Attached files

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EX-10.1 - CONSULTING AGREEMENT FOR SERVICES OF INDEPENDENT CONTRACTOR - PIPER JAFFRAY COMPANIESpjcq12016ex101.htm
EX-10.4 - FORM OF PERFORMANCE SHARE UNIT AGREEMENT FOR 2016 - PIPER JAFFRAY COMPANIESpjcq12016ex104.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - PIPER JAFFRAY COMPANIESpjcq12016ex312.htm
EX-10.2 - RESTRICTED STOCK AGREEMENT FOR MICHAEL E FRAZIER - PIPER JAFFRAY COMPANIESpjcq12016ex102.htm
EX-31.1 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER - PIPER JAFFRAY COMPANIESpjcq12016ex311.htm
EX-2.1 - FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT - PIPER JAFFRAY COMPANIESpjcq12016ex21.htm
EX-10.3 - AMENDED AND RESTATED MUTUAL FUND RS INVESTMENT PLAN - PIPER JAFFRAY COMPANIESpjcq12016ex103.htm
EX-32.1 - SECTION 1350 CERTIFICATION - PIPER JAFFRAY COMPANIESpjcq12016ex321.htm
 


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2016
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to                     

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

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

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

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

As of April 27, 2016, the registrant had 16,094,194 shares of Common Stock outstanding.

 




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

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





PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS.
Piper Jaffray Companies
Consolidated Statements of Financial Condition
 
March 31,
 
December 31,
 
2016
 
2015
(Amounts in thousands, except share data)
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
49,140

 
$
189,910

Cash and cash equivalents segregated for regulatory purposes
47,042

 
81,022

Receivables:
 
 
 
Customers
29,697

 
41,167

Brokers, dealers and clearing organizations
185,779

 
147,949

Securities purchased under agreements to resell
117,172

 
136,983

 
 
 
 
Financial instruments and other inventory positions owned
426,042

 
283,579

Financial instruments and other inventory positions owned and pledged as collateral
675,876

 
707,355

Total financial instruments and other inventory positions owned
1,101,918

 
990,934

 
 
 
 
Fixed assets (net of accumulated depreciation and amortization of $61,284 and $51,874, respectively)
20,815

 
18,984

Goodwill
289,862

 
217,976

Intangible assets (net of accumulated amortization of $52,099 and $48,803, respectively)
41,845

 
30,530

Investments
163,701

 
163,861

Other assets
131,444

 
119,202

Total assets
$
2,178,415

 
$
2,138,518

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Short-term financing
$
459,043

 
$
446,190

Senior notes
175,000

 
175,000

Payables:
 
 
 
Customers
44,641

 
37,364

Brokers, dealers and clearing organizations
170,931

 
48,131

Securities sold under agreements to repurchase
51,632

 
45,319

Financial instruments and other inventory positions sold, but not yet purchased
264,653

 
239,155

Accrued compensation
106,075

 
251,638

Other liabilities and accrued expenses
53,503

 
62,901

Total liabilities
1,325,478

 
1,305,698

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $0.01 par value:
 
 
 
Shares authorized: 100,000,000 at March 31, 2016 and December 31, 2015;
 
 
 
Shares issued: 19,512,638 at March 31, 2016 and 19,510,858 at December 31, 2015;
 
 
 
Shares outstanding: 13,267,785 at March 31, 2016 and 13,311,016 at December 31, 2015
195

 
195

Additional paid-in capital
773,117

 
752,066

Retained earnings
281,577

 
279,140

Less common stock held in treasury, at cost: 6,244,853 at March 31, 2016 and 6,199,842 shares at December 31, 2015
(249,117
)
 
(247,553
)
Accumulated other comprehensive loss
(592
)
 
(189
)
Total common shareholders’ equity
805,180

 
783,659

 
 
 
 
Noncontrolling interests
47,757

 
49,161

Total shareholders’ equity
852,937

 
832,820

 
 
 
 
Total liabilities and shareholders’ equity
$
2,178,415

 
$
2,138,518

See Notes to the Consolidated Financial Statements

3

Piper Jaffray Companies
Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended
 
March 31,
(Amounts in thousands, except per share data)
2016
 
2015
Revenues:
 
 
 
Investment banking
$
103,938

 
$
87,077

Institutional brokerage
32,049

 
36,036

Asset management
13,848

 
20,522

Interest
8,829

 
12,205

Investment income
937

 
12,591

 
 
 
 
Total revenues
159,601

 
168,431

 
 
 
 
Interest expense
6,045

 
6,560

 
 
 
 
Net revenues
153,556

 
161,871

 
 
 
 
Non-interest expenses:
 
 
 
Compensation and benefits
104,436

 
95,857

Outside services
8,451

 
8,184

Occupancy and equipment
7,718

 
6,783

Communications
7,330

 
6,328

Marketing and business development
7,004

 
6,982

Trade execution and clearance
1,762

 
1,997

Restructuring and integration costs
6,773

 

