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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to                     

Commission File No. 001-31720
PIPER JAFFRAY COMPANIES
(Exact Name of Registrant as specified in its Charter)
DELAWARE
 
30-0168701
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
800 Nicollet Mall, Suite 1000
Minneapolis, Minnesota
 
55402
(Address of Principal Executive Offices)
 
(Zip Code)
 
(612) 303-6000
 
(Registrant’s Telephone Number, Including Area Code)

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  þ No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨    Accelerated filer þ    Non-accelerated filer ¨     Smaller reporting company ¨
(Do not check if a smaller reporting company)

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

As of October 24, 2014, the registrant had 16,285,976 shares of Common Stock outstanding.

 




Piper Jaffray Companies
Index to Quarterly Report on Form 10-Q

PART I. FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
ITEM 1.
 
ITEM 1A.
 
ITEM 2.
 
ITEM 6.
 
 
 





PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS.

Piper Jaffray Companies
Consolidated Statements of Financial Condition
 
September 30,
 
December 31,
 
2014
 
2013
(Amounts in thousands, except share data)
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
14,947

 
$
123,683

Cash and cash equivalents segregated for regulatory purposes
38,029

 
43,012

Receivables:
 
 
 
Customers
25,669

 
11,633

Brokers, dealers and clearing organizations
291,190

 
127,113

Securities purchased under agreements to resell
263,680

 
167,875

 
 
 
 
Financial instruments and other inventory positions owned
459,624

 
406,513

Financial instruments and other inventory positions owned and pledged as collateral
1,023,970

 
957,515

Total financial instruments and other inventory positions owned
1,483,594

 
1,364,028

 
 
 
 
Fixed assets (net of accumulated depreciation and amortization of $46,128 and $62,311, respectively)
17,373

 
16,114

Goodwill
211,878

 
210,634

Intangible assets (net of accumulated amortization of $38,823 and $31,869, respectively)
32,976

 
39,930

Investments
125,167

 
112,043

Other assets
96,037

 
102,092

Total assets
$
2,600,540

 
$
2,318,157

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Short-term financing
$
338,795

 
$
514,711

Variable rate senior notes
125,000

 
125,000

Payables:
 
 
 
Customers
35,944

 
33,109

Brokers, dealers and clearing organizations
84,344

 
27,722

Securities sold under agreements to repurchase
66,973

 
4,397

Financial instruments and other inventory positions sold, but not yet purchased
768,991

 
512,833

Accrued compensation
181,322

 
159,928

Other liabilities and accrued expenses
53,823

 
58,385

Total liabilities
1,655,192

 
1,436,085

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $0.01 par value:
 
 
 
Shares authorized: 100,000,000 at September 30, 2014 and December 31, 2013;
 
 
 
Shares issued: 19,523,371 at September 30, 2014 and 19,537,127 at December 31, 2013;
 
 
 
Shares outstanding: 15,108,607 at September 30, 2014 and 14,383,418 at December 31, 2013
195

 
195

Additional paid-in capital
737,449

 
740,321

Retained earnings
214,522

 
163,893

Less common stock held in treasury, at cost: 4,414,764 shares at September 30, 2014 and 5,153,709 shares at December 31, 2013
(148,286
)
 
(170,629
)
Accumulated other comprehensive income
753

 
896

Total common shareholders’ equity
804,633

 
734,676

 
 
 
 
Noncontrolling interests
140,715

 
147,396

Total shareholders’ equity
945,348

 
882,072

 
 
 
 
Total liabilities and shareholders’ equity
$
2,600,540

 
$
2,318,157

See Notes to the Consolidated Financial Statements

3

Piper Jaffray Companies
Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Amounts in thousands, except per share data)
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Investment banking
$
94,911

 
$
62,848

 
$
287,198

 
$
156,924

Institutional brokerage
35,923

 
35,318

 
114,485

 
100,076

Asset management
21,595

 
18,701

 
64,820

 
55,584

Interest
10,828

 
12,360

 
36,935

 
35,469

Investment income
2,690

 
5,279

 
12,379

 
8,285

 
 
 
 
 
 
 
 
Total revenues
165,947

 
134,506

 
515,817

 
356,338

 
 
 
 
 
 
 
 
Interest expense
6,521

 
6,192

 
18,227

 
18,719

 
 
 
 
 
 
 
 
Net revenues
159,426

 
128,314

 
497,590

 
337,619

 
 
 
 
 
 
 
 
Non-interest expenses:
 
 
 
 
 
 
 
Compensation and benefits
97,180

 
79,426

 
300,745

 
210,531

Occupancy and equipment
8,312

 
6,509

 
22,151

 
18,869

Communications
5,661

 
5,778

 
17,048

 
16,040

Floor brokerage and clearance
1,905

 
2,109

 
5,527

 
6,506

Marketing and business development
6,827

 
5,447

 
19,787

 
16,384

Outside services
9,155

 
8,082

 
27,837

 
23,745

Restructuring and integration costs

 
3,823

 

 
3,823

Intangible asset amortization expense
2,318

 
2,899

 
6,954

 
6,221

Other operating expenses
2,376

 
2,181

 
8,719

 
1,939

 
 
 
 
 
 
 
 
Total non-interest expenses
133,734

 
116,254

 
408,768

 
304,058

 
 
 
 
 
 
 
 
Income from continuing operations before income tax expense
25,692

 
12,060

 
88,822

 
33,561

 
 
 
 
 
 
 
 
Income tax expense
8,596

 
2,886

 
28,472

 
10,130

 
 
 
 
 
 
 
 
Income from continuing operations
17,096

 
9,174

 
60,350

 
23,431

 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax

 
(1,529
)
 

 
(3,921
)
 
 
 
 
 
 
 
 
Net income
17,096

 
7,645

 
60,350

 
19,510

 
 
 
 
 
 
 
 
Net income applicable to noncontrolling interests
2,428

 
2,323

 
9,721

 
1,554

 
 
 
 
 
 
 
 
Net income applicable to Piper Jaffray Companies
$
14,668

 
$
5,322

 
$
50,629

 
$
17,956

 
 
 
 
 
 
 
 
Net income applicable to Piper Jaffray Companies’ common shareholders
$
13,552

 
$
4,826

 
$
46,386

 
$
16,163

 
 
