Attached files

file filename
EX-10.20 - SUMMARY OF NON-EMPLOYEE DIRECTOR COMPENSATION PROGRAM - PIPER JAFFRAY COMPANIESpjc2015ex1020.htm
EX-10.25 - THIRD AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT - PIPER JAFFRAY COMPANIESpjc2015ex1025.htm
EX-4.1 - SPECIMEN CERTIFICATE FOR PJC COMMON STOCK - PIPER JAFFRAY COMPANIESpjc2015ex41.htm
EX-23.1 - CONSENT OF ERNST & YOUNG LLP - PIPER JAFFRAY COMPANIESpjc2015ex231.htm
EX-24.1 - POWER OF ATTORNEY - PIPER JAFFRAY COMPANIESpjc2015ex241.htm
EX-21.1 - SUBSIDIARIES OF PIPER JAFFRAY COMPANIES - PIPER JAFFRAY COMPANIESpjc2015ex211.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - PIPER JAFFRAY COMPANIESpjc2015ex312.htm
EX-10.38 - AGREEMENT FOR CA-BASED EMPLOYEE GRANTS IN 2016 - PIPER JAFFRAY COMPANIESpjc2015ex1038.htm
EX-32.1 - SECTION 1350 CERTIFICATION - PIPER JAFFRAY COMPANIESpjc2015ex321.htm
EX-10.37 - AGREEMENT FOR EMPLOYEE GRANTS IN 2016 - PIPER JAFFRAY COMPANIESpjc2015ex1037.htm
EX-31.1 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER - PIPER JAFFRAY COMPANIESpjc2015ex311.htm


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2015
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)
 
 
 
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 $0.01 per share
 
The 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  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ¨    No  þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 þ    Accelerated filer ¨    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
The aggregate market value of the 14,474,232 shares of the Registrant’s Common Stock, par value $0.01 per share, held by non-affiliates based upon the last sale price, as reported on the New York Stock Exchange, of the Common Stock on June 30, 2015 was approximately $632 million.
As of February 18, 2016, the registrant had 14,926,391 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the Registrant’s Proxy Statement for its 2016 Annual Meeting of Shareholders to be held on May 4, 2016.
 




TABLE OF CONTENTS

PART I
ITEM 1.
 
ITEM 1A.
 
ITEM 1B.
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
 
 
 
 
PART II
ITEM 5.
 
ITEM 6.
 
ITEM 7.
 
ITEM 7A.
 
ITEM 8.
 
ITEM 9.
 
ITEM 9A.
 
ITEM 9B.
 
 
 
 
 
PART III
ITEM 10.
 
ITEM 11.
 
ITEM 12.
 
ITEM 13.
 
ITEM 14.
 
 
 
 
 
PART IV
ITEM 15.
 
 
 



2


PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the year ended December 31, 2015 (this "Form 10-K") contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements include, among other things, statements other than historical information or statements of current conditions and may relate to our future plans and objectives and results, and also may include our belief regarding the effect of various legal proceedings, as set forth under "Legal Proceedings" in Part I, Item 3 of this Form 10-K and in our subsequent reports filed with the Securities and Exchange Commission ("SEC"). Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including those factors discussed below under "Risk Factors" in Item 1A, as well as those factors discussed under "External Factors Impacting Our Business" included in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K and in our subsequent reports filed with the SEC. Our SEC reports are available at our Web site at www.piperjaffray.com and at the SEC’s Web site at www.sec.gov. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.

ITEM 1.     BUSINESS.

Overview

Piper Jaffray Companies ("Piper Jaffray") is an investment bank and asset management firm, serving the needs of corporations, private equity groups, public entities, non-profit entities and institutional investors in the U.S. and internationally. Founded in 1895, Piper Jaffray provides a broad set of products and services, including equity and debt capital markets products; public finance services; financial advisory services; equity and fixed income institutional brokerage; equity and fixed income research; and asset management services. Our headquarters are located in Minneapolis, Minnesota and we have offices across the United States and international locations in London, Hong Kong and Zurich. We market our investment banking and institutional securities business under a single name – Piper Jaffray – which gives us a consistent brand across this business. Our traditional asset management business is marketed under Advisory Research, Inc.

Prior to 1998, Piper Jaffray was an independent public company. U.S. Bancorp acquired the Piper Jaffray business in 1998 and operated it through various subsidiaries and divisions. At the end of 2003, U.S. Bancorp facilitated a tax-free distribution of our common stock to all U.S. Bancorp shareholders, causing Piper Jaffray to become an independent public company again.

Our Businesses

We operate through two reportable business segments, Capital Markets and Asset Management. We believe that the mix of activities across our business segments helps to provide diversification in our business model.

Capital Markets

The Capital Markets segment provides investment banking and institutional sales, trading and research services for various equity and fixed income products. This segment also includes the results from our alternative asset management funds and our principal investments.

Investment Banking – For our corporate clients, we help raise capital through equity and debt financings. We also provide advisory services, primarily relating to mergers and acquisitions, equity private placements, debt advisory, and municipal financial advisory services. We operate in the following focus sectors: healthcare; consumer; diversified industrials and services; business services; technology; financial institutions; and agriculture, clean technologies and renewables, primarily focusing on middle-market clients. For our government and non-profit clients, we underwrite debt issuances and provide financial advisory, loan placement and interest rate risk management services. Our public finance investment banking capabilities focus on state and local governments, cultural and social service non-profit entities, and the education, healthcare, hospitality, senior living and transportation sectors.


3


Equity and Fixed Income Institutional Brokerage – We offer both equity and fixed income advisory and trade execution services for institutional investors and government and non-profit entities. Integral to our capital markets efforts, we have equity sales and trading relationships with institutional investors in the United States and Europe that invest in our core sectors. Our research analysts provide investment ideas and support to our trading clients on approximately 700 companies. Our fixed income sales and trading professionals have expertise in municipal, corporate, mortgage, agency, treasury and structured product securities and cover a range of institutional investors. We engage in trading activities for both customer facilitation and strategic trading purposes. Our strategic trading activities (i.e. proprietary trading) are dedicated solely to investing firm capital, and focus on proprietary investments in municipal bonds, mortgage-backed securities and U.S. government agency securities. The strategic trading activities related to municipal bonds are principally operated in a fund structure vehicle with a limited number of employee investors.

Principal Investments – We engage in merchant banking activities, which involve equity or debt investments in late stage private companies. Additionally, we have investments in private equity funds and other firm investments.

Alternative Asset Management Funds We have created alternative asset management funds in merchant banking and senior living in order to invest firm capital as well as to manage capital from outside investors. In the second half of 2015, we closed and completed liquidation of a municipal bond fund managed for the benefit of outside investors.

Asset Management

The Asset Management segment includes our traditional asset management business and our investments in registered funds and private funds or partnerships that we manage. Our traditional asset management business offers specialized investment management solutions for institutions, private clients and investment advisors. We manage value-oriented domestic, international and global strategies, as well as MLP and energy infrastructure strategies, through open-end and closed-end funds. We also provide customized solutions to our clients. In many cases, we offer both diversified and more concentrated versions of our products, generally through separately managed accounts.

Value Equity – We take a value-driven approach to managing assets in the domestic and international equity markets. These investment strategies have an investment philosophy that centers on fundamental security selection across industries and regions with a focus on analyzing, among other things, a company's financial position, liquidity and profitability in light of its valuation. By focusing on securities with attractive net asset values, we seek to generate competitive long-term returns while minimizing investment risk.

Master Limited Partnerships ("MLPs") and Energy Infrastructure We also manage MLPs, energy infrastructure, and related operating entity assets focused on the energy sector. These strategies focus on growth, yet seek to limit exposure to riskier securities by placing greater importance on characteristics which support stable distributions and are representative of higher quality MLPs, including less volatile businesses, strategic assets, cleaner balance sheets and proven management teams. In addition to our MLP-focused funds, we manage other private funds focused on energy sector securities.

As of December 31, 2015, total assets under management ("AUM") were $8.9 billion, of which approximately 56 percent was invested in equities and 44 percent in MLPs. As of the same date, approximately 18 percent of our AUM was invested in international and global investment strategies and 82 percent was invested in domestic investment strategies. Approximately 79 percent of our AUM as of December 31, 2015 was managed on behalf of institutional clients, including foundations, endowments, pension funds and corporations, and through mutual fund sponsors and registered advisors. Approximately 13 percent of our AUM was managed on behalf of individual client relationships, which are principally high net worth individuals, and approximately 8 percent of our AUM was managed through sub-advisory relationships on closed-end funds.

Discontinued Operations

Our discontinued operations include the costs to liquidate our Hong Kong capital markets business, which ceased operations in 2012, and the operating results of Fiduciary Asset Management, LLC ("FAMCO"), an asset management subsidiary we sold in 2013. For further information on our discontinued operations, see Note 5 to our consolidated financial statements included in Part II, Item 8 of this Form 10-K.


4


Financial Information about Geographic Areas

As of December 31, 2015, the substantial majority of the Company's net revenues and long-lived assets were located in the U.S.

Competition

Our business is subject to intense competition driven by large Wall Street and international firms operating independently or as part of a large commercial banking institution. We also compete with regional broker dealers, boutique and niche-specialty firms, asset management firms and alternative trading systems that effect securities transactions through various electronic venues. Competition is based on a variety of factors, including price, quality of advice and service, reputation, product selection, transaction execution, financial resources and investment performance. Many of our large competitors have greater financial resources than we have and may have more flexibility to offer a broader set of products and services than we can.

In addition, there is significant competition within the securities industry for obtaining and retaining the services of qualified employees. Our business is a human capital business and the performance of our business is dependent upon the skills, expertise and performance of our employees. Therefore, our ability to compete effectively is dependent upon attracting and retaining qualified individuals who are motivated to serve the best interests of our clients, thereby serving the best interests of our company. Attracting and retaining employees depends, among other things, on our company’s culture, management, work environment, geographic locations and compensation.

Employees

As of February 18, 2016, we had approximately 1,192 employees, of whom approximately 750 were registered with the Financial Industry Regulatory Authority (“FINRA”).

Regulation

As a participant in the financial services industry, our business is regulated by U.S. federal and state regulatory agencies, self-regulatory organizations (“SROs”) and securities exchanges, and by foreign governmental agencies, financial regulatory bodies and securities exchanges. We are subject to complex and extensive regulation of most aspects of our business, including the manner in which securities transactions are effected, net capital requirements, recordkeeping and reporting procedures, relationships and conflicts with customers, the handling of cash and margin accounts, conduct, experience and training requirements for certain employees, and the manner in which we prevent and detect money-laundering and bribery activities. The regulatory framework of the financial services industry is designed primarily to safeguard the integrity of the capital markets and to protect customers, not creditors or shareholders.

The laws, rules and regulations comprising this regulatory framework can (and do) change frequently, as can the interpretation and enforcement of existing laws, rules and regulations. Conditions in the global financial markets and economy, including the 2008 financial crisis, caused legislators and regulators to increase the examination, enforcement and rule-making activity directed toward the financial services industry, which we expect to continue in the coming years. This intensified regulatory environment, will likely alter certain business practices and change the competitive landscape of the financial services industry, which may have an adverse effect on our business, financial condition and results of operations.

Our U.S. broker dealer subsidiary (Piper Jaffray & Co.) is registered as a securities broker dealer with the SEC and is a member of various SROs and securities exchanges. In July of 2007, the National Association of Securities Dealers and the member regulation, enforcement and arbitration functions of the New York Stock Exchange (“NYSE”) consolidated to form FINRA, which now serves as the primary SRO of Piper Jaffray & Co., although the NYSE continues to have oversight over NYSE-related market activities. FINRA regulates many aspects of our U.S. broker dealer business, including registration, education and conduct of our employees, examinations, rulemaking, enforcement of these rules and the federal securities laws, trade reporting and the administration of dispute resolution between investors and registered firms. We have agreed to abide by the rules of FINRA (as well as those of the NYSE and other SROs), and FINRA has the power to expel, fine and otherwise discipline Piper Jaffray & Co. and its officers, directors and employees. Among the rules that apply to Piper Jaffray & Co. are the uniform net capital rule of the SEC (Rule 15c3-1) and the net capital rule of FINRA. Both rules set a minimum level of net capital a broker dealer must maintain and also require that a portion of the broker dealer's assets be relatively liquid. Under the FINRA rule, FINRA may prohibit a member firm from expanding its business or paying cash dividends if resulting net capital falls below FINRA requirements. In addition, Piper Jaffray & Co. is subject to certain notification requirements related to withdrawals of excess net capital. As a result of these rules, our ability

5


to make withdrawals of capital from Piper Jaffray & Co. may be limited. In addition, Piper Jaffray & Co. is licensed as a broker dealer in each of the 50 states, requiring us to comply with applicable laws, rules and regulations of each state. Any state may revoke a license to conduct a securities business and fine or otherwise discipline broker dealers and their officers, directors and employees.

