The following table provides a summary of the results of our operations on a U.S. GAAP basis and the results of our operations as a percentage of net revenues for the periods indicated.
Noncontrolling interests – The impacts of consolidating noncontrolling interests in our alternative asset management funds are not included in our adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin.financial results.
In the thirdsecond quarter of 2017,2022, investment banking revenues increaseddecreased 39.5 percent to $190.6$234.1 million, compared with $136.6$387.1 million in the corresponding period of the prior year.prior-year period. For the three months ended SeptemberJune 30, 2017,2022, advisory services revenues were $146.8$169.7 million, up 95.2down 31.8 percent compared to $75.2$248.7 million in the thirdsecond quarter of 2016. The results reflect the continuation of our strong performance over the past three quarters elevated2021, due to fewer completed transactions and lower average fees driven by several large fees. We completed 43 transactions with an aggregate enterprise value of $11.3 billion in the third quarter of 2017, compared with 46 transactions with an aggregate enterprise value of $5.8 billion in the third quarter of 2016.delayed transaction closings. For the three months ended SeptemberJune 30, 2017, equity2022, corporate financing revenues were $22.1$29.2 million, down 27.471.4 percent compared with $30.5$102.4 million infor the three months ended June 30, 2021, as the overall market for equity capital raising continues to remain largely shut as the result of market volatility, declining valuations and a strong prior-year period due to fewer completed transactions, which was partially offset by higher revenue per transaction. Duringcautious investor outlook stemming from economic concerns and geopolitical risks. Activity for us during the thirdsecond quarter of 2017, we completed 16 equity financings, raising $1.9 billion for our clients, compared with 25 equity financings, raising $4.9 billion for our clients2022 was principally in the comparable year-ago period. Debtfinancial services and healthcare sectors. Municipal financing revenues for the three months ended SeptemberJune 30, 20172022 were $21.7$35.2 million, down 29.8 percent compared with $30.9to $36.1 million in a strong year-agothe prior-year period. The decrease was dueOur revenues were essentially flat relative to aan approximate 12 percent decline in municipalthe overall market issuance volumes, driven by lower levels of refunding activity. Duringbased on the third quarter of 2017, we completed 139 negotiated municipal issues with a total par value of $3.4 billion, compared with 184municipal negotiated municipal issues with a total par valueissuances driven by less refinancing activity. Our results in the second quarter of $4.3 billion during the prior-year period.2022 reflect solid performance within our governmental business, as well as our specialty sectors.
Institutional sales and tradingbrokerage revenues comprise all of the revenues generated through trading activities, which consist of facilitating customer trades and executing competitive municipal underwritings, andas well as fees received for our strategic trading activities in municipal bonds, mortgage-backed securities and U.S. government agency securities. To assess the profitability of institutional brokerage activities, we aggregate institutional brokerage revenues with the net interest income or expense associated with financing, economically hedging and holding long or short inventory positions.research services. Our results may vary from quarter to quarter as a result of changes in trading margins, trading gains and losses, net interest spreads, trading volumes, the timing of payments for research services and the timing of transactions based on market opportunities.
For the three months ended SeptemberJune 30, 2017,2022, institutional brokerage revenues increased 9.5 percent to $104.9 million, compared with $95.8 million in the prior-year period. Equity brokerage revenues were $39.1$51.4 million a decreasein the second quarter of 15.62022, up 47.3 percent compared with $46.3$34.9 million in the corresponding period of 2021, due to the addition of Cornerstone Macro to our platform as well as elevated volatility driving increased client activity. For the three months ended June 30, 2022, fixed income services revenues were $53.6 million, down 12.1 percent compared to $61.0 million in the prior-year period due to lower equityclient activity resulting from interest rate volatility and fixedexpectations for continued tightening of monetary policy.
Interest income institutional brokerage revenues. Equity institutional brokerage revenues were $18.4 million in the third quarter of 2017, down 10.2 percent compared with $20.5 million in the corresponding period of 2016. Historically low volatility resulted in lower trading volumes in the third quarter of 2017.represents amounts earned from holding long inventory positions. For the three months ended SeptemberJune 30, 2017, fixed2022, interest income institutional brokerage revenues were $20.7increased to $4.5 million, down 19.9 percent compared with $25.8$1.7 million in the prior-year period. A decline in customer flow activity and fewer trading opportunities due to the lack of volatility reduced our revenues.
Management and performance fees include the fees generated from our merchant banking, energy and senior living funds with outside investors. Forfor the three months ended SeptemberJune 30, 2017, management and performance fees were $0.7 million, compared2021. Average inventory balances are largely consistent with $1.4 million in the prior-year period.period, however higher yields are driving the increase in interest income.
Investment income/(loss)income includes realized and unrealized gains and losses on investments, including amounts attributable to noncontrolling interests, in our merchant banking energy and senior livinghealthcare funds, as well as management and other firm investments.performance fees generated from those funds. For the three months ended SeptemberJune 30, 2017,2022, we recorded investment loss was $0.7income of $10.9 million, compared with investment income of $4.5$26.7 million in the corresponding period of 2016.2021. In the thirdsecond quarter of 2016,2022, we recorded lower gains on our investments and the noncontrolling interests in the merchant banking fundfunds that we manage compared with losses in the current period.manage. Excluding the impact of noncontrolling interests, adjusted investment income was $0.3$2.8 million for the three months ended SeptemberJune 30, 2017.2022, compared with $8.5 million for the three months ended June 30, 2021.
Long-termInterest expense represents amounts associated with financing, expenses primarily representeconomically hedging and holding short inventory positions, including interest paid on our senior notes.long-term financing arrangements, as well as commitment fees on our line of credit and revolving credit facility. For the three months ended SeptemberJune 30, 2017, long-term financing expenses2022, interest expense decreased to $1.7$2.4 million, from $2.3compared with $2.7 million in the prior-year period. WeThe decrease was primarily due to lower interest paid on long-term financing as we repaid the $50 million of Class A unsecured senior notes upon maturity on May 31, 2017.October 15, 2021. Excluding the impact of interest expense on long-term financing, adjusted interest expense increased to $0.7 million for the three months ended June 30, 2022, compared with $0.5 million for the three months ended June 30, 2021.
Capital Markets segment pre-tax operatingPre-tax margin for the three months ended SeptemberJune 30, 2017 was 13.92022 decreased to 10.6 percent, compared with 9.0to 22.4 percent for the corresponding period of 2016. Pre-tax operating margin was higher in the third quarter of 2017 compared to the prior-year period due to a lower non-compensation ratio2021 driven by an increase inlower net revenues which was partially offset byand a higher acquisition-related costs.compensation ratio. Adjusted segment pre-tax operating margin for the three months ended SeptemberJune 30, 2017 was 21.72022 decreased to 17.5 percent, compared with 16.427.7 percent for the corresponding period of 2016. Adjusted pre-tax operating margin was higher compared to the third quarter of 20162021 due to operating leverage as a result of higher revenues. Adjustedlower adjusted net revenues increasedand higher adjusted non-compensation expenses.
24.0 percent and adjusted operating expenses increased 16.1 percent compared to the third quarter of 2016, reflecting operating leverage in the business.
Asset Management
The following table sets forth the Asset Management segment financial results and adjustments necessary to reconcile to our consolidated U.S. GAAP pre-tax operating income and pre-tax operating margin for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | | | Adjustments (1) | | | | | | Adjustments (1) | | |
| | Total | | Noncontrolling | | Other | | U.S. | | Total | | Noncontrolling | | Other | | U.S. |
| (Dollars in thousands) | Adjusted | | Interests | | Adjustments | | GAAP | | Adjusted | | Interests | | Adjustments | | GAAP |
| Management fees | | | | | | | | | | | | | | | |
| Equity | $ | 5,296 |
| | $ | — |
| | $ | — |
| | $ | 5,296 |
| | $ | 6,750 |
| | $ | — |
| | $ | — |
| | $ | 6,750 |
|
| MLP | 6,844 |
| | — |
| | — |
| | 6,844 |
| | 7,153 |
| | — |
| | — |
| | 7,153 |
|
| Total management fees | 12,140 |
| | — |
| | — |
| | 12,140 |
| | 13,903 |
| | — |
| | — |
| | 13,903 |
|
| | | | | | | | | | | | | | | | |
| Performance fees | | | | | | | | | | | | | | | |
| Equity | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| MLP | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total performance fees | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | |
| Total management and performance fees | 12,140 |
| | — |
| | — |
| | 12,140 |
| | 13,903 |
| | — |
| | — |
| | 13,903 |
|
| | | | | | | | | | | | | | | | |
| Investment income | 439 |
| | — |
| | — |
| | 439 |
| | 461 |
| | — |
| | — |
| | 461 |
|
| | | | | | | | | | | | | | | | |
| Total net revenues | 12,579 |
| | — |
| | — |
| | 12,579 |
| | 14,364 |
| | — |
| | — |
| | 14,364 |
|
| | | | | | | | | | | | | | | | |
| Operating expenses | 10,753 |
| | — |
| | 115,641 |
| | 126,394 |
| | 11,264 |
| | — |
| | 1,387 |
| | 12,651 |
|
| | | | | | | | | | | | | | | | |
| Segment pre-tax operating income/(loss) | $ | 1,826 |
| | $ | — |
| | $ | (115,641 | ) | | $ | (113,815 | ) | | $ | 3,100 |
| | $ | — |
| | $ | (1,387 | ) | | $ | 1,713 |
|
| | | | | | | | | | | | | | | | |
| Segment pre-tax operating margin | 14.5 | % | | | | | | (904.8 | )% | | 21.6 | % | | | | | | 11.9 | % |
| | | | | | | | | | | | | | | | |
| Adjusted segment pre-tax operating margin excluding investment income (2) | 11.4 | % | | | | | |
| | 19.0 | % | | | | | |
|
| |
(1) | Other Adjustments – The following table sets forth the items not included in adjusted segment pre-tax operating income/(loss) and adjusted segment pre-tax operating margin for the periods presented: |
|
| | | | | | | |
| | Three Months Ended September 30, |
| (Dollars in thousands) | 2017 | | 2016 |
| Goodwill impairment | $ | 114,363 |
| | $ | — |
|
| Amortization of intangible assets related to acquisitions | 1,278 |
| | 1,387 |
|
| | $ | 115,641 |
| | $ | 1,387 |
|
| |
(2) | Management believes that presenting adjusted segment pre-tax operating margin excluding investment income, a non-GAAP measure, provides the most meaningful basis for comparison of Asset Management operating results across periods. |
Management and performance fee revenues comprise the revenues generated from management and investment advisory services performed for separately managed accounts, registered funds and partnerships. Client asset inflows and outflows and investment performance have a direct effect on management and performance fee revenues. Management fees are generally based on the level of AUM measured monthly or quarterly, and an increase or reduction in AUM, due to market price fluctuations or net client asset flows, will result in a corresponding increase or decrease in management fees. Fees vary with the type of assets managed and the vehicle in which they are managed. Performance fees are earned when the investment return on AUM exceeds certain benchmark targets or other performance targets over a specified measurement period. The level of performance fees earned can vary significantly from period to period and these fees may not necessarily be correlated to changes in total AUM. The majority of performance fees, if earned, are generally recorded in the fourth quarter of the applicable year or upon withdrawal of client assets. At September 30, 2017, approximately four percent of our AUM was eligible to earn performance fees.
For the three months ended September 30, 2017, management fees were $12.1 million, a decrease of 12.7 percent, compared with $13.9 million in the prior-year period, due primarily to lower management fees from our equity product offerings. In the third quarter of 2017, management fees related to our equity strategies were $5.3 million, down 21.5 percent compared to $6.8 million in the corresponding period of 2016 due to lower average AUM resulting from net client outflows, and a lower average effective revenue yield. The net client outflows were exacerbated by our efforts to remix our product offerings to a broader set of products and the lower yield resulted from changes in our product mix. The average effective revenue yield (total annualized management fees as a percentage of our average month-end AUM) for our equity strategies was 61 basis points for the third quarter of 2017, compared with 70 basis points for the prior-year period. Management fees from our master limited partnership ("MLP") strategies decreased 4.3 percent in the third quarter of 2017 to $6.8 million, compared with $7.2 million in the third quarter of 2016 as lower average AUM was partially offset by a higher average effective revenue yield. Our average effective revenue yield for our MLP strategies was 66 basis points for the third quarter of 2017, compared with 64 basis points for the prior-year period.
Investment income includes gains and losses from our investments in registered funds and private funds or partnerships that we manage. For the three months ended September 30, 2017, investment income was $0.4 million, compared with $0.5 million for the prior-year period.
The negative segment pre-tax operating margin for the three months ended September 30, 2017 was due to the $114.4 million non-cash goodwill impairment charge. Excluding investment income on firm capital invested in our strategies, adjusted segment operating margin declined from 19.0 percent in the third quarter of 2016 to 11.4 percent in the third quarter of 2017 due to lower management fees.
The following table summarizes the changes in our AUM for the periods presented:
|
| | | | | | | | | | | |
| | | | | | Twelve |
| | Three Months Ended | | Months Ended |
| | September 30, | | September 30, |
| (Dollars in millions) | 2017 | | 2016 | | 2017 |
| Equity | | | | | |
| Beginning of period | $ | 4,276 |
| | $ | 3,681 |
| | $ | 3,878 |
|
| Net outflows | (862 | ) | | (103 | ) | | (784 | ) |
| Net market appreciation | 171 |
| | 300 |
| | 491 |
|
| End of period | $ | 3,585 |
| | $ | 3,878 |
| | $ | 3,585 |
|
| | | | | | |
| MLP | | | | | |
| Beginning of period | $ | 4,304 |
| | $ | 4,410 |
| | $ | 4,551 |
|
| Net outflows | (210 | ) | | (122 | ) | | (333 | ) |
| Net market appreciation/(depreciation) | (51 | ) | | 263 |
| | (175 | ) |
| End of period | $ | 4,043 |
| | $ | 4,551 |
| | $ | 4,043 |
|
| | | | | | |
| Total | | | | | |
| Beginning of period | $ | 8,580 |
| | $ | 8,091 |
| | $ | 8,429 |
|
| Net outflows | (1,072 | ) | | (225 | ) | | (1,117 | ) |
| Net market appreciation | 120 |
| | 563 |
| | 316 |
|
| End of period | $ | 7,628 |
| | $ | 8,429 |
| | $ | 7,628 |
|
Total AUM was $7.6 billion at September 30, 2017. Equity AUM decreased to $3.6 billion at September 30, 2017 as net client outflows of $0.9 billion during the quarter were partially offset by net market appreciation of $0.2 billion. In the third quarter of 2017, we exited our Japan value product, which reduced our AUM by approximately $0.8 billion. The reduction from client outflows was partially offset by client inflows into our new global dividend strategy during the quarter. This product, which we added in the first quarter of 2017, is part of our strategy to remix our product offerings. MLP AUM decreased to $4.0 billion at September 30, 2017 as we experienced net client outflows of $0.2 billion during the quarter.