Intangible asset amortization expense
3,296

 
1,773

Other operating expenses
3,344

 
2,675

 
 
 
 
Total non-interest expenses
150,114

 
130,579

 
 
 
 
Income before income tax expense
3,442

 
31,292

 
 
 
 
Income tax expense
256

 
9,490

 
 
 
 
Net income
3,186

 
21,802

 
 
 
 
Net income applicable to noncontrolling interests
749

 
4,830

 
 
 
 
Net income applicable to Piper Jaffray Companies
$
2,437

 
$
16,972

 
 
 
 
Net income applicable to Piper Jaffray Companies’ common shareholders
$
2,124

 
$
15,810

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.16

 
$
1.03

Diluted
$
0.16

 
$
1.03

 
 
 
 
Weighted average number of common shares outstanding
 
 
 
Basic
13,160

 
15,294

Diluted
13,172

 
15,332


See Notes to the Consolidated Financial Statements


4

Piper Jaffray Companies
Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three Months Ended
 
March 31,
(Amounts in thousands)
2016
 
2015
Net income
$
3,186

 
$
21,802

 
 
 
 
Other comprehensive loss, net of tax:
 
 
 
Foreign currency translation adjustment
(403
)
 
(475
)
 
 
 
 
Comprehensive income
2,783

 
21,327

 
 
 
 
Comprehensive income applicable to noncontrolling interests
749

 
4,830

 
 
 
 
Comprehensive income applicable to Piper Jaffray Companies
$
2,034

 
$
16,497


See Notes to the Consolidated Financial Statements


5

Piper Jaffray Companies
Consolidated Statements of Cash Flows
(Unaudited)

 
Three Months Ended
 
March 31,
(Dollars in thousands)
2016
 
2015
 
 
 
 
Operating Activities:
 
 
 
Net income
$
3,186

 
$
21,802

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization of fixed assets
1,458

 
1,215

Deferred income taxes
6,436

 
10,162

Stock-based and deferred compensation
10,064

 
13,756

Amortization of intangible assets
3,296

 
1,773

Amortization of forgivable loans
2,051

 
1,280

Decrease/(increase) in operating assets:
 
 
 
Cash and cash equivalents segregated for regulatory purposes
33,980

 
(2,008
)
Receivables:
 
 
 
Customers
12,748

 
(16,842
)
Brokers, dealers and clearing organizations
(36,899
)
 
(41,203
)
Securities purchased under agreements to resell
17,899

 
(77,542
)
Net financial instruments and other inventory positions owned
(85,486
)
 
(90,662
)
Investments
(8,051
)
 
(18,070
)
Other assets
(17,559
)
 
(25,932
)
Increase/(decrease) in operating liabilities:
 
 
 
Payables:
 
 
 
Customers
7,277

 
21,594

Brokers, dealers and clearing organizations
122,800

 
150,890

Securities sold under agreements to repurchase
2,809

 

Accrued compensation
(133,238
)
 
(128,977
)
Other liabilities and accrued expenses
(17,075
)
 
3,633

 
 
 
 
Net cash used in operating activities
(74,304
)
 
(175,131
)
 
 
 
 
Investing Activities:
 
 
 
Business acquisitions, net of cash acquired
(70,230
)
 

Purchases of fixed assets, net
(1,331
)
 
(1,896
)
 
 
 
 
Net cash used in investing activities
(71,561
)
 
(1,896
)
 
 
 
 
Continued on next page

6

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

 
Three Months Ended
 
March 31,
(Dollars in thousands)
2016
 
2015
 
 
 
 
Financing Activities:
 
 
 
Increase in short-term financing
$
12,853

 
$
139,755

Increase in securities sold under agreements to repurchase
5,416

 
66,581

Increase in noncontrolling interests
7,262

 
1,805

Repurchase of common stock
(19,445
)
 
(42,566
)
Excess/(reduced) tax benefit from stock-based compensation
(895
)
 
3,662

Proceeds from stock option exercises

 
1,562

 
 
 
 
Net cash provided by financing activities
5,191

 
170,799

 
 
 
 
Currency adjustment:
 
 
 
Effect of exchange rate changes on cash
(96
)
 
(257
)
 
 
 
 
Net decrease in cash and cash equivalents
(140,770
)
 
(6,485
)
 
 
 
 
Cash and cash equivalents at beginning of period
189,910

 
15,867

 
 
 
 
Cash and cash equivalents at end of period
$
49,140

 
$
9,382

 
 
 
 
Supplemental disclosure of cash flow information –
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
6,067

 
$
6,427

Income taxes
$
19,827

 
$
15,871

 
 
 
 
Non-cash investing activities –
 
 
 
Issuance of common stock for the acquisition of Simmons & Company International:
 
 
 
25,525 shares for the three months ended March 31, 2016
$
1,074

 
$

 
 
 
 
Non-cash financing activities –
 
 
 
Issuance of restricted common stock for annual equity award:
 
 
 
843,889 shares and 550,650 shares for the three months ended March 31, 2016 and 2015, respectively
$
35,089

