(1,944	)		(1,327	)		(5,821	)		(2,896	)		0			0

Total net revenues after provision for loan losses		111,361			144,713			149,484			73,112			31,688			65,121

Non-interest Expenses
Compensation and benefits		89,017			95,708			105,179			65,746			18,393			45,618
Income allocation and accretion - Redeemable
Class A member interests (1)		0			0			0			0			117,418			0
Administration		6,649			5,752			5,050			5,887			1,771			3,371
Brokerage, clearing and exchange fees		4,735			5,110			5,284			5,063			1,689			3,366
Travel and business development		3,681			3,447			2,396			3,472			1,197			1,930
Communications and technology		3,988			3,969			3,892			3,837			1,390			2,475
Professional fees		2,955			3,080			3,589			3,065			376			2,054
Impairment loss on purchased management contract		700			2,750			0			0			0			0
Other		4,074			3,912			3,749			2,888			984			2,057

Total non-interest expenses		115,799			123,728			129,139			89,958			143,218			60,871

Income (loss) before income tax expense		(4,438	)		20,985			20,345			(16,846	)		(111,530	)		4,250
Income tax expense (benefit)		(1,670	)		8,577			7,663			(5,701	)		0			(2,537	)

Net income (loss)		(2,768	)		12,408			12,682			(11,145	)		(111,530	)		6,787
Less: Net income (loss) attributable to noncontrolling interests (2)		(257	)		2,805			1,872			(498	)		167			247

Net income (loss) attributable to JMP Group Inc. (3) (6)	$	(2,511	)	$	9,603		$	10,810		$	(10,647	)	$	(111,697	)	$	6,540

Net (loss) income per common share:
Basic	$	(0.11	)	$	0.44		$	0.52		$	(0.53	)	$	0.00		$	0.30
Diluted	$	(0.11	)	$	0.43		$	0.49		$	(0.53	)	$	0.00		$	0.30
Dividends declared and paid per common share:	$	0.105		$	0.06		$	0.04		$	0.20		$	0.00		$	0.075
Weighted average common shares outstanding:
Basic		22,118			21,646			20,791			20,211			0			21,830
Diluted		23,069			22,396			22,137			20,211			0			21,916
Net (loss) per unit-Class A common interests: (3) (4)
Basic		N/A			N/A			N/A			N/A		$	(23.84	)		N/A
Diluted		N/A			N/A			N/A			N/A		$	(23.84	)		N/A
Weighted average units outstanding—Class A common interests: (4)
Basic		N/A			N/A			N/A			N/A			2,385			N/A
Diluted		N/A			N/A			N/A			N/A			2,385			N/A
Net (loss) per unit—Class B common interests: (3) (4)
Basic		N/A			N/A			N/A			N/A		$	(23.84	)		N/A
Diluted		N/A			N/A			N/A			N/A		$	(23.84	)		N/A
Weighted average units outstanding—Class B common interests: (4)
Basic		N/A			N/A			N/A			N/A			2,300			N/A
Diluted		N/A			N/A			N/A			N/A			2,300			N/A


	December 31,
	2011			2010			2009			2008			2007
(Dollars in thousands)	Successor			Successor			Successor			Successor			Successor
Statement of Financial Condition Data
Total assets	$	660,621		$	638,788		$	574,721		$	152,846		$	184,711
Asset-backed securities issued		381,556			351,322			326,632			0			0
Note payable		19,222			26,209			9,045			8,681			0
Total liabilities		504,137			496,736			449,070			39,774			54,506
Total equity		156,434			142,052			125,651			113,072			130,206
Selected Data and Operating Metrics (Unaudited) (7)
Number of employees—end of period		217			215			224			191			202
Number of employees—average		214			218			211			198			194
Net revenues after provision for loan losses per employee	$	520		$	664		$	708		$	369		$	499
Compensation and benefits as a percentage of net revenues after provision for loan losses (5)		79.2	%		64.4	%		68.2	%		84.6	%		58.7	%
Companies covered by research analysts		342			317			286			200			213
Number of completed investment banking transactions		86			74			56			35			71

(1)

Prior to our initial public offering, we were organized as a limited liability company and issued to employee members Redeemable Class A member interests, which were entitled to their pro rata share of our income. Our Third Amended and Restated Limited Liability Company Agreement, as amended, provided that each employee member may elect to redeem their Redeemable Class A member interests upon resignation from us. Because of this repurchase feature, the Redeemable Class A member interests were classified as a liability in our statement of financial condition. As a result of the liability classification, the pro rata share of income allocated to the Redeemable Class A member interests based on ownership percentages and any changes in the redemption amount of the Redeemable Class A member interests were recorded as expense in our statement of income.

(2)

Non-controlling interest relate to the interest of third parties in Harvest Growth Capital LLC, Harvest Capital Credit LLC (from August 18, 2011), Harvest Mortgage Opportunities Partners (from May 1, 2009 through December 31, 2010), JMP Realty Trust (through December 31, 2008), in two asset management funds, Harvest Consumer Partners (through November 30, 2008), Harvest Technology Partners (through July 31, 2008) and in Opportunity Acquisition Corp (through December 31, 2009).

(3)	Prior to our initial public offering we were a limited liability company and our earnings did not reflect the income taxes we pay as a corporation.

(4)

We issued 2,300,000 units of Class B common interests in a private offering in August 2004, which represented 15.5% of our outstanding membership interests. Because there is a direct relationship between the number of Class B common interests outstanding and the ownership percentage in our equity, we were able to determine the number of units associated with the Class A common interests outstanding. As a result, we were able to determine earnings per share, based on an implied number of Class A common interests and an existing number of Class B common interests outstanding. We have reflected this implied number of units for purposes of determining earnings per share in all periods presented.

(5)

The computation of compensation and benefits as a percentage of net revenues after provision for loan losses includes salaries, performance-based cash payments and equity awards to our managing directors and other employees, but excludes compensation expense of $0.8 million, $2.6 million, $3.2 million, $3.9 million and $7.2 million for the years ended December 31, 2011, 2010, 2009, 2008 and 2007, respectively, related to equity awards granted or vested in connection with our initial public offering.

(6)	For the period from January 1, 2007 through May 15, 2007, net income after non-controlling interest was attributable to Class A and Class B common interests.

(7)	2007 figures within “Selected Data and Operating Metrics (Unaudited)” reflect the combined activity from the Predecessor for January 1, 2007 through May 15, 2007 and the Successor for May 16, 2007 through December 31, 2007.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with our consolidated financial statements and the accompanying notes contained elsewhere in this Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those discussed in Item 1A— “Risk Factors” and elsewhere in this Form 10-K.

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:

•

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

•

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

•

proprietary equity research in our four target industries;

•

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

•

management of collateralized loan obligations; and

•

small business lending.

Our business, by its nature, does not produce predictable earnings. Our results in any given period can be materially affected by conditions in global financial markets and economic conditions generally. For a further discussion of the factors that may affect our future operating results, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K.

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 and incentive fees in our asset management business and interest income on collateralized loan obligations and small business loans 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 placements and providing advisory services in mergers and acquisitions and other strategic advisory assignments.

Underwriting Revenues

We earn underwriting revenues from securities offerings in which we act as an underwriter, such as initial public offerings and follow-on equity offerings. Underwriting revenues include management fees, underwriting fees, 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 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 placement fees in non-underwritten transactions such as private placements of equity securities, private investments in public equity (“PIPE”) transactions, Rule 144A private offerings and trust preferred securities offerings. We record private placement revenues on the closing date of these transactions.

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

Brokerage Revenues

Our brokerage revenues include commissions paid by customers from brokerage transactions in exchange-listed and over-the-counter (“OTC”) equity securities. Commissions are recognized on a trade date basis. Brokerage revenues also include net trading gains and losses that result from market-making activities and from the commitment of capital to facilitate customer orders. 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, real estate investment trusts (“REITs”) and Harvest Capital Credit (“HCC”), a small business loan investment vehicle launched in 2011, include base management fees and incentive fees earned from managing investment partnerships sponsored by us and from managing a portion of the net assets of New York Mortgage Trust, Inc. (“NYMT”) pursuant to the advisory agreement between HCS and NYMT entered into in January 2008. The advisory agreement was amended effective July 26, 2010, and 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. The amended agreement was terminated on December 31, 2011, pending

certain contingent advisory obligations. Through the first half of 2012, we will continue to earn base management fees from managing a portion of NYMT assets. Base management fees we earn 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 that are 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 are earned by the Company after returning contributions by the investors for that portfolio investment and for all other portfolio investments in which each such investor participates that have been disposed of at the time of distribution.

As of December 31, 2011, 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 high-water marks, for the hedge funds; (ii) 5% to 20%, subject to high-water marks or a performance hurdle rate, for the hedge funds of funds; (iii) 35%, subject to high-water marks for NYMT; and (iv) 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 HGC and HCC, the management and incentive fees earned at HCS from HGC and HCC are eliminated in consolidation.

Asset management fees for the two CLOs the Company managed through the year consisted of senior and subordinated base management fees. For one of the CLOs, the Company earns incentive fees in the event that specified cumulative investment returns are achieved; such investment returns have not been achieved yet. The Company recognizes base management fees for the CLOs on a monthly basis over the period in which the collateral management services are performed. The base management fees for the CLOs are calculated as a percentage of the average aggregate collateral balances for a specified period. As we consolidate Cratos CLO, the management fees earned at JMPCA from Cratos CLO are eliminated on consolidation in accordance with GAAP. At December 31, 2011, the contractual base management fees earned from the CLOs ranged from 0.40% to 0.50% of the average aggregate collateral balance for a specified period. In December 2011, one of the CLOs initiated liquidation proceedings.

The following tables present certain information with respect to the investment funds managed by Harvest Capital Strategies (“HCS”) and CLOs managed by JMP Credit Advisors LLC (“JMPCA”):


	Assets Under Management (1) at				Company’s Share of Assets Under Management at
	December 31,				December 31,
(In thousands)	2011		2010		2011		2010
Funds Managed by HCS:
Hedge Funds:
Harvest Opportunity Partners II	$	74,953	$	70,622	$	3,931	$	3,873
Harvest Small Cap Partners		324,453		270,498		5,112		4,378
Harvest Agriculture Select (2)		12,149		8,702		1,995		580
Harvest Technology Partners (3)		58,712		31,202		113		106
Harvest Diversified Partners		23,637		31,413		12,921		14,708
Private Equity Funds:
Harvest Growth Capital LLC (4)		23,691		10,698		1,195		891
Funds of Funds:
JMP Masters Fund		52,853		75,196		102		102
REITs:
New York Mortgage Trust		34,056		48,191		N/A		N/A
Loans:
Harvest Capital Credit (4)		10,674		0		5,124		0

HCS Totals	$	615,178	$	546,522	$	30,493	$	24,638

CLOs Managed by JMPCA:
Cratos CLO (4)		470,910		474,824		N/A		N/A
Other (5)		104,473		284,264		N/A		N/A

JMPCA Totals	$	575,383	$	759,088	$	N/A	$	N/A

JMP Group Inc. Totals	$	1,190,561	$	1,305,610	$	30,493	$	24,638

(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 management 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 terminated effective July 26, 2010 and 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 Consumer Partners changed its name to Harvest Agriculture Select effective February 14, 2011.

(3)	Harvest Technology Partners (“HTP”) includes managed accounts in which the Company has neither equity investment nor control. These are included as they follow HTP strategy and earn fees.

(4)	HGC and Cratos CLO were consolidated in the Company’s Statements of Financial Condition at December 31, 2011 and 2010. HCC was consolidated in the Company’s Statements of Financial Condition at December 31, 2011.

(5)	The CLO within “Other” initiated liquidation proceedings in December 2011. The remaining assets will be distributed in 2012.


	Year Ended December 31, 2011
(In thousands)	Company’s Share of Change in Fair Value			Management Fee		Incentive Fee		TWR (1)
Hedge Funds:
Harvest Opportunity Partners II	$	59		$	661	$	96		0.4	%
Harvest Small Cap Partners		735			5,398		7,569		13.3	%
Harvest Agriculture Select (2)		(86	)		86		31		-4.7	%
Harvest Technology Partners (3)		11			600		504		4.2	%
Harvest Diversified Partners		231			286		119		0.5	%
Private Equity Funds:
Harvest Growth Capital LLC (4)		(102	)		759		77		N/A
Funds of Funds:
JMP Masters Fund		0			601		0		-3.1	%
REITs:
New York Mortgage Trust		147			1,058		1,681		N/A
Loans:
Harvest Capital Credit (4)		N/A			13		0		N/A
CLOs Managed by JMPCA:
Cratos CLO (4)		N/A			2,374		N/A		N/A
Other (5)		N/A			1,180		0		N/A

Totals	$	995		$	13,016	$	10,077		N/A

(1)

Time-weighted rate of return (“TWR”) for the hedge funds and funds of funds. TWR is a measure of the compound rate of growth in a portfolio and eliminates the effect of varying cash inflows by assuming a single investment at the beginning of a period and measuring the growth or loss of market value to the end of that period.

(2)	Harvest Consumer Partners changed its name to Harvest Agriculture Select effective February 14, 2011.

(3)	Harvest Technology Partners (“HTP”) includes managed accounts in which the Company has neither equity investment nor control. These are included as they follow HTP strategy and earn fees.

(4)	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.

(5)	The CLO within “Other” initiated liquidation proceedings in December 2011. The remaining assets will be distributed in 2012.


	Year Ended December 31, 2010
(In thousands)	Company’s Share of Change in Fair Value			Management Fee		Incentive Fee		TWR (1)
Hedge Funds:
Harvest Opportunity Partners II	$	184		$	686	$	381		5.3	%
Harvest Small Cap Partners		(271	)		5,867		212		-1.8	%
Harvest Consumer Partners		(204	)		88		11		0.3	%
Harvest Technology Partners		(236	)		308		65		0.6	%
Harvest Mortgage Opportunities Partners (2)		778			156		166		6.7	%
Harvest Global Select Partners (3)		60			31		118		10.1	%
Harvest Diversified Partners		1,046			268		118		3.7	%
Private Equity Funds:
Harvest Growth Capital LLC (2)		150			254		0		N/A
Funds of Funds:
JMP Masters Fund		119			702		1		5.8	%
REITs:
New York Mortgage Trust		226			809		1,997		N/A
CLOs by JMPCA:
Cratos CLO (2)		N/A			2,399		N/A		N/A
Other		N/A			556		0		N/A

Totals	$	1,852		$	12,124	$	3,069		N/A

(1)	TWR is a measure of the compound rate of growth in a portfolio and eliminates the effect of varying cash inflows by assuming a single investment at the beginning of a period and measuring the growth or loss of market value to the end of that period.

(2)

Revenues earned from HMOP, HGC and Cratos CLO are consolidated and then eliminated in consolidation in the Company’s Statements of Operations, net of non-controlling interest. HMOP was liquidated on December 31, 2010, with all of its partners redeeming their interests as of that date. The assets of HMOP were distributed to its partners in January 2011.

(3)	Harvest Global Select Partners was liquidated on May 31, 2010 and its assets were distributed to its partners.


	Year Ended December 31, 2009
(In thousands)	Company’s Share of Change in Fair Value		Management Fee		Incentive Fee		TWR (1)
Hedge Funds:
Harvest Opportunity Partners II	$	2,794	$	587	$	1,422		31.6	%
Harvest Small Cap Partners		1,889		5,798		9,200		14.6	%
Harvest Consumer Partners		884		59		133		23.3	%
Harvest Technology Partners		1,661		126		298		25.5	%
Harvest Mortgage Opportunities Partners (2)		1,999		206		0		24.6	%
Harvest Global Select Partners (3)		86		44		61		6.7	%
Funds of Funds:
JMP Masters Fund		232		955		0		12.5	%
JMP Emerging Masters Fund (4)		23		99		0		5.9	%
REITs:
New York Mortgage Trust		4,046		746		525		N/A
CLOs by JMPCA:
Cratos CLO (2)		N/A		1,857		N/A		N/A

Totals	$	13,614	$	10,477	$	11,639		N/A

(1)	TWR is a measure of the compound rate of growth in a portfolio and eliminates the effect of varying cash inflows by assuming a single investment at the beginning of a period and measuring the growth or loss of market value to the end of that period.

(2)

Effective May 1, 2009, revenues earned from HMOP are consolidated and then allocated to non-controlling interest in consolidation in the Company’s Statements of Operations. HMOP was liquidated on December 31, 2010, with all of its partners redeeming their interests as of that date. The assets of HMOP were distributed to its partners in January 2011. Effective April 7, 2009, revenues earned from Cratos CLO are consolidated and then eliminated in consolidation in the Company’s Statements of Operations, net of non-controlling interest.

(3)	Harvest Global Select Partners was liquidated on May 31, 2010 and its assets were distributed to its partners.

(4)	JMP Emerging Masters Fund was liquidated on December 31, 2009 and its assets were distributed to its partners.

Principal Transactions

Principal transaction revenues include realized and unrealized net gains and losses resulting from our principal investments, which include investments in equity and other securities for our own account, general partner investments in funds that we manage, 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 the 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.

Gain on Repurchase of Asset-Backed Securities Issued

Gain on repurchase of asset-backed securities issued (“ABS”) primarily consists of gains from repurchases of our ABS from third parties. Gains are recorded when the repurchase price is less than the carrying value of the ABS.

Gain on Bargain Purchase

A bargain purchase gain was recognized upon the acquisition of Cratos by JMP Credit on April 7, 2009. This represents the difference between the fair value of net assets acquired and the consideration given to the sellers.

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 included settlement fees from the termination of a purchased management contract.

Interest Income

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

Interest Expense

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

Provision for Loan Losses

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 its loan portfolio. A provision for loan losses is charged to expense to establish the allowance for loan losses. The allowance for loan losses is maintained at a level, in the opinion of management, sufficient to offset estimated losses inherent in the loan portfolio as of the date of the financial statements. The appropriateness of the allowance and the allowance components are reviewed quarterly. 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.

A specific reserve 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 additional 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 accordance with the guidance 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 its 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 and 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. Effective February 23, 2011, we changed our clearing broker from Penson Financial Services Inc. to J.P. Morgan Clearing Corp. The arrangements with the new clearing broker are consistent with those of the previous clearing broker, including the indemnification agreement described in Note 20 to the Consolidated Financial Statements. 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. Since a single investor had previously acquired control of the right to transfer the management contract without cause at any time with 90 days’ notice, 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 to the Consolidated Financial Statements 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 the year ended December 31, 2011 includes the interest of third parties in Cratos CLO, HGC, and HCC (effective August 18, 2011), the partially-owned subsidiaries consolidated in our financial statements. Non-controlling interest for year ended December 31, 2010 includes the interest of third parties in JMP Credit (through August 6, 2010), Cratos CLO (effective August 7, 2010), HMOP (through December 31, 2010) and HGC (effective April 1, 2010), the partially-owned subsidiaries consolidated in our financial statements. HMOP was liquidated on December 31, 2010, with all of its partners redeeming their interests effective that date. The assets of HMOP were distributed to its partners in January 2011. Non-controlling interest for the year ended December 31, 2009 includes the interest of third parties in JMP Credit, HMOP and Opportunity Acquisition Corp. (“SPAC”), partially-owned subsidiaries consolidated in our financial statements. SPAC was liquidated on December 31, 2009 with no distribution of assets to the non-controlling interest holders due to its accumulated loss.

The partnership agreements for HMOP provide for the right of the limited partners to remove the general partners by a simple majority vote of the non-affiliated limited partners. 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 partnership agreements for HMOP provide for the right of the limited partners to remove the general partner by a simple majority vote of the non-affiliated limited partners. Because of these substantive kick-out rights, we, as the general partner, did not control HMOP and therefore did not consolidate HMOP from January 2, 2009 through April 30, 2009. During the quarter ended June 30, 2009, several non-affiliated limited partners redeemed their interest in HMOP, and the remaining limited partners were no longer deemed to have substantive kick-out rights. As a result, we consolidated HMOP in our consolidated financial statements from May 1, 2009 through December 31, 2010.

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.

HCC launched on August 18, 2011 to make 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. HCS acts as its investment advisor, earning a base management fee equal to 2% annually of the gross assets and an incentive fee of 20% of the net operating income above an 8% hurdle rate and 20% of realized gains net of realized and unrealized losses. 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 and affiliates owned approximately 80% of HCC at December 31, 2011. The Company consolidates HCC into its consolidated financial statements.

Revision to 2010 Consolidated Financial Statements

In preparing the consolidated financial statements for the quarter ended March 31, 2011, the Company discovered an error that impacted the company’s previously issued consolidated financial statements for the second quarter of 2010, the third quarter of 2010 and for the year ended December 31, 2010. The net after tax effect of this error together with errors previously identified, was an understatement of net income of $0.7 million for the year ended December 31, 2010 ($31,000 for the second quarter of 2010, $384,000 for the third quarter of 2010 and $327,000 for the fourth quarter of 2010). The adjustments were primarily related to the newly identified error, a difference in the determination of taxable income, causing a $0.6 million impact to income tax expense for the year ended December 31, 2010 ($31,000 for the second quarter of 2010, $397,000 for the third quarter of 2010 and $148,000 for the fourth quarter of 2010.) The Company evaluated these errors and

concluded that they did not, individually or in the aggregate, result in a material misstatement of the company’s previously issued consolidated financial statements. However, the Company also concluded that the effect of correcting the errors in the first quarter of 2011 would have been misleading to the users of the financial statements for the quarter ended March 31, 2011 and expected results for the year ended December 31, 2011. Accordingly, the Company has determined to revise, in this report and future filings, its previously reported Consolidated Statements of Financial Condition as of June 30, 2010, September 30, 2010 and December 31, 2010 and its Consolidated Statements of Operations and Changes in Equity for the periods ended June 30, 2010, September 30, 2010 and December 31, 2010 to adjust for these errors. The effect of this revision had no material impact on our Consolidated Statement of Cash Flows. (See Note 2 of the Notes to the consolidated financial statements for more information).

Historical Results of Operations

The following table sets forth our historical results of operations for the years ended December 31, 2011, 2010 and 2009 and is not necessarily indicative of the results to be expected for any future period.


	Year Ended December 31,						Change from 2010 to 2011
(In thousands)	2011			2010			$			%
Revenues
Investment banking	$	46,114		$	45,577		$	537			1.2	%
Brokerage		25,461			28,259			(2,798	)		-9.9	%
Asset management fees		19,785			12,231			7,554			61.8	%
Principal transactions		1,615			3,421			(1,806	)		-52.8	%
Gain on sale and payoff of loans		17,020			39,363			(22,343	)		-56.8	%
Net dividend income		1,365			2,248			(883	)		-39.3	%
Other income		4,336			3,466			870			25.1	%

Non-interest revenues		115,696			134,565			(18,869	)		-14.0	%

Interest income		33,356			45,162			(11,806	)		-26.1	%
Interest expense		(35,747	)		(33,687	)		(2,060	)		6.1	%

Net interest (loss) income		(2,391	)		11,475			(13,866	)		-120.8	%

Provision for loan losses		(1,944	)		(1,327	)		(617	)		46.5	%

Total net revenues after provision for loan losses		111,361			144,713			(33,352	)		-23.0	%

Non-interest expenses
Compensation and benefits		89,017			95,708			(6,691	)		-7.0	%
Administration		6,649			5,752			897			15.6	%
Brokerage, clearing and exchange fees		4,735			5,110			(375	)		-7.3	%
Travel and business development		3,681			3,447			234			6.8	%
Communication and technology		3,988			3,969			19			0.5	%
Professional fees		2,955			3,080			(125	)		-4.1	%
Impairment loss on purchased management contract		700			2,750			(2,050	)		-74.5	%
Other		4,074			3,912			162			4.1	%

Total non-interest expenses		115,799			123,728			(7,929	)		-6.4	%

(Loss) income before income tax expense		(4,438	)		20,985			(25,423	)		-121.1	%
Income tax (benefit) expense		(1,670	)		8,577			(10,247	)		-119.5	%

Net (loss) income		(2,768	)		12,408			(15,176	)		-122.3	%
Less: Net (loss) income attributable to non-controlling interest		(257	)		2,805			(3,062	)		-109.2	%

Net (loss) income attributable to JMP Group Inc.	$	(2,511	)	$	9,603		$	(12,114	)		-126.1	%


	Year Ended December 31,						Change from 2009 to 2010
(In thousands)	2010			2009			$			%
Revenues
Investment banking	$	45,577		$	39,924		$	5,653			14.2	%
Brokerage		28,259			34,004			(5,745	)		-16.9	%
Asset management fees		12,231			20,148			(7,917	)		-39.3	%
Principal transactions		3,421			18,517			(15,096	)		-81.5	%
Gain on sale and payoff of loans		39,363			22,268			17,095			76.8	%
Gain on repurchase of asset-backed securities issued		0			4,705			(4,705	)		-100.0	%
Gain on bargain purchase		0			1,179			(1,179	)		-100.0	%
Net dividend income		2,248			2,521			(273	)		-10.8	%
Other income		3,466			2,593			873			33.7	%

Non-interest revenues		134,565			145,859			(11,294	)		-7.7	%

Interest income		45,162			35,370			9,792			27.7	%
Interest expense		(33,687	)		(25,924	)		(7,763	)		29.9	%

Net interest income		11,475			9,446			2,029			21.5	%

Provision for loan losses		(1,327	)		(5,821	)		4,494			-77.2	%
		0

Total net revenues after provision for loan losses		144,713			149,484			(4,771	)		-3.2	%

Non-interest expenses
Compensation and benefits		95,708			105,179			(9,471	)		-9.0	%
Administration		5,752			5,050			702			13.9	%
Brokerage, clearing and exchange fees		5,110			5,284			(174	)		-3.3	%
Travel and business development		3,447			2,396			1,051			43.9	%
Communication and technology		3,969			3,892			77			2.0	%
Professional fees		3,080			3,589			(509	)		-14.2	%
Impairment loss on purchased management contract		2,750			0			2,750			N/A
Other		3,912			3,749			163			4.3	%

Total non-interest expenses		123,728			129,139			(5,411	)		-4.2	%

Income before income tax expense		20,985			20,345			640			3.1	%
Income tax expense		8,577			7,663			914			11.9	%

Net income		12,408			12,682			(274	)		-2.2	%
Less: Net income attributable to non-controlling interest		2,805			1,872			933			49.8	%

Net income attributable to JMP Group Inc.	$	9,603		$	10,810		$	(1,207	)		-11.2	%

Year Ended December 31, 2011, Compared to Year Ended December 31, 2010

Overview

Total net revenues after provision for loan losses decreased $33.3 million, or 23.0%, from $144.7 million for the year ended December 31, 2010 to $111.4 million for the year ended December 31, 2011, resulting from a decrease in total non-interest revenues of $18.9 million, a decrease in net interest income of $13.9 million and an increase in provision for loan losses of $0.6 million.

Total non-interest revenues decreased $18.9 million, or 14.0%, primarily due to a decrease in gain on sale and payoff of loans of $22.3 million, a decrease of brokerage revenues of $2.8 million, and a decrease in principal transaction revenues of $1.8 million, partially offset by an increase in asset management revenues of $7.6 million.

Net interest income decreased $13.9 million, or 120.8%, from $11.5 million for the year ended December 31, 2010 to a $2.4 million loss for the same period in 2011. The decrease was primarily due to an increase in net amortization of liquidity discounts at JMP Credit of $15.4 million, from $6.1 million for the year ended December 31, 2010 to a $21.5 million loss for the year ended December 31, 2011.

Provision for loan losses increased $0.6 million, or 46.5%, from $1.3 million for the year ended December 31, 2010 to $1.9 million for the year ended December 31, 2011. Provision for loan losses for the year ended December 31, 2011 was comprised of provision recorded against loans held for investment of $0.2 million, provision recorded against loans collateralizing ABS issued of $2.2 million, partially offset by an impairment reversal of $0.5 million. Provision for loan losses for the year ended December 31, 2010 was comprised of provision recorded against loans held for investment of $0.3 million and provision recorded against loans collateralizing ABS issued of $1.0 million.

Total non-interest expenses decreased $7.9 million, or 6.4%, from $123.7 million for the year ended December 31, 2010 to $115.8 million for the year ended December 31, 2011, primarily due to a decrease in compensation and benefits of $6.7 million, a decrease in impairment loss on purchased management contract of $2.1 million, partially offset by an increase in administrative expense of $0.9 million.

Net income attributable to JMP Group Inc. decreased $12.1 million, or 126.1%, from $9.6 million for the year ended December 31, 2010 to a $2.5 million loss for the year ended December 31, 2011 and includes income tax expense of $8.6 million and a tax benefit of $1.7 million for the years ended December 31, 2010 and 2011, respectively.

Revenues

Investment Banking

Investment banking revenues increased $0.5 million, or 1.2%, from $45.6 million for the year ended December 31, 2010 to $46.1 million for the same period in 2011, and increased as a percentage of total net revenues after provision for loan losses from 31.5% to 41.4%, respectively. The increase in revenues reflects a higher level of activity in our public equity underwriting, partially offset by decreases in our strategic advisory business and private capital markets and other business. Public equity underwriting revenues increased $4.2 million, or 18.8%, from $22.3 million for the year ended December 31, 2010 to $26.5 million for the year ended December 31, 2011. We executed 56 public equity underwriting transactions in 2011 compared to 44 in 2010. We acted as a lead manager on nine transactions in 2011 and 10 in 2010. Our strategic advisory revenues decreased $2.1 million, or 17.4%, from $12.2 million for the year ended December 31, 2010 to $10.1 million for the year ended December 31, 2011. We executed 19 strategic advisory transactions in 2011 compared to 16 in 2010. Private capital market and other revenues decreased from $11.0 million for the year ended December 31, 2010 to $9.5 million for the year ended December 31, 2011. We executed 11 private placement transactions in 2011 compared to 14 in 2010.