 
 
 
 
 
 

Continued on next page

4

Piper Jaffray Companies
Consolidated Statements of Operations – Continued
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Amounts in thousands, except per share data)
2014
 
2013
 
2014
 
2013
Amounts applicable to Piper Jaffray Companies
 
 
 
 
 
 
 
Net income from continuing operations
$
14,668

 
$
6,851

 
$
50,629

 
$
21,877

Net loss from discontinued operations

 
(1,529
)
 

 
(3,921
)
Net income applicable to Piper Jaffray Companies
$
14,668

 
$
5,322

 
$
50,629

 
$
17,956

 
 
 
 
 
 
 
 
Earnings/(loss) per basic common share
 
 
 
 
 
 
 
Income from continuing operations
$
0.90

 
$
0.42

 
$
3.12

 
$
1.29

Loss from discontinued operations

 
(0.09
)
 

 
(0.23
)
Earnings per basic common share
$
0.90

 
$
0.33

 
$
3.12

 
$
1.06

 
 
 
 
 
 
 
 
Earnings/(loss) per diluted common share
 
 
 
 
 
 
 
Income from continuing operations
$
0.90

 
$
0.42

 
$
3.11

 
$
1.29

Loss from discontinued operations

 
(0.09
)
 

 
(0.23
)
Earnings per basic common share
$
0.90

 
$
0.33

 
$
3.11

 
$
1.06

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
Basic
15,066

 
14,621

 
14,880

 
15,271

Diluted
15,129

 
14,626

 
14,934

 
15,284

See Notes to the Consolidated Financial Statements



5

Piper Jaffray Companies
Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Amounts in thousands)
2014
 
2013
 
2014
 
2013
Net income
$
17,096

 
$
7,645

 
$
60,350

 
$
19,510

 
 
 
 
 
 
 
 
Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Adjustment to unrecognized pension cost

 
(38
)
 

 
(38
)
Foreign currency translation adjustment
(399
)
 
175

 
(143
)
 
54

 
 
 
 
 
 
 
 
Total other comprehensive income/(loss), net of tax
(399
)
 
137

 
(143
)
 
16

 
 
 
 
 
 
 
 
Comprehensive income
16,697

 
7,782

 
60,207

 
19,526

 
 
 
 
 
 
 
 
Comprehensive income applicable to noncontrolling interests
2,428

 
2,323

 
9,721

 
1,554

 
 
 
 
 
 
 
 
Comprehensive income applicable to Piper Jaffray Companies
$
14,269

 
$
5,459

 
$
50,486

 
$
17,972

See Notes to the Consolidated Financial Statements


6

Piper Jaffray Companies
Consolidated Statements of Cash Flows
(Unaudited)

 
Nine Months Ended
 
September 30,
(Dollars in thousands)
2014
 
2013
Operating Activities:
 
 
 
Net income
$
60,350

 
$
19,510

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
 
 
 
Depreciation and amortization of fixed assets
3,992

 
4,300

Deferred income taxes
(2,487
)
 
5,933

Loss on sale of FAMCO

 
1,876

Share-based and deferred compensation
21,067

 
11,012

Amortization of intangible assets
6,954

 
6,221

Amortization of forgivable loans
3,961

 
4,827

Decrease/(increase) in operating assets:
 
 
 
Cash and cash equivalents segregated for regulatory purposes
4,983

 
5,999

Receivables:
 
 
 
Customers
(14,036
)
 
(17,580
)
Brokers, dealers and clearing organizations
(164,077
)
 
(94,186
)
Securities purchased under agreements to resell
(95,805
)
 
(81,990
)
Net financial instruments and other inventory positions owned
136,592

 
(163,710
)
Investments
(13,124
)
 
(19,375
)
Other assets
3,298

 
2,945

Increase/(decrease) in operating liabilities:
 
 
 
Payables:
 
 
 
Customers
2,835

 
(1,229
)
Brokers, dealers and clearing organizations
56,622

 
65,071

Accrued compensation
25,741

 
(26,425
)
Other liabilities and accrued expenses
(4,559
)
 
(23,566
)
Decrease in assets held for sale

 
605

Decrease in liabilities held for sale

 
(465
)
 
 
 
 
Net cash provided by/(used in) operating activities
32,307

 
(300,227
)
 
 
 
 
Investing Activities:
 
 
 
Business acquisitions, net of cash acquired

 
(24,726
)
Sale of FAMCO

 
250

Purchases of fixed assets, net
(5,270
)
 
(3,257
)
 
 
 
 
Net cash used in investing activities
(5,270
)
 
(27,733
)

Continued on next page

7

Piper Jaffray Companies
Consolidated Statements of Cash Flows – Continued
(Unaudited)

 
Nine Months Ended
 
September 30,
(Dollars in thousands)
2014
 
2013
 
 
 
 
Financing Activities:
 
 
 
Increase/(decrease) in short-term financing
$
(175,916
)
 
$
186,275

Issuance of variable rate senior notes
50,000

 

Repayment of variable rate senior notes
(50,000
)
 

Increase in securities sold under agreements to repurchase
62,576

 
28,914

Increase/(decrease) in noncontrolling interests
(16,402
)
 
91,192

Repurchase of common stock
(10,563
)
 
(69,947
)
Excess tax benefit from share-based compensation
1,006

 
39

Proceeds from stock option exercises
3,644

 

 
 
 
 
Net cash provided by/(used in) financing activities
(135,655
)
 
236,473

 
 
 
 
Currency adjustment:
 
 
 
Effect of exchange rate changes on cash
(118
)
 
77

 
 
 
 
Net decrease in cash and cash equivalents
(108,736
)
 
(91,410
)
 
 
 
 
Cash and cash equivalents at beginning of period
123,683

 
105,371

 
 
 
 
Cash and cash equivalents at end of period
$
14,947

 
$
13,961

 
 
 
 
Supplemental disclosure of cash flow information –
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
17,116

 
$
17,938

Income taxes
$
45,284

 
$
2,870

 
 
 
 
Non-cash financing activities –
 
 
 
Issuance of common stock for retirement plan obligations:
 
 
 
103,598 shares and 96,049 shares for the nine months ended September 30, 2014 and 2013, respectively
$
4,156