 
$
30,429


See Notes to the Consolidated Financial Statements


7

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


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


8

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

Note 1 Organization and Basis of Presentation

Organization

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

Capital Markets

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

Asset Management

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

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and the rules and regulations of the Securities and Exchange Commission ("SEC"). Pursuant to this guidance, certain information and disclosures have been omitted that are included within complete annual financial statements. Except as disclosed herein, there have been no material changes in the information reported in the financial statements and related disclosures in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

The consolidated financial statements include the accounts of Piper Jaffray Companies, its wholly owned subsidiaries, and all other entities in which the Company has a controlling financial interest. Noncontrolling interests represent equity interests in consolidated entities that are not attributable, either directly or indirectly, to Piper Jaffray Companies. Noncontrolling interests include the minority equity holders’ proportionate share of the equity in the Company's alternative asset management funds. All material intercompany balances have been eliminated.

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates and assumptions are based on the best information available, actual results could differ from those estimates.


9

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

Note 2 Accounting Policies and Pronouncements

Summary of Significant Accounting Policies

Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2015 for a full description of the Company's significant accounting policies. Changes to the Company's significant accounting policies are described below.

Principles of Consolidation

The Company consolidates entities in which it has a controlling financial interest. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a variable interest entity ("VIE") or a voting interest entity.

VIEs are entities in which (i) the total equity investment at risk is not sufficient to enable the entity to finance its activities independently or (ii) the at-risk equity holders do not have the normal characteristics of a controlling financial interest. A controlling financial interest in a VIE is present when an enterprise has one or more variable interests that have both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The enterprise with a controlling financial interest is the primary beneficiary and consolidates the VIE.

Voting interest entities lack one or more of the characteristics of a VIE. The usual condition for a controlling financial interest is ownership of a majority voting interest for a corporation or a majority of kick-out rights for a limited partnership.

When the Company does not have a controlling financial interest in an entity but exerts significant influence over the entity’s operating and financial policies (generally defined as owning a voting or economic interest of between 20 percent to 50 percent), the Company's investment is accounted for under the equity method of accounting. If the Company does not have a controlling financial interest in, or exert significant influence over, an entity, the Company accounts for its investment at fair value, if the fair value option was elected, or at cost.

Adoption of New Accounting Standards

Consolidation

In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis" ("ASU 2015-02"). ASU 2015-02 makes several modifications to the consolidation guidance for VIEs and general partners' investments in limited partnerships, as well as modifications to the evaluation of whether limited partnerships are VIEs or voting interest entities. It was effective for the Company as of January 1, 2016. The adoption of ASU 2015-02 resulted in the deconsolidation of certain investment partnerships with assets (and the related noncontrolling interests) of approximately $9.4 million. There was no impact to the Company’s retained earnings upon adoption. In addition, certain entities previously consolidated as voting interest entities became consolidated VIEs under the amended guidance.


10

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

Future Adoption of New Applicable Accounting Standards

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," ("ASU 2014-09") which supersedes current revenue recognition guidance, including most industry-specific guidance. ASU 2014-09 requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services, and also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue that is recognized. The guidance, as stated in ASU 2014-09, is effective for annual and interim periods beginning after December 15, 2016. In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers the effective date by one year, with early adoption on the original effective date permitted. The FASB has subsequently issued various ASUs which amend specific areas of guidance in ASU 2014-09. The Company is evaluating the impact of the new guidance on its consolidated financial statements.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). The amendments in ASU 2016-01 address certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for annual and interim periods beginning after December 15, 2017. Except for the early application guidance outlined in ASU 2016-01, early adoption is not permitted. The Company is evaluating the impact of the new guidance on its consolidated financial statements.

Leases

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability on the consolidated statements of financial position and disclose key information about leasing arrangements. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current U.S. GAAP. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact of the new guidance on its consolidated financial statements.

Stock-Based Compensation

In March 2016, the FASB issued ASU No. 2016-09, "Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 makes targeted amendments to the accounting for share-based payments to employees. Under ASU 2016-09, entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled, rather than as additional paid-in-capital. As of March 31, 2016, the Company had $6.1 million of excess tax benefits recorded as additional paid-in-capital. ASU 2016-09 also amends the guidance regarding the employer’s statutory income tax withholding requirements and allows an entity to make an accounting policy election for forfeitures. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016. The Company is evaluating the impact of the new guidance on its consolidated financial statements.

Note 3 Acquisitions

The following acquisitions were accounted for pursuant to FASB Accounting Standards Codification Topic 805, "Business Combinations." Accordingly, the purchase price of each acquisition was allocated to the acquired assets and liabilities assumed based on their estimated fair values as of the respective acquisition dates. The excess of the purchase price over the net assets acquired was allocated between goodwill and intangible assets within the Capital Markets segment.


11

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

Simmons & Company International

On February 26, 2016, the Company completed the purchase of Simmons & Company International ("Simmons"), an employee-owned investment bank and broker dealer focused on the energy industry. The economic value of the acquisition was approximately $140.0 million and was completed pursuant to the Securities Purchase Agreement dated November 16, 2015, as amended. The acquisition of Simmons supports the Company's strategy to expand its investment banking business into the energy sector and also grow its advisory business.

