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EX-32.1 - SECTION 1350 CERTIFICATION - PIPER JAFFRAY COMPANIESpjcq32017ex321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - PIPER JAFFRAY COMPANIESpjcq32017ex312.htm
EX-31.1 - CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER - PIPER JAFFRAY COMPANIESpjcq32017ex311.htm
EX-4.1 - FIRST AMENDMENT TO SECOND AMENDED AND RESTATED INDENTURE - PIPER JAFFRAY COMPANIESpjcq32017ex41.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 September 30, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

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 November 1, 2017, the registrant had 15,109,138 shares of Common Stock outstanding.

 




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

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





PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS.
Piper Jaffray Companies
Consolidated Statements of Financial Condition
 
September 30,
 
December 31,
 
2017
 
2016
(Amounts in thousands, except share data)
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
40,916

 
$
41,359

Cash and cash equivalents segregated for regulatory purposes
6,016

 
29,015

Receivables:
 
 
 
Customers

 
31,917

Brokers, dealers and clearing organizations
80,880

 
212,730

Securities purchased under agreements to resell

 
159,697

 
 
 
 
Financial instruments and other inventory positions owned
763,946

 
464,610

Financial instruments and other inventory positions owned and pledged as collateral
335,382

 
594,361

Total financial instruments and other inventory positions owned
1,099,328

 
1,058,971

 
 
 
 
Fixed assets (net of accumulated depreciation and amortization of $61,312 and $58,308, respectively)
24,286

 
25,343

Goodwill
81,855

 
196,218

Intangible assets (net of accumulated amortization of $81,483 and $70,017, respectively)
25,768

 
37,234

Investments
179,527

 
168,057

Net deferred income tax assets
145,817

 
97,833

Other assets
55,443

 
67,129

Total assets
$
1,739,836

 
$
2,125,503

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Short-term financing
$
76,797

 
$
418,832

Senior notes
125,000

 
175,000

Payables:
 
 
 
Customers

 
29,352

Brokers, dealers and clearing organizations
54,265

 
40,842

Securities sold under agreements to repurchase

 
15,046

Financial instruments and other inventory positions sold, but not yet purchased
357,735

 
299,357

Accrued compensation
288,299

 
288,255

Other liabilities and accrued expenses
50,955

 
42,553

Total liabilities
953,051

 
1,309,237

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $0.01 par value:
 
 
 
Shares authorized: 100,000,000 at September 30, 2017 and December 31, 2016;
 
 
 
Shares issued: 19,512,328 at September 30, 2017 and 19,535,307 at December 31, 2016;
 
 
 
Shares outstanding: 12,899,902 at September 30, 2017 and 12,391,970 at December 31, 2016
195

 
195

Additional paid-in capital
786,527

 
788,927

Retained earnings
227,095

 
257,188

Less common stock held in treasury, at cost: 6,612,426 at September 30, 2017 and 7,143,337 shares at December 31, 2016
(274,089
)
 
(284,461
)
Accumulated other comprehensive loss
(1,462
)
 
(2,599
)
Total common shareholders’ equity
738,266

 
759,250

 
 
 
 
Noncontrolling interests
48,519

 
57,016

Total shareholders’ equity
786,785

 
816,266

 
 
 
 
Total liabilities and shareholders’ equity
$
1,739,836

 
$
2,125,503

See Notes to the Consolidated Financial Statements

3

Piper Jaffray Companies
Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Amounts in thousands, except per share data)
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Investment banking
$
190,482

 
$
136,682

 
$
461,260

 
$
338,034

Institutional brokerage
34,873

 
42,189

 
111,083

 
122,423

Asset management
12,818

 
15,256

 
44,011

 
43,699

Interest
7,164

 
7,343

 
22,649

 
24,094

Investment income/(loss)
(422
)
 
4,806

 
15,406

 
14,019

 
 
 
 
 
 
 
 
Total revenues
244,915

 
206,276

 
654,409

 
542,269

 
 
 
 
 
 
 
 
Interest expense
4,348

 
5,429

 
15,568

 
17,383

 
 
 
 
 
 
 
 
Net revenues
240,567

 
200,847

 
638,841

 
524,886

 
 
 
 
 
 
 
 
Non-interest expenses:
 
 
 
 
 
 
 
Compensation and benefits
169,469

 
135,186

 
438,161

 
356,770

Outside services
7,495

 
10,288

 
27,612

 
28,923

Occupancy and equipment
8,127

 
8,743

 
24,846

 
25,311

Communications
7,136

 
7,845

 
22,025

 
22,469

Marketing and business development
6,683

 
7,629

 
22,512

 
23,804

Trade execution and clearance
2,125

 
2,008

 
5,864

 
5,686

Restructuring and integration costs

 

 

 
10,206

Goodwill impairment
114,363

 

 
114,363

 

Intangible asset amortization
3,822

 
8,010

 
11,466

 
15,400

Back office conversion costs
1,293

 

 
3,027

 

Other operating expenses
2,290

 
2,687

 
8,525

 
7,915

 
 
 
 
 
 
 
 
Total non-interest expenses
322,803

 
182,396

 
678,401

 
496,484

 
 
 
 
 
 
 
 
Income/(loss) before income tax expense/(benefit)
(82,236
)
 
18,451

 
(39,560
)
 
28,402

 
 
 
 
 
 
 
 
Income tax expense/(benefit)
(31,423
)
 
6,515

 
(26,912
)
 
8,767

 
 
 
 
 
 
 
 
Net income/(loss)
(50,813
)
 
11,936

 
(12,648
)
 
19,635

 
 
 
 
 
 
 
 
Net income/(loss) applicable to noncontrolling interests
(1,100
)
 
1,278

 
3,217

 
4,602

 
 
 
 
 
 
 
 
Net income/(loss) applicable to Piper Jaffray Companies
$
(49,713
)
 
$
10,658

 
$
(15,865
)
 
$
15,033

 
 
 
 
 
 
 
 
Net income/(loss) applicable to Piper Jaffray Companies’ common shareholders
$
(50,415
)
(1) 
$
8,582

 
$
(18,106
)
(1) 
$
12,476

 
 
 
 
 
 
 
 
Earnings/(loss) per common share
 
 
 
 
 
 
 
Basic
$
(3.91
)
 
$
0.70

 
$
(1.42
)
 
$
0.98

Diluted
$
(3.91
)
(2) 
$
0.70

 
$
(1.42
)
(2) 
$
0.97

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.31

 
$

 
$
0.94

 
$

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
Basic
12,898

 
12,282

 
12,774

 
12,787

Diluted
12,975

(2) 
12,298

 
12,945

(2) 
12,801

                     
(1)
No allocation of undistributed income was made due to loss position. See Note 17.
(2)
Earnings per diluted common share is calculated using the basic weighted average number of common shares outstanding for periods in which a loss is incurred.
See Notes to the Consolidated Financial Statements

4

Piper Jaffray Companies
Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Amounts in thousands)
2017
 
2016
 
2017
 
2016
Net income/(loss)
$
(50,813
)
 
$
11,936

 
$
(12,648
)
 
$
19,635

 
 
 
 
 
 
 
 
Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
142

 
(587
)
 
1,137

 
(1,843
)
 
 
 
 
 
 
 
 
Comprehensive income/(loss)
(50,671
)
 
11,349

 
(11,511
)
 
17,792

 
 
 
 
 
 
 
 
Comprehensive income/(loss) applicable to noncontrolling interests
(1,100
)
 
1,278

 
3,217

 
4,602

 
 
 
 
 
 
 
 
Comprehensive income/(loss) applicable to Piper Jaffray Companies
$
(49,571
)
 
$
10,071

 
$
(14,728
)
 
$
13,190


See Notes to the Consolidated Financial Statements


5

Piper Jaffray Companies
Consolidated Statements of Cash Flows
(Unaudited)

 
Nine Months Ended
 
September 30,
(Dollars in thousands)
2017
 
2016
 
 
 
 
Operating Activities:
 
 
 
Net income/(loss)
$
(12,648
)
 
$
19,635

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization of fixed assets
5,343

 
4,724

Deferred income taxes
(47,984
)
 
715

Stock-based and deferred compensation
26,459

 
43,839

Goodwill impairment
114,363

 

Amortization of intangible assets
11,466

 
15,400

Amortization of forgivable loans
5,207

 
6,894

Decrease/(increase) in operating assets:
 
 
 
Cash and cash equivalents segregated for regulatory purposes
22,999

 
35,000

Receivables:
 
 
 
Customers
31,917

 
(46,398
)
Brokers, dealers and clearing organizations
131,850

 
(21,478
)
Securities purchased under agreements to resell
159,697

 
(10,492
)
Net financial instruments and other inventory positions owned
18,021

 
(72,758
)
Investments
(11,470
)
 
(4,767
)
Other assets
7,185

 
(8,898
)
Increase/(decrease) in operating liabilities:
 
 
 
Payables:
 
 
 
Customers
(29,352
)
 
13,366

Brokers, dealers and clearing organizations
13,423

 
153,795

Securities sold under agreements to repurchase
(15,046
)
 
(2,018
)
Accrued compensation
4,666

 
(51,569
)
Other liabilities and accrued expenses
7,864

 
(32,005
)
 
 
 
 
Net cash provided by operating activities
443,960

 
42,985

 
 
 
 
Investing Activities:
 
 
 
Business acquisitions, net of cash acquired

 
(71,019
)
Purchases of fixed assets, net
(4,310
)
 
(7,360
)
 
 
 
 
Net cash used in investing activities
(4,310
)
 
(78,379
)
 
 
 
 
Continued on next page

6

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

 
Nine Months Ended
 
September 30,
(Dollars in thousands)
2017
 
2016
 
 
 
 
Financing Activities:
 
 
 
Decrease in short-term financing
$
(342,035
)
 
$
(20,405
)
Repayment of variable rate senior notes
(50,000
)
 

Decrease in securities sold under agreements to repurchase

 
(21,292
)
Payment of cash dividend
(14,217
)
 

Increase/(decrease) in noncontrolling interests
(11,714
)
 
10,189

Repurchase of common stock
(25,065
)
 
(70,428
)
Proceeds from stock option exercises
1,703

 
119

 
 
 
 
Net cash used in financing activities
(441,328
)
 
(101,817
)
 
 
 
 
Currency adjustment:
 
 
 
Effect of exchange rate changes on cash
1,235

 
(1,328
)
 
 
 
 
Net decrease in cash and cash equivalents
(443
)
 
(138,539
)
 
 
 
 
Cash and cash equivalents at beginning of period
41,359

 
189,910

 
 
 
 
Cash and cash equivalents at end of period
$
40,916

 
$
51,371

 
 
 
 
Supplemental disclosure of cash flow information –
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
15,397

 
$
17,679

Income taxes
$
7,781

 
$
22,148

 
 
 
 
Non-cash investing activities –
 
 
 
Issuance of common stock related to the acquisition of Simmons & Company International:
 
 
 
25,525 shares for the nine months ended September 30, 2016
$

 
$
1,074

 
 
 
 
Non-cash financing activities –
 
 
 
Issuance of restricted common stock for annual equity award:
 
 
 
198,981 shares and 843,889 shares for the nine months ended September 30, 2017 and 2016, respectively
$
16,187

 
$
35,089


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
 


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; 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. and Piper Jaffray Financial Products II Inc., entities that facilitate derivative transactions; and other immaterial subsidiaries.

Effective August 7, 2017, Piper Jaffray transitioned from a self clearing securities broker dealer to a fully disclosed clearing model. Pershing LLC ("Pershing") is Piper Jaffray's clearing broker dealer responsible for the clearance and settlement of firm and customer cash and security transactions.

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 investment banking services and institutional sales, trading and research services. 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. 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. Also, the Company generates revenue through strategic trading and investing activities, which focus on investments in municipal bonds, 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 merchant banking, energy 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, 2016.

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, 2016 for a full description of the Company's significant accounting policies. Changes to the Company's significant accounting policies are described below.

Stock-Based Compensation

Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 718, "Compensation – Stock Compensation," ("ASC 718") requires all stock-based compensation to be expensed on the consolidated statements of operations based on the grant date fair value of the award. Compensation expense related to stock-based awards that do not require future service are recognized in the year in which the awards were deemed to be earned. Stock-based awards that require future service are amortized over the relevant service period. Forfeitures of awards with service conditions are accounted for when they occur. See Note 16 for additional information on the Company's accounting for stock-based compensation.

Adoption of New Accounting Standards

Stock-Based Compensation

In March 2016, the FASB issued Accounting Standard Update ("ASU") No. 2016-09, "Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 made targeted amendments to the accounting for share-based payments to employees. It became effective for the Company as of January 1, 2017. There was no impact to the Company’s retained earnings upon adoption of ASU 2016-09.

Under ASU 2016-09, the Company recognizes the income tax effects of stock awards in the income statement when the awards vest or are settled. For the nine months ended September 30, 2017, this accounting change resulted in the recording of a $9.1 million tax benefit for stock awards vesting during the period. Prior to the adoption of this ASU, this amount would have been recorded directly to additional paid-in capital. In addition, the Company has elected to account for forfeitures of awards with service conditions as they occur. This will result in dividends originally charged against retained earnings for forfeited, unvested stock-based payment awards to be reclassified to compensation expense in the period in which the forfeiture occurs. Furthermore, tax impacts from the vesting of stock-based compensation are presented as an operating activity on the consolidated statements of cash flows on a prospective basis.

Goodwill Impairment

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill (i.e., perform a hypothetical purchase price allocation) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 is effective for the Company’s annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted for interim and annual goodwill impairment testing dates after January 1, 2017. The Company adopted ASU 2017-04 effective July 1, 2017.

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, as amended, 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 enhanced disclosures.


10

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

The Company has identified its revenues and costs that are within the scope of the new guidance. The current broker dealer industry treatment of netting deal expenses with investment banking revenues will change under the new guidance. As a result of adopting ASU 2014-09, the Company will generally present deal expenses on a gross basis on the consolidated statements of operations, rather than the current presentation of netting deal expenses for completed investment banking deals within revenues. This change will not impact earnings, however, the Company will report higher revenues and higher non-compensation expenses. In addition, the Company expects to defer the recognition of performance fees on its merchant banking, energy and senior living alternative asset management funds until such fees are no longer subject to reversal, which will cause a delay in the recognition of these fees as revenue. The Company anticipates that its current methods of recognizing investment banking revenues will not be significantly impacted by the new guidance.

The AICPA industry task forces on broker dealers and asset management, the AICPA’s Revenue Recognition Working Group and the AICPA’s Financial Reporting Executive Committee (FinREC) continue to issue interpretive guidance on ASU 2014-09. The Company will continue to evaluate the potential impact of this guidance.

The Company will adopt this guidance effective as of January 1, 2018 under the modified retrospective method, in which the cumulative effect of applying the standard will be recognized at the date of initial application. As of September 30, 2017, the estimated cumulative effect that the Company would recognize as an adjustment to retained earnings upon adoption will be less than $2 million, net of tax.

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 adoption of ASU 2016-01 is not expected to have a material impact on the Company's results of operations or financial position, but may impact the Company's disclosures.

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. As of December 31, 2016, the Company had approximately 65 operating leases for office space with aggregate minimum lease commitments of $78.4 million. The Company is evaluating other service contracts which may include embedded leases. Upon adoption of ASU 2016-02, the Company does not expect material changes to the recognition of rent expense in its consolidated statements of operations. The impact of the new guidance on Piper Jaffray’s net capital is expected to be minimal.

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 does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.


11

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

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"). ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The amendments in ASU 2016-15 are effective for annual and interim periods beginning after December 31, 2017 and should be applied retrospectively. Early adoption is permitted. The Company expects that only a limited number of amendments will impact the presentation of its consolidated statements of cash flows.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" ("ASU 2016-18"). Under ASU 2016-18, restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the consolidated statements of cash flows. ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017 and should be applied retrospectively. Early adoption is permitted.

Note 3 Acquisition of Simmons & Company International

On February 26, 2016, the Company completed the acquisition 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.

The Company acquired net assets with a fair value of $119.3 million. 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. 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 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. As of September 30, 2017, the Company had accrued $14.4 million related to this performance award plan.

The acquisition was accounted for pursuant to FASB Accounting Standards Codification Topic 805, "Business Combinations." Accordingly, the purchase price was allocated to the acquired assets and liabilities assumed based on their estimated fair values as of the acquisition date. The excess of the purchase price over the net assets acquired was allocated between goodwill and intangible assets within the Capital Markets segment. The Company recorded $60.7 million of goodwill on its consolidated statements of financial condition, of which $59.4 million is expected to be deductible for income tax purposes. 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 of $17.5 million and $9.1 million, respectively. Transaction costs of $0.9 million were incurred for the nine months ended September 30, 2016, and are included in restructuring and integration costs on the consolidated statements of operations.


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 on January 1, 2015, the beginning of the prior annual period in which the acquisition occurred. 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 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 period presented, does not contemplate anticipated operational efficiencies of the combined entities, nor does it indicate the results of operations in future periods.
 
 
Nine Months Ended
(Dollars in thousands)
 
September 30, 2016
Net revenues
 
$
532,683

Net income applicable to Piper Jaffray Companies
 
15,642



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

 
September 30,
 
December 31,
(Dollars in thousands)
2017
 
2016
Financial instruments and other inventory positions owned:
 
 
 
Corporate securities:
 
 
 
Equity securities
$
66,904

 
$
6,363

Convertible securities
70,900

 
103,486

Fixed income securities
27,480

 
21,018

Municipal securities:
 
 
 
Taxable securities
37,073

 
63,090

Tax-exempt securities
374,348

 
559,329

Short-term securities
177,873

 
35,175

Mortgage-backed securities
4,321

 
5,638

U.S. government agency securities
300,832

 
205,685

U.S. government securities
17,205

 
29,970

Derivative contracts
22,392

 
29,217

Total financial instruments and other inventory positions owned
1,099,328

 
1,058,971

 
 
 
 
Less noncontrolling interests (1)

 
(57,700
)
 
$
1,099,328

 
$
1,001,271

 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
Corporate securities:
 
 
 
Equity securities
$
100,403

 
$
89,453

Fixed income securities
21,149

 
17,324

U.S. government agency securities
26,703

 
6,723

U.S. government securities
203,995

 
180,650

Derivative contracts
5,485

 
5,207

Total financial instruments and other inventory positions sold, but not yet purchased
357,735

 
299,357

 
 
 
 
Less noncontrolling interests (2)

 
(631
)
 
$
357,735

 
$
298,726

(1)
Noncontrolling interests attributable to third party ownership in a consolidated municipal bond fund consist of $1.3 million of taxable municipal securities, $55.2 million of tax-exempt municipal securities, and $1.2 million of derivative contracts as of December 31, 2016
(2)
Noncontrolling interests attributable to third party ownership in a consolidated municipal bond fund consist of U.S. government securities as of December 31, 2016.

At September 30, 2017 and December 31, 2016, financial instruments and other inventory positions owned in the amount of $335.4 million and $594.4 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 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 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 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:
 
 
September 30, 2017
 
December 31, 2016
(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
 
$
270,149

 
$
255,102

 
$
3,178,725

 
$
288,955

 
$
272,819

 
$
3,330,207

Trading securities
 
686

 
4,456

 
345,850

 
13,952

 
1,707

 
423,550

Credit default swap index
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
 

 

 

 

 
127

 
7,470

 
 
$
270,835

 
$
259,558

 
$
3,524,575

 
$
302,907

 
$
274,653

 
$
3,761,227

(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
 
Nine Months Ended
(Dollars in thousands)
 
 
 
September 30,
 
September 30,
Derivative Category               
 
Operations Category
 
2017
 
2016
 
2017
 
2016
Interest rate derivative contract
 
Investment banking
 
$
(300
)
 
$
(1,901
)
 
$
(1,076
)
 
$
(3,953
)
Interest rate derivative contract
 
Institutional brokerage
 
1,627

 
8,438

 
(16,028
)
 
819

Credit default swap index contract
 
Institutional brokerage
 
4,304

 
74

 
4,482

 
3,958

Futures and equity option derivative contracts
 
Institutional brokerage
 

 
107

 

 
255

 
 
 
 
$
5,631

 
$
6,718

 
$
(12,622
)
 
$
1,079


Credit risk associated with the Company’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. Credit exposure associated with the Company’s derivatives is driven by uncollateralized market movements in the fair value of the contracts with counterparties and is monitored regularly by the Company’s financial risk committee. The Company considers counterparty credit risk in determining derivative contract fair value. The majority of the Company’s derivative contracts are substantially collateralized by its counterparties, who are major financial institutions. The Company has a limited number of counterparties who are not required to post collateral. Based on market movements, the uncollateralized amounts representing the fair value of the derivative contract can become material, exposing the Company to the credit risk of these counterparties. As of September 30, 2017, the Company had $20.8 million of uncollateralized credit exposure with these counterparties (notional contract amount of $181.8 million), including $15.4 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 205-853 basis points ("bps") on spreads over U.S. treasury securities, or models based upon prepayment expectations ranging from 0%-18% 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 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 $13.9 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 September 30, 2017 and December 31, 2016, 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 $1.4 million and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively.


18

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

The following table summarizes quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s Level III financial instruments as of September 30, 2017:
 
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 - 10%
 
2.7%
 
 
 
Prepayment rates (4)
 
2 - 18%
 
10.0%
 
 
 
Loss severity (3)
 
5 - 50%
 
32.6%
 
 
 
Valuation yields (3)
 
5 - 6%
 
5.3%
Derivative contracts:
 
 
 
 
 
 
 
Interest rate locks
Discounted cash flow
 
Premium over the MMD curve (1)
 
4 - 20 bps
 
11.3 bps
Investments at fair value:
 
 
 
 
 
 
 
Equity securities in private companies
Market approach
 
Revenue multiple (2)
 
2 - 6 times
 
4.8 times
 
 
 
EBITDA multiple (2)
 
10 - 15 times
 
12.2 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)
 
1 - 21 bps
 
10.9 bps
Sensitivity of the fair value to changes in unobservable inputs:
(1)
Significant increase/(decrease) in the unobservable input in isolation would result in a significantly lower/(higher) fair value measurement.
(2)
Significant increase/(decrease) in the unobservable input in isolation would result in a significantly higher/(lower) fair value measurement.
(3)
Significant changes in any of these inputs in isolation could result in a significantly different fair value. Generally, a change in the assumption used for credit default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally inverse change in the assumption for valuation yields.
(4)
The potential impact of changes in prepayment rates on fair value is dependent on other security-specific factors, such as the par value and structure. Changes in the prepayment rates may result in directionally similar or directionally inverse changes in fair value depending on whether the security trades at a premium or discount to the par value.

19

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

The following table summarizes the valuation of the Company’s financial instruments by pricing observability levels defined in FASB Accounting Standards Codification Topic 820, "Fair Value Measurement" ("ASC 820") as of September 30, 2017:
 
 
 
 
 
 
 
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
$
2,466

 
$
64,438

 
$

 
$

 
$
66,904

Convertible securities

 
70,900

 

 

 
70,900

Fixed income securities

 
27,480

 

 

 
27,480

Municipal securities:
 
 
 
 
 
 
 
 
 
Taxable securities

 
37,073

 

 

 
37,073

Tax-exempt securities

 
373,598

 
750

 

 
374,348

Short-term securities

 
177,168

 
705

 

 
177,873

Mortgage-backed securities

 

 
4,321

 

 
4,321

U.S. government agency securities

 
300,832

 

 

 
300,832

U.S. government securities
17,205

 

 

 

 
17,205

Derivative contracts

 
270,149

 
686

 
(248,443
)
 
22,392

Total financial instruments and other inventory positions owned
19,671

 
1,321,638

 
6,462

 
(248,443
)
 
1,099,328

 
 
 
 
 
 
 
 
 
 
Cash equivalents
4,112

 

 

 

 
4,112

 
 
 
 
 
 
 
 
 
 
Investments at fair value
37,778

 

 
130,160

(2)

 
167,938

Total assets
$
61,561

 
$
1,321,638

 
$
136,622

 
$
(248,443
)
 
$
1,271,378

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
 
 
Equity securities
$
100,181

 
$
222

 
$

 
$

 
$
100,403

Fixed income securities

 
21,149

 

 

 
21,149

U.S. government agency securities

 
26,703

 

 

 
26,703

U.S. government securities
164,084

 
39,911

 

 

 
203,995

Derivative contracts

 
255,308

 
4,250

 
(254,073
)
 
5,485

Total financial instruments and other inventory positions sold, but not yet purchased
$
264,265

 
$
343,293

 
$
4,250

 
$
(254,073
)
 
$
357,735

(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 $44.9 million are attributable to third party ownership in consolidated merchant banking and senior living funds.


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, 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
$
82

 
$
6,281

 
$

 
$

 
$
6,363

Convertible securities

 
103,486

 

 

 
103,486

Fixed income securities

 
21,018

 

 

 
21,018

Municipal securities:
 
 
 
 
 
 
 
 
 
Taxable securities

 
60,404

 
2,686

 

 
63,090

Tax-exempt securities

 
558,252

 
1,077

 

 
559,329

Short-term securities

 
34,431

 
744

 

 
35,175

Mortgage-backed securities

 
273

 
5,365

 

 
5,638

U.S. government agency securities

 
205,685

 

 

 
205,685

U.S. government securities
29,970

 

 

 

 
29,970

Derivative contracts

 
288,955

 
13,952

 
(273,690
)
 
29,217

Total financial instruments and other inventory positions owned
30,052

 
1,278,785

 
23,824

 
(273,690
)
 
1,058,971

 
 
 
 
 
 
 
 
 
 
Cash equivalents
768

 

 

 

 
768

 
 
 
 
 
 
 
 
 
 
Investments at fair value
32,783

 

 
123,319

(2)

 
156,102

Total assets
$
63,603

 
$
1,278,785

 
$
147,143

 
$
(273,690
)
 
$
1,215,841

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
 
 
Equity securities
$
89,453

 
$

 
$

 
$

 
$
89,453

Fixed income securities

 
17,324

 

 

 
17,324

U.S. government agency securities

 
6,723

 

 

 
6,723

U.S. government securities
180,650

 

 

 

 
180,650

Derivative contracts

 
273,166

 
1,487

 
(269,446
)
 
5,207

Total financial instruments and other inventory positions sold, but not yet purchased
$
270,103

 
$
297,213

 
$
1,487

 
$
(269,446
)
 
$
299,357

(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 $45.1 million are attributable to third party ownership in consolidated merchant banking and senior living funds.

The Company’s Level III assets were $136.6 million and $147.1 million, or 10.7 percent and 12.1 percent of financial instruments measured at fair value at September 30, 2017 and December 31, 2016, respectively. The value of transfers between levels are recognized at the beginning of the reporting period. There were no significant transfers between Level I, Level II or Level III for the nine months ended September 30, 2017.
 

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
 
June 30,
 
 
 
 
 
Transfers
 
Transfers
 
gains/
 
gains/
 
September 30,
 
September 30,
(Dollars in thousands)
2017
 
Purchases
 
Sales
 
in
 
out
 
(losses) (1)
 
(losses) (1)
 
2017
 
2017 (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt securities
$
1,117

 
$

 
$
(267
)
 
$

 
$

 
$

 
$
(100
)
 
$
750

 
$
(100
)
Short-term securities
721

 

 

 

 

 

 
(16
)
 
705

 
(16
)
Mortgage-backed securities
4,251

 

 

 

 

 

 
70

 
4,321

 
70

Derivative contracts
383

 
105

 

 

 

 
(105
)
 
303

 
686

 
686

Total financial instruments and other inventory positions owned
6,472

 
105

 
(267
)
 

 

 
(105
)
 
257

 
6,462

 
640

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments at fair value
113,885

 
18,250

 

 

 

 

 
(1,975
)
 
130,160

 
(1,975
)
Total assets
$
120,357

 
$
18,355

 
$
(267
)
 
$

 
$

 
$
(105
)
 
$
(1,718
)
 
$
136,622

 
$
(1,335
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments and other inventory positions sold, but not yet purchased:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative contracts
$
5,573

 
$

 
$
3,461

 
$

 
$

 
$
(3,461
)
 
$
(1,323
)
 
$
4,250

 
$
1,430

Total financial instruments and other inventory positions sold, but not yet purchased
$
5,573

 
$

 
$
3,461

 
$

 
$

 
$
(3,461
)
 
$
(1,323
)
 
$
4,250

 
$
1,430

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

22

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains/
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(losses) for assets/
 
Balance at
 
 
 
 
 
 
 
 
 
Realized
 
Unrealized
 
Balance at
 
liabilities held at
 
June 30,
 
 
 
 
 
Transfers
 
Transfers
 
gains/
 
gains/
 
September 30,
 
September 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