 
$
3,939

 
 
 
 
Issuance of restricted common stock for annual equity award:
 
 
 
402,074 shares and 431,582 shares for the nine months ended September 30, 2014 and 2013, respectively
$
16,131

 
$
17,699


See Notes to the Consolidated Financial Statements


8

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)


Index
Note 1
 
Note 2
 
Note 3
 
Note 4
 
Note 5
 
Note 6
 
Note 7
 
Note 8
 
Note 9
 
Note 10
 
Note 11
 
Note 12
 
Note 13
 
Note 14
 
Note 15
 
Note 16
 
Note 17
 
Note 18
 
Note 19
 
Note 20
 
Note 21
 
Note 22
 
Note 23
 
Note 24
 


9

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

Note 1 Organization and Basis of Presentation

Organization

Piper Jaffray Companies is the parent company of Piper Jaffray & Co. ("Piper Jaffray"), a securities broker dealer and investment banking firm; Piper Jaffray Ltd., a firm providing securities brokerage and mergers and acquisitions services in Europe headquartered in London, England; Advisory Research, Inc. ("ARI"), which provides asset management services to separately managed accounts, closed-end and open-end funds and partnerships; Piper Jaffray Investment Group Inc., which consists of entities providing alternative asset management services; Piper Jaffray Financial Products Inc., Piper Jaffray Financial Products II Inc. and Piper Jaffray Financial Products III Inc., entities that facilitate derivative transactions; and other immaterial subsidiaries. Piper Jaffray Companies and its subsidiaries (collectively, the "Company") operate in two reporting segments: Capital Markets and Asset Management. A summary of the activities of each of the Company’s business segments is as follows:

Capital Markets

The Capital Markets segment provides institutional sales, trading and research services and investment banking services. Institutional sales, trading and research services focus on the trading of equity and fixed income products with institutions, government and non-profit entities. Revenues are generated through commissions and sales credits earned on equity and fixed income institutional sales activities, net interest revenues on trading securities held in inventory, and profits and losses from trading these securities. Investment banking services include management of and participation in underwritings, merger and acquisition services and public finance activities. Revenues are generated through the receipt of advisory and financing fees. Also, the Company generates revenue through strategic trading and investing activities, which focus on proprietary investments in a variety of securities, including municipal bonds, mortgage-backed securities, and equity securities, and merchant banking activities involving equity or debt investments in late stage private companies. As certain of these efforts have matured and an investment process has been developed, the Company has created alternative asset management funds in merchant banking and municipal securities in order to invest firm capital as well as to seek capital from outside investors. The Company receives management and performance fees for managing these funds.

As discussed in Note 5, the Company discontinued its Hong Kong capital markets business in 2012.

Asset Management

The Asset Management segment provides traditional asset management services with product offerings in equity securities and master limited partnerships to institutions and individuals. Revenues are generated in the form of management and performance fees. Revenues are also generated through investments in the partnerships and funds that the Company manages.

As discussed in Note 5, Fiduciary Asset Management, LLC ("FAMCO") was sold in 2013.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and include the accounts of Piper Jaffray Companies, its wholly owned subsidiaries, and all other entities in which the Company has a controlling financial interest. Noncontrolling interests represent equity interests in consolidated entities that are not attributable, either directly or indirectly, to Piper Jaffray Companies. Noncontrolling interests include the minority equity holders’ proportionate share of the equity in a municipal bond fund, merchant banking fund and private equity investment vehicles. All material intercompany balances have been eliminated.

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates and assumptions are based on the best information available, actual results could differ from those estimates.


10

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

Reclassifications

In 2013, the Company reclassified interest revenue and expense associated with its derivative contracts to investment banking or institutional brokerage revenues within the consolidated statements of operations to more accurately reflect the nature and intent of the derivative instrument. The Company reclassified $3.9 million and $8.5 million of interest revenue and $4.3 million and $9.8 million of interest expense for the three and nine months ended September 30, 2013, respectively. This change had no effect on net revenues, net income, shareholders’ equity or cash flows for the periods presented. 

Note 2 Summary of Significant Accounting Policies

Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2013 for a full description of the Company's significant accounting policies.

Note 3 Recent Accounting Pronouncements

Adoption of New Accounting Standards

Investment Companies

In June 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-08, "Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements," ("ASU 2013-08") amending FASB Accounting Standards Codification Topic 946, "Financial Services - Investment Companies" ("ASC 946"). The amended guidance changes the approach to the investment company assessment in ASC 946, clarifies the characteristics of an investment company and requires new disclosures for investment company financial statements. ASU 2013-08 was effective for the Company as of January 1, 2014. The adoption of ASU 2013-08 did not impact the Company's results of operations, financial position or disclosures.

Future Adoption of New Accounting Standards

Discontinued Operations

In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," ("ASU 2014-08") amending FASB Accounting Standards Codification Topic 205-20, "Discontinued Operations" ("ASC 205-20"). The amended guidance changes the criteria for reporting discontinued operations and requires new disclosures. ASU 2014-08 is effective for annual and interim periods beginning on or after December 15, 2014, and will be applied prospectively.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," ("ASU 2014-09") which supersedes current revenue recognition guidance, including most industry-specific guidance. ASU 2014-09 requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The guidance also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue that is recognized. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. The Company is evaluating the impact of the new guidance on its consolidated financial statements.


11

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

Repurchase Agreements

In June 2014, the FASB issued ASU No. 2014-11, "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures," ("ASU 2014-11") amending FASB Accounting Standards Codification Topic 860, "Transfers and Servicing." The amended guidance changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. The guidance also requires new disclosures for certain transfers accounted for as sales and collateral supporting transactions that are accounted for as secured borrowings. ASU 2014-11 is effective for annual and interim periods beginning after December 15, 2014, except for the disclosures related to secured borrowings, which are effective for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The adoption of ASU 2014-11 is not expected to have a material impact on the Company's results of operations or financial position, but may impact the Company's disclosures.

Going Concern

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" ("ASU 2014-15"). ASU 2014-15 provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related disclosures thereon. The guidance is effective for annual and interim periods ending after December 15, 2016, with early adoption permitted. The adoption of ASU 2014-15 is not expected to impact the Company's results of operations, financial position or disclosures.