The Company acquired net assets with a fair value of $118.5 million as described below. As part of the purchase price, the Company issued 1,149,340 restricted shares valued at $48.2 million as equity consideration on the acquisition date. These restricted shares cliff vest after three years, and the employees must fulfill service requirements in exchange for the rights to the shares. Compensation expense will be amortized on a straight-line basis over the requisite service period of one or three years (a weighted average service period of 2.7 years). The fair value of the restricted stock was determined using the market price of the Company's common stock on the date of the acquisition.

The Company also entered into acquisition-related compensation arrangements with certain employees of $20.6 million which consisted of cash ($9.0 million) and restricted stock ($11.6 million) for retention purposes. Compensation expense related to these arrangements will be amortized on a straight-line basis over the requisite service period of three years. Additional cash compensation may be available to certain investment banking employees subject to exceeding an investment banking revenue threshold during the three year post-acquisition period to the extent they are employed by the Company at the time of payment. Amounts estimated to be payable, if any, related to this performance award plan will be recorded as compensation expense on the consolidated statements of operations over the requisite performance period of three years.

The Company recorded $71.9 million of goodwill on the consolidated statements of financial condition, of which $61.7 million is expected to be deductible for income tax purposes. The final goodwill recorded on the Company's consolidated statements of financial condition may differ from that reflected herein as a result of measurement period adjustments. In management's opinion, the goodwill represents the reputation and operating expertise of Simmons.

Identifiable intangible assets purchased by the Company consisted of customer relationships and the Simmons trade name with acquisition-date fair values currently estimated to be $13.8 million and $0.8 million, respectively. The Company anticipates finalizing the fair value of Simmons intangible assets in the second quarter of 2016. Transaction costs of $0.5 million were incurred for the three months ended March 31, 2016, and are included in restructuring and integration costs on the consolidated statements of operations.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition:
(Dollars in thousands)
 
 
Assets:
 
 
Cash and cash equivalents
 
$
47,201

Receivables:
 
 
Customers
 
1,278

Brokers, dealers and clearing organizations
 
931

Fixed assets
 
1,981

Goodwill
 
71,900

Intangible assets
 
14,597

Investments
 
995

Other assets
 
3,599

Total assets acquired
 
142,482

 
 
 
Liabilities:
 
 
Accrued compensation
 
16,284

Other liabilities and accrued expenses
 
7,693

Total liabilities assumed
 
23,977

 
 
 
Net assets acquired
 
$
118,505


12

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


Simmons’ results of operations have been included in the Company's consolidated financial statements prospectively beginning on the date of acquisition. The acquisition has been fully integrated with the Company's existing operations. Accordingly, post-acquisition revenues and net income are not discernible. The following unaudited pro forma financial data assumes the acquisition had occurred at the beginning of the comparable prior period presented. Pro forma results have been prepared by adjusting the Company's historical results to include Simmons' results of operations adjusted for the following changes: amortization expense was adjusted to account for the acquisition-date fair value of intangible assets; compensation and benefits expenses were adjusted to reflect such expenses based on the Company’s compensation arrangements and the restricted stock issued as equity consideration; and the income tax effect of applying the Company's statutory tax rates to Simmons’ results of operations. The consolidated Company's unaudited pro forma information presented does not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable periods presented, does not contemplate anticipated operational efficiencies of the combined entities, nor does it indicate the results of operations in future periods.
 
Three Months Ended
 
March 31,
(Dollars in thousands)
2016
 
2015
Net revenues
$
161,353

 
$
187,982

Net income/(loss) applicable to Piper Jaffray Companies
(222
)
 
15,490


River Branch Holdings LLC and BMO Capital Markets GKST Inc.

On September 30, 2015, the Company acquired the assets of River Branch Holdings LLC ("River Branch"), an equity investment banking boutique focused on the financial institutions sector. The purchase was completed pursuant to the Asset Purchase Agreement dated July 11, 2015.

On October 9, 2015, the Company completed the purchase of BMO Capital Markets GKST Inc. ("BMO GKST"), a municipal bond sales, trading and origination business of BMO Financial Corp. The purchase was completed pursuant to the Stock Purchase Agreement dated July 19, 2015.

The Company recorded $6.1 million of goodwill on the consolidated statements of financial condition related to these acquisitions and $7.5 million of identifiable intangible assets consisting of customer relationships. In management's opinion, the goodwill represents the reputation and operating expertise of River Branch and BMO GKST.

The results of operations of River Branch and BMO GKST have been included in the Company's consolidated financial statements prospectively from the respective dates of acquisition. The terms of these transactions were not disclosed as the acquisitions did not have a material impact on the Company's consolidated financial statements.


