UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended June 30, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File No. 001-31720
PIPER JAFFRAY COMPANIES
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction of
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30-0168701
(IRS Employer Identification No.)
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incorporation or organization)
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800 Nicollet Mall, Suite 800
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Minneapolis, Minnesota
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55402
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(Address of principal executive offices)
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(Zip Code)
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(612) 303-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer:
þ
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Accelerated filer:
o
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Non-accelerated filer:
o
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Smaller reporting company:
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes
o
No
þ
As of July 24, 2009, the registrant had 19,673,187 shares of Common Stock outstanding.
Piper Jaffray Companies
Index to Quarterly Report on Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Piper Jaffray Companies
Consolidated Statements of Financial Condition
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June 30,
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December 31,
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2009
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2008
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(Amounts in thousands, except share data)
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(Unaudited)
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Assets
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Cash and cash equivalents
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$
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42,504
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$
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49,848
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Cash and cash equivalents segregated for regulatory purposes
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1,006
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20,005
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Receivables:
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Customers
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74,662
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39,228
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Brokers, dealers and clearing organizations
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91,005
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122,120
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Deposits with clearing organizations
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33,905
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28,471
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Securities purchased under agreements to resell
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159,462
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65,237
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Securitized municipal tender option bonds
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28,843
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84,586
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Financial instruments and other inventory positions owned
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409,741
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380,812
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Financial instruments and other inventory positions owned and pledged as collateral
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129,600
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112,023
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Total financial instruments and other inventory positions owned
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539,341
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492,835
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Fixed assets (net of accumulated depreciation and amortization of $63,167 and $59,485,
respectively)
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18,218
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20,034
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Goodwill
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160,436
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160,582
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Intangible assets (net of accumulated amortization of $9,458 and $8,230, respectively)
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13,295
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14,523
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Other receivables
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52,274
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36,951
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Other assets
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144,972
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185,738
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Total assets
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$
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1,359,923
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$
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1,320,158
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Liabilities and Shareholders Equity
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Short-term bank financing
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$
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63,000
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$
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9,000
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Payables:
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Customers
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46,000
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34,188
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Checks and drafts
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3,502
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4,397
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Brokers, dealers and clearing organizations
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12,750
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10,049
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Securities sold under agreements to repurchase
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61,298
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106,372
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Tender option bond trust certificates
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28,720
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87,982
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Financial instruments and other inventory positions sold, but not yet purchased
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180,344
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143,213
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Accrued compensation
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80,815
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98,150
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Other liabilities and accrued expenses
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105,385
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78,828
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Total liabilities
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581,814
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572,179
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Shareholders equity:
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Common stock, $0.01 par value:
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Shares authorized: 100,000,000 at June 30, 2009 and December 31, 2008;
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Shares issued: 19,503,488 at June 30, 2009 and 19,498,488 at December 31, 2008;
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Shares outstanding: 16,110,685 at June 30, 2009 and 15,684,433 at December 31,
2008
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195
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195
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Additional paid-in capital
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803,319
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808,358
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Retained earnings
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133,675
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124,824
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Less common stock held in treasury, at cost: 3,392,803 shares at June 30, 2009 and
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3,814,055 shares at December 31, 2008
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(159,607
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)
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(183,935
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)
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Other comprehensive income/(loss)
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527
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(1,463
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)
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Total shareholders equity
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778,109
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747,979
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Total liabilities and shareholders equity
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$
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1,359,923
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$
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1,320,158
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See Notes to Consolidated Financial Statements
Piper Jaffray Companies
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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(Amounts in thousands, except per share data)
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2009
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2008
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2009
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2008
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Revenues:
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Investment banking
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$
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62,150
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$
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32,184
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$
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86,500
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$
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87,449
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Institutional brokerage
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60,852
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51,196
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115,879
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81,008
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Interest
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8,973
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13,114
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16,261
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28,273
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Asset management
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3,240
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4,697
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6,249
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8,670
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Other income/(loss)
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(950
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)
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2,356
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(4,549
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)
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|
772
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Total revenues
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134,265
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103,547
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220,340
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206,172
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Interest expense
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1,975
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|
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5,826
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4,168
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12,704
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Net revenues
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132,290
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97,721
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216,172
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193,468
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Non-interest expenses:
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|
|
|
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Compensation and benefits
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79,377
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61,087
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129,701
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120,364
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Occupancy and equipment
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7,680
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|
|
8,133
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|
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|
14,198
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|
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16,243
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Communications
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|
5,430
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|
|
|
5,869
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|
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11,529
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|
|
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12,608
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|
|
Floor brokerage and clearance
|
|
|
3,232
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|
|
|
3,899
|
|
|
|
6,114
|
|
|
|
6,553
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|
|
Marketing and business development
|
|
|
3,419
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|
|
|
7,381
|
|
|
|
7,864
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|
|
|
13,477
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|
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Outside services
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|
|
7,415
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|
|
|
11,308
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|
|
|
14,934
|
|
|
|
19,950
|
|
|
Restructuring-related expenses
|
|
|
3,572
|
|
|
|
729
|
|
|
|
3,572
|
|
|
|
3,583
|
|
|
Other operating expenses
|
|
|
3,747
|
|
|
|
6,604
|
|
|
|
6,298
|
|
|
|
9,068
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total non-interest expenses
|
|
|
113,872
|
|
|
|
105,010
|
|
|
|
194,210
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|
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|
201,846
|
|
|
|
|
|
|
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|
|
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|
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|
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|
|
|
|
|
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|
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|
Income/(loss) from continuing operations before
income tax expense/(benefit)
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|
18,418
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|
|
|
(7,289
|
)
|
|
|
21,962
|
|
|
|
(8,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense/(benefit)
|
|
|
6,842
|
|
|
|
(5,776
|
)
|
|
|
13,111
|
|
|
|
(5,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from continuing operations
|
|
|
11,576
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|
|
|
(1,513
|
)
|
|
|
8,851
|
|
|
|
(2,907
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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|
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|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income from discontinued operations, net of tax
|
|
|
-
|
|
|
|
1,439
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|
|
-
|
|
|
|
1,439
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
11,576
|
|
|
$
|
(74
|
)
|
|
$
|
8,851
|
|
|
$
|
(1,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
9,475
|
|
|
|
N/A
|
|
|
$
|
7,269
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
$
|
0.59
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.45
|
|
|
$
|
(0.18
|
)
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
0.09
|
|
|
|
-
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic common share
|
|
$
|
0.59
|
|
|
$
|
-
|
|
|
$
|
0.45
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
$
|
0.59
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.45
|
|
|
$
|
(0.18
|
)
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
0.09
|
|
(1)
|
|
-
|
|
|
|
0.09
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted common share
|
|
$
|
0.59
|
|
|
$
|
-
|
|
|
$
|
0.45
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,104
|
|
|
|
16,072
|
|
|
|
15,987
|
|
|
|
15,951
|
|
|
Diluted
|
|
|
16,117
|
|
|
|
16,072
|
|
(1)
|
|
15,995
|
|
|
|
15,951
|
|
(1)
|
(1) In accordance with SFAS 128, earnings per diluted common share is calculated using the basic weighted average number of common shares outstanding in periods a loss is
incurred.