Note 4 Acquisitions

On July 12, 2013, the Company completed the purchase of Seattle-Northwest Securities Corporation ("Seattle-Northwest"), a Seattle-based investment bank and broker dealer focused on public finance in the Northwest region of the U.S. The purchase was completed pursuant to the Agreement and Plan of Merger dated April 16, 2013. The acquisition of Seattle-Northwest supports the Company's strategy to grow its public finance business.

On July 16, 2013, the Company completed the purchase of Edgeview Partners, L.P. ("Edgeview"), a middle-market advisory firm specializing in mergers and acquisitions. The purchase was completed pursuant to the Unit Purchase Agreement dated June 17, 2013. The acquisition of Edgeview further strengthened the Company's mergers and acquisitions position in the middle market and added resources dedicated to the private equity community.

The Company paid $32.7 million in cash for Seattle-Northwest and Edgeview, which represented the fair values as of the respective acquisition dates. The Company also entered into acquisition-related compensation arrangements of $14.3 million which consisted of cash, restricted stock and restricted mutual fund shares ("MFRS Awards") of registered funds managed by the Company's asset management business. Compensation expense related to these arrangements will be amortized on a straight-line basis over the requisite service period of two to five years (a weighted average service period of 4.3 years).

These acquisitions were accounted for pursuant to FASB Accounting Standards Codification Topic 805, "Business Combinations." Accordingly, the purchase price of each acquisition was allocated to the acquired assets and liabilities assumed based on their estimated fair values as of the respective acquisition dates. The excess of the purchase price over the net assets acquired was allocated between goodwill and intangible assets within the Capital Markets segment. The Company recorded $15.0 million of goodwill on the consolidated statements of financial condition, of which $9.1 million is expected to be deductible for income tax purposes. In management's opinion, the goodwill represents the reputation and expertise of Seattle-Northwest and Edgeview in their respective business lines.

Identifiable intangible assets purchased by the Company consisted of customer relationships and non-competition agreements with acquisition-date fair values estimated to be $6.0 million and $0.7 million, respectively. Transaction costs of $0.9 million were incurred in the three and nine months ended September 30, 2013, respectively, and are included in restructuring and integration costs within continuing operations on the consolidated statements of operations.


12

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the respective dates of acquisition:
(Dollars in thousands)
 
 
Assets
 
 
Cash and cash equivalents
 
$
8,014

Financial instruments and other inventory positions owned
 
24,074

Fixed assets
 
1,247

Goodwill
 
15,034

Intangible assets
 
6,665

Other assets
 
7,678

Total assets acquired
 
62,712

 
 
 
Liabilities
 
 
Payables
 
1,126

Financial instruments and other inventory positions sold, but not yet purchased
 
22,588

Accrued compensation
 
1,469

Other liabilities and accrued expenses
 
4,789

Total liabilities assumed
 
29,972

 
 
 
Net assets acquired
 
$
32,740

Seattle-Northwest and Edgeview results of operations have been included in the Company's consolidated financial statements prospectively from their respective dates of acquisition. These acquisitions have been fully integrated with the Company's existing operations. Accordingly, post-acquisition revenues and net income are not discernible. The following unaudited pro forma financial data assumes the acquisitions had occurred on January 1, 2012, the beginning of the prior annual period in which the acquisitions occurred. Pro forma results have been prepared by adjusting the Company's historical results from continuing operations to include Seattle-Northwest and Edgeview results of operations adjusted for the following changes: depreciation and amortization expenses were adjusted to account for acquisition-date fair value adjustments of fixed assets and intangible assets; compensation and benefits expenses were adjusted to reflect excess partner distributions as compensation expense; and the income tax effect of applying the Company's statutory tax rates to Seattle-Northwest and Edgeview results of operations. The consolidated Company's unaudited pro forma information presented does not necessarily reflect the results of operations that would have resulted had the acquisitions been completed at the beginning of the applicable period presented, does not contemplate anticipated operational efficiencies of the combined entities, nor does it indicate the results of operations in future periods.
 
Three Months Ended
 
Nine Months Ended
(Dollars in thousands)
September 30, 2013
 
September 30, 2013
Net revenues
$
132,773

 
$
353,728

Net income from continuing operations applicable to Piper Jaffray Companies
$
6,921

 
$
20,276


Note 5 Discontinued Operations

The Company's Hong Kong capital markets business ceased operations in 2012. In the second quarter of 2013, the Company completed the sale of FAMCO, an asset management subsidiary, for consideration of $4.0 million which consisted of $0.3 million in cash and a $3.7 million note receivable from the buyer. In accordance with the provisions of ASC 205-20, the results from these businesses have been classified as discontinued operations for all periods presented. The Company recorded a $1.5 million net loss and a $3.9 million net loss from discontinued operations for the three and nine months ended September 30, 2013, respectively.



13

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

Note 6 Financial Instruments and Other Inventory Positions Owned and Financial Instruments and Other Inventory Positions Sold, but Not Yet Purchased

Financial instruments and other inventory positions owned and financial instruments and other inventory positions sold, but not yet purchased were as follows:
 
September 30,
 
December 31,
(Dollars in thousands)
2014
 
2013
Financial instruments and other inventory positions owned:
 
 
 
Corporate securities:
 
 
 
Equity securities
$
54,386

 
$
54,097

Convertible securities
164,580

 
80,784

Fixed income securities
41,482

 
10,102

Municipal securities:
 
 
 
Taxable securities
306,534

 
232,379

Tax-exempt securities
365,563

 
460,865

Short-term securities
78,222

 
62,620

Asset-backed securities
99,294

 
119,811

U.S. government agency securities
322,284

 
304,737

Derivative contracts
51,249

 
38,633

Total financial instruments and other inventory positions owned
1,483,594

 
1,364,028

 
 
 
 
Less noncontrolling interests (1)
(234,876
)
 
(291,513
)
 
$
1,248,718

 
$
1,072,515

 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
Corporate securities:
 
 
 
Equity securities
$
158,479

 
$
69,205

Fixed income securities
23,498

 
24,021

U.S. government agency securities
70,992

 
120,084

U.S. government securities
505,689

 
291,320

Derivative contracts
10,333

 
8,203

Total financial instruments and other inventory positions sold, but not yet purchased
768,991

 
512,833

 
 
 
 
Less noncontrolling interests (2)
(113,773
)
 
(68,356
)
 
$
655,218

 
$
444,477

(1)
Noncontrolling interests attributable to third party ownership in a consolidated municipal bond fund consist of $127.4 million and $101.8 million of taxable municipal securities, $102.7 million and $183.9 million of tax-exempt municipal securities, and $4.8 million and $5.8 million of derivative contracts as of September 30, 2014 and December 31, 2013, respectively. 
(2)
Noncontrolling interests attributable to third party ownership in a consolidated municipal bond fund consist of $112.5 million and $67.4 million of U.S. government securities, and $1.3 million and $1.0 million of derivative contracts as of September 30, 2014 and December 31, 2013, respectively.