We also operate an entity that is authorized, licensed and regulated by the U.K. Financial Conduct Authority and registered under the laws of England and Wales, as well as an entity that is authorized, licensed and regulated by the Hong Kong Securities and Futures Commission and registered under the laws of Hong Kong, China. The U.K. Financial Conduct Authority and the Hong Kong Securities and Futures Commission regulate these entities (in their respective jurisdictions) in areas of capital adequacy, customer protection and business conduct, among others.

Entities in the jurisdictions identified above are also subject to anti-money laundering regulations. Piper Jaffray & Co., our U.S. broker dealer subsidiary, is subject to the USA PATRIOT Act of 2001, which contains anti-money laundering and financial transparency laws and mandates the implementation of various regulations requiring us to implement standards for verifying client identification at account opening, monitoring client transactions and reporting suspicious activity. Our entities in Hong Kong and the United Kingdom are subject to similar anti-money laundering laws and regulations. We are also subject to the U.S. Foreign Corrupt Practices Act as well as other anti-bribery laws in the jurisdictions in which we operate. These laws generally prohibit companies and their intermediaries from engaging in bribery or making other improper payments to foreign officials for the purpose of obtaining or retaining business or gaining an unfair business advantage.

We maintain asset management subsidiaries that are registered as investment advisers with the SEC and subject to regulation and oversight by the SEC. These entities are Advisory Research, Inc. ("ARI"), Piper Jaffray Investment Management LLC ("PJIM"), and PJC Capital Partners LLC. As registered investment advisors, these entities are subject to requirements that relate to, among other things, fiduciary duties to clients, maintaining an effective compliance program, solicitation agreements, conflicts of interest, recordkeeping and reporting requirements, disclosure requirements, limitations on agency cross and principal transactions between advisor and advisory clients, as well as general anti-fraud prohibitions. Certain investment funds that we manage are registered investment companies under the Investment Company Act, as amended. Those funds and entities that serve as the funds' investment advisors are subject to the Investment Company Act and the rules and regulations of the SEC, which regulate the relationship between a registered investment company and its investment advisor and prohibit or severely restrict principal transactions or joint transactions, among other requirements. ARI is also authorized by the Irish Financial Services Regulatory Authority as an investment advisor in Ireland and cleared by the Luxembourg Commission de Surviellance du Secteur Financier as a manager to Luxembourg funds. ARI is the investment advisor for Advisory Research Global Funds PLC, an open-ended investment company with variable capital authorized and regulated by the Central Bank of Ireland pursuant to the European Communities Regulations (Undertakings for Collective Investments in Transferable Securities or UCITS). ARI has established a Tokyo office which is a Representative Office of a Foreign Investment Advisor subject to Japanese laws and regulations. PJIM is registered with the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association (“NFA”) as a commodities pool operator. The registrations with the CFTC and NFA allow PJIM to enter into derivative instruments (e.g., interest rate swaps and credit default swap index contracts) to hedge risks associated with certain security positions of funds managed by PJIM. 

Certain of our businesses also are subject to compliance with laws and regulations of U.S. federal and state governments, non-U.S. governments, their respective agencies and/or various self-regulatory organizations or exchanges governing the privacy of client information. Any failure with respect to our practices, procedures and controls in any of these areas could subject us to regulatory consequences, including fines, and potentially other significant liabilities.


6


Executive Officers

Information regarding our executive officers and their ages as of February 18, 2016, are as follows:
Name
 
Age
 
Position(s)
Andrew S. Duff
 
58
 
Chairman and Chief Executive Officer
Chad R. Abraham
 
47
 
Co-Head of Global Investment Banking and Capital Markets
Christopher D. Crawshaw
 
49
 
Head of Asset Management
Christine N. Esckilsen
 
47
 
Chief Human Capital Officer
Frank E. Fairman
 
58
 
Head of Public Finance
John W. Geelan
 
40
 
General Counsel and Secretary
Jeff P. Klinefelter
 
48
 
Global Head of Equities
R. Scott LaRue
 
55
 
Co-Head of Global Investment Banking and Capital Markets
Debbra L. Schoneman
 
47
 
Chief Financial Officer
Thomas G. Smith
 
59
 
Chief Strategy Officer
M. Brad Winges
 
47
 
Head of Fixed Income Services and Piper Jaffray Firm Investments and Trading

Andrew S. Duff is our chairman and chief executive officer. Mr. Duff became chairman and chief executive officer of Piper Jaffray Companies following completion of our spin-off from U.S. Bancorp on December 31, 2003. He also has served as chairman of our broker dealer subsidiary since 2003, as chief executive officer of our broker dealer subsidiary since 2000, and as president of our broker dealer subsidiary since 1996. He has been with Piper Jaffray since 1980. Prior to the spin-off from U.S. Bancorp, Mr. Duff also was a vice chairman of U.S. Bancorp from 1999 through 2003.

Chad R. Abraham is our co-head of global investment banking and capital markets, a position he has held since October 2010. Prior to his current role, he served as head of equity capital markets since November 2005. Mr. Abraham joined Piper Jaffray in 1991.

Christopher D. Crawshaw is our head of asset management. He has served in this role since January 2014. Mr. Crawshaw joined Piper Jaffray from Advisory Research, Inc., a Chicago-based asset management firm that we acquired in 2010, where he had been a managing director since 2004, having joined the company in 2001. Mr. Crawshaw was named president of Advisory Research in 2012.

Christine N. Esckilsen is our chief human capital officer, a title she has held since January 2016. Ms. Esckilsen has been our global head of human capital and a managing director since 2011. She joined Piper Jaffray in 2002 as an assistant general counsel responsible for employment matters and litigation.

Frank E. Fairman is head of our public finance services business, a position he has held since July 2005. Prior to that, he served as head of the firm's public finance investment banking group from 1991 to 2005, as well as the head of the firm's municipal derivative business from 2002 to 2005. He has been with Piper Jaffray since 1983.

John W. Geelan is our general counsel and secretary. He served as assistant general counsel and assistant secretary from November 2007 until becoming general counsel in January 2013. Mr. Geelan joined Piper Jaffray in 2005.

Jeff P. Klinefelter is the global head of our equities business, a position he has held since July 2012. From May 2010 until July 2012, he served as head of equity research. Mr. Klinefelter joined Piper Jaffray in 1997 as a research analyst.

R. Scott LaRue is our co-head of global investment banking and capital markets, a position he has held since October 2010. He had previously served as global co-head of consumer investment banking since February 2010, after having served as co-head of consumer investment banking since August 2004. He has been with Piper Jaffray since 2003.

Debbra L. Schoneman is our chief financial officer. Ms. Schoneman joined Piper Jaffray in 1990 and has held her current position since May 2008. She previously served as treasurer from August 2006 until May 2008. Prior to that, she served as finance director of our corporate and institutional services business from July 2002 until July 2004 when the role was expanded to include our public finance services division.


7


Thomas G. Smith is our chief strategy officer, a title he has held since January 2016 which encompasses his roles as our head of strategy, corporate development, and investor relations. He joined Piper Jaffray in 1998 as a managing director in our technology investment banking group. He became head of corporate development in 2006 and head of investor relations in 2012.

M. Brad Winges is head of fixed income services, a position he has held since January 2009, and became head of Piper Jaffray firm investments and trading in February 2014. Mr. Winges joined Piper Jaffray in 1991 and served as head of public finance services sales and trading from June 2005 until obtaining his current position. Prior to that, he served as head of municipal sales and trading from June 2003 until June 2005.

Additional Information

Our principal executive offices are located at 800 Nicollet Mall, Suite 1000, Minneapolis, Minnesota 55402, and our general telephone number is (612) 303-6000. We maintain an Internet Web site at http://www.piperjaffray.com. The information contained on and connected to our Web site is not incorporated into this report. We make available free of charge on or through our Web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and all other reports we file with the SEC, as soon as reasonably practicable after we electronically file these reports with, or furnish them to, the SEC. “Piper Jaffray,” the “Company,” “registrant,” “we,” “us” and “our” refer to Piper Jaffray Companies and our subsidiaries. The Piper Jaffray logo and the other trademarks, tradenames and service marks of Piper Jaffray mentioned in this report, including Piper Jaffray®, are the property of Piper Jaffray.

ITEM 1A.     RISK FACTORS.

Developments in market and economic conditions have in the past adversely affected, and may in the future adversely affect, our business and profitability and cause volatility in our results of operations.

Economic and market conditions have had, and will continue to have, a direct and material impact on our results of operations and financial condition because performance in the financial services industry is heavily influenced by the overall strength of economic conditions and financial market activity. For example:
  
Our equities investment banking revenue, in the form of underwriting, placement and financial advisory fees, is directly related to macroeconomic conditions and corresponding financial market activity. When the outlook for macroeconomic conditions is uncertain or negative, financial market activity generally tends to be decreased, which can reduce our equities investment banking revenues. As an example, a significant component of our investment banking revenues are derived from initial public offerings of middle-market companies in growth sectors, and activity in this area is highly correlated to the macroeconomic environment and market conditions. Beginning in the third quarter of 2015, volatility in equity markets began increasing leading up to the Federal Reserve's decision to raise the federal funds rate in December. This volatility has continued into the first quarter of 2016 as the markets weigh falling commodity prices, depressed energy markets, a slowdown in global economic growth, including in China and other developing markets, and weakening growth in the U.S. In addition, U.S. financial markets remain vulnerable to the potential risks posed by exogenous shocks, which could include, among other things, further conflict in the Middle East and in Eastern Europe, political and financial uncertainty in the European Union and further government debt crises, and a more severe and prolonged downturn in China's economy. If these factors were to worsen or if an exogenous shock were to materialize, it could lead to further or more severe equity market declines and volatility, which would likely have a significant negative impact on our results of operations.

Interest rates have a significant impact on our business, particularly our fixed income institutional business. This includes the direction and rate of change in rates, as well as uncertainy around both of these. Volatility generally increased in 2015, reflecting the uncertainty and volatility around the Federal Reserve's decision to raise the federal funds rate for the first time in nearly a decade, slowing economic growth in China, and the potential for a global economic slowdown. Yields are expected to be impacted in 2016 by perceptions around the strength of the U.S. economy and the ability of the Federal Reserve to gradually raise the federal funds rate through the year. As to the impact to our business, a large percentage of our securities inventory - both that held for facilitating client activity as well as our own proprietary trading - consist of fixed income securities, and a rapid increase in interest rates would decrease the value of these positions, possibly significantly. Further, our interest rate hedging strategies may not mitigate this volatility as we generally do not hedge all of our interest rate risk and volatility may reduce the correlation (i.e., effectiveness) between certain hedging vehicles and the securities inventory we are attempting to hedge. In addition, interest rate increases in 2016, both gradual and more severe, may negatively impact the volume of debt

8


refinancing issuances underwritten by our public finance investment banking business, as well as our managed funds focused on master limited partnerships ("MLPs"), which may underperform in a rising interest rate environment.

An unsustainable U.S. economic recovery, or a significant worsening of global economic conditions, would likely result in a decline in the financial markets, reducing asset valuations and adversely impacting our asset management business. A reduction in asset values would negatively impact this business by reducing the value of assets under management, and as a result, the revenues generated from this business.

It is difficult to predict the market conditions for 2016, which are dependent in large part upon the pace of global and U.S. economic growth. Our smaller scale compared to many of our competitors and the cyclical nature of the economy and this industry leads to volatility in our financial results, including our operating margins, compensation ratios and revenue and expense levels. Our financial performance may be limited by the fixed nature of certain expenses, the impact from unanticipated losses or expenses during the year, and the inability to scale back costs in a timeframe to match decreases in revenue-related changes in market and economic conditions. As a result, our financial results may vary significantly from quarter-to-quarter and year-to-year.

Developments in specific business sectors of the U.S. and global economy, as well as areas of the markets in which we conduct our business, have in the past adversely affected, and may in the future adversely affect, our business and profitability.

Our results for a particular period may be disproportionately impacted by declines in specific sectors of the U.S. or global economy, or for certain products within the financial services industry, due to our business mix and focus areas. For example:

Our equities investment banking business focuses on specific sectors, specifically healthcare, consumer, diversified industrials and services, business services, technology, financial institutions, and agriculture, clean technologies and renewables. Volatility, uncertainty, or slowdowns in these sectors, particularly healthcare, may adversely affect our business, sometimes disproportionately, and may cause volatility in the net revenues we receive from our capital markets and corporate advisory activities. In recent years, the healthcare sector has been a significant contributor to our overall results, and negative developments in this sector would materially and disproportionately impact us, even if general economic conditions were strong. Further, energy markets are currently suffering from a prolonged depression in oil and natural gas prices, and uncertainty regarding the outlook for future oil prices is dampening the prospects of many energy companies and reducing capital markets and corporate advisory activities in the sector. We recently announced the acquisition of Simmons & Company International, an energy-based investment banking firm, and the transaction is expected to close in the first quarter of 2016. Upon close, the energy sector will become one of our most significant sectors of coverage for our equity investment banking business. Disproportionately negative market conditions in the energy sector will slow and hinder our ability to realize the benefits from the acquisition. Lastly, we may not participate or may participate to a lesser degree than other firms in sectors that experience significant activity, such as real estate, and our operating results may not correlate with the results of other firms which participate in these sectors.