N/A - Not applicable as no allocation of income was made due to loss position.
See Notes to Consolidated Financial Statements
Piper Jaffray Companies
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
8,851
|
|
|
$
|
(1,468
|
)
|
Adjustments
to reconcile net loss to net cash provided by/(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of fixed assets
|
|
|
3,540
|
|
|
|
4,755
|
|
Deferred income taxes
|
|
|
8,607
|
|
|
|
6,294
|
|
Stock-based compensation
|
|
|
20,479
|
|
|
|
13,993
|
|
Amortization of intangible assets
|
|
|
1,228
|
|
|
|
1,311
|
|
Decrease/(increase) in operating assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents segregated for regulatory purposes
|
|
|
18,999
|
|
|
|
(7,000
|
)
|
Receivables:
|
|
|
|
|
|
|
|
|
Customers
|
|
|
(36,864
|
)
|
|
|
25,991
|
|
Brokers, dealers and clearing organizations
|
|
|
31,021
|
|
|
|
23,132
|
|
Deposits with clearing organizations
|
|
|
(5,434
|
)
|
|
|
(3,851
|
)
|
Securities purchased under agreements to resell
|
|
|
(94,225
|
)
|
|
|
(30,143
|
)
|
Securitized municipal tender option bonds
|
|
|
55,743
|
|
|
|
1,873
|
|
Net financial instruments and other inventory positions owned
|
|
|
(9,244
|
)
|
|
|
(63,247
|
)
|
Other receivables
|
|
|
(15,099
|
)
|
|
|
(3,988
|
)
|
Other assets
|
|
|
32,946
|
|
|
|
(6,795
|
)
|
Increase/(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Payables:
|
|
|
|
|
|
|
|
|
Customers
|
|
|
11,826
|
|
|
|
(22,588
|
)
|
Checks and drafts
|
|
|
(895
|
)
|
|
|
(2,201
|
)
|
Brokers, dealers and clearing organizations
|
|
|
4,423
|
|
|
|
75,430
|
|
Securities sold under agreements to repurchase
|
|
|
(441
|
)
|
|
|
3,015
|
|
Tender option bond trust certificates
|
|
|
(59,262
|
)
|
|
|
(1,631
|
)
|
Accrued compensation
|
|
|
(11,531
|
)
|
|
|
(81,119
|
)
|
Other liabilities and accrued expenses
|
|
|
26,393
|
|
|
|
(21,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(8,939
|
)
|
|
|
(89,237
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of fixed assets, net
|
|
|
(1,558
|
)
|
|
|
(509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,558
|
)
|
|
|
(509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in securities sold under agreements to repurchase
|
|
|
(44,633
|
)
|
|
|
(181,514
|
)
|
Increase in short-term bank financing
|
|
|
54,000
|
|
|
|
161,500
|
|
Repurchase of common stock
|
|
|
(4,242
|
)
|
|
|
(8,192
|
)
|
Excess/(reduced) tax benefits from stock-based compensation
|
|
|
(2,941
|
)
|
|
|
792
|
|
Proceeds from stock option transactions
|
|
|
-
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities
|
|
|
2,184
|
|
|
|
(27,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency adjustment:
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
969
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(7,344
|
)
|
|
|
(117,117
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
49,848
|
|
|
|
150,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
42,504
|
|
|
$
|
33,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information -
|
|
|
|
|
|
|
|
|
Cash paid/(received) during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
490
|
|
|
$
|
13,095
|
|
Income taxes
|
|
$
|
(36,688
|
)
|
|
$
|
(5,028
|
)
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities -
|
|
|
|
|
|
|
|
|
Issuance of common stock for retirement plan obligations:
|
|
|
|
|
|
|
|
|
134,700 shares and 90,140 shares for the six months ended June 30,
2009 and 2008, respectively
|
|
$
|
3,756
|
|
|
$
|
3,704
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock for annual equity award:
|
|
|
|
|
|
|
|
|
585,198 shares and 1,237,756 shares for the six months ended June
30, 2009 and 2008, respectively
|
|
$
|
16,331
|
|
|
$
|
50,859
|
|
See Notes to Consolidated Financial Statements
Piper Jaffray Companies
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1
Background
Piper Jaffray Companies is the parent company of Piper Jaffray & Co. (Piper Jaffray), a
securities broker dealer and investment banking firm; Piper Jaffray Ltd., a firm providing
securities brokerage and investment banking services in Europe headquartered in London, England;
Piper Jaffray Asia Holdings Limited, an entity providing investment banking services in China
headquartered in Hong Kong; Fiduciary Asset Management, LLC (FAMCO), an entity providing asset
management services to clients through separately managed accounts and closed end funds offering
investment products; Piper Jaffray Financial Products Inc., Piper Jaffray Financial Products II
Inc. and Piper Jaffray Financial Products III Inc., entities that facilitate customer derivative
and inventory hedging transactions; and other immaterial subsidiaries. Piper Jaffray Companies and
its subsidiaries (collectively, the Company) operate as one reporting segment providing
investment banking services, institutional sales, trading and research services, and asset
management services. As discussed more fully in Note 4, the Company completed the sale of its
Private Client Services branch network and certain related assets to UBS Financial Services, Inc.,
a subsidiary of UBS AG (UBS), on August 11, 2006, thereby exiting the Private Client Services
(PCS) business.
Basis of Presentation
The consolidated financial statements include the accounts of Piper Jaffray Companies, its
wholly owned subsidiaries and other entities in which the Company has a controlling financial
interest. All material intercompany balances have been eliminated. Certain financial information
for prior periods has been reclassified to conform to the current period presentation.