Brokerage Revenues

Brokerage revenues decreased $2.8 million, or 9.9%, from $28.3 million for the year ended December 31, 2010 to $25.5 million for the year ended December 31, 2011. The decrease was the result of lower gross commissions. Brokerage revenues increased as a percentage of total net revenues after provision for loan losses, from 19.5% for the year ended December 31, 2010 to 22.9% for the year ended December 31, 2011.

Asset Management Fees

Asset management fees increased $7.6 million, or 61.8%, from $12.2 million for the year ended December 31, 2010 to $19.8 million for the year ended December 31, 2011. Asset management fees include base management fees and incentive fees for our funds and collateralized loan obligations (“CLOs”) under

management. Base management fees increased $0.4 million from $9.3 million for the year ended December 31, 2010 to $9.7 million for the same period in 2011. Incentive fees increased $7.1 million from $3.0 million for the year ended December 31, 2010 to $10.1 million for the same period in 2011. The increase in incentive fees is driven by an increase of $7.4 million and $0.4 million related to Harvest Small Cap Partners (“HSCP”) and HTP, respectively, partially offset by a $0.3 million decline related to Harvest Opportunity Partners II (“HOP II”) and NYMT. As a percentage of total net revenues after provision for loan losses, asset management fees decreased from 8.5% for the year ended December 31, 2010 to 17.8% for the same period in 2011.

Principal Transactions

Principal transaction revenues decreased $1.8 million, or 52.8%, from $3.4 million for the year ended December 31, 2010 to $1.6 million for the same period in 2011. The decrease reflects lower revenue from our equity investment and other securities. Revenues from equity and other securities decreased $2.9 million from $4.3 million for the year ended December 31, 2010 to $1.4 million for the same period in 2011, driven primarily by decreases in unrealized gains in our equity security investments including a $1.5 million decline related to HGC and a $1.1 million decline related to JMPS. This decline was partially offset by increases in warrants and other investments and investment partnerships. Revenues from warrants and other investments increased by $0.7 million from a loss of $1.4 million for the year ended December 31, 2010 to a loss of $0.7 million for the year ended December 31, 2011. This increase was primarily driven by the loss of $1.5 million recorded for one investment in 2010, partially offset by a $0.9 million loss in our investment in a private equity fund managed by a third party. In addition, revenues from our investment partnerships increased $0.3 million from $0.5 million for the year ended December 31, 2010 to $0.8 million for the year ended December 31, 2011. As a percentage of total net revenues after provision for loan losses, principal transaction revenues decreased from 2.4% for the year ended December 31, 2010 to 1.5% for the year ended December 31, 2011.

Gain on Sale and Payoff of Loans

Gain on sale and payoff of loans decreased $22.4 million, or 56.8%, from $39.4 million for the year ended December 31, 2010 to $17.0 million for the same period in 2011, with all of the gain generated at JMP Credit. During the year ended December 31, 2011, 110 loans were sold or paid off, resulting in a total net gain of $17.3 million. Of the total net gain, $11.7 million was related to 90 loan payoffs, where the borrowers repaid the loans at a premium to our carrying value. The remaining $5.3 million related to 20 loans, 11 of which were sold at a discount to our carrying value and nine of which were sold at par, which was a premium to our carrying value. While we expect further gains from loan payoffs in future periods, these revenues are highly unpredictable as we are not actively marketing the loans collateralized by asset-backed securities for sale. These gains were partially offset by a $0.3 million loss recorded to reflect fair value adjustments of the loan held for sale. As a percentage of total net revenues after provision for loan losses, gain on sale and payoff of loans decreased from 27.2% for the year ended December 31, 2010 to 15.3% for the year ended December 31, 2011.

Net Dividend Income

Net dividend income decreased $0.8 million, or 39.3%, from $2.2 million for the year ended December 31, 2010 to $1.4 million for the year ended December 31, 2011. For both periods, net dividend income was primarily related to dividends from our NYMT investment.

Other Income

Other income increased $0.8 million, or 25.1%, from $3.5 million for the year ended December 31, 2010 to $4.3 million for the year ended December 31, 2011. For both years, other income was comprised of revenues from fee sharing arrangements with, and fees earned to raise capital for, third-party investment partnerships or funds. In 2011, other income also included $0.8 million settlement fees received from the termination of JMPCA as a collateral manager.

Interest Income

Interest income decreased $11.8 million, or 26.1%, from $45.2 million for the year ended December 31, 2010 to $33.4 million for the same period in 2011. The increase was primarily related to JMP Credit, which recorded interest income of $44.5 million and $32.3 million for the years ended December 31, 2010 and 2011, respectively. As a percentage of total net revenues after provision for loan losses, interest income decreased from 31.2% for the year ended December 31, 2010 to 30.0% for the year ended December 31, 2011.

The following table sets forth components of net interest income for the years ended December 31, 2011 and 2010:


	Year Ended December 31,
(In thousands)	2011			2010
Cratos CLO loan contractual interest income	$	21,814		$	20,706
Cratos CLO ABS issued contractual interest expense		(4,582	)		(4,697	)

Net Cratos CLO contractual interest		17,232			16,009

Cratos CLO loan liquidity discount accretion		8,748			22,072
Cratos CLO ABS liquidity discount amortization		(30,234	)		(28,165	)

Net Cratos CLO liquidity discount amortization		(21,486	)		(6,093	)

Other interest income		2,794			2,384
Other interest expense		(931	)		(825	)

Total net interest (expense) income	$	(2,391	)	$	11,475

The following table sets forth contractual interest income and expense related to Cratos CLO loans and ABS issued and their weighted average contractual interest rates:


	Year Ended December 31, 2011
(In thousands)	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	$	21,814		$	444,758			4.84	%		0.31	%		4.53	%
Cratos CLO ABS issued contractual interest expense		(4,582	)		(431,003	)		1.05	%		0.31	%		0.74	%

Net Cratos CLO contractual interest	$	17,232		$	N/A			N/A			N/A			N/A


	Year Ended December 31, 2010
(In thousands)	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	$	20,706		$	421,411			4.85	%		0.34	%		4.51	%
Cratos CLO ABS issued contractual interest expense		(4,697	)		(431,466	)		1.07	%		0.34	%		0.73	%

Net Cratos CLO contractual interest	$	16,009		$	N/A			N/A			N/A			N/A

At JMP Credit, for the year ended December 31, 2011, total interest income of $32.3 million was comprised of contractual interest on Cratos CLO loans of $21.8 million, purchase discount and other deferred fee amortization of $1.8 million and non-cash liquidity discount amortization of $8.7 million. We earned contractual

interest on 211 performing loans held by Cratos CLO. Of the non-cash liquidity discount amortization of $8.7 million, $0.4 million was accelerated due to unscheduled principal payments on these loans. The annualized weighted average contractual interest rate on the performing loans was 4.84% with a spread to weighted average LIBOR of 4.53% for the year ended December 31, 2011. We did not recognize any 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 $12.3 million that were on non-accrual status during the year ended December 31, 2011.

At JMP Credit, for the year ended December 31, 2010, total interest income of $44.5 million was comprised of contractual interest on Cratos CLO loans of $20.7 million, purchase discount and other deferred fee amortization of $1.7 million and non-cash liquidity discount amortization of $22.1 million. We earned contractual interest on 178 performing loans held by Cratos CLO. Of the non-cash liquidity discount amortization of $22.1 million, $3.1 million was accelerated due to unscheduled principal payments on these loans. The annualized weighted average contractual interest rate on the performing loans was 4.85% with a spread to weighted average LIBOR of 4.51% for the year ended December 31, 2010. We did not recognize any interest income, other than the accretion of liquidity discounts on those loans deemed impaired at the acquisition of Cratos, for the 11 impaired loans with an aggregate weighted average loan balance of $37.4 million that were on non-accrual status during the year ended December 31, 2010.

Interest Expense

Interest expense increased $2.0 million, or 6.1%, from $33.7 million for the year ended December 31, 2010 to $35.7 million for the same period in 2011. The increase was primarily related to JMP Credit, which recorded interest expense of $33.1 million and $34.9 million for the year ended December 31, 2010 and 2011, respectively.

At JMP Credit, for the year ended December 31, 2011, total interest expense of $34.9 million was comprised of interest expense on ABS issued of $4.6 million and non-cash liquidity discount amortization related to ABS issued of $30.2 million. The annualized weighted average contractual interest rate on the ABS issued during the year was 1.05% with a spread to weighted average LIBOR of 0.74%.

At JMP Credit, for the year ended December 31, 2010, total interest expense of $33.1 million was comprised of interest expense on ABS issued of $4.7 million and non-cash liquidity discount amortization related to ABS issued of $28.2 million. The annualized weighted average contractual interest rate on the ABS issued during the year was 1.07% with a spread to weighted average LIBOR of 0.73%.

Provision for Loan Losses

Provision for loan losses increased $0.6 million, or 46.5%, from $1.3 million for the year ended December 31, 2010 to $1.9 million for the same period in 2011. The change related to a $1.2 million increase in provision against loans collateralizing ABS issued and a $0.2 million related to small business loans held at HCC, partially offset by a decrease of $0.7 million related to provision against loans held for investment. The $0.7 million decrease in the provision against loans held for investment included a $0.5 million reversal related to loan recovery. For the year ended December 31, 2011, the provision against loans collateralizing ABS issued of $2.2 million comprised of $1.7 million recorded as a specific reserve and $0.5 million recorded as a general reserve against performing loans that were purchased after the Cratos acquisition. For the year ended December 31, 2010, the provision against loans collateralizing ABS issued of $1.0 million was recorded as general reserve against performing loans that were purchased after the Cratos acquisition.

Expenses

Compensation and Benefits

Compensation and benefits, which includes employee payroll, taxes and benefits, performance-based cash bonus and commissions as well as equity-based compensation to our employees and managing directors, decreased $6.7 million, or 7.0%, from $95.7 million for the year ended December 31, 2010 to $89.0 million for the year ended December 31, 2011.

Employee payroll, taxes and benefits, and consultant fees, increased $1.3 million, or 3.7%, from $32.7 million for the year ended December 31, 2010 to $34.0 million for the year ended December 31, 2011, primarily due to the effect of a full year of base pay increases made during 2011.

Performance-based bonus and commissions decreased $10.6 million, or 19.1%, from $55.4 million for the year ended December 31, 2010 to $44.8 million for the same period in 2011. The decrease was primarily due to a decrease in total net revenues after provision for loan losses from $144.7 million for the year ended December 31, 2010 to $111.4 million for the same period in 2011.

Equity-based compensation increased $2.7 million, or 36.0%, from $7.6 million for the year ended December 31, 2010 to $10.3 million for the year ended December 31, 2011. The change reflects an increase of $4.5 million of performance-based RSUs, partially offset by a decrease of $1.8 million related to RSUs granted in connection with the initial public offering. In 2010, the vesting of 56.3% of the 2010 performance-based RSUs became probable and were expensed. In 2011, the vesting of the remaining 2010 performance-based RSUs became probable, in addition to 100% of the 2011 performance-based RSUs.

Compensation and benefits as a percentage of net revenues after provision for loan losses increased from 66.1% for the year ended December 31, 2010 to 79.9% for the same period in 2011.

Administration

Administration expenses increased $0.8 million, or 15.6%, from $5.8 million for the year ended December 31, 2010 to $6.6 million for the year ended December 31, 2011, partially due to a $0.2 million increase in placement and recruiting fees and a $0.1 million increase in building repairs and maintenance. As a percentage of total net revenues after provision for loan losses, administration expense increased from 4.0% of total net revenues after provision for loan losses for the year ended December 31, 2010 to 6.0% for the same period in 2011.

Brokerage, Clearing and Exchange Fees

Brokerage, clearing and exchange fees decreased $0.4 million, or 7.3%, from $5.1 million for the year ended December 31, 2010 to $4.7 million for the year ended December 31, 2011. 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 increased from 3.5% for the year ended December 31, 2010 to 4.3% for the year ended 2011.

Travel and Business Development

Travel and business development expense increased $0.3 million, or 6.8%, from $3.4 million for the year ended December 31, 2010 to $3.7 million for the year ended December 31, 2011. The increase primarily reflects a $0.3 million increase in travel expense, driven by a 4.3% increase in travel volume and a 14.3% increase in flight and hotel cost per trip. Reimbursements from clients were $1.1 million for both years ended December 31, 2010 and 2011. As a percentage of total net revenues after provision for loan losses, travel and business development expense increased from 2.4% of for the year ended December 31, 2010 to 3.3% for the year ended December 31, 2011.

Communications and Technology

Communications and technology expense was $4.0 million for both years ended December 31, 2011 and 2010. As a percentage of total net revenues after provision for loan losses, communications and technology expense increased from 2.7% for the year ended December 31, 2010 to 3.6% for the year ended December 31, 2011.

Professional Fees

Professional fees decreased $0.1 million, or 4.1%, from $3.1 million for the year ended December 31, 2010 to $3.0 million for the year ended December 31, 2011. As a percentage of total net revenues after provision for loan losses, professional fees increased from 2.1% for the year ended December 31, 2010 to 2.7% for the year ended December 31, 2011.

Impairment Loss on Purchased Management Contract

On June 11, 2010, we agreed to purchase the collateral management contracts for two CLOs, from Princeton Advisory Group, Inc., for up to $5.0 million. The transfers of the contracts were subject to the receipt of certain consents and other conditions. On September 8, 2010, we completed the purchase of one of the two management contracts for $3.8 million, and the contract was transferred to JMPCA. However, since a single investor had previously acquired control of the right to transfer the management contract without cause at any time with 90 days’ notice, we recorded an impairment charge of $2.8 million for the quarter ended September 30, 2010. We later restructured the transaction to provide us with indemnity from the seller in the amount of $2.6 million, which was collateralized by certain assets and $1.0 million in cash. We determined the initial carrying value of the purchased management contract to be $1.0 million. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of the asset, is recognized if the sum of the estimated undiscounted cash flows relating to the asset is less than the corresponding carrying value. We determined that the carrying value of the purchased management contract was impaired and recorded a $0.7 million impairment charge for the quarter ended March 31, 2011. At that time, we also revised the estimated useful life of the asset. At June 30, 2011, the purchased management contract was fully amortized. For the years ended December 31, 2011 and 2010, the amortization expense was $0.2 million and $0.1 million, respectively. On December 6, 2011, the CLO’s transaction documents and indenture were amended, which allowed the noteholders of this CLO to direct a liquidation of the collateral and redemption of the notes at any time with no requirement for full repayment of the notes, if such affected class voted in favor of receiving less than par. The CLO initiated liquidation proceedings in December 2011. During the fourth quarter of 2010, we were released from the obligation to purchase the second CLO management contract from Princeton Advisory Group, Inc.

Other Expenses

Other expenses increased $0.2 million, or 4.1%, from $3.9 million for the year ended December 31, 2010 to $4.1 million for the year ended December 31, 2011. As a percentage of total net revenues after provision for loan losses, other expenses increased from 2.7% for the year ended December 31, 2010 to 3.7% for the same period in 2011.

Net Income (Loss) Attributable to Non-controlling Interest

Net income attributable to non-controlling interest decreased $3.1 million from $2.8 million for the year ended December 31, 2010 to a $0.3 million loss for the year ended December 31, 2011. Non-controlling interest for the year ended December 31, 2011 includes the interest of third parties in JMP Credit (through August 6, 2010), Cratos CLO (effective August 6, 2010), HGC (effective April 1, 2010), and HCC (effective August 8, 2011), partially-owned subsidiaries consolidated in our financial statements. Non-controlling interest for the year ended December 31, 2010 includes the interest of third parties in JMP Credit (through August 6, 2010), Cratos

CLO (effective August 6, 2010), HMOP (through December 31, 2010) and HGC (effective April 1, 2010), partially-owned subsidiaries consolidated in our financial statements. HMOP was liquidated on December 31, 2010, with all of its partners redeeming their interests as of that date. The assets of HMOP were distributed to its partners in January 2011. The members of HGC do not have substantive kick-out rights, and therefore, HGC has been consolidated from inception on April 1, 2010. The decrease in net income attributable to non-controlling interest reflected a decrease of $2.2 million related to HGC, a decrease of $0.8 million related to JMP Credit and Cratos CLO, and a decrease of $0.1 million related to HCC.

Provision for Income Taxes

For the years ended December 31, 2011 and 2010, we recorded a tax benefit of $1.7 million and tax expense of $8.6 million, respectively. The effective tax rate for the years ended December 31, 2011 and 2010 was 37.6% and 40.9%, respectively. The 3.3% decrease in the effective tax rate was primarily attributable to the income associated with HGC and HCC, which are consolidated for financial reporting purposes but not for tax purposes, partially offset by an adjustment in the California state enterprise zone tax credit.

Year Ended December 31, 2010, Compared to Year Ended December 31, 2009

Overview

Total net revenues after provision for loan losses decreased $4.8 million, or 3.2%, from $149.5 million for the year ended December 31, 2009 to $144.7 million for the year ended December 31, 2010, driven by a decrease in total non-interest revenues of $11.3 million, partially offset by an increase in net interest income of $2.0 million and a decrease in provision for loan losses of $4.8 million.

Total non-interest revenues decreased $11.3 million, or 7.7%, primarily due to a decrease in principal transaction revenues of $15.1 million, a decrease in asset management revenues of $7.9 million, a decrease in brokerage revenues of $5.7 million and a decrease in gain on repurchase of asset-backed securities issued of $4.7 million, partially offset by an increase in gain on sale and payoff of loans of $17.1 million and an increase in investment banking revenues of $5.7 million.

Net interest income increased $2.1 million, or 21.5%, from $9.4 million for the year ended December 31, 2009 to $11.5 million for the same period in 2010. The increase was primarily due to an increase in net interest income at JMP Credit of $2.5 million, from $9.1 million for the year ended December 31, 2009 to $11.6 million for the year ended December 31, 2010, partially offset by a decrease in net interest income for other businesses.

Provision for loan losses decreased $4.5 million, or 77.2%, from $5.8 million for the year ended December 31, 2009 to $1.3 million for the year ended December 31, 2010. Provision for loan losses for the year ended December 31, 2010 was comprised of provision recorded against loans held for investment of $0.3 million and provision recorded against loans collateralizing ABS issued of $1.0 million. Provision for loan losses for the year ended December 31, 2009 was comprised of provision recorded against loans held for investment of $1.4 million and provision recorded against loans collateralizing ABS issued of $4.4 million.

Total non-interest expenses decreased $5.4 million, or 4.2%, from $129.1 million for the year ended December 31, 2009 to $123.7 million for the year ended December 31, 2010, primarily due to a decrease in compensation and benefits of $9.5 million, partially offset by an impairment loss on purchased management contract recorded in 2010 of $2.8 million, an increase in travel and business development expense of $1.1 million and a net increase in the remaining expenses of $0.3 million.

Net income attributable to JMP Group Inc. decreased $1.2 million, or 11.2%, from $10.8 million for the year ended December 31, 2009 to $9.6 million for the year ended December 31, 2010 and includes income tax expense of $7.7 million and $8.6 million for the year ended December 31, 2009 and 2010, respectively.

Revenues

Investment Banking

Investment banking revenues increased $5.7 million, or 14.2%, from $39.9 million for the year ended December 31, 2009 to $45.6 million for the same period in 2010, and increased as a percentage of total net revenues after provision for loan losses from 26.7% to 31.5%, respectively. The increase in revenues reflects a higher level of activity in our public equity underwriting and private placement business, partially offset by decreased activity in our strategic advisory business. Public equity underwriting revenues increased $6.0 million, or 37.1%, from $16.3 million for the year ended December 31, 2009 to $22.3 million for the year ended December 31, 2010. We executed 44 public equity underwriting transactions in 2010 compared to 30 in 2009. We acted as a lead manager on ten transactions in 2010 and four in 2009. Private placement revenues increased from $9.7 million for the year ended December 31, 2009 to $11.3 million for the year ended December 31, 2010. We executed 14 private placement transactions in 2010 compared to 10 in 2009. Our strategic advisory revenues decreased $2.1 million, or 15.1%, from $14.0 million for the year ended December 31, 2009 to $11.9 million for the year ended December 31, 2010. We executed 16 strategic advisory transactions in both of 2010 and 2009.

Brokerage Revenues

Brokerage revenues decreased $5.7 million, or 16.9%, from $34.0 million for the year ended December 31, 2009 to $28.3 million for the year ended December 31, 2010. The decrease was the result of lower gross commissions. Brokerage revenues decreased as a percentage of total net revenues after provision for loan losses, from 22.7% for the year ended December 31, 2009 to 19.5% for the year ended December 31, 2010.

Asset Management Fees

Asset management fees decreased $7.9 million, or 39.3%, from $20.1 million for the year ended December 31, 2009 to $12.2 million for the year ended December 31, 2010. Asset management fees include base management fees and incentive fees for our funds and CLOs under management. Base management fees increased $0.8 million from $8.5 million for the year ended December 31, 2009 to $9.3 million for the same period in 2010. The increase in base management fees reflects additional fees of $0.6 million earned from the CLO management contract purchased by JMPCA in September 2010 and $0.3 million earned from Harvest Growth Capital LLC (“HGC”), a HCS-managed private equity fund launched in April 2010. Incentive fees decreased $8.7 million from $11.6 million for the year ended December 31, 2009 to $2.9 million for the same period in 2010. The decrease in incentive fees reflects a decline of $9.0 million and $1.0 million related to Harvest Small Cap Partners (“HSCP”) and Harvest Opportunity Partners II (“HOP II”), respectively, partially offset by a $1.5 million increase related to NYMT. As a percentage of total net revenues after provision for loan losses, asset management fees decreased from 13.5% for the year ended December 31, 2009 to 8.5% for the same period in 2010.

Principal Transactions

Principal transaction revenues decreased $15.1 million, or 81.5%, from $18.5 million for the year ended December 31, 2009 to $3.4 million for the same period in 2010. The decrease was partly due to a decrease in unrealized gain on our convertible preferred security and equity security investments in NYMT of $5.4 million, from $5.6 million for the year ended December 31, 2009 to $0.2 million for the year ended December 31, 2010. Our investment in convertible preferred security of NYMT was redeemed at a price per share of $20.00 on December 31, 2010. In addition, revenues from our family of hedge funds and hedge funds of funds, excluding consolidated funds, decreased $7.9 million, from $8.4 million for the year ended December 31, 2009 to $0.5 million for the year ended December 31, 2010. The decrease in revenues from our family of hedge funds and hedge funds of funds reflects a total decline of $7.0 million related to HOP II, HSCP and Harvest Technology Partners. Revenues from equity and debt securities traded for our own account also decreased $3.1 million, from $4.9 million to $1.8 million, partially offset by an increase in revenues from private equity securities owned by HGC and JMP Capital of $2.1 million. Revenues from warrants and other investments decreased by $1.0 million from a loss of $0.2 million for the year ended December 31, 2009 to a loss of $1.2 million for the year ended

December 31, 2010. As a percentage of total net revenues after provision for loan losses, principal transaction revenues decreased from 12.4% for the year ended December 31, 2009 to 2.4% for the year ended December 31, 2010.

Gain on Sale and Payoff of Loans

Gain on sale and payoff of loans increased $17.1 million, or 76.8%, from $22.3 million for the year ended December 31, 2009 to $39.4 million for the same period in 2010, with all of the gain generated at JMP Credit. During the year ended December 31, 2010, 81 loans were sold or paid off, resulting in a total net gain of $39.4 million. Of the total net gain, $34.9 million was related to 66 loan payoffs, where the borrowers repaid the loans at a premium to our carrying value. The remaining $4.5 million was related to 15 loans, nine of which were sold at par, which was a premium to our carrying value, and six of which were sold at a discount 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 collateralized by asset-backed securities for sale. As a percentage of total net revenues after provision for loan losses, gain on sale and payoff of loans increased from 14.9% for the year ended December 31, 2009 to 27.2% for the year ended December 31, 2010.

Gain on Repurchase of Asset-Backed Securities Issued

Gain on repurchase of ABS issued decreased from $4.7 million for the year ended December 31, 2009 to zero for the year ended December 31, 2010. In May and July 2009, we repurchased in the open market $0.8 million and $4.0 million, respectively, of face value of our ABS at a discount resulting in a total gain of $4.2 million recorded at JMP Credit. In addition, on December 29, 2009, we repurchased a zero-coupon note with a $3.0 million unpaid principal balance that was issued to one of the previous owners of Cratos at acquisition (contingent consideration) for $1.8 million. The note was repurchased at a discount to our carrying value resulting in a gain of $0.5 million. This type of gain is not expected to recur at these levels in future periods, unless the market price of our ABS issued falls significantly from our carrying value as of December 31, 2010 and we can take advantage of opportunistic repurchases.

Gain on Bargain Purchase

Upon the acquisition of Cratos by JMP Credit on April 7, 2009, a bargain purchase gain of $1.2 million was recorded which reflected the difference between the fair value of net assets acquired of $7.5 million and the consideration given to the sellers of $6.3 million. In accordance with the authoritative guidance under GAAP on business combinations, this gain was booked to revenues in the period the acquisition was completed. No such gain was recorded for the year ended December 31, 2010.

Net Dividend Income

Net dividend income decreased $0.3 million, or 10.8%, from $2.5 million for the year ended December 31, 2009 to $2.2 million for the year ended December 31, 2010. For both periods, net dividend income was primarily related to dividends from our NYMT investment.

Other Income

Other income increased $0.9 million, or 33.7%, from $2.6 million for the year ended December 31, 2009 to $3.5 million for the year ended December 31, 2010. For both years, 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 as well as administrative agency fees at JMP Credit. The increase was primarily due to an increase in fees earned from capital raising activity of $1.5 million, partially offset by a decrease in administrative agency fees at JMP Credit of $0.5 million.

Interest Income

Interest income increased $9.8 million, or 27.7%, from $35.4 million for the year ended December 31, 2009 to $45.2 million for the same period in 2010. The increase was primarily related to JMP Credit, which recorded interest income of $35.4 million and $44.5 million for the year ended December 31, 2009 and 2010, respectively. As a percentage of total net revenues after provision for loan losses, interest income increased from 23.7% for the year ended December 31, 2009 to 31.2% for the year ended December 31, 2010.

The following table sets forth components of net interest income for the years ended December 31, 2010 and 2009:


	Year Ended December 31,
(In thousands)	2010			2009 (1)
Cratos CLO loan contractual interest income	$	20,706		$	14, 253
Cratos CLO ABS issued contractual interest expense		(4,697	)		(4,565	)

Net Cratos CLO contractual interest		16,009			9,688

Cratos CLO loan liquidity discount accretion		22,072			19,228
Cratos CLO ABS liquidity discount amortization		(28,165	)		(20,645	)

Net Cratos CLO liquidity discount amortization		(6,093	)		(1,417	)

Other interest income		2,384			1,889
Other interest expense		(825	)		(714	)

Total net interest income	$	11,475		$	9,446

(1)	For 2009, Cratos CLO related amounts are for the period from April 7, 2009 through December 31, 2009.

The following table sets forth contractual interest income and expense related to Cratos CLO loans and ABS issued and their weighted average contractual interest rates:


	Year Ended December 31, 2010
(In thousands)	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	$	20,706		$	421,411			4.85	%		0.34	%		4.51	%
Cratos CLO ABS issued contractual interest expense		(4,697	)		(431,466	)		1.07	%		0.34	%		0.73	%

Net Cratos CLO contractual interest	$	16,009		$	N/A			N/A			N/A			N/A


	Year Ended December 31, 2009
(In thousands)	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	$	14,253		$	381,630			5.00	%		0.67	%		4.33	%
Cratos CLO ABS issued contractual interest expense		(4,565	)		(440,425	)		1.39	%		0.67	%		0.72	%

Net Cratos CLO contractual interest	$	9,688		$	N/A			N/A			N/A			N/A

was earned on 178 performing loans held by Cratos CLO. Of the non-cash liquidity discount amortization of $22.1 million, $3.1 million was accelerated due to unscheduled principal payments on these loans. The annualized weighted average contractual interest rate on the performing loans was 4.85% with a spread to weighted average LIBOR of 4.51% for the year ended December 31, 2010. We did not recognize any interest income, other than the accretion of liquidity discounts on those loans deemed impaired at the acquisition of Cratos, for the 11 impaired loans with an aggregate weighted average loan balance of $37.4 million that were on non-accrual status during the year ended December 31, 2010.

At JMP Credit, for the year ended December 31, 2009, total interest income of $34.5 million was comprised of interest earned on Cratos CLO loans of $14.3 million, amortization of purchase discounts and other deferred fees of $1.0 million and non-cash liquidity discount amortization of $19.2 million. Contractual interest was earned on 99 performing loans held by Cratos CLO. Of the non-cash liquidity discount amortization of $19.2 million, $0.8 million was accelerated due to unscheduled principal payments on these loans. The annualized weighted average contractual interest rate on the loans was 5.00% with a spread to weighted average LIBOR of 4.33% for the year ended December 31, 2009. We did not recognize any interest income, other than the accretion of liquidity discounts on those loans deemed impaired at the acquisition of Cratos, for the 17 impaired loans with a weighted average loan balance of $95.1 million that were on non-accrual status during the year ended December 31, 2009.