Financial Summary for the ninesix months ended SeptemberJune 30, 20172022 and SeptemberJune 30, 20162021
The following table provides a summary of the results of our operations on a U.S. GAAP basis and the results of our operations as a percentage of net revenues for the periods indicated.
| | | | | | | | | | | | | | | As a Percentage of |
| | | | | | | | As a Percentage of | | Net Revenues for the |
| | | | | | | | Net Revenues for the | | Six Months Ended | | Six Months Ended |
| | Nine Months Ended | | Nine Months Ended | | June 30, | | June 30, |
| | September 30, | | September 30, | | | 2022 | | |
| | | | | | 2017 | | | | | |
| (Dollars in thousands) | 2017 | | 2016 | | v2016 | | 2017 | | 2016 | |
| (Amounts in thousands) | | (Amounts in thousands) | 2022 | | 2021 | | v2021 | | 2022 | | 2021 |
| Revenues: | | | | | | | | | | Revenues: | | | | | | | | | |
| Investment banking | $ | 461,260 |
| | $ | 338,034 |
| | 36.5 | % | | 72.2 | % | | 64.4 | % | Investment banking | $ | 491,634 | | | $ | 683,221 | | | (28.0) | % | | 70.0 | % | | 72.9 | % |
| Institutional brokerage | 111,083 |
| | 122,423 |
| | (9.3 | ) | | 17.4 |
| | 23.3 |
| Institutional brokerage | 209,504 | | | 205,318 | | | 2.0 | | | 29.8 | | | 21.9 | |
| Asset management | 44,011 |
| | 43,699 |
| | 0.7 |
| | 6.9 |
| | 8.3 |
| |
| Interest | 22,649 |
| | 24,094 |
| | (6.0 | ) | | 3.5 |
| | 4.6 |
| |
| Investment income | 15,406 |
| | 14,019 |
| | 9.9 |
| | 2.4 |
| | 2.7 |
| |
| Interest income | | Interest income | 8,392 | | | 3,730 | | | 125.0 | | | 1.2 | | | 0.4 | |
| Investment income/(loss) | | Investment income/(loss) | (2,138) | | | 50,462 | | | N/M | | (0.3) | | | 5.4 | |
| Total revenues | 654,409 |
| | 542,269 |
| | 20.7 |
| | 102.4 |
| | 103.3 |
| Total revenues | 707,392 | | | 942,731 | | | (25.0) | | | 100.6 | | | 100.6 | |
| | | | | | | | | | | |
| Interest expense | 15,568 |
| | 17,383 |
| | (10.4 | ) | | 2.4 |
| | 3.3 |
| Interest expense | 4,556 | | | 5,476 | | | (16.8) | | | 0.6 | | | 0.6 | |
| | | | | | | | | | | | | | | | | | | | |
| Net revenues | 638,841 |
| | 524,886 |
| | 21.7 |
| | 100.0 |
| | 100.0 |
| Net revenues | 702,836 | | | 937,255 | | | (25.0) | | | 100.0 | | | 100.0 | |
| | | | | | | | | | | | | | | | | | | | |
| Non-interest expenses: | | | | | | | | | | Non-interest expenses: | |
| Compensation and benefits | 438,161 |
| | 356,770 |
| | 22.8 |
| | 68.6 |
| | 68.0 |
| Compensation and benefits | 487,816 | | | 605,580 | | | (19.4) | | | 69.4 | | | 64.6 | |
| Outside services | 27,612 |
| | 28,923 |
| | (4.5 | ) | | 4.3 |
| | 5.5 |
| Outside services | 25,605 | | | 18,268 | | | 40.2 | | | 3.6 | | | 1.9 | |
| Occupancy and equipment | 24,846 |
| | 25,311 |
| | (1.8 | ) | | 3.9 |
| | 4.8 |
| Occupancy and equipment | 30,098 | | | 27,742 | | | 8.5 | | | 4.3 | | | 3.0 | |
| Communications | 22,025 |
| | 22,469 |
| | (2.0 | ) | | 3.4 |
| | 4.3 |
| Communications | 25,640 | | | 21,834 | | | 17.4 | | | 3.6 | | | 2.3 | |
| Marketing and business development | 22,512 |
| | 23,804 |
| | (5.4 | ) | | 3.5 |
| | 4.5 |
| Marketing and business development | 20,870 | | | 7,181 | | | 190.6 | | | 3.0 | | | 0.8 | |
| Deal-related expenses | | Deal-related expenses | 13,852 | | | 21,141 | | | (34.5) | | | 2.0 | | | 2.3 | |
| Trade execution and clearance | 5,864 |
| | 5,686 |
| | 3.1 |
| | 0.9 |
| | 1.1 |
| Trade execution and clearance | 9,926 | | | 8,387 | | | 18.3 | | | 1.4 | | | 0.9 | |
| Restructuring and integration costs | — |
| | 10,206 |
| | (100.0 | ) | | — |
| | 1.9 |
| Restructuring and integration costs | 2,856 | | | 3,568 | | | (20.0) | | | 0.4 | | | 0.4 | |
| Goodwill impairment | 114,363 |
| | — |
| | N/M |
| | 17.9 |
| | — |
| |
| | Intangible asset amortization | 11,466 |
| | 15,400 |
| | (25.5 | ) | | 1.8 |
| | 2.9 |
| Intangible asset amortization | 6,314 | | | 15,040 | | | (58.0) | | | 0.9 | | | 1.6 | |
| Back office conversion costs | 3,027 |
| | — |
| | N/M |
| | 0.5 |
| | — |
| |
| Other operating expenses | 8,525 |
| | 7,915 |
| | 7.7 |
| | 1.3 |
| | 1.5 |
| Other operating expenses | 7,062 | | | 11,587 | | | (39.1) | | | 1.0 | | | 1.2 | |
| Total non-interest expenses | 678,401 |
| | 496,484 |
| | 36.6 |
| | 106.2 |
| | 94.6 |
| Total non-interest expenses | 630,039 | | | 740,328 | | | (14.9) | | | 89.6 | | | 79.0 | |
| | | | | | | | | | | | | | | | | | | | |
| Income/(loss) before income tax expense/(benefit) | (39,560 | ) | | 28,402 |
| | N/M |
| | (6.2 | ) | | 5.4 |
| |
| Income before income tax expense | | Income before income tax expense | 72,797 | | | 196,927 | | | (63.0) | | | 10.4 | | | 21.0 | |
| | | | | | | | | | | |
| Income tax expense/(benefit) | (26,912 | ) | | 8,767 |
| | N/M |
| | (4.2 | ) | | 1.7 |
| |
| Income tax expense | | Income tax expense | 20,364 | | | 44,340 | | | (54.1) | | | 2.9 | | | 4.7 | |
| | | | | | | | | | | | | | | | | | | | |
| Net income/(loss) | (12,648 | ) | | 19,635 |
| | N/M |
| | (2.0 | ) | | 3.7 |
| |
| Net income | | Net income | 52,433 | | | 152,587 | | | (65.6) | | | 7.5 | | | 16.3 | |
| | | | | | | | | | | |
| Net income applicable to noncontrolling interests | 3,217 |
| | 4,602 |
| | (30.1 | ) | | 0.5 |
| | 0.9 |
| |
| Net income/(loss) applicable to noncontrolling interests | | Net income/(loss) applicable to noncontrolling interests | (5,608) | | | 33,307 | | | N/M | | (0.8) | | | 3.6 | |
| | | | | | | | | | | | | | | | | | | | |
| Net income/(loss) applicable to Piper Jaffray Companies | $ | (15,865 | ) | | $ | 15,033 |
| | N/M |
| | (2.5 | )% | | 2.9 | % | |
| Net income applicable to Piper Sandler Companies | | Net income applicable to Piper Sandler Companies | $ | 58,041 | | | $ | 119,280 | | | (51.3) | % | | 8.3 | % | | 12.7 | % |
SegmentFinancial Performance
Capital Markets
The following table sets forth the Capital Markets adjusted, segmentnon-GAAP financial results and adjustments necessary to reconcile to our consolidated U.S. GAAP pre-tax operating income and pre-tax operating marginfinancial results for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| | | Adjustments (1) | | | | | | Adjustments (1) | | |
| Total | | Noncontrolling | | Other | | U.S. | | Total | | Noncontrolling | | Other | | U.S. |
| (Amounts in thousands) | Adjusted | | Interests | | Adjustments | | GAAP | | Adjusted | | Interests | | Adjustments | | GAAP |
| Investment banking | | | | | | | | | | | | | | | |
| Advisory services | $ | 380,559 | | | $ | — | | | $ | — | | | $ | 380,559 | | | $ | 401,517 | | | $ | — | | | $ | — | | | $ | 401,517 | |
| Corporate financing | 48,423 | | | — | | | — | | | 48,423 | | | 218,537 | | | — | | | — | | | 218,537 | |
| Municipal financing | 62,652 | | | — | | | — | | | 62,652 | | | 63,167 | | | — | | | — | | | 63,167 | |
| Total investment banking | 491,634 | | | — | | | — | | | 491,634 | | | 683,221 | | | — | | | — | | | 683,221 | |
| | | | | | | | | | | | | | | |
| Institutional brokerage | | | | | | | | | | | | | | | |
| Equity brokerage | 101,180 | | | — | | | — | | | 101,180 | | | 78,107 | | | — | | | — | | | 78,107 | |
| Fixed income services | 108,324 | | | — | | | — | | | 108,324 | | | 127,211 | | | — | | | — | | | 127,211 | |
| Total institutional brokerage | 209,504 | | | — | | | — | | | 209,504 | | | 205,318 | | | — | | | — | | | 205,318 | |
| | | | | | | | | | | | | | | |
| Interest income | 8,392 | | | — | | | — | | | 8,392 | | | 3,730 | | | — | | | — | | | 3,730 | |
| Investment income/(loss) | (789) | | | (1,349) | | | — | | | (2,138) | | | 15,127 | | | 35,335 | | | — | | | 50,462 | |
| | | | | | | | | | | | | | | |
| Total revenues | 708,741 | | | (1,349) | | | — | | | 707,392 | | | 907,396 | | | 35,335 | | | — | | | 942,731 | |
| | | | | | | | | | | | | | | |
| Interest expense | 1,306 | | | — | | | 3,250 | | | 4,556 | | | 972 | | | — | | | 4,504 | | | 5,476 | |
| | | | | | | | | | | | | | | |
| Net revenues | 707,435 | | | (1,349) | | | (3,250) | | | 702,836 | | | 906,424 | | | 35,335 | | | (4,504) | | | 937,255 | |
| | | | | | | | | | | | | | | |
| Total non-interest expenses | 571,702 | | | 4,259 | | | 54,078 | | | 630,039 | | | 667,215 | | | 2,028 | | | 71,085 | | | 740,328 | |
| | | | | | | | | | | | | | | |
| Pre-tax income | $ | 135,733 | | | $ | (5,608) | | | $ | (57,328) | | | $ | 72,797 | | | $ | 239,209 | | | $ | 33,307 | | | $ | (75,589) | | | $ | 196,927 | |
| | | | | | | | | | | | | | | |
| Pre-tax margin | 19.2 | % | | | | | | 10.4 | % | | 26.4 | % | | | | | | 21.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | | | Adjustments (1) | | | | | | Adjustments (1) | | |
| | Total | | Noncontrolling | | Other | | U.S. | | Total | | Noncontrolling | | Other | | U.S. |
| (Dollars in thousands) | Adjusted | | Interests | | Adjustments | | GAAP | | Adjusted | | Interests | | Adjustments | | GAAP |
| Investment banking | | | | | | | | | | | | | | | |
| Financing | | | | | | | | | | | | | | | |
| Equities | $ | 70,229 |
| | $ | — |
| | $ | — |
| | $ | 70,229 |
| | $ | 53,831 |
| | $ | — |
| | $ | — |
| | $ | 53,831 |
|
| Debt | 60,066 |
| | — |
| | — |
| | 60,066 |
| | 80,195 |
| | — |
| | — |
| | 80,195 |
|
| Advisory services | 332,205 |
| | — |
| | — |
| | 332,205 |
| | 204,971 |
| | — |
| | — |
| | 204,971 |
|
| Total investment banking | 462,500 |
| | — |
| | — |
| | 462,500 |
| | 338,997 |
| | — |
| | — |
| | 338,997 |
|
| | | | | | | | | | | | | | | | |
| Institutional sales and trading | | | | | | | | | | | | | | | |
| Equities | 59,085 |
| | — |
| | — |
| | 59,085 |
| | 62,773 |
| | — |
| | — |
| | 62,773 |
|
| Fixed income | 63,137 |
| | — |
| | — |
| | 63,137 |
| | 70,665 |
| | 1,153 |
| | — |
| | 71,818 |
|
| Total institutional sales and trading | 122,222 |
| | — |
| | — |
| | 122,222 |
| | 133,438 |
| | 1,153 |
| | — |
| | 134,591 |
|
| | | | | | | | | | | | | | | | |
| Management and performance fees | 4,172 |
| | — |
| | — |
| | 4,172 |
| | 4,112 |
| | — |
| | — |
| | 4,112 |
|
| | | | | | | | | | | | | | | | |
| Investment income | 10,275 |
| | 4,880 |
| | — |
| | 15,155 |
| | 8,672 |
| | 5,337 |
| | — |
| | 14,009 |
|
| | | | | | | | | | | | | | | | |
| Long-term financing expenses | (6,003 | ) | | — |
| | — |
| | (6,003 | ) | | (6,838 | ) | | — |
| | — |
| | (6,838 | ) |
| | | | | | | | | | | | | | | | |
| Net revenues | 593,166 |
| | 4,880 |
| | — |
| | 598,046 |
| | 478,381 |
| | 6,490 |
| | — |
| | 484,871 |
|
| | | | | | | | | | | | | | | | |
| Operating expenses | 484,677 |
| | 1,663 |
| | 38,362 |
| | 524,702 |
| | 415,760 |
| | 1,888 |
| | 42,980 |
| | 460,628 |
|
| | | | | | | | | | | | | | | | |
| Segment pre-tax operating income | $ | 108,489 |
| | $ | 3,217 |
| | $ | (38,362 | ) | | $ | 73,344 |
| | $ | 62,621 |
| | $ | 4,602 |
| | $ | (42,980 | ) | | $ | 24,243 |
|
| | | | | | | | | | | | | | | | |
| Segment pre-tax operating margin | 18.3 | % | | | | | | 12.3 | % | | 13.1 | % | | | | | | 5.0 | % |
| |
(1) | The following is a summary of the adjustments needed to reconcile our consolidated U.S. GAAP segment pre-tax operating income and segment pre-tax operating margin to the adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin: |
Noncontrolling interests – The impacts of consolidating noncontrolling interests in our alternative asset management funds are not included in our adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin.financial results.