The consolidated financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (SEC) with respect to Form 10-Q and reflect
all adjustments that in the opinion of management are normal and recurring and that are necessary
for a fair statement of the results for the interim periods presented. In accordance with these
rules and regulations, certain disclosures that are normally included in annual financial
statements have been omitted. The consolidated financial statements included in this Form 10-Q
should be read in conjunction with the consolidated financial statements and notes thereto included
in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
The consolidated financial statements are prepared in conformity with U.S. generally accepted
accounting principles. These principles require management to make certain estimates and
assumptions that may affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The nature of the Companys
business is such that the results of any interim period may not be indicative of the results to be
expected for a full year.
Effective June 30, 2009, the Company adopted Statement of Financial Accounting Standards No.
165, Subsequent Events (SFAS 165). Under SFAS 165, subsequent events are defined as events or
transactions that occur after the balance sheet date, but before the financial statements are
issued. Recognized subsequent events are events or transactions that provide additional evidence
about conditions that existed at the date of the balance sheet. Unrecognized subsequent events are
events or transactions that provide evidence about conditions that did not exist at the date of the
balance sheet, but arose before the financial statements are issued. Recognized subsequent events
are recorded in the consolidated financial statements and unrecognized subsequent events are
excluded from the consolidated financial statements but disclosed in the notes to the consolidated
financial statements if their effect is material. In accordance with SFAS 165, the Company
evaluated subsequent events through July 31, 2009, the date the financial statements were issued
and no events or transactions occurred.
Note 2
Summary of Significant Accounting Policies
Refer to the Companys Annual Report on Form 10-K for the year ended December 31, 2008, for a
full description of the Companys significant accounting policies. Changes to the Companys
significant accounting policies are described below.
Earnings Per Share
Effective January 1, 2009, the Company adopted FASB Staff Position (FSP) EITF No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating
Securities (FSP EITF 03-6-1). Under FSP EITF 03-6-1, unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and should be included in the earnings per share calculation under the
two-class method. The Company grants restricted stock as part of its share-based compensation
program, which entitle the recipients to receive nonforfeitable dividends or dividend equivalents
during the vesting period.
Basic earnings per common share is computed by dividing net income/(loss) applicable to common
shareholders by the weighted average number of common shares outstanding for the period. Net
income/(loss) applicable to common shareholders represents net income/(loss) reduced by the
allocation of earnings to participating securities. Losses are not allocated to participating
securities. Diluted earnings per common share is calculated by adjusting the weighted average
outstanding shares to assume conversion of all potentially dilutive stock options.
Note 3
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 141 (revised 2007), Business Combinations (SFAS 141(R)).
SFAS 141(R) expands the definition of transactions and events that qualify as business
combinations; requires that acquired assets and liabilities, including contingencies, be recorded
at the fair value determined on the acquisition date and changes thereafter reflected in revenue,
not goodwill; changes the recognition timing for restructuring costs; and requires acquisition
costs to be expensed as incurred. Adoption of SFAS 141(R) was required for combinations after
December 15, 2008. The Company will apply the standard to any business combinations within the
scope of SFAS 141(R).
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interest in Consolidated Financial Statements (SFAS 160). SFAS 160
re-characterizes minority interests in consolidated subsidiaries as non-controlling interests and
requires the classification of minority interests as a component of equity. Under SFAS 160, a
change in control is measured at fair value, with any gain or loss recognized in earnings. SFAS 160
was effective for fiscal years beginning after December 15, 2008. The provisions of SFAS 160 are to
be applied prospectively, except for the presentation and disclosure requirements which are to be
applied retrospectively to all periods presented. The adoption of SFAS 160 did not have a material
effect on the consolidated financial statements of the Company.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires
disclosures regarding the location and amounts of derivative instruments in the Companys financial
statements; how derivative instruments and related hedged items are accounted for; and how
derivative instruments and related hedged items affect the Companys financial position, results of
operations and cash flows. SFAS 161 was effective for interim periods beginning after November 15,
2008. Since SFAS 161 impacts the Companys disclosures and not its accounting treatment for
derivative instruments and hedging activities, the Companys adoption of SFAS 161 did not impact
its consolidated results of operations or financial condition.
In June 2008, the FASB issued FSP EITF No. 03-6-1. FSP EITF 03-6-1 clarifies that unvested
share-based payment awards with nonforfeitable rights to dividends or dividend equivalents are
considered participating securities and should be included in the calculation of earnings per share
pursuant to the two-class method. FSP EITF 03-6-1 was effective for financial statements issued
for periods beginning after December 15, 2008 with early adoption prohibited. The adoption of FSP
EITF 03-06-1 reduced earnings per diluted share by $0.03 for the three and six months ended June
30, 2009.
In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active (FSP 157-3), which was effective upon
issuance, including prior periods for which financial statements have not been issued. FSP 157-3
clarifies the application of Statement of Financial Accounting Standards No. 157 Fair Value
Measurements (SFAS 157) in a market that is not active and provides an example of key
considerations to determine the fair value of financial assets when the market for those assets is
not active. The adoption of FSP 157-3 did not have a material effect on the Companys consolidated
results of operations or financial condition. In April, 2009, FSP 157-3 was superseded by FSP FAS
157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions that are Not Orderly (FSP 157-4).
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8 Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities (FSP 140-4), which was effective for the first reporting period ending after December
15, 2008. FSP 140-4 requires additional disclosure related to transfers of financial assets and
variable interest entities. Since FSP 140-4 impacts the Companys disclosures and not its
accounting treatment for transfers of financial assets and variable interest entities, the
Companys adoption of FSP 140-4 did not impact its consolidated results of operations or financial
condition.
In April 2009, the FASB issued FSP 157-4. FSP 157-4 provides guidance on estimating the fair
value of a financial asset or liability when the trade volume and level of activity for the asset
or liability has significantly decreased relative to historical levels and also provides additional
guidance on circumstances that may indicate that a transaction is not orderly. FSP 157-4 requires
entities to disclose in interim and annual periods the inputs and valuation techniques used to
measure fair value and any changes in valuation inputs or techniques. In addition, debt and equity
securities as defined by Statement of Financial Accounting Standards No. 115 Accounting for
Certain Investments in Debt and Equity Securities (SFAS 115) shall be disclosed by major
category. This FSP was effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending
after March 15, 2009, and is to be applied prospectively. The adoption of FSP 157-4 did not
have a material impact on the Companys consolidated financial statements.