Our fixed income institutional business derives its revenue from sales and trading activity in the municipal market and from products within the taxable market, including structured mortgages, hybrid preferreds and government agency products. Our operating results for our fixed income institutional business may not correlate with the results of other firms or the fixed income market generally because we do not participate in significant segments of the fixed income markets such as credit default swaps, corporate high-yield bonds, currencies and commodities.

Our public finance investment banking business depends heavily upon conditions in the municipal market. Our public finance business focuses on investment banking activity in sectors that include state and local government, education, senior living, healthcare, transportation, and hospitality sectors, with an emphasis on transactions with a par value of $500 million or less. Challenging market conditions for these sectors that are disproportionately worse than those impacting the broader economy or municipal markets generally may adversely impact our business. More broadly, our fixed income institutional business and our public finance business are tied to the municipal market and the enactment, or the threat of enactment, of any legislation that would alter the financing alternatives available to municipalities through the elimination or reduction of tax-exempt bonds.

A significant portion of our asset management revenues are derived from actively managed equity products, and this type of investment product has experienced asset outflows in recent years, including in 2015. In addition, U.S. equity markets were largely flat or slightly down in 2015, and the beginning of 2016 saw further declines and increased volatility. Uncertainty relating to global and U.S. economic growth and equity valuations, the continued shift into lower-cost passively-managed funds, and other negative events impacting investor confidence could cause the negative trend for actively-managed equity products to continue. Outflows for this investment product negatively affect results of operations for this business, as revenues are closely tied to assets under management.

9



Management and performance fees we earn on assets invested by institutions and individuals in our managed funds focused on MLPs and other investments related to the energy infrastructure sector are a meaningful contributor to our asset management revenues. Return on investment in the energy infrastructure sector is dependent to a meaningful degree on the prices of energy commodities such as natural gas, natural gas liquids, crude oil, refined petroleum products or coal. Persistently depressed prices for any of these products, such as those experienced in 2015, will likely lead to a further deterioration of market conditions for companies in the energy infrastructure sector and poorer returns by our funds, and, consequently, a reduction in the management and performance fees we receive.

Our stock price may fluctuate as a result of several factors, including but not limited to, changes in our revenues, operating results, tangible book value and return on equity.

We have experienced, and expect to experience in the future, fluctuations in the market price of our common stock due to factors that relate to the nature of our business, including but not limited to changes in our revenues, operating results, tangible book value, and return on equity. Our business, by its nature, does not produce steady and predictable earnings on a quarterly basis, which causes fluctuations in our stock price that may be significant. Other factors that have affected, and may further affect, our stock price include changes in or news related to economic or market events or conditions, changes in market conditions in the financial services industry, including developments in regulation affecting our business, failure to meet the expectations of market analysts, changes in recommendations or outlooks by market analysts, and aggressive short selling similar to that experienced in the financial industry in 2008.

We may make strategic acquisitions and minority investments, engage in joint ventures or divest or exit existing businesses, which could cause us to incur unforeseen expenses and have disruptive effects on our business and may not yield the benefits we expect.

We may grow in part through corporate development activities that may include acquisitions, joint ventures and minority investment stakes. For example, we expanded our existing asset management business in March 2010 with the acquisition of ARI, a Chicago-based asset management firm, and we added to our public finance and fixed income sales and trading and corporate advisory businesses with our acquisitions of Seattle-Northwest Securities Corporation and Edgeview Partners, L.P. in July 2013. In 2015, we expanded our equities investment banking business into the financial institutions and energy sectors, respectively, through our completed acquisition of River Branch Holdings LLC and our announced acquisition of Simmons & Company International, which is expected to close in the first quarter of 2016. We also added scale to our fixed income institutional sales and trading business through our acquisition of BMO Capital Markets GKST Inc. There are a number of risks associated with corporate development activities. Costs or difficulties relating to a transaction, including integration of products, employees, technology systems, accounting systems and management controls, may be difficult to predict accurately and be greater than expected causing our estimates to differ from actual results. Importantly, we may be unable to retain key personnel after the transaction, and the transaction may impair relationships with customers and business partners. We may incur unforeseen liabilities of an acquired company that could impose significant and unanticipated legal costs on us. Also, our share price could decline after we announce or complete a transaction if investors view the transaction as too costly or unlikely to improve our competitive position. Longer-term, these activities may require increased costs in the form of management personnel, financial and management systems and controls and facilities, which, in the absence of continued revenue growth, would cause our operating margins to decline. More generally, any difficulties that we experience could disrupt our ongoing business, increase our expenses and adversely affect our operating results and financial condition. We also may be unable to achieve anticipated benefits and synergies from the transaction as fully as expected or within the expected time frame. Divestitures or elimination of existing businesses or products could have similar effects. For example, we shut down our Hong Kong capital markets business in 2012, and realized a pre-tax loss on the investment in our Hong Kong subsidiaries.

Our proprietary trading and principal investments expose us to risk of loss.

We engage in a variety of activities in which we commit or invest our own capital, including proprietary trading and principal investing. Our proprietary trading activities (which we also refer to as "strategic trading" in this report) related to municipal bonds and mortgage-backed securities have been a meaningful contributor to our overall financial results. Fixed income proprietary trading activities comprise a meaningful percentage of our Level III assets within our securities inventory. Level III assets have little or no pricing observability, and may be less liquid than other securities that we hold in our securities inventory. In addition to proprietary trading, we engage in principal investing, having established alternative asset management funds for merchant banking (focused on investments in the equity and debt instruments of private companies) and senior living construction projects. We have invested firm capital in these funds alongside capital raised from outside investors, and intend to continue to develop

10


these alternative asset management strategies. Additionally, we make principal investments in funds managed by ARI, our asset management subsidiary, which are generally invested in publicly traded equities.

Our results from these activities may vary significantly from quarter to quarter. We may incur significant losses from our proprietary trading activities and principal investments due to fixed income or equity market fluctuations and volatility from quarter to quarter. For example, in 2015, our principal investments in ARI funds focused on MLPs and other investments related to the energy sector, and, as a result, suffered significant declines related to the ongoing downturn in that sector. In addition, we may engage in hedging transactions that if not successful, could result in losses. With respect to principal investing, there often is not an established liquid trading market for these investments or our investments may be otherwise subject to restrictions on sale or hedging, and our ability to withdraw our capital from these investments may be limited, increasing our risk of losses. Also, our merchant banking activity involves investments in late stage private companies, and we may be unable to realize our investment objectives by sale or other disposition at attractive prices.

Damage to our reputation could damage our business.

Maintaining our reputation is critical to attracting and maintaining clients, customers, investors, and employees. If we fail to deal with, or appear to fail to deal with, issues that may give rise to reputational risk, such failure or appearance of failure could have a material adverse effect on our business and stock price. These issues include, but are not limited to, any of the risks discussed in this Item 1A, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money laundering, cybersecurity, and the proper identification of the strategic, market, credit, liquidity, human capital, and operational risks inherent in our business and products.

Financing and advisory services engagements are transactional in nature and do not generally provide for subsequent engagements.

Even though we work to represent our clients at every stage of their lifecycle, we are typically retained on a short-term, engagement-by-engagement basis in connection with specific capital markets or mergers and acquisitions transactions. As a consequence, the timing of when fees are earned, and, therefore, our financial results from capital markets and corporate advisory activities may experience volatility quarter to quarter based on equity market conditions as well as the macroeconomic business cycle more broadly. In particular, our revenues related to acquisition and disposition transactions tend to be highly volatile and unpredictable (or “lumpy”) from quarter to quarter due to the one-time nature of the transaction and the size of the fee. As a result, high levels of revenue in one quarter will not necessarily be predictive of continued high levels of revenue in any subsequent period. If we are unable to generate a substantial number of new engagements and generate fees from the successful completion of those transactions, our business and results of operations will likely be adversely affected.

The volume of anticipated investment banking transactions may differ from actual results.

The completion of anticipated investment banking transactions in our pipeline is uncertain and partially beyond our control, and our investment banking revenue is typically earned only upon the successful completion of a transaction. In most cases, we receive little or no payment for investment banking engagements that do not result in the successful completion of a transaction. 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 client's or counterparty's business. If parties fail to complete a transaction on which we are advising or an offering in which we are participating, we earn little or no revenue from the transaction and may have incurred significant expenses (for example, travel and legal expenses) associated with the transaction. Accordingly, our business is highly dependent on market conditions as well as the decisions and actions of our clients and interested third parties, and the number of engagements we have at any given time (and any characterization or description of our deal pipelines) is subject to change and may not necessarily result in future revenues.

Asset management revenue may vary based on investment performance and market and economic factors.

We have grown our asset management business in recent years, including with the acquisition of ARI in 2010, which has increased the risks associated with this business relative to our overall operations. Assets under management are a significant driver of this business, as revenues are primarily derived from management fees paid on the assets under management. Our ability to maintain or increase assets under management is subject to a number of factors, including investors' perception of our past performance, market or economic conditions, competition from other fund managers and our ability to negotiate terms with major investors.


11


Investment performance is one of the most important factors in retaining existing clients and competing for new asset management business. Poor investment performance and other competitive factors could reduce our revenues and impair our growth in many ways: existing clients may withdraw funds from our asset management business in favor of better performing products or a different investment style or focus; our capital investments in our investment funds or the seed capital we have committed to new asset management products may diminish in value or may be lost; and our key employees in the business may depart, whether to join a competitor or otherwise.

To the extent our investment performance is perceived to be poor in either relative or absolute terms, our asset management revenues will likely be reduced and our ability to attract new funds will likely be impaired. Even when market conditions are generally favorable, our investment performance may be adversely affected by our investment style and the particular investments that we make. Further, as the size and number of investment funds, including exchange-traded funds, hedge funds and private equity funds increases, it is possible that it will become increasingly difficult for us to attract new assets under management or price competition may mean that we are unable to maintain our current fee structures.

Our ability to attract, develop and retain highly skilled and productive employees is critical to the success of our business.

Historically, the market for qualified employees within the financial services industry has been marked by intense competition, and the performance of our business may suffer to the extent we are unable to attract and retain employees effectively, particularly given the relatively small size of our company and our employee base compared to some of our competitors and the geographic locations in which we operate. The primary sources of revenue in each of our business lines are commissions and fees earned on advisory and underwriting transactions and customer accounts managed by our employees, who have historically been recruited by other firms and in certain cases are able to take their client relationships with them when they change firms. Some specialized areas of our business are operated by a relatively small number of employees, the loss of any of whom could jeopardize the continuation of that business following the employee's departure.

Further, recruiting and retention success often depends on the ability to deliver competitive compensation, and we may be at a disadvantage to some competitors given our size and financial resources. Our inability or unwillingness to meet compensation needs or demands may result in the loss of some of our professionals or the inability to recruit additional professionals at compensation levels that are within our target range for compensation and benefits expense. Our ability to retain and recruit also may be hindered if we limit our aggregate annual compensation and benefits expense as a percentage of annual net revenues.

An inability to readily divest trading positions may result in financial losses to our business.

Timely divestiture of our trading positions, including equity, fixed income and other securities positions, can be impaired by decreased trading volume, increased price volatility, rapid changes in interest rates, concentrated trading positions, limitations on the ability to divest positions in highly specialized or structured transactions and changes in industry and government regulations. This is true both for customer transactions that we facilitate as well as proprietary trading positions that we maintain. While we hold a security, we are vulnerable to valuation fluctuations and may experience financial losses to the extent the value of the security decreases and we are unable to timely divest or hedge our trading position in that security. The value may decline as a result of many factors, including issuer-specific, market or geopolitical events. In addition, in times of market uncertainty, the inability to transfer inventory positions may have an impact on our liquidity as funding sources generally decline and we are unable to pledge the underlying security as collateral. Our liquidity may also be impacted if we choose to facilitate liquidity for specific products and voluntarily increase our inventory positions in order to do so, exposing ourselves to greater market risk and potential financial losses from the reduction in value of illiquid positions.

In addition, reliance on revenues from hedge funds and hedge fund advisors, which are less regulated than many investment company and advisor clients, may expose us to greater risk of financial loss from unsettled trades than is the case with other types of institutional investors. Concentration of risk may result in losses to us even when economic and market conditions are generally favorable for others in our industry.

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.