At September 30, 2014 and December 31, 2013, financial instruments and other inventory positions owned in the amount of $1.0 billion and $957.5 million, respectively, had been pledged as collateral for short-term financings and repurchase agreements.

Financial instruments and other inventory positions sold, but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price, thereby creating a liability to purchase the security in the market at prevailing prices. The Company is obligated to acquire the securities sold short at prevailing market prices, which may exceed the amount reflected on the consolidated statements of financial condition. The Company economically hedges changes in the market value of its financial instruments and other inventory positions owned using inventory positions sold, but not yet purchased, interest rate derivatives, credit default swap index contracts, treasury futures and exchange traded options.


14

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

Derivative Contract Financial Instruments

The Company uses interest rate swaps, interest rate locks, credit default swap index contracts, treasury futures and option contracts to facilitate customer transactions and as a means to manage risk in certain inventory positions. The following describes the Company’s derivatives by the type of transaction or security the instruments are economically hedging.

Customer matched-book derivatives: The Company enters into interest rate derivative contracts in a principal capacity as a dealer to satisfy the financial needs of its customers.  The Company simultaneously enters into an interest rate derivative contract with a third party for the same notional amount to hedge the interest rate and credit risk of the initial client interest rate derivative contract. In certain limited instances, the Company has only hedged interest rate risk with a third party, and retains uncollateralized credit risk as described below. The instruments use interest rates based upon either the London Interbank Offer Rate (“LIBOR”) index or the Securities Industry and Financial Markets Association (“SIFMA”) index.

Trading securities derivatives: The Company enters into interest rate derivative contracts to hedge interest rate and market value risks associated with its fixed income securities. The instruments use interest rates based upon either the Municipal Market Data (“MMD”) index, LIBOR or the SIFMA index. The Company also enters into credit default swap index contracts to hedge credit risk associated with its taxable fixed income securities and option contracts to hedge market value risk associated with its convertible securities and asset-backed securities.

The following table presents the total absolute notional contract amount associated with the Company’s outstanding derivative instruments:
(Dollars in thousands)
 
 
 
September 30,
 
December 31,
Transaction Type or Hedged Security    
 
Derivative Category               
 
2014
 
2013
Customer matched-book
 
Interest rate derivative contract
 
$
4,917,596

 
$
5,310,929

Trading securities
 
Interest rate derivative contract
 
307,450

 
198,500

Trading securities
 
Credit default swap index contract
 
397,815

 
299,333

Trading securities
 
Equity option derivative contract
 
13,522

 
17,090

 
 
 
 
$
5,636,383

 
$
5,825,852


The Company’s derivative contracts do not qualify for hedge accounting, therefore, unrealized gains and losses are recorded on the consolidated statements of operations. The gains and losses on the related economically hedged inventory positions are not disclosed below as they are not in qualifying hedging relationships. The following table presents the Company’s unrealized gains/(losses) on derivative instruments:
 
 
 
 
Three Months Ended
 
Nine Months Ended
(Dollars in thousands)
 
 
 
September 30,
 
September 30,
Derivative Category               
 
Operations Category
 
2014
 
2013
 
2014
 
2013
Interest rate derivative contract
 
Investment banking
 
$
(809
)
 
$
(483
)
 
$
(2,178
)
 
$
(1,132
)
Interest rate derivative contract
 
Institutional brokerage
 
1,368

 
(16,532
)
 
(2,898
)
 
4,930

Credit default swap index contract
 
Institutional brokerage
 
2,078

 
(1,918
)
 
(845
)
 
(650
)
Equity option derivative contract
 
Institutional brokerage
 
693

 

 
1,112

 

 
 
 
 
$
3,330

 
$
(18,933
)
 
$
(4,809
)
 
$
3,148



15

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

The gross fair market value of all derivative instruments and their location on the Company’s consolidated statements of financial condition prior to counterparty netting are shown below by asset or liability position:
(Dollars in thousands)
 
 
 
Asset Value at
 
 
 
Liability Value at
 
 
 
 
September 30,
 
 
 
September 30,
Derivative Category
 
Financial Condition Location
 
2014
 
Financial Condition Location
 
2014
Interest rate derivative contract
 
Financial instruments and other inventory positions owned
 
$
389,825

 
Financial instruments and other inventory positions sold,  but not yet purchased
 
$
375,723

Credit default swap index contract
 
Financial instruments and other inventory positions owned
 
7,025

 
Financial instruments and other inventory positions sold,  but not yet purchased
 
7,999

Equity option derivative contract
 
Financial instruments and other inventory positions owned
 
63

 
Financial instruments and other inventory positions sold,  but not yet purchased
 
247

 
 
 
 
$
396,913

 
 
 
$
383,969


Derivatives are reported on a net basis by counterparty (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of offset exists and on a net basis by cross product when applicable provisions are stated in master netting agreements. Cash collateral received or paid is netted on a counterparty basis, provided a legal right of offset exists.

Credit risk associated with the Company’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. Credit exposure associated with the Company’s derivatives is driven by uncollateralized market movements in the fair value of the contracts with counterparties and is monitored regularly by the Company’s financial risk committee. The Company considers counterparty credit risk in determining derivative contract fair value. The majority of the Company’s derivative contracts are substantially collateralized by its counterparties, who are major financial institutions. The Company has a limited number of counterparties who are not required to post collateral. Based on market movements, the uncollateralized amounts representing the fair value of the derivative contract can become material, exposing the Company to the credit risk of these counterparties. As of September 30, 2014, the Company had $25.2 million of uncollateralized credit exposure with these counterparties (notional contract amount of $199.2 million), including $13.3 million of uncollateralized credit exposure with one counterparty.