In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP 141(R)-1). FSP
141(R)-1 amends the provisions in SFAS 141(R) for the initial recognition and measurement,
subsequent measurement and accounting, and disclosure for assets and liabilities arising from
contingencies in business combinations. FSP 141(R)-1 eliminates the distinction between contractual
and non-contractual contingencies, including the initial recognition and measurement criteria in
SFAS 141(R) and instead carries forward most of the provisions in SFAS 141 for acquired
contingencies. The provisions of FSP 141(R)-1 apply to business combinations beginning on or after
the first annual reporting period after December 15, 2008. The Company will apply the standard to
business combinations completed after January 1, 2009.
In May 2009, the FASB issued SFAS 165. SFAS 165 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. SFAS 165 defines the period after the balance
sheet date during which management should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet date in the
financial statements, and the disclosures that an entity should make about events or transactions
that occurred after the balance sheet date. SFAS 165 was effective for interim or annual reporting
periods ending after June 15, 2009, and should be applied prospectively. The adoption of SFAS 165
did not impact the consolidated financial statements of the Company.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting
for Transfers of Financial Assets an amendment of FASB Statement No. 140 (SFAS 166). SFAS 166
improves the relevance, representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash flows; and a
transferors continuing involvement, if any, in transferred financial assets. Additionally, SFAS
166 eliminates the qualifying special-purpose entity (QSPE) concept from FASB Statement No. 140,
Accounting For Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(SFAS 140). SFAS 166 is effective for interim and annual reporting periods beginning after
November 15, 2009. The recognition and measurement provisions are effective for prospective
transfers with the exception of existing QSPEs which must be evaluated at the time of adoption. The
disclosures required by SFAS 166 are applied to both retrospective and prospective transfers. The
Company is evaluating the impact of SFAS 166 on its consolidated financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167 Amendments
to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities (SFAS 167). SFAS
167 addresses the effects of eliminating the QSPE concept in SFAS 166 and constituent concerns
about the application of certain key provisions of Interpretation No. 46(R), including concerns
over the transparency of enterprises involvement with variable interest entities. SFAS 167 is
effective for interim and annual reporting periods beginning after November 15, 2009 and is
applicable to all entities with which the enterprise has involvement, regardless of when that
involvement arose. The Company is evaluating the impact of SFAS 167 on its consolidated financial
statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168 The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162 (SFAS 168). SFAS 168 makes the FASB Accounting Standards
Codification (the Codification) the single source of authoritative non-governmental generally
accepted accounting principles, superseding existing FASB, American Institute of Certified Public
Accountants, Emerging Issues Task Force and related accounting literature. Also included is
relevant Securities and Exchange Commission guidance organized using the same topical structure in
separate sections. SFAS 168 is effective for interim and annual reporting periods ending after
September 15, 2009. SFAS 168 will impact the Companys financial statement disclosures since all
future references to authoritative accounting literature will be referenced in accordance with the
Codification.
Note 4
Sale of PCS
On August 11, 2006, the Company and UBS completed the sale of the Companys PCS branch network
under a previously announced asset purchase agreement. The purchase price under the asset purchase
agreement was approximately $750 million, which included $500 million for the branch network and
approximately $250 million for the net assets of the branch network, consisting principally of
customer margin receivables.
In connection with the sale of the Companys PCS branch network, the Company initiated a plan
in 2006 to significantly restructure the Companys support infrastructure. All restructuring costs
related to the sale of the PCS branch network were included within discontinued operations in
accordance with Statement of Financial Accounting Standards No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets. See Note 14 for additional information regarding
the Companys restructuring activities.
|
|
|
Note 5
|
|
Financial Instruments and Other Inventory Positions Owned and Financial Instruments and
Other Inventory Positions Sold, but Not Yet Purchased
|
Financial instruments and other inventory positions owned and financial instruments and other
inventory positions sold, but not yet purchased were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
Financial instruments and other inventory positions owned (1):
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
2,918
|
|
|
$
|
4,148
|
|
Convertible securities
|
|
|
338
|
|
|
|
7,088
|
|
Fixed income securities
|
|
|
112,459
|
|
|
|
72,571
|
|
Municipal securities
|
|
|
278,579
|
|
|
|
173,169
|
|
Asset-backed securities
|
|
|
74,400
|
|
|
|
52,385
|
|
U.S. government agency securities
|
|
|
22,999
|
|
|
|
59,341
|
|
U.S. government securities
|
|
|
21,733
|
|
|
|
67,631
|
|
Derivative contracts
|
|
|
25,915
|
|
|
|
56,502
|
|
|
|
|
|
|
|
|
$
|
539,341
|
|
|
$
|
492,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments and other inventory positions sold,
but not yet purchased:
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
1,114
|
|
|
$
|
6,335
|
|
Convertible securities
|
|
|
284
|
|
|
|
-
|
|
Fixed income securities
|
|
|
17,052
|
|
|
|
9,283
|
|
Municipal securities
|
|
|
-
|
|
|
|
23,250
|
|
Asset-backed securities
|
|
|
22,814
|
|
|
|
-
|
|
U.S. government agency securities
|
|
|
4
|
|
|
|
10,298
|
|
U.S. government securities
|
|
|
136,452
|
|
|
|
58,377
|
|
Derivative contracts
|
|
|
2,624
|
|
|
|
35,670
|
|
|
|
|
|
|
|
|
$
|
180,344
|
|
|
$
|
143,213
|
|
|
|
|
|
|
(1)
|
|
Excludes $28.8 million and $84.6 million in securitized municipal tender option bonds held
in securitized trusts at June 30, 2009, and December 31, 2008, respectively. These financial
instruments are included in securitized municipal tender option bonds on the consolidated
statements of financial condition.
|
At June 30, 2009, and December 31, 2008, financial instruments and other inventory
positions owned in the amount of $129.6 million and $112.0 million, respectively, had been pledged
as collateral for the Companys repurchase agreements and secured borrowings.
Inventory positions sold, but not yet purchased represent obligations of the Company to
deliver the specified security at the contracted price, thereby creating a liability to purchase
the security in the market at prevailing prices. The Company is obligated to acquire the securities
sold short at prevailing market prices, which may exceed the amount reflected on the consolidated
statements of financial condition. The Company economically hedges changes in market value of its
financial instruments and other inventory positions owned utilizing inventory positions sold, but
not yet purchased, interest rate derivatives, futures and exchange-traded options.
Derivative Contract Financial Instruments
The Company uses interest rate swaps, interest rate locks, and forward contracts to facilitate
customer transactions and as a means to manage risk in certain inventory positions. Interest rate
swaps are also used to manage interest rate exposure associated with the
Companys securitized municipal tender option bonds. The following describes the Companys
derivatives by the type of transaction or security the instruments are economically hedging.