The nature of our businesses exposes us to the risk that third parties who 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. Deterioration in the credit quality of securities or obligations we hold could result in losses and adversely affect our ability to rehypothecate or otherwise use those securities or obligations for liquidity purposes. A significant downgrade in the credit ratings of our counterparties could also have a negative impact on our results. Default rates, downgrades and disputes with

12


counterparties as to the valuation of collateral tend to increase in times of market stress and illiquidity. Although we review credit exposures to specific clients and counterparties and to specific industries that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect or foresee. Also, concerns about, or a default by, one institution generally leads to losses, significant liquidity problems, or defaults by other institutions, which in turn adversely affects our business.

Particular activities or products within our business expose us to increased credit risk, including inventory positions, interest rate swap contracts with customer credit exposure, counterparty risk with two major financial institutions related to customer interest rate swap contracts without customer credit exposure, investment banking and advisory fee receivables, customer margin accounts, and trading counterparty activities related to settlement and similar activities. With respect to interest rate swap contracts with customer credit exposure, we have retained the credit exposure with five public finance counterparties totaling $24.4 million at December 31, 2015 as part of our matched-book interest rate swap program. In the event of a termination of the contract, the counterparty would owe us the applicable amount of the credit exposure. If our counterparty is unable to make its payment to us, we would still be obligated to pay our hedging counterparty, resulting in credit losses. Non-performance by our counterparties, clients and others, including with respect to our inventory positions, interest rate swap contracts with customer credit exposures and our merchant banking debt investments could result in losses, potentially material, and thus have a significant adverse effect on our business and results of operations.

An inability to access capital readily or on terms favorable to us could impair our ability to fund operations and could jeopardize our financial condition and results of operations.

Liquidity, or ready access to funds, is essential to our business. Several large financial institutions failed or merged with others during the credit crisis following significant declines in asset values in securities held by these institutions, and, during 2011, a financial institution failed due to liquidity issues related to the European sovereign debt crisis. To fund our business, we rely on commercial paper and bank financing as well as other funding sources such as the repurchase markets. Our bank financing includes uncommitted credit lines, which could become unavailable to us on relatively short notice. In an effort to mitigate this funding risk, we renewed a $250 million committed credit facility for the seventh consecutive year in 2015. We also have $175 million of unsecured notes. The notes consist of two classes, with $125 million maturing in October 2018 and $50 million maturing in May 2017. In order to further diversify our short-term funding needs, we also continue to maintain three commercial paper programs in the amounts of $300 million, $150 million, and $125 million.

Our access to funding sources, particularly uncommitted funding sources, could be hindered by many factors, and many of these factors we cannot control, such as economic downturns, the disruption of financial markets, the failure or consolidation of other financial institutions, negative news about the financial industry generally or us specifically. We could experience disruptions with our credit facilities in the future, including the loss of liquidity sources and/or increased borrowing costs, if lenders or investors develop a negative perception of our short- or long-term financial prospects, which could result from decreased business activity. Our liquidity also could be impacted by the activities resulting in concentration of risk, including proprietary activities from long-term investments and/or investments in specific markets or products without liquidity. Our access to funds may be impaired if regulatory authorities take significant action against us, or if we discover that one of our employees has engaged in serious unauthorized or illegal activity.

In the future, we may need to incur debt or issue equity in order to fund our working capital requirements, as well as to execute our growth initiatives that may include acquisitions and other investments. Similarly, our access to funding sources may be contingent upon terms and conditions that may limit or restrict our business activities and growth initiatives. For example, the unsecured notes discussed above include covenants that, among other things, limit our leverage ratio and require maintenance of certain levels of tangible net worth, regulatory net capital, and operating cash flow to fixed charges.

Lastly, we currently do not have a credit rating, which could adversely affect our liquidity and competitive position by increasing our borrowing costs and limiting access to sources of liquidity that require a credit rating as a condition to providing funds.

Concentration of risk increases the potential for significant losses.

Concentration of risk increases the potential for significant losses in our sales and trading, proprietary trading, merchant banking and underwriting businesses. We have committed capital to these businesses, and we may take substantial positions in particular types of securities and/or issuers. This concentration of risk may cause us to suffer losses even when economic and market conditions are generally favorable for our competitors. Further, disruptions in the credit markets can make it difficult to hedge exposures effectively and economically.

13



Our information and technology systems, including outsourced systems, are critical components of our operations, and failure of those systems or other aspects of our operations infrastructure may disrupt our business, cause financial loss and constrain our growth.

We typically transact thousands of securities trades on a daily basis across multiple markets. Our data and transaction processing, custody, financial, accounting and other technology and operating systems are essential to this task. A system malfunction (due to hardware failure, capacity overload, security incident, data corruption, etc.) or mistake made relating to the processing of transactions could result in financial loss, liability to clients, regulatory intervention, reputational damage and constraints on our ability to grow. We outsource a substantial portion of our critical data processing activities, including trade processing and back office data processing. For example, we have entered into contracts with Broadridge Financial Solutions, Inc. ("Broadridge"), pursuant to which Broadridge handles our trade and back office processing, and Unisys Corporation ("Unisys"), pursuant to which Unisys supports our data center and helpdesk needs. We also contract with third parties for market data services, which constantly broadcast news, quotes, analytics and other relevant information to our employees. We contract with other vendors to produce and mail our customer statements and to provide other services. In the event that any of these service providers fails to adequately perform such services or the relationship between that service provider and us is terminated, we may experience a significant disruption in our operations, including our ability to timely and accurately process transactions or maintain complete and accurate records of those transactions.

Adapting or developing our technology systems to meet new regulatory requirements, client needs, geographic expansion and industry demands also is critical for our business. Introduction of new technologies present new challenges on a regular basis. We have an ongoing need to upgrade and improve our various technology systems, including our data and transaction processing, financial, accounting, risk management, compliance, and trading systems. This need could present operational issues or require significant capital spending. It also may require us to make additional investments in technology systems and may require us to reevaluate the current value and/or expected useful lives of our technology systems, which could negatively impact our results of operations.

Our clients routinely provide us with sensitive and confidential information. Secure processing, storage and transmission of confidential and other information in our internal and outsourced computer systems and networks is critically important to our business. We take protective measures and endeavor to modify them as circumstances warrant. However, our computer systems, software and networks, and those of our clients, vendors, service providers, counterparties and other third parties, may be vulnerable to unauthorized access, cyberattacks, security breaches, computer viruses or other malicious code, inadvertent, erroneous or intercepted transmission of information (including by e-mail), and other events that could have an information security impact. We work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and protect against these events, but we do not have, and may be unable to put in place, secure capabilities with all of these third parties and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of the information. If one or more of such events occur, this potentially 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 those of third parties, 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 or to investigate and remediate vulnerabilities or other exposures, and we may be subject to reputational harm as well as litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

A disruption in the infrastructure that supports our business due to fire, natural disaster, health emergency (for example, a disease pandemic), power or communication failure, act of terrorism or war may affect our ability to service and interact with our clients. If we are not able to implement contingency plans effectively, any such disruption could harm our results of operations.

Legislative and regulatory proposals could significantly curtail the revenue from certain products that we currently provide.

Proposed changes in laws or regulations relating to our business could decrease, perhaps significantly, the revenue that we receive from certain products or services that we provide. For example, federal law currently allows investors in debt issuances by government and non-profit entities to exclude the bond interest for federal income tax purposes, resulting in lower interest expense for the issuer as compared to a taxable financing. In recent years, federal lawmakers have presented various proposals to limit or eliminate the tax-exempt status of this bond interest. Our public finance investment banking business receives significant revenues as a result of underwriting activity in connection with debt issuances by government and non-profit clients, primarily on a tax-exempt basis. Also, a significant percentage of our securities inventory — both positions held for client activity and our own proprietary trading positions — consist of municipal securities. Any reduction or elimination of tax-exempt bond interest could

14


negatively impact the value of the municipal securities we hold in our securities inventory as well as our public finance investment banking business more generally, which would negatively impact the results of operations for these businesses.
      
Our exposure to legal liability is significant, and could lead to substantial damages.

We face significant legal risks in our businesses. These risks include potential liability under securities laws and regulations in connection with our capital markets, asset management and other businesses. The volume and amount of damages claimed in litigation, arbitrations, regulatory enforcement actions and other adversarial proceedings against financial services firms have increased in recent years. Our experience has been that adversarial proceedings against financial services firms typically increase during and following a market downturn. We also are subject to claims from disputes with our employees and our former employees under various circumstances. Risks associated with legal liability often are difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time, making the amount of legal reserves related to these legal liabilities difficult to determine and subject to future revision. Legal or regulatory matters involving our directors, officers or employees in their individual capacities also may create exposure for us because we may be obligated or may choose to indemnify the affected individuals against liabilities and expenses they incur in connection with such matters to the extent permitted under applicable law. In addition, like other financial services companies, we may face the possibility of employee fraud or misconduct. The precautions we take to prevent and detect this activity may not be effective in all cases and there can be no assurance that we will be able to deter or prevent fraud or misconduct. Exposures from and expenses incurred related to any of the foregoing actions or proceedings could have a negative impact on our results of operations and financial condition. In addition, future results of operations could be adversely affected if reserves relating to these legal liabilities are required to be increased or legal proceedings are resolved in excess of established reserves.

Our inability to identify and address actual, potential, or perceived conflicts of interest may negatively impact our reputation and have a material adverse effect on our business.

We regularly address actual, potential or perceived conflicts of interest in our business, including situations where our services to a particular client or our own investments or other interests conflict, or are perceived to conflict, with the interests of another client. Appropriately identifying and dealing with conflicts of interest is complex and difficult, and we face the risk that our current policies, controls and procedures do not timely identify or appropriately manage such conflicts of interest. It is possible that actual, potential or perceived conflicts could give rise to client dissatisfaction, litigation or regulatory enforcement actions. Our reputation could be damaged if we fail, or appear to fail, to deal appropriately with potential or actual conflicts of interest. Client dissatisfaction, litigation, or regulatory enforcement actions arising from a failure to adequately deal with conflicts of interest, and the reputational harm suffered as a consequence, could have a material adverse effect on our business.

Our business is subject to extensive regulation in the jurisdictions in which we operate, and a significant regulatory action against our company may have a material adverse financial effect or cause significant reputational harm to our company.

As a participant in the financial services industry, we are subject to complex and extensive regulation of many aspects of our business by U.S. federal and state regulatory agencies, self-regulatory organizations (including securities exchanges) and by foreign governmental agencies, regulatory bodies and securities exchanges. Specifically, our operating subsidiaries include broker dealer and related securities entities organized in the United States, the United Kingdom, and Hong Kong, China. Each of these entities is registered or licensed with the applicable local securities regulator and is subject to all of the applicable rules and regulations promulgated by those authorities. In addition, our asset management subsidiaries, ARI, PJIM, and PJC Capital Partners LLC are registered as investment advisers with the SEC and subject to the regulation and oversight by the SEC.

Generally, the requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with us. These requirements are not designed to protect our shareholders. Consequently, broker dealer regulations often serve to limit our activities, through net capital, customer protection and market conduct requirements and restrictions on the businesses in which we may operate or invest. We also must comply with asset management regulations, including requirements related to fiduciary duties to clients, recordkeeping and reporting and customer disclosures. Compliance with many of these regulations entails a number of risks, particularly in areas where applicable regulations may be newer or unclear. In addition, regulatory authorities in all jurisdictions in which we conduct business may intervene in our business and we and our employees could be fined or otherwise disciplined for violations or prohibited from engaging in some of our business activities.


15


Our business also subjects us to the complex income tax laws of the jurisdictions in which we have business operations, and these tax laws may be subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. We must make judgments and interpretations about the application of these inherently complex tax laws when determining the provision for income taxes. We are subject to contingent tax risk that could adversely affect our results of operations, to the extent that our interpretations of tax laws are disputed upon examination or audit, and are settled in amounts in excess of established reserves for such contingencies.

The effort to combat money laundering also has become a high priority in governmental policy with respect to financial institutions. The obligation of financial institutions, including ourselves, to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial institutions, has required the implementation and maintenance of internal practices, procedures and controls which have increased, and may continue to increase, our costs. Any failure with respect to our programs in this area could subject us to serious regulatory consequences, including substantial fines, and potentially other liabilities. In addition, our international operations require compliance with anti-bribery laws, including the Foreign Corrupt Practices Act and the U.K. Bribery Act 2010. These laws generally prohibit companies and their intermediaries from engaging in bribery or making other improper payments to foreign officials for the purpose of obtaining or retaining business or gaining an unfair business advantage. While our employees and agents are required to comply with these laws, we cannot ensure that our internal control policies and procedures will always protect us from intentional, reckless or negligent acts committed by our employees or agents, which acts could subject our company to fines or other regulatory consequences.

Risk management processes may not fully mitigate exposure to the various risks that we face, including market risk, liquidity risk and credit risk.