Note 7 Fair Value of Financial Instruments

Based on the nature of the Company’s business and its role as a “dealer” in the securities industry or as a manager of alternative asset management funds, the fair values of its financial instruments are determined internally. The Company’s processes are designed to ensure that the fair values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, unobservable inputs are developed based on an evaluation of all relevant empirical market data, including prices evidenced by market transactions, interest rates, credit spreads, volatilities and correlations and other security-specific information. Valuation adjustments related to illiquidity or counterparty credit risk are also considered. In estimating fair value, the Company may utilize information provided by third-party pricing vendors to corroborate internally-developed fair value estimates.

The Company employs specific control processes to determine the reasonableness of the fair value of its financial instruments. The Company’s processes are designed to ensure that the internally estimated fair values are accurately recorded and that the data inputs and the valuation techniques used are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. Individuals outside of the trading departments perform independent pricing verification reviews as of each reporting date. The Company has established parameters which set forth when the fair value of securities are independently verified. The selection parameters are generally based upon the type of security, the level of estimation risk of a security, the materiality of the security to the Company’s financial statements, changes in fair value from period to period, and other specific facts and circumstances of the Company’s securities portfolio. In evaluating the initial internally-estimated fair values made by the Company’s traders, the nature and complexity of securities involved (e.g., term, coupon, collateral, and other key drivers of value), level of market activity for securities, and availability of market data are considered. The independent price verification procedures include, but are not limited to, analysis of trade data (both internal and external where available), corroboration to the valuation of positions with similar characteristics, risks and components, or comparison to an alternative pricing source, such as a discounted cash flow model. The Company’s valuation committee, comprised of members of senior

16

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

management and risk management, provides oversight and overall responsibility for the internal control processes and procedures related to fair value measurements.

The following is a description of the valuation techniques used to measure fair value.

Cash Equivalents

Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value and classified as Level I.

Financial Instruments and Other Inventory Positions Owned

The Company records financial instruments and other inventory positions owned and financial instruments and other inventory positions sold, but not yet purchased at fair value on the consolidated statements of financial condition with unrealized gains and losses reflected on the consolidated statements of operations.

Equity securities – Exchange traded equity securities are valued based on quoted prices from the exchange for identical assets or liabilities as of the period-end date. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized as Level I. Non-exchange traded equity securities (principally hybrid preferred securities) are measured primarily using broker quotations, prices observed for recently executed market transactions and internally-developed fair value estimates based on observable inputs and are categorized within Level II of the fair value hierarchy.

Convertible securities – Convertible securities are valued based on observable trades, when available. Accordingly, these convertible securities are categorized as Level II. When observable price quotations are not available, fair value is determined using model-based valuation techniques with observable market inputs, such as specific company stock price and volatility, and unobservable inputs such as option adjusted spreads over the U.S. treasury securities curve. These instruments are categorized as Level III.

Corporate fixed income securities – Fixed income securities include corporate bonds which are valued based on recently executed market transactions of comparable size, internally-developed fair value estimates based on observable inputs, or broker quotations. Accordingly, these corporate bonds are categorized as Level II. When observable price quotations or certain observable inputs are not available, fair value is determined using model-based valuation techniques with observable inputs such as specific security contractual terms and yield curves, and unobservable inputs such as credit spreads over U.S. treasury securities. Corporate bonds measured using model-based valuation techniques are categorized as Level III.

Taxable municipal securities – Taxable municipal securities are valued using recently executed observable trades or market price quotations and therefore are generally categorized as Level II.

Tax-exempt municipal securities – Tax-exempt municipal securities are valued using recently executed observable trades or market price quotations and therefore are generally categorized as Level II. Certain illiquid tax-exempt municipal securities are valued using market data for comparable securities (maturity and sector) and management judgment to infer an appropriate current yield or other model-based valuation techniques deemed appropriate by management based on the specific nature of the individual security and are therefore categorized as Level III.

Short-term municipal securities – Short-term municipal securities include auction rate securities, variable rate demand notes, and other short-term municipal securities. Variable rate demand notes and other short-term municipal securities are valued using recently executed observable trades or market price quotations and therefore are generally categorized as Level II. Auction rate securities with limited liquidity are categorized as Level III and are valued using discounted cash flow models with unobservable inputs such as the Company’s expected recovery rate on the securities.

Asset-backed securities – Asset-backed securities are valued using observable trades, when available. Certain asset-backed securities are valued using models where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data. These asset-backed securities are categorized as Level II. Other asset-backed securities, which are principally collateralized by residential mortgages, have experienced low volumes of executed transactions resulting in less observable transaction data. Certain asset-backed securities collateralized by residential mortgages are valued using cash flow models that utilize unobservable inputs including credit default rates, prepayment rates, loss severity and valuation yields. As judgment is used to determine the range of these inputs, these asset-backed securities are categorized as Level III.

17

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)


U.S. government agency securities – U.S. government agency securities include agency debt bonds and mortgage bonds. Agency debt bonds are valued by using either direct price quotes or price quotes for comparable bond securities and are categorized as Level II. Mortgage bonds include bonds secured by mortgages, mortgage pass-through securities, agency collateralized mortgage-obligation (“CMO”) securities and agency interest-only securities. Mortgage pass-through securities, CMO securities and interest-only securities are valued using recently executed observable trades or other observable inputs, such as prepayment speeds and therefore are generally categorized as Level II. Mortgage bonds are valued using observable market inputs, such as market yields ranging from 11-598 basis points (“bps”) on spreads over U.S. treasury securities, or models based upon prepayment expectations ranging from 102-324 Public Securities Association (“PSA”) prepayment levels. These securities are categorized as Level II.

U.S. government securities – U.S. government securities include highly liquid U.S. treasury securities which are generally valued using quoted market prices and therefore categorized as Level I. The Company does not transact in securities of countries other than the U.S. government.