Customer matched-book derivatives:
The Company enters into interest rate derivative contracts
in a principal capacity as a dealer to satisfy the financial needs of its customers. The Company
simultaneously enters into an interest rate derivative contract with a third party for the same
notional amount to hedge the interest rate risk of the initial client interest rate derivative
contract. The instruments use interest rates based upon either the London Inter-bank Offer Rate
(LIBOR) index or the Securities Industry and Financial Markets Association (SIFMA) index.
Trading securities derivatives:
The Company enters into interest rate derivative contracts to
hedge interest rate and market value risks associated with its fixed income securities. The
instruments use interest rates based upon either the Municipal Market Data (MMD) index or the
SIFMA index.
Securitization transaction derivatives:
The Company enters into interest rate derivative
contracts to manage the interest rate exposure associated with the Companys securitized municipal
tender option bonds. The instruments used are based upon the SIFMA index.
The following table presents the total absolute notional contract amount associated with the
Companys outstanding derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Derivative Instrument
|
|
Derivative Category
|
|
June 30, 2009
|
|
December 31, 2008
|
Customer matched-book
|
|
Interest rate derivative contract
|
|
$
|
6,892,755
|
|
|
$
|
6,834,402
|
|
Trading securities
|
|
Interest rate derivative contract
|
|
|
211,500
|
|
|
|
114,500
|
|
Securitization transactions
|
|
Interest rate derivative contract
|
|
|
28,740
|
|
|
|
144,400
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,132,995
|
|
|
$
|
7,093,302
|
|
|
|
|
|
|
|
|
The Companys interest rate derivative contracts do not qualify for hedge accounting under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities; therefore, unrealized
gains and losses are recorded on the consolidated statements of operations. The following table
presents the Companys gains/(losses) on derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Derivative Category
|
|
Revenue Category
|
|
June 30, 2009
|
|
June 30, 2008
|
|
June 30, 2009
|
|
June 30, 2008
|
Interest rate
derivative contract
|
|
Institutional brokerage
|
|
$
|
1,866
|
|
|
$
|
8,204
|
|
|
$
|
11,582
|
|
|
$
|
8,535
|
|
The gross fair market value of all derivative instruments and their location on the Companys
consolidated statements of financial condition are shown below by asset or liability position
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Asset Value at
|
|
|
|
|
|
Liability Value at
|
Derivative Category
|
|
Financial Condition Location
|
|
June 30, 2009
|
|
Financial Condition Location
|
|
June 30, 2009
|
Interest rate derivative contract
|
|
Financial intruments and other inventory positions owned
|
|
$
|
365,446
|
|
|
Financial intruments and other inventory positions sold, but not yet purchased
|
|
$
|
330,999
|
|
(1)
|
|
Amounts are disclosed at gross fair value in accordance with SFAS 161 requirements and
therefore do not reflect the net presentation allowed by FSP No. FIN 39-1 Amendment of FASB
Interpretation No. 39.
|
The Companys derivative contracts are recorded at fair value. These derivatives are
valued using quoted market prices when available or pricing models based on the net present value
of estimated future cash flows. The valuation models used require inputs including contractual
terms, market prices, yield curves, credit curves and measures of volatility. Derivatives are
reported on a net-by-counterparty basis when legal right of offset exists, and on a net-by-cross
product basis when applicable provisions are stated in master netting agreements. Cash collateral
received or paid is netted on a counterparty basis, provided a legal right of offset exists.
Credit risk associated with the Companys derivatives is the risk that a derivative
counterparty will not perform in accordance with the terms of the applicable derivative contract.
Credit exposure associated with the Companys derivatives is driven by uncollateralized market
movements in the fair value of the contracts with counterparties and is monitored regularly by its
market and credit risk committee. The majority of the Companys derivative contracts are
substantially collateralized by its counterparties, which
are major financial institutions. The Company has a limited number of counterparties (notional
contract amount of $271.7 million at June 30, 2009) who are not required to post collateral. Based
on market movements, the uncollateralized amounts representing the fair value of the derivative
contract can become material, exposing the Company to the credit risk of these counterparties. As
of June 30, 2009, the Company had $22.6 million of credit exposure with these counterparties,
including $10.5 million of credit exposure with one counterparty.
Note 6
Fair Value of Financial Instruments
The Company records financial instruments and other inventory positions owned, financial
instruments and other inventory positions sold, but not yet purchased, and securitized municipal
tender option bonds at fair value on the consolidated statements of financial condition with
unrealized gains and losses reflected in the consolidated statements of operations.
The degree of judgment used in measuring the fair value of financial instruments generally
correlates to the level of pricing observability. Pricing observability is impacted by a number of
factors, including the type of financial instrument, whether the financial instrument is new to the
market and not yet established and other characteristics specific to the instrument. Financial
instruments with readily available active quoted prices for which fair value can be measured from
actively quoted prices generally will have a higher degree of pricing observability and a lesser
degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or
not quoted will generally have less, or no, pricing observability and a higher degree of judgment
used in measuring fair value.
The following is a description of the valuation techniques used to measure fair value.
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of 90 days or
less. Actively traded money market funds are measured at their net asset value and classified as
Level I.
Cash Instruments (Trading Securities)
When available, the fair value of cash instruments is based on quoted prices in active markets
and reported in Level I. Level I cash instruments include highly liquid instruments with quoted
prices such as certain U.S. treasury bonds, and equities listed in active markets.
If quoted prices are not available, fair values are obtained from pricing services, broker
quotes, or other model-based valuation techniques with observable inputs such as the present value
of estimated cash flows and reported as Level II. The nature of these cash instruments include
instruments for which quoted prices are available but traded less frequently, instruments whose
fair value have been derived using a model where inputs to the model are directly observable in the
market, or can be derived principally from or corroborated by observable market data, and
instruments that are fair valued using other financial instruments, the parameters of which can be
directly observed. Level II cash instruments generally include certain U.S. treasury bonds and U.S.
government agency securities, certain corporate bonds, certain municipal bonds, certain
asset-backed securities, convertible securities and securitized municipal tender option bonds.
Level III cash instruments have little to no pricing observability as of the report date.