13

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

Note 4 Financial Instruments and Other Inventory Positions Owned and Financial Instruments and Other Inventory Positions Sold, but Not Yet Purchased

 
March 31,
 
December 31,
(Dollars in thousands)
2016
 
2015
Financial instruments and other inventory positions owned:
 
 
 
Corporate securities:
 
 
 
Equity securities
$
4,791

 
$
9,505

Convertible securities
17,039

 
18,460

Fixed income securities
59,735

 
48,654

Municipal securities:
 
 
 
Taxable securities
125,692

 
111,591

Tax-exempt securities
509,219

 
416,966

Short-term securities
72,164

 
33,068

Mortgage-backed securities
117,891

 
121,794

U.S. government agency securities
155,894

 
188,140

U.S. government securities

 
7,729

Derivative contracts
39,493

 
35,027

Total financial instruments and other inventory positions owned
1,101,918

 
990,934

 
 
 
 
Less noncontrolling interests (1)
(54,047
)
 
(43,397
)
 
$
1,047,871

 
$
947,537

 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
Corporate securities:
 
 
 
Equity securities
$
21,949

 
$
15,740

Fixed income securities
43,553

 
39,909

U.S. government agency securities
13,584

 
21,267

U.S. government securities
180,462

 
159,037

Derivative contracts
5,105

 
3,202

Total financial instruments and other inventory positions sold, but not yet purchased
264,653

 
239,155

 
 
 
 
Less noncontrolling interests (2)
(11,457
)
 
(4,586
)
 
$
253,196

 
$
234,569

(1)
Noncontrolling interests attributable to third party ownership in a consolidated municipal bond fund consist of $12.5 million and $7.5 million of taxable municipal securities, $40.6 million and $35.1 million of tax-exempt municipal securities, and $0.9 million and $0.8 million of derivative contracts as of March 31, 2016 and December 31, 2015, respectively. 
(2)
Noncontrolling interests attributable to third party ownership in a consolidated municipal bond fund consist of U.S. government securities as of March 31, 2016 and December 31, 2015.

At March 31, 2016 and December 31, 2015, financial instruments and other inventory positions owned in the amount of $675.9 million and $707.4 million, respectively, had been pledged as collateral for short-term financings and repurchase agreements.

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


14

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

Derivative Contract Financial Instruments

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

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

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

Derivatives are reported on a net basis by counterparty (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of offset exists and on a net basis by cross product when applicable provisions are stated in master netting agreements. Cash collateral received or paid is netted on a counterparty basis, provided a legal right of offset exists. The total absolute notional contract amount, representing the absolute value of the sum of gross long and short derivative contracts, provides an indication of the volume of the Company's derivative activity and does not represent gains and losses. The following table presents the gross fair market value and the total absolute notional contract amount of the Company's outstanding derivative instruments, prior to counterparty netting, by asset or liability position:
 
 
March 31, 2016
 
December 31, 2015
(Dollars in thousands)
 
Derivative
 
Derivative
 
Notional
 
Derivative
 
Derivative
 
Notional
Derivative Category
 
Assets (1)
 
Liabilities (2)
 
Amount
 
Assets (1)
 
Liabilities (2)
 
Amount
Interest rate
 
 
 
 
 
 
 
 
 
 
 
 
Customer matched-book
 
$
445,897

 
$
425,503

 
$
3,989,068

 
$
406,888

 
$
386,284

 
$
4,392,440

Trading securities
 
5

 
6,907

 
301,800

 

 
7,685

 
290,600

Credit default swap index
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
 
4,905

 
1,341

 
116,902

 
5,411

 
530

 
94,270

Futures and equity options
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
 
502

 

 
12,925,612

 
164

 
149

 
2,345,037

 
 
$
451,309

 
$
433,751

 
$
17,333,382

 
$
412,463

 
$
394,648

 
$
7,122,347

(1)
Derivative assets are included within financial instruments and other inventory positions owned on the consolidated statements of financial condition.
(2)
Derivative liabilities are included within financial instruments and other inventory positions sold, but not yet purchased on the consolidated statements of financial condition.


15

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

The Company’s derivative contracts do not qualify for hedge accounting, therefore, unrealized gains and losses are recorded on the consolidated statements of operations. The gains and losses on the related economically hedged inventory positions are not disclosed below as they are not in qualifying hedging relationships. The following table presents the Company’s unrealized gains/(losses) on derivative instruments:
 
 
 
 
Three Months Ended
(Dollars in thousands)
 
 
 
March 31,
Derivative Category               
 
Operations Category
 
2016
 
2015
Interest rate derivative contract
 
Investment banking
 
$
(1,172
)
 
$
(520
)
Interest rate derivative contract
 
Institutional brokerage
 
1,744

 
679

Credit default swap index contract
 
Institutional brokerage
 
389

 
4,607

Futures and equity option derivative contracts
 
Institutional brokerage
 
29

 
35

 
 
 
 
$
990

 
$
4,801


Credit risk associated with the Company’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. Credit exposure associated with the Company’s derivatives is driven by uncollateralized market movements in the fair value of the contracts with counterparties and is monitored regularly by the Company’s financial risk committee. The Company considers counterparty credit risk in determining derivative contract fair value. The majority of the Company’s derivative contracts are substantially collateralized by its counterparties, who are major financial institutions. The Company has a limited number of counterparties who are not required to post collateral. Based on market movements, the uncollateralized amounts representing the fair value of the derivative contract can become material, exposing the Company to the credit risk of these counterparties. As of March 31, 2016, the Company had $28.2 million of uncollateralized credit exposure with these counterparties (notional contract amount of $186.1 million), including $20.0 million of uncollateralized credit exposure with one counterparty.