Derivatives – Derivative contracts include interest rate and basis swaps, forward purchase agreements, interest rate locks, treasury futures, options and credit default swap index contracts. These instruments derive their value from underlying assets, reference rates, indices or a combination of these factors. The Company's equity option derivative contracts are valued based on quoted prices from the exchange for identical assets or liabilities as of the period-end date. To the extent these contracts are actively traded and valuation adjustments are not applied, they are categorized as Level I. The Company’s credit default swap index contracts are valued using market price quotations and are classified as Level II. The majority of the Company’s interest rate derivative contracts, including both interest rate swaps and interest rate locks, are valued using market standard pricing models based on the net present value of estimated future cash flows. The valuation models used do not involve material subjectivity as the methodologies do not entail significant judgment and the pricing inputs are market observable, including contractual terms, yield curves and measures of volatility. These instruments are classified as Level II within the fair value hierarchy. Certain interest rate locks transact in less active markets and were valued using valuation models that included the previously mentioned observable inputs and certain unobservable inputs that required significant judgment, such as the premium over the MMD curve. These instruments are classified as Level III.

Investments

The Company’s investments valued at fair value include equity investments in private companies, investments in public companies, investments in registered mutual funds, and warrants of public or private companies. Exchange traded direct equity investments in public companies and registered mutual funds are valued based on quoted prices on active markets and classified as Level I. Company-owned warrants, which have a cashless exercise option, are valued based upon the Black-Scholes option-pricing model and certain unobservable inputs. The Company applies a liquidity discount to the value of its warrants in public and private companies. For warrants in private companies, valuation adjustments, based upon management’s judgment, are made to account for differences between the measured security and the stock volatility factors of comparable companies. Company-owned warrants are reported as Level III assets. Equity securities in private companies are valued based on an assessment of each underlying security, considering rounds of financing, third-party transactions and market-based information, including comparable company transactions, trading multiples (e.g., multiples of revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA")) and changes in market outlook, among other factors. These securities are generally categorized as Level III.

Fair Value Option – The fair value option permits the irrevocable fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The fair value option was elected for certain merchant banking and other investments at inception to reflect economic events in earnings on a timely basis. Merchant banking and other equity investments of $17.9 million and $16.1 million, included within investments on the consolidated statements of financial condition, are accounted for at fair value and are classified as Level III assets at September 30, 2014 and December 31, 2013, respectively. The realized and unrealized gains from fair value changes included in earnings as a result of electing to apply the fair value option to certain financial assets were $2.1 million and $9.5 million for the nine months ended September 30, 2014 and 2013, respectively.


18

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

The following table summarizes quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s Level III financial instruments as of September 30, 2014:
 
Valuation
 
 
 
 
 
Weighted
 
Technique
 
Unobservable Input
 
Range      
 
Average
Assets:
 
 
 
 
 
 
 
Financial instruments and other inventory positions owned:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Tax-exempt securities
Discounted cash flow
 
Debt service coverage ratio (2)
 
5 - 69%
 
22.2%
Short-term securities
Discounted cash flow
 
Expected recovery rate (% of par) (2)
 
77 - 80%
 
79.6%
Asset-backed securities:
 
 
 
 
 
 
 
Collateralized by residential mortgages
Discounted cash flow
 
Credit default rates (3)
 
1 - 6%
 
3.4%
 
 
 
Prepayment rates (4)
 
2 - 22%
 
4.3%
 
 
 
Loss severity (3)
 
25 - 85%
 
66.0%
 
 
 
Valuation yields (3)
 
5 - 10%
 
5.1%
Derivative contracts:
 
 
 
 
 
 
 
Interest rate locks
Discounted cash flow
 
Premium over the MMD curve (1)
 
3 - 15 bps
 
11.4 bps
Investments at fair value:
 
 
 
 
 
 
 
Warrants in public and private companies
Black-Scholes option pricing model
 
Liquidity discount rates (1)
 
30 - 40%
 
35.5%
Warrants in private companies
Black-Scholes option pricing model
 
Stock volatility factors of comparable companies (2)
 
23 - 94%
 
47.9%
Equity securities in private companies
Market approach
 
Revenue multiple (2)
 
2 - 6 times
 
3.6 times
 
 
 
EBITDA multiple (2)
 
9 - 12 times
 
9.4 times
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
Derivative contracts:
 
 
 
 
 
 
 
Interest rate locks
Discounted cash flow
 
Premium over the MMD curve (1)
 
4 - 40 bps
 
15.9 bps
Sensitivity of the fair value to changes in unobservable inputs:
(1)
Significant increase/(decrease) in the unobservable input in isolation would result in a significantly lower/(higher) fair value measurement.
(2)
Significant increase/(decrease) in the unobservable input in isolation would result in a significantly higher/(lower) fair value measurement.
(3)
Significant changes in any of these inputs in isolation could result in a significantly different fair value. Generally, a change in the assumption used for credit default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally inverse change in the assumption for valuation yields.
(4)
The potential impact of changes in prepayment rates on fair value is dependent on other security-specific factors, such as the par value and structure. Changes in the prepayment rates may result in directionally similar or directionally inverse changes in fair value depending on whether the security trades at a premium or discount to the par value.

19

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

The following table summarizes the valuation of the Company’s financial instruments by pricing observability levels defined in FASB Accounting Standards Codification Topic 820, "Fair Value Measurement" ("ASC 820") as of September 30, 2014:
 
 
 
 
 
 
 
Counterparty
 
 
 
 
 
 
 
 
 
and Cash
 
 
 
 
 
 
 
 
 
Collateral
 
 
(Dollars in thousands)
Level I
 
Level II
 
Level III
 
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions owned:
 
 
 
 
 
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
 
 
Equity securities
$
46,087

 
$
8,299

 
$

 
$

 
$
54,386

Convertible securities

 
164,580

 

 

 
164,580

Fixed income securities

 
41,482

 

 

 
41,482

Municipal securities:
 
 
 
 
 
 
 
 
 
Taxable securities

 
306,534

 

 

 
306,534

Tax-exempt securities

 
364,257

 
1,306

 

 
365,563

Short-term securities

 
77,491

 
731

 

 
78,222

Asset-backed securities

 
4,020

 
95,274

 

 
99,294

U.S. government agency securities

 
322,284

 

 

 
322,284

Derivative contracts
63

 
395,533

 
1,317

 
(345,664
)
 