These cash instruments do not have active two-way markets and are measured using managements best
estimate of fair value, where the inputs into the determination of fair value require significant
management judgment or estimation. The Company has identified Level III cash instruments to include
certain asset-backed securities, principally collateralized by aircraft, that have experienced low
volumes of executed transactions; auction-rate securities for which the market has been dislocated
and largely ceased to function; and certain corporate bonds where there was less frequent or
nominal market activity. The Companys Level III asset-backed securities are valued using cash flow
models that utilize unobservable inputs including airplane lease rates, utilization rates, trust
costs, aircraft residual values and assumptions on timing of sales. Auction-rate securities are
valued based upon the Companys expectations of issuer refunding plans and using internal models.
Level
III corporate bonds are valued using prices from comparable securities.
Derivatives
Derivatives are valued using quoted market prices when available or pricing models based on
the net present value of estimated future cash flows. The valuation models used require market
observable inputs including contractual terms, market prices, yield curves, credit curves and
measures of volatility. These measurements are classified as Level II within the fair value
hierarchy and are used to value interest rate swaps, interest rate locks, and forward contracts.
Investments
Investments in public companies are valued based on quoted prices on active markets and
reported in Level I. Investments in certain illiquid municipal bonds that the Company is holding
for investment are reported as Level III assets.
The following table summarizes the valuation of our financial instruments by SFAS 157 pricing
observability levels as of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
|
|
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Netting (1)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
instruments and other inventory positions owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
2,918
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,918
|
|
Convertible securities
|
|
|
-
|
|
|
|
338
|
|
|
|
-
|
|
|
|
-
|
|
|
|
338
|
|
Fixed income securities
|
|
|
-
|
|
|
|
105,886
|
|
|
|
6,573
|
|
|
|
-
|
|
|
|
112,459
|
|
Municipal securities
|
|
|
-
|
|
|
|
261,416
|
|
|
|
17,163
|
|
|
|
-
|
|
|
|
278,579
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
30,176
|
|
|
|
44,224
|
|
|
|
-
|
|
|
|
74,400
|
|
U.S. government agency securities
|
|
|
-
|
|
|
|
22,999
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,999
|
|
U.S. government securities
|
|
|
6,524
|
|
|
|
15,209
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,733
|
|
Derivative instruments
|
|
|
-
|
|
|
|
57,792
|
|
|
|
-
|
|
|
|
(31,877
|
)
|
|
|
25,915
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments and other inventory
positions owned
|
|
|
9,442
|
|
|
|
493,816
|
|
|
|
67,960
|
|
|
|
(31,877
|
)
|
|
|
539,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized municipal tender option bonds
|
|
|
-
|
|
|
|
28,843
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
9,274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
1,733
|
|
|
|
-
|
|
|
|
85
|
|
|
|
-
|
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,449
|
|
|
$
|
522,659
|
|
|
$
|
68,045
|
|
|
$
|
(31,877
|
)
|
|
$
|
579,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
instruments and other inventory positions sold, but not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
1,114
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,114
|
|
Convertible securities
|
|
|
-
|
|
|
|
284
|
|
|
|
-
|
|
|
|
-
|
|
|
|
284
|
|
Fixed income securities
|
|
|
-
|
|
|
|
17,052
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,052
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
21,249
|
|
|
|
1,565
|
|
|
|
-
|
|
|
|
22,814
|
|
U.S. government agency securities
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
U.S. government securities
|
|
|
50,863
|
|
|
|
85,589
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136,452
|
|
Derivative instruments
|
|
|
-
|
|
|
|
23,345
|
|
|
|
-
|
|
|
|
(20,721
|
)
|
|
|
2,624
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments and other inventory
positions sold, but not yet purchased
|
|
|
51,977
|
|
|
|
147,523
|
|
|
|
1,565
|
|
|
|
(20,721
|
)
|
|
|
180,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
51,977
|
|
|
$
|
147,523
|
|
|
$
|
1,584
|
|
|
$
|
(20,721
|
)
|
|
$
|
180,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents cash collateral and the impact of netting on a counterparty basis.
Additionally, the Company had no securities posted as collateral to its counterparties.
|
The following table summarizes the valuation of our financial instruments by SFAS 157 pricing
observability levels as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
|
|
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Netting (1)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
instruments and other inventory positions owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
4,148
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,148
|
|
Convertible securities
|
|
|
-
|
|
|
|
3,417
|
|
|
|
3,671
|
|
|
|
-
|
|
|
|
7,088
|
|
Fixed income securities
|
|
|
-
|
|
|
|
70,433
|
|
|
|
2,138
|
|
|
|
-
|
|
|
|
72,571
|
|
Municipal securities
|
|
|
-
|
|
|
|
155,419
|
|
|
|
17,750
|
|
|
|
-
|
|
|
|
173,169
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
29,825
|
|
|
|
22,560
|
|
|
|
-
|
|
|
|
52,385
|
|
U.S. government agency securities
|
|
|
-
|
|
|
|
59,335
|
|
|
|
6
|
|
|
|
-
|
|
|
|
59,341
|
|
U.S. government securities
|
|
|
61,224
|
|
|
|
6,407
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67,631
|
|
Derivative instruments
|
|
|
-
|
|
|
|
84,502
|
|
|
|
-
|
|
|
|
(28,000
|
)
|
|
|
56,502
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments and other inventory
positions owned
|
|
|
65,372
|
|
|
|
409,338
|
|
|
|
46,125
|
|
|
|
(28,000
|
)
|
|
|
492,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized municipal tender option bonds
|
|
|
-
|
|
|
|
84,586
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
31,595
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
1,741
|
|
|
|
-
|
|
|
|
433
|
|
|
|
-
|
|
|
|
2,174
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
98,708
|
|
|
$
|
493,924
|
|
|
$
|
46,558
|
|
|
$
|
(28,000
|
)
|
|
$
|
611,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments and other inventory
positions sold, but not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
6,335
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,335
|
|
Fixed income securities
|
|
|
-
|
|
|
|
9,283
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,283
|
|
Municipal securities
|
|
|
-
|
|
|
|
23,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,250
|
|
U.S. government agency securities
|
|
|
-
|
|
|
|
10,298
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,298
|
|
U.S. government securities
|
|
|
14,424
|
|
|
|
43,953
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58,377
|
|
Derivative instruments
|
|
|
-
|
|
|
|
63,670
|
|
|
|
-
|
|
|
|
(28,000
|
)
|
|
|
35,670
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments and other inventory
positions sold, but not yet purchased
|
|
|
20,759
|
|
|
|
150,454
|
|
|
|
-
|
|
|
|
(28,000
|
)
|
|
|
143,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
-
|
|
|
|
-
|
|
|
|
366
|
|
|
|
-
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
20,759
|
|
|
$
|
150,454
|
|
|
$
|
366
|
|
|
$
|
(28,000
|
)
|
|
$
|
143,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents cash collateral and the impact of netting on a counterparty basis.