Note 5 Fair Value of Financial Instruments

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

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


16

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

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

Cash Equivalents

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

Financial Instruments and Other Inventory Positions Owned

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

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

Convertible securities – Convertible securities are valued based on observable trades, when available. Accordingly, these convertible securities are categorized as Level II.

Corporate fixed income securities – Fixed income securities include corporate bonds which are valued based on recently executed market transactions of comparable size, internally-developed fair value estimates based on observable inputs, or broker quotations. Accordingly, these corporate bonds are categorized as Level II.

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

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

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

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


17

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

U.S. government agency securities – U.S. government agency securities include agency debt bonds and mortgage bonds. Agency debt bonds are valued by using either direct price quotes or price quotes for comparable bond securities and are categorized as Level II. Mortgage bonds include bonds secured by mortgages, mortgage pass-through securities, agency collateralized mortgage-obligation (“CMO”) securities and agency interest-only securities. Mortgage pass-through securities, CMO securities and interest-only securities are valued using recently executed observable trades or other observable inputs, such as prepayment speeds and therefore are generally categorized as Level II. Mortgage bonds are valued using observable market inputs, such as market yields ranging from 180-300 basis points (“bps”) on spreads over U.S. treasury securities, or models based upon prepayment expectations ranging from 8%-20% conditional prepayment rate (“CPR”). These securities are categorized as Level II.

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

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

Investments

The Company’s investments valued at fair value include equity investments in private companies and partnerships, investments in registered mutual funds, warrants of public and private companies and private company debt. Investments in registered mutual funds are valued based on quoted prices on active markets and classified as Level I. Company-owned warrants, which have a cashless exercise option, are valued based upon the Black-Scholes option-pricing model and certain unobservable inputs. The Company applies a liquidity discount to the value of its warrants in public and private companies. For warrants in private companies, valuation adjustments, based upon management’s judgment, are made to account for differences between the measured security and the stock volatility factors of comparable companies. Company-owned warrants are reported as Level III assets. 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 securities are generally categorized as Level III.

Fair Value Option – The fair value option permits the irrevocable fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The fair value option was elected for certain merchant banking and other investments at inception to reflect economic events in earnings on a timely basis. Merchant banking and other equity investments of $18.2 million and $19.7 million, included within investments on the consolidated statements of financial condition, are accounted for at fair value and are classified as Level III assets at March 31, 2016 and December 31, 2015, respectively. The realized and unrealized gains from fair value changes included in earnings as a result of electing to apply the fair value option to certain financial assets were $0.3 million and $0.8 million for the three months ended March 31, 2016 and 2015, respectively.


18

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

The following table summarizes quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s Level III financial instruments as of March 31, 2016:
 
Valuation
 
 
 
 
 
Weighted
 
Technique
 
Unobservable Input
 
Range      
 
Average
Assets:
 
 
 
 
 
 
 
Financial instruments and other inventory positions owned:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Tax-exempt securities
Discounted cash flow
 
Debt service coverage ratio (2)
 
5 - 60%
 
19.4%
Short-term securities
Discounted cash flow
 
Expected recovery rate (% of par) (2)
 
66 - 94%
 
91.0%
Mortgage-backed securities:
 
 
 
 
 
 
 
Collateralized by residential mortgages
Discounted cash flow
 
Credit default rates (3)
 
2 - 8%
 
4.2%
 
 
 
Prepayment rates (4)
 
3 - 25%
 
7.9%
 
 
 
Loss severity (3)
 
20 - 95%
 
65.8%
 
 
 
Valuation yields (3)
 
2 - 7%
 
5.0%
Derivative contracts:
 
 
 
 
 
 
 
Interest rate locks
Discounted cash flow
 
Premium over the MMD curve (1)
 
6.5 bps
 
6.5 bps
Investments at fair value:
 
 
 
 
 
 
 
Equity securities in private companies
Market approach
 
Revenue multiple (2)
 
2 - 5 times
 
4.0 times
 
 
 
EBITDA multiple (2)
 
10 - 12 times
 
10.4 times
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
Derivative contracts:
 
 
 
 
 
 
 
Interest rate locks
Discounted cash flow
 
Premium over the MMD curve (1)
 
3 - 51 bps
 
15.3 bps
Sensitivity of the fair value to changes in unobservable inputs:
(1)
Significant increase/(decrease) in the unobservable input in isolation would result in a significantly lower/(higher) fair value measurement.
(2)
Significant increase/(decrease) in the unobservable input in isolation would result in a significantly higher/(lower) fair value measurement.
(3)
Significant changes in any of these inputs in isolation could result in a significantly different fair value. Generally, a change in the assumption used for credit default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally inverse change in the assumption for valuation yields.
(4)
The potential impact of changes in prepayment rates on fair value is dependent on other security-specific factors, such as the par value and structure. Changes in the prepayment rates may result in directionally similar or directionally inverse changes in fair value depending on whether the security trades at a premium or discount to the par value.