Interest Expense

Interest expense increased $7.8 million, or 29.9%, from $25.9 million for the year ended December 31, 2009 to $33.7 million for the same period in 2010. The increase was primarily related to JMP Credit, which recorded interest expense of $25.9 million and $33.1 million for the year ended December 31, 2009 and 2010, respectively.

At JMP Credit, for the year ended December 31, 2010, total interest expense of $32.9 million was comprised of interest expense on ABS issued of 4.7 million and non-cash liquidity discount amortization related to ABS issued of $28.2 million. The annualized weighted average contractual interest rate on the ABS issued during the year was 1.07% with a spread to weighted average LIBOR of 0.73%.

At JMP Credit, for the year ended December 31, 2009, total interest expense of $25.4 million was comprised of interest on ABS issued of $4.7 million, non-cash liquidity discount amortization related to ABS issued of $20.6 million and $0.2 million of other interest expense primarily on the contingent consideration to one of the previous owners of Cratos. The annualized weighted average contractual interest rate on the ABS issued during the year ended December 31, 2009 was 1.39% with a spread to weighted average LIBOR of 0.72%.

Provision for Loan Losses

Provision for loan losses decreased $4.5 million, or 77.2%, from $5.8 million for the year ended December 31, 2009 to $1.3 million for the same period in 2010. The decrease was comprised of $1.1 million related to provision against loans held for investment and $3.4 million related to provision against loans collateralizing ABS issued. For the year ended December 31, 2010, the provision against loans collateralizing ABS issued of $1.0 million was recorded as general reserve against performing loans that were purchased after the Cratos acquisition. For the year ended December 31, 2009, the provision against loans collateralizing ABS issued of $4.4 million was comprised of $4.0 million of specific reserves on impaired loans, which were recorded in addition to the credit discount recorded at the acquisition of Cratos and $0.4 million of general reserve against performing loans.

Expenses

Compensation and Benefits

decreased $9.5 million, or 9.0%, from $105.2 million for the year ended December 31, 2009 to $95.7 million for the year ended December 31, 2010.

Employee payroll, taxes and benefits, and consultant fees, increased $2.1 million, or 7.0%, from $30.6 million for the year ended December 31, 2009 to $32.7 million for the year ended December 31, 2010 primarily due to higher average headcount in 2010.

Performance-based bonus and commissions decreased $9.4 million, or 14.5%, from $64.8 million for the year ended December 31, 2009 to $55.4 million for the same period in 2010. The decrease was primarily due to a decrease in total net revenues after provision for loan losses from $149.5 million for the year ended December 31, 2009 to $144.7 million for the same period in 2010.

Equity-based compensation decreased $2.2 million, or 22.4%, from $9.8 million for the year ended December 31, 2009 to $7.6 million for the year ended December 31, 2010. The decrease reflects $0.6 million related to RSUs granted in connection with the initial public offering (“IPO”) and $1.6 million related to RSUs granted after the initial public offering. The decrease in expense related to RSUs granted in connection with the IPO was primarily due to scheduled vesting of such RSUs in May 2010. The decrease in expense related to RSUs granted after the IPO was partly due to a decline in scheduled amortization expense of $0.7 million as a result of the acceleration of the vesting of 1,295,000 RSUs in November 2009, which eliminated future amortization expense on those RSUs. The remaining decrease was attributable to two different types of unscheduled amortization expense recognized in 2009 and 2010. In 2009, we recognized unscheduled amortization expense of $4.7 million relating to the acceleration of the vesting of certain RSUs. In 2010, we recognized $3.8 million of unscheduled amortization expense relating to the vesting of performance-based RSUs. The performance RSUs were granted in February 2010 to certain employees for long-term incentive purposes and have a Company-level performance target.

Compensation and benefits as a percentage of net revenues after provision for loan losses decreased from 70.4% for the year ended December 31, 2009 to 66.1% for the same period in 2010.

Administration

Administration expenses increased $0.7 million, or 13.9%, from $5.1 million for the year ended December 31, 2009 to $5.8 million for the year ended December 31, 2010 primarily due to an increase in conference expense of $0.5 million and an increase in placement and training cost of $0.2 million. As a percentage of total net revenues after provision for loan losses, administration expense increased from 3.4% of total net revenues after provision for loan losses for the year ended December 31, 2009 to 4.0% for the same period in 2010.

Brokerage, Clearing and Exchange Fees

Brokerage, clearing and exchange fees decreased $0.2 million, or 3.3%, from $5.3 million for the year ended December 31, 2009 to $5.1 million for the year ended December 31, 2010. 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 was 3.5% for both years ended December 31, 2010 and 2009.

Travel and Business Development

Travel and business development expense increased $1.1 million, or 43.9%, from $2.4 million for the year ended December 31, 2009 to $3.4 million for the year ended December 31, 2010. The increase primarily reflects an 8.5% increase in travel volume and a 6.2% increase in flight and hotel cost per trip. In addition, reimbursements from clients decreased $0.1 million or 10.4%. As a percentage of total net revenues after provision for loan losses, travel and business development expense increased from 1.6% of for the year ended December 31, 2009 to 2.4% for the year ended December 31, 2010.

Communications and Technology

Communications and technology expense increased $0.1 million, or 2.0% from $3.9 million for the year ended December 31, 2009 to $4.0 million for the year ended December 31, 2010. As a percentage of total net revenues after provision for loan losses, communications and technology expense increased from 2.6% for the year ended December 31, 2009 to 2.7% for the year ended December 31, 2010.

Professional Fees

Professional fees decreased $0.5 million, or 14.2%, from $3.6 million for the year ended December 31, 2009 to $3.1 million for the year ended December 31, 2010. As a percentage of total net revenues after provision for loan losses, professional fees decreased from 2.4% for the year ended December 31, 2009 to 2.1% for the year ended December 31, 2010.

Impairment Loss on Purchased Management Contract

On June 11, 2010, we agreed to purchase the collateral management contracts for two collateralized loan obligations, or CLOs, from Princeton Advisory Group, Inc. for up to $5.0 million. The transfers of the contracts were subject to the receipt of certain consents and other conditions. On September 8, 2010, we completed the purchase of one of the two management contracts for $3.8 million, and the contract was transferred to JMPCA. However, since a single investor had previously acquired control of the right to transfer the management contract without cause at any time with 90 days’ notice, we recorded an impairment charge of $2.8 million for the quarter ended September 30, 2010. We subsequently restructured the transaction to provide an indemnity from the seller in the amount of $2.6 million, which is collateralized by certain assets and $1.0 million in cash. The indemnity amortizes over a period ending in February 2013. For the year ended December 31, 2010, the amortization amount was $0.1 million which was partially offset against related asset management fees on the Consolidated Statements of Operations. During the fourth quarter of 2010, we were released from the obligation to purchase the second CLO management contract from Princeton Advisory Group, Inc.

Other Expenses

Other expenses increased $0.2 million, or 4.3%, from $3.7 million for the year ended December 31, 2009 to $3.9 million for the year ended December 31, 2010. As a percentage of total net revenues after provision for loan losses, other expenses increased from 2.5% for the year ended December 31, 2009 to 2.7% for the same period in 2010.

Net Income (Loss) Attributable to Non-controlling Interest

Net income attributable to non-controlling interest increased $0.9 million from $1.9 million for the year ended December 31, 2009 to $2.8 million for the year ended December 31, 2010. Non-controlling interest for the year ended December 31, 2010 includes the interest of third parties in JMP Credit (through August 6, 2010), Cratos CLO (effective August 6, 2010), HMOP (through December 31, 2010) and HGC (effective April 1, 2010), all of which are partially-owned subsidiaries consolidated in our financial statements. Non-controlling interest for the year ended December 31, 2009 relates to the interest of third parties in SPAC and HMOP. SPAC was liquidated on December 31, 2009. Because of the limited partners’ substantive kick-out rights, HMOP was not consolidated from January 2, 2009 through April 30, 2009. During the three months ended June 30, 2009, several non-affiliated limited partners redeemed their interest in HMOP, and the remaining limited partners were no longer deemed to have substantive kick-out rights. As a result, we consolidated HMOP in its consolidated financial statements effective May 1, 2009 through December 31, 2010. HMOP was liquidated on December 31, 2010, with all of its partners redeeming their interests as of that date. The assets of HMOP were distributed to its partners in January 2011. The members of HGC do not have substantive kick-out rights, and therefore, HGC has been consolidated from inception on April 1, 2010. The increase in net income attributable to non-controlling interest reflected an increase of $1.2 million related to HGC, an increase of $0.2 million related to JMP Credit and Cratos CLO, partially offset by a decrease related to HMOP of $0.5 million.

Provision for Income Taxes

For the year ended December 31, 2010 and 2009, we recorded tax expense of $8.6 million and $7.7 million, respectively. The effective tax rate for the years ended December 31, 2010 and 2009 was 40.9% and 37.7%, respectively. The change in the effective tax rate is primarily related to a separate 2009 state tax return for JMP Credit that was filed in 2010.

Financial Condition, Liquidity and Capital Resources

In the section that follows, we discuss the significant changes in the components of our balance sheet, cash flows and capital and liquidity for the year ended December 31, 2011 to demonstrate where our capital is invested and the financial condition of the Company.

Overview

As of December 31, 2011, we had net liquid assets of $62.9 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 initial public offering and internally generated cash from operations. Most of our financial instruments, other than loans collateralizing asset-backed securities issued, loans held for investment and asset-backed securities issued, are recorded at fair value or amounts that approximate fair value. At December 31, 2011 and December 31, 2010, we had Level 3 assets (financial instruments whose fair value was determined using unobservable inputs that are not corroborated by market data) of $24.0 million and $14.9 million, respectively, which represented 3.6% and 2.3% of total assets, respectively. Level 3 assets increased by $9.1 million, due to the purchased new assets (primarily private equity securities) of $15.2 million, partially offset by the sale of assets of $1.8 million, the unrealized loss of $0.2 million and by the transfers of certain private equity securities into Level 2 of $4.1 million. These $4.1 million in investments were subsequently transferred into Level 1, reflecting the fair value measurement of these investments being based on quoted market prices without further adjustment. The transfers from Level 3 were a result of the initial public offerings of two positions in HGC.

Liquidity Considerations Related to Cratos

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. As we own substantially all of the subordinated securities of the CLO, in accordance with the authoritative guidance under GAAP on accounting for consolidation of variable interest entities, we are the primary beneficiary and are required to consolidate all of the assets and liabilities of the CLO securitization structure even though it is a bankruptcy remote entity with no recourse to us.

Our maximum exposure to loss of capital on the Cratos acquisition is the original April 7, 2009 investment of $4.0 million plus the $1.8 million paid to repurchase the contingent consideration, plus any earnings retained in Cratos CLO 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 over-collateralization 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 CLOs investment criteria are not given full par credit for purposes of calculation of the CLO over-collateralization (“OC”) tests. We were in compliance with all OC tests on the determination dates in 2011, as well as the determination dates November, August and May 2010. However, on the quarterly determination dates in February 2010, November and August 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 CLOs residual cash flows to pay down Class A note holders, rather than distribute the funds to us as owners of the CLOs 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 December 31, 2011, we had $410.8 million of loans collateralizing asset-backed securities, net, $3.0 million of loans held for sale, $36.1 million of restricted cash and $1.2 million of interest receivable funded by $381.6 million of asset-backed securities issued, net, and interest payable of $0.6 million. These assets and liabilities represented 67.9% of total assets and 75.8% of total liabilities respectively, reported on our Consolidated Statement of Financial Condition at December 31, 2011.

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 December 31, 2011.


(Dollars in thousands)	As of December 31, 2011
Range of Outstanding Balance	Number of Loans		Maturity Date		Total Principal
$0 – $500		20		8/2015 - 11/2018	$	8,583
$500 – $2,000		103		12/2012 - 12/2018		147,598
$2,000 – $5,000		84		4/2013 - 9/2019		250,010
$5,000 – $10,000		6		2/2013 - 3/2016		35,623

Total		213			$	441,814


(Dollars in thousands)	As of December 31, 2011
Industry	Number of Loans		Outstanding Balance		% of Outstanding Balance
Healthcare, Education & Childcare		24	$	61,543		13.9	%
Retail Store		14		35,704		8.1	%
Electronics		13		31,721		7.2	%
Telecommunications		13		27,638		6.3	%
Chemicals, Plastics and Rubber		12		25,336		5.7	%
Diversified/Conglomerate Service		15		22,320		5.1	%
Beverage, Food & Tobacco		10		20,274		4.6	%
Leisure , Amusement, Motion Pictures & Entertainment		8		18,904		4.3	%
Personal &Non-Durable Consumer Products		8		18,203		4.1	%
Aerospace & Defense		10		17,254		3.9	%
Utilities		5		16,723		3.8	%
Hotels, Motels, Inns and Gaming		5		15,914		3.6	%
Personal, Food & Misc Services		12		14,598		3.3	%
Containers, Packaging and Glass		7		14,493		3.3	%
Finance		8		11,471		2.6	%


(Dollars in thousands)	As of December 31, 2011
Industry	Number of Loans		Outstanding Balance		% of Outstanding Balance
Printing & Publishing		4		11,404		2.6	%
Automobile		7		9,829		2.2	%
Diversified/Conglomerate Mfg		6		9,643		2.2	%
Banking		3		8,777		2.0	%
Broadcasting & Entertainment.		3		6,293		1.4	%
Mining, Steel, Iron and Non-Precious Metals		3		6,242		1.4	%
Machinery (Non-Agriculture, Non-Construction & Non-Electronic)		4		6,029		1.4	%
Textiles & Leather		5		5,281		1.2	%
Personal Transportation		2		4,969		1.1	%
Grocery		3		4,911		1.1	%
Buildings and Real Estate		2		4,887		1.1	%
Insurance		2		4,352		1.0	%
Diversified Natural Resources, Precious Metals and Minerals		1		2,227		0.5	%
Ecological		2		1,984		0.4	%
Farming & Agriculture		1		1,900		0.4	%
Cargo Transport		1		990		0.2	%

Total		213	$	441,814		100.0	%


(Dollars in thousands)	As of December 31, 2011
Moody’s Rating Category	Number of Loans		Outstanding Balance		% of Outstanding Balance
Baa3		1	$	4,975		1.1	%
Ba1		8		25,858		5.9	%
Ba2		19		40,805		9.2	%
Ba3		30		68,799		15.6	%
B1		71		134,165		30.4	%
B2		67		126,205		28.6	%
B3		13		24,253		5.5	%
Caa1		1		1,356		0.3	%
Caa2		2		12,970		2.9	%
Caa3		1		2,428		0.5	%

Total		213	$	441,814		100.0	%

Other Liquidity Considerations

As of December 31, 2011 the Company had two term loans with City National Bank (“CNB”) in the aggregate amount of $19.2 million under the Credit Agreement entered into on August 3, 2006 by and between JMP Group LLC, a wholly-owned subsidiary of the Company, and CNB, 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 25, 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”) dated as of April 8, 2011, and Amendment Number Six (the “Sixth Amendment”), dated as of August 24, 2011 (collectively, the “Credit Agreement”). The Credit Agreement also provides for revolving lines of credit, discussed in more detail below.

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 $15.7 million as of December 31, 2011. We also had $3.5 million outstanding on the other term loan with CNB as of December 31, 2011. As of December 31, 2010, the revolving line of credit was no longer available for future use by the Company.

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, indexed to LIBOR and amortizes in accordance with the amortization of the term loan. The notional principal amount of the cap was $19.2 million at December 31, 2011, with a recorded fair value of $7,860. 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 are available through April 8, 2012 on which date, if there is an existing outstanding amount, it converts to a loan that matures on April 8, 2013. There was no borrowing under this line of credit as of December 31, 2011.

Under the Sixth Amendment, JMP Group LLC 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 Sixth Amendment also permits additional investments. We anticipate that the proceeds of this line will be used to fund certain commitments to HCC, to repurchase Company stock and other permitted investments, and for other general working capital purposes. There was no borrowing on this line of credit as of December 31, 2011.

On January 18, 2008, we and certain affiliated entities completed the acquisition of 1.0 million shares of Series A Cumulative Redeemable Convertible preferred stock of New York Mortgage Trust, Inc. (“NYMT”), a publicly traded real estate investment trust (“REIT”) engaged in the investment management of mortgage-backed securities and high credit quality residential adjustable rate mortgage loans, at a price per share of $20.00, for a total of $20.0 million. The investment comprised of $5.0 million from JMP Group Inc., $5.0 million from certain funds managed by HCS, and $10.0 million from JMP Realty Trust (“JMPRT”), which was an affiliated REIT managed by HCS. Concurrent with the acquisition of the preferred shares, we entered into an advisory agreement between HCS and NYMT to manage certain non-agency assets. JMPRT’s investment in NYMT was transferred to HMOP on January 2, 2009. In addition, we invested $4.5 million in the common stock of NYMT on February 14, 2008 via a private investment in public equity (“PIPE”) transaction. The Series A Preferred Stock was convertible into shares of NYMT’s common stock based on a conversion price of $8.00 per share of common stock, which represents a conversion rate of two and one-half (2 1/2) shares of common stock for each share of Series A Cumulative Redeemable Convertible preferred stock. On December 31, 2010, all of the 1.0 million shares of Series A Cumulative Redeemable Convertible preferred stock of NYMT owned by JMP Group Inc. and certain of its affiliates matured and were redeemed at a price per share of $20.00 for a total of $20.0 million. The advisory agreement was terminated effective July 26, 2010 upon execution of an amended and restated advisory agreement between HCS and NYMT. 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. Under the amended advisory agreement, in order to maintain certain rights under the agreement, we were required to have a minimum $10.0 million of investment commitment in NYMT’s common stock, subject to certain adjustments for variations in NYMT’s stock price subsequent to the effective date of the agreement. This advisory agreement was terminated December 31, 2011, pending certain contingent advisory obligations. At December 31, 2011, we had an investment in NYMT’s common stock of $10.3 million which represented 10.3% of NYMT’s outstanding shares of common stock.

The timing of bonus compensation payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees and managing directors are generally paid semi-monthly during the year, bonus compensation, which makes up a larger portion of total compensation, is generally paid once a year during the first two months of the following year. In February 2011, we paid out $34.2 million of cash bonuses for 2010, excluding employer payroll tax expense. 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. We currently do not plan to pay dividends on unvested shares of restricted stock. Our board of directors declared a quarterly cash dividend of $0.02 per share of common stock in March 2011, $0.025 per share of common stock in May, $0.03 per share of common stock in August and November 2011. Those dividends were paid in April, June, September and December 2011 for the fourth quarter of 2010, the first, second and third quarter of 2011, respectively. The Company does not pay dividends on unvested shares of restricted stock.

During the years ended December 31, 2011 and 2010, the Company repurchased 860,778 and 1,205,991 shares, respectively, of the Company’s common stock at an average price of $7.38 per share and $6.91 per share, respectively, for an aggregate purchase price of $6.4 million and $8.3 million, respectively. Of the total shares repurchased during the years ended December 31, 2011 and 2010, 406,163 shares and 394,005 shares, respectively, were deemed to have been repurchased in connection with employee stock plans, whereby the Company’s shares were issued on a net basis to employees for the payment of applicable statutory withholding taxes and therefore such withheld shares are deemed to be purchased by the Company.

We had total restricted cash of $48.4 million comprised primarily of $36.1 million of restricted cash at JMP Credit on December 31, 2011. This balance was comprised of $3.8 million in interest received from loans in the CLO and $32.3 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 initial public offering and funds anticipated to be provided by our operating activities, will be adequate to meet our liquidity and regulatory capital requirements for at least the next twelve months. 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 $38.0 million and $29.7 million, which were $37.0 million and $28.7 million in excess of the required net capital of $1.0 million at December 31, 2011 and 2010, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.26 to 1 and 0.39 to 1 at December 31, 2011 and 2010, respectively.

A condensed table of cash flows for the years ended December 31, 2011 and 2010 is presented below.


	Year Ended December 31,						Change from 2010 to 2011
(Dollars in thousands)	2011			2010			$			%
Cash flows provided by (used in) operating activities	$	16,150		$	(33,160	)	$	49,310			148.7	%
Cash flows (used in) provided by investing activities		(16,473	)		17,622			(34,095	)		-193.5	%
Cash flows (used in) provided by financing activities		(428	)		10,972			(11,400	)		-103.9	%

Total cash flows	$	(751	)	$	(4,566	)	$	3,815			83.6	%



(Dollars in thousands)	Year Ended December 31,						Change from 2009 to 2010
	2010			2009			$			%
Cash flows (used in) provided by operating activities	$	(33,160	)	$	39,893		$	(73,053	)		-183.1	%
Cash flows provided by investing activities		17,622			3,855			13,767			357.1	%
Cash flows provided by (used in) financing activities		10,972			(14,330	)		25,302			176.6	%

Total cash flows	$	(4,566	)	$	29,418		$	(33,984	)		-115.5	%

Cash Flows for the Year Ended December 31, 2011

Cash decreased by $0.8 million during the year ended December 31, 2011, primarily as a result of cash used in investing activities.

Our operating activities provided $16.2 million of cash from the net loss of $2.8 million, adjusted for the cash used in the change in operating assets and liabilities of $14.5 million and non-cash revenue and expense items of $4.4 million. The non-cash revenue and expense items included net amortization expense of liquidity discount of $21.5 million and stock-based compensation expense of $10.3 million partially offset by a loss on sale and payoff of loans of $17.0 million.

Our investing activities used $16.5 million of cash primarily due to the funding of loans collateralizing ABS issued of $245.9 million, the purchases of other investments of $17.0 million, and an increase of restricted cash reserved for lending of $12.2 million, partially offset by cash provided by sales and payoff of loans collateralizing ABS issued of $229.6 million, and $28.5 million of repayments on loans collateralizing ABS.

Our financing activities used $0.4 million of cash primarily due to proceeds from capital contributions from non-controlling interest holders of $18.4 million, partially offset by issuance of note payable of $7.0 million, the repurchase of our common stock for treasury of $6.4 million, and cash dividends paid to stockholders of $2.3 million.

Cash Flows for the Year Ended December 31, 2010

Cash decreased by $4.6 million during the year ended December 31, 2010, primarily as a result of cash used in operating activities.

Our operating activities used $33.2 million of cash from the net income of $12.4 million, adjusted for the cash used in the change in operating assets and liabilities of $25.9 million and non-cash revenue and expense items of $19.7 million. The non-cash revenue and expense items included gain on sale and payoff of loans of $39.4 million, net amortization expense of liquidity discount of $6.1 million and impairment loss on purchased management contract of $2.8 million.

Our investing activities provided $17.6 million of cash primarily due to cash provided by the following: sales of other investments of $46.1 million, $15.0 million of which represents proceeds from the redemption of Series A Cumulative Redeemable Convertible preferred stock of NYMT, sales and payoff of loans collateralizing ABS issued of $256.6 million, repayments on loans collateralizing ABS issued of $72.5 million and net change in restricted cash reserved for lending activities of $10.9 million, partially offset by cash used in the following: funding of loans collateralizing ABS issued of $339.9 million, purchases of other investments of $24.5 million and purchase of management contract of $3.8 million.

Our financing activities provided $11.0 million of cash primarily due to proceeds from issuance of note payable of $18.9 million and capital contributions from non-controlling interest holders of $8.6 million, partially

offset by repurchase of our common stock for treasury of $8.3 million, repayment of asset-backed securities issued of $3.5 million, repayment of a note payable of $1.7 million, cash dividends paid to stockholders of $1.2 million and purchase of subsidiary shares from non-controlling interest holders of $0.8 million.

Cash Flows for the Year Ended December 31, 2009

Cash increased by $29.4 million during the year ended December 31, 2009, primarily as a result of cash provided by operating activities.

Our operating activities provided $39.9 million of cash from the net income of $12.7 million adjusted for the cash provided by the change in operating assets and liabilities of $47.0 million, reduced by non-cash revenue and expense items of $19.8 million. The non-cash revenue and expense items included gain on sale and payoff of loans of $22.3 million, gain on repurchase of ABS issued of $4.7 million, gain on bargain purchase of $1.2 million and provision for loan losses of $4.5 million.

Our investing activities provided $3.9 million of cash, which primarily due to cash provided by sales and payoff of loans collateralizing ABS of $93.3 million, repayments on loans collateralizing ABS issued of $53.4 million, net change in restricted cash reserved for lending activities of $9.0 million, and sales of other investments of $13.4 million, partially offset by cash used in funding of loans collateralizing ABS issued of $156.1 million, purchases of other investments of $7.5 million and purchase of Cratos of $2.1 million (net of cash owned by Cratos at acquisition).

Our financing activities used $14.3 million of cash primarily due to cash provided by two draw downs on our revolving note with City National Bank (CNB) totaling $6.1 million and sales of asset-backed securities issued of $1.0 million, partially offset by repayment of asset- backed securities issued of $6.8 million, repurchase of our common stock for treasury of $5.4 million, repayments on and repurchase of a note payable (contingent consideration payable) of $1.8 million, scheduled repayments on a term loan of $1.7 million, repayment of one of the draw downs on our revolving note of $4.0 million and dividends paid to non-controlling interests of $1.3 million.

We had total restricted cash of $36.6 million comprised primarily of $34.7 million of restricted cash at JMP Credit on December 31, 2009. This balance was comprised of $3.7 million in interest received from loans in the CLO and $31.0 million in principal cash. The interest and fees will be restricted until the next payment date to note holders of the CLO. The principal restricted cash will be used to buy additional loans or pay down CLO notes.

Contractual Obligations and Commitments

The following table provides a summary of our contractual obligations and commitments as of December 31, 2011:


(in thousands)	Payments Due by Period:
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Note payable	$	19,222	$	8,736	$	10,486	$	0	$	0
CLO Notes due 2021		431,003		0		0		0		431,003
Contractual interest payments (1)		50,611		5,686		10,786		10,646		23,493
Operating lease obligations		22,288		2,582		6,846		6,663		6,197
Purchase obligations		201		65		131		5		0
Commitments to lend (2)		21,930		21,930		0		0		0
Commitments under standby letters of credit (3)		248		248		0		0		0

Total payments	$	545,503	$	39,247	$	28,249	$	17,314	$	460,693

(1)	Estimated future interest payments related to note payable and CLO Notes based on applicable interest rates as of December 31, 2011.

(2)	Unsettled trades to purchase loans at JMP Credit. The funds for such unsettled trades are included in restricted cash on the Consolidated Statement of Financial Condition at December 31, 2011.

(3)	Conditional commitments issued by JMP Credit to guarantee the performance by a borrower to a third party. The cash collateral supporting these standby letters of credit is included in restricted cash on the Consolidated Statement of Financial Condition at December 31, 2011.

Off-Balance Sheet Arrangements

In connection with Cratos CLO, the Company had unfunded commitments to lend of $3.2 million and zero and standby letters of credit of $0.2 million and $0.4 million as of December 31, 2011 and 2010, respectively. These commitments do not extend to JMP Group Inc.

Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each borrower’s creditworthiness on a case by case basis.

We had no other material off-balance sheet arrangements as of December 31, 2011. However, as described below under “Quantitative and Qualitative Disclosures About Market Risk—Credit Risk,” through indemnification provisions in our clearing agreements with our clearing broker, customer activities may expose us to off-balance sheet credit risk, which we seek to mitigate through customer screening and collateral requirements.

Critical Accounting Policies and Estimates

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

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

•

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

•

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

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

Valuation of Financial Instruments

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

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

Fair value our financial instruments is generally obtained from quoted market prices, broker or dealer price quotations, or alternative pricing methodologies that we believe offer reasonable levels of price transparency. Valuations obtained from broker or dealer price quotations are considered reflective of executable prices. Data obtained from multiple sources are compared for consistency and reasonableness. To the extent that certain financial instruments trade infrequently or are non-marketable securities and, therefore, do not have readily determinable fair values, we estimate the fair value of these instruments using various pricing models and the information available to us that we deem most relevant. Among the factors considered by us in determining the fair value of financial instruments are discounted anticipated cash flows, the cost, terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, the Black-Scholes Options Valuation methodology and other factors generally pertinent to the valuation of financial instruments.

Marketable securities owned and securities sold, but not yet purchased, consist of U.S. listed and over-the-counter (“OTC”) equity securities. Other investments include investments in private investment funds managed by us or our affiliates, as well as cash paid for a subscription in a private investment fund managed by a third party. Such investments held by non-broker-dealer entities are accounted for under the equity method based on our share of the earnings (or losses) of the investee. The financial position and operating results of the private investment funds are generally determined on an estimated fair value basis. Generally, securities are valued (i) at their last published sale price if they are listed on an established exchange or (ii) if last sales prices are not published, at the highest closing “bid” price (for securities held “long”) and the lowest closing “asked” price (for “short” positions) as recorded by the composite tape system or such principal exchange, as the case may be. Where the general partner determines that market prices or quotations do not fairly represent the value of a security in the investment fund’s portfolio (for example, if a security is a restricted security of a class that is publicly traded) the general partner may assign a different value. The general partner will determine the estimated fair value of any assets that are not publicly traded.

In September 2009, the FASB issued amended accounting principles related to fair value measurements of investments in certain entities that calculate net asset value per share. The amended accounting principles permit, as a practical expedient, an entity to estimate the fair value of investments in certain entities using the net asset value per share of such entities. The Company estimates the fair value of its investments in private investment funds managed by third parties using the net asset value per share of those funds.