Additionally, the Company had $56.8 million of securities posted as collateral to its
counterparties.
|
The Companys Level III assets were $68.0 million and $46.6 million, or 11.7 percent and
7.6 percent of financial instruments measured at fair value at June 30, 2009, and December 31,
2008, respectively.
The following tables summarize the changes in fair value carrying values associated with
Level III financial instruments during the six months ended June 30, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
December 31,
|
|
Purchases/
|
|
Net transfers
|
|
Realized gains/
|
|
Unrealized gains/
|
|
June 30,
|
(Dollars in thousands)
|
|
2008
|
|
(sales), net
|
|
in/(out)
|
|
(losses) (2)
|
|
(losses) (2)
|
|
2009
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
instruments and other inventory positions owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible securities
|
|
$
|
3,671
|
|
|
$
|
-
|
|
|
$
|
(3,671
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Fixed income securities
|
|
|
2,138
|
|
|
|
3,516
|
|
|
|
637
|
|
|
|
7
|
|
|
|
275
|
|
|
|
6,573
|
|
Municipal securities
|
|
|
17,750
|
|
|
|
175
|
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
(662
|
)
|
|
|
17,163
|
|
Asset-backed securities
|
|
|
22,560
|
|
|
|
9,226
|
|
|
|
10,613
|
|
|
|
416
|
|
|
|
1,409
|
|
|
|
44,224
|
|
U.S. government agency securities
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments and other inventory
positions owned
|
|
|
46,125
|
|
|
|
12,916
|
|
|
|
7,474
|
|
|
|
423
|
|
|
|
1,022
|
|
|
|
67,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
433
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(348
|
)
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
46,558
|
|
|
$
|
12,916
|
|
|
$
|
7,474
|
|
|
$
|
423
|
|
|
$
|
674
|
|
|
$
|
68,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments and other inventory
positions sold, but not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
$
|
-
|
|
|
$
|
415
|
|
|
$
|
1,297
|
|
|
$
|
(49
|
)
|
|
$
|
(98
|
)
|
|
$
|
1,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments and other inventory
positions sold, but not yet purchased
|
|
|
-
|
|
|
|
415
|
|
|
|
1,297
|
|
|
|
(49
|
)
|
|
|
(98
|
)
|
|
|
1,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
366
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(347
|
)
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
366
|
|
|
$
|
415
|
|
|
$
|
1,297
|
|
|
$
|
(49
|
)
|
|
$
|
(445
|
)
|
|
$
|
1,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
December 31,
|
|
Purchases/
|
|
Net transfers
|
|
Realized gains/
|
|
Unrealized gains/
|
|
June 30,
|
(Dollars in thousands)
|
|
2007
|
|
(sales), net
|
|
in/(out)
|
|
(losses) (2)
|
|
(losses) (2)
|
|
2008
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
instruments and other inventory positions owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible securities
|
|
$
|
-
|
|
|
$
|
843
|
|
|
$
|
1,696
|
|
|
$
|
(168
|
)
|
|
$
|
66
|
|
|
$
|
2,437
|
|
Fixed income securities
|
|
|
-
|
|
|
|
(230
|
)
|
|
|
10,529
|
|
|
|
5
|
|
|
|
(793
|
)
|
|
|
9,511
|
|
Municipal securities
|
|
|
202,500
|
|
|
|
(117,475
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85,025
|
|
Asset-backed securities
|
|
|
14,282
|
|
|
|
4,415
|
|
|
|
16,953
|
|
|
|
24
|
|
|
|
(2,360
|
)
|
|
|
33,314
|
|
Other
|
|
|
13,921
|
|
|
|
35
|
|
|
|
-
|
|
|
|
(1,800
|
)
|
|
|
(700
|
)
|
|
|
11,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments and other inventory positions owned
|
|
|
230,703
|
|
|
|
(112,412
|
)
|
|
|
29,178
|
|
|
|
(1,939
|
)
|
|
|
(3,787
|
)
|
|
|
141,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
6,015
|
|
|
|
(1,073
|
)
|
|
|
-
|
|
|
|
323
|
|
|
|
(1,343
|
)
|
|
|
3,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
236,718
|
|
|
$
|
(113,485
|
)
|
|
$
|
29,178
|
|
|
$
|
(1,616
|
)
|
|
$
|
(5,130
|
)
|
|
$
|
145,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
instruments and other inventory positions sold, but not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,960
|
|
|
$
|
(80
|
)
|
|
$
|
-
|
|
|
$
|
1,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments and other inventory
positions sold, but not yet purchased
|
|
|
-
|
|
|
|
-
|
|
|
|
1,960
|
|
|
|
(80
|
)
|
|
|
-
|
|
|
|
1,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
1,260
|
|
|
|
(267
|
)
|
|
|
-
|
|
|
|
267
|
|
|
|
33
|
|
|
|
1,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,260
|
|
|
$
|
(267
|
)
|
|
$
|
1,960
|
|
|
$
|
187
|
|
|
$
|
33
|
|
|
$
|
3,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
Realized and unrealized gains/(losses) related to non-derivative assets are reported in
institutional brokerage on the consolidated statements of operations. Realized and unrealized
gains/(losses) related to investments are reported in other income/(loss) on the consolidated
statements of operations.
|
Note 7
Securitizations
Historically, the Company conducted a tender option bond securitization program, which the
Company decided to discontinue in October of 2008. Under this program, the Company sold highly
rated municipal bonds into securitization vehicles (Securitized Trust) that were funded by the
sale of variable rate certificates to institutional customers seeking variable rate tax-free
investment products. These variable rate certificates reprice weekly and the Company receives a fee
to remarket the variable rate certificates. The Company had one Securitized Trust outstanding as of
June 30, 2009, and seven outstanding as of December 31, 2008. Securitization transactions meeting
certain Statement of Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of
Financial Assets and Extinguishment of Liabilities (SFAS 140), criteria are treated
as sales, with the resulting gain included in institutional brokerage revenue on the consolidated
statements of operations. If a securitization does not meet the asset sale criteria of SFAS 140,
the transaction is recorded as a borrowing.