Other adjustments – The following table sets forth the items are not included in our adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin for the periods presented:financial results:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| (Amounts in thousands) | 2022 | | 2021 |
| Interest expense on long-term financing | $ | 3,250 | | | $ | 4,504 | |
| | | |
| Compensation from acquisition-related agreements | 44,908 | | | 52,477 | |
| Acquisition-related restructuring and integration costs | 2,856 | | | 3,568 | |
| Amortization of intangible assets related to acquisitions | 6,314 | | | 15,040 | |
| | | |
| | | |
| 54,078 | | | 71,085 | |
| | | |
| Total other adjustments | $ | 57,328 | | | $ | 75,589 | |
|
| | | | | | | |
| | Nine Months Ended September 30, |
| (Dollars in thousands) | 2017 | | 2016 |
| Compensation from acquisition-related agreements | $ | 30,301 |
| | $ | 21,544 |
|
| Restructuring and integration costs | — |
| | 10,197 |
|
| Amortization of intangible assets related to acquisitions | 7,633 |
| | 11,239 |
|
| Non-compensation expenses from acquisition-related agreements | 428 |
| | — |
|
| | $ | 38,362 |
| | $ | 42,980 |
|
Capital Markets netNet revenues on a U.S. GAAP basis were $598.0$702.8 million for the ninesix months ended SeptemberJune 30, 2017,2022, compared with $484.9$937.3 million in the prior-year period. In the first nine monthshalf of 2017, Capital Markets2022, adjusted net revenues were $593.2$707.4 million, compared with $478.4$906.4 million in the first nine monthshalf of 2016.2021. The variance explanations for net revenues and adjusted net revenues are consistent on both a U.S. GAAP and non-GAAP basis.basis unless stated otherwise.
The following table provides supplemental business information:
| | | | | | | | | | | |
| Six Months Ended |
| June 30, |
| 2022 | | 2021 |
| Advisory services | | | |
| Completed M&A and restructuring transactions | 103 | | | 108 | |
| Completed capital advisory transactions | 49 | | | 69 | |
| | | |
| Corporate financings | | | |
| Total equity transactions priced | 15 | | | 119 | |
| Book run equity transactions priced | 11 | | | 79 | |
| Total debt and preferred transactions priced | 21 | | | 25 | |
| Book run debt and preferred transactions priced | 12 | | | 12 | |
| | | |
| Municipal negotiated issues | | | |
| Aggregate par value of issues priced (in billions) | $ | 7.5 | | | $ | 8.1 | |
| Total issues priced | 314 | | | 493 | |
| | | |
| Equity brokerage | | | |
| Number of shares traded (in billions) | 5.6 | | | 5.4 | |
In the first nine monthshalf of 2017,2022, investment banking revenues increased 36.4were $491.6 million, down 28.0 percent compared to $462.5 million, compared with $339.0$683.2 million in the corresponding period of the prior year. For the ninesix months ended SeptemberJune 30, 2017,2022, advisory services revenues increased 62.1were $380.6 million, down 5.2 percent to $332.2 million, compared with $205.0$401.5 million in the first nine monthshalf of 2016. The increase reflects our long-term efforts2021, due to grow the advisory services business and the diversity in our business. These factors have led to market share gains. Wefewer completed 118 transactions with an aggregate enterprise value of $27.8 billion in the first nine months of 2017, compared with 104 transactions with an aggregate enterprise value of $14.1 billion in the first nine months of 2016.transactions. For the ninesix months ended SeptemberJune 30, 2017, equity2022, corporate financing revenues were $70.2$48.4 million, up 30.5down 77.8 percent compared with $53.8to $218.5 million in the prior-year period, due to more completed transactions and higher revenue per transaction. On a year-to-date basis,as the overall fee poolmarket for equity capital raising remains largely shut down. Activity for us during the first half of 2022 was primarily in our target market was up approximately 75 percentthe financial services sector. Municipal financing revenues for the six months ended June 30, 2022 were $62.7 million, compared to the corresponding period of the prior year. During the first nine months of 2017, we completed 60 equity financings, raising $12.0 billion for our clients, compared with 48 equity financings, raising $9.7 billion for our clients$63.2 million in the year-ago period. Debt financingOur increase in average issuance size from 2021 drove revenues fordespite the nine months ended September 30, 2017 were $60.1 million, down 25.1 percent compared with $80.2 milliondecline in the year-ago period, due to lower public finance revenues as refundingissuance activity has declined compared to the prior-year periodresulting from higher nominal interest rates and new money issuance volumes have remained essentially flat. Duringincreased interest rate volatility. In the first nine monthshalf of 2017, we completed 421 negotiated municipal issues with a total par value of $10.5 billion, compared with 512 negotiated municipal issues with a total par value of $11.6 billion during the prior-year period.2022, our results were driven by solid issuance activity in our governmental business and specialty sectors.
For the ninesix months ended SeptemberJune 30, 2017,2022, institutional brokerage revenues decreased 9.2 percentincreased to $122.2$209.5 million, compared with $134.6$205.3 million in the prior-year period, due to lower equity and fixed income institutional brokerage revenues.period. Equity institutional brokerage revenues decreased 5.9increased 29.5 percent to $59.1$101.2 million in the first nine monthshalf of 2017,2022, compared with $62.8$78.1 million in the corresponding period of 2016,2021, due to lower client trading volumes.the addition of Cornerstone Macro to our platform. For the ninesix months ended SeptemberJune 30, 2017,2022, fixed income institutional brokerageservices revenues were $63.1$108.3 million, down 12.114.8 percent compared with $71.8to $127.2 million in the prior-year period, dueas a result of lower client activity driven by interest rate volatility and expectations for inflation, tightening of monetary policy and the economic outlook.
Interest income for the six months ended June 30, 2022 increased to a decline in customer flow activity and fewer opportunities for trading gains.
For the nine months ended September 30, 2017, management and performance fees were $4.2$8.4 million, compared with $4.1$3.7 million in the prior-year period.period, reflecting higher interest rates on long inventory balances.
For the ninesix months ended SeptemberJune 30, 2017,2022, we recorded an investment income was $15.2loss of $2.1 million, compared to $14.0investment income of $50.5 million in the corresponding period of 2016.year-ago period. In the first ninesix months of 2017,2022, we recored higher gainsrecorded unrealized losses on our investments and the noncontrolling interests in ourthe merchant banking fund and on our other firm investments, which were partially offset byfunds that we manage that reflect lower gains in our senior living fund.equity market valuations. Excluding the impact of noncontrolling interests, adjusted investment incomeloss was $10.3$0.8 million for the ninesix months ended SeptemberJune 30, 2017.2022, compared with adjusted investment income of $15.1 million for the six months ended June 30, 2021.
ForInterest expense for the ninesix months ended SeptemberJune 30, 2017, long-term financing expenses decreased to $6.02022 was $4.6 million, compared with $6.8$5.5 million in the prior-year period. WeThe decrease was primarily due to lower interest paid on long-term financings as we repaid the $50 million of Class A unsecured senior notes upon maturity on May 31, 2017.October 15, 2021. Excluding the impact of interest expense on long-term financing, adjusted interest expense was $1.3 million and $1.0 million for the six months ended June 30, 2022 and 2021, respectively.
Pre-tax margin for the ninesix months ended SeptemberJune 30, 20172022 was 12.310.4 percent, compared to 21.0 percent for the six months ended June 30, 2021. Adjusted pre-tax margin for the six months ended June 30, 2022 decreased to 19.2 percent, compared with 5.026.4 percent for the corresponding period of 2016. The increased pre-tax operating margin was primarily due to a lower non-compensation ratio driven by higher revenues and lower levels of restructuring costs. In the year-ago period, we recorded $10.2 million of restructuring and integration costs primarily related to the acquisition of Simmons. Adjusted segment pre-tax operating margin for the nine months ended September 30, 2017 was 18.3 percent, compared with 13.1 percent for the corresponding period of 2016, primarily due to operating leverage as a result of higher revenues.
Asset Management
The following table sets forth the Asset Management segment financial results and adjustments necessary to reconcile to our consolidated U.S. GAAP pre-tax operating income and pre-tax operating margin for the periods presented:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | | | Adjustments (1) | | | | | | Adjustments (1) | | |
| | Total | | Noncontrolling | | Other | | U.S. | | Total | | Noncontrolling | | Other | | U.S. |
| (Dollars in thousands) | Adjusted | | Interests | | Adjustments | | GAAP | | Adjusted | | Interests | | Adjustments | | GAAP |
| Management fees | | | | | | | | | | | | | | | |
| Equity | $ | 18,478 |
| | $ | — |
| | $ | — |
| | $ | 18,478 |
| | $ | 21,051 |
| | $ | — |
| | $ | — |
| | $ | 21,051 |
|
| MLP | 21,361 |
| | — |
| | — |
| | 21,361 |
| | 18,536 |
| | — |
| | — |
| | 18,536 |
|
| Total management fees | 39,839 |
| | — |
| | — |
| | 39,839 |
| | 39,587 |
| | — |
| | — |
| | 39,587 |
|
| | | | | | | | | | | | | | | | |
| Performance fees | | | | | | | | | | | | | | | |
| Equity | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| MLP | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total performance fees | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | |
| Total management and performance fees | 39,839 |
| | — |
| | — |
| | 39,839 |
| | 39,587 |
| | — |
| | — |
| | 39,587 |
|
| | | | | | | | | | | | | | | | |
| Investment income | 956 |
| | — |
| | — |
| | 956 |
| | 428 |
| | — |
| | — |
| | 428 |
|
| | | | | | | | | | | | | | | | |
| Total net revenues | 40,795 |
| | — |
| | — |
| | 40,795 |
| | 40,015 |
| | — |
| | — |
| | 40,015 |
|
| | | | | | | | | | | | | | | | |
| Operating expenses | 35,503 |
| | — |
| | 118,196 |
| | 153,699 |
| | 31,686 |
| | — |
| | 4,170 |
| | 35,856 |
|
| | | | | | | | | | | | | | | | |
| Segment pre-tax operating income/(loss) | $ | 5,292 |
| | $ | — |
| | $ | (118,196 | ) | | $ | (112,904 | ) | | $ | 8,329 |
| | $ | — |
| | $ | (4,170 | ) | | $ | 4,159 |
|
| | | | | | | | | | | | | | | | |
| Segment pre-tax operating margin | 13.0 | % | | | | | | (276.8 | )% | | 20.8 | % | | | | | | 10.4 | % |
| | | | | | | | | | | | | | | | |
| Adjusted segment pre-tax operating margin excluding investment income (2) | 10.9 | % | | | | | |
| | 20.0 | % | | | | | |
|
| |
(1) | Other Adjustments – The following table sets forth the items not included in adjusted segment pre-tax operating income/(loss) and adjusted segment pre-tax operating margin for the periods presented: |
|
| | | | | | | |
| | Nine Months Ended September 30, |
| (Dollars in thousands) | 2017 | | 2016 |
| Restructuring and integration costs | $ | — |
| | $ | 9 |
|
| Goodwill impairment | 114,363 |
| | — |
|
| Amortization of intangible assets related to acquisitions | 3,833 |
| | 4,161 |
|
| | $ | 118,196 |
| | $ | 4,170 |
|
| |
(2) | Management believes that presenting adjusted segment pre-tax operating margin excluding investment income, a non-GAAP measure, provides the most meaningful basis for comparison of Asset Management operating results across periods. |
For the nine months ended September 30, 2017, management fees were $39.8 million, essentially flat compared with $39.6 million in the prior-year period as higher management fees from our MLP product offerings were offset by lower management fees from our equity product offerings.2021. In the first ninesix months of 2017, management fees related to our equity strategies were $18.5 million, down 12.2 percent compared to $21.1 million2022, the decrease in the corresponding period of 2016, due topre-tax margin on both a U.S. GAAP and adjusted basis was driven by lower average effective revenue yield. The average effective revenue yield for our equity strategies was 63 basis points for the nine months ended September 30, 2017, down from 71 basis points for the nine months ended September 30, 2016. Management fees from our MLP strategies increased 15.2 percent in the first nine months of 2017 to $21.4 million, compared with $18.5 million in the first nine months of 2016,levels and a higher compensation ratio. Additionally, adjusted pre-tax margin decreased due to higher average AUM.adjusted non-compensation expenses.
The negative segment pre-tax operating margin for the nine months ended September 30, 2017 was driven by the $114.4 million non-cash goodwill impairment charge. Excluding investment income on firm capital invested in our strategies, adjusted segment operating margin declined from 20.0 percent in the first nine months of 2016 to 10.9 percent in the first nine months of 2017, due to higher compensation and non-compensation ratios.