19

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

The following table summarizes the valuation of the Company’s financial instruments by pricing observability levels defined in FASB Accounting Standards Codification Topic 820, "Fair Value Measurement" ("ASC 820") as of March 31, 2016:
 
 
 
 
 
 
 
Counterparty
 
 
 
 
 
 
 
 
 
and Cash
 
 
 
 
 
 
 
 
 
Collateral
 
 
(Dollars in thousands)
Level I
 
Level II
 
Level III
 
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions owned:
 
 
 
 
 
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
 
 
Equity securities
$
4,031

 
$
760

 
$

 
$

 
$
4,791

Convertible securities

 
17,039

 

 

 
17,039

Fixed income securities

 
59,735

 

 

 
59,735

Municipal securities:
 
 
 
 
 
 
 
 
 
Taxable securities

 
125,692

 

 

 
125,692

Tax-exempt securities

 
508,042

 
1,177

 

 
509,219

Short-term securities

 
71,416

 
748

 

 
72,164

Mortgage-backed securities

 

 
117,891

 

 
117,891

U.S. government agency securities

 
155,894

 

 

 
155,894

Derivative contracts
87

 
451,217

 
5

 
(411,816
)
 
39,493

Total financial instruments and other inventory positions owned
4,118

 
1,389,795

 
119,821

 
(411,816
)
 
1,101,918

 
 
 
 
 
 
 
 
 
 
Cash equivalents
766

 

 

 

 
766

 
 
 
 
 
 
 
 
 
 
Investments at fair value
36,922

 

 
110,477

 

 
147,399

Total assets
$
41,806

 
$
1,389,795

 
$
230,298

 
$
(411,816
)
 
$
1,250,083

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
 
 
Equity securities
$
17,837

 
$
4,112

 
$

 
$

 
$
21,949

Fixed income securities

 
43,553

 

 

 
43,553

U.S. government agency securities

 
13,584

 

 

 
13,584

U.S. government securities
180,462

 

 

 

 
180,462

Derivative contracts

 
428,343

 
5,408

 
(428,646
)
 
5,105

Total financial instruments and other inventory positions sold, but not yet purchased
$
198,299

 
$
489,592

 
$
5,408

 
$
(428,646
)
 
$
264,653

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


20

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

The following table summarizes the valuation of the Company’s financial instruments by pricing observability levels defined in ASC 820 as of December 31, 2015:
 
 
 
 
 
 
 
Counterparty
 
 
 
 
 
 
 
 
 
and Cash
 
 
 
 
 
 
 
 
 
Collateral
 
 
(Dollars in thousands)
Level I
 
Level II
 
Level III
 
Netting (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions owned:
 
 
 
 
 
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
 
 
Equity securities
$
7,569

 
$
1,936

 
$

 
$

 
$
9,505

Convertible securities

 
18,460

 

 

 
18,460

Fixed income securities

 
48,654

 

 

 
48,654

Municipal securities:
 
 
 
 
 
 
 
 
 
Taxable securities

 
105,775

 
5,816

 

 
111,591

Tax-exempt securities

 
415,789

 
1,177

 

 
416,966

Short-term securities

 
32,348

 
720

 

 
33,068

Mortgage-backed securities

 
670

 
121,124

 

 
121,794

U.S. government agency securities

 
188,140

 

 

 
188,140

U.S. government securities
7,729

 

 

 

 
7,729

Derivative contracts
164

 
412,299

 

 
(377,436
)
 
35,027

Total financial instruments and other inventory positions owned
15,462

 
1,224,071

 
128,837

 
(377,436
)
 
990,934

 
 
 
 
 
 
 
 
 
 
Cash equivalents
130,138

 

 

 

 
130,138

 
 
 
 
 
 
 
 
 
 
Investments at fair value
34,874

 

 
107,907

 

 
142,781

Total assets
$
180,474

 
$
1,224,071

 
$
236,744

 
$
(377,436
)
 
$
1,263,853

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
 
 
Equity securities
$
13,489

 
$
2,251

 
$

 
$

 
$
15,740

Fixed income securities

 
39,909

 

 

 
39,909

U.S. government agency securities

 
21,267

 

 

 
21,267

U.S. government securities
159,037

 

 

 

 
159,037

Derivative contracts
149

 
387,351

 
7,148

 
(391,446
)
 
3,202

Total financial instruments and other inventory positions sold, but not yet purchased
$
172,675

 
$
450,778

 
$
7,148

 
$
(391,446
)
 
$
239,155

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

The Company’s Level III assets were $230.3 million and $236.7 million, or 18.4 percent and 18.7 percent of financial instruments measured at fair value at March 31, 2016 and December 31, 2015, respectively. The value of transfers between levels are recognized at the beginning of the reporting period. There were $14.3 million of transfers of financial assets out of Level III for the three months ended March 31, 2016, of which $9.1 million primarily related to the deconsolidation of certain investment partnerships as discussed in Note 2, and $5.2 million related to taxable municipal securities for which valuation inputs became observable. There were no other significant transfers between Level I, Level II or Level III for the three months ended March 31, 2016.
 