Also included in other investments are warrants on public and private common stock, private equity securities owned by HGC and JMP Capital, the investments in private companies sponsored by HCS and JMP

Capital and an interest rate cap derivative instrument. The warrants on public and private common stock are generally received as a result of investment banking transactions and are valued at estimated fair value as determined by management. Warrants owned are valued at the date of issuance and marked-to-market as unrealized gains and losses until realized. Estimated fair value is determined using the Black-Scholes Options Valuation methodology. The fair value of the private equity securities owned by HGC and JMP Capital is determined by the Company using comparable public company metrics discounted for private company market illiquidity. The interest rate cap derivative instrument fair value is determined from counterparty price quotations. The investments in private companies sponsored by HCS and JMP Capital are carried at cost and evaluated for impairment on a quarterly basis.

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

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

The following tables summarize our marketable securities and other investments, as presented in our Consolidated Statements of Financial Condition, by valuation methodology as of December 31, 2011:


					Other Investments (3)
(in thousands)	Marketable Securities Owned, at Market Value (1)		Marketable Securities Sold, But Not Yet Purchased, at Market Value (2)		General Partner in Hedge Funds		General Partner in Fund of Funds		Limited Partner in Private Equity Fund		Warrants		Equity securities		Total Other Investments		Total Marketable Securities and Other Investments
Fair values based on:
Quoted market prices	$	24,309	$	10,921	$	0	$	0	$	0		0	$	0	$	0	$	35,230
Black Scholes credit adjusted valuation		0		0		0		0		0		0		0		0		0
Black Scholes options valuation		0		0		0		0		0		617		0		617		617
Observable market based inputs		0		0		24,072		0		0		0		0		24,072		24,072
Valuation determined by third party general partners		0		0		0		102		2,585		0		0		2,687		2,687
Comparable public company metrics discounted for private company market illiquidity		0		0		0		0		0		0		24,133		24,133		24,133

Totals	$	24,309	$	10,921	$	24,072	$	102	$	2,585		617	$	24,133	$	51,509	$	86,739


							Other Investments (3)
(in thousands)	Marketable Securities Owned, at Market Value (1)			Marketable Securities Sold, But Not Yet Purchased, at Market Value (2)			General Partner in Hedge Funds			General Partner in Fund of Funds			Limited Partner in Private Equity Fund			Warrants			Equity securities			Total Other Investments			Total Marketable Securities and Other Investments
Fair values based on:
Quoted market prices		100.0	%		100.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		40.6	%
Black Scholes credit adjusted valuation		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
Black Scholes options valuation		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		1.2	%		0.0	%		1.2	%		0.7	%
Observable market based inputs		0.0	%		0.0	%		46.7	%		0.0	%		0.0	%		0.0	%		0.0	%		46.7	%		27.8	%
Valuation determined by third party general partners		0.0	%		0.0	%		0.0	%		0.2	%		5.0	%		0.0	%		0.0	%		5.2	%		3.1	%
Comparable public company metrics discounted for private company market illiquidity		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		46.9	%		46.9	%		27.8	%

Totals		100.0	%		100.0	%		46.7	%		0.2	%		5.0	%		1.2	%		46.9	%		100.0	%		100.0	%

(1)	Marketable securities owned consist mainly of U.S. listed and OTC equity securities.

(2)	Marketable securities sold, but not yet purchased consist mainly of U.S. listed and OTC equity securities.

(3)	Other investments consist of general partnership interests in hedge funds and funds of funds managed by HCS, limited partnership interests in private investment funds managed by third parties that invest in predominately private securities and warrants in public and private common stock.

Asset Management Investment Partnerships

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

We earn base management fees from the investment partnerships that we manage generally based on the net assets of the underlying partnerships. In addition, we are entitled to allocations of the appreciation and

depreciation in the fair value of the underlying partnerships from our general partnership interests in the partnerships. Such allocations are based on the terms of the respective partnership agreements.

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

Purchased Management Contract

Purchased management contract relates to the CLO contract the Company purchased from Princeton Advisory Group, Inc. on September 8, 2010 and is included in other assets on the Consolidated Statements of Financial Condition. The purchased management contract was amortized over its estimated life. The Company tests the purchased management contract for impairment whenever events or changes in circumstances suggest that the asset’s carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of the asset, is recognized if the sum of the estimated undiscounted cash flows relating to the asset is less than the corresponding carrying value. See Note 9 to the consolidated financial statements for more information.

Loans Collateralizing Asset-Backed Securities Issued

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

Loans acquired during the purchase and resulting consolidation of Cratos were recorded at their fair value as of the acquisition date, which then became the new basis of the loans. Any unamortized deferred fees or costs that existed prior to the acquisition were written off at that date.

For those loans deemed impaired as of the date of the acquisition, the total discount from unpaid principal balance to fair value consists of a non-accretable credit discount and an accretable liquidity discount. For the remaining loans acquired through the purchase of Cratos the discount to fair value was all accretable liquidity discount as the discount was not attributable to credit quality. For both types of loans the accretable portion of the discount is recognized into interest income as an adjustment to the yield of the loan over the contractual life of the loan using the interest method. For those loans deemed impaired as of the date of the acquisition, such accretion is discontinued when the net realizable value becomes equal or less than the carrying value. For the remaining loans acquired through the purchase of Cratos, such accretion is discontinued when the loan becomes impaired.

The Company continues to estimate the cash flows expected to be collected over the life of the loans acquired through the purchase of Cratos. If, upon subsequent evaluation, the Company believes it is unable to collect all cash flows expected at the acquisition date plus additional cash flows expected to be collected arising from changes in estimate after the acquisition, the loan is considered impaired for purposes of applying the authoritative guidance under GAAP on loss contingencies or, if applicable, the authoritative guidance under GAAP on loan impairment. Loans considered impaired at the acquisition date of Cratos can only continue to be assessed in accordance with the authoritative guidance under GAAP on loan impairment. If, based on current information and events, it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, the Company will first reduce any remaining valuation allowance (or allowance for loan losses) for the loan established after its acquisition for the increase in the present value of cash flows expected to be collected. Then the Company will recalculate the amount of accretable yield for the loan as the excess of the revised cash flows expected to be collected over the sum of (a) the initial investment less (b) cash collected less (c) write-downs plus (d) amount of yield accreted to date. The Company will adjust the amount of accretable yield by reclassification from

non-accretable discount. The adjustment is accounted for as a change in estimate, with the amount of periodic accretion adjusted over the remaining life of the loan. The resulting yield is then used as the effective interest rate in any subsequent accounting.

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

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

Allowance for Loan Losses

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

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

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

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

Asset-backed Securities Issued

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

Legal and Other Contingent Liabilities

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

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

Income Taxes

The Company accounts for income taxes in accordance with the authoritative guidance under GAAP on income taxes which requires the recognition of deferred tax assets and liabilities based upon the temporary differences between the financial reporting and tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce the deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized.

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

Recent Accounting Pronouncements

For a description of recent accounting pronouncements affecting the Company, refer to Note 3 in the accompanying consolidated financial statements.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk

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

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

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

Equity Price and Liquidity Risk

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

Our marketable securities owned include long positions in equity securities that were recorded at a fair value of $24.3 million as of December 31, 2011. Our marketable securities sold but not yet purchased consist of short positions in equity securities and were recorded at a fair value of $10.9 million as of December 31, 2011. The net potential loss in fair value for our marketable equity securities portfolio as of December 31, 2011, using a hypothetical 10% decline in prices, is estimated to be approximately $1.3 million. In addition, as of December 31, 2011, we have invested $25.4 million of our own capital in our funds, which are invested primarily in publicly traded equity securities. The net potential loss in fair value for our investments at December 31, 2011, using a hypothetical 10% decline in the funds’ investment portfolios, is estimated to be approximately $2.5 million

Interest Rate Risk

Interest rate risk represents the potential loss from adverse changes in market interest rates. As we may hold U.S. Treasury securities and other fixed income securities and may incur interest-sensitive liabilities from time to time, we are exposed to interest rate risk arising from changes in the level and volatility of interest rates and in the shape of the yield curve. We believe we have mitigated our interest rate risk on our interest-sensitive liabilities, except liabilities of Cratos CLO, by entering into an interest rate cap through the maturity of these liabilities.

Credit Risk

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

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

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

Inflation Risk

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

Item 8.

Financial Statements and Supplementary Data

Management’s Report on Internal Control Over Financial Reporting

The management of JMP Group Inc. is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. This assessment was based on criteria for effective internal control over financial reporting described in “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2011, the Company maintained effective internal control over financial reporting.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, has been audited by PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, as stated in its report appearing on page 83, which expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

JMP Group Inc.

In our opinion, the accompanying Consolidated Statements of Financial Conditions and the related Consolidated Statements of Operations, Statements of Changes in Equity and Cash Flows present fairly, in all material respects, the financial position of JMP Group Inc. and its subsidiaries at December 31, 2011 and December 31, 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

San Francisco, CA

March 8, 2012

JMP Group Inc.

Consolidated Statements of Financial Condition

(Dollars in thousands, except per share data)


	As of December 31,
	2011			2010
Assets
Cash and cash equivalents	$	70,363		$	71,114
Restricted cash and deposits (includes cash on deposit with clearing broker of $255 at December 31, 2011 and 2010)		48,440			47,718
Receivable from clearing broker		1,138			1,331
Investment banking fees receivable, net of allowance for doubtful accounts of zero at December 31, 2011 and 2010		2,539			9,764
Marketable securities owned, at fair value		24,309			23,748
Incentive fee receivable		2,097			763
Other investments (of which $51,517 and $38,672 at fair value at December 31, 2011 and 2010, respectively)		51,706			38,702
Loans held for sale		2,957			0
Loans held for investment, net of allowance for loan losses		0			813
Small business loans, net of allowance for loan losses		7,477			0
Loans collateralizing asset-backed securities issued, net of allowance for loan losses		410,770			400,763
Interest receivable		1,358			1,163
Fixed assets, net		2,285			1,481
Deferred tax assets		26,221			33,430
Other assets		8,961			7,998

Total assets	$	660,621		$	638,788

Liabilities and Equity
Liabilities:
Marketable securities sold, but not yet purchased, at fair value	$	10,921		$	10,669
Accrued compensation		38,143			37,424
Asset-backed securities issued		381,556			351,322
Interest payable		651			570
Note payable		19,222			26,209
Deferred tax liability		23,214			37,099
Other liabilities		30,430			33,443

Total liabilities		504,137			496,736

Redeemable Non-controlling Interest		50			0
Commitments and Contingencies
JMP Group Inc. Stockholders’ Equity
Common stock, $0.001 par value, 100,000,000 shares authorized; 22,409,644 and 22,069,741 shares issued at December 31, 2011 and 2010, respectively; 21,947,353 and 21,737,367 shares outstanding at December 31, 2011 and 2010, respectively		22			22
Additional paid-in capital		132,944			128,151
Treasury stock, at cost, 462,291 and 332,374 shares at December 31, 2011 and 2010, respectively		(3,011	)		(2,210	)
Accumulated other comprehensive loss		(102	)		(63	)
(Accumulated deficit)/Retained earnings		(148	)		4,696

Total JMP Group Inc. stockholders’ equity		129,705			130,596
Nonredeemable Non-controlling Interest		26,729			11,456

Total equity		156,434			142,052

Total liabilities and equity	$	660,621		$	638,788

See accompanying notes to consolidated financial statements

JMP Group Inc.

Consolidated Statements of Financial Condition

(Dollars in thousands, except per share data)

Assets and liabilities of consolidated variable interest entities (“VIE”) included in total assets and total liabilities above:


	As of December 31,
	2011		2010
Restricted cash	$	36,137	$	23,821
Loans held for sale		2,957		0
Loans collateralizing asset-backed securities issued, net of allowance for loan losses		410,770		400,763
Interest receivable		1,191		1,162
Deferred tax assets		8,567		15,685
Other assets		40		41

Total assets of consolidated VIE	$	459,662	$	441,472

Asset-backed securities issued		381,556		351,322
Interest payable		601		545
Deferred tax liability		21,791		34,110
Other liabilities		2,042		379

Total liabilities of consolidated VIE	$	405,990	$	386,356

The asset-backed securities issued by the VIE are limited recourse obligations payable solely from cash flows of the loans collateralizing them and related collection and payment accounts pledged as security. Accordingly, the assets of the VIE can only be used to settle the obligations of the VIE.

See accompanying notes to consolidated financial statements

JMP Group Inc.

Consolidated Statements of Operations

(In thousands, except per share data)


	Year Ended December 31,
	2011			2010			2009
Revenues
Investment banking	$	46,114		$	45,577		$	39,924
Brokerage		25,461			28,259			34,004
Asset management fees		19,785			12,231			20,148
Principal transactions		1,615			3,421			18,517
Gain on sale and payoff of loans		17,020			39,363			22,268
Gain on repurchase of asset-backed securities issued		0			0			4,705
Gain on bargain purchase		0			0			1,179
Net dividend income		1,365			2,248			2,521
Other income		4,336			3,466			2,593

Non-interest revenues		115,696			134,565			145,859

Interest income		33,356			45,162			35,370
Interest expense		(35,747	)		(33,687	)		(25,924	)

Net interest income (expense)		(2,391	)		11,475			9,446

Provision for loan losses		(1,944	)		(1,327	)		(5,821	)

Total net revenues after provision for loan losses		111,361			144,713			149,484

Non-interest expenses
Compensation and benefits		89,017			95,708			105,179
Administration		6,649			5,752			5,050
Brokerage, clearing and exchange fees		4,735			5,110			5,284
Travel and business development		3,681			3,447			2,396
Communications and technology		3,988			3,969			3,892
Occupancy		2,927			2,666			2,448
Professional fees		2,955			3,080			3,589
Depreciation		721			635			746
Impairment loss on purchased management contract		700			2,750			0
Other		426			611			555

Total non-interest expenses		115,799			123,728			129,139

Net income (loss) before income tax expense		(4,438	)		20,985			20,345
Income tax expense (benefit)		(1,670	)		8,577			7,663

Net income		(2,768	)		12,408			12,682
Less: Net income (loss) attributable to nonredeemable non-controlling interest		(257	)		2,805			1,872

Net income (loss) attributable to JMP Group Inc.	$	(2,511	)	$	9,603		$	10,810

Net income (loss) attributable to JMP Group Inc. per common share:
Basic	$	(0.11	)	$	0.44		$	0.52
Diluted	$	(0.11	)	$	0.43		$	0.49
Dividends declared per common share	$	0.105		$	0.055		$	0.04
Weighted average common shares outstanding:
Basic		22,118			21,646			20,791
Diluted		23,069			22,396			22,137

See accompanying notes to consolidated financial statements

JMP Group Inc.

Consolidated Statements of Changes in Equity

(In thousands)


	JMP Group Inc. Stockholders’ Equity
	Common Stock				Treasury Stock			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Nonredeemable Non-controlling Interest			Comprehensive Income			Total Equity
	Shares		Amount		Treasury Stock			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Nonredeemable Non-controlling Interest			Comprehensive Income			Total Equity

Balance, December 31, 2008		22,070	$	22	$	(10,711	)	$	125,940		$	(10,130	)	$	0		$	7,951		$	8,921		$	113,072
Net income		0		0		0			0			10,810			0			1,872			12,682			12,682
Additional paid-in capital—stock-based compensation		0		0		0			(481	)		0			0			0			0			(481	)
Additional paid-in capital—excess tax benefit related to stock-based compensation		0		0		0			666			0			0			0			0			666
Cash dividends paid to shareholders		0		0		0			0			(835	)		0			0			0			(835	)
Purchases of shares of common stock for treasury		0		0		(5,404	)		0			0			0			0			0			(5,404	)
Reissuance of shares of common stock from treasury		0		0		11,755			0			(997	)		0			0			0			10,758
Sale of subsidiary shares to non-controlling interest holders		0		0		0			0			0			0			374			0			374
Dividends paid to non-controlling interest holders		0		0		0			0			0			0			(1,285	)		0			(1,285	)
Reorganization/dissolution of subsidiaries (Note 2)		0		0		0			0			0			0			(3,896	)		0			(3,896	)

Balance, December 31, 2009		22,070	$	22	$	(4,360	)	$	126,125		$	(1,152	)	$	0		$	5,016		$	21,603		$	125,651
Net income		0		0		0			0			9,603			0			2,805			12,408			12,408
Additional paid-in capital—stock-based compensation		0		0		0			1,282			0			0			0			0			1,282
Additional paid-in capital—excess tax benefit related to stock-based compensation		0		0		0			(332	)		0			0			0			0			(332	)
Cash dividends paid to shareholders		0		0		0			0			(1,199	)		0			0			0			(1,199	)
Purchases of shares of common stock for treasury		0		0		(8,338	)		0			0			0			0			0			(8,338	)
Reissuance of shares of common stock from treasury		0		0		7,956			939			(1	)		0			0			0			8,894
Sale of subsidiary shares to non-controlling interest holders		0		0		0			0			0			0			10,251			0			10,251
Purchase of subsidiary shares from non-controlling interest holders		0		0		2,532			137			(2,373	)		0			(2,738	)		0			(2,442	)
Unrealized loss on cash flow hedge, net of tax		0		0		0			0			0			(63	)		0			(63	)		(63	)
Dividends paid to non-controlling interest holders		0		0		0			0			(182	)		0			(475	)		0			(657	)
Reorganization/dissolution of subsidiaries (Note 2)		0		0		0			0			0						(3,403	)					(3,403	)

JMP Group Inc.

Consolidated Statements of Changes in Equity—(Continued)

(In thousands)


	JMP Group Inc. Stockholders’ Equity
	Common Stock				Treasury Stock			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Nonredeemable Non-controlling Interest			Comprehensive Income			Total Equity
	Shares		Amount		Treasury Stock			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Nonredeemable Non-controlling Interest			Comprehensive Income			Total Equity

Balance, December 31, 2010		22,070	$	22	$	(2,210	)	$	128,151		$	4,696		$	(63	)	$	11,456		$	33,948		$	142,052
Net income		0		0		0			0			(2,511	)		0			(257	)		(2,768	)		(2,768	)
Additional paid-in capital—stock-based compensation		0		0		0			804			0			0			0			0			804
Additional paid-in capital—excess tax benefit related to stock-based compensation		0		0		0			(335	)		0			0			0			0			(335	)
Cash dividends paid to shareholders		0		0		0			0			(2,333	)		0			0			0			(2,333	)
Purchases of shares of common stock for treasury		0		0		(6,353	)		0			0			0			0			0			(6,353	)
Reissuance of shares of common stock from treasury		0		0		5,552			433			0			0			0			0			5,985
Common stock issued		340		0		0			3,891			0			0			0			0			3,891
Distributions to non-controlling interest holders		0		0		0			0			0			0			(2,828	)		0			(2,828	)
Unrealized gain on cash flow hedge, net of tax		0		0		0			0			0			(39	)		0			(39	)		(39	)
Capital contributions from non-controlling interest holders (1)		0		0		0			0			0			0			18,358			0			18,358


Balance, December 31, 2011		22,410	$	22	$	(3,011	)	$	132,944		$	(148	)	$	(102	)	$	26,729		$	31,141		$	156,434

(1)	Excludes $50.4 thousand attributable to redeemable non-controlling interest.

See accompanying notes to consolidated financial statements

JMP Group Inc.

Consolidated Statements of Cash Flows

(In thousands)


	Year Ended December 31,
	2011			2010			2009
Cash flows from operating activities:
Net income	$	(2,768	)	$	12,408		$	12,682
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		1,944			1,327			5,821
Accretion of deferred loan fees		(1,317	)		(1,580	)		(977	)
Amortization of liquidity discount, net		21,513			6,093			1,561
Gain on sale and payoff of loans		(17,020	)		(39,363	)		(22,268	)
Gain on repurchase of asset-backed securities issued		0			0			(4,705	)
Change in other investments:
Fair value		409			(2,069	)		(10,779	)
Incentive fees reinvested in general partnership interests		(6,414	)		(700	)		(4,734	)
Realized gain on other investments		(793	)		0			0
Impairment loss on purchased management contract		700			2,750			0
Depreciation and amortization of fixed assets		721			635			746
Stock-based compensation expense		10,303			7,576			9,759
Deferred income taxes		(5,673	)		5,677			6,978
Gain on bargain purchase		0			0			(1,179	)
Net change in operating assets and liabilities:
(Increase) decrease in interest receivable		(195	)		(117	)		163
Decrease (increase) in receivables		7,554			(4,761	)		(1,941	)
Decrease (increase) in marketable securities		(561	)		(17,849	)		8,688
Decrease (increase) in restricted cash (excluding restricted cash reserved for lending activities), deposits and other assets		10,333			(20,587	)		8,684
Increase (decrease) in marketable securities sold, but not yet purchased		252			9,622			(4,630	)
Increase (decrease) in interest payable		81			45			(703	)
Increase (decrease) in accrued compensation and other liabilities		(2,919	)		7,733			36,727

Net cash provided by (used in) operating activities		16,150			(33,160	)		39,893

Cash flows from investing activities:
Purchases of fixed assets		(1,525	)		(771	)		(724	)
Purchase of management contract		0			(3,750	)		0
Investment in subsidiary		0			0			(2,089	)
Purchases of other investments		(16,985	)		(24,540	)		(7,486	)
Sales of other investments		8,771			46,083			13,358
Funding of loans collateralizing asset-backed securities issued		(245,907	)		(339,859	)		(156,086	)
Funding of small business loans		(8,000	)		0			0
Sale and payoff of loans collateralizing asset-backed securities issued		229,626			256,552			93,301
Principal receipts on loans collateralizing asset-backed securities issued		28,475			72,530			53,397
Principal receipts on loans held for investment		1,290			450			270
Net change in restricted cash reserved for lending activities		(12,218	)		10,927			9,012
Cash associated with consolidation / deconsolidation of subsidiaries		0			0			902

Net cash (used in) provided by investing activities		(16,473	)		17,622			3,855

See accompanying notes to consolidated financial statements

JMP Group Inc.

Consolidated Statements of Cash Flows—(Continued)


	Year Ended December 31,
	2011			2010			2009
Cash flows from financing activities:
Proceeds from issuance of note payable		0			18,900			6,100
Repayment of note payable		(6,987	)		(1,736	)		(5,736	)
Repayment and repurchase of contingent consideration payable		0			0			(1,899	)
Sale of asset-back securities issued		0			0			996
Repurchase of asset-backed securities issued		0			0			(555	)
Repayment of asset-backed securities issued		0			(3,475	)		(6,762	)
Cash dividends paid to stockholders		(2,333	)		(1,199	)		(835	)
Purchases of shares of common stock for treasury		(6,353	)		(8,338	)		(5,404	)
Capital contributions of redeemable non-controlling interest holders		50			0			0
Capital contributions of nonredeemable non-controlling interest holders		18,358			8,616			300
Distributions to non-controlling interest shareholders		(2,828	)		(657	)		(1,284	)
Purchase of subsidiary shares from non-controlling interest holders		0			(807	)		0
Proceeds from exercises of stock options		0			0			83
Excess tax benefit related to stock-based compensation		(335	)		(332	)		666

Net cash (used in) provided by financing activities		(428	)		10,972			(14,330	)

Net (decrease) increase in cash and cash equivalents		(751	)		(4,566	)		29,418
Cash and cash equivalents, beginning of period		71,114			75,680			46,262

Cash and cash equivalents, end of period	$	70,363		$	71,114		$	75,680

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	5,382		$	5,423		$	5,776
Cash paid during the period for taxes	$	5,128		$	2,091		$	730
Non-cash investing and financing activities:
Reissuance of shares of common stock from treasury related to vesting of restricted stock units and exercises of stock options	$	2,332		$	5,165		$	6,405
Fair value of noncash assets acquired in the Cratos acquisition	$	0		$	0		$	376,372
Fair value of noncash liabilities assumed in the Cratos acquisition	$	0		$	0		$	370,776
Membership interest in LSC III, LLC (“LSC”) received in full satisfaction of a non-revolving credit note (Note 2)	$	0		$	0		$	2,435

See accompanying notes to consolidated financial statements

JMP GROUP INC.

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

1. Organization and Description of Business

JMP Group Inc., together with its subsidiaries (collectively, the “Company”), is an independent investment banking and asset management firm headquartered in San Francisco, California. JMP Group Inc. completed its initial public offering (“IPO”) on May 16, 2007, and also completed a corporate reorganization (the “Reorganization”), which is described in greater detail in the Registration Statement on Form S-1 (File No. 333-140689) (the “Registration Statement”) filed with the Securities and Exchange Commission (“SEC”) in connection with the IPO. The Company conducts its brokerage business through JMP Securities LLC (“JMP Securities”), its asset management business through Harvest Capital Strategies LLC (“HCS”), its corporate credit business through JMP Credit Corporation (“JMP Credit”), JMP Credit Advisors LLC (“JMPCA”) and the newly formed entity Harvest Capital Credit LLC (“HCC”), and certain principal investments through JMP Capital LLC (“JMP Capital”). The above entities are wholly-owned subsidiaries, with the exception of HCC, which is a partly-owned subsidiary. JMP Securities is a U.S. registered broker-dealer under the Securities Exchange Act of 1934, as amended, and is a member of the Financial Industry Regulatory Authority (“FINRA”). JMP Securities operates as an introducing broker and does not hold funds or securities for, or owe any money or securities to customers and does not carry accounts for customers. All customer transactions are cleared through another broker-dealer on a fully disclosed basis. HCS is a registered investment advisor under the Investment Advisers Act of 1940, as amended, and provides investment management services for sophisticated investors in investment partnerships and other entities managed by HCS. Effective April 7, 2009, through JMP Credit, the Company completed the acquisition of 100% of the membership interests of Cratos Capital Partners, LLC (which changed its name to JMP Credit Advisors LLC on July 12, 2010) and its subsidiaries, including Cratos Capital Management, LLC (collectively, “Cratos”), a manager of collateralized loan obligations (“CLO”), together with certain securities of Cratos CLO I, Ltd. (“Cratos CLO”). See Note 2 for further details regarding the ownership of Cratos CLO.

2. Summary of Significant Accounting Policies

Basis of Presentation

These financial statements and accompanying notes present the consolidated financial condition of the Company as of December 31, 2011 and December 31, 2010. Consolidated results of operations, stockholders’ equity and cash flows are presented for the Company for the years ended December 31, 2011, 2010 and 2009.

The consolidated accounts of the Company include the wholly-owned subsidiaries, JMP Securities, HCS, JMP Capital, JMP Credit, JMPCA, and the partially-owned subsidiaries Harvest Growth Capital LLC (“HGC”) (effective April 1, 2010), Cratos CLO and HCC (effective August 18, 2011), Harvest Mortgage Opportunities Partners (“HMOP”) (from May 1, 2009 through December 31, 2010), Opportunity Acquisition Corp. (through December 31, 2009), a special purpose acquisition corporation, or “SPAC”, formed for the purpose of acquiring one or more businesses through a merger, capital stock exchange, stock purchase, asset acquisition, or other similar business combination. HMOP was liquidated on December 31, 2010, with all of its partners redeeming their interests as of that date. On December 31, 2010, HMOP was liquidated, with all of its partners redeeming their interests as of that date. The assets of HMOP were distributed to its partners in January 2011. The Company was the sponsor of the SPAC. The SPAC was liquidated on December 31, 2009 with no distribution of assets to the Company or non-controlling interest holders due to its accumulated loss. All material intercompany accounts and transactions have been eliminated in consolidation.

The Company follows the authoritative accounting guidance for the consolidation of variable interest entities (“VIEs”). Such guidance applies to VIEs, which are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. When the Company enters into a transaction with a VIE, the Company determines if it is the primary beneficiary of the VIE by performing a

qualitative analysis of the VIE that includes a review of, among other factors, its capital structure, contractual terms, related party relationships, the Company’s fee arrangements and the design of the VIE. The Company performed this analysis for Cratos CLO and concluded that Cratos CLO is a VIE and that the Company, which manages the CLO and owns approximately 94% of the subordinated notes in the CLO, is deemed the primary beneficiary. As a result, the Company consolidates the assets and liabilities of the CLO securitization entity, and the underlying loans owned by the CLO entity are shown on our Consolidated Statements of Financial Condition under loans collateralizing asset-backed securities issued and the asset-backed securities (“ABS”) issued to third parties are shown under asset-backed securities issued. See Note 7 and Note 11 for the information pertaining to the loans owned and ABS issued by Cratos CLO, respectively.

HCS currently manages several asset management funds, which are structured as limited partnerships, and is the general partner of each. In assessing whether or not to consolidate these funds, the Company follows the accounting guidance on determining whether a general partner controls a limited partnership. Such guidance provides that the presumption that the general partner controls the limited partnership may be overcome if the limited partners have substantive kick-out rights. Except for HMOP and HGC, the partnership agreements for these funds provide for the right of the limited partners to remove the general partners by a simple majority vote of the non-affiliated limited partners. Because of these substantive kick-out rights, the Company, as the general partner, does not control these funds, and therefore does not consolidate them except for HGC and prior to December 31, 2010, HMOP. The Company accounts for its investments in these non-consolidated funds under the equity method of accounting. Effective January 1, 2010, the accounting guidance on consolidation was amended to improve the financial reporting by entities involved in VIEs. In February 2010, the consolidation requirements under the amended accounting guidance were indefinitely deferred for a reporting entity’s interest in entities that have the attributes of an investment company or for which it is industry practice to apply the specialized industry accounting guidance for investment companies. The Company’s investments in the above asset management funds qualify for the deferral, and therefore the new consolidation requirements did not impact our accounting for these funds. If the deferral were to be removed, the Company would be required to evaluate these funds under the new accounting guidance, and based on such evaluation, some if not all of the funds may require consolidation.