51,249

Total financial instruments and other inventory positions owned:
46,150

 
1,684,480

 
98,628

 
(345,664
)
 
1,483,594

 
 
 
 
 
 
 
 
 
 
Cash equivalents
903

 

 

 

 
903

 
 
 
 
 
 
 
 
 
 
Investments at fair value
22,175

 

 
69,998

 

 
92,173

Total assets
$
69,228

 
$
1,684,480

 
$
168,626

 
$
(345,664
)
 
$
1,576,670

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
 
 
Equity securities
$
157,598

 
$
881

 
$

 
$

 
$
158,479

Fixed income securities

 
23,498

 

 

 
23,498

U.S. government agency securities

 
70,992

 

 

 
70,992

U.S. government securities
505,689

 

 

 

 
505,689

Derivative contracts
247

 
373,555

 
10,167

 
(373,636
)
 
10,333

Total financial instruments and other inventory positions sold, but not yet purchased:
$
663,534

 
$
468,926

 
$
10,167

 
$
(373,636
)
 
$
768,991

(1)
Represents cash collateral and the impact of netting on a counterparty basis. The Company had no securities posted as collateral to its counterparties.


20

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

The following table summarizes the valuation of the Company’s financial instruments by pricing observability levels defined in ASC 820 as of December 31, 2013:
 
 
 
 
 
 
 
Counterparty
 
 
 
 
 
 
 
 
 
and Cash
 
 
 
 
 
 
 
 
 
Collateral
 
 
(Dollars in thousands)
Level I
 
Level II
 
Level III
 
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions owned:
 
 
 
 
 
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
 
 
Equity securities
$
39,711

 
$
14,386

 
$

 
$

 
$
54,097

Convertible securities

 
80,784

 

 

 
80,784

Fixed income securities

 
10,002

 
100

 

 
10,102

Municipal securities:
 
 
 
 
 
 
 
 
 
Taxable securities

 
232,379

 

 

 
232,379

Tax-exempt securities

 
459,432

 
1,433

 

 
460,865

Short-term securities

 
61,964

 
656

 

 
62,620

Asset-backed securities

 
12

 
119,799

 

 
119,811

U.S. government agency securities

 
304,737

 

 

 
304,737

Derivative contracts
19

 
351,589

 
691

 
(313,666
)
 
38,633

Total financial instruments and other inventory positions owned:
39,730

 
1,515,285

 
122,679

 
(313,666
)
 
1,364,028

 
 
 
 
 
 
 
 
 
 
Cash equivalents
101,629

 

 

 

 
101,629

 
 
 
 
 
 
 
 
 
 
Investments at fair value
20,690

 

 
49,240

 

 
69,930

Total assets
$
162,049

 
$
1,515,285

 
$
171,919

 
$
(313,666
)
 
$
1,535,587

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
 
 
Equity securities
$
69,205

 
$

 
$

 
$

 
$
69,205

Fixed income securities

 
24,021

 

 

 
24,021

U.S. government agency securities

 
120,084

 

 

 
120,084

U.S. government securities
291,320

 

 

 

 
291,320

Derivative contracts
1,889

 
324,065

 
6,643

 
(324,394
)
 
8,203

Total financial instruments and other inventory positions sold, but not yet purchased:
$
362,414

 
$
468,170

 
$
6,643

 
$
(324,394
)
 
$
512,833

(1)
Represents cash collateral and the impact of netting on a counterparty basis. The Company had no securities posted as collateral to its counterparties.

The Company’s Level III assets were $168.6 million and $171.9 million, or 10.7 percent and 11.2 percent of financial instruments measured at fair value at September 30, 2014 and December 31, 2013, respectively. The value of transfers between levels are recognized at the beginning of the reporting period. There were no significant transfers between Level I, Level II or Level III for the nine months ended September 30, 2014.

21

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

The following tables summarize the changes in fair value associated with Level III financial instruments held at the beginning or end of the periods presented:
 
Balance at
 
 
 
 
 
 
 
 
 
Realized
 
Unrealized
 
Balance at
 
June 30,
 
 
 
 
 
Transfers
 
Transfers
 
gains/
 
gains/
 
September 30,
(Dollars in thousands)
2014
 
Purchases
 
Sales
 
in
 
out
 
(losses) (1)
 
(losses) (1)
 
2014
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt securities
$
1,306

 
$

 
$

 
$

 
$

 
$

 
$

 
$
1,306

Short-term securities
732

 

 

 

 

 

 
(1
)
 
731

Asset-backed securities
129,126

 
58,028

 
(93,801
)
 
515

 

 
1,377

 
29

 
95,274

Derivative contracts
627

 

 

 

 

 

 
690

 
1,317

Total financial instruments and other inventory positions owned:
131,791

 
58,028

 
(93,801
)
 
515

 

 
1,377

 
718

 
98,628

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments at fair value
58,567

 
10,500

 
(9
)
 

 

 
9

 
931

 
69,998

Total assets
$
190,358

 
$
68,528

 
$
(93,810
)
 
$
515

 
$

 
$
1,386

 
$
1,649

 
$
168,626

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative contracts
$
10,846

 
$
(8,439
)
 
$

 
$

 
$

 
$
8,439

 
$
(679
)
 
$
10,167

Total financial instruments and other inventory positions sold, but not yet purchased:
$
10,846

 
$
(8,439
)
 
$

 
$

 
$

 
$
8,439

 
$
(679
)
 
$
10,167

(1)
Realized and unrealized gains/(losses) related to financial instruments, with the exception of customer matched-book derivatives, are reported in institutional brokerage on the consolidated statements of operations. Realized and unrealized gains/(losses) related to customer matched-book derivatives are reported in investment banking. Realized and unrealized gains/(losses) related to investments are reported in investment banking revenues or investment income/(loss) on the consolidated statements of operations.


22

Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)

 
Balance at
 
 
 
 
 
 
 
 
 
Realized
 
Unrealized
 
Balance at
 
June 30,
 
 
 
 
 
Transfers
 
Transfers
 
gains/
 
gains/
 
September 30,
(Dollars in thousands)
2013
 
Purchases
 
Sales
 
in
 
out
 
(losses) (1)
 
(losses) (1)
 
2013
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions owned: