PIPER JAFFRAY COMPANIES - FORM 10-Q

Attached files

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EX-31.1 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER - PIPER JAFFRAY COMPANIES	pjcq22016ex311.htm
EX-32.1 - SECTION 1350 CERTIFICATION - PIPER JAFFRAY COMPANIES	pjcq22016ex321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - PIPER JAFFRAY COMPANIES	pjcq22016ex312.htm
EX-10.1 - AMENDED AND RESTATED NON-EMPLOYEE DIRECTORS DEFERRED COMP PLAN - PIPER JAFFRAY COMPANIES	pjcq22016ex101.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 June 30, 2016



¨	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 July 27, 2016, the registrant had 15,214,792 shares of Common Stock outstanding.

Piper Jaffray Companies

Index to Quarterly Report on Form 10-Q



PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	3
	Consolidated Statements of Financial Condition as of June 30, 2016 (Unaudited) and December 31, 2015	3
	Consolidated Statements of Operations for the three and six months ended June 30, 2016 and June 30, 2015 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and June 30, 2015 (Unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and June 30, 2015 (Unaudited)	6
	Notes to the Consolidated Financial Statements (Unaudited)	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	42
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	70
ITEM 4.	CONTROLS AND PROCEDURES	70

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	70
ITEM 1A.	RISK FACTORS	70
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	71
ITEM 6.	EXHIBITS	71
	SIGNATURES	72

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Piper Jaffray Companies

Consolidated Statements of Financial Condition



	June 30,			December 31,
	2016			2015
(Amounts in thousands, except share data)	(Unaudited)
Assets
Cash and cash equivalents	$	172,244		$	189,910
Cash and cash equivalents segregated for regulatory purposes	42,028			81,022
Receivables:
Customers	52,057			41,167
Brokers, dealers and clearing organizations	100,638			147,949
Securities purchased under agreements to resell	142,473			136,983

Financial instruments and other inventory positions owned	337,852			283,579
Financial instruments and other inventory positions owned and pledged as collateral	630,364			707,355
Total financial instruments and other inventory positions owned	968,216			990,934

Fixed assets (net of accumulated depreciation and amortization of $55,887 and $51,874, respectively)	21,941			18,984
Goodwill	290,740			217,976
Intangible assets (net of accumulated amortization of $56,193 and $48,803, respectively)	37,751			30,530
Investments	163,320			163,861
Other assets	129,896			119,202
Total assets	$	2,121,304		$	2,138,518

Liabilities and Shareholders’ Equity
Short-term financing	$	501,846		$	446,190
Senior notes	175,000			175,000
Payables:
Customers	47,391			37,364
Brokers, dealers and clearing organizations	132,268			48,131
Securities sold under agreements to repurchase	33,731			45,319
Financial instruments and other inventory positions sold, but not yet purchased	211,012			239,155
Accrued compensation	137,708			251,638
Other liabilities and accrued expenses	55,089			62,901
Total liabilities	1,294,045			1,305,698

Shareholders’ equity:
Common stock, $0.01 par value:
Shares authorized: 100,000,000 at June 30, 2016 and December 31, 2015;
Shares issued: 19,534,376 at June 30, 2016 and 19,510,858 at December 31, 2015;
Shares outstanding: 12,425,069 at June 30, 2016 and 13,311,016 at December 31, 2015	195			195
Additional paid-in capital	775,632			752,066
Retained earnings	283,515			279,140
Less common stock held in treasury, at cost: 7,109,307 at June 30, 2016 and 6,199,842 shares at December 31, 2015	(282,886		)	(247,553		)
Accumulated other comprehensive loss	(1,445		)	(189		)
Total common shareholders’ equity	775,011			783,659

Noncontrolling interests	52,248			49,161
Total shareholders’ equity	827,259			832,820

Total liabilities and shareholders’ equity	$	2,121,304		$	2,138,518

See Notes to the Consolidated Financial Statements

Table of Contents

Piper Jaffray Companies

Consolidated Statements of Operations

(Unaudited)



	Three Months Ended					Six Months Ended
	June 30,					June 30,
(Amounts in thousands, except per share data)	2016		2015			2016		2015
Revenues:
Investment banking	$	97,414	$	106,069		$	201,352	$	193,146
Institutional brokerage	48,185		36,661			80,234		72,697
Asset management	14,595		19,257			28,443		39,779
Interest	7,922		11,422			16,751		23,627
Investment income/(loss)	8,276		(3,299		)	9,213		9,292

Total revenues	176,392		170,110			335,993		338,541

Interest expense	5,909		6,044			11,954		12,604

Net revenues	170,483		164,066			324,039		325,937

Non-interest expenses:
Compensation and benefits	117,148		103,554			221,584		199,411
Outside services	10,184		8,885			18,635		17,069
Occupancy and equipment	8,850		6,983			16,568		13,766
Communications	7,294		5,088			14,624		11,416
Marketing and business development	9,171		7,239			16,175		14,221
Trade execution and clearance	1,916		1,977			3,678		3,974
Restructuring and integration costs	3,433		—			10,206		—
Intangible asset amortization expense	4,094		1,773			7,390		3,546
Other operating expenses	1,884		2,708			5,228		5,383

Total non-interest expenses	163,974		138,207			314,088		268,786

Income before income tax expense	6,509		25,859			9,951		57,151

Income tax expense	1,996		9,542			2,252		19,032

Net income	4,513		16,317			7,699		38,119

Net income/(loss) applicable to noncontrolling interests	2,575		(682		)	3,324		4,148

Net income applicable to Piper Jaffray Companies	$	1,938	$	16,999		$	4,375	$	33,971

Net income applicable to Piper Jaffray Companies’ common shareholders	$	1,577	$	15,699		$	3,685	$	31,513

Earnings per common share
Basic	$	0.12	$	1.08		$	0.28	$	2.12
Diluted	$	0.12	$	1.08		$	0.28	$	2.11

Weighted average number of common shares outstanding
Basic	12,927		14,487			13,043		14,888
Diluted	12,942		14,513			13,056		14,920

See Notes to the Consolidated Financial Statements

Table of Contents

Piper Jaffray Companies

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Amounts in thousands)	2016			2015			2016			2015
Net income	$	4,513		$	16,317		$	7,699		$	38,119

Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustment	(853		)	501			(1,256		)	26

Comprehensive income	3,660			16,818			6,443			38,145

Comprehensive income/(loss) applicable to noncontrolling interests	2,575			(682		)	3,324			4,148

Comprehensive income applicable to Piper Jaffray Companies	$	1,085		$	17,500		$	3,119		$	33,997

See Notes to the Consolidated Financial Statements

Table of Contents

Piper Jaffray Companies

Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended
	June 30,
(Dollars in thousands)	2016			2015

Operating Activities:
Net income	$	7,699		$	38,119
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization of fixed assets	3,088			2,440
Deferred income taxes	8,184			5,041
Stock-based and deferred compensation	25,884			22,733
Amortization of intangible assets	7,390			3,546
Amortization of forgivable loans	4,567			2,663
Decrease/(increase) in operating assets:
Cash and cash equivalents segregated for regulatory purposes	38,994			(7,016		)
Receivables:
Customers	(9,071		)	(29,997		)
Brokers, dealers and clearing organizations	47,311			(5,602		)
Securities purchased under agreements to resell	(5,490		)	125,023
Net financial instruments and other inventory positions owned	(5,425		)	(97,495		)
Investments	(7,685		)	(39,200		)
Other assets	(20,771		)	(23,546		)
Increase/(decrease) in operating liabilities:
Payables:
Customers	10,027			18,060
Brokers, dealers and clearing organizations	84,137			70,020
Securities sold under agreements to repurchase	(6,086		)	—
Accrued compensation	(105,857		)	(82,669		)
Other liabilities and accrued expenses	(15,547		)	(2,315		)

Net cash provided by/(used in) operating activities	61,349			(195		)