We refine our risk management techniques, strategies and assessment methods on an ongoing basis. However, risk management techniques and strategies, both ours and those available to the market generally, may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk. For example, we may fail to identify or anticipate particular risks that our systems are capable of identifying, or the systems that we use, and that are used within the industry generally, may not be capable of identifying certain risk, or every economic and financial outcome, or the specifics and timing of such outcomes. In addition, our risk management techniques and strategies seek to balance our ability to profit from our market-making and investing positions with our exposure to potential losses. Some of our strategies for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to quantify our risk exposure. Any failures in our risk management techniques and strategies to accurately quantify our risk exposure could limit our ability to manage risks. In addition, any risk management failures could cause our losses to be significantly greater than the historical measures indicate. Further, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses.

Use of derivative instruments as part of our financial risk management techniques may not effectively hedge the risks associated with activities in certain of our businesses.

We use interest rate swaps, interest rate locks, credit default swap index contracts and option contracts as a means to manage risk in certain inventory positions and to facilitate customer transactions. With respect to risk management, we enter into derivative contracts to hedge interest rate and market value risks associated with our security positions, including fixed income inventory positions we hold both for facilitating client activity as well as for our own proprietary trading operations. The instruments use interest rates based upon the Municipal Market Data (“MMD”), LIBOR or SIFMA index. We also enter into credit default swap index contracts to hedge risks associated with our taxable fixed income securities, and option contracts to hedge market value risk associated with convertible securities and mortgage-backed securities. Generally, we do not hedge all of our interest rate risk. In addition, these hedging strategies may not work in all market environments and as a result may not be effective in mitigating interest rate and market value risk, especially when market volatility reduces the correlation between a hedging vehicle and the securities inventory being hedged.

There are risks inherent in our use of these products, including counterparty exposure and basis risk. Counterparty exposure refers to the risk that the amount of collateral in our possession on any given day may not be sufficient to fully cover the current value of the swaps if a counterparty were to suddenly default. Basis risk refers to risks associated with swaps where changes in the value of the swaps may not exactly mirror changes in the value of the cash flows they are hedging. We may incur losses from our exposure to derivative interest rate products and the increased use of these products in the future.


16


The use of estimates and valuations in measuring fair value involve significant estimation and judgment by management.

We make various estimates that affect reported amounts and disclosures. Broadly, those estimates are used in measuring fair value of certain financial instruments, investments in private companies, accounting for goodwill and intangible assets, establishing provisions for potential losses that may arise from litigation, and regulatory proceedings and tax examinations. Estimates are based on available information and judgment. Therefore, actual results could differ from our estimates and that difference could have a material effect on our consolidated financial statements.

Financial instruments and other inventory positions owned, and financial instruments and other inventory positions sold but not yet purchased, are recorded at fair value, and unrealized gains and losses related to these financial instruments are reflected on our consolidated statements of operations. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments' complexity. Difficult market environments, such as those experienced in 2008, may cause financial instruments to become substantially more illiquid and difficult to value, increasing the use of valuation models. Our future results of operations and financial condition may be adversely affected by the valuation adjustments that we apply to these financial instruments.

Investments 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 valuation techniques require significant management estimation and judgment.

The financial services industry and the markets in which we operate are subject to systemic risk that could adversely affect our business and results.

Participants in the financial services industry and markets increasingly are closely interrelated as a result of credit, trading, clearing, technology and other relationships between them. A significant adverse development with one participant (such as a bankruptcy or default) may spread to others and lead to significant concentrated or market-wide problems (such as defaults, liquidity problems or losses) for other participants, including us. This systemic risk was evident during 2008 following the demise of Bear Stearns and Lehman Brothers, and the resulting events (sometimes described as “contagion”) had a negative impact on the remaining industry participants, including us. Further, the control and risk management infrastructure of the markets in which we operate often is outpaced by financial innovation and growth in new types of securities, transactions and markets. Systemic risk is inherently difficult to assess and quantify, and its form and magnitude can remain unknown for significant periods of time.

Regulatory capital requirements may limit our ability to expand or maintain our present levels of business or impair our ability to meet our financial obligations.

We are subject to the SEC's uniform net capital rule (Rule 15c3-1) and the net capital rule of FINRA, which may limit our ability to make withdrawals of capital from Piper Jaffray & Co., our U.S. 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. FINRA may prohibit a member firm from expanding its business or paying cash dividends if resulting net capital falls below its requirements. Underwriting commitments require a charge against net capital and, accordingly, our ability to make underwriting commitments may be limited by the requirement that we must at all times be in compliance with the applicable net capital regulations.

As Piper Jaffray Companies is a holding company, it depends on dividends, distributions and other payments from our subsidiaries to fund its obligations. The regulatory restrictions described above may impede access to funds our holding company needs to make payments on any such obligations.

We may not be able to compete successfully with other companies in the financial services industry who often have significantly greater resources than we do.

The financial services industry remains extremely competitive, and our revenues and profitability will suffer if we are unable to compete effectively. We compete generally on the basis of such factors as quality of advice and service, reputation, price, product selection, transaction execution and financial resources. Pricing and other competitive pressures in investment banking, including trends toward multiple book runners, co-managers, and multiple financial advisors handling transactions, have continued and could

17


adversely affect our revenues. The trend toward multiple book runners has also been accompanied by an increasing disparity in the relative economics between or among book runners, with the senior book runner(s) receiving a large percentage of the economics.

We remain at a competitive disadvantage given our relatively small size compared to some of our competitors. Large financial services firms have a larger capital base, greater access to capital and greater resources than we have, affording them greater capacity for risk and potential for innovation, an extended geographic reach and flexibility to offer a broader set of products. For example, these firms have used their resources and larger capital base to take advantage of growth in international markets and to support their investment banking business by offering credit products to corporate clients, which is a significant competitive advantage. With respect to our fixed income institutional and public finance investment banking businesses, it is more difficult for us to diversify and differentiate our product set, and our fixed income business mix currently is concentrated in the municipal market and to a lesser extent corporate credits and structured mortgage products, potentially with less opportunity for growth than other firms which have grown their fixed income businesses by investing in, developing and offering non-traditional products (e.g., credit default swaps, interest rate products and currencies and commodities).

The business operations that we conduct outside of the United States subject us to unique risks.

To the extent we conduct business outside the United States, for example in Asia and Europe, we are subject to risks including, without limitation, the risk that we will be unable to provide effective operational support to these business activities, the risk of non-compliance with foreign laws and regulations, and the general economic and political conditions in countries where we conduct business, which may differ significantly from those in the United States. With respect to our Asia-based capital markets activity, we facilitated underwritten capital-raising transactions for Asia-based issuers, which may have exposed us to greater underwriting risk in our capital markets business as compared to the U.S., as noted above.

Provisions in our certificate of incorporation and bylaws and of Delaware law may prevent or delay an acquisition of our company, which could decrease the market value of our common stock.

Our certificate of incorporation and bylaws and Delaware law contain provisions that are intended to deter abusive takeover tactics by making them unacceptably expensive to the raider and to encourage prospective acquirors to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include limitations on our shareholders' ability to act by written consent and to call special meetings. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15 percent or more of our outstanding common stock. We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal, and are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of our company and our shareholders.

ITEM 1B.   UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.     PROPERTIES.

As of February 18, 2016, we conducted our operations through 54 principal offices in 29 states, and the District of Columbia, and in London, Hong Kong, Tokyo and Zurich. All of our offices are leased. Our principal executive office is located at 800 Nicollet Mall, Suite 1000, Minneapolis, Minnesota 55402 and, as of February 18, 2016, comprises approximately 124,000 square feet of space under a lease which expires November 30, 2025, with an early termination option effective January 31, 2022.


18


ITEM 3.     LEGAL PROCEEDINGS.

Due to the nature of our business, we are involved in a variety of legal proceedings (including, but not limited to, those described below). These proceedings include litigation, arbitration and regulatory proceedings, which may arise from, among other things, underwriting or other transactional activity, client account activity, employment matters, regulatory examinations of our businesses and investigations of securities industry practices by governmental agencies and self-regulatory organizations. The securities industry is highly regulated, and the regulatory scrutiny applied to securities firms is intense, resulting in a significant number of regulatory investigations and enforcement actions and uncertainty regarding the likely outcome of these matters.

Litigation-related expenses include amounts we reserve and/or pay out as legal and regulatory settlements, awards or judgments, and fines. Parties who initiate litigation and arbitration proceedings against us may seek substantial or indeterminate damages, and regulatory investigations can result in substantial fines being imposed on us. We reserve for contingencies related to legal proceedings at the time and to the extent we determine the amount to be probable and reasonably estimable. However, it is inherently difficult to predict accurately the timing and outcome of legal proceedings, including the amounts of any settlements, judgments or fines. We assess each proceeding based on its particular facts, our outside advisors' and our past experience with similar matters, and expectations regarding the current legal and regulatory environment and other external developments that might affect the outcome of a particular proceeding or type of proceeding. Subject to the foregoing and except for the legal proceeding described below, we believe, based on our current knowledge, after appropriate consultation with outside legal counsel and taking into account our established reserves, that pending legal actions, investigations and regulatory proceedings, will be resolved with no material adverse effect on our consolidated financial condition, results of operations or cash flows. However, there can be no assurance that our assessments will reflect the ultimate outcome of pending proceedings, and the outcome of any particular matter may be material to our operating results for any particular period, depending, in part, on the operating results for that period and the amount of established reserves. We generally have denied, or believe that we have meritorious defenses and will deny, liability in all significant cases currently pending against us, and we intend to vigorously defend such actions.

Municipal Derivatives Litigation

Several class action complaints were brought on behalf of a purported class of state, local and municipal government entities in connection with the bidding or sale of municipal investment contracts and municipal derivative products directly from one of the defendants or through a broker, from January 1, 1992, to the present. The complaints, which have been consolidated into a single nationwide class action entitled In re Municipal Derivatives Antitrust Litigation, MDL No. 1950 (Master Docket No. 08-2516), allege antitrust violations and are pending in the U.S. District Court for the Southern District of New York under the multi-district litigation rules. The consolidated complaint seeks unspecified treble damages under Section 1 of the Sherman Act. Several California municipalities also brought separate class action complaints in California federal court, and approximately eighteen California municipalities and two New York municipalities filed individual lawsuits that are not as part of class actions, all of which have since been transferred to the Southern District of New York and consolidated for pretrial purposes. All three sets of complaints assert similar claims under federal (and for the California and New York plaintiffs, state) antitrust claims. The plaintiffs in the consolidated class action and Piper Jaffray entered into a settlement agreement for In re Municipal Derivatives Antitrust Litigation on February 22, 2016. The settlement is subject to court approval after notice to the class. If approved, Piper Jaffray will be required to pay $9.8 million to settle the MDL class action. Litigation in the separate California and New York cases is ongoing.

ITEM 4.     MINE SAFETY DISCLOSURES.

Not applicable.


19


PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is listed on the New York Stock Exchange under the symbol “PJC.” The following table contains historical quarterly price information for the years ended December 31, 2015 and 2014. On February 18, 2016, the last reported sale price of our common stock was $41.87.
 
2015 Fiscal Year
 
2014 Fiscal Year
 
High
 
Low
 
High
 
Low
First Quarter
$
58.24

 
$
51.05

 
$
45.80

 
$
37.13

Second Quarter
55.39

 
43.45

 
51.77

 
40.30

Third Quarter
46.24

 
36.17

 
56.30

 
50.54

Fourth Quarter
42.81

 
34.40

 
59.35

 
46.15


Shareholders

We had 15,462 shareholders of record and approximately 27,193 beneficial owners of our common stock as of February 18, 2016.

Dividends

We do not currently pay cash dividends on our common stock. Our board of directors is free to change our dividend policy at any time. Restrictions on our U.S. broker dealer subsidiary’s ability to pay dividends are described in Note 25 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K.

The table below sets forth the information with respect to purchases made by or on behalf of Piper Jaffray Companies or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the quarter ended December 31, 2015.
 
 
 
 
 
 
Total Number of Shares
 
Approximate Dollar
 
 
 
 
 
 
Purchased as Part of
 
Value of Shares Yet to be
 
 
Total Number of
 
Average Price
 
Publicly Announced
 
Purchased Under the
Period
 
Shares Purchased
 
Paid per Share
 
Plans or Programs
 
Plans or Programs (1)
Month #1
 
 
 
 
 
 
 
 
 
(October 1, 2015 to October 31, 2015)
 

 
$

 

 
$
158

million
Month #2
 
 
 
 
 
 
 
 
 
(November 1, 2015 to November 30, 2015)
 
209,672

(2) 
$
38.68

 
200,960

 
$
150

million
Month #3
 
 
 
 
 
 
 
 
 
(December 1, 2015 to December 31, 2015)
 
455,100

(3) 
$
40.81

 
453,554

 
$
131

million
Total
 
664,772

 
$
40.14

 
654,514

 
$
131

million
(1)
Effective October 1, 2014, our board of directors authorized the repurchase of up to $100.0 million of common stock through September 30, 2016, and we repurchased the full amount of this authorization in 2015. Additionally, effective August 14, 2015, our board of directors authorized the repurchase of up to an additional $150.0 million of common stock through September 30, 2017.
(2)
Consists of 200,960 shares of common stock repurchased on the open market pursuant to a 10b5-1 plan established with an independent agent at an average price of $38.79 per share, and 8,712 shares of common stock withheld from recipients of restricted stock to pay taxes upon the vesting of the restricted stock at an average price per share of $36.19.
(3)
Consists of 453,554 shares of common stock repurchased on the open market pursuant to a 10b5-1 plan established with an independent agent at an average price of $40.82 per share, and 1,546 shares of common stock withheld from recipients of restricted stock to pay taxes upon the vesting of the restricted stock at an average price per share of $40.50.