Non-controlling interest on the Consolidated Statements of Financial Condition at December 31, 2011 relates to the interest of third parties in Cratos CLO, HCC, and HGC, partially-owned subsidiaries consolidated in our financial statements. Non-controlling interest on the Consolidated Statements of Financial Condition at December 31, 2010 relates to the interest of third parties in Cratos CLO and HGC, partially-owned subsidiaries consolidated in our financial statements. On August 6, 2010, the Company and individual employee security holders (the “Unitholders”) of JMP Credit entered into an Exchange Agreement providing for, among other things, an offer to buy the minority interest units and shares in JMP Credit held by the Unitholders in exchange for a combination of (i) restricted common stock of the Company par value $.001 per share, (ii) cash and (iii) certain Cratos CLO subordinated notes in such amounts as elected by the Unitholder. In connection with the Exchange Agreement, the Company issued an aggregate of 381,310 shares of restricted stock to the Unitholders and the Company received all the remaining units and shares of JMP Credit that it did not previously own. The restricted stock and the Cratos CLO notes are subject to limitations on transfer and repurchase rights of the Company in the event of certain terminations of the Unitholder’s employment with the Company or its affiliates through June 1, 2013. As a result of this transaction, the Company’s ownership of JMP Credit increased from approximately 93% to 100% and the Company’s ownership of Cratos CLO decreased from 100% to approximately 94% effective August 6, 2010.

On August 18, 2011, HCS formed HCC to make 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. 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 and affiliates owned approximately 80% of HCC at December 31, 2011. The Company consolidates HCC into its consolidated financial statements.

JMPRT was a real estate investment trust that was formed in June 2006. As of December 31, 2008, the Company owned 49.5% of JMPRT and certain employees owned 20.1%. Because of its ownership and management position, the Company consolidated JMPRT and recorded a non-controlling interest through December 31, 2008. On January 2, 2009, all of the assets and liabilities within JMPRT were transferred to HMOP, a hedge fund managed by HCS. HMOP is a Delaware limited partnership organized for the purposes of investing in real estate-related assets which may include investments in residential or commercial mortgages or loans, real estate and other assets, loans and participation in loans of all types, other specialty mortgage products, and securities. HCS is the general partner of HMOP. Because of substantive kick-out rights, the Company, as the general partner, did not control HMOP and therefore did not consolidate HMOP from January 2, 2009 through April 30, 2009. During the quarter ended June 30, 2009, several non-affiliated limited partners redeemed their interest in HMOP, and the remaining limited partners were no longer deemed to have substantive kick-out rights. As a result, the Company consolidated HMOP in its consolidated financial statements effective May 1, 2009. HMOP was liquidated on December 31, 2010, with all of its partners redeeming their interests as of that date. The assets of HMOP were distributed to its partners in January 2011.

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

On January 18, 2008, JMP Group Inc. and certain unconsolidated affiliates completed the acquisition of 1.0 million shares of Series A Cumulative Redeemable Convertible preferred stock of New York Mortgage Trust, Inc. (“NYMT”), a publicly traded real estate investment trust (“REIT”) engaged in the investment management of mortgage-backed securities and high credit quality residential adjustable rate mortgage loans, at a price per share of $20.00, for a total of $20.0 million. The investment comprised of $5.0 million from JMP Group Inc., $5.0 million from certain funds managed by HCS, and $10.0 million from JMPRT. Concurrent with the acquisition of the preferred shares, the Company entered into an advisory agreement between HCS and NYMT to manage certain non-agency assets. JMPRT’s investment in NYMT was transferred to HMOP on January 2, 2009. In addition, JMP Group Inc. invested $4.5 million in the common stock of NYMT on February 14, 2008 via a private investment in public equity (“PIPE”) transaction. The Series A Preferred Stock was convertible into shares of NYMT’s common stock based on a conversion price of $8.00 per share of common stock, which represents a conversion rate of two and one-half (2 1 / 2) shares of common stock for each share of Series A Preferred Stock. On December 31, 2010, all of the 1.0 million shares of Series A Cumulative Redeemable Convertible preferred stock of NYMT owned by JMP Group Inc. and certain of its affiliates were redeemed at a price per share of $20.00 for a total of $20.0 million. The advisory agreement was terminated effective July 26, 2010 upon execution of an amended and restated advisory agreement between HCS and NYMT. 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. Under the amended advisory agreement, the Company had a minimum $10.0 million of investment commitment in NYMT’s common stock, subject to certain adjustments for variations in NYMT’s stock price subsequent to the effective date of the agreement. As of December 31, 2011, the advisory agreement was terminated, pending certain contingent advisory obligations. At December 31, 2011, we had an investment in NYMT’s common stock of $10.3 million which represented 10.3% of NYMT’s outstanding shares of common stock. Because of its current ownership and management position, the Company does not consolidate NYMT. Refer to Exhibit 99.3 for NYMT financial information.

Revision to 2010 Consolidated Financial Statements

In preparing the consolidated financial statements for the quarter ended March 31, 2011, the Company discovered an error that impacted the Company’s previously issued consolidated financial statements for the second quarter of 2010, the third quarter of 2010 and for the year ended December 31, 2010. The net after tax effect of this error together with errors previously identified, was an understatement of net income of $0.7 million for the year ended December 31, 2010 ($31,000 for the second quarter of 2010, $384,000 for the third quarter of 2010 and $327,000 for the fourth quarter of 2010). The adjustments were primarily related to the newly identified error, a difference in the determination of taxable income, causing a $0.6 million impact to income tax expense for the year ended December 31, 2010 ($31,000 for the second quarter of 2010, $397,000 for the third quarter of 2010 and $148,000 for the fourth quarter of 2010.) The Company evaluated these errors and concluded that they did not, individually or in the aggregate, result in a material misstatement of the company’s previously issued consolidated financial statements. However, the Company also concluded that the effect of correcting the errors in the first quarter of 2011 would have been misleading to the users of the financial statements for the quarter ended March 31, 2011 and expected results for the year ended December 31, 2011. Accordingly, the Company has determined to revise, in this report, its previously reported Consolidated Statements of Financial Condition as of June 30, 2010, September 30, 2010 and December 31, 2010 and its Consolidated Statements of Operations and Changes in Equity for the periods ended June 30, 2010, September 30, 2010 and December 31, 2010 to adjust for these errors. The effect of this revision had no impact on our Consolidated Statement of Cash Flows.

A summary of the revisions to the Consolidated Financial Statements as of June 30, 2010, September 30, 2010 and December 31, 2010 is as follows:


	As Previously Reported		Adjustment			As Revised
(In thousands, except per common share data)
Consolidated Statements of Operation

	For the Three Months Ended June 30, 2010
Income tax expense	$	2,133	$	(31	)	$	2,102
Net income		2,983		31			3,014
Net income attributable to JMP Group Inc.		2,185		31			2,216
Net income attributable to JMP Group Inc. per common share:
Basic	$	0.10	$	0.00		$	0.10
Diluted	$	0.10	$	0.00		$	0.10

	For the Six Months Ended June 30, 2010
Income tax expense	$	3,522	$	(31	)	$	3,491
Net income		5,003		31			5,034
Net income attributable to JMP Group Inc.		3,903		31			3,934
Net income attributable to JMP Group Inc. per common share:
Basic	$	0.18	$	0.00		$	0.18
Diluted	$	0.17	$	0.01		$	0.18

Consolidated Statements of Financial Condition
	As of June 30, 2010
Deferred tax assets	$	41,994	$	31		$	42,025
Total assets		580,836		31			580,867
Retained earnings		2,203		31			2,234
Total JMP Group Inc. stockholders’ equity		121,276		31			121,307
Total equity		131,541		31			131,572
Total liabilities and equity		580,836		31			580,867


Consolidated Statements of Changes in Equity
	For the Six Months Ended June 30, 2010
Net Income	$	3,903	$	31		$	3,934
Retained Earnings- Balance, June 30, 2010		2,203		31			2,234

	As Previously Reported		Adjustment			As Revised
(In thousands, except per common share data)

Consolidated Statements of Operation
	For the Three Months Ended September 30, 2010
Interest income	$	11,525	$	(23	)	$	11,502
Net interest income		2,986		(23	)		2,963
Total net revenues after provision for loan losses		32,681		(23	)		32,658
Income before income tax expense		4,579		(23	)		4,556
Income tax expense		1,943		(407	)		1,536
Net income		2,636		384			3,020
Net income attributable to JMP Group Inc.		1,431		384			1,815
Net income attributable to JMP Group Inc. per common share:
Basic	$	0.07	$	0.01		$	0.08
Diluted	$	0.06	$	0.02		$	0.08

	For the Nine Months Ended September 30, 2010
Interest income	$	36,106	$	(23	)	$	36,083
Net interest income		11,017		(23	)		10,994
Total net revenues after provision for loan losses		100,745		(23	)		100,722
Income before income tax expense		13,103		(23	)		13,080
Income tax expense		5,464		(438	)		5,026
Net income		7,639		415			8,054
Net income attributable to JMP Group Inc.		5,334		415			5,749
Net income attributable to JMP Group Inc. per common share:
Basic	$	0.25	$	0.02		$	0.27
Diluted	$	0.24	$	0.02		$	0.26

Consolidated Statements of Financial Condition
	As of September 30, 2010
Deferred tax assets	$	37,727	$	438		$	38,165
Total assets		603,303		438			603,741
Other liabilities		28,289		23			28,312
Total liabilities		470,779		23			470,802
Retained earnings		753		415			1,168
Total JMP Group Inc. stockholders’ equity		122,124		415			122,539
Total equity		132,524		415			132,939
Total liabilities and equity		603,303		438			603,741

Consolidated Statements of Changes in Equity
	For the Nine Months Ended September 30, 2010
Net Income	$	5,334	$	415		$	5,749
Retained Earnings—Balance, September 30, 2010		753		415			1,168


	As Previously Reported		Adjustment			As Revised
(In thousands, except per common share data)

Consolidated Statements of Operation
	For the Year Ended December 31, 2010
Investment banking revenues	$	45,519	$	58		$	45,577
Non-interest revenues		134,507		58			134,565
Interest income		45,209		(47	)		45,162
Net interest income		11,522		(47	)		11,475
Total net revenues after provision for loan losses		144,702		11			144,713
Travel and business development		3,401		46			3,447
Administration		5,767		(15	)		5,752
Professional fees		3,380		(300	)		3,080
Total non-interest expenses		123,997		(269	)		123,728
Income before income tax expense		20,705		280			20,985
Income tax expense		9,039		(462	)		8,577
Net income		11,666		742			12,408
Net income attributable to JMP Group Inc.		8,861		742			9,603
Net income attributable to JMP Group Inc. per common share:
Basic	$	0.41	$	0.03		$	0.44
Diluted	$	0.40	$	0.03		$	0.43

Consolidated Statements of Financial Condition
	As of December 31, 2010
Investment banking fees receivable	$	9,706	$	58		$	9,764
Deferred tax assets		32,542		(35	)		32,507
Other assets		8,008		(10	)		7,998
Total assets		637,852		13			637,865
Other liabilities		34,172		(729	)		33,443
Total liabilities		496,542		(729	)		495,813
Retained earnings		3,954		742			4,696
Total JMP Group Inc. stockholders’ equity		129,854		742			130,596
Total equity		141,310		742			142,052
Total liabilities and equity		637,852		13			637,865

Consolidated Statements of Changes in Equity
	For the Year Ended December 31, 2010
Net Income	$	8,861	$	742		$	9,603
Retained Earnings—Balance, December 31, 2010		3,954		742			4,696

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the use of estimates and assumptions that affect both the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Revenue Recognition

Investment banking revenues

Investment banking revenues consist of underwriting revenues, strategic advisory revenues and private placement fees, and are recorded when the underlying transaction is completed under the terms of the relevant

agreement. Underwriting revenues arise from securities offerings in which the Company acts as an underwriter and include management fees, selling concessions and underwriting fees, net of related syndicate expenses. Management fees and selling concessions are recorded on the trade date, which is typically the day of pricing an offering (or the following day) and underwriting fees, net of related syndicate expenses, at the time the underwriting is completed and the related income is reasonably determinable. For these transactions, management estimates the Company’s share of the transaction-related expenses incurred by the syndicate, and recognizes revenues net of such expense. On final settlement, typically 90 days from the trade date of the transaction, these amounts are adjusted to reflect the actual transaction-related expenses and the resulting underwriting fee. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded. If management determines that a transaction is likely not to be completed, deferred expenses related to that transaction are expensed at that time. In connection with some underwritten transactions, the Company may hold in inventory, for a period of time, equity positions to facilitate the completion of the underwritten transactions. Realized and unrealized net gains and losses on these positions are recorded within investment banking revenues. Strategic advisory revenues primarily include success fees on closed merger and acquisition transactions, as well as retainer fees, earned in connection with advising on both buyers’ and sellers’ transactions. Fees are also earned for related advisory work and other services such as providing fairness opinions and valuation analyses. Strategic advisory revenues are recorded when the transactions or the services (or, if applicable, separate components thereof) to be performed are substantially complete, the fees are determinable and collection is reasonably assured. Private placement fees are related to non-underwritten transactions such as private placements of equity securities, PIPE, Rule 144A private offerings and trust preferred securities offerings, and are recorded on the closing date of the transaction. Un-reimbursed expenses associated with strategic advisory and private placement transactions, net of client reimbursements, are recorded in the Consolidated Statements of Operations within various expense captions other than compensation expense.

Brokerage revenues

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

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

Asset Management Fees

Asset management fees for hedge funds, hedge funds of funds, private equity funds, HCC and NYMT consist of base management fees and incentive fees. The Company recognizes base management fees on a monthly basis over the period in which the investment services are performed. Base management fees earned by

the Company are generally based on the fair value of assets under management and the fee schedule for each fund and account. Base management fees for hedge funds and hedge funds of funds are calculated at the investor level using their quarter-beginning capital balance adjusted for any contributions or withdrawals. Base management fees for private equity funds are calculated at the investor level using their aggregate capital commitments during the commitment period, which is generally three years from first closing, and on invested capital following the commitment period. Base management fees for HCC are calculated based on the average value of our gross assets, reduced by the amount outstanding on its credit facility with JMP Group LLC, at the end of the two most recently completed calendar quarters. Refer to Note 10 for further information relating to this credit facility. The Company also earns incentive fees for hedge funds and hedge funds of funds that are based upon the performance of investment funds and accounts. Such fees are either a specified percentage of the total investment return of a fund or account or a percentage of the excess of an investment return over a specified highwater mark or hurdle rate over a defined performance period. For most funds, the highwater mark is calculated using the greatest value of a partner’s capital account as of the end of any performance period, increased for contributions and decreased for withdrawals. Incentive fees are recognized as revenue at the end of the specified performance period. The performance period used to determine the incentive fee is quarterly for the hedge funds and NYMT, and annually for the hedge funds of funds managed by HCS. Generally, the incentive fees are reinvested in the investment funds in which the Company holds a general partner investment. The incentive fees are not subject to any contingent repayments to investors or any other clawback arrangements. Incentive fees for private equity funds and HCC are based on a specified percentage of realized gains from the disposition of each portfolio investment in which each investor participates, and are earned by the Company after returning contributions by the investors for that portfolio investment and for all other portfolio investments in which each such investor participates that have been disposed of at the time of distribution. For both private equity funds and HCC, fees are eliminated upon consolidation.

Asset management fees for the two CLOs the Company managed through the year consisted of senior and subordinated base management fees. For one of the CLOs, the Company earns incentive fees in the event that specified cumulative investment returns are achieved, but such investment returns have not been achieved yet. The Company recognizes base management fees for the CLOs on a monthly basis over the period in which the collateral management services are performed. The base management fees for the CLOs are calculated as a percentage of the average aggregate collateral balances for a specified period. As the Company consolidates Cratos CLO, the management fees earned at JMPCA from Cratos CLO are eliminated on consolidation in accordance with GAAP. In December 2011, one of the CLOs initiated liquidation proceedings. See Note 9 for additional information regarding this liquidation.

Principal transactions

Principal transaction revenues include realized and unrealized net gains and losses resulting from our principal investments in equity and other securities for the Company’s account and in equity-linked warrants received from certain investment banking assignments, as well as limited partner investments in private funds managed by third parties, our investment in NYMT and interest rate cap. Unrealized gain (loss) on interest rate cap was recorded in principal transaction revenues through June 30, 2010. Effective July 1, 2010, such gain (loss) is recorded in other comprehensive income (loss). Principal transaction revenues also include earnings (or losses) attributable to investment partnership interests held by our asset management subsidiary, HCS, which are accounted for using the equity method of accounting. 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.

The Company’s principal transaction revenues for these categories for the years ended December 31, 2011, 2010 and 2009 are as follows:


	Year Ended December 31,
(In thousands)	2011			2010			2009
Equity and other securities	$	1,449		$	4,281		$	10,293
Warrants and other investments		(674	)		(1,362	)		(220	)
Investment partnerships		840			502			8,444

Total principal transaction revenues	$	1,615		$	3,421		$	18,517

Gain on Sale and Payoff of Loans

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

Gain on Repurchase of Asset-Backed Securities Issued

Gain on repurchase of asset-backed securities issued consists of gains from repurchases of our ABS from third parties. Gains are recorded when the repurchase price is less than the carrying value of the ABS.

Gain on Bargain Purchase

A bargain purchase gain was recognized upon the acquisition of Cratos by JMP Credit Corporation on April 7, 2009. This gain represents the difference between the fair value of net assets acquired and the consideration to the sellers.

Interest Income

Interest income primarily relates to income earned on loans. Interest income on loans comprises the stated coupon as a percentage of the face amount receivable as well as accretion of accretable or purchase discounts and deferred fees. See Loans Held for Investment, Small Business Loans and Loans Collateralizing Asset-Backed Securities Issued below for more information. Interest income is recorded on the accrual basis in accordance with the terms of the respective loans unless such loans are placed on non-accrual status.

Interest Expense

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

Cash and Cash Equivalents

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

Restricted Cash and Deposits

Restricted cash and deposits include principal and interest payments that are collateral for the asset-backed securities issued by Cratos CLO. They also include proceeds from short sales deposited with brokers that cannot be removed unless the securities are delivered, cash collateral supporting standby letters of credit issued by JMP Credit, cash on deposit for operating leases, and cash on deposit with JMP Securities’ clearing broker. In addition, as of December 31, 2010, restricted cash and deposits included cash distributions payable to non-controlling interest holders of HMOP of $10.5 million. HMOP was liquidated on December 31, 2010, with all of its partners redeeming their interests as of that date.

Restricted cash consisted of the following at December 31, 2011 and 2010:


	As of December 31,
(In thousands)	2011		2010
Principal and interest payments held as collateral for asset-backed securities issued	$	35,889	$	23,442
Cash collateral supporting standby letters of credit		248		379
Cash collateral supporting indemnity agreement (Note 9)		0		1,000
Proceeds from short sales		10,920		10,669
Cash distributions payable to non-controlling interest holders		0		10,514
Deposit with clearing broker		255		255
Deposits for operating leases		1,128		1,459

	$	48,440	$	47,718

Receivable from Clearing Broker

The Company clears customer transactions through another broker-dealer on a fully disclosed basis. At both December 31, 2011 and December 31, 2010, the receivable from clearing broker consisted solely of commissions related to securities transactions.

Investment Banking Fees Receivable

Investment banking fees receivable include receivables relating to the Company’s investment banking or advisory engagements. The Company records an allowance for doubtful accounts on these receivables on a specific identification basis. Investment banking fees receivable which are deemed to be uncollectible are charged off and the charge-off is deducted from the allowance. The allowance for doubtful accounts related to investment banking fees receivable were zero at December 31, 2011, 2010 and 2009. The following table summarizes activities in the allowance for doubtful accounts for the years ended December 31, 2011, 2010 and 2009.


Allowance for Doubtful Accounts	Balance at Beginning of Period		Additions Charged to Expenses		Deductions (Charge- Off, net of Recoveries)			Balance at End of Period
Year ended December 31, 2011	$	0	$	0	$	0		$	0
Year ended December 31, 2010		0		0		0			0
Year ended December 31, 2009		78,579		0		(78,579	)		0

Fair Value of Financial Instruments

The Company adopted amended accounting principles related to fair value measurements as of January 1, 2008. The amendment establishes a consistent framework for measuring fair value in accordance with GAAP and expands disclosures with respect to fair value measurements. The amendment applies to all financial instruments that are being measured and reported on a fair value basis. This includes those items currently reported in marketable securities owned, at fair value, other investments and marketable securities sold, not yet purchased, at

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fair value on the Consolidated Statements of Financial Condition. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 4 for the disclosures related to the fair value of our marketable securities and other investments.

Most of the Company’s financial instruments, other than loans collateralizing asset-backed securities issued, small business loans, loans held for investment, asset-backed securities issued and investment in HuaMei Capital Company, Inc. (redeemed in December 2010), Sanctuary Wealth Services LLC, and the commercial mortgage originator sponsored by JMP Capital are recorded at fair value or amounts that approximate fair value. See Note 4 for the description of our investments in Sanctuary Wealth Services LLC and a commercial mortgage originator sponsored by JMP Capital.

Marketable securities owned, other investments at fair value, and marketable securities sold, but not yet purchased are stated at fair value, with related changes in unrealized appreciation or depreciation reflected in the line item principal transactions in the accompanying Consolidated Statements of Operations.

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

Marketable securities owned and securities sold, but not yet purchased, consist of U.S. listed and over-the-counter (“OTC”) equity securities. Other investments include investments in private investment funds managed by the Company and investments in private investment funds managed by third parties. Such investments held by non-broker-dealer entities are accounted for under the equity method based on the Company’s share of the earnings (or losses) of the investee. The financial position and operating results of the private investment funds are generally determined on an estimated fair value basis. Generally, securities are valued (i) at their last published sale price if they are listed on an established exchange or (ii) if last sales prices are not published, at the highest closing “bid” price (for securities held “long”) and the lowest closing “asked” price (for “short” positions) as recorded by the composite tape system or such principal exchange, as the case may be. Where the general partner determines that market prices or quotations do not fairly represent the value of a security in the investment fund’s portfolio (for example, if a security is a restricted security of a class that is publicly traded) the general partner may assign a different value. The general partner will determine the estimated fair value of any assets that are not publicly traded.

Also included in other investments are warrants on public and private common stock, private equity securities owned by HGC and JMP Capital, investments in private companies sponsored by HCS and JMP Capital and an interest rate cap derivative instrument. The warrants on public and private common stock are generally received as a result of investment banking transactions. Such warrants are fair valued at the date of issuance and marked-to-market as of each reporting period using the Black-Scholes Options Valuation methodology. The fair value of the private equity securities owned by HGC and JMP Capital is determined by the Company using comparable public company metrics discounted for private company market illiquidity. The interest rate cap derivative instrument fair value is determined from counterparty price quotations. The investments in private companies sponsored by HCS and JMP Capital are carried at cost and evaluated for impairment on a quarterly basis.

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The Company follows the authoritative guidance included in GAAP on the fair value option which provides companies with a choice to report selected financial assets and financial liabilities at fair value. The election to use the fair value option is available at specified election dates, such as when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes in fair value must be recorded in the Consolidated Statements of Operations. The Company elected to apply the fair value option to our investments in NYMT convertible preferred and common stock. The primary reason for electing the fair value option was to measure these gains on our investments on the same basis as our other equity securities, all of which are stated at fair value.

Dividends received during the years ended December 31, 2011 and 2010 of $1.4 million and $2.2 million, respectively, were recorded in net dividend income on the Consolidated Statement of Operations. For the years ended December 31, 2011 and 2010, the Company recorded unrealized gains of $0.4 million and $0.2 million, respectively, on the above investments in NYMT. The unrealized gains on the investments in NYMT are reported in Principal Transactions in the Consolidated Statements of Operation.

Derivative Financial Instruments

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

Fair Value Hierarchy

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

Level 1 Quoted market prices in active markets for identical assets or liabilities.

Level 2 Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3 Unobservable inputs that are not corroborated by market data.

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

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

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

•

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

•

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

•

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

•

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

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

Loans

Accounting guidance requires that the Company present and disclose certain information about its financing receivables by portfolio segment and/or by class of receivables. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine the allowance for credit losses. A class of financing receivables is defined as the level of information (below a portfolio segment) that enables a reader to understand the nature and extent of exposure to credit risk arising from financing receivables. The Company’s portfolio segments are loans held for sale, loans held for investment, small business loans and loans collateralizing asset-backed securities issued. The Company has treated the loans held for investment as single classes given the small size of the respective loan portfolios as of December 31, 2011. The classes within the loans held for sale, small business loans, and loans collateralizing asset-backed securities issued portfolio segment are Asset Backed Loan (“ABL”), ABL – stretch, Cash Flow and Enterprise Value.

Loans Held for Sale

Loans that the Company intends to sell in the foreseeable future are designated as loans held for sale. Once identified as such, the loans are recorded at the lower of cost or market. A quarterly evaluation is performed on a specific identification basis. The Company employs anticipated cash flows, discounted at an appropriate market credit adjusted interest rate to determine the fair value of the loans held for sale. Internally developed and third-party estimation tools are used to measure credit risk (loan ratings, probability of default, and exposure at default). An allowance is not recorded for loans held for sale as the determination of fair value incorporates the credit risk calculation. The adjustment to the lower of cost or market is recognized in the Consolidated Statements of Operations in the gain on sale and payoff of loans. All loans held for sale are considered performing as of December 31, 2011.

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Loans Held for Investment

Loans held for investment are carried at their unpaid principal balance, net of any allowance for credit losses or deferred loan origination or commitment fees. For loans held for investment, the Company establishes and maintains an allowance for credit losses based on management’s estimate of credit losses in our loans as of each reporting date. The Company records the allowance against loans held for investment on a specific identification basis. Loans are charged off against the reserve for credit losses if the principal is deemed not recoverable within a reasonable timeframe. Loan origination and commitment fees are deferred and recognized into interest income in the Consolidated Statements of Operations over the life of the related loan. The Company does not accrue interest on loans which are in default for more than 90 days and loans for which the Company expects full principal payments may not be received. When loans are placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Any reversals of income from previous years are recorded against the allowance for loan losses. When the Company receives a cash interest payment on a non-accrual loan, it is applied as a reduction of the principal balance. Non-accrual loans are returned to accrual status when the borrower becomes current as to principal and interest and has demonstrated a sustained period of payment performance. The amortization of loan fees is discontinued on non-accrual loans. The Company applies the above non-accrual policy consistently to all loans classified as loans held for investment without further disaggregation. Loans that are deemed to be uncollectible are charged off and the charged-off amount is deducted from the allowance.

Small Business Loans

Small business loans represent loans extended by HCC to small to mid-sized companies. The loans are carried at the principal amount outstanding net of deferred fees, deferred costs and the allowance for loan losses. Net deferred fees or costs are recognized as an adjustment to interest income over the contractual life of the loans using the interest method. Any discount from the principal amount of purchased loans is accreted into interest income as a yield adjustment over the contractual life of the loan using the interest method. An allowance for credit losses is established based on continuing review and the quarterly evaluation of the Company’s loan portfolio. Refer to Allowance for Loan Losses below for the Company’s policy in determining an allowance for loan losses.

Loans Collateralizing Asset-Backed Securities Issued

Loans collateralizing asset-backed securities issued are commercial loans securitized and owned by Cratos CLO. Loans acquired through the acquisition and resulting consolidation of Cratos were recorded at their fair value as of the acquisition date. Any unamortized deferred fees or costs related to the loans that existed prior to the acquisition were written off at that date.

For those loans deemed impaired as of the date of the acquisition, the total discount from outstanding principal balance to fair value consists of a non-accretable credit discount and in most cases an accretable liquidity (or market value) discount. For the remaining loans acquired through the purchase of Cratos, any discounts to fair value were recorded as accretable liquidity discounts as they were not attributable to credit impairment. For both types of loans, the accretable portion of the discount is recognized into interest income as an adjustment to the yield of the loan over the contractual life of the loan using the interest method. For those loans deemed impaired as of the date of the acquisition, such accretion is discontinued when the net realizable value becomes equal or less than the carrying value. For the remaining loans acquired through the purchase of Cratos, contractual interest and such discount accretion is discontinued when the loan becomes impaired.

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on loan impairment. If, based on current information and events, it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, the Company will first reduce any remaining credit discounts (including allowances for loan losses) for the loans established after its acquisition for the increase in the present value of cash flows expected to be collected. Then the Company will recalculate the amount of accretable yield for the loan as the excess of the revised cash flows expected to be collected over the sum of (a) the initial investment, less (b) cash collected, less (c) write-downs, plus (d) amount of yield accreted to date. The Company will adjust the amount of accretable yield by reclassification from non-accretable discount. The adjustment is accounted for as a change in estimate, with the amount of periodic accretion adjusted over the remaining life of the loan. The resulting yield is then used as the effective interest rate in any subsequent accounting.

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

The accrual of interest on loans is discontinued when principal or interest payments are 90 days or more past due or when, in the opinion of management, reasonable doubt exists as to the full collection of principal and/or interest. When loans are placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Any reversals of income from previous years are recorded against the allowance for loan losses. When the Company receives a cash interest payment on a non-accrual loan, it is applied as a reduction of the principal balance. Non-accrual loans are returned to accrual status when the borrower becomes current as to principal and interest and has demonstrated a sustained period of payment performance. The amortization of loan fees is discontinued on non-accrual loans and may be considered for write-off. Depending on the terms of the loan, a fee may be charged upon a prepayment which is recognized in the period of the prepayment. The Company applies the above non-accrual policy consistently to all loans classified as loans collateralizing asset-backed securities issued without further disaggregation.