Investing Activities:
Business acquisitions, net of cash acquired	(71,019		)	—
Repayment of note receivable	—			1,500
Purchases of fixed assets, net	(4,245		)	(3,544		)

Net cash used in investing activities	(75,264		)	(2,044		)

Continued on next page

Table of Contents

Piper Jaffray Companies

Consolidated Statements of Cash Flows – Continued

(Unaudited)



	Six Months Ended
	June 30,
(Dollars in thousands)	2016			2015

Financing Activities:
Increase in short-term financing	$	55,656		$	122,646
Decrease in securities sold under agreements to repurchase	(5,502		)	(34,510		)
Increase in noncontrolling interests	9,178			10,329
Repurchase of common stock	(62,142		)	(105,335		)
Excess/(reduced) tax benefit from stock-based compensation	(113		)	5,723
Proceeds from stock option exercises	82			1,722

Net cash provided by/(used in) financing activities	(2,841		)	575

Currency adjustment:
Effect of exchange rate changes on cash	(910		)	(106		)

Net decrease in cash and cash equivalents	(17,666		)	(1,770		)

Cash and cash equivalents at beginning of period	189,910			15,867

Cash and cash equivalents at end of period	$	172,244		$	14,097

Supplemental disclosure of cash flow information –
Cash paid during the period for:
Interest	$	12,361		$	13,907
Income taxes	$	21,559		$	21,907

Non-cash investing activities –
Issuance of common stock related to the acquisition of Simmons & Company International:
25,525 shares for the six months ended June 30, 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 six months ended June 30, 2016 and 2015, respectively	$	35,089		$	30,429

See Notes to the Consolidated Financial Statements

Table of Contents

Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Index



Note 1	Organization and Basis of Presentation	9
Note 2	Accounting Policies and Pronouncements	10
Note 3	Acquisitions	12
Note 4	Financial Instruments and Other Inventory Positions Owned and Financial Instruments and Other Inventory Positions Sold, but Not Yet Purchased	14
Note 5	Fair Value of Financial Instruments	16
Note 6	Variable Interest Entities	26
Note 7	Receivables from and Payables to Brokers, Dealers and Clearing Organizations	27
Note 8	Collateralized Securities Transactions	27
Note 9	Investments	28
Note 10	Other Assets	29
Note 11	Goodwill and Intangible Assets	29
Note 12	Short-Term Financing	30
Note 13	Senior Notes	30
Note 14	Contingencies and Commitments	31
Note 15	Restructuring	32
Note 16	Shareholders’ Equity	32
Note 17	Compensation Plans	34
Note 18	Earnings Per Share	38
Note 19	Segment Reporting	39
Note 20	Net Capital Requirements and Other Regulatory Matters	41
Note 21	Income Taxes	41

Table of Contents

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, financial advisory 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.

Table of Contents

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.

Table of Contents

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. 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. The guidance is effective on a prospective basis for annual and interim periods beginning after December 15, 2016. As of June 30, 2016, the Company had $6.9 million of excess tax benefits recorded as additional paid-in capital, which will remain in additional paid-in capital upon adoption. The adoption of ASU 2016-09 will impact the Company's 2017 results of operations as all income tax effects of awards that vest or are settled will be recognized in the income statement as opposed to additional paid-in capital.

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). The new guidance requires an entity to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts as opposed to delaying recognition until the loss was probable of occurring. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted 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.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

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.

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 expands the Company's equity investment banking business into the energy sector and grows its advisory business.

The Company acquired net assets with a fair value of $119.3 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 $72.8 million of goodwill on the consolidated statements of financial condition, of which $62.6 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 third quarter of 2016. Transaction costs of $0.9 million were incurred for the six months ended June 30, 2016, and are included in restructuring and integration costs on the consolidated statements of operations.