The following table summarizes the changes in our AUM for the periods presented:
|
| | | | | | | | | | | |
| | | | | | Twelve |
| | Nine Months Ended | | Months Ended |
| | September 30, | | September 30, |
| (Dollars in millions) | 2017 | | 2016 | | 2017 |
| Equity | | | | | |
| Beginning of period | $ | 4,115 |
| | $ | 4,954 |
| | $ | 3,878 |
|
| Net outflows | (832 | ) | | (1,379 | ) | | (784 | ) |
| Net market appreciation | 302 |
| | 303 |
| | 491 |
|
| End of period | $ | 3,585 |
| | $ | 3,878 |
| | $ | 3,585 |
|
| | | | | | |
| MLP | | | | | |
| Beginning of period | $ | 4,616 |
| | $ | 3,924 |
| | $ | 4,551 |
|
| Net outflows | (240 | ) | | (193 | ) | | (333 | ) |
| Net market appreciation/(depreciation) | (333 | ) | | 820 |
| | (175 | ) |
| End of period | $ | 4,043 |
| | $ | 4,551 |
| | $ | 4,043 |
|
| | | | | | |
| Total | | | | | |
| Beginning of period | $ | 8,731 |
| | $ | 8,878 |
| | $ | 8,429 |
|
| Net outflows | (1,072 | ) | | (1,572 | ) | | (1,117 | ) |
| Net market appreciation/(depreciation) | (31 | ) | | 1,123 |
| | 316 |
|
| End of period | $ | 7,628 |
| | $ | 8,429 |
| | $ | 7,628 |
|
Recent Accounting Pronouncements
Recent accounting pronouncements are set forth in Note 2 to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and are incorporated herein by reference.
Critical Accounting Policies
Our accounting and reporting policies comply with U.S. GAAP and conform to practices within the securities industry. The preparation of financial statements in compliance with U.S. GAAP and industry practices requires us to make estimates and assumptions that could materially affect amounts reported in our consolidated financial statements. Critical accounting policies are those policies that we believe to be the most important to the portrayal of our financial condition and results of operations and that require us to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by us to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical, including whether the estimates are significant to the consolidated financial statements taken as a whole, the nature of the estimates, the ability to readily validate the estimates with other information (e.g., third party or independent sources), the sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be used under U.S. GAAP.
We believe that of our significant accounting policies, the following are our critical accounting policies:
•Valuation of Financial Instruments
•Goodwill and Intangible Assets
•Compensation Plans
•Income Taxes
Our accounting policies related to goodwill and intangible assets are described below. See the "Critical Accounting Policies" section and Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 20162021 for further information on our other critical accounting policies. See also Note 2, "Accounting Policies and Pronouncements" in the notes to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for changes to our significant accounting policies, as well as the impact from the adoption of new accounting standards.
Goodwill and Intangible Assets
We record all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value. Determining the fair value of assets and liabilities acquired requires certain management estimates. At September 30, 2017, we had goodwill of $81.9 million, all of which relates to our capital markets segment. At September 30, 2017, we had intangible assets of $25.8 million, of which $11.7 million relates to our capital markets segment and $14.1 million relates to our asset management segment.
We are required to perform impairment tests of our goodwill and indefinite-life intangible assets annually and on an interim basis when circumstances exist that could indicate possible impairment. We have elected to test for goodwill impairment in the fourth quarter of each calendar year. We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after making an assessment, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if we conclude otherwise, then we are required to perform the two-step impairment test, which requires management to make judgments in determining what assumptions to use in the calculation. As discussed in Note 2, "Accounting Policies and Pronouncements" in the notes to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, we adopted new accounting guidance effective July 1, 2017 which eliminates the second step from the goodwill impairment test. Accordingly, we evaluate impairment charges based on the excess of a reporting unit’s carrying amount over its fair value. See Note 11 to our unaudited consolidated financial statements for additional information on our goodwill impairment testing.
The initial recognition of goodwill and other intangible assets and the subsequent quantitative impairment analysis involves significant judgment in determining the estimates of future cash flows, discount rates, economic forecast and other assumptions which are then used in acceptable valuation techniques, such as the market approach (earnings and/or transaction multiples) and/or the income approach (discounted cash flow method). Changes in these estimates and assumptions could have a significant impact on the fair value and any resulting impairment of goodwill. Our estimated cash flows, by their nature, are difficult to determine over an extended time period. Events and factors that may significantly affect the estimates include, among others, competitive forces and changes in revenue growth trends, cost structures, technology, and market conditions. To assess the reasonableness of cash flow estimates and validate assumptions used in our estimates, we review historical performance of the underlying assets or similar assets. In assessing the fair value of our reporting units, the volatile nature of the securities markets and our industry requires us to consider the business and market cycle and assess the stage of the cycle in estimating the timing and extent of future cash flows. In addition to discounted cash flows, we consider earnings multiples of comparable public companies and multiples of recent mergers and acquisitions transactions of similar businesses in our subsequent impairment analysis.
We identified impairment indicators in the third quarter of 2017 related to our asset management reporting unit and performed an interim goodwill impairment test as of July 31, 2017, which resulted in a non-cash goodwill impairment charge of $114.4 million. The impairment charge resulted from declining profitability in 2017 as decreases in revenues relating to higher fee product offerings have not been fully offset by new revenues on assets gained in lower fee product offerings. We believe the shift in revenue mix is attributable, in part, to the extended cycle of investors favoring passive investment vehicles over active management. The fair value of the asset management reporting unit was calculated using the income approach (discounted cash flow method based on revenue and EBITDA forecasts) and market approach (earnings multiples of comparable public companies), which are valuation techniques we believe market participants would use for the reporting unit.
We also evaluated the intangible assets (indefinite and definite-lived) related to the asset management reporting unit and concluded there was no impairment in the third quarter of 2017.
We anticipate completing our 2017 annual goodwill and intangible asset impairment testing for the capital markets reporting unit in the fourth quarter of 2017.
Liquidity, Funding and Capital Resources
LiquidityWe regularly monitor our liquidity position, which is of critical importance to us given the nature of our business. Insufficient liquidity resulting from adverse circumstances contributes to, and may be the cause of, financial institution failure. Accordingly, we regularly monitor our liquidity position and maintain a liquidity strategy designed to enable our business to continue to operate even under adverse circumstances, although there can be no assurance that our strategy will be successful under all circumstances. Insufficient liquidity resulting from adverse circumstances contributes to, and may be the cause of, financial institution failure.
The majority of our tangible assets consist of assets readily convertible into cash. Financial instruments and other inventory positions owned are stated at fair value and are generally readily marketable in most market conditions. Receivables and payables with brokers, dealers and clearing organizations usually settle within a few days. As part of our liquidity strategy, we emphasize diversification of funding sources to the extent possible while considering tenor and cost. Our assets are financed by our cash flows from operations, equity capital and our funding arrangements. The fluctuations in cash flows from financing activities are directly related to daily operating activities from our various businesses. One of our most important risk management disciplines is our ability to manage the size and composition of our balance sheet. While our asset base changes due to client activity, market fluctuations and business opportunities, the size and composition of our balance sheet reflect our overall risk tolerance, our ability to access stable funding sources and the amount of equity capital we hold.
Certain market conditions can impact the liquidity of our inventory positions, requiring us to hold larger inventory positions for longer than expected or requiring us to take other actions that may adversely impact our results.
A significant component of our employees’employees' compensation is paid in annual discretionary incentive compensation. The timing of these incentive compensation payments, which generally are made in February, has a significant impact on our cash position and liquidity.
Our acquisition of DBO Partners, which is expected to close in 2017, we initiated the paymentfourth quarter of a quarterly2022, will be funded through cash flows from operations.
Our dividend policy is intended to holdersreturn between 30 percent and 50 percent of our common stock.fiscal year adjusted net income to shareholders. Our board of directors determines the declaration and payment of dividends on a quarterly basis, and is free to change our dividend policy at any time.
Our board of directors declared the following dividends:dividends on shares of our common stock:
| | | | | | | | | | | | | | | | | | | | |
| Declaration Date | | Dividend Per Share | | Record Date | | Payment Date |
| Related to 2020: |
| February 4, 2021 | (1) | $ | 1.85 | | | March 3, 2021 | | March 12, 2021 |
| Related to 2021: |
| February 4, 2021 | | $ | 0.40 | | | March 3, 2021 | | March 12, 2021 |
| April 30, 2021 | | $ | 0.45 | | | May 28, 2021 | | June 11, 2021 |
| July 30, 2021 | | $ | 0.55 | | | August 27, 2021 | | September 10, 2021 |
| October 29, 2021 | (1) | $ | 3.00 | | | November 23, 2021 | | December 10, 2021 |
| October 29, 2021 | | $ | 0.55 | | | November 23, 2021 | | December 10, 2021 |
| February 10, 2022 | (1) | $ | 4.50 | | | March 2, 2022 | | March 11, 2022 |
| Related to 2022: |
| February 10, 2022 | | $ | 0.60 | | | March 2, 2022 | | March 11, 2022 |
| April 29, 2022 | | $ | 0.60 | | | May 27, 2022 | | June 10, 2022 |
| July 29, 2022 | | $ | 0.60 | | | August 26, 2022 | | September 9, 2022 |
| | | | | | |
| | | | | | |
|
| | | | | | | | |
| Declaration Date | | Dividend Per Share |
| | Record Date | | Payment Date |
| February 2, 2017 | | $ | 0.3125 |
| | February 20, 2017 | | March 13, 2017 |
| April 27, 2017 | | $ | 0.3125 |
| | May 26, 2017 | | June 15, 2017 |
| July 27, 2017 | | $ | 0.3125 |
| | August 28, 2017 | | September 15, 2017 |
| October 26, 2017 | | $ | 0.3125 |
| | November 29, 2017 | | December 15, 2017 |
We repurchase our common stock as part of our capital management strategy in order to offset the dilutive effect of our employee stock-based compensation awards over time and return capital to shareholders.
We had two share repurchase authorizations in place as of June 30, 2022. Effective August 14, 2015,May 6, 2022, our board of directors authorized the repurchase of up to $150.0 million in common shares through SeptemberDecember 31, 2024. At June 30, 2017. During the nine months ended September 30, 2017,2022, we repurchased 36,936 shares of our common stock at an average price of $67.62 per share for an aggregate purchase price of $2.5had $150.0 million related toremaining under this authorization. This authorization expired on September 30, 2017.
On August 10, 2017,Effective January 1, 2022, our board of directors authorized the repurchase of up to $150.0 million in common shares through SeptemberDecember 31, 2023. During the six months ended June 30, 2019. The2022, we repurchased 1,068,387 shares of our common stock at an average price of $133.79 per share for an aggregate purchase price of $142.9 million related to this authorization. At June 30, 2022, we had $7.1 million remaining under this authorization, became effective on September 30, 2017.for a combined $157.1 million remaining under both current authorizations.
We also purchase shares of common stock from restricted stock award recipients upon the award vesting or as recipients sell shares to meet their employment tax obligations. During the first nine monthshalf of 2017,2022, we purchased 308,801139,073 shares or $22.6$21.3 million of our common stock for this purpose.these purposes.
Leverage
The following table presents total assets, adjusted assets, total shareholders’shareholders' equity and tangible shareholders’common shareholders' equity with the resulting leverage ratios as of:ratios:
| | | | | | | | | | | |
| June 30, | | December 31, |
| (Dollars in thousands) | 2022 | | 2021 |
| Total assets | $ | 1,950,972 | | | $ | 2,565,307 | |
| Deduct: Goodwill and intangible assets | (378,316) | | | (347,286) | |
| Deduct: Right-of-use lease asset | (98,584) | | | (71,341) | |
| Deduct: Assets from noncontrolling interests | (184,797) | | | (168,675) | |
| Adjusted assets | $ | 1,289,275 | | | $ | 1,978,005 | |
| | | |
| Total shareholders' equity | $ | 1,177,635 | | | $ | 1,226,855 | |
| Deduct: Goodwill and intangible assets | (378,316) | | | (347,286) | |
| Deduct: Noncontrolling interests | (180,996) | | | (164,645) | |
| Tangible common shareholders' equity | $ | 618,323 | | | $ | 714,924 | |
| | | |
| Leverage ratio (1) | 1.7 | | | 2.1 | |
| | | |
| Adjusted leverage ratio (2) | 2.1 | | | 2.8 | |
|
| | | | | | | |
| | September 30, | | December 31, |
| (Dollars in thousands) | 2017 | | 2016 |
| Total assets | $ | 1,739,836 |
| | $ | 2,125,503 |
|
| Deduct: Goodwill and intangible assets | (107,623 | ) | | (233,452 | ) |
| Deduct: Assets from noncontrolling interests | (52,271 | ) | | (109,179 | ) |
| Adjusted assets | $ | 1,579,942 |
| | $ | 1,782,872 |
|
| | | | |
| Total shareholders' equity | $ | 786,785 |
| | $ | 816,266 |
|
| Deduct: Goodwill and intangible assets | (107,623 | ) | | (233,452 | ) |
| Deduct: Noncontrolling interests | (48,519 | ) | | (57,016 | ) |
| Tangible common shareholders' equity | $ | 630,643 |
| | $ | 525,798 |
|
| | | | |
| Leverage ratio (1) | 2.2 |
| | 2.6 |
|
| | | | |
| Adjusted leverage ratio (2) | 2.5 |
| | 3.4 |
|
| |
(1)
| Leverage ratio equals total assets divided by total shareholders’ equity. |
| |
(2)
| Adjusted leverage ratio equals adjusted assets divided by tangible common shareholders’ equity. |
(2)Adjusted leverage ratio equals adjusted assets divided by tangible common shareholders' equity.
Adjusted assets and tangible common shareholders’shareholders' equity are non-GAAP financial measures. Goodwill and intangible assets are subtracted from total assets and total shareholders’shareholders' equity in determining adjusted assets and tangible common shareholders’shareholders' equity, respectively, as we believe that goodwill and intangible assets do not constitute operating assets whichthat can be deployed in a liquid manner. The right-of-use lease asset is also subtracted from total assets in determining adjusted assets as it is not an operating asset that can be deployed in a liquid manner. Amounts attributed to noncontrolling interests are subtracted from total assets and total shareholders' equity in determining adjusted assets and tangible common shareholders' equity, respectively, as they represent assets and equity interests in consolidated entities that are not attributable, either directly or indirectly, to Piper JaffraySandler Companies. We view the resulting measure of adjusted leverage, also a non-GAAP financial measure, as a more relevant measure of financial risk when comparing financial services companies. Our adjusted leverage ratio decreased from December 31, 2016,2021, due to a decline in cash and cash equivalents driven by annual incentive compensation payments in the $114.4 million non-cash goodwill impairment charge recorded forfirst quarter of 2022 and repurchases of our common stock during the asset management reporting unit, as well as reduced asset levels resulting from our migration to a fully disclosed clearing model.first six months of 2022.
Funding and Capital Resources
The primary goal of our funding activities is to ensure adequate funding over a wide range of market conditions. Given the mix of our business activities, funding requirements are fulfilled through a diversified range of short-term and long-term financing. We attempt to ensure that the tenor of our borrowing liabilities equals or exceeds the expected holding period of the assets being financed. Our ability to support increases in total assets is largely a function of our ability to obtain funding from external sources. Access to these external sources, as well as the cost of that financing, is dependent upon various factors, including market conditions, the general availability of credit and credit ratings. We currently do not have a credit rating, which could adversely affect our liquidity and competitive position by increasing our financing costs and limiting access to sources of liquidity that require a credit rating as a condition to providing the funds.
In the third quarter of 2017, we migrated to a fully disclosed clearing model and are no longer self clearing. Pershing LLC ("Pershing") is our clearing broker dealer. The conversion provided us with a new funding source through Pershing and, as a result, changed our mix of funding sources.
Our day-to-day funding and liquidity is obtained primarily through the use of our clearing arrangement with Pershing commercial paper issuance, prime broker agreements,LLC ("Pershing"), a clearing arrangement with bank financing, and a bank linesline of credit, and is typically collateralized by our securities inventory. These funding sources are critical to our ability to finance and hold inventory, which is a necessary part of our institutional brokerage business. The majority of our inventory is liquid and is therefore funded by short-term facilities. Certain of these short-term facilities (i.e.,Our committed line and commercial paper) havehas been established to mitigate changes in the liquidity of our inventory based on changing market conditions. In the case of our committed line, itconditions, and is available to us regardless of changes in market liquidity conditions through the end of its term, although there may be limitations on the type of securities available to pledge. Our commercial paper program helps mitigate changes in market liquidity conditions given it is not an overnight facility, but provides funding with a term of 27 to 270 days. Our funding sources are also dependent on the types of inventory that our counterparties are willing to accept as collateral and the number of counterparties available. Funding is generally obtained at rates based upon the federal funds rate or the London Interbank Offer Rate.Offered Rate ("LIBOR").
Pershing Clearing Arrangement – We have established an arrangement to obtain financing from Pershing related to the majority of our trading activities. Under our fully disclosed clearing agreement, the majorityall of our securities inventories with the exception of convertible securities, and all of our customer activities are held by or cleared through Pershing. Financing under this arrangement is secured primarily by securities, and collateral limitations could reduce the amount of funding available under this arrangement. Our clearing arrangement activities are recorded net from trading activity and reported within receivables from or payables to brokers, dealers and clearing organizations. The funding is at the discretion of Pershing (i.e., uncommitted) and could be denied.denied without a notice period. Our fully disclosed clearing agreement includes a covenant requiring Piper JaffraySandler & Co., our U.S. broker dealer subsidiary, to maintain excess net capital of $120 million. At SeptemberJune 30, 2017,2022, we had $75.1less than $0.1 million of financing outstanding under this arrangement.
Commercial Paper ProgramClearing Arrangement with Bank Financing – Our U.S. broker dealer subsidiary, Piper Jaffray & Co., issues secured commercial paper to fund a portion of its securities inventory. This commercial paper is currently issued under two separate programs, CP Series A and CP Series II A, and is secured by different inventory classes, which is reflected inIn the interest rate paid on the respective program. The programs can issue commercial paper with maturities of 27 to 270 days. CP Series II A includes a revised covenant that requires Piper Jaffray & Co. to maintain excess net capital of $100 million. During the thirdsecond quarter of 2017,2021, we retired the CP Series III A program, and increased the maximum amount that may be issued under CP Series II A from $150 million to $200 million. The following table provides information about our commercial paper programs at September 30, 2017:
|
| | | | | | | | |
| (Dollars in millions) | | CP Series A | | CP Series II A |
| Maximum amount that may be issued | | $ | 300.0 |
| | $ | 200.0 |
|
| Amount outstanding | | — |
| | — |
|
We resumed issuing commercial paper in the fourth quarter of 2017.
Prime Broker Arrangements – We have established an arrangement to obtain overnight financing by a single prime broker related to certain strategic trading activities in municipal securities. Additionally, we have established a second overnight financing arrangement with another broker dealera U.S. branch of Canadian Imperial Bank of Commerce ("CIBC") related to our convertible securities inventories. Under this arrangement, our convertible securities inventories are cleared through a broker dealer affiliate of CIBC, and held and financed by CIBC. Our convertible securities inventories are generally economically hedged by the underlying common stock or the stock options of the underlying common stock. Financing under these arrangementsthis arrangement is secured primarily by convertible securities and collateral limitations could reduce the amount of funding available under these arrangements. Our prime broker financing activities are recorded net of receivables from trading activity.available. The funding is at the discretion of the prime brokersCIBC and could be denied subject to a notice period. This arrangement is reported within receivables from or payables to brokers, dealers, and clearing organizations, net of trading activity. At SeptemberJune 30, 2017,2022, we had $76.8$70.0 million of financing outstanding under these prime broker arrangements.this arrangement.
Committed LinesPrime Broker Arrangement – We electedpreviously had an overnight financing arrangement with a broker dealer related to decrease our convertible securities inventories. In the second quarter of 2021, we replaced this arrangement with the clearing arrangement with bank financing.
Committed Line – Our committed line from $250 million tois a one-year $200$100 million revolving secured credit facility in 2016 based on our liquidity needs and our back office conversion, completed in the third quarter of 2017, which provided us with an additional funding source from our clearing broker Pershing. We use our committed credit facility in the ordinary course of business to fund a portion of our daily operations, and the amount borrowed under the facility varies daily based on our funding needs.facility. Advances under this facility are secured by certain marketable securities. The facility includes a covenant that requires Piper JaffraySandler & Co. to maintain a minimum regulatory net capital of $120$120 million,, and the unpaid principal amount of all advances under the facility will be due on December 16, 2017.9, 2022. This credit facility has been in place since 2008 and we anticipate being able to renewrenewed the facility for another one-year term in the fourth quarter of 2017.2021. At SeptemberJune 30, 2017,2022, we had no advances against this line of credit.
Uncommitted LineRevolving Credit Facility – We use this uncommitted line in the ordinary course of business to fund a portion of our daily operations,Our parent company, Piper Sandler Companies, has an unsecured $65 million revolving credit facility with U.S. Bank N.A. The credit agreement will terminate on December 20, 2022, unless otherwise terminated, and the amount borrowed under our uncommitted line varies daily based on our funding needs. Our $85 million uncommitted secured line is dependent on having appropriate collateral, as determined by the bank agreement, to secure an advance under the line. Collateral limitations could reduce the amount of funding available under this secured line. Our uncommitted line is discretionary and is not a commitment by the bank to provide an advance under the line. More specifically, the line is subject to approval by the bank each time an advance is requested and advances may be denied, which may be particularly true during times of market stress or market perceptions ofa one-year extension exercisable at our exposures. We manage our relationship with the bank that provides this uncommitted facility in order to have appropriate levels of funding for our business.option. At SeptemberJune 30, 2017, we had 2022, there were no advances against this linecredit facility.
This credit facility includes customary events of credit.default and covenants that, among other things, requires Piper Sandler & Co. to maintain a minimum regulatory net capital of $120 million, limits our leverage ratio, requires maintenance of a minimum ratio of operating cash flow to fixed charges, and imposes certain limitations on our ability to make acquisitions and make payments on our capital stock. At June 30, 2022, we were in compliance with all covenants.
The following tables presenttable presents the average balances outstanding for our various funding sources by quarter for 20172022 and 2016, respectively.2021:
| | | | | | | | | | | | | | | |
| | | | | Average Balance for the
Three Months Ended |
| (Amounts in millions) | | | | | June 30, 2022 | | Mar. 31, 2022 |
| Funding source: | | | | | | | |
| Pershing clearing arrangement | | | | | $ | 19.7 | | | $ | 3.8 | |
| Clearing arrangement with bank financing | | | | | 83.3 | | | 110.3 | |
| Prime broker arrangement | | | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| Total | | | | | $ | 103.0 | | | $ | 114.1 | |
|
| | | | | | | | | | | |
| | Average Balance for the Three Months Ended |
| (Dollars in millions) | Sept. 30, 2017 | | June 30, 2017 | | Mar. 31, 2017 |
| Funding source: | | | | | |
| Pershing clearing arrangement | $ | 42.5 |
| | $ | — |
| | $ | — |
|
| Commercial paper | 30.3 |
| | 117.1 |
| | 137.7 |
|
| Prime broker arrangements | 87.7 |
| | 103.7 |
| | 127.2 |
|
| Short-term bank loans | 6.0 |
| | 67.1 |
| | 2.5 |
|
| Total | $ | 166.5 |
| | $ | 287.9 |
| | $ | 267.4 |
|
54
|
| | | | | | | | | | | | | | | |
| | Average Balance for the Three Months Ended |
| (Dollars in millions) | Dec. 31, 2016 | | Sept. 30, 2016 | | June 30, 2016 | | Mar. 31, 2016 |
| Funding source: | | | | | | | |
| Repurchase agreements | $ | 3.5 |
| | $ | 14.8 |
| | $ | 28.9 |
| | $ | 30.5 |
|
| Commercial paper | 165.8 |
| | 235.8 |
| | 279.7 |
| | 279.2 |
|
| Prime broker arrangements | 225.6 |
| | 200.6 |
| | 169.2 |
| | 159.0 |
|
| Short-term bank loans | 5.3 |
| | — |
| | 6.4 |
| | 0.8 |
|
| Total | $ | 400.2 |
| | $ | 451.2 |
| | $ | 484.2 |
| | $ | 469.5 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average Balance for the Three Months Ended |
| (Amounts in millions) | | | Dec. 31, 2021 | | Sept. 30, 2021 | | June 30, 2021 | | Mar. 31, 2021 |
| Funding source: | | | | | | | | | |
| Pershing clearing arrangement | | | $ | 4.1 | | | $ | 12.1 | | | $ | 5.2 | | | $ | 6.9 | |
| Clearing arrangement with bank financing | | | 92.7 | | | 84.2 | | | 49.9 | | | — | |
| Prime broker arrangement | | | — | | | — | | | 8.0 | | | 57.2 | |
| | | | | | | | | |
| | | | | | | | | |
| Total | | | $ | 96.8 | | | $ | 96.3 | | | $ | 63.1 | | | $ | 64.1 | |
The average funding in the thirdsecond quarter of 2017 decreased2022 increased to $166.5$103.0 million, compared with $287.9$63.1 million during the second quarter of 2017, due to a decrease in2021, primarily driven by our clearing arrangement with bank financing. The average inventory balances and the accumulation of cash from operations. Average funding decreased compared with $114.1 million during the first quarter of 2022, primarily due to the corresponding periodlower average balances of 2016 as we used cash from operations to reduce funding.convertible securities inventories.
The following table presents the maximum daily funding amount by quarter for 20172022 and 2016, respectively.2021:
| | | | | | | | | | | | | | |
| (Amounts in millions) | | 2022 | | 2021 |
| First Quarter | | $ | 366.3 | | | $ | 141.5 | |
| Second Quarter | | $ | 409.5 | | | $ | 306.2 | |
| Third Quarter | | | | $ | 228.1 | |
| Fourth Quarter | | | | $ | 170.3 | |
|
| | | | | | | | |
| (Dollars in millions) | | 2017 | | 2016 |
| First Quarter | | $ | 543.4 |
| | $ | 576.4 |
|
| Second Quarter | | $ | 538.3 |
| | $ | 669.7 |
|
| Third Quarter | | $ | 418.7 |
| | $ | 525.6 |
|
| Fourth Quarter | |
| | $ | 445.9 |
|
Long-Term Financing
Senior Notes
We have entered into variable andOur long-term financing consists of $125 million of Class B unsecured fixed rate senior notes with("Class B Notes"). The initial holders of the Class B Notes were certain entities advised by Pacific Investment Management Company ("PIMCO"). The following table presents the outstanding balance by note class:
|
| | | | | | | |
| | Outstanding Balance |
| | September 30, | | December 31, |
| (Dollars in thousands) | 2017 | | 2016 |
| Class A Notes | $ | — |
| | $ | 50,000 |
|
| Class C Notes | 125,000 |
| | 125,000 |
|
| Total senior notes | $ | 125,000 |
| | $ | 175,000 |
|
On October 8, 2015, we entered into a second amended and restated note purchase agreement ("Second Amended and Restated Note Purchase Agreement") under which we issued $125 million of fixed rate Class C Notes. The Class CB Notes bear interest at an annual fixed rate of 5.065.20 percent are payable semi-annually and mature on October 9, 2018.15, 2023. Interest is payable semi-annually. The unpaid principal amount is due in full on the maturity date and may not be prepaid. The $50 million of variable rate Class A Notes issued in 2014 were repaid in full on the May 31, 2017 maturity date.
The Second Amended and Restated Note Purchase Agreement includesClass B Notes include customary events of default and covenants that, among other things, require usPiper Sandler & Co. to maintain a minimum consolidated tangible net worth and minimum regulatory net capital, limit our leverage ratio and require maintenance of a minimum ratio of operating cash flow to fixed charges. At SeptemberJune 30, 2017,2022, we were in compliance with all covenants.
Contractual Obligations
Our contractual obligations have not materially changed from those reported in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016, except for our purchase commitments. On June 30, 2017, we entered into an agreement to move all of our self clearing broker dealer operations to a fully disclosed clearing model with Pershing.
|
| | | | | | | | | | | | | | | | | | | |
| | Remainder of | | 2018 | | 2020 | | 2022 and | | |
| (Dollars in millions) | 2017 | | - 2019 | | - 2021 | | thereafter | | Total |
| Purchase commitments | $ | 8.4 |
| | $ | 21.5 |
| | $ | 6.7 |
| | $ | 18.7 |
| | $ | 55.3 |
|
Purchase commitments include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase commitments with variable pricing provisions are included in the table based on the minimum contractual amounts. Certain purchase commitments contain termination or renewal provisions. The table reflects the minimum contractual amounts likely to be paid under these agreements assuming the contracts are not terminated.
Capital Requirements
As a registered broker dealer and member firm of the Financial Industry Regulatory Authority, Inc. ("FINRA"), Piper JaffraySandler & Co., our U.S. broker dealer subsidiary, is subject to the uniform net capital rule of the SEC and the net capital rule of FINRA. We have elected to use the alternative method permitted by the uniform net capital rule which requires that we maintain minimum net capital of $1.0 million.$1.0 million. Advances to affiliates, repayment of subordinated liabilities, dividend payments and other equity withdrawals are subject to certain approvals, notifications and other provisions of the uniform net capital rules. We expect that these provisions will not impact our ability to meet current and future obligations. At SeptemberJune 30, 2017,2022, our net capital under the SEC’sSEC's uniform net capital rule was $215.5$243.1 million, and exceeded the minimum net capital required under the SEC rule by $214.5$242.1 million.
Although we operate with a level of net capital substantially greater than the minimum thresholds established by FINRA and the SEC, a substantial reduction of our capital would curtail many of our Capital Marketscapital markets revenue producing activities.
Our committed short-term credit facility, revolving credit facility and our senior notes with PIMCOClass B Notes include covenants requiring Piper JaffraySandler & Co. to maintain a minimum regulatory net capital of $120 million. Secured commercial paper issued under CP Series II A includes a covenant that requires Piper Jaffray & Co. to maintain excess net capital of $100 million. Our fully disclosed clearing agreement with Pershing also includes a covenant requiring Piper JaffraySandler & Co. to maintain excess net capital of $120 million.
At SeptemberJune 30, 2017,2022, Piper JaffraySandler Ltd., our broker dealer subsidiary registered in the United Kingdom,U.K., was subject to, and was in compliance with, the capital requirements of the Prudential Regulation Authority and the Financial Conduct Authority pursuant to the Financial Services Act of 2012.
Piper JaffraySandler Hong Kong Limited is licensed by the Hong Kong Securities and Futures Commission, which is subject to the liquid capital requirements of the Securities and Futures (Financial Resources) Rule promulgated under the Securities and Futures Ordinance. At SeptemberJune 30, 2017,2022, Piper JaffraySandler Hong Kong Limited was in compliance with the liquid capital requirements of the Hong Kong Securities and TradeFutures Commission.
Off-Balance Sheet Arrangements
In the ordinary course of business we enter into various types of off-balance sheet arrangements. The following table summarizes the notional contract value of our off-balance sheet arrangements for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Expiration Per Period at December 31, | | Total Contractual Amount |
| | | | | | | 2025 | | 2027 | | | | June 30, | | December 31, |
| (Amounts in thousands) | 2022 | | 2023 | | 2024 | | - 2026 | | - 2028 | | Later | | 2022 | | 2021 |
| Customer matched-book derivative contracts (1) (2) | $ | 8,430 | | | $ | 1,080 | | | $ | 17,930 | | | $ | 11,210 | | | $ | 55,576 | | | $ | 1,482,346 | | | $ | 1,576,572 | | | $ | 1,630,056 | |
| Trading securities derivative contracts (2) | 124,200 | | | 77,750 | | | — | | | — | | | — | | | 9,375 | | | 211,325 | | | 65,925 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Investment commitments (3) | — | | | — | | | — | | | — | | | — | | | — | | | 73,839 | | | 80,562 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Expiration Per Period at December 31, | | Total Contractual Amount |
| |
| | | | | | 2020 | | 2022 | | | | September 30, | | December 31, |
| (Dollars in thousands) | 2017 | | 2018 | | 2019 | | - 2021 | | - 2023 | | Later | | 2017 | | 2016 |
| Customer matched-book derivative contracts (1) (2) | $ | 22,100 |
| | $ | — |
| | $ | 32,850 |
| | $ | 42,360 |
| | $ | 143,460 |
| | $ | 2,937,955 |
| | $ | 3,178,725 |
| | $ | 3,330,207 |
|
| Trading securities derivative contracts (2) | 301,100 |
| | 26,000 |
| | — |
| | — |
| | — |
| | 18,750 |
| | 345,850 |
| | 423,550 |
|
| Credit default swap index contracts (2) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,470 |
|
| Investment commitments (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 40,905 |
| | 22,776 |
|
| |
(1)
| Consists of interest rate swaps. We have minimal market risk related to these matched-book derivative contracts; however, we do have counterparty risk with one major financial institution, which is mitigated by collateral deposits. In addition, we have a limited number of counterparties (contractual amount of $181.8 million at September 30, 2017) who are not required to post collateral. The uncollateralized amounts, representing the fair value of the derivative contracts, expose us to the credit risk of these counterparties. At September 30, 2017, we had $20.8 million of credit exposure with these counterparties, including $15.4 million of credit exposure with one counterparty.
|
| |
(2)
| We believe the fair value of these derivative contracts is a more relevant measure of the obligations because we believe the notional or contract amount overstates the expected payout. At September 30, 2017 and December 31, 2016, the net fair value of these derivative contracts approximated $16.9 million and $24.0 million, respectively.
|
| |
(3)
| The investment commitments have no specified call dates. The timing of capital calls is based on market conditions and investment opportunities. |
(2)We believe the fair value of these derivative contracts is a more relevant measure of the obligations because we believe the notional or contract amount overstates the expected payout. At June 30, 2022 and December 31, 2021, the net fair value of these derivative contracts approximated $14.4 million and $19.8 million, respectively.
(3)The investment commitments have no specified call dates. The timing of capital calls is based on market conditions and investment opportunities.
Derivatives
Derivatives’Derivatives' notional or contract amounts are not reflected as assets or liabilities on our consolidated statements of financial condition. Rather, the fair value of the derivative transactions are reported on the consolidated statements of financial condition as assets or liabilities in financial instruments and other inventory positions owned and financial instruments and other inventory positions sold, but not yet purchased, as applicable. For a complete discussion of our activities related to derivative products, see Note 4 "Financial Instruments and Other Inventory Positions Owned and Financial Instruments and Other Inventory Positions Sold, but Not Yet Purchased," in the notes to our unaudited consolidated financial statements.statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Investment Commitments
We have investments, including those made as part of our merchant bankingalternative asset management activities, in various limited partnerships or limited liability companies that provide financingmake direct or makeindirect equity or debt investments in private equity companies. We commit capital and/or act as the managing partner of these entities.
We have committed capital of $73.8 million to certain entities and these commitments generally have no specified call dates.
Replacement of Interbank Offered Rates ("IBORs"), including LIBOR
Central banks and regulators in a number of major jurisdictions (e.g., U.S., U.K., European Union, Switzerland and Japan) have convened working groups to find, and implement the transition to, suitable replacements for IBORs. On March 5, 2021, the U.K. Financial Conduct Authority, which regulates LIBOR, formally announced the dates after which LIBOR will cease publication. The publication of certain USD LIBOR tenors and all non-USD LIBOR tenors ceased after December 31, 2021, which did not impact our operations. The remaining USD LIBOR tenors will continue publication until June 30, 2023.
Our limited number of contractual agreements, which use the remaining USD LIBOR tenors, are primarily within our customer matched-book derivatives portfolio. Substantially all of these instruments mature after June 30, 2023 and use interest rates based on LIBOR. The International Swaps and Derivatives Association ("ISDA") created the IBOR Fallback Protocol to facilitate amending references to benchmark interest rates in derivative contracts governed by Master ISDA Agreements. If a benchmark interest rate is no longer published, it will "fall back" to a new benchmark interest rate in those contracts where both counterparties have agreed to adhere to the protocol. We had $40.9 million of commitments outstanding at September 30, 2017, of which $33.3 million relateare working with our clients to affiliated merchant banking funds and $2.0 million relateensure adherence to an affiliated fund, which provides financing for senior living facilities.
the protocol. As a result, we do not expect the transition from the remaining USD LIBOR tenors to a replacement rate to have a significant impact on our operations.
Risk Management
Risk is an inherent part of our business. The principal risks we face in operating our business include: strategic risk, market risk, liquidity risk, credit risk, operational risk, human capital risk, and legal and regulatory risks. The extent to which we properly identify and effectively manage each of these risks is critical to our financial condition and profitability. We have a formal risk management process to identify, assess and monitor each risk and mitigating controls in accordance with defined policies and procedures. The risk management functions are independent of our business lines. Our management takes an active role in the risk management process, and the results are reported to senior management and the Boardboard of Directors.directors.
The audit committee of the Boardboard of Directorsdirectors oversees management’smanagement's processes for identifying and evaluating our major risks, and the policies, procedures and practices employed by management to govern its risk assessment and risk management processes. The nominating and governance committee of the Boardboard of Directorsdirectors oversees the Boardboard of Directors’directors' committee structures and functions as they relate to the various committees’committees' responsibilities with respect to oversight of our major risk exposures. With respect to these major risk exposures, the audit committee is responsible for overseeing management’smanagement's monitoring and control of our major risk exposures relating to market risk, credit risk, liquidity risk, legal and regulatory risk,risks, operational risk (including cybersecurity), and human capital risk relating to misconduct, fraud, and legal and compliance matters. Our compensation committee is responsible for overseeing management’smanagement's monitoring and control of our major risk exposures relating to compensation, organizational structure, and succession. Our Boardboard of Directorsdirectors is responsible for overseeing management’smanagement's monitoring and control of our major risk exposures related to our corporate strategy. Our Chief Executive Officer and Chief Financial Officer and Senior Vice President of Finance meet with the audit committee on a quarterly basis to discuss our market, liquidity, and legal and regulatory risks, and provide updates to the Boardboard of Directors,directors, audit committee, and compensation committee concerning the other major risk exposures on a regular basis.
We use internal committees to assist in governing risk and ensure that our business activities are properly assessed, monitored and managed. Our executive financial risk committees managecommittee manages our market, liquidity and credit risks, and overseerisks; oversees risk management practices related to these risks, including defining acceptable risk tolerances and approving risk management policies.policies; and responds to market changes in a dynamic manner. Membership is comprised of senior leadership, including but not limited to, our Chief Executive Officer, President, Chief Financial Officer, Senior Vice President of Finance, General Counsel, Treasurer, Head of Market and Credit Risk, Head of Public Finance,and Head of Fixed Income Services and Firm Investments and Trading and Head of Equities.Risk. Other committees that help evaluate and monitor risk include underwriting, leadership team and operating committees. These committees help manage risk by ensuring that business activities are properly managed and within a defined scope of activity. Our valuation committee,committees, comprised of members of senior management and risk management, provide oversight and overall responsibility for the internal control processes and procedures related to fair value measurements. Additionally, our operational risk committees address and monitor risk related to information systems and security, legal, regulatory and compliance matters, and third parties such as vendors and service providers.
With respect to market risk and credit risk, the cornerstone of our risk management process is daily communication among traders, trading department management and senior management concerning our inventory positions including those associated with our strategic trading activities, and overall risk profile. Our risk management functions supplement this communication process by providing their independent perspectives on our market and credit risk profile on a daily basis. The broader objectives of our risk management functions are to understand the risk profile of each trading area, to consolidate risk monitoring company-wide, to assist in implementing effective hedging strategies, to articulate large trading or position risks to senior management, and to ensure accurate fair values of our financial instruments.
Risk management techniques, processes and strategies may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, and any risk management failures could expose us to material unanticipated losses.
Strategic Risk
Strategic risk represents the risk associated with executive management failing to develop and execute on the appropriate strategic vision which demonstrates a commitment to our culture, leverages our core competencies, appropriately responds to external factors in the marketplace, and is in the best interests of our clients, employees and shareholders.
Our leadership team is responsible for managing our strategic risks. The Boardboard of Directorsdirectors oversees the leadership team in setting and executing our strategic plan.
Market Risk
Market risk represents the risk of losses, or financial volatility, that may result from the change in value of a financial instrument due to fluctuations in its market price. Our exposure to market risk is directly related to our role as a financial intermediary for our clients and to our market-making activities and our strategic trading activities. Market risks are inherent to both cash and derivative financial instruments. The scope of our market risk management policies and procedures includes all market-sensitive cash and derivative financial instruments.
Our different types of market risk include:
Interest Rate Risk — Interest rate risk represents the potential volatility from changes in market interest rates. We are exposed to interest rate risk arising from changes in the level and volatility of interest rates, changes in the slope of the yield curve, changes in credit spreads, and the rate of prepayments on our interest-earning assets (e.g., inventories) and our funding sources (e.g., short-term financing) which finance these assets. Interest rate risk is managed by selling short U.S. government securities, agency securities, corporate debt securities and derivative contracts. See Note 4 of to our accompanying unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our derivative contracts. Our interest rate hedging strategies may not work in all market environments and as a result may not be effective in mitigating interest rate risk. Also, we establish limits on our long fixed income securities inventory, monitor these limits on a daily basis and manage within those limits. Our limits include but are not limited to the notional levelfollowing: position and concentration size, dollar duration (i.e., DV01), credit quality and aging.
We estimate that a parallel 50 basis point adverse change in the market would result in a decrease of approximately $0.3 million in the carrying value of our fixed income securities inventory as of June 30, 2022, including the effect of the hedging transactions.
We also measure and monitor the aging and turnover of our long fixed income securities inventory. Turnover is evaluated based on a five-day average by category of security. The vast majority of our fixed income securities inventory generally turns over within three weeks.
In addition to the measures discussed above, we monitor and manage net positions within those limits.market risk exposure through evaluation of spread DV01 and the MMD basis risk for municipal securities to movements in U.S. treasury securities. All metrics are aggregated by asset concentration and are used for monitoring limits and exception approvals. In times of market volatility, we may also perform ad hoc stress tests and scenario analysis as market conditions dictate.
Equity Price Risk — Equity price risk represents the potential loss in value due to adverse changes in the level or volatility of equity prices. We are exposed to equity price risk through our trading activities primarily in the U.S. market. We attempt to reduce the risk of loss inherent in our market-making and in our inventory of equity securities by establishing limits on the notional level of our long inventory, monitoring these limits on a daily basis, and by managing net position levels within those limits.
Foreign Exchange Risk — Foreign exchange risk represents the potential volatility to earnings or capital arising from movement in foreign exchange rates. A modest portion of our business is conducted in currencies other than the U.S. dollar, and changes in foreign exchange rates relative to the U.S. dollar can therefore affect the value of non-U.S. dollar net assets, revenues and expenses. A change in the foreign currency rates could create either a foreign currency transaction gain/loss (recorded in our consolidated statements of operations) or a foreign currency translation adjustment (recorded to accumulated other comprehensive income/ (loss) within the shareholders’equity section of our consolidated statements of financial condition and other comprehensive income/ (loss) within the consolidated statements of comprehensive income).
Value-at-Risk ("VaR")
We use the statistical technique known as VaR to measure, monitor and review the market risk exposures in our trading portfolios. VaR is the potential loss in value of our trading positions, excluding noncontrolling interests, due to adverse market movements over a defined time horizon with a specified confidence level. We perform a daily VaR analysis on substantially all of our trading positions, including fixed income, equities, convertible bonds, mortgage-backed securities and all associated economic hedges. These positions encompass both customer-related and strategic trading activities. A VaR model provides a common metric for assessing market risk across business lines and products. Changes in VaR between reporting periods are generally due to changes in levels of risk exposure, volatilities and/or correlations among asset classes and individual securities.
We use a Monte Carlo simulation methodology for VaR calculations. We believe this methodology provides VaR results that properly reflect the risk profile of all our instruments, including those that contain optionality, and also accurately models correlation movements among all of our asset classes. In addition, it provides improved tail results as there are no assumptions of distribution, and can provide additional insight for scenario shock analysis.
Model-based VaR derived from simulation has inherent limitations including: reliance on historical data to predict future market risk; VaR calculated using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or offset with hedges within one day; and published VaR results reflect past trading positions while future risk depends on future positions.
The modeling of the market risk characteristics of our trading positions involves a number of assumptions and approximations. While we believe that these assumptions and approximations are reasonable, different assumptions and approximations could produce materially different VaR estimates. When comparing our VaR numbers to those of other firms, it is important to remember that different methodologies, assumptions and approximations could produce significantly different results.
The following table quantifies the model-based VaR simulated for each component of market risk for the periods presented, which are computed using the past 250 days of historical data. When calculating VaR we use a 95 percent confidence level and a one-day time horizon. This means that, over time, there is a one in 20 chance that daily trading net revenues will fall below the expected daily trading net revenues by an amount at least as large as the reported VaR. Shortfalls on a single day can exceed reported VaR by significant amounts. Shortfalls can also accumulate over a longer time horizon, such as a number of consecutive trading days. Therefore, there can be no assurance that actual losses occurring on any given day arising from changes in market conditions will not exceed the VaR amounts shown below or that such losses will not occur more than once in a 20-day trading period.
|
| | | | | | | |
| | September 30, | | December 31, |
| (Dollars in thousands) | 2017 | | 2016 |
| Interest Rate Risk | $ | 740 |
| | $ | 696 |
|
| Equity Price Risk | 82 |
| | 41 |
|
| Diversification Effect (1) | (57 | ) | | (26 | ) |
| Total Value-at-Risk | $ | 765 |
| | $ | 711 |
|
| |
(1)
| Equals the difference between total VaR and the sum of the VaRs for the two risk categories. This effect arises because the two market risk categories are not perfectly correlated. |
We view average VaR over a period of time as more representative of trends in the business than VaR at any single point in time. The table below illustrates the daily high, low and average VaR calculated for each component of market risk during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
|
| | | | | | | | | | | |
| (Dollars in thousands) | High | | Low | | Average |
| For the Nine Months Ended September 30, 2017 | | | | | |
| Interest Rate Risk | $ | 1,235 |
| | $ | 480 |
| | $ | 769 |
|
| Equity Price Risk | 178 |
| | 32 |
| | 87 |
|
| Diversification Effect (1) | | | | | (62 | ) |
| Total Value-at-Risk | $ | 1,244 |
| | $ | 506 |
| | $ | 794 |
|
|
| | | | | | | | | | | |
| (Dollars in thousands) | High | | Low | | Average |
| For the Year Ended December 31, 2016 | | | | | |
| Interest Rate Risk | $ | 990 |
| | $ | 251 |
| | $ | 533 |
|
| Equity Price Risk | 412 |
| | 6 |
| | 150 |
|
| Diversification Effect (1) | | | | | (72 | ) |
| Total Value-at-Risk | $ | 1,049 |
| | $ | 362 |
| | $ | 611 |
|
| |
(1)
| Equals the difference between total VaR and the sum of the VaRs for the two risk categories. This effect arises because the two market risk categories are not perfectly correlated. Because high and low VaR numbers for these risk categories may have occurred on different days, high and low numbers for diversification benefit would not be meaningful. |
Trading losses exceeded our one-day VaR on one occasion during the first nine months of 2017.
The aggregate VaR as of September 30, 2017 was higher than the reported VaR on December 31, 2016. The increase in VaR was due to increased average inventory levels in asset classes that are accretive to VaR in the first nine months of 2017, compared to the end of 2016.
In addition to VaR, we also employ additional measures to monitor and manage market risk exposure including net market position, duration exposure, option sensitivities, and inventory turnover. All metrics are aggregated by asset concentration and are used for monitoring limits and exception approvals. In times of market volatility, we also perform ad hoc stress tests and scenario analysis as market conditions dictate. Unlike our VaR, which measures potential losses within a given confidence level, stress scenarios do not have an associated implied probability. Rather, stress testing is used to estimate the potential loss from market moves outside our VaR confidence levels.
Liquidity Risk
Liquidity risk is the risk that we are unable to timely access necessary funding sources in order to operate our business, as well as the risk that we are unable to timely divest securities that we hold in connection with our market-making and sales and trading, and strategic trading activities. We are exposed to liquidity risk in our day-to-day funding activities, by holding potentially illiquid inventory positions and in our role as a remarketing agent for variable rate demand notes.
See the section entitled "Liquidity, Funding and Capital Resources" in Part I, Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," in this Quarterly Report on Form 10-Q for information regarding our liquidity and how we manage liquidity risk.
Our inventory positions including those associated with strategic trading activities, subject us to potential financial losses from the reduction in value of illiquid positions. Market risk can be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Depending on the specific security, the structure of the financial product, and/or overall market conditions, we may be forced to hold a security for substantially longer than we had planned or forced to liquidate into a challenging market if funding becomes unavailable.
See the section entitled "Liquidity, Funding and Capital Resources" for information regarding our liquidity and how we manage liquidity risk.
Credit Risk
Credit risk refers to the potential for loss due to the default or deterioration in credit quality of a counterparty, customer, borrower or issuer of securities we hold in our trading inventory. The nature and amount of credit risk depends on the type of transaction, the structure and duration of that transaction and the parties involved. Credit risk also results from an obligor's failure to meet the terms of any contract with us or otherwise fail to perform as agreed. This may be reflected through issues such as settlement obligations or payment collections.
A key tenet of our risk management procedures related to credit risk is the daily monitoring of the credit quality of our long fixed income securities inventory. These rating trends and the credit quality mix are regularly reviewed with the executive financial risk committee. The following table summarizes the credit rating for our long corporate fixed income, municipal (taxable and tax-exempt), and U.S. government and agency securities as a percentage of the total of these asset classes as of June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| AAA | | AA | | A | | BBB | | BB | | Not Rated | | |
| Corporate fixed income securities | — | % | | 1.1 | % | | 0.6 | % | | 0.4 | % | | — | % | | — | % | | |
| Municipal securities - taxable and tax-exempt | 10.9 | % | | 57.7 | % | | 13.3 | % | | 1.2 | % | | — | % | | 3.6 | % | | |
| U.S. government and agency securities | — | % | | 11.0 | % | | 0.1 | % | | — | % | | — | % | | 0.1 | % | | |
| 10.9 | % | | 69.8 | % | | 14.0 | % | | 1.6 | % | | — | % | | 3.7 | % | | |
Convertible and preferred securities are excluded from the table above as they are typically unrated.
Our different types of credit risk include:
Credit Spread Risk — Credit spread risk arises from the possibility that changes in credit spreads will affect the value of financial instruments. Credit spreads represent the credit risk premiums required by market participants for a given credit quality (e.g., the additional yield that a debt instrument issued by a AA-rated entity must produce over a risk-free alternative). Changes in credit spreads result from potential changes in an issuer’sissuer's credit rating or the market’smarket's perception of the issuer’s credit worthiness.issuer's creditworthiness. We are exposed to credit spread risk with the debt instruments held in our trading inventory, including those held for strategic trading activites.inventory. We enter into transactions to hedge our exposure to credit spread risk through the use ofwith derivatives and certain other financial instruments. These hedging strategies may not work in all market environments and as a result may not be effective in mitigating credit spread risk.
Deterioration/Default Risk — Deterioration/default risk represents the risk due to an issuer, counterparty or borrower failing to fulfill its obligations. We are exposed to deterioration/default risk in our role as a trading counterparty to dealers and customers, as a holder of securities, and as a member of exchanges. The risk of default depends on the creditworthiness of the counterparty and/or issuer of the security. We mitigate this risk by establishing and monitoring individual and aggregate position limits for each counterparty relative to potential levels of activity, holding and marking to market collateral on certain transactions. Our risk management functions also evaluate the potential risk associated with institutional counterparties with whom we hold derivatives, TBAs and other documented institutional counterparty agreements that may give rise to credit exposure.
Collections Risk — Collections risk arises from ineffective management and monitoring of collecting outstanding debts and obligations, including those related to our customer trading activities and margin lending.activities. Our client activities involve the execution, settlement and financing of various transactions. Client activities are transacted on a delivery versus payment, cash or margin basis. Our credit exposure to institutional client business is mitigated by the use of industry-standard delivery versus payment through depositories and clearing banks. Credit exposure associated with our customer margin accounts in the U.S. is monitored daily. Our risk management functions have credit risk policies establishing appropriate credit limits and collateralization thresholds for our customers utilizing margin lending.and counterparties.
Concentration Risk— Concentration risk is the risk due to concentrated exposure to a particular product; individual issuer, borrower or counterparty; financial instrument; or geographic area. We are subject to concentration risk if we hold large individual securities positions, execute large transactions with individual counterparties or groups of related counterparties, or make substantial underwriting commitments. Concentration risk can occur by industry, geographic area or type of client. Securities purchased under agreements to resell consist primarily of securities issued by the U.S. government or its agencies. The counterparties to these agreements typically are primary dealers of U.S. government securities and major financial institutions. Inventory and investment positions taken and commitments made, including underwritings, may result in exposure to individual issuers and businesses. Potential concentration risk is carefully monitored through review of counterparties and borrowers and is managed through the use ofusing policies and limits established by senior management.
We have concentrated counterparty credit exposure with fivefour non-publicly rated entities totaling $20.8$14.0 million at SeptemberJune 30, 2017.2022. This counterparty credit exposure is part of our matched-book derivative program related to our public finance business, consisting primarily of interest rate swaps. One derivative counterparty represents 74.3represented 65.0 percent,, or $15.4$9.1 million,, of this exposure. Credit exposure associated with our derivative counterparties is driven by uncollateralized market movements in the fair value of the interest rate swap contracts and is monitored regularly by our financial risk committee. We attempt to minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by senior management.
Operational Risk
Operational risk is the risk of loss, or damage to our reputation, resulting from inadequate or failed processes, people and systems or from external events. We rely on the ability of our employees and our systems, both internal and at computer centers operated by third parties, to process a large number of transactions. Our systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control. In the event of a breakdown or improper operation of our systems or improper action by our employees or third party vendors, we could suffer financial loss, a disruption of our businesses, regulatory sanctions and damage to our reputation. We also face the risk of operational failure or termination of our relationship with any of the exchanges, clearing houses, fully disclosed clearing firms, or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and manage our exposure to risk.
Our operations rely on secure processing, storage and transmission of confidential and other information in our internal and outsourced computer systems and networks. Our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, internal misconduct or inadvertent errors and other events that could have an information security impact. The occurrence of one or more of these events, which we have experienced, could jeopardize our or our clients' or counterparties' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients', our counterparties' or third parties' operations. We take protective measures and endeavor to modify them as circumstances warrant.
In order to mitigate and control operational risk, we have developed and continue to enhance policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization. Important aspects of these policies and procedures include segregation of duties, management oversight, internal control over financial reporting and independent risk management activities within such functions as Risk Management, Compliance, Operations, Internal Audit, Treasury, Finance, Information Technology and Legal. Internal Audit oversees, monitors, evaluates, analyzes and reports on operational risk across the firm. We also have business continuity plans in place that we believe will cover critical processes on a company-wide basis, and redundancies are built into our systems as we have deemed appropriate. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our various businesses are operating within established corporate policies and limits.
In the third quarter of 2017, we migrated toWe operate under a fully disclosed clearing model for all of our selfsecurities inventories with the exception of convertible securities, and for all of our client clearing operations.activities. In a fully disclosed clearing model, we act as an introducing broker for client transactions and rely on Pershing, our clearing broker dealer, to facilitate clearance and settlement of our clients' securities transactions. The migration process introduced unique risks that could have caused disruptions inclearing services provided by Pershing are critical to our business or createdoperations, and similar to other unexpected capital charges or losses. We had preventative measures in place, including a project governance committee comprised of members of senior management, as well as senior management at ourservices performed by third party partner. In order to mitigate and control operational risk inherent in the migration, we had developed procedures specificvendors, any failure by Pershing with respect to the project implementation process, including parallel system operations, mock conversion testing,services we rely upon Pershing to provide could cause financial loss, significantly disrupt our business, damage our reputation, and ongoing monitoring and reporting to members of the project governance committee. We also had theadversely affect our ability to obtain additional methods of financing from existing creditors in the event unknown capital charges arose.serve our clients and manage our exposure to risk.
Human Capital Risk
Our business is a human capital business and our success is dependent upon the skills, expertise and performance of our employees. Human capital risks represent the risks posed if we fail to attract and retain qualified individuals who are motivated to serve the best interests of our clients, thereby serving the best interests of our company. Attracting and retaining employees depends, among other things, on our company's culture, management, work environment, geographic locations and compensation. There are risks associated with the proper recruitment, development and rewards of our employees to ensure quality performance and retention.
Legal and Regulatory Risk
Legal and regulatory risk includes the risk of non-compliance with applicable legal and regulatory requirements and loss to our reputation we may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. We are generally subject to extensive regulation in the various jurisdictions in which we conduct our business. We have established procedures that are designed to ensure compliance with applicable statutory and regulatory requirements, such as public company reporting obligations, regulatory net capital requirements, sales and trading practices, potential conflicts of interest, use and safekeeping of customer funds and securities, anti-money laundering, privacy and
recordkeeping. We have also established procedures that are designed to require that our policies relating to ethics and business conduct are followed. The legal and regulatory focus on the financial services industry presents a continuing business challenge for us.
Our business also subjects us to the complex income tax laws of the jurisdictions in which we have business operations, and these tax laws may be subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. We must make judgments and interpretations about the application of these inherently complex tax laws when determining the provision for income taxes.
Effects of Inflation
Because our assets are liquid and generally short-term in nature, they are not significantly affected by inflation. However, the rate of inflation affects our expenses, such as employee compensation, office space leasing costs, and communications charges and travel costs, which may not be readily recoverable in the price of services we offer to our clients. To the extent inflation results in rising interest rates and has adverse effects upon the securities markets, it may adversely affect our financial position and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information under the caption "Risk Management" in Part I, Item 2, "Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations," in this Quarterly Report on Form 10-Q is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)1934, as amended (the "Exchange Act")). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (a) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange CommissionSEC rules and forms and (b) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding disclosure.
During the thirdsecond quarter of our fiscal year ending December 31, 2017, we migrated to a fully disclosed clearing model for all of our self clearing broker dealer operations. Management believes this conversion may constitute a2022, there was no change in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Other than as described above, there were no other changes in our system of internal control over financial reporting during the third quarter of our fiscal year ending December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The discussion of our business and operations should be read together with the legal proceedings contained in Part I, Item 3 "Legal Proceedings" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2021 is incorporated herein by reference.
ITEM 1A. RISK FACTORS.
The discussion of our business and operations should be read together with the risk factors contained in Part I, Item 1A of"Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as updated in our subsequent reports on Form 10-Q filed with the SEC.2021. These risk factors describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. The following information updates
There have been no material changes to the risk factors fromdisclosed under Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2021.
The use of estimates and valuations in measuring fair value involve significant estimation and judgment by management.
We make various estimates that affect reported amounts and disclosures. Broadly, those estimates are used in measuring fair value of certain financial instruments, investments in private companies, accounting for goodwill and intangible assets, establishing provisions for potential losses that may arise from litigation, and regulatory proceedings and tax examinations. Estimates are based on available information and judgment. Therefore, actual results could differ from our estimates and that difference could have a material effect on our consolidated financial statements. With respect to accounting for goodwill, we complete our annual goodwill and intangible asset impairment testing in the fourth quarter of each year or earlier if goodwill impairment indicators are present. Impairment charges resulting from this valuation analysis could materially adversely affect our results of operations. In 2016, we recorded an $82.9 million non-cash impairment charge to reduce the carrying value of the goodwill associated with our Asset Management segment following significant net client outflows of AUM in 2016, primarily from our value equity strategies, due to investment performance below benchmarks and an extended cycle of investors favoring passive investment vehicles over active management. Throughout 2017, our Asset Management segment has experienced a further decline in profitability as revenues have decreased in product offerings with higher management fees, which has not been fully offset with earnings from new product offerings. As a result, we identified impairment indicators in the third quarter of 2017 related to our Asset Management segment, and performed an interim goodwill impairment test as of July 31, 2017, which resulted in a non-cash goodwill impairment charge of $114.4 million.
Financial instruments and other inventory positions owned, and financial instruments and other inventory positions sold but not yet purchased, are recorded at fair value, and unrealized gains and losses related to these financial instruments are reflected on our consolidated statements of operations. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments' complexity. Difficult market environments, such as those experienced in 2008, may cause financial instruments to become substantially more illiquid and difficult to value, increasing the use of valuation models. Our future results of operations and financial condition may be adversely affected by the valuation adjustments that we apply to these financial instruments.
Investments in private companies are valued based on an assessment of each underlying security, considering rounds of financing, third party transactions and market-based information, including comparable company transactions, trading multiples (e.g., multiples of revenue and EBITDA) and changes in market outlook, among other factors. These valuation techniques require significant management estimation and judgment.
A failure to protect our computer systems, networks and information, and our clients’ information, against cyber attacks, data breaches, and similar threats could impair our ability to conduct our businesses, result in the disclosure, theft or destruction of confidential information, damage our reputation and cause significant financial and legal exposure.
Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. There have been several highly publicized cases involving financial services companies, consumer-based companies and other companies, as well as governmental and political organizations, reporting breaches in the security of their websites, networks or other systems. Some of the publicized breaches have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, including through the introduction of computer viruses or malware, cyberattacks and other means. There have also been several highly publicized cases where hackers have requested "ransom" payments in exchange for not disclosing customer information.
A successful penetration or circumvention of the security of our systems could cause serious negative consequences for us, including significant disruption of our operations and those of our clients, customers and counterparties; misappropriation of our confidential information or that of our clients, customers, counterparties or employees; or damage to our computers or systems and those of our clients, customers and counterparties; and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure and reputational harm, all of which could have a material adverse effect on us.
We must continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption. Despite our efforts to ensure the integrity of our systems and information, we have not been and may not be able to anticipate, detect or implement effective preventive measures against all cyber threats, especially because the techniques used are increasingly sophisticated, change frequently, and are often not recognized until months after the attack. Cyber attacks can originate from a variety of sources, including third parties who are affiliated with foreign governments or employees acting negligently or in a manner adverse to our interests. Third parties may seek to gain access to our systems either directly or using equipment or security passwords belonging to employees, customers, third-party service providers or other users of our systems. In addition, due to our interconnectivity with third-party vendors, central agents, exchanges, clearing houses and other financial institutions, we could be adversely impacted if any of them is subject to a successful cyber attack or other information security event.
Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks have been and may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities, exposures, or information security events. Due to the complexity and interconnectedness of our systems, the process of enhancing our protective measures can itself create a risk of systems disruptions and security issues.
The increased use of cloud technologies can heighten these and other operational risks. Certain aspects of the security of such technologies are unpredictable or beyond our control, and this lack of transparency may inhibit our ability to discover a failure by cloud service providers to adequately safeguard their systems and prevent cyber attacks that could disrupt our operations and result in misappropriation, corruption or loss of confidential and other information. In addition, there is a risk that encryption and other protective measures, despite their sophistication, may be defeated, particularly to the extent that new computing technologies vastly increase the speed and computing power available.
Legislative and regulatory proposals could significantly curtail the revenue from certain products that we currently provide or otherwise have a material adverse effect on our results of operations.
Proposed changes in laws or regulations relating to our business could decrease, perhaps significantly, the revenue that we receive from certain products or services that we provide, or otherwise have a material adverse effect on our results of operations. For example, proposed legislation brought under consideration by the U.S. House of Representatives in November 2017 would reduce the income tax rates paid by U.S. corporations, as well as limit certain other deductions that U.S. corporations can take. Although a reduction in overall corporate tax rates would generally be positive for our results of operations, it would cause us to incur a one-time non-cash write-off of our existing deferred tax assets based on the proposed lower rate. This write-off could be significant (i.e., $50 to $55 million) based on the tax rates currently proposed.
In addition, the U.S. House of Representatives’ proposed tax reform legislation contains provisions that would eliminate advance refunding bonds and the tax exemption currently available for certain private activity bonds. Advance refunding bonds are those issued by a local or state government to refinance outstanding bonds before the original bonds mature or are callable in order to take advantage of lower borrowing costs. Tax-exempt private activity bonds are bonds issued by or on behalf of a local or state government for the purpose of financing facilities owned or used by private entities or 501(c)(3) organizations, including non-profit hospitals, universities, and multifamily and senior living housing developers. Our public finance investment banking business receives significant revenues as a result of underwriting activity in connection with debt issuances by government and non-profit clients, primarily on a tax-exempt basis. If advance refunding bonds and the tax exemption for certain private activity bonds are eliminated, our public finance business would be adversely effected to the extent that the elimination reduces the number of bond offerings, or those bond offerings are instead completed on a taxable basis and we are not able to compete effectively to serve as underwriter for those bonds. Also, federal law currently allows investors in debt issuances by government and non-profit entities to exclude the bond interest for federal income tax purposes, resulting in lower interest expense for the issuer as compared to a taxable financing. As the U.S. House of Representatives and U.S. Senate considers tax reform legislation, any other changes to, or a reduction or elimination of tax-exempt bond interest, or a reduction in individual income tax rates, could negatively impact the value of the municipal securities we hold in our securities inventory as well as our public finance investment banking business
more generally, which would negatively impact the results of operations for these businesses. At this time, however, it is not possible to ascertain which provisions will be included in a final legislative package or whether the legislation will pass at all and, therefore, we cannot estimate the total effect that these changes, if enacted, may have on our financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The table below sets forth the information with respect to purchases made by or on behalf of Piper JaffraySandler Companies or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934)Act), of our common stock during the quarter ended SeptemberJune 30, 2017.2022.
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| | | | | | | Total Number of Shares | | Approximate Dollar |
| | | | | | | Purchased as Part of | | Value of Shares Yet to be |
| | | Total Number of | | Average Price | | Publicly Announced | | Purchased Under the |
| Period | | Shares Purchased | | Paid per Share | | Plans or Programs | | Plans or Programs (1) |
| Month #1 | | | | | | | | | |
| (April 1, 2022 to April 30, 2022) | | — | | | $ | — | | | — | | | $ | 57 | | million |
| Month #2 | | | | | | | | | |
| (May 1, 2022 to May 31, 2022) | | 284,834 | | (2) | $ | 124.02 | | | 282,201 | | | $ | 172 | | million |
| Month #3 | | | | | | | | | |
| (June 1, 2022 to June 30, 2022) | | 133,157 | | | $ | 112.63 | | | 133,157 | | | $ | 157 | | million |
| Total | | 417,991 | | | $ | 120.39 | | | 415,358 | | | $ | 157 | | million |
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| (1) | We had two share repurchase authorizations in place as of June 30, 2022. Effective January 1, 2022, our board of directors authorized the repurchase of up to $150.0 million of common stock through December 31, 2023 (the "January 2022 Authorization"). Effective May 6, 2022, our board of directors authorized the repurchase of up to $150.0 million of common stock through December 31, 2024 (the "May 2022 Authorization"). All shares of common stock repurchased under such authorizations during the quarter ended June 30, 2022 were made under the January 2022 Authorization. |
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| (2) | Consists of 282,201 shares of common stock repurchased on the open market pursuant to a 10b5-1 plan established with an independent agent at an average price of $124.01 per share, and 2,633 shares of common stock withheld from recipients of restricted stock to pay taxes upon the vesting of the restricted stock at an average price of $125.58 per share. |
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| | | | | | | Total Number of Shares | | Approximate Dollar |
| | | | | | | Purchased as Part of | | Value of Shares Yet to be |
| | | Total Number of | | Average Price | | Publicly Announced | | Purchased Under the |
| Period | | Shares Purchased | | Paid per Share | | Plans or Programs | | Plans or Programs (1) |
| Month #1 | | | | | | | | | |
| (July 1, 2017 to July 31, 2017) | | 12,619 |
| | $ | 64.00 |
| | — |
| | $ | 70 |
| million |
| Month #2 | | | | | | | | | |
| (August 1, 2017 to August 31, 2017) | | 2,825 |
| | $ | 57.75 |
| | — |
| | $ | 70 |
| million |
| Month #3 | | | | | | | | | |
| (September 1, 2017 to September 30, 2017) | | 9,406 |
| | $ | 52.96 |
| | 9,406 |
| | $ | 150 |
| million |
| Total | | 24,850 |
| | $ | 59.11 |
| | 9,406 |
| | $ | 150 |
| million |
| |
(1)
| Effective August 14, 2015, our board of directors authorized the repurchase of up to $150.0 million of common stock through September 30, 2017. On August 10, 2017, our board of directors authorized the repurchase of up to $150.0 million of common stock, effective from September 30, 2017 through September 30, 2019. There were no share repurchases under the authorization that became effective on September 30, 2017. |
ITEM 6. EXHIBITS.
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| Exhibit Index |
| Exhibit | | | | Method |
| Number | | Description | | of Filing |
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| 3.1 | | | | (1) |
| 3.2 | | | | (2) |
| 3.3 | | | | (3) |
| 10.1 | | | | Filed herewith |
| 31.1 | | | | Filed herewith |
| 31.2 | | | | Filed herewith |
| 32.1 | | | | Furnished herewith |
| 101 | | The following financial information from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements. | | Filed herewith |
| 104 | | The cover page from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in iXBRL. | | Filed herewith |
_______________________
(1)Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2007, filed with the SEC on August 3, 2007, and incorporated herein by reference.
(2)Filed as Exhibit 3.1 to the Company's Current Report on Form 8-K, filed with the SEC on January 6, 2020, and incorporated herein by reference.
(3)Filed as Exhibit 3.2 to the Company's Current Report on Form 8-K, filed with the SEC on January 6, 2020, and incorporated herein by reference.
† This exhibit is a management contract or compensatory plan or agreement.
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| Exhibit | | | | Method |
| Number | | Description | | of Filing |
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| 4.1 | | | | Filed herewith |
| 4.2 | | | | (1) |
| 4.3 | | | | (2) |
| 31.1 | | | | Filed herewith |
| 31.2 | | | | Filed herewith |
| 32.1 | | | | Filed herewith |
| 101 | | Interactive data files pursuant to Rule 405 Registration S-T: (i) the Consolidated Statements of Financial Condition as of September 30, 2017 and December 31, 2016, (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016, (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 and (v) the notes to the Consolidated Financial Statements. | | Filed herewith |
_________________
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(1) | Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2017, and incorporated by reference herein. |
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(2) | Filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2017, and incorporated by reference herein. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report has beento be signed belowon its behalf by the following persons on behalf of the registrant and in the capacities indicated on November 8, 2017.undersigned thereunto duly authorized.
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PIPER JAFFRAYSANDLER COMPANIES |
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ByDate: | August 2, 2022 | | By | | /s/ Andrew S. DuffChad R. Abraham |
Its | | | Name | | Chad R. Abraham |
| | | Its | | Chairman and Chief Executive Officer |
| | | | |
ByDate: | August 2, 2022 | | By | | /s/ DebbraTimothy L. SchonemanCarter |
Its | | | Name | | Timothy L. Carter |
| | | Its | | Chief Financial Officer |