21

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


The following tables summarize the changes in fair value associated with Level III financial instruments held at the beginning or end of the periods presented:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(losses) for assets/
 
Balance at
 
 
 
 
 
 
 
 
 
Realized
 
Unrealized
 
Balance at
 
liabilities held at
 
December 31,
 
 
 
 
 
Transfers
 
Transfers
 
gains/
 
gains/
 
March 31,
 
March 31,
(Dollars in thousands)
2015
 
Purchases
 
Sales
 
in
 
out
 
(losses) (1)
 
(losses) (1)
 
2016
 
2016 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable securities
$
5,816

 
$

 
$
(611
)
 
$

 
$
(5,216
)
 
$
11

 
$

 
$

 
$

Tax-exempt securities
1,177

 

 

 

 

 

 

 
1,177

 

Short-term securities
720

 

 

 

 

 

 
28

 
748

 
28

Mortgage-backed securities
121,124

 
26,519

 
(27,213
)
 

 

 
1,067

 
(3,606
)
 
117,891

 
(730
)
Derivative contracts

 

 

 

 

 

 
5

 
5

 
5

Total financial instruments and other inventory positions owned
128,837

 
26,519

 
(27,824
)
 

 
(5,216
)
 
1,078

 
(3,573
)
 
119,821

 
(697
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments at fair value
107,907

 
9,301

 

 

 
(9,088
)
 

 
2,357

 
110,477

 
2,357

Total assets
$
236,744

 
$
35,820

 
$
(27,824
)
 
$

 
$
(14,304
)
 
$
1,078

 
$
(1,216
)
 
$
230,298

 
$
1,660

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative contracts
$
7,148

 
$

 
$
(9,882
)
 
$

 
$

 
$
9,882

 
$
(1,740
)
 
$
5,408

 
$
4,534

Total financial instruments and other inventory positions sold, but not yet purchased
$
7,148

 
$

 
$
(9,882
)
 
$

 
$

 
$
9,882

 
$
(1,740
)
 
$
5,408

 
$
4,534

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

22

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(losses) for assets/
 
Balance at
 
 
 
 
 
 
 
 
 
Realized
 
Unrealized
 
Balance at
 
liabilities held at
 
December 31,
 
 
 
 
 
Transfers
 
Transfers
 
gains/
 
gains/
 
March 31,
 
March 31,
(Dollars in thousands)
2014
 
Purchases
 
Sales
 
in
 
out
 
(losses) (1)
 
(losses) (1)
 
2015
 
2015 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt securities
$
1,186

 
$

 
$

 
$

 
$

 
$

 
$
(10
)
 
$
1,176

 
$
(10
)
Short-term securities
720

 

 

 

 

 

 

 
720

 

Mortgage-backed securities
124,749

 
119,826

 
(98,947
)
 

 

 
2,490

 
(241
)
 
147,877

 
517

Derivative contracts
140

 
520

 

 

 

 
(520
)
 
1,082

 
1,222

 
1,222

Total financial instruments and other inventory positions owned
126,795

 
120,346

 
(98,947
)
 

 

 
1,970

 
831

 
150,995

 
1,729

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments at fair value
74,165

 

 
(182
)
 

 

 
182

 
13,303

 
87,468

 
13,303

Total assets
$
200,960

 
$
120,346

 
$
(99,129
)
 
$

 
$

 
$
2,152

 
$
14,134

 
$
238,463

 
$
15,032

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative contracts
$
7,822

 
$
(5,814
)
 
$

 
$

 
$

 
$
5,814

 
$
404

 
$
8,226

 
$
4,318

Total financial instruments and other inventory positions sold, but not yet purchased
$
7,822

 
$
(5,814
)
 
$

 
$

 
$

 
$
5,814

 
$
404

 
$
8,226

 
$
4,318

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

The carrying values of the Company’s cash, securities either purchased or sold under agreements to resell, receivables and payables either from or to customers and brokers, dealers and clearing organizations and short-term financings approximate fair value due to their liquid or short-term nature.


23

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

Note 6 Variable Interest Entities

The Company has investments in and/or acts as the managing partner of various partnerships, limited liability companies, or registered mutual funds. These entities were established for the purpose of investing in securities of public or private companies, or municipal debt obligations, or providing financing to senior living facilities, and were initially financed through the capital commitments or seed investments of the members.

VIEs are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities. The determination as to whether an entity is a VIE is based on the structure and nature of each entity. The Company als