Restructured loans are considered a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company may receive an asset from the debtor in a TDR, but the value of the asset received is typically significantly less than the amount of the debt forgiven. The Company has received equity interest in certain debtors as compensation for reducing the loan principal balance in some cases.

Allowance for Loan Losses

The Company maintains an allowance for loan losses that is intended to estimate loan losses inherent in its loan portfolio. A provision for loan losses is charged to expense to establish the allowance for loan losses. The allowance for loan losses consists of two components: estimated loan losses for specifically identified loans and estimated loan losses inherent in the remainder of the portfolio. Loans held for investment are evaluated on a loan by loan basis. The Company’s remaining loan portfolio consists primarily of loans made to small to middle market, privately owned companies. Loans made to these companies generally have higher risks compared to larger, publicly traded companies who have greater access to financial resources. The allowance for loan losses is maintained at a level, in the opinion of management, sufficient to offset estimated losses inherent in the loan portfolio as of the date of the financial statements. The appropriateness of the allowance and the allowance components are reviewed quarterly. The Company’s estimate of each allowance component is based on observable information and on market and third-party data that the Company believes are reflective of the underlying loan losses being estimated. Given these considerations, the Company believes that it is necessary to reserve for estimated loan losses inherent in the portfolio.

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The Company provides an allowance for loans that are considered impaired. A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company measures impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral securing the loan if the loan is collateral dependent, depending on the circumstances and the Company’s collection strategy.

For those loans held by Cratos at the date of acquisition by JMP Credit, and deemed impaired at that date or a subsequent date, allowance for loan losses is calculated considering two further factors. For loans deemed impaired at the date of acquisition if there is a further decline in expected future cash flows, the reduction is recognized as a specific reserve in accordance with the guidance 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 recorded as provision for loan losses. If the total discount from unpaid principal balance to carrying value is larger than the expected loss at the date of assessment, no provision for loan losses is recognized. In addition, the Company provides an allowance on a loan by loan basis at JMP Credit for loans that were purchased after the Cratos acquisition. The Company employs internally developed and third-party estimation tools for measuring credit risk (loan ratings, probability of default, and exposure at default), which are used in developing an appropriate allowance for loan losses. The Company performs periodic detailed reviews of its loan portfolio to identify risks and to assess the overall collectability of loans.

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

In determining the required allowance for loan losses inherent in the portfolio, the following factors are considered: 1) the expected loss severity rate for each class of loans, 2) the current Moody’s Investors Service (“Moody’s”) rating and related probability of default, 3) the existing liquidity discount on the loans (when applicable), 4) internal loan ratings, and 5) loan performance.

•

Expected loss severity rate for each class of loans: The Company’s loans are classified as either ABL, ABL—stretch, Cash Flow or Enterprise Value. The loss severity given a default is expected to be the least on a conforming ABL loan since the value of the collateral is typically enough to satisfy most of the amount owed. For ABL—stretch loans, the loss severity given a default is expected to be higher than for a conforming ABL loan because of less collateral coverage. For Cash flow loans, the loss severity given a default is expected to be higher than ABL—stretch loans since generally less collateral coverage is provided for this class of loans. For Enterprise Value loans, the loss severity given a default is expected to be the highest, assuming that if the obligor defaults there has probably been a significant loss of enterprise value in the business as well.

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Moody’s rating and related probability of default: If there is not already a published rating on one of our loans, the Company engages Moody’s to assign the loan a credit estimate factor/or rating. Moody uses factors such as, but not limited to, the borrower’s leverage, use of proceeds, cash flows, growth rate, industry condition, concentration of risks, EBITDA margins and others factors. The lower the rating a loan carries, the higher the risk. Moody’s publishes a probability of default for each rating class. The higher the loan is rated the less probability there is of a default. The Company updates Moody’s rating assigned to a loan whenever Moody’s changes its published rating for the loan.

•

Existing liquidity discount on the loans: For non-impaired loans held at Cratos at the acquisition date, liquidity discount was recorded to reflect the fair value of those loans. To the extent that the liquidity discount on a loan is greater than the component of the general reserve attributable to that loan, that asset is excluded from the general reserve calculation. If the pooled reserve for a loan is greater than its liquidity discount, the amount by which it exceeds the liquidity discount will be included in the pooled reserve calculation.

•

Internal loan ratings for Loans collateralizing asset-backed securities issued and Loans held for sale: The Internal Rating System is an internal portfolio monitoring mechanism allowing the Company to

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proactively manage portfolio risk and minimize losses. In evaluating these loans, the Company uses six account rating categories: Performing, Moderate Risk, Watch List, Sub-Standard, Non-Accrual and Charge off. Performing and Moderate Risk indicate lower risks while Non-Accrual and Default indicate higher risks. Internal ratings are updated at least quarterly. The following describes each of the Company’s internal ratings:


Performing		Financial and collateral performance is good with no adverse trends or weakening factors noted. There is sufficient loan liquidity, with positive cash flow. Reporting is accurate and timely.
Moderate Risk		Collateral and financial performance is good; some adverse trends may have begun to develop. There is sufficient loan liquidity, with breakeven or better cash flow. The quality and timeliness of reporting is still sufficient.
Watch List		Negative trends in financial performance, collateral quality and/or reporting accuracy and timeliness. Loan liquidity has begun to deteriorate. Positive cash flow is low and restructuring of capital structure may be required.
Sub-Standard		Negative trends in financial performance, collateral quality and/or reporting accuracy and timeliness. Loan liquidity has deteriorated requiring periodic over advance accommodations. Cash flow is negative and turnaround efforts have been implemented or account may be in bankruptcy. Specific reserve is needed.
Non-Accrual		Probability of a turnaround is doubtful or the account is in liquidation. Recovery of interest is unlikely and principal is doubtful. Specific reserve is needed.
Charge Off		Considered uncollectible and the continuance of full asset value is not warranted. This does not mean that the asset has absolutely no recovery value but a portion of the principal loan, if not all, should be written off even though a recovery may be affected in the future.

•

Internal loan ratings for HCC loans: The Internal Rating System is an internal portfolio monitoring mechanism allowing the Company to proactively manage portfolio risk and minimize losses. In evaluating the HCC loans, the Company uses five account rating categories: 1 through 5. Internal ratings of 1 and 2 indicate lower risks while ratings between 3 and 5 indicate higher risks. Internal ratings are updated at least quarterly. The following describes each of the Company’s internal ratings:


1		Investment exceeding expectations and/or a capital gain is expected.
2		Investment generally performing in accordance with expectations.
3		Investment performing below expectations and requires closer monitoring.
4		Investment performing below expectations where a higher risk of loss exists.
5		Investment performing significantly below expectations where the Company expects to experience a loss.

•

Performance ratings:


Performing		Non-impaired loans
Non-performing		Impaired loans

Asset-Backed Securities Issued

Asset-backed securities (“ABS”) represent securities issued to third parties by Cratos CLO in 2007. The Company consolidated Cratos CLO for financial reporting purposes as of the April 7, 2009 acquisition date. At the acquisition date, the ABS were recorded at fair value, which comprised the principal balance outstanding less liquidity discount. The liquidity discount will be amortized into interest expense over the expected remaining lives of the ABS using the interest method.

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Fixed Assets

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

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

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

Purchased Management Contract

Purchased management contract relates to the CLO contract the Company purchased from Princeton Advisory Group, Inc. on September 8, 2010 and was included in other assets on the Consolidated Statements of Financial Condition at December 31, 2010. The purchased management contract is amortized over its estimated life. The Company tests the purchased management contract for impairment whenever events or changes in circumstances suggest that the asset’s carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of the asset, is recognized if the sum of the estimated undiscounted cash flows relating to the asset is less than the corresponding carrying value. The CLO initiated liquidation proceedings in December 2011. See Note 9 for more information.

Income Taxes

The Company recognizes deferred tax assets and liabilities based upon the temporary differences between the financial reporting and tax bases of its assets and liabilities. Valuation allowances are established when necessary to reduce the deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The Company recognizes a tax benefit from an uncertain position only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. If this threshold is met, the Company measures the tax benefit as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

Stock-Based Compensation

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

Stock-based compensation includes restricted stock units and stock options granted under the Company’s 2007 Equity Incentive Plan, and stock options granted under the Company’s 2004 Equity Incentive Plan.

In accordance with generally accepted valuation practices for stock-based awards issued as compensation, the Company uses the Black-Scholes option-pricing model to calculate the fair value of option awards, although such models were originally developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock options and restricted stock units. The Black-Scholes model requires subjective assumptions regarding variables such as future stock price volatility, dividend yield and expected time to exercise, which greatly affect the calculated values.

The fair value of restricted stock units (“RSUs”) is determined based on the closing price of the underlying stock on the grant date, discounted for future dividends not expected to be paid on unvested units during the vesting period. If applicable, a liquidity discount for post-vesting transfer restrictions is also applied.

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Treasury Stock

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

Reclassification

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

3. Recent Accounting Pronouncements

Accounting Standards Update (“ASU”) 2011-05: Presentation of Other Comprehensive Income was issued to increase the prominence of other comprehensive income in financial statements, by eliminating the option to report other comprehensive income in the statement of changes in stockholder’s equity. The standard requires comprehensive income to be reported in either a single statement that presents the components of net income, the components of other comprehensive income, and total comprehensive income, or in two consecutive statements. This standard was scheduled to be effective for periods starting after December 15, 2011. However, ASU 2011-12: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income defers the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. The adoption of ASU 2011-05 will result in the disclosure of other comprehensive income outside the statement of changes in stockholder’s equity.

ASU 2011-04: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRS. The adoption of ASU 2011-04 gives fair value the same meaning between GAAP and International Financial Reporting Standards (IFRS), and improves consistency of disclosures relating to fair value. As a result of this standard, an entity is required to add more robust disclosures regarding the sensitivity of fair value measurements categorized within Level 3 of the fair value hierarchy. The standard is effective for interim periods beginning after December 15, 2011. The adoption of ASU 2011-04 is expected to result in additional disclosures within our future consolidated financial statements.

ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. In April 2011, the FASB issued ASU No. 2011-02, which amended the accounting guidance for troubled debt restructurings. The new standard provides additional guidance for creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The standard sets the effective dates for troubled debt restructuring disclosures required by recent guidance on credit quality disclosures. The standard is effective for interim and annual periods beginning on or after June 15, 2011, and is applied to modifications occurring on or after the beginning of the annual period of adoption. For purposes of measuring impairments of receivables that are considered impaired as a result of applying the new guidance, the standard should be applied prospectively for the interim or annual period beginning on or after June 15, 2011. The adoption of ASU 2011-02 did not have a material impact on the Company’s consolidated financial position or results of operations.

ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU 2010-20. The amendments in this ASU temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. The guidance became effective for interim and annual periods ending after June 15, 2011. The deferral in ASU 2011-01 was effective January 19, 2011. The adoption of ASU 2011-01 did not have a material impact on the Company’s consolidated financial position or results of operations.

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4. Marketable Securities and Other Investments

Financial Instruments at Fair Value

The following tables provide fair value information related to the Company’s financial assets and liabilities at December 31, 2011 and 2010:


	Assets at Fair Value as of
	December 31, 2011
(In thousands)	Level 1		Level 2		Level 3		Total
Financial instruments owned, at fair value:
Marketable securities owned:
Equity securities	$	24,309	$	0	$	0	$	24,309

Total marketable securities owned	$	24,309	$	0	$	0	$	24,309

Other investments:
General partner investment in hedge funds	$	0	$	24,072	$	0	$	24,072
General partner investment in funds of funds		0		0		102		102

Total general partner investment in funds		0		24,072		102		24,174
Limited partner investment in private equity fund		0		0		2,585		2,585
Warrants and Other		0		0		617		617
Equity securities held by HGC and JMP Capital		3,426		0		20,707		24,133
Interest rate cap		8		0		0		8

Total other investments	$	3,434	$	24,072	$	24,011	$	51,517


	Liabilities at Fair Value as of
	December 31, 2011
(In thousands)	Level 1		Level 2		Level 3		Total
Financial instruments sold, but not yet purchased, at fair value:
Marketable securities sold, but not yet purchased	$	10,921	$	0	$	0	$	10,921


	Assets at Fair Value as of
	December 31, 2010
(In thousands)	Level 1		Level 2		Level 3		Total
Financial instruments owned, at fair value:
Marketable securities owned:
Equity securities	$	23,748	$	0	$	0	$	23,748

Total marketable securities owned	$	23,748	$	0	$	0	$	23,748

Other investments:
General partner investment in hedge funds	$	0	$	23,629	$	0	$	23,629
General partner investment in funds of funds		0		0		102		102

Total general partner investment in funds		0		23,629		102		23,731
Limited partner investment in private equity fund		0		0		3,063		3,063
Warrants		0		0		532		532
Equity securities held by HGC and JMP Capital		0		0		11,245		11,245
Interest rate cap		101		0		0		101

Total other investments	$	101	$	23,629	$	14,942	$	38,672

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	Liabilities at Fair Value as of
	December 31, 2010
(In thousands)	Level 1		Level 2		Level 3		Total
Financial instruments sold, but not yet purchased, at fair value:
Marketable securities sold, but not yet purchased	$	10,669	$	0	$	0	$	10,669

The following tables provide a reconciliation of the beginning and ending balances for the assets at fair value using significant unobservable inputs (Level 3) for the years ended December 31, 2011 and 2010:


(In thousands)	Balance as of December 31, 2010		Purchases		Sales			Total gains (losses) - realized and unrealized included in earnings (1)			Transfers in/(out) of Level 3			Balance as of December 31, 2011		Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds	$	102	$	0	$	0		$	0		$	0		$	102	$	0
Limited partner investment in private equity fund		3,063		32		(157	)		(353	)		0			2,585		(353	)
Warrants and Other		532		17		0			67			0			616		67
Equity securities held by HGC and JMP Capital		11,245		15,184		(1,651	)		53			(4,123	)		20,708		(553	)

Total Level 3 assets	$	14,942	$	15,233	$	(1,808	)	$	(233	)	$	(4,123	)	$	24,011	$	(267	)

(1)	No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.


(In thousands)	Balance as of December 31, 2009		Purchases		Sales			Total gains (losses) - realized and unrealized included in earnings (1)		Transfers in/(out) of Level 3		Balance as of December 31, 2010		Unrealized gains/(losses) included in earnings related to assets still held at reporting date
General partner investment in funds of funds	$	2,933	$	0	$	(2,950	)	$	119	$	0	$	102	$	119
Limited partner investment in private equity fund		2,476		85		(50	)		552		0		3,063		552
Limited partner investment in mortgage fund		1,147		0		(1,210	)		63		0		0		63
Investment in NYMT convertible preferred stock (2)		15,000		0		(15,000	)		0		0		0		0
Warrants		0		0		0			532		0		532		532
Equity securities held by
HGC and JMP Capital		2,321		9,049		(2,098	)		1,973		0		11,245		1,973

Total Level 3 assets	$	23,877	$	9,134	$	(21,308	)	$	3,239	$	0	$	14,942	$	3,239

(1)	No Level 3 asset gains (losses) are included in other comprehensive income. All realized and unrealized gains (losses) related to Level 3 assets are included in earnings.

(2)	The shares of NYMT convertible preferred stock held by JMP Group Inc. and HMOP were redeemed at a price per share of $20.00 for a total of $15.0 million on December 31, 2010.

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Purchases and sales of Level 3 assets shown above were recorded at fair value at the date of the transaction.

Total gains and losses included in earnings (or changes in net assets) represent the total gains and/or losses (realized and unrealized) recorded for the Level 3 assets and are reported in Principal Transactions in the accompanying Consolidated Statements of Operations.

Transfers between levels of the fair value hierarchy result from changes in the observability of fair value inputs used in determining fair values for different types of financial assets and are recognized at the beginning of the reporting period in which the event or change in circumstances that caused the transfer occurs.

There were two transfers into Level 2 from Level 3 of $4.1 million for the year ended December 31, 2011, which were a result of the initial public offerings of two investments in HGC. These $4.1 million in investments were subsequently transferred into Level 1 from Level 2 during the year ended December 31, 2011, reflecting the fair value measurement of these investments being based on quoted market prices without further adjustment. There were no transfers in or out of Level 1, Level 2 or Level 3 during the year ended December 31, 2010.

The amount of unrealized gains and losses included in earnings attributable to the change in unrealized gains and losses relating to Level 3 assets still held at the end of the period are reported in Principal Transactions in the accompanying Consolidated Statements of Operations.

Included in other investments are investments in partnerships in which one of the Company’s subsidiaries is the investment manager and general partner. The Company accounts for these investments using the equity method as described in Note 2. The Company’s proportionate share of those investments is included in the tables above. In addition, other investments include warrants, and two investments in funds managed by third parties. The investments in private investment funds managed by third parties are generally not redeemable at the option of the Company. As of December 31, 2011, the Company had unfunded investment commitments of $0.1 million related to private investment funds managed by third parties.

Investments at Cost

On February 11, 2010, the Company made a $1.5 million investment in Class D Preferred Units of Sanctuary Wealth Services LLC (“Sanctuary”). Sanctuary provides a turnkey platform that will allow independent wealth advisors to establish an independent advisory business without the high startup costs and regulatory hurdles. The Class D Preferred Units entitle the Company to receive a preferred dividend with units that are convertible into equity of Sanctuary at the option of the Company prior to the maturity date, which is three years from the investment date. The Company carries its investment in Sanctuary at cost within other investments on the Consolidated Statements of Financial Condition and evaluates the investment for impairment on a quarterly basis. During the fourth quarter of 2010, the Company determined that its investment in Sanctuary was fully impaired and recorded an impairment loss of $1.5 million, which was included in Principal Transactions on the Consolidated Statements of Operations. The carrying value of the Company’s investment in Sanctuary was zero at December 31, 2010.

During the years ended December 31, 2010 and 2011, the Company invested $0.8 million and $0.3 million, respectively, in a newly formed commercial mortgage originator for the commencement of a commercial loan origination program. The Company carried its investment in the newly formed entity at cost within other investments on the Consolidated Statements of Financial Condition and evaluates the investment for impairment on a quarterly basis. In the fourth quarter of 2010 and the first quarter of 2011, the Company determined its investment in the entity was impaired and recorded an impairment loss of $0.8 million and $0.3 million, respectively. In the fourth quarter of 2011, the private commercial mortgage originator was dissolved.

Derivative Financial Instruments

On May 29, 2010, the Company entered into an interest rate cap with City National Bank (the “Lender”) to effectively lock in or fix the interest rate on its revolving line of credit and term loan from July 1, 2010 through maturity. The interest rate cap will allow the Company to receive payments from the Lender in the event that LIBOR plus 2.25% exceeds 3.75%, limiting the interest rate on the outstanding balance of the line of credit and

112

term loan to such rate. On July 1, 2010, the Company designated the interest rate cap as a cash flow hedge of the interest rate risk of a total of $27.1 million of outstanding borrowings with the Lender as of that date. The notional principal amount of the cap was $19.2 million at December 31, 2011. See Note 10 for the information pertaining to the Company’s borrowing from the Lender.

The interest rate cap is recorded at fair value in other investments on the Consolidated Statements of Financial Condition, with unrealized gains and losses recorded as other comprehensive income. For the year ended December 31, 2011, the Company recorded $93,218 of other comprehensive loss representing unrealized loss on the interest rate cap. In addition, during the year ended December 31, 2011, $54,696 was reclassified from accumulated other comprehensive income into interest expense as amortization of the interest cap.

5. Loans Held for Investment

Loans held for investment at December 31, 2011 is comprised of one loan note. At December 31, 2010, loans held for investment was comprised of two loan notes and advances on one non-revolving credit note commitment. Given the small size of this loan portfolio segment, the Company reviews credit quality of the loans within this portfolio segment on a loan by loan basis mainly focusing on the borrower’s financial position and results of operations as well as the current and expected future cash flows on the loan.

Non-Impaired Loans

As of December 31, 2010, the Company had a $0.8 million advance, respectively, on a $1.3 million non-revolving commitment to a public non-traded REIT. The advance had an interest at the rate of 20.0% per annum as of that date. This advance was fully paid in June 2011. As of December 31, 2011 and 2010, the Company had no unfunded credit commitments.

Impaired Loans

The Company had one loan note outstanding at December 31, 2011, which was a participation interest in a loan made by JMPRT to a client during 2007. The loan was collateralized by real estate related assets, and had an interest rate of 20.0% per annum, payable monthly in arrears. The principal of the loan was due and payable on December 1, 2007, but was extended until September 2008 for an additional fee at the borrower’s option and in connection with a partial repayment. At December 31, 2008, the outstanding principal balance of $0.8 million was in default and the loan note was deemed impaired and was place on non-accrual status. The Company recorded a loan loss provision of $0.4 million in the third quarter of 2008, $0.1 million in the fourth quarter of 2009 and $0.3 million in the third quarter of 2010. The Company sought recovery of the loan through bankruptcy court and recovered $0.5 million in the fourth quarter of 2011. Further recovery of the loan is being sought; however, considering the legal cost it expects to incur, the Company believes that any significant net recovery is doubtful. The recorded investment, outstanding principal and related allowance balance of the loan note were each $0.4 million at December 31, 2011 and $0.9 million at December 31, 2010. No interest income was recorded on this impaired loan for the years ended December 31, 2011 and 2010.

The following table presents components of loans held for investment, net on the Consolidated Statements of Financial Condition at December 31, 2011 and 2010:


	As of December 31,
(In thousands)	2011			2010
Loans held for investment	$	380		$	1,670
Allowance for loan losses		(380	)		(857	)

Total loans held for investment, net	$	0		$	813

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A summary of the activity in the allowance for loan losses for the years ended December 31, 2011 and 2010 is as follows:


	Year Ended December 31,
(In thousands)	2011			2010
Balance at beginning of period	$	(857	)	$	(4,285	)
Provision for loan losses		0			(330	)
Loans charged off		0			3,758
Recoveries		477			0

Balance at end of period	$	(380	)	$	(857	)

The Company determined the fair value of loans held for investment to be zero and $0.8 million as of December 31, 2011 and 2010, respectively, using anticipated cash flows, discounted at an appropriate market credit adjusted interest rate.

6. Small Business Loans

Small business loans consist of loans held at HCC. HCC was formed to generate both current income and capital appreciation by primarily making direct investments in the form of subordinated debt, and, to a lesser extent, senior debt and minority equity investments in small to mid-size companies. As of December 31, 2011, the $7.5 million loans outstanding were commercial loans. The following table summarizes the components of this small business loan receivable balance:


(In thousands)	December 31, 2011
Small business loans	$	8,000
Allowance for loan losses		(216	)
Deferred loan fees		(307	)

Small business loans, net	$	7,477

The Company, at least on a quarterly basis, reviews and evaluates the credit quality of each loan. The review primarily includes the following credit quality indicators with regard to each loan: 1) Moody’s rating, 2) current internal rating and 3) performance. The review follows a similar methodology as the review over loans collateralizing asset-backed securities issued. Refer to Note 2 for the policy and methodology used in determining an allowance for loan losses and further descriptions of the credit quality factors analyzed.


	Cash Flow (CF)
(In thousands)	December 31, 2011
Moody’s rating:
B1 - B3		4,000
NR		4,000

Total:	$	8,000

Internal rating:
2		8,000

Total:	$	8,000

Performance:
Performing	$	8,000

Total:	$	8,000

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A summary of the activity in the allowance for loan losses for the year ended December 31, 2011 is as follows:


(In thousands)	Year Ended December 31, 2011
Balance at beginning of period	$	0
Provision for loan losses		(216	)
Loans charged off		0
Recoveries		0

Balance at end of period	$	(216	)

At December 31, 2011, the fair value of small business loans receivable approximated carrying value.

7. Loans Collateralizing Asset-backed Securities Issued and Loans Held for Sale

Loans collateralizing asset-backed securities issued and loans held for sale are commercial loans securitized and owned by Cratos CLO. The loans consist of those loans within the CLO securitization structure at the acquisition date of Cratos and loans purchased by the CLO subsequent to the Cratos acquisition date. The following table presents the components of loans collateralizing asset-backed securities issued and loans held for sale as of December 31, 2011 and 2010:


	As of December 31,
(In thousands)	2011						2010
	Loans Collateralizing Asset- backed Securities			Loans Held for Sale			Loans Collateralizing Asset- backed Securities
Loans	$	436,954		$	4,686		$	453,358
Allowance for loan losses		(4,199	)		0			(1,992	)
Liquidity discount		(14,459	)		(1,279	)		(35,594	)
Credit discount		(1,335	)		0			(8,558	)
Deferred loan fees, net		(6,191	)		(168	)		(6,451	)
Valuation allowance		N/A			(282	)		N/A

Total loans, net	$	410,770		$	2,957		$	400,763

Loans recorded upon the acquisition of Cratos at fair value reflect a liquidity discount and a credit discount. In addition, most loans purchased subsequent to the acquisition were purchased at a discount to their principal value, reflecting deferred loan fees. The table below summarizes the activity in the loan principal, allowance for loan losses, liquidity discount, credit discount, deferred loan fees, and the carrying value for the impaired and non-impaired loans as of and for the year ended December 31, 2011:


	Year Ended December 31, 2011
(In thousands)	Principal			Allowance for Loan Losses			Liquidity Discount			Credit Discount			Deferred Loan Fees			Carrying Value, Net
Impaired Loans
Balance at beginning of period	$	13,867		$	(582	)	$	(2,557	)	$	(8,558	)	$	0		$	2,170
Purchases / funding		19			0			0			0			0			19
Repayments		(286	)		0			26			0			0			(260	)
Accretion of discount		0			0			99			0			0			99
Sales and payoff		(10,011	)		0			660			7,223			0			(2,128	)
Write-off / restructuring		0			(1,695	)		0			0			0			(1,695	)
Transfers to/from non-impaired loans, net		6,949			0			(4,152	)		0			(54	)		2,743

Balance at end of period	$	10,538		$	(2,277	)	$	(5,924	)	$	(1,335	)	$	(54	)	$	948

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	Year Ended December 31, 2011
(In thousands)	Principal			Allowance for Loan Losses			Liquidity Discount			Credit Discount		Deferred Loan Fees			Carrying Value, Net
Non-impaired Loans
Balance at beginning of period	$	439,491		$	(1,410	)	$	(33,037	)	$	0	$	(6,451	)	$	398,593
Purchases / funding		250,103			0			0			0		(4,215	)		245,888
Repayments		(28,215	)		0			0			0		0			(28,215	)
Accretion of discount		0			0			8,609			0		1,617			10,226
Provision for loan losses		0			(512	)		0			0		0			(512	)
Sales and payoff		(223,328	)		0			10,449			0		2,683			(210,196	)
Transfers to/from impaired loans, net		(6,949	)		0			4,152			0		54			(2,743	)
Transfers to loans held for sale (1)		(4,686	)		0			1,292			0		175			(3,219	)

Balance at end of period	$	426,416		$	(1,922	)	$	(8,535	)	$	0	$	(6,137	)	$	409,822

(1)

During the year ended December 31, 2011, one of the loans collateralizing ABS issued was reclassified as a loan held for sale reflecting management’s intention to sell. The loan is carried at lower of cost or market and had the principal amount of $4.7 million, liquidity discount of $1.3 million and deferred loan fees of $0.2 million at December 31, 2011.

The table below summarizes the activity in the loan principal, allowance for loan losses, liquidity discount, credit discount, deferred loan fees, and the carrying value for the impaired non-impaired loans as of and for the year ended December 31, 2010:


	Year Ended December 31, 2010
(In thousands)	Principal			Allowance for Loan Losses			Liquidity Discount			Credit Discount			Deferred Loan Fees			Carrying Value, Net
Impaired Loans
Balance at beginning of period	$	74,369		$	(1,581	)	$	(18,411	)	$	(35,105	)	$	0		$	19,272
Repayments		(3,365	)		0			0			174			0			(3,191	)
Accretion of discount		0			0			836			0			0			836
Sales and payoff		(29,579	)		0			7,314			14,509			0			(7,756	)
Write-off / restructuring		(8,955	)		999			0			7,956			0			0
Transfers to/from non-impaired loans, net		(18,603	)		0			7,704			3,908			0			(6,991	)

Balance at end of period	$	13,867		$	(582	)	$	(2,557	)	$	(8,558	)	$	0		$	2,170

Non-impaired Loans
Balance at beginning of period	$	387,090		$	(413	)	$	(73,133	)	$	0		$	(4,849	)	$	308,695
Purchases / funding		344,994			0			0			0			(5,135	)		339,859
Repayments		(69,339	)		0			0			0			0			(69,339	)
Accretion of discount		0			0			21,237			0			1,580			22,817
Provision for loan losses		0			(997	)		0			0			0			(997	)
Sales and payoff		(242,918	)		0			31,532			0			1,953			(209,433	)
Transfers to/from impaired loans, net		19,664			0			(12,673	)		0			0			6,991

Balance at end of period	$	439,491		$	(1,410	)	$	(33,037	)	$	0		$	(6,451	)	$	398,593

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Allowance for Loan Losses

The Company recorded specific reserves of $1.7 million and zero and general reserves of $0.5 million and $1.0 million during the years ended December 31, 2011 and 2010, respectively, on non-impaired loans. A summary of the activity in the allowance for loan losses for the years ended December 31, 2011 and 2010 is as follows:


	Year Ended December 31,
(In thousands)	2011			2010
Balance at beginning of period	$	(1,992	)	$	(1,994	)
Provision for loan losses:
Specific reserve		(1,695	)		0
General reserve		(512	)		(997	)
Reversal due to sale, payoff or restructure of loans		0			999

Balance at end of period	$	(4,199	)	$	(1,992	)

Impaired Loans

A loan is considered to be impaired when, based on current information, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement, including scheduled principal and interest payments. As of December 31, 2011 and 2010, $3.2 million and $8.5 million of recorded investment amount of loans collateralizing asset-backed securities issued were individually evaluated for impairment, respectively. The remaining $411.7 million and $394.5 million of recorded investment amount of loans collateralizing asset-backed securities issued were collectively evaluated for impairment, as of December 31, 2011 and 2010, respectively. The entire $3.0 million of recorded investment amount of loans held for sale were individually evaluated for impairment. All impaired loans are classified as cash flow loans.