Table of Contents

Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of the acquisition:



(Dollars in thousands)
Assets:
Cash and cash equivalents	$	47,201
Receivables:
Customers	1,812
Fixed assets	1,868
Goodwill	72,778
Intangible assets	14,597
Investments	980
Other assets	3,259
Total assets acquired	142,495

Liabilities:
Accrued compensation	15,387
Other liabilities and accrued expenses	7,814
Total liabilities assumed	23,201

Net assets acquired	$	119,294

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		Six Months Ended
	June 30,		June 30,
(Dollars in thousands)	2015		2016		2015
Net revenues	$	189,499	$	331,836	$	377,481
Net income applicable to Piper Jaffray Companies	16,581		1,716		32,071

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. 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 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.

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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



	June 30,			December 31,
(Dollars in thousands)	2016			2015
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	5,329		$	9,505
Convertible securities	261			18,460
Fixed income securities	27,449			48,654
Municipal securities:
Taxable securities	95,433			111,591
Tax-exempt securities	529,245			416,966
Short-term securities	55,488			33,068
Mortgage-backed securities	58,042			121,794
U.S. government agency securities	153,079			188,140
U.S. government securities	4,158			7,729
Derivative contracts	39,732			35,027
Total financial instruments and other inventory positions owned	968,216			990,934

Less noncontrolling interests (1)	(59,315		)	(43,397		)
	$	908,901		$	947,537

Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	1,562		$	15,740
Fixed income securities	26,112			39,909
U.S. government agency securities	10,522			21,267
U.S. government securities	165,668			159,037
Derivative contracts	7,148			3,202
Total financial instruments and other inventory positions sold, but not yet purchased	211,012			239,155

Less noncontrolling interests (2)	(6,348		)	(4,586		)
	$	204,664		$	234,569


(1)	Noncontrolling interests attributable to third party ownership in a consolidated municipal bond fund consist of $9.4 million and $7.5 million of taxable municipal securities, $48.8 million and $35.1 million of tax-exempt municipal securities, and $1.1 million and $0.8 million of derivative contracts as of June 30, 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 June 30, 2016 and December 31, 2015.

At June 30, 2016 and December 31, 2015, financial instruments and other inventory positions owned in the amount of $630.4 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.

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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:



	June 30, 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	$	461,019	$	441,088	$	3,802,430	$	406,888	$	386,284	$	4,392,440
Trading securities	18		16,701		318,850		—		7,685		290,600
Credit default swap index
Trading securities	—		1,024		66,000		5,411		530		94,270
Futures and equity options
Trading securities	61		—		19,724		164		149		2,345,037
	$	461,098	$	458,813	$	4,207,004	$	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.

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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						Six Months Ended
(Dollars in thousands)		June 30,						June 30,
Derivative Category	Operations Category	2016			2015			2016			2015
Interest rate derivative contract	Investment banking	$	(880	)	$	(479	)	$	(2,052	)	$	(999	)
Interest rate derivative contract	Institutional brokerage	(9,363		)	11,877			(7,619		)	12,556
Credit default swap index contract	Institutional brokerage	3,495			8,038			3,884			12,645
Futures and equity option derivative contracts	Institutional brokerage	119			18			148			53
		$	(6,629	)	$	19,454		$	(5,639	)	$	24,255

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 June 30, 2016, the Company had $30.3 million of uncollateralized credit exposure with these counterparties (notional contract amount of $185.2 million), including $22.0 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.

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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.

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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 on spreads over U.S. treasury securities, or models based upon prepayment expectations. 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 $18.1 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 June 30, 2016 and December 31, 2015, respectively. The realized and unrealized net gains from fair value changes included in earnings as a result of electing to apply the fair value option to certain financial assets were $0.2 million and $0.5 million for the six months ended June 30, 2016 and 2015, respectively.

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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 June 30, 2016:



	Valuation			Weighted
	Technique	Unobservable Input	Range	Average
Assets:
Financial instruments and other inventory positions owned:
Municipal securities:
Tax-exempt securities	Discounted cash flow	Expected recovery rate (% of par) (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)	1 - 7%	3.7%
		Prepayment rates (4)	2 - 25%	9.3%
		Loss severity (3)	0 - 90%	52.2%
		Valuation yields (3)	2 - 8%	5.3%
Derivative contracts:
Interest rate locks	Discounted cash flow	Premium over the MMD curve in basis points ("bps") (1)	16.8 bps	16.8 bps
Investments at fair value:
Equity securities in private companies	Market approach	Revenue multiple (2)	2 - 7 times	4.2 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 - 35 bps	16.4 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.