20


Stock Performance Graph

The following graph compares the performance of an investment in our common stock from December 31, 2010 through December 31, 2015, with the S&P 500 Index and the S&P 500 Diversified Financials Index. The graph assumes $100 was invested on December 31, 2010, in each of our common stock, the S&P 500 Index and the S&P 500 Diversified Financials Index and that all dividends were reinvested on the date of payment without payment of any commissions. The performance shown in the graph represents past performance and should not be considered an indication of future performance.

FIVE YEAR TOTAL RETURN FOR PIPER JAFFRAY COMPANIES COMMON STOCK,
THE S&P 500 INDEX AND THE S&P DIVERSIFIED FINANCIALS INDEX

Company/Index
 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
Piper Jaffray Companies
 
100

 
57.70

 
91.77

 
112.97

 
165.92

 
115.40

S&P 500 Index
 
100

 
102.11

 
118.45

 
156.82

 
178.29

 
180.75

S&P 500 Diversified Financials
 
100

 
69.97

 
98.89

 
139.82

 
162.98

 
148.15



21


ITEM 6.     SELECTED FINANCIAL DATA.

The following table presents our selected consolidated financial data in accordance with U.S. generally accepted accounting principles for the periods and dates indicated. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto.
 
For the year ended December 31,
 
(Dollars and shares in thousands, except per share data)
2015
 
2014
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
Investment banking
$
414,118

 
$
369,811

 
$
248,563

 
$
232,958

 
$
202,513

  
Institutional brokerage
154,889

 
156,809

 
146,648

 
166,642

 
135,358

  
Asset management
75,017

 
85,062

 
83,045

 
65,699

 
63,307

  
Interest
41,557

 
48,716

 
50,409

 
37,845

 
43,447

  
Investment income
10,736

 
12,813

 
21,566

 
4,903

 
8,178

  
 
 
 
 
 
 
 
 
 
 
 
Total revenues
696,317

 
673,211

 
550,231

 
508,047

 
452,803

  
 
 
 
 
 
 
 
 
 
 
 
Interest expense
23,399

 
25,073

 
25,036

 
19,095

 
20,720

  
 
 
 
 
 
 
 
 
 
 
 
Net revenues
672,918

 
648,138

 
525,195

 
488,952

 
432,083

  
 
 
 
 
 
 
 
 
 
 
 
Non-interest expenses:
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
421,733

 
394,510

 
322,464

 
296,882

 
265,015

  
Restructuring and integration costs
10,652

 

 
4,689

 
3,642

 

  
Goodwill impairment

 

 

 

 
120,298

  
Other
154,110

 
143,317

 
122,429

 
119,417

 
126,959

  
 
 
 
 
 
 
 
 
 
 
 
Total non-interest expenses
586,495

 
537,827

 
449,582

 
419,941

 
512,272

  
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from continuing operations before income tax expense
86,423

 
110,311

 
75,613

 
69,011

 
(80,189
)
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
27,941

 
35,986

 
20,390

 
19,470

 
9,120

  
 
 
 
 
 
 
 
 
 
 
 
Net income/(loss) from continuing operations
58,482

 
74,325

 
55,223

 
49,541

 
(89,309
)
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax

 

 
(4,739
)
 
(5,807
)
 
(11,248
)
  
 
 
 
 
 
 
 
 
 
 
 
Net income/(loss)
58,482

 
74,325

 
50,484

 
43,734

 
(100,557
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to noncontrolling interests
6,407

 
11,153

 
5,394

 
2,466

 
1,463

  
 
 
 
 
 
 
 
 
 
 
 
Net income/(loss) applicable to Piper Jaffray Companies
$
52,075

 
$
63,172

 
$
45,090

 
$
41,268

 
$
(102,020
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income/(loss) applicable to Piper Jaffray Companies' common shareholders
$
48,060

 
$
58,141

 
$
40,596

 
$
35,335

 
$
(102,020
)
(1) 
 
 
 
 
 
 
 
 
 
 
 
Continued on next page
 

22


 
For the year ended December 31,
 
(Dollars and shares in thousands, except per share data)
2015
 
2014
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
Amounts applicable to Piper Jaffray Companies
 
 
 
 
 
 
 
 
 
 
Net income/(loss) from continuing operations
$
52,075

 
$
63,172

 
$
49,829

 
$
47,075

 
$
(90,772
)
 
Net loss from discontinued operations

 

 
(4,739
)
 
(5,807
)
 
(11,248
)
 
Net income/(loss) applicable to Piper Jaffray Companies
$
52,075

 
$
63,172

 
$
45,090

 
$
41,268

 
$
(102,020
)
 
 
 
 
 
 
 
 
 
 
 
 
Earnings/(loss) per basic common share
 
 
 
 
 
 
 
 
 
 
Income/(loss) from continuing operations
$
3.34

 
$
3.88

 
$
2.98

 
$
2.58

 
$
(5.79
)
 
Loss from discontinued operations

 

 
(0.28
)
 
(0.32
)
 
(0.72
)
  
Earnings/(loss) per basic common share
$
3.34

 
$
3.88

 
$
2.70

 
$
2.26

 
$
(6.51
)
 
 
 
 
 
 
 
 
 
 
 
 
Earnings/(loss) per diluted common share
 
 
 
 
 
 
 
 
 
 
Income/(loss) from continuing operations
$
3.34

 
$
3.87

 
$
2.98

 
$
2.58

 
$
(5.79
)
 
Loss from discontinued operations

 

 
(0.28
)
 
(0.32
)
 
(0.72
)
 
Earnings/(loss) per diluted common share
$
3.34

 
$
3.87

 
$
2.70

 
$
2.26

 
$
(6.51
)
(2) 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of common shares
 
 
 
 
 
 
 
 
 
 
Basic
14,368

 
14,971

 
15,046

 
15,615

 
15,672

 
Diluted
14,389

 
15,025

 
15,061

 
15,616

 
15,672

(2) 
 
 
 
 
 
 
 
 
 
 
 
Other data
 
 
 
 
 
 
 
 
 
 
Total assets
$
2,138,518

 
$
2,623,917

 
$
2,318,157

 
$
2,087,733

 
$
1,655,721

 
Long-term debt
$
175,000

 
$
125,000

 
$
125,000

 
$
125,000

 
$
115,000

  
Total common shareholders' equity
$
783,659

 
$
819,912

 
$
734,676

 
$
733,292

 
$
718,391

  
Total shareholders' equity
$
832,820

 
$
969,460

 
$
882,072

 
$
790,175

 
$
750,600

 
Total employees (3)
1,152

 
1,026

 
1,026

 
907

 
919

  
 
(1)
No allocation of income was made due to loss position.
(2)
Earnings per diluted common share is calculated using the basic weighted average number of common shares outstanding for periods in which a loss is incurred.
(3)
Number of employees reflect continuing operations.


23


ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following information should be read in conjunction with the accompanying audited consolidated financial statements and related notes and exhibits included elsewhere in this report. Certain statements in this report may be considered forward-looking. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements include, among other things, statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, and also may include our belief regarding the effect of various legal proceedings, as set forth under "Legal Proceedings" in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2015 and in our subsequent reports filed with the SEC. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including those factors discussed below under "External Factors Impacting Our Business" as well as the factors identified under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, as updated in our subsequent reports filed with the SEC. These reports are available at our Web site at www.piperjaffray.com and at the SEC Web site at www.sec.gov. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.

Explanation of Non-GAAP Financial Measures

We have included financial measures that are not prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). These non-GAAP financial measures include adjustments to exclude (1) revenues and expenses related to noncontrolling interests, (2) amortization of intangible assets related to acquisitions, (3) compensation from acquisition-related agreements and (4) restructuring and acquisition integration costs. These adjustments affect the following financial measures: net revenues, compensation expenses, non-compensation expenses, net income applicable to Piper Jaffray Companies, earnings per diluted common share, return on average common shareholders' equity, segment net revenues, segment operating expenses, segment pre-tax operating income and segment pre-tax operating margin. Management believes that presenting these results and measures on an adjusted basis in conjunction with U.S. GAAP measures provides the most meaningful basis for comparison of its operating results across periods.


24


Executive Overview

Our operations are principally engaged in providing investment banking, institutional brokerage, asset management and related financial services to corporations, private equity groups, public entities, non-profit entities and institutional investors in the United States and Europe. We operate through two reportable business segments:

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, we generate revenue through strategic trading and investing activities, which focus on investments in municipal bonds, mortgage-backed securities and U.S. government agency securities. We have created alternative asset management funds in merchant banking that involve equity or debt investments in late stage private companies; and senior living, which provides financing to U.S. senior living facilities, in order to invest firm capital and to manage capital from outside investors. We receive management and performance fees for managing these funds.

During 2015, we accelerated our growth strategy, primarily by expanding into new sectors within equity investment banking and the expansion of our fixed income middle market sales platform. The following is a summary of our most significant activity for the year.

On September 30, 2015, we acquired the assets of River Branch Holdings LLC ("River Branch"), an equity investment banking boutique focused on the financial institutions sector. The acquisition further strengthens our mergers and acquisitions leadership in the middle markets and adds investment banking resources dedicated to banks, thrifts, and depository institutions, building upon the organic expansion of our financial institutions group.

On October 9, 2015, we completed the acquisition of BMO Capital Markets GKST Inc. ("BMO GKST"), a municipal bond sales, trading and origination business of BMO Financial Corp. This acquisition expands our fixed income institutional sales, trading and underwriting platforms. Additionally, it strengthens our strategic analytic and advisory capabilities, and supports our growing financial institutions group with their coverage of bank clients.

As part of our strategy to expand our investment banking business into the energy sector, on November 16, 2015, we entered into a definitive agreement to purchase 100 percent of the common stock of Simmons & Company International ("Simmons"), including its subsidiaries. Simmons is an employee-owned investment bank and broker dealer focused on the energy industry. The transaction is expected to close in the first quarter of 2016, subject to regulatory approvals and customary closing conditions.

For more information on our acquisitions, see Note 4 of our consolidated financial statements. We incurred $10.7 million of restructuring, integration and transactions costs in the year ended December 31, 2015 principally related to the River Branch and BMO GKST acquisitions.

Asset Management – The Asset Management segment provides traditional asset management services by taking a value-driven approach to managing assets in domestic and international equity markets. Additionally, the asset management segment manages investments in master limited partnerships ("MLPs") focused on the energy sector for 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 we manage.

Discontinued Operations – Our discontinued operations include the costs to liquidate our Hong Kong capital markets business, which ceased operations in 2012, and the operating results of Fiduciary Asset Management, LLC ("FAMCO"), an asset management subsidiary we sold in 2013. See Note 5 to our consolidated financial statements for further discussion of our discontinued operations.


25


Results for the year ended December 31, 2015

Net income applicable to Piper Jaffray Companies in 2015 was $52.1 million, or $3.34 per diluted common share, compared with $63.2 million, or $3.87 per diluted common share, in 2014. In 2015, we generated a return on average common shareholders' equity on a GAAP basis of 6.4 percent, compared with 8.1 percent for 2014. Net revenues from continuing operations for the year ended December 31, 2015 were $672.9 million, up 3.8 percent from $648.1 million in the year-ago period, due to higher investment banking revenues driven by strong advisory services and debt financing revenues, partially offset by lower asset management revenues. For the year ended December 31, 2015, non-compensation expenses were $164.8 million, up from $143.3 million in 2014. The increase was due to restructuring and integration costs of $10.7 million related to severance benefits and integration costs incurred primarily in conjunction with our acquisitions of River Branch and BMO GKST, and a $9.8 million charge related to settlement of a multi-district class action antitrust litigation related to municipal derivatives. This litigation originated in 2006 and is described in greater detail in "Legal Proceedings" in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2015.

For the year ended December 31, 2015, adjusted net income applicable to Piper Jaffray Companies was $65.9 million(1), or $4.22(1) per diluted common share, compared with $72.1 million(1), or $4.42(1) per diluted common share, for the prior-year period. In 2015, we generated an adjusted return on average common shareholders' equity of 8.1 percent(2), compared with 9.2 percent(2) for 2014. Adjusted net revenues for the year ended December 31, 2015 were $663.1 million(1), an increase of 4.8 percent from $632.4 million(1) reported in the year-ago period. For the year ended December 31, 2015, adjusted non-compensation expenses were $143.0 million(1), up 10.5 percent compared to $129.5 million(1) for the year ended December 31, 2014.