The table below presents certain information pertaining to the impaired loans as of and for the years ended December 31, 2011 and 2010:


(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
2011
Impaired loans with an allowance recorded	$	3,223	$	10,537	$	2,277	$	3,430	$	201
Impaired loans with no related allowance recorded		0		0		0		0		0

	$	3,223	$	10,537	$	2,277	$	3,430	$	201

2010
Impaired loans with an allowance recorded	$	569	$	2,497	$	582	$	7,044	$	101
Impaired loans with no related allowance recorded		2,183		11,370		0		0		0

	$	2,752	$	13,867	$	582	$	7,044	$	101

Non-Accrual, Past Due Loans and Restructured Loans

At December 31, 2011, two Cash Flow loans with the aggregate principal amount of $10.5 million and recorded aggregate investment amount of $3.2 million were on non-accrual status. At December 31, 2010, four loans, all of which were Cash Flow loans, with the aggregate principal amount of $13.9 million and recorded investment amount of $2.8 million were on non-accrual status. The Company recognized interest income for four non-accrual status loans with a weighted average loan balance of $12.3 million that were on non-accrual status during the year ended December 31, 2011. The Company did not recognize any interest income for 11 loans with a weighted average loan balance of $37.4 million that were on non-accrual status during the year ended December 31, 2010.

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Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. At December 31, 2010, none of the loans, including non-accrual status loans, were past due. At December 31, 2011, one non-accrual loan in the amount of $2.7 million was over 90 days past due. No other loans were past due at December 31, 2011.

At December 31, 2011 and 2010, the impaired loans included two and three Cash Flow loans, respectively, with the aggregated recorded investment balance of $0.6 million for both these periods, whose terms were modified in a TDR. Concessions for these TDRs included a below market interest rate as of December 31, 2011, or receipt of equity interest in the debtor as compensation for reducing the loan principal balance. There were neither new TDR loans nor additional restructuring to existing TDR loans in the year ended December 31, 2011. No payment defaults in the previous 12 months resulted in any TDRs. At December 31, 2011 and 2010, there were no remaining commitments to lend funds to debtors whose terms have been modified in a TDR.

Credit Quality of Loans

The Company’s management, at least on a quarterly basis, reviews each loan and evaluates the credit quality of the loan. The review primarily includes the following credit quality indicators with regard to each loan: 1) Moody’s rating, 2) current internal rating and 3) performance. The tables below present, by credit quality indicator, the Company’s recorded investment in loans collateralizing asset-backed securities issued at December 31, 2011 and 2010:


	Cash Flow (CF)				Asset Based Loan (ABL)				Enterprise Value (EV)				Total Loans Collateralizing Asset- Backed Securities Issued				Held for Sale - Cash Flow (CF)
	December 31,				December 31,				December 31,				December 31,				December 31,
(In thousands)	2011		2010		2011		2010		2011		2010		2011		2010		2011		2010
Moody’s rating:
Baa1 -Baa3	$	4,951	$	5,750	$	0	$	0	$	0	$	0	$	4,951	$	5,750	$	0	$	0
Ba1-Ba3		131,743		139,351		0		0		0		0		131,743		139,351		0		0
B1 - B3		271,770		235,394		0		6,851		1,958		1,975		273,728		244,220		0		0
Caa1 - Caa3		4,546		12,865		0		0		0		0		4,546		12,865		2,957		0
Ca		0		569		0		0		0		0		0		569		0		0
C		0		0		0		0		0		0		0		0		0		0
D		0		0		0		0		0		0		0		0		0		0

Total:	$	413,010	$	393,929	$	0	$	6,851	$	1,958	$	1,975	$	414,968	$	402,755	$	2,957	$	0

Internal rating:
Performing	$	397,033	$	366,522	$	0	$	6,851	$	1,958	$	1,975	$	398,991	$	375,348	$	0	$	0
Moderate		12,754		18,895		0		0		0		0		12,754		18,895		0		0
Watchlist (1)		3,223		5,839		0		0		0		0		3,223		5,839		2,957		0
Substandard (1)		0		2,104		0		0		0		0		0		2,104		0		0
Non-Accrual (1)		0		569		0		0		0		0		0		569		0		0
Charge Off (1)		0		0		0		0		0		0		0		0		0		0

Total:	$	413,010	$	393,929	$	0	$	6,851	$	1,958	$	1,975	$	414,968	$	402,755	$	2,957	$	0

Performance:
Performing	$	409,787	$	391,177	$	0	$	6,851	$	1,958	$	1,975	$	411,745	$	400,003	$	2,957	$	0
Non-performing		3,223		2,752		0		0		0		0		3,223		2,752		0		0

Total:	$	413,010	$	393,929	$	0	$	6,851	$	1,958	$	1,975	$	414,968	$	402,755	$	2,957	$	0

(1)	Loans with an internal rating of Watchlist or below are designated as loans on non-accrual status.

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The Company determined the fair value of loans collateralizing asset-backed securities to be $420.1 million and $432.5 million as of December 31, 2011 and 2010, respectively; primarily using the average market bid and ask quotation obtained from a loan pricing service. The fair value of loans held for sale was determined to be $3.0 million as of December 31, 2011.

8. Fixed Assets

At December 31, 2011 and 2010, fixed assets consisted of the following:


	As of December 31,
(In thousands)	2011			2010
Furniture and fixtures	$	1,946		$	1,638
Computer and office equipment		4,776			4,376
Leasehold improvements		3,266			2,472
Software		606			590
Less: accumulated depreciation		(8,309	)		(7,595	)

Total fixed assets, net	$	2,285		$	1,481

Depreciation expense for the years ended December 31, 2011, 2010 and 2009 was $0.7 million, $0.6 million and $0.7 million, respectively.

9. Purchased Management Contract

On June 11, 2010, the Company agreed to purchase the collateral management contracts for two CLOs, from Princeton Advisory Group, Inc., for up to $5.0 million. The transfers of the contracts were subject to the receipt of certain consents and other conditions. On September 8, 2010, the Company completed the purchase of one of the two management contracts for $3.8 million, and the contract was transferred to JMPCA. However, since a single investor had previously acquired control of the right to transfer the management contract without cause at any time with 90 days’ notice, the Company recorded an impairment charge of $2.8 million for the quarter ended September 30, 2010. The Company later restructured the transaction to provide the Company with indemnity from the seller in the amount of $2.6 million, which was collateralized by certain assets and $1.0 million in cash. The Company determined the initial carrying value of the purchased management contract to be $1.0 million. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of the asset, is recognized if the sum of the estimated undiscounted cash flows relating to the asset is less than the corresponding carrying value. The Company determined that the carrying value of the purchased management contract was impaired and recorded a $0.7 million impairment charge for the quarter ended March 31, 2011. At that time, the Company also revised the estimated useful life of the asset. At June 30, 2011, the purchased management contract was fully amortized. For the years ended December 31, 2011 and 2010, amortization expense was $0.2 million and $0.1 million, respectively. On December 6, 2011, the CLO’s transaction documents and indenture were amended, which allowed the noteholders of this CLO to direct a liquidation of the collateral and redemption of the notes at any time with no requirement for full repayment of the notes, if such affected class voted in favor of receiving less than par. The CLO initiated liquidation proceedings in December 2011. The Company received $0.8 million settlement fee income from the termination of JMPCA as the collateral manager in December 2011. During the fourth quarter of 2010, the Company was released from the obligation to purchase the second CLO management contract from Princeton Advisory Group, Inc.

10. Note Payable

Note payable consists of two term loans related to the Company’s credit facility with City National Bank (the “Lender”) initially entered into on August 3, 2006.

On August 24, 2011, JMP Group LLC, a wholly-owned subsidiary of the Company, entered into Amendment Number Six to Credit Agreement (the “Sixth Amendment”), which amends certain provisions of the

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Credit Agreement, dated as of August 3, 2006, by and between JMP Group LLC 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 25, 2008, Amendment Number Three to Credit Agreement (the “Third Amendment”), dated as of December 31, 2008, Amendment Number Four to Credit Agreement and Waiver, dated as of January 28, 2010, and Amendment Number Five (the “Fifth Amendment”), dated as of April 8, 2011 (collectively, the “Credit Agreement”).

The Sixth Amendment provided 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 unused portion of the line bears interest at the rate of 0.25% per annum, paid quarterly. The new line of credit will remain available through August 24, 2013. On such date, any outstanding amounts convert to 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 Sixth Amendment also permits additional investments. The Company anticipates that the proceeds will be used to fund certain commitments to HCC, to repurchase Company stock and other permitted investments, and for other general working capital purposes. There was no borrowing on this line of credit as of December 31, 2011.

Under the Fifth Amendment, JMP Securities entered into a $20.0 million revolving line of credit with the Lender to be used for regulatory capital purposes during its securities underwriting activities. The unused portion of the line bears interest at the rate of 0.25% per annum, paid monthly. Draws on the revolving line of credit bear interest at the rate of prime and are available through April 8, 2012 on which date, if there is an existing outstanding amount, it converts to a loan that matures on April 8, 2013. There was no borrowing on this line of credit as of December 31, 2011.

The Third Amendment converted the Company’s outstanding revolving loans of $8.7 million into a single term loan as of December 31, 2008. The term loan is being repaid in equal quarterly payments of $0.4 million, which commenced on March 31, 2009 and continues through December 31, 2013 and bears interest at LIBOR plus 2.25%. The outstanding balance on this term loan was $3.5 million as of December 31, 2011.

The Third Amendment also provided that of the original $30.0 million revolving line of credit, $21.0 million remained available under the revolving portion of the Credit Agreement and the annual interest rate provisions of the Credit Agreement were increased from the prime rate minus 1.25% to the prime rate and from LIBOR plus 1.25% to LIBOR plus 2.25%. The Lender agreed to continue to provide revolving loans of up to $21.0 million through December 31, 2010, on which date the then existing revolving loans convert into term loans. 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 that will fully mature on January 1, 2014. As of December 31, 2010, the revolving line of credit was no longer available for future use. This term loan is being repaid in equal quarterly payments of $1.8 million, which commenced on April 1, 2011 and continues through January 1, 2014. The outstanding balance on this term loan was $15.7 million as of December 31, 2011.

The two term loans had an aggregate outstanding principal amount of $19.2 million at December 31, 2011. The following table shows the repayment schedules for the principal portion of the term loans at December 31, 2011:


(In thousands)	December 31, 2011
2012		8,736
2013		8,736
2014		1,750

	$	19,222

The Credit Agreement contains financial and other covenants, including, but not limited to, limitations on debt, liens and investments, as well as the maintenance of certain financial covenants. A violation of any one of these covenants could result in a default under the Credit Agreement, which would permit the bank to terminate our note and require the immediate repayment of any outstanding principal and interest. The Third Amendment

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modified the financial covenants in the Credit Agreement to remove both the minimum requirement of Net Income (as defined in the Credit Agreement) and the minimum requirement of EBITDA (as defined in the Credit Agreement). The Third Amendment also removed the Fixed Charge Coverage Ratio (as defined in the Credit Agreement) and added a new financial covenant regarding the Company’s liquidity. The Sixth Amendment added back the Fixed Charge Coverage Ratio requirement and introduced certain leverage ratio requirements. At December 31, 2011, the Company was in compliance with the loan covenants. The term loans are collateralized by a pledge of the Company’s assets, including its interests in each of JMP Securities and HCS.

On May 29, 2010 the Company entered into an interest rate cap with the Lender to effectively lock in or fix the interest rate on its revolving line of credit and term loan from July 1, 2010 through maturity. The interest rate cap will allow the Company to receive payments from the counterparty in the event that LIBOR plus 2.25% exceeds 3.75%, limiting the interest rate on the outstanding balance of the term loan to such rate. The cap had an initial notional principal amount of $27.1 million, indexed to LIBOR and amortizes in accordance with the amortization of the revolving line of credit and term loan. The notional principal amount of the cap was $19.2 million at December 31, 2011. See Note 4 for additional information on the interest rate cap.

11. Asset-backed Securities Issued

On May 17, 2007, Cratos CLO completed a $500.0 million aggregate principal amount of notes (the “Notes”) on-balance sheet debt securitization and obtained $455.0 million of third-party financing. The Notes will be repaid from the cash flows generated by the loan portfolio owned by the CLO. The Notes were issued in seven separate classes as set forth in the table below. The Company owns approximately 94.0% of the unsecured subordinated notes and $13.8 million of Class C, D and E notes. These unsecured subordinated notes and the Class C, D and E notes owned by the Company are eliminated upon consolidation of JMP Credit, and therefore, are not reflected on the Company’s Consolidated Statement of Financial Condition at December 31, 2011 and 2010.


	As of December 31, 2011
(In millions)	Notes Originally Issued		Outstanding Principal Balance			Liquidity Discount			Net Outstanding Balance			Interest Rate Spread to LIBOR		Ratings (Moody’s/ S&P) (1)
Class A Senior Secured Floating Rate Revolving Notes due 2021	$	326.0	$	315.8		$	(17.6	)	$	298.2			0.26% -0.29%		Aaa/AAA
Class B Senior Secured Floating Rate Notes due 2021		30.0		30.0			(4.4	)		25.6			0.50%		Aaa/AA+
Class C Senior Secured Deferrable Floating Rate Notes due 2021		35.0		35.0			(10.5	)		24.5			1.10%		Aa3/AA-
Class D Secured Deferrable Floating Rate Notes due 2021		34.0		34.0			(10.5	)		23.5			2.40%		A3/BBB+
Class E Secured Deferrable Floating Rate Notes due 2021		30.0		30.0			(10.0	)		20.0			5.00%		Ba2/BB-

Total secured notes sold to investors	$	455.0	$	444.8		$	(53.0	)	$	391.8
Unsecured subordinated notes due 2021		45.0		45.0			(39.9	)		5.1

Total notes for the CLO I offering	$	500.0	$	489.8		$	(92.9	)	$	396.9
Consolidation elimination		N/A		(58.8	)		43.5			(15.3	)

Total asset-backed securities issued		N/A	$	431.0		$	(49.4	)	$	381.6

(1)	These ratings are unaudited and were the current ratings as of December 31, 2011 and are subject to change from time to time.

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(In millions)	As of December 31, 2010
	Notes Originally Issued		Outstanding Principal Balance			Liquidity Discount			Net Outstanding Balance			Interest Rate Spread to LIBOR		Ratings (Moody’s/ S&P) (1)
Class A Senior Secured Floating Rate Revolving Notes due 2021	$	326.0	$	315.8		$	(28.3	)	$	287.5			0.26% -0.29%		Aaa/AAA
Class B Senior Secured Floating Rate Notes due 2021		30.0		30.0			(7.1	)		22.9			0.50%		Aa2/AA
Class C Senior Secured Deferrable Floating Rate Notes due 2021		35.0		35.0			(16.9	)		18.1			1.10%		Baa1/A
Class D Secured Deferrable Floating Rate Notes due 2021		34.0		34.0			(16.7	)		17.3			2.40%		Ba1/BBB
Class E Secured Deferrable Floating Rate Notes due 2021		30.0		30.0			(16.0	)		14.0			5.00%		B3/CCC-

Total secured notes sold to investors	$	455.0	$	444.8		$	(85.0	)	$	359.8
Unsecured subordinated notes due 2021		45.0		45.0			(39.9	)		5.1

Total notes for the CLO I offering	$	500.0	$	489.8		$	(124.9	)	$	364.9
Consolidation elimination		N/A		(58.8	)		45.2			(13.6	)

Total asset-backed securities issued		N/A	$	431.0		$	(79.7	)	$	351.3

(1)	These ratings are unaudited and were the current ratings as of December 31, 2010 and are subject to change from time to time.

The secured notes and subordinated notes are limited recourse obligations payable solely from cash flows of the CLO loan portfolio and related collection and payment accounts pledged as security. Payment on the Class A-1 notes rank equal, or pari passu, in right of payment with payments on the Class A-2 notes and payment on the Class A-1 and Class A-2 notes rank senior in right of payment to the other secured notes and the subordinated notes. Payment on the Class B, Class C, Class D and Class E notes generally rank subordinate in right of payment to any other class of notes which has an earlier alphabetical designation. The subordinated notes are subordinated in right of payment to all other classes of notes and will not accrue interest. Interest on the secured notes is payable quarterly at a per annum rate equal to LIBOR plus the applicable spread set forth in the table above. Payment of interest on the Class C, Class D and Class E notes is payable only to the extent proceeds are available therefore under the applicable payment priority provisions. As of December 31, 2011, all interest on the secured notes was current. To the extent proceeds are not readily available, interest on the Class C, Class D and Class E notes will be deferred. The CLO is also required to pay a commitment fee of 0.18% on the unused portion of the funding commitments of the Class A-1 notes. As of December 31, 2011, all of the Class A-1 notes were drawn. The secured notes are secured by the CLO loan portfolio and the funds on deposit in various related collection and payment accounts. The terms of the debt securitization subject the loans included in the CLO loan portfolio to a number of collateral quality, portfolio profile, interest coverage and over-collateralization tests. Total interest expense related to the asset-backed securities issued for the years ended December 31, 2011 and 2010 was $34.9 million and $32.9 million, respectively, which comprised cash coupon of $4.6 million and $4.7 million, respectively, and liquidity discount amortization of $30.2 million and $28.2 million, respectively. As of December 31, 2011 and December 31, 2010, accrued interest payable on the Notes was $0.6 million and $0.5 million, respectively.

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The Notes recorded upon the acquisition of Cratos at fair value reflect a liquidity discount. The activity in the note principal and liquidity discount for the years ended December 31, 2011 and 2010 comprised the following:


(In thousands)	Year Ended December 31, 2011
	Principal		Liquidity Discount			Net
Balance at beginning of period	$	431,003	$	(79,681	)	$	351,322
Amortization of discount		0		30,234			30,234

Balance at end of period	$	431,003	$	(49,447	)	$	381,556


(In thousands)	Year Ended December 31, 2010
	Principal			Liquidity Discount			Net
Balance at beginning of period	$	434,478		$	(107,846	)	$	326,632
Repayments		(3,475	)		0			(3,475	)
Amortization of discount		0			28,165			28,165

Balance at end of period	$	431,003		$	(79,681	)	$	351,322

The Company determined the fair value of asset-backed securities issued to be $375.9 million and $379.2 million as of December 31, 2011 and 2010, respectively.

12. Stockholders’ Equity

Common Stock

The Company’s board of directors declared a quarterly cash dividend of $0.02 per share of common stock in March 2011, $0.025 per share of common stock in May, $0.03 per share of common stock in August and November 2011. Those dividends were paid in April, June, September and December 2011 for the fourth quarter of 2010, the first, second and third quarter of 2011, respectively. The Company does not pay dividends on unvested shares of restricted stock.

Stock Repurchase Program

The Company’s board of directors authorized in August and November 2007 a 1.5 million share repurchase program, which was fully executed as of January 18, 2008. On March 10, 2008, March 3, 2009, May 4, 2010, May 3, 2011 and November 2011, the Company’s board of directors authorized the repurchase of an additional 2.0 million shares during the subsequent eighteen months, the repurchase of an additional 0.5 million shares during the subsequent twelve months, the repurchase of an additional 1.0 million shares during the subsequent eighteen months, the repurchase of an additional 0.5 million shares during the subsequent twelve months, and the repurchase of an additional 1.0 million shares during the subsequent eighteen months, respectively. During the years ended December 31, 2011 and 2010, the Company repurchased 860,778 and 1,205,991 shares, respectively, of the Company’s common stock at an average price of $7.38 per share and $6.91 per share, respectively, for an aggregate purchase price of $6.4 million and $8.3 million, respectively. Of the total shares repurchased during the years ended December 31, 2011 and 2010, 406,163 shares and 394,005 shares, respectively, were deemed to have been repurchased in connection with employee stock plans, whereby the Company’s shares were issued on a net basis to employees for the payment of applicable statutory withholding taxes and therefore such withheld shares are deemed to be purchased by the Company. As of December 31, 2011, 1,109,038 shares remain available to be repurchased under the repurchase program.

The timing and amount of any future open market stock repurchases will be determined by JMP management based on its evaluation of market conditions, the relative attractiveness of other capital deployment activities, regulatory considerations and other factors. Any open market stock repurchase activities will be conducted in compliance with the safe harbor provisions of Rule 10b-18 of the Securities Exchange Act of 1934,

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as amended, or in privately negotiated transactions. Repurchases of common stock may also be made under an effective Rule 10b5-1 plan which permits common stock to be repurchased when the Company may otherwise be prohibited from doing so under insider trading laws. This repurchase program may be suspended or discontinued at any time.

13. Stock-Based Compensation

On March 26, 2007, the board of directors adopted the JMP Group Inc. 2007 Equity Incentive Plan (“JMP Group 2007 Plan”), which was approved by the stockholders on April 12, 2007. JMP Group Inc. authorized the issuance of 4,000,000 shares of its common stock under this Plan. This amount is increased by any shares JMP Group Inc. purchases on the open market, or through any share repurchase or share exchange program, as well as any shares that may be returned to the JMP Group 2007 Plan or the JMP Group LLC 2004 Equity Incentive Plan (“JMP Group 2004 Plan”) as a result of forfeiture, termination or expiration of awards; not to exceed a maximum aggregate number of shares of 2,960,000 shares under the JMP Group 2004 Plan. The Company will issue shares upon exercises or vesting from authorized but unissued shares or from treasury stock.

Stock Options

Prior to the Company’s initial public offering, JMP Group LLC, then a multi-member Delaware limited liability company, issued options to purchase its membership interests to certain employees. In connection with the Company’s initial public offering and related reorganization of JMP Group LLC, all outstanding options to purchase membership interests in JMP Group LLC were exchanged into options to purchase the Company’s common stock.

The following table summarizes the stock option activity for the years ended December 31, 2011, 2010 and 2009:


	Year Ended December 31,
	2011					2010					2009
	Shares Subject to Option			Weighted Average Exercise Price		Shares Subject to Option			Weighted Average Exercise Price		Shares Subject to Option			Weighted Average Exercise Price
Balance, beginning of year		1,800,565		$	11.23		1,938,315		$	11.28		2,086,990		$	11.40
Granted		0			0.00		0			0.00		0			0.00
Exercised		0			0.00		0			0.00		(8,325	)		10.00
Forfeited		0			0.00		0			0.00		(6,475	)		10.00
Expired		(95,900	)		11.82		(137,750	)		12.00		(133,875	)		13.17

Balance, end of period		1,704,665		$	11.20		1,800,565		$	11.23		1,938,315		$	11.28

Options exercisable at end of period		1,704,665		$	11.20		1,800,565		$	11.23		1,925,815		$	11.28

The following table summarizes the stock options outstanding as well as stock options vested and exercisable as of December 31, 2011 and 2010:


	December 31, 2011
	Options Outstanding								Options Vested and Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Aggregate Intrinsic Value		Number Exercisable		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Aggregate Intrinsic Value
$10.00 -$12.50		1,704,665		3.00	$	11.20	$	0		1,704,665		3.00	$	11.20		0

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	December 31, 2010
	Options Outstanding								Options Vested and Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Aggregate Intrinsic Value		Number Exercisable		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Aggregate Intrinsic Value
$10.00 - $12.50		1,800,565		3.98	$	11.23	$	0		1,800,565		3.98	$	11.23		0

The Company recognizes stock-based compensation expense for stock options over the graded vesting period of the options using the accelerated attribution method. The Company recognized compensation expense related to stock options of zero, $3,231 and $18,229 for the years ended December 31, 2011, 2010 and 2009, respectively.

As of December 31, 2011 and 2010, there was no unrecognized compensation expense related to stock options.

During the year ended December 31, 2009, 8,325 shares of stock options were exercised with the aggregate intrinsic value of $7,926. There were no stock options exercised during the years ended December 31, 2011 and 2010. As a result, the Company did not recognize any current income tax benefits from exercise of stock options during these periods.

Restricted Stock Units

In 2009, the Company issued 987,948 RSUs under the JMP Group 2007 Plan, which was comprised of 800,000 RSUs granted to certain employees as part of the 2008 annual compensation program, 156,748 RSUs granted to certain new employees and 31,200 RSUs granted to certain independent directors of the Company. The RSUs granted as part of the 2008 annual compensation program had a required service period of four years. The RSUs granted to certain new employees and independent directors had required service periods ranging from one to four years.

In 2009, the Company also granted 87,076 restricted shares to certain employees as a part of the 2008 annual compensation program. These shares vested immediately with a two-year restricted period subject to non-competition, non-solicitation and certain other covenants.

On November 2, 2009, the Company’s Board of Directors approved amendments to, and the immediate acceleration of the vesting of 1,295,000 RSUs that were granted in the first quarters of 2008 and 2009 to 28 employees, including each of the Company’s named officers, under the Company’s 2007 Equity Incentive Plan. The acceleration was to align the terms of existing RSUs with those of future RSUs, which are anticipated to have performance-based vesting conditions instead of service-based vesting conditions. These accelerated RSUs remain subject to the terms and conditions of the applicable restricted stock unit agreements, which include lockup provisions and potential forfeiture if the holder breaches certain covenants, including non-competition covenants. In connection with the above vesting, the Company was deemed to have repurchased 526,400 shares of its common stock, mainly to allow employees to tender shares for the payment of the statutory minimum withholding taxes.

In 2010, the Company issued 1,014,034 RSUs under the JMP Group 2007 Plan, which was comprised of 886,761 performance-based RSUs granted on February 4, 2010 to certain employees and the Company’s independent directors for long term incentive purposes (the “2010 performance-based RSUs”), 63,433 RSUs granted to certain new employees and 63,840 RSUs granted to the Company’s independent directors. The 2010 performance-based RSUs have Company performance-based vesting conditions and vest if and to the extent the Company performance target set for such RSUs is met during any of the years ending December 31, 2010, 2011 or 2012. In the fourth quarter of 2010, the vesting of approximately 56.3% of the 2010 performance-based RSUs became probable based on the Company’s operating results for the year 2010, and the Company recognized $3.8

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million of compensation expense for such RSUs in the quarter. In the fourth quarter of 2011, the vesting of the remaining 2010 performance-based RSUs became probable based on the Company’s operating results for the year 2011, and the Company recognized $2.8 million of compensation expense for such RSUs in the quarter. The Company estimates the vesting of approximately 0.2 million shares, net of applicable withholding tax, in the first quarter of 2012, related to the 2010 performance-based RSUs. The 2010 performance-based RSUs are subject to post-vesting transfer restrictions until December 31, 2012, and therefore, the fair value of such RSUs included a liquidity discount of 10% for the post-vesting transfer restrictions. The RSUs granted to certain new employees and the Company’s independent directors had required service periods ranging from one to three years.

In 2010, the Company also granted 131,341 restricted shares to certain employees as a part of the 2009 annual compensation program. These shares vested immediately with a two-year restricted period during which the holders are subject to non-competition, non-solicitation and certain other covenants.

In 2011, the Company issued 1,073,583 RSUs under the JMP Group 2007 Plan, which was comprised of 921,876 performance-based RSUs granted on January 31, 2011 to certain employees for long term incentive purposes (the “2011 performance-based RSUs”), 144,505 RSUs granted to certain new employees and 7,202 RSUs granted to the Company’s independent directors. The 2011 performance-based RSUs have Company performance-based vesting conditions and vest if the Company performance target set for such RSUs is met during any of the years ending December 31, 2011, 2012 or 2013. In the fourth quarter of 2011, the vesting of all of the 2011 performance-based RSUs became probable based on the Company’s operating results for the year 2011, and the Company recognized $6.1 million of compensation expense for such RSUs in the quarter. The Company estimates the vesting of approximately 0.5 million shares, net of applicable withholding tax, in the first quarter of 2012, related to the 2011 performance-based RSUs. The 2011 performance-based RSUs are subject to post-vesting transfer restrictions until December 31, 2013, and therefore, the fair value of such RSUs included a liquidity discount of 15% for the post-vesting restrictions. The RSUs granted to certain new employees and the Company’s independent directors had vesting periods ranging from one to three years.

In 2011, the Company also granted 42,869 restricted shares to certain employees as a part of the 2010 annual compensation program. These shares vested immediately with a two-year restricted period during which the holders are subject to non-competition, non-solicitation and certain other covenants.

The following table summarizes the RSU activity for the years ended December 31, 2011, 2010 and 2009:


	Year Ended December 31,
	2011					2010					2009
	Restricted Stock Units			Weighted Average Grant Date Fair Value		Restricted Stock Units			Weighted Average Grant Date Fair Value		Restricted Stock Units			Weighted Average Grant Date Fair Value
Balance, beginning of year		1,630,026		$	8.52		1,392,551		$	9.59		2,265,292		$	8.94
Granted		1,073,583			7.43		1,014,034			7.82		987,948			4.77
Vested		(1,039,082	)		9.14		(641,124	)		9.82		(1,684,585	)		6.03
Forfeited		(30,259	)		8.11		(135,435	)		8.10		(176,104	)		8.38

Balance, end of period		1,634,268		$	7.42		1,630,026		$	8.52		1,392,551		$	9.59

The aggregate fair value of RSUs vested during the years ended December 31, 2011, 2010 and 2009 was $8.4 million, $4.6 million and $13.1 million, respectively. The income tax benefits realized from the vested RSUs were $3.0 million, $2.7 million and $4.2 million, respectively.