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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 June 30, 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	$	3,553	$	1,776	$	—		$	—		$	5,329
Convertible securities	—		261		—			—			261
Fixed income securities	—		27,449		—			—			27,449
Municipal securities:
Taxable securities	—		95,433		—			—			95,433
Tax-exempt securities	—		528,068		1,177			—			529,245
Short-term securities	—		54,740		748			—			55,488
Mortgage-backed securities	—		1,989		56,053			—			58,042
U.S. government agency securities	—		153,079		—			—			153,079
U.S. government securities	4,158		—		—			—			4,158
Derivative contracts	61		461,019		18			(421,366		)	39,732
Total financial instruments and other inventory positions owned	7,772		1,323,814		57,996			(421,366		)	968,216

Cash equivalents	94,136		—		—			—			94,136

Investments at fair value	33,889		—		116,405		(2)	—			150,294
Total assets	$	135,797	$	1,323,814	$	174,401		$	(421,366	)	$	1,212,646

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	277	$	1,285	$	—		$	—		$	1,562
Fixed income securities	—		26,112		—			—			26,112
U.S. government agency securities	—		10,522		—			—			10,522
U.S. government securities	165,668		—		—			—			165,668
Derivative contracts	—		444,028		14,785			(451,665		)	7,148
Total financial instruments and other inventory positions sold, but not yet purchased	$	165,945	$	481,947	$	14,785		$	(451,665	)	$	211,012


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


(2)	Noncontrolling interests of $36.7 million are attributable to third party ownership in a consolidated merchant banking fund.

Table of Contents

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		(2)	—			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.


(2)	Noncontrolling interests of $40.1 million are attributable to third party ownership in a consolidated merchant banking fund and private investment vehicles.

The Company’s Level III assets were $174.4 million and $236.7 million, or 14.4 percent and 18.7 percent of financial instruments measured at fair value at June 30, 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 six months ended June 30, 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 and six months ended June 30, 2016.

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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
	March 31,								Transfers		Transfers		gains/			gains/		June 30,		June 30,
(Dollars in thousands)	2016		Purchases			Sales			in		out		(losses) (1)			(losses) (1)		2016		2016 (1)
Assets:
Financial instruments and other inventory positions owned:
Municipal securities:
Tax-exempt securities	$	1,177	$	—		$	—		$	—	$	—	$	—		$	—	$	1,177	$	—
Short-term securities	748		—			—			—		—		—			—		748		—
Mortgage-backed securities	117,891		—			(62,693		)	—		—		778			77		56,053		253
Derivative contracts	5		246			—			—		—		(246		)	13		18		18
Total financial instruments and other inventory positions owned	119,821		246			(62,693		)	—		—		532			90		57,996		271

Investments at fair value	109,498		2,521			—			—		—		—			4,386		116,405		4,386
Total assets	$	229,319	$	2,767		$	(62,693	)	$	—	$	—	$	532		$	4,476	$	174,401	$	4,657

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Derivative contracts	$	5,408	$	(6,457	)	$	—		$	—	$	—	$	6,457		$	9,377	$	14,785	$	13,173
Total financial instruments and other inventory positions sold, but not yet purchased	$	5,408	$	(6,457	)	$	—		$	—	$	—	$	6,457		$	9,377	$	14,785	$	13,173

(1)

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

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Unrealized gains/

(losses) for assets/

Balance at

Realized

Unrealized

Balance at

liabilities held at

March 31,

Transfers

gains/

June 30,

(Dollars in thousands)

2015

Purchases

Sales

out

(losses) (1)

2015

2015 (1)

Assets:

Financial instruments and other inventory positions owned:

Municipal securities:

PIPER JAFFRAY COMPANIES - FORM 10-Q - August 5, 2016

Attached files