(1)
Reconciliation of U.S. GAAP to adjusted non-GAAP financial information
 
Year Ended December 31,
(Amounts in thousands, except per share data)
2015
 
2014
 Net revenues:
 
 
 
Net revenues – U.S. GAAP basis
$
672,918

 
$
648,138

Adjustments:
 
 
 
Revenue related to noncontrolling interests
(9,810
)
 
(15,699
)
Adjusted net revenues
$
663,108

 
$
632,439

 
 
 
 
Non-compensation expenses:
 
 
 
Non-compensation expenses – U.S. GAAP basis
$
164,762

 
$
143,317

Adjustments:
 
 
 
Non-compensation expenses related to noncontrolling interests
(3,403
)
 
(4,546
)
Restructuring and integration costs
(10,652
)
 

Amortization of intangible assets related to acquisitions
(7,662
)
 
(9,272
)
Adjusted non-compensation expenses
$
143,045

 
$
129,499

 
 
 
 
Net income applicable to Piper Jaffray Companies:
 
 
 
Net income applicable to Piper Jaffray Companies – U.S. GAAP basis
$
52,075

 
$
63,172

 Adjustments:
 
 
 
Compensation from acquisition-related agreements
2,586

 
3,195

Restructuring and integration costs
6,508

 

Amortization of intangible assets related to acquisitions
4,681

 
5,747

Adjusted net income applicable to Piper Jaffray Companies
$
65,850

 
$
72,114

 
 
 
 
Earnings per diluted common share:
 
 
 
 Earnings per diluted common share – U.S. GAAP basis
$
3.34

 
$
3.87

 Adjustments:
 
 
 
Compensation from acquisition-related agreements
0.17

 
0.20

Restructuring and integration costs
0.42

 

Amortization of intangible assets related to acquisitions
0.30

 
0.35

 Adjusted earnings per diluted common share
$
4.22

 
$
4.42


(2)
Adjusted return on average common shareholders' equity is computed by dividing adjusted net income applicable to Piper Jaffray Companies for the last 12 months by average monthly common shareholders' equity. For a detailed explanation of the components of adjusted net income, see "Reconciliation of U.S. GAAP to adjusted non-GAAP financial information" in footnote (1).


26


Market Data

The following table provides a summary of relevant market data over the past three years.
 
 
 
 
 
 
 
 
2015
 
2014
Year Ended December 31,
 
2015
 
2014
 
2013
 
v2014
 
v2013
Dow Jones Industrials Average (a)
 
17,425

 
17,823

 
16,577

 
(2.2
)%
 
7.5
 %
NASDAQ (a)
 
5,007

 
4,736

 
4,177

 
5.7
 %
 
13.4
 %
NYSE Average Daily Number of Shares Traded
 
 
 
 
 
 
 
 
 
 
(millions of shares)
 
1,187

 
1,039

 
1,034

 
14.2
 %
 
0.5
 %
NASDAQ Average Daily Number of Shares Traded
 
 
 
 
 
 
 
 
 
 
(millions of shares)
 
1,895

 
1,955

 
1,762

 
(3.1
)%
 
11.0
 %
Mergers and Acquisitions
 
 
 
 
 
 
 
 
 
 
(number of transactions in U.S.) (b)
 
10,319

 
10,263

 
9,146

 
0.5
 %
 
12.2
 %
Public Equity Offerings
 
 
 
 
 
 
 
 
 
 
(number of transactions in U.S.) (c) (e)
 
909

 
1,107

 
1,125

 
(17.9
)%
 
(1.6
)%
Initial Public Offerings
 
 
 
 
 
 
 
 
 
 
(number of transactions in U.S.) (c)
 
171

 
282

 
221

 
(39.4
)%
 
27.6
 %
Municipal Negotiated Issuances
 
 
 
 
 
 
 
 
 
 
(number of transactions in U.S.) (d)
 
8,764

 
7,261

 
7,628

 
20.7
 %
 
(4.8
)%
Municipal Negotiated Issuances
 
 
 
 
 
 
 
 
 
 
(value of transactions in billions in U.S.) (d)
 
$
315.9

 
$
266.1

 
$
263.8

 
18.7
 %
 
0.9
 %
10-Year Treasuries Average Rate
 
2.14
%
 
2.21
%
 
2.35
%
 
(3.2
)%
 
(6.0
)%
3-Month Treasuries Average Rate
 
0.05
%
 
0.03
%
 
0.06
%
 
66.7
 %
 
(50.0
)%
(a)
Data provided is at period end.
(b)
Source: Securities Data Corporation.
(c)
Source: Dealogic (offerings with reported market value greater than $20 million).
(d)
Source: Thomson Reuters.
(e)
Number of transactions includes convertible offerings.

External Factors Impacting Our Business

Performance in the financial services industry in which we operate is highly correlated to the overall strength of economic conditions and financial market activity. Overall market conditions are a product of many factors, which are beyond our control and mostly unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services as reflected by the number and size of equity and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, changes in interest rates (especially rapid and extreme changes) and credit spreads, overall market liquidity, the level and shape of various yield curves, the volume and value of trading in securities, overall equity valuations, and the demand for asset management services.

Factors that differentiate our business within the financial services industry may also affect our financial results. For example, our capital markets business focuses on a middle-market clientele in specific industry sectors. If the business environment for our focus sectors is impacted disproportionately as compared to the economy as a whole, our business and results of operations will be negatively impacted. In addition, our business could be affected differently than overall market trends. Given the variability of the capital markets and securities businesses, our earnings may fluctuate significantly from period to period, and results for any individual period should not be considered indicative of future results.


27


Outlook for 2016

We continue to encounter mixed signals relative to the strength of the recovery for the U.S. economy. In 2016, we believe the U.S. economy will continue its sluggish growth pattern. Risks to continued growth include ongoing or accelerating weakness in major economies internationally, falling oil prices, or significant geopolitical events (including terrorism) or conflicts, which could adversely impact the rate of growth in the U.S. and continue to inject volatility into the U.S. equity and debt markets. The 2016 presidential election could also influence the volatility or direction of markets based on investors’ assessment of the outcome and the overall political outlook in the United States.

The Federal Reserve increased short-term interest rates for the first time in almost ten years at the end of 2015, however the beginning of 2016 has seen lower interest rates among most fixed income securities as volatility in global markets has created uncertainty in the marketplace. If lower interest rates persist through 2016 it is generally favorable for our municipal debt underwriting business as refunding activity increases, however lower interest rates will likely reduce activity in our fixed income institutional brokerage business. Given the impact of new regulations and capital requirements on major market participants, we may experience periods when volatility is exacerbated by the withdrawal of liquidity historically provided by these participants. We generally anticipate maintaining a conservative bias in managing our inventories and hedging strategies to mitigate market volatility and our exposure to interest rates.

As to our businesses tied to the equity markets, we expect that market conditions will likely remain volatile given the mixed outlook for the U.S. economy coupled with global economic and geopolitical risks. While higher volatility typically benefits our equity sales and trading business, a period of sustained market volatility or prolonged market correction may be disruptive to our capital raising activities.

Asset management revenues will continue to be dependent upon valuations and our investment performance, which can impact the amount of client inflows and outflows of assets under management. Our exposure to energy through a dedicated energy fund, our MLP strategies and energy holdings in our domestic strategies, adversely impacted our assets under management in the second half of 2015. Sharp fluctuations in the price of oil may continue to increase the volatility of energy-related equity holdings in 2016.

Results of Operations

To provide comparative information of our operating results for the periods presented, a discussion of adjusted segment results follows the discussion of our total consolidated U.S. GAAP results. Our adjusted segment results exclude certain revenue and expenses required under U.S. GAAP. See the sections titled "Explanation of Non-GAAP Financial Measures" and "Segment Performance from Continuing Operations" in Management's Discussion and Analysis of Financial Condition and Results of Operations for additional discussion and reconciliations.


28


Financial Summary

The following table provides a summary of the results of our operations on a U.S. GAAP basis and the results of our operations as a percentage of net revenues for the periods indicated.
 
 
 
 
 
 
 
 
 
As a Percentage of
 
 
 
 
 
 
 
 
 
Net Revenues for the
 
Year Ended December 31,
 
Year Ended December 31,
 
 
 
 
 
 
 
2015
 
2014
 
 
 
 
 
 
(Dollars in thousands)
2015
 
2014
 
2013
 
v2014
 
v2013
 
2015
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment banking
$
414,118

 
$
369,811

 
$
248,563

 
12.0
 %
 
48.8
 %
 
61.5
%
 
57.1
%
 
47.3
 %
Institutional brokerage
154,889

 
156,809

 
146,648

 
(1.2
)
 
6.9

 
23.0

 
24.2

 
27.9

Asset management
75,017

 
85,062

 
83,045

 
(11.8
)
 
2.4

 
11.1

 
13.1

 
15.8

Interest
41,557

 
48,716

 
50,409

 
(14.7
)
 
(3.4
)
 
6.2

 
7.5

 
9.6

Investment income
10,736

 
12,813

 
21,566

 
(16.2
)
 
(40.6
)
 
1.6

 
2.0

 
4.1

Total revenues
696,317

 
673,211

 
550,231

 
3.4

 
22.4

 
103.5

 
103.9

 
104.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
23,399

 
25,073

 
25,036

 
(6.7
)
 
0.1

 
3.5

 
3.9

 
4.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
672,918

 
648,138

 
525,195

 
3.8

 
23.4

 
100.0

 
100.0

 
100.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
421,733

 
394,510

 
322,464

 
6.9

 
22.3

 
62.7

 
60.9

 
61.4

Outside services
36,218

 
37,055

 
32,982

 
(2.3
)
 
12.3

 
5.4

 
5.7

 
6.3

Occupancy and equipment
28,301

 
28,231

 
25,493

 
0.2

 
10.7

 
4.2

 
4.4

 
4.9

Communications
23,762

 
22,732

 
21,431

 
4.5

 
6.1

 
3.5

 
3.5

 
4.1

Marketing and business development
29,990

 
27,260

 
21,603

 
10.0

 
26.2

 
4.5

 
4.2

 
4.1

Trade execution and clearance
7,794

 
7,621

 
8,270

 
2.3

 
(7.8
)
 
1.2

 
1.2

 
1.6

Restructuring and integration costs
10,652

 

 
4,689

 
N/M

 
N/M

 
1.6

 

 
0.9

Intangible asset amortization expense
7,662

 
9,272

 
7,993

 
(17.4
)
 
16.0

 
1.1

 
1.4

 
1.5

Other operating expenses
20,383

 
11,146

 
4,657

 
82.9

 
139.3

 
3.0

 
1.7

 
0.9

Total non-interest expenses
586,495

 
537,827

 
449,582

 
9.0

 
19.6

 
87.2

 
83.0

 
85.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations before income tax expense
86,423

 
110,311

 
75,613

 
(21.7
)
 
45.9

 
12.8

 
17.0

 
14.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
27,941

 
35,986

 
20,390

 
(22.4
)
 
76.5

 
4.2

 
5.6

 
3.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
58,482

 
74,325

 
55,223

 
(21.3
)
 
34.6

 
8.7

 
11.5

 
10.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax

 

 
(4,739
)
 

 
N/M

 

 

 
(0.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
58,482

 
74,325

 
50,484

 
(21.3
)
 
47.2

 
8.7

 
11.5

 
9.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to noncontrolling interests
6,407

 
11,153

 
5,394

 
(42.6
)
 
106.8

 
1.0

 
1.7

 
1.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to Piper Jaffray Companies
$
52,075

 
$
63,172

 
$
45,090

 
(17.6
)%
 
40.1
 %
 
7.7
%
 
9.7
%
 
8.6
 %
N/M — Not meaningful


29


For the year ended December 31, 2015, we recorded net income applicable to Piper Jaffray Companies of $52.1 million. Net revenues from continuing operations for the year ended December 31, 2015 were $672.9 million, a 3.8 percent increase compared to $648.1 million in the year-ago period. In 2015, investment banking revenues increased 12.0 percent to $414.1 million, compared with $369.8 million in 2014, driven by strong advisory services and debt financing revenues as we were able to continue to capitalize on the investments we have made to strengthen these businesses. For the year ended December 31, 2015, institutional brokerage revenues were $154.9 million, compared with $156.8 million in 2014. Asset management fees were $75.0 million in 2015, compared with $85.1 million in 2014, due to lower management fees from our value equity product offerings resulting from decreased assets under management. For the year ended December 31, 2015, net interest income decreased to $18.2 million, compared with $23.6 million in 2014. The decrease primarily resulted from lower average inventory balances in municipal and treasury securities driven by the closure and liquidation of our municipal bond fund with outside investors in the second half of 2015, as well as lower interest income attributable to a merchant banking debt investment that was repaid in the second quarter of 2014. These decreases were partially offset by increased interest expense at the end of the year due to a higher amount of outstanding principal on our senior notes. In 2015, investment income was $10.7 million, compared with $12.8 million in 2014, as we recorded gains associated with our investment and the noncontrolling interests in the merchant banking fund that we manage, which were partially offset by losses on our investments of firm capital in our MLP strategies. Non-interest expenses from continuing operations were $586.5 million for the year ended December 31, 2015, an increase of 9.0 percent compared to $537.8 million in the prior year, resulting from higher compensation expenses due to increased revenues and expansion of our financial institutions group, as well as higher non-compensation expenses due to a $9.8 million legal settlement charge and restructuring and integration costs primarily associated with the acquisitions of River Branch and BMO GKST.