The Company recognizes compensation expense over a graded vesting period using the accelerated attribution method. For the years ended December 31, 2011, 2010 and 2009, the Company recorded compensation expense related to RSUs of $10.3 million, $7.6 million and $9.7 million, respectively. Included in these amounts were expenses related to RSUs awarded in connection with the initial public offering of $0.8 million, $2.6 million and $3.2 million for the years ended December 31, 2011, 2010 and 2009, respectively. The

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remaining expenses were related to RSUs awarded after the initial public offering. For the year ended December 31, 2011, the compensation expense related to RSUs awarded after the initial public offering included $8.9 million recognized on the probable vesting of 100.0% and 43.7% of the 2011 and 2010 performance-based RSUs, respectively, described above. For the year ended December 31, 2010, the compensation expense related to RSUs awarded after the initial public offering included $3.8 million recognized on the probable vesting of 56.3% of the 2010 performance-based RSUs granted on February 4, 2010 described above. For the year ended December 31, 2009, the compensation expense related to RSUs awarded after the initial public offering included additional compensation expense of $4.7 million related to the accelerated vesting of certain RSUs on November 2, 2009 described above.

For the years ended December 31, 2011, 2010 and 2009, the Company recognized income tax benefits of $4.2 million, $3.1 million and $4.0 million, respectively, related to the compensation expense recognized for RSUs. As of December 31, 2011 and 2010, there was $1.1 million and $0.9 million, respectively, of unrecognized compensation expense related to RSUs expected to be recognized over a weighted average period of 1.84 years and 1.52 years, respectively.

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

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

The computations of basic and diluted net (loss) income per share and basic and diluted net (loss) income per unit for the years ended December 31, 2011, 2010 and 2009 are shown in the table below:


	Year Ended December 31,
(In thousands, except per share data)	2011			2010		2009
Numerator:
Net (loss) income	$	(2,511	)	$	9,603	$	10,810

Denominator:
Basic weighted average shares outstanding		22,118			21,646		20,791
Effect of potential dilutive securities:
Restricted stock units		951			750		1,346

Diluted weighted average shares outstanding		23,069			22,396		22,137

Net (loss) income per share
Basic	$	(0.11	)	$	0.44	$	0.52
Diluted	$	(0.11	)	$	0.43	$	0.49

Weighted average stock options to purchase 1,755,131, 1,857,083 and 2,013,151 shares of common stock for the years ended December 31, 2011, 2010 and 2009 were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding.

Weighted average restricted stock units for 71,883, 6,293 and zero shares of common stock for the years ended December 31, 2011, 2010 and 2009 were anti-dilutive and, therefore, were not included in the computation of diluted weighted-average common shares outstanding.

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15. Employee Benefits

All salaried employees of the Company are eligible to participate in the JMP Group 401(k) Plan after three months of employment. Participants may contribute up to the limits set by the United States Internal Revenue Service. There were no contributions by the Company during the years ended December 31, 2011, 2010 and 2009.

16. Income Taxes

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

The components of the Company’s income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009 is as follows:


	Year Ended December 31,
(In thousands)	2011			2010		2009
Federal	$	3,725		$	1,432	$	362
State		278			1,005		323

Total current income tax expense		4,003			2,437		685
Federal		(4,828	)		5,409		5,845
State		(845	)		731		1,133

Total deferred income tax expense (benefit)		(5,673	)		6,140		6,978

Total income tax expense (benefit)	$	(1,670	)	$	8,577	$	7,663

A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate for the years ended December 31, 2011, 2010 and 2009 is as follows:


	Year Ended December 31,
	2011			2010			2009
Tax at federal statutory tax rate		35.00	%		35.00	%		35.00	%
State income tax, net of federal tax benefit		5.75	%		5.75	%		5.75	%
Adjustment for permanent items (HGC and HCC non-controlling interest) (1)		-7.51	%		-2.75	%		0.00	%
Adjustment for other permanent items		-2.60	%		0.67	%		-1.85	%

Rate before one-time events		30.64	%		38.67	%		38.90	%
Deferred tax asset written off related to options and RSUs		-3.33	%		0.00	%		0.00	%
Adjustment for prior year taxes		5.70	%		3.92	%		-0.39	%
Additional state income tax expense for JMP Credit		0.00	%		-0.73	%		0.00	%
California state enterprise zone tax credit		4.62	%		-1.04	%		0.00	%
New York state tax amendment		0.00	%		0.06	%		0.00	%

Effective tax rate		37.63	%		40.88	%		37.66	%

(1)	HGC and HCC are consolidated for financial reporting purposes but not for tax purposes.

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As of December 31, 2011 and 2010, the components of deferred tax assets and liabilities are as follows:


	As of December 31,
(In thousands)	2011			2010
Deferred tax assets:
Accrued compensation and related expenses	$	9,677		$	9,960
Equity based compensation		5,265			4,991
Depreciation and amortization		0			185
Reserves and allowances		3,543			2,699
Interest in HMOP/HCC (1)		80			0
Interest on loans on non-accrual status		226			642
Liquidity discount at JMP Credit		6,334			14,105
Other		1,096			848

Total deferred tax assets		26,221			33,430
Deferred tax liabilities:
Investment in partnerships		(683	)		(2,063	)
Repurchase of asset-backed securities issued (Note 10)		(1,647	)		(1,647	)
Liquidity discount at JMP Credit		(20,148	)		(32,467	)
Depreciation and amortization		(112	)		0
Net unrealized capital losses		(624	)		(922	)

Total deferred tax liabilities		(23,214	)		(37,099	)
Valuation allowance		0			0

Net deferred tax assets (liabilities)	$	3,007		$	(3,669	)

(1)	HMOP was consolidated for financial reporting purposes but not consolidated for tax reporting purposes.

The Company determined that a valuation allowance against deferred tax assets was not necessary as of December 31, 2011, 2010 and 2009 based on the assessment of future ordinary income and capital gains and that the deferred tax assets will, more-likely-than-not, be realized.

The Company has analyzed the filing positions in its federal and state income tax returns for all open tax years, which are 2008 through 2010 for federal income tax purposes and 2007 through 2010 for state income tax purposes. The Company does not anticipate any tax adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow. Therefore, the Company did not record a cumulative effect adjustment related to the adoption of the amended accounting principles related to the accounting for uncertainty in income taxes, and no liabilities for uncertain income tax positions have been recorded pursuant to the amended accounting principles.

The Company’s policy for recording interest and penalties associated with the tax audits or unrecognized tax benefits, if any, is to record such items as a component of income before taxes. Penalties, if incurred, would be recorded in “administration” and interest paid or received would be recorded in “interest and dividend expense” in the Consolidated Statements of Operations.

17. Commitments and Contingencies

The Company leases office space in California, Illinois, Georgia, Massachusetts, Minnesota and New York under various operating leases. Rental expense for the years ended December 31, 2011, 2010 and 2009 was $2.9 million, $2.7 million and $2.5 million, respectively. The Company recorded sublease income of $0.6 million, $0.5 million, and $0.3 million for the years ended December 31, 2011, 2010 and 2009.

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The California, Illinois, Minnesota and New York leases included a period of free rent at the start of the lease. Rent expense is recognized over the entire lease period uniformly net of the free rent savings. The aggregate minimum future commitments of these leases are:


(In thousands)	December 31, 2011
2012		2,582
2013		3,458
2014		3,388
2015		3,356
2016		3,307
Thereafter		6,197

	$	22,288

In connection with its underwriting activities, JMP Securities enters into firm commitments for the purchase of securities in return for a fee. These commitments require JMP Securities to purchase securities at a specified price. Securities underwriting exposes JMP Securities to market and credit risk, primarily in the event that, for any reason, securities purchased by JMP Securities cannot be distributed at anticipated price levels. At December 31, 2011 and 2010, JMP Securities had no open underwriting commitments.

The marketable securities owned and the restricted cash as well as the cash held by the clearing broker may be used to maintain margin requirements. At both December 31, 2011 and 2010, the Company had $255,336 of cash on deposit with JMP Securities’ clearing broker. Furthermore, the marketable securities owned may be hypothecated or borrowed by the clearing broker.

Unfunded commitments are agreements to lend to a borrower, provided that all conditions have been met. As of December 31, 2011 and 2010, the Company had unfunded commitments of $3.2 million and zero in the Corporate Credit segment, respectively.

18. Regulatory Requirements

JMP Securities is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital, as defined, and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. JMP Securities had net capital of $38.0 million and $29.7 million, which were $37.0 million and $28.7 million in excess of the required net capital of $1.0 million at December 31, 2011 and 2010, respectively. JMP Securities’ ratio of aggregate indebtedness to net capital was 0.26 to 1 and 0.39 to 1 at December 31, 2011 and 2010, respectively.

Since all customer transactions are cleared through another broker-dealer on a fully disclosed basis, JMP Securities is not required to maintain a separate bank account for the exclusive benefit of customers in accordance with Rule 15c3-3 under the Exchange Act.

19. Related Party Transactions

The Company earns base management fees and incentive fees from serving as investment advisor for various entities, including corporations, partnerships and offshore investment companies. The Company also owns an investment in most of these entities. As of December 31, 2011 and 2010, the aggregate fair value of the Company’s investments in these entities was $34.5 million and $33.7 million, respectively, which consisted of general partner investments in hedge funds of $24.1 million and $23.6 million, respectively, general partner investments in hedge funds of funds of $0.1 million for each year, and an investment in NYMT common stock of $10.3 million and $10.0 million, respectively. Base management fees earned from these entities were $9.7 million, $8.8 million and $8.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. Also,

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the Company earned incentive fees of $10.1 million, $2.9 million and $11.6 million from these entities for the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011 and 2010, the Company had incentive fees receivable from these entities of $2.1 million and $0.8 million, respectively.

20. Guarantees

JMP Securities has agreed to indemnify its clearing broker for losses that the clearing broker may sustain from the accounts of customers introduced by JMP Securities. Should a customer not fulfill its obligation on a transaction, JMP Securities may be required to buy or sell securities at prevailing market prices in the future on behalf of its customer. JMP Securities’ obligation under the indemnification has no maximum amount. All unsettled trades at December 31, 2011 had settled with no resulting material liability to the Company. For the years ended December 31, 2011, 2010 and 2009, the Company had no material loss due to counterparty failure, and has no obligations outstanding under the indemnification arrangement as of December 31, 2011.

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

21. Litigation

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

The Company reviews the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability and the amount of loss, if any, can be reasonably estimated. The Company was named as a defendant in a purported securities class action complaint with respect to a company for which JMP Securities served as an underwriter in a public offering, and recorded an accrual based on its portion of the estimated legal expenses. A loss contingency has not been booked as a range of loss cannot be reasonably estimated at this time. Generally, given the inherent difficulty of predicting the outcome of matters the Company is involved in, particularly cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution. For these matters, no reserve is established until such time, other than for reasonably estimable legal fees and expenses. Management, after consultation with legal counsel, believes that the currently known actions or threats will not result in any material adverse effect on the Company’s financial condition, results of operations or cash flows.

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

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

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

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

In connection with the Cratos CLO, the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unfunded commitments to lend and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet of the Company.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a borrower to a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to borrowers. In its Corporate Credit segment, the Company had unfunded commitments of $3.2 million and standby letters of credit of $0.2 million at December 31, 2011. As of December 31, 2010, the Company had standby letters of credit of $0.4 million in the Corporate Credit segment.

23. Business Segments

The Company’s business results are categorized into the following four business segments: Broker-Dealer, Asset Management, Corporate Credit and Corporate. In the first quarter of 2011, the Company determined that a new segment “Corporate” would be used by the Company’s chief operating decision maker to evaluate segment revenue and segment operating income and to make resource allocation decisions. The Broker-Dealer segment includes a broad range of services, such as underwriting and acting as a placement agent for public and private capital markets raising transactions and financial advisory services in M&A, restructuring and other strategic transactions. The Broker-Dealer segment also includes institutional brokerage services and equity research services to our institutional investor clients. The Asset Management segment includes the management of a broad range of pooled investment vehicles, including the Company’s hedge funds, hedge funds of funds, as well as the Company’s principal investments in public and private securities. The Corporate Credit segment includes the management of collateralized loan obligations, small business loans and certain principal investments through JMP Capital and HCC. The new Corporate segment includes revenues and expenses related to JMP Group Inc., the holding company, and JMP Group LLC, and is mainly comprised of corporate overhead expenses and interest expense related to the Company’s credit facility with City National Bank. With the disclosure of this new segment, beginning in 2011, the results and assets for comparative 2010 and 2009 periods have been revised to reflect the four segments.

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

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

The Company’s segment information for the years ended December 31, 2011, 2010 and 2009 was prepared using the following methodology:

•

Revenues and expenses directly associated with each segment are included in determining segment operating income.

•

Revenues and expenses not directly associated with a specific segment are allocated based on the most relevant measures applicable, including revenues, headcount and other factors.

•

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

The Company evaluates segment results based on revenue and segment operating income before non-controlling interest and taxes.

Segment Operating Results

Management believes that the following information provides a reasonable representation of each segment’s contribution to revenues, income and assets:


	Year Ended December 31,
(In thousands)	2011			2010		2009
Broker-Dealer
Non-interest revenues	$	74,103		$	77,388	$	79,468
Net Interest Income		174			68		124

Total net revenues after provision for loan losses	$	74,277		$	77,456	$	79,592
Non-interest expenses		75,916			74,311		81,171

Segment income (loss) before income tax expense	$	(1,639	)	$	3,145	$	(1,579	)

Segment assets	$	69,922		$	75,148	$	63,351
Asset Management
Non-interest revenues	$	23,144		$	16,931	$	31,850
Net Interest Income		253			42		95

Total net revenues after provision for loan losses	$	23,397		$	16,973	$	31,945
Non-interest expenses		21,321			13,930		24,692

Segment income (loss) before income tax expense	$	2,076		$	3,043	$	7,253

Segment assets	$	91,181		$	82,319	$	74,184

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	Year Ended December 31,
(In thousands)	2011			2010			2009
Corporate Credit
Non-interest revenues	$	18,519		$	39,588		$	28,798
Net Interest Income		(2,372	)		11,586			9,467
Provision for loan losses		(2,423	)		(997	)		(5,721	)

Total net revenues after provision for loan losses	$	13,724		$	50,177		$	32,544
Non-interest expenses		7,229			20,066			14,145

Segment income (loss) before income tax expense	$	6,495		$	30,111		$	18,399

Segment assets	$	486,089		$	459,071		$	412,217
Corporate
Non-interest revenues	$	514		$	1,281		$	7,045
Net Interest Income		(446	)		(221	)		(240	)
Provision for loan losses		479			(330	)		(100	)

Total net revenues after provision for loan losses	$	547		$	730		$	6,705
Non-interest expenses		11,896			16,044			13,256

Segment income (loss) before income tax expense	$	(11,349	)	$	(15,314	)	$	(6,551	)

Segment assets	$	133,541		$	142,391		$	142,038
Eliminations
Non-interest revenues	$	(584	)	$	(623	)	$	(1,302	)

Total net revenues after provision for loan losses	$	(584	)	$	(623	)	$	(1,302	)
Non-interest expenses		(563	)		(623	)		(1,302	)

Segment income (loss) before income tax expense	$	(21	)	$	0		$	0

Segment assets	$	(120,112	)	$	(120,141	)	$	(117,069	)
Consolidated Entity
Non-interest revenues	$	115,696		$	134,565		$	145,859
Net Interest Income		(2,391	)		11,475			9,446
Provision for loan losses		(1,944	)		(1,327	)		(5,821	)

Total net revenues after provision for loan losses	$	111,361		$	144,713		$	149,484
Non-interest expenses		115,799			123,728			129,139

Income (loss) before income tax expense	$	(4,438	)	$	20,985		$	20,345

Total assets	$	660,621		$	638,788		$	574,721

24. Summarized financial information for equity method investments

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


	As of December 31,
(In thousands)	2011		2010
	Net Assets		Net Assets
Harvest Opportunity Partners II	$	74,953	$	70,622
Harvest Small Cap Partners		324,453		270,498
Harvest Agriculture Select		12,149		8,702
Harvest Technology Partners		24,571		26,029
Harvest Diversified Partners		23,637		31,413

134


	Year Ended December 31,
	2011						2010					2009
(In thousands)	Net Realized and Unrealized Gains (Losses)			Net Investment Income (Loss)			Net Realized and Unrealized Gains (Losses)		Net Investment Income (Loss)			Net Realized and Unrealized Gains (Losses)		Net Investment Income (Loss)
Harvest Opportunity Partners II	$	2,100		$	(1,661	)	$	5,210	$	(1,349	)	$	19,818	$	(909	)
Harvest Small Cap Partners		63,139			(19,588	)		1,927		(11,940	)		62,827		(14,836	)
Harvest Agriculture Select		(158	)		(308	)		123		(236	)		2,248		(149	)
Harvest Technology Partners		2,149			(722	)		713		(586	)		4,305		(328	)
Harvest Global Select Partners		0			0			739		(99	)		591		(189	)
Harvest Diversified Partners		1,071			(726	)		2,296		(665	)		0		0

25. Subsequent Events

On February 8, 2012, the Company granted 910,228 RSUs to certain employees for long term incentive purposes. These units have Company performance-based vesting conditions and will vest when the Company performance target set for such RSUs is met.

On March 6, 2012, the Company’s board of directors declared a cash dividend of $0.03 per share of common stock for the fourth quarter of 2011 to be paid on March 30, 2012, to common stockholders of record on March 16, 2012.

26. Selected Quarterly Financial Data (Unaudited)

The following represents the Company’s unaudited quarterly results for the years ended December 31, 2011 and 2010. These quarterly results were prepared in accordance with GAAP and reflect all adjustments that are in the opinion of management, necessary for a fair statement of the results.


	JMP Group Inc. Selected Consolidated Financial Data
(In thousands, except per share data)	Three Months Ended December 31, 2011			Three Months Ended September 30, 2011			Three Months Ended June 30, 2011			Three Months Ended March 31, 2011
Total net revenues after provision for loan losses	$	19,623		$	17,375		$	31,461		$	42,902

Non-interest expenses:
Compensation and benefits		22,799			15,970			22,017			28,231
Other expenses		6,573			7,518			6,597			6,094

Total non-interest expenses		29,372			23,488			28,614			34,325

Income (loss) before income tax expense		(9,749	)		(6,113	)		2,847			8,577
Income tax expense (benefit)		(4,024	)		(1,410	)		1,281			2,483

Net income (loss)		(5,725	)		(4,703	)		1,566			6,094
Less: Net income attributable to the non-controlling interest		(732	)		3,080			(49	)		(2,556	)

Net income (loss) attributable to JMP Group Inc.		(4,993	)		(7,783	)		1,615			8,650

Net income attributable to JMP Group Inc. per common share:
Basic	$	(0.27	)	$	(0.07	)	$	0.07		$	0.16
Diluted	$	(0.26	)	$	(0.07	)	$	0.07		$	0.15

135


	JMP Group Inc. Selected Consolidated Financial Data
(In thousands, except per share data)	Three Months Ended December 31, 2010		Three Months Ended September 30, 2010		Three Months Ended June 30, 2010		Three Months Ended March 31, 2010
Total net revenues after provision for loan losses	$	43,991	$	32,658	$	42,846	$	25,218

Non-interest expenses:
Compensation and benefits		30,234		19,361		30,592		15,521
Other expenses		5,852		8,741		7,138		6,289

Total non-interest expenses		36,086		28,102		37,730		21,810

Income (loss) before income tax expense		7,905		4,556		5,116		3,408
Income tax expense (benefit)		3,551		1,536		2,102		1,388

Net income (loss)		4,354		3,020		3,014		2,020
Less: Net income attributable to the non-controlling interest		500		1,205		798		302

Net income (loss) attributable to JMP Group Inc.		3,854		1,815		2,216		1,718

Net income attributable to JMP Group Inc. per common share:
Basic	$	0.18	$	0.08	$	0.10	$	0.08
Diluted	$	0.17	$	0.08	$	0.10	$	0.08

136

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Our management, with the participation of the Chairman and Chief Executive Officer and the Chief Financial Officer (our principal executive officer and principal financial officer, respectively), has evaluated our disclosure controls and procedures as of the end of the year covered by this report.

Based on that evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the year covered by this report, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chairman and Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting that occurred during the three months ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our management report on internal control over financial reporting is contained in Part II, Item 8 of this annual report on Form 10-K and is incorporated herein by reference.

Item 9B.

Other Information

None.

137

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The information required by this item will be contained in the sections of our Proxy Statement for the 2011 Annual Meeting of Stockholders, captioned “Board of Directors,” “Compensation of Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance,” which is incorporated herein by reference.

Item 11.

Executive Compensation

Information with respect to this item will be contained in the sections of our Proxy Statement for the 2012 Annual Meeting of Stockholders, captioned “Executive Compensation” which is incorporated herein by reference.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information with respect to this item will be contained in the sections of our Proxy Statement for the 2012 Annual Meeting of Stockholders, captioned “Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” which is incorporated herein by reference.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Information with respect to this item will be contained in the sections of our Proxy Statement for the 2012 Annual Meeting of Stockholders, captioned “Related Party Transactions” and “Director Independence” which is incorporated herein by reference.

Item 14.

Principal Accountant Fees and Services

Information with respect to this item will be contained in the sections of our Proxy Statement for the 2012 Annual Meeting of Stockholders, captioned “Fees Paid to Independent Registered Public Accounting Firm” which is incorporated herein by reference.

138

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(a) Documents filed as part of this Form 10-K:

Consolidated Financial Statements

The consolidated financial statements required to be filed in the Form 10-K are listed below. The required financial statements appear on pages through herein. In addition, pursuant to Exchange Act Rule 12b-23, the Company incorporates the financial statements and supplementary data of New York Mortgage Trust, Inc. by reference to Exhibit 99.1 filed with this Form 10-K.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm			83

Consolidated Statements of Financial Condition as of December 31, 2011 and 2010			84

Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009			86

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2011, 2010 and 2009			87

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009			89

Notes to Consolidated Financial Statements			91

Financial Statement Schedules

Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements.

Exhibits

See the Exhibit Index beginning on page 141 for a list of the exhibits being filed or furnished with or incorporated by reference into this Annual Report on Form 10-K.

139

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: March 12, 2012


JMP Group Inc.
Registrant

By:		/S/ JOSEPH A. JOLSON
		Joseph A. Jolson
		Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Date: March 12, 2012


Signature		Title

/S/ JOSEPH A. JOLSON Joseph A. Jolson		Director, Chairman and Chief Executive Officer (principal executive officer)

/S/ RAYMOND S. JACKSON Raymond S. Jackson		Chief Financial Officer (principal financial and accounting officer)

/S/ CRAIG R. JOHNSON Craig R. Johnson		Director

/S/ DAVID M. DIPIETRO David M. DiPietro		Director

/S/ KENNETH M. KARMIN Kenneth M. Karmin		Director

/S/ MARK L. LEHMANN Mark L. Lehmann		Director

/S/ H. MARK LUNENBURG H. Mark Lunenburg		Director

/S/ JONATHAN M. ORSZAG Jonathan M. Orszag		Director

/S/ CARTER D. MACK Carter D. Mack		Director

/S/ GLENN H. TONGUE Glenn H. Tongue		Director

140

EXHIBIT INDEX


Exhibit Number		Description
2.1		Reorganization and Exchange Agreement (incorporated by reference to Exhibit 2.1 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed on May 8, 2007).

2.2		Cratos Purchase Agreement dated March 31, 2009 (incorporated by reference to Exhibit to the Registrant’s quarterly report with respect to the quarter ended June 30, 2009 on Form 10-Q filed on August 6, 2009).

3.1		Fourth Amended and Restated Certificate of Incorporation of JMP Group Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s quarterly report with respect to the quarter ended March 31, 2007 on Form 10-Q filed on June 21, 2007).

3.2		Amended and Restated Bylaws of JMP Group Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s quarterly report with respect to the quarter ended March 31, 2007 on Form 10-Q filed on June 21, 2007).

4.1		Form of Certificate Representing Shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed on April 19, 2007).

10.1		Amendment Number Three to Credit Agreement, dated As of December 31, 2008 (incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed on January 7, 2009).

10.1.1		Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1.1 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed on May 8, 2007).

10.2		Form of Partners’ Exchange Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed on May 8, 2007).

10.3		Credit Agreement Dated August 3, 2006 (incorporated by reference to Exhibit 10.3 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed on March 27, 2007).

10.5		Form of Indemnification Agreement (incorporated by reference to Exhibit 10.5 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed on March 27, 2007).

10.8		Lease Agreement, Dated December 18, 2003 (incorporated by reference to Exhibit 10.8 to the Registrant’s registration statement on Form S-1 (No. 333-140689) filed on February 14, 2007).

10.8.1		First Amendment Letter to Lease Dated May 10, 2004 (incorporated by reference to Exhibit 10.8.1 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed on April 19, 2007).

10.9		Sublease, Dated December 18, 2003 (incorporated by reference to Exhibit 10.9 to the Registrant’s registration statement on Form S-1 (No. 333-140689) filed on February 14, 2007).

10.9.1		Consent to Sublease, Dated December 18, 2003 (incorporated by reference to Exhibit 10.9.1 to the Registrant’s registration statement on Form S-1 (No. 333-140689) filed on February 14, 2007).

10.9.2		Letter Amendment to Consent to Sublease, Dated May 10, 2004 (incorporated by reference to Exhibit 10.9.2 to the Registrant’s registration statement on Form S-1 (No. 333-140689) filed on February 14, 2007).

10.10		JMP Group Inc. 2007 Senior Executive Bonus Plan (incorporated by reference to Exhibit 10.10 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed on April 19, 2007).

10.11		JMP Group LLC 2004 Equity Incentive Plan (incorporated by reference to Exhibit 10.11 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed on May 8, 2007).

10.12		Form of Stock Pledge Agreement (incorporated by reference to Exhibit 10.12 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed on May 8, 2007).

141


Exhibit Number		Description
10.13		JMP Group 2007 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed on April 19, 2007).

10.13.1		Notice of Restricted Stock Unit Agreement (Principal Portion of Award) (incorporated by reference to Exhibit 10.13.1 to the Registrant’s quarterly report with respect to the quarter ended March 31, 2008 on Form 10-Q filed May 9, 2008).

10.13.2		Notice of Restricted Stock Unit Agreement (Discount Portion of Award) (incorporated by reference to Exhibit 10.13.2 to the Registrant’s quarterly report with respect to the quarter ended March 31, 2008 on Form 10-Q filed May 9, 2008).

10.13.3		Notice of Restricted Stock Unit Agreement (Four-Year Cliff) (incorporated by reference to Exhibit 10.13.3 to the Registrant’s quarterly report with respect to the quarter ended March 31, 2008 on Form 10-Q filed May 9, 2008).

10.13.4		Form of 2008 Compensation Program Election Form and Participation Agreement (incorporated by reference to Exhibit 10.13.4 to the Registrant’s Current Report on Form 8-K filed February 5, 2009).

10.13.5		Form of Restricted Stock Bonus Award Agreement (incorporated by reference to Exhibit 10.13.4 to the Registrant’s Current Report on Form 8-K filed February 5, 2009).

10.15		Amendment Number Two to Credit Agreement (CNB) (incorporated by reference to Exhibit 10.15 to the Registrant’s quarterly report with respect to the quarter ended March 31, 2008 on Form 10-Q filed May 9, 2008).

10.16		Amendment Number One to Credit Agreement (CNB) (incorporated by reference to Exhibit 10.16 to the Registrant’s annual report on Form 10-K filed on March 9, 2010).

10.17		Summary of Compensation Arrangements with Executive Officers, Dated March 3, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q filed on May 8, 2009).

10.18		Summary of Performance Goals under the 2007 Senior Executive Bonus Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q filed on August 10, 2007).

10.19		Form of Tax Identification Agreement (incorporated by reference to Exhibit 10.7 to the Registrant’s registration statement on Form S-1/A (No. 333-140689) filed May 8, 2007).

10.20		Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.13.6 to the Registrant’s quarterly report on Form 10-Q filed on May 6, 2010).

10.20.1		Amendment Number Four to Credit Agreement, Dated January 28, 2010 (incorporated by reference to Exhibit 10.17 to the Registrant’s quarterly report on Form 10-Q filed on May 6, 2010).

10.20.2		Amendment Number Five to Credit Agreement, dated as of April 8, 2011 (incorporated by reference to Exhibit 10.20.2 to the Registrant’s quarterly report on Form 10-Q filed on August 4, 2011).

10.20.3		Amendment Number Six to Credit Agreement, dated as of August 24, 2011 (incorporated by reference to the Registrant’s current report on Form 8-K filed on August 25, 2011).

21*		List of Subsidiaries of JMP Group Inc.

23.1*		Consent of PricewaterhouseCoopers LLP

23.2*		Consent of Grant Thornton LLP

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

142


Exhibit Number		Description
32.1*		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1*		Financial statements and supplementary data of New York Mortgage Trust, Inc. as of December 31, 2010 and 2009 and for the years then ended.

99.3*		Financial statements and supplementary data of New York Mortgage Trust, Inc. as of December 31, 2011 and 2010 and for the years then ended.

101*		The following materials from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Statements of Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes.

*	Filed herewith

143