For the year ended December 31, 2014, we recorded net income applicable to Piper Jaffray Companies of $63.2 million. Net revenues from continuing operations for the year ended December 31, 2014 were $648.1 million, a 23.4 percent increase compared to $525.2 million in 2013. In 2014, investment banking revenues increased 48.8 percent to $369.8 million, compared with $248.6 million in 2013, driven by robust advisory services revenues as we were able to capitalize on favorable market conditions and the investments we have made to strengthen our mergers and acquisitions resources in the middle market. For the year ended December 31, 2014, institutional brokerage revenues were $156.8 million, compared with $146.6 million in 2013, due to higher fixed income institutional brokerage revenues, partially offset by lower equity institutional brokerage revenues. Asset management fees were $85.1 million in 2014, compared with $83.0 million in 2013. For the year ended December 31, 2014, net interest income decreased to $23.6 million, compared with $25.4 million in 2013. In 2014, investment income was $12.8 million, compared with $21.6 million in the prior-year period as we recorded lower investment gains associated with our merchant banking and firm investments, partially offset by higher gains associated with our investment and the noncontrolling interests in the municipal bond fund that we managed for the benefit of outside investors. Non-interest expenses from continuing operations were $537.8 million for the year ended December 31, 2014, an increase of 19.6 percent compared to $449.6 million in 2013, primarily resulting from higher compensation expenses due to increased revenues and improved operating performance and higher non-compensation expenses due to increased business activity and incremental costs associated with the acquisitions of Seattle-Northwest Securities Corporation ("Seattle-Northwest") and Edgeview Partners, L.P. ("Edgeview").


30


Consolidated Non-Interest Expenses from Continuing Operations

Compensation and Benefits Compensation and benefits expenses, which are the largest component of our expenses, include salaries, incentive compensation, benefits, stock-based compensation, employment taxes, income associated with the forfeiture of stock-based compensation and other employee costs. A portion of compensation expense is comprised of variable incentive arrangements, including discretionary incentive compensation, the amount of which fluctuates in proportion to the level of business activity, increasing with higher revenues and operating profits. Other compensation costs, primarily base salaries and benefits, are more fixed in nature. The timing of incentive compensation payments, which generally occur in February, has a greater impact on our cash position and liquidity than is reflected on our consolidated statements of operations.

For the year ended December 31, 2015, compensation and benefits expenses increased 6.9 percent to $421.7 million from $394.5 million in 2014 due primarily to improved financial results. Compensation and benefits expenses as a percentage of net revenues was 62.7 percent in 2015, compared with 60.9 percent in 2014. The higher compensation expense ratio was attributable to incremental compensation related to the expansion of our financial institutions group as well as a change in our mix of revenues.

For the year ended December 31, 2014, compensation and benefits expenses increased 22.3 percent to $394.5 million from $322.5 million in 2013, due to improved financial results. Compensation and benefits expenses as a percentage of net revenues was 60.9 percent in 2014, compared with 61.4 percent in 2013. The lower compensation expense ratio was due to an increased revenue base.

Outside Services – Outside services expenses include securities processing expenses, outsourced technology functions, outside legal fees, fund expenses associated with our consolidated alternative asset management funds and other professional fees. Outside services expenses decreased 2.3 percent to $36.2 million in 2015, compared with $37.1 million in the corresponding period of 2014. Excluding the portion of expenses from non-controlled equity interests in our consolidated alternative asset management funds, outside services expenses decreased 1.7 percent.

Outside services expenses increased 12.3 percent to $37.1 million in 2014, compared with $33.0 million in 2013. Excluding the portion of expenses from non-controlled equity interests in our consolidated alternative asset management funds, outside services expenses increased 9.3 percent due primarily to higher legal and other professional fees.

Occupancy and Equipment – For the year ended December 31, 2015, occupancy and equipment expenses were $28.3 million, essentially flat compared with 2014.

For the year ended December 31, 2014, occupancy and equipment expenses increased 10.7 percent to $28.2 million, compared with $25.5 million in the corresponding period of 2013. The increase was primarily the result of incremental occupancy expenses from our acquisitions of Seattle-Northwest and Edgeview completed during the third quarter of 2013, and incremental one-time occupancy costs related to our office space in New York City.

Communications – Communication expenses include costs for telecommunication and data communication, primarily consisting of expenses for obtaining third party market data information. For the year ended December 31, 2015, communication expenses increased 4.5 percent to $23.8 million, compared with $22.7 million for the year ended December 31, 2014. The increase resulted from higher market data service expenses due to the additional headcount associated with our financial institutions group expansion and our acquisitions of River Branch and BMO GKST.

For the year ended December 31, 2014, communication expenses increased 6.1 percent to $22.7 million, compared with $21.4 million for the year ended December 31, 2013. The increase resulted from higher market data service expenses.

Marketing and Business Development – Marketing and business development expenses include travel and entertainment costs, advertising and third party marketing fees. In 2015, marketing and business development expenses increased 10.0 percent to $30.0 million, compared with $27.3 million in the year ended December 31, 2014, due to higher travel expenses from increased business activity and acquisition-related travel.

In 2014, marketing and business development expenses increased 26.2 percent to $27.3 million, compared with $21.6 million in the year ended December 31, 2013, due to higher third party marketing fees associated with our asset management business, as well as higher travel expenses from increased business activity.


31


Trade Execution and Clearance – For the year ended December 31, 2015, trade execution and clearance expenses were $7.8 million, compared with $7.6 million million in the year ended December 31, 2014.

For the year ended December 31, 2014, trade execution and clearance expenses were $7.6 million, compared with $8.3 million in the year ended December 31, 2013, due to lower trading execution expenses.

Restructuring and Integration Costs – During the year ended December 31, 2015, we recorded restructuring and integration costs of $10.7 million primarily consisting of severance benefits and transaction costs related to the acquisitions of River Branch and BMO GKST. For the year ended December 31, 2013, we recorded restructuring and integration costs of $4.7 million, primarily related to the acquisitions of Seattle-Northwest and Edgeview. We expect to incur additional restructuring and integration costs in 2016, primarily related to the acquisition of Simmons, which is expected to close in the first quarter of 2016.

Intangible Asset Amortization Expense – Intangible asset amortization expense includes the amortization of definite-lived intangible assets consisting of customer relationships and non-competition agreements. For the year ended December 31, 2015, intangible asset amortization expense was $7.7 million, compared with $9.3 million in the corresponding period of 2014. In the fourth quarter of 2015, we recorded incremental intangible asset amortization expense related to identifiable intangible assets associated with the acquisitions of River Branch and BMO GKST. In 2016, we anticipate incurring a full year of intangible asset amortization expense related to River Branch and BMO GKST and additional intangible asset amortization expense related to the acquisition of Simmons.

For the year ended December 31, 2014, intangible asset amortization expense was $9.3 million, compared with $8.0 million in the corresponding period of 2013. The increase reflects a full year of intangible asset amortization expense related to the 2013 acquisitions of Seattle-Northwest and Edgeview.

Other Operating Expenses – Other operating expenses include insurance costs, license and registration fees, expenses related to our charitable giving program and litigation-related expenses, which consist of the amounts we reserve and/or pay out related to legal and regulatory matters. Other operating expenses increased to $20.4 million in 2015, compared with $11.1 million in 2014. In 2015, we recorded a $9.8 million charge related to settlement of a legal matter.

Other operating expenses increased to $11.1 million in 2014, compared with $4.7 million in 2013. In 2013, we received insurance proceeds for the reimbursement of prior legal settlements. Additionally, in 2014, we incurred higher expenses related to our charitable giving program, driven by our increased profitability.

Income Taxes For the year ended December 31, 2015, our provision for income taxes was $27.9 million equating to an effective tax rate, excluding noncontrolling interests, of 34.9 percent.

For the year ended December 31, 2014, our provision for income taxes was $36.0 million, equating to an effective tax rate, excluding noncontrolling interests, of 36.3 percent.

For the year ended December 31, 2013, our provision for income taxes was $20.4 million equating to an effective tax rate, excluding noncontrolling interests, of 29.0 percent. In 2013, we recorded a tax benefit for the full reversal of our U.K subsidiary's deferred tax asset valuation allowance of $4.0 million as we achieved three years of profitability and forecasted future taxable profits.
 

32


Segment Performance from Continuing Operations

We measure financial performance by business segment. Our two reportable segments are Capital Markets and Asset Management. We determined these segments based upon the nature of the financial products and services provided to customers and our management organization. Segment pre-tax operating income and segment pre-tax operating margin are used to evaluate and measure segment performance by our chief operating decision maker in deciding how to allocate resources and in assessing performance in relation to our competitors. Revenues and expenses directly associated with each respective segment are included in determining segment operating results. Revenues and expenses that are not directly attributable to a particular segment are allocated based upon our allocation methodologies, generally based on each segment’s respective net revenues, use of shared resources, headcount or other relevant measures.

Throughout this section, we have presented segment results on both a U.S. GAAP and non-GAAP basis. Management believes that presenting adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin in conjunction with the U.S. GAAP measures provides a more meaningful basis for comparison of its operating results and underlying trends between periods.

Adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin exclude (1) revenues and expenses related to noncontrolling interests, (2) amortization of intangible assets related to acquisitions, (3) compensation from acquisition-related agreements and (4) restructuring and acquisition integration costs. For U.S. GAAP purposes, these items are included in each of their respective line items on the consolidated statements of operations.

Adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin present the segments' results of operations excluding the impact resulting from the consolidation of noncontrolling interests in alternative asset management funds and private equity investment vehicles. Consolidation of these funds results in the inclusion of the proportionate share of the income or loss attributable to the equity interests in consolidated funds that are not attributable, either directly or indirectly, to us (i.e. noncontrolling interests). This proportionate share is reflected in net income/(loss) applicable to noncontrolling interests in the accompanying consolidated statements of operations, and has no effect on the overall financial performance of the segments, as ultimately, this income or loss is not income or loss for the segments themselves. Included in adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin is the actual proportionate share of the income or loss attributable to us as an investor in such funds.

Adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin also exclude amortization of intangible assets and compensation from acquisition-related agreements. These amounts are excluded on a non-GAAP basis as they represent expenses specifically related to acquisitions that will eventually be fully amortized and therefore not part of our on-going operations. The restructuring and integration costs excluded from adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin represent charges that resulted from severance benefits, vacating redundant office space and contract termination costs. Restructuring and integration costs are excluded from our non-GAAP financial measures as they generally relate to an acquisition or a specific event and excluding these amounts provides a better understanding of our core non-compensation expenses. Management believes that presenting adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin excluding the acquisition-related amounts and restructuring and integration costs provides clarity on the financial results generated by the core operating components of our business.


33


Capital Markets

The following table sets forth the Capital Markets adjusted segment financial results from continuing operations and adjustments necessary to reconcile to our consolidated U.S. GAAP pre-tax operating income and pre-tax operating margin for the periods presented:
 
Year Ended December 31,
 
2015
 
2014
 
 
 
Adjustments (1)
 
 
 
 
 
Adjustments (1)
 
 
 
Total
 
Noncontrolling
 
Other
 
U.S.
 
Total
 
Noncontrolling
 
Other
 
U.S.
(Dollars in thousands)
Adjusted
 
Interests
 
Adjustments
 
GAAP
 
Adjusted
 
Interests
 
Adjustments
 
GAAP
Investment banking
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
$
114,468

 
$

 
$

 
$
114,468

 
$
109,706

 
$

 
$

 
$
109,706

Debt
91,195

 

 

 
91,195

 
63,005

 

 

 
63,005

Advisory services
209,163

 

 

 
209,163

 
197,880

 

 

 
197,880

Total investment banking
414,826

 

 

 
414,826

 
370,591

 

 

 
370,591

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Institutional sales and trading
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
78,584

 

 

 
78,584

 
82,211

 

 

 
82,211

Fixed income
93,489

 
816

 

 
94,305

 
92,200

 

 

 
92,200

Total institutional sales and trading
172,073

 
816

 

 
172,889

 
174,411

 

 

 
174,411

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total management and performance fees
4,642

 

 

 
4,642

 
5,398

 

 

 
5,398

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment income
15,474

 
8,994

 

 
24,468

 
8,347

 
15,699

 

 
24,046