At June 30, 2009, the Company maintained one Securitized Trust that did not meet the asset
sale criteria of SFAS 140, causing the Company to account for this transaction as a borrowing. The
Company consolidated the assets and liabilities of the trust onto the Companys consolidated
statement of financial condition. Accordingly, the Company recorded an asset for the underlying
bonds of $28.8 million (par value $28.7 million) as of June 30, 2009, in securitized municipal
tender option bonds and a liability for the certificates sold by the trust for $28.7 million as of
June 30, 2009, in tender option bond trust certificates on the consolidated statement of financial
condition. At December 31, 2008, the Company had seven Securitized Trusts that did not meet the
asset sale requirements of SFAS 140, causing the Company to consolidate these trusts. Accordingly,
the Company recorded an asset for the underlying bonds of $84.6 million (par value $113.6 million)
as of December 31, 2008, in securitized municipal tender option bonds and a liability for the
certificates sold by the trusts for $88.0 million as of December 31, 2008, in tender option bond
trust certificates on the consolidated statement of financial condition.
The Company has contracted with a major third-party financial institution to act as the
liquidity provider for the Companys tender option bond Securitized Trust through December 30,
2009. The Company has agreed to reimburse this party for any losses associated with providing
liquidity to the trust. The maximum exposure to loss at June 30, 2009, was $28.7 million
representing the outstanding amount of all trust certificates. This exposure to loss is mitigated,
however, by the underlying bonds in the trust and derivative hedges the Company has in place. The
underlying bonds had a market value of approximately $28.8 million at June 30, 2009.
The Company has entered into interest rate swap agreements to manage interest rate exposure
associated with its Securitized Trust, which have been recorded at fair value. See further
discussion of interest rate swap agreements in Note 5 to our unaudited consolidated financial
statements.
Note 8
Variable Interest Entities
In the normal course of business, the Company periodically creates or transacts with entities
that may be variable interest entities (VIEs). The determination as to whether an entity is a VIE
is based on the amount and nature of the Companys equity investment in the entity. The Company
also considers other characteristics such as the ability to influence the decision making about the
entitys activities and how the entity is financed. The Companys involvement with VIEs is limited
to entities used as either securitization vehicles or investment vehicles. See Note 7 for a
discussion of the Companys securitization vehicles.
The Company has investments in and/or acts as the managing partner or member to approximately
20 partnerships and limited liability companies (LLCs). These entities were established for the
purpose of investing in equity and debt securities of public and private investments and were
initially financed through the capital commitments of the members. At June 30, 2009, the Companys
aggregate net investment in these partnerships and LLCs totaled $8.0 million. The Companys
remaining capital commitment to these partnerships and LLCs was $3.4 million at June 30, 2009.
The Company has identified one partnership and three LLCs described above as VIEs. The Company
is required to consolidate all VIEs for which it is considered to be the primary beneficiary. The
determination as to whether the Company is considered to be the primary beneficiary is based on
whether the Company will absorb a majority of the VIEs expected losses, receive a majority of the
VIEs expected residual returns, or both. It was determined that the Company is not the
primary beneficiary of these VIEs, however, the Company owns a significant variable interest in
these VIEs. These VIEs had assets approximating $156.2 million at June 30, 2009. The Companys
exposure to loss from these entities is $4.4 million, which is the value of its capital
contributions recorded in other assets on the consolidated statement of financial condition at June
30, 2009. The Company had no liabilities related to these entities at June 30, 2009.
The Company has not provided financial or other support to the VIEs that it was not previously
contractually required to provide as of June 30, 2009.
Note 9
Receivables from and Payables to Brokers, Dealers and Clearing Organizations
Amounts receivable from brokers, dealers and clearing organizations at June 30, 2009, and
December 31, 2008, included:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
Receivable arising from unsettled securities transactions, net
|
|
$
|
2,454
|
|
|
$
|
79,370
|
|
Deposits paid for securities borrowed
|
|
|
48,942
|
|
|
|
18,475
|
|
Receivable from clearing organizations
|
|
|
18,914
|
|
|
|
17,661
|
|
Securities failed to deliver
|
|
|
9,538
|
|
|
|
2,282
|
|
Other
|
|
|
11,157
|
|
|
|
4,332
|
|
|
|
|
|
|
|
|
$
|
91,005
|
|
|
$
|
122,120
|
|
|
|
|
|
|
Amounts payable to brokers, dealers and clearing organizations at June 30, 2009, and December
31, 2008, included:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
Payable to clearing organizations
|
|
$
|
7,642
|
|
|
$
|
8,482
|
|
Securities failed to receive
|
|
|
5,106
|
|
|
|
1,565
|
|
Other
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
$
|
12,750
|
|
|
$
|
10,049
|
|
|
|
|
|
|
Deposits paid for securities borrowed approximate the market value of the securities.
Securities failed to deliver and receive represent the contract value of securities that have not
been delivered or received by the Company on settlement date.
Note 10
Other Assets
Other assets included investments in public companies, investments in private equity
partnerships that are valued using the equity method of accounting, investments in private
companies and bridge-loans valued at cost, net deferred tax assets, income tax receivables and
prepaid expenses.
Other assets at June 30, 2009, and December 31, 2008, included:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
Investments at fair value
|
|
$
|
1,818
|
|
|
$
|
2,174
|
|
Investments at cost
|
|
|
39,375
|
|
|
|
33,988
|
|
Investments valued using equity method
|
|
|
16,825
|
|
|
|
19,817
|
|
Deferred income tax assets
|
|
|
78,813
|
|
|
|
87,420
|
|
Income tax receivables
|
|
|
445
|
|
|
|
35,268
|
|
Prepaid expenses
|
|
|
6,340
|
|
|
|
5,779
|
|
Other
|
|
|
1,356
|
|
|
|
1,292
|
|
|
|
|
|
|
Total other assets
|
|
$
|
144,972
|
|
|
$
|
185,738
|
|
|
|
|
|
|
Note 11
Goodwill and Intangible Assets
The following table presents the changes in the carrying value of goodwill and intangible
assets for the six months ended June 30, 2009:
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Goodwill
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
160,582
|
|
Goodwill acquired
|
|
|
-
|
|
Impairment losses
|
|
|
-
|
|
FAMCO goodwill adjustment
|
|
|
(146
|
)
|
|
|
|
Balance at June 30, 2009
|
|
$
|
160,436
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Intangible assets
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
14,523
|
|
Intangible assets acquired
|
|
|
-
|
|
Amortization of intangible assets
|
|
|
(1,228
|
)
|
Impairment losses
|
|
|
-
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
13,295
|
|
|
|
|
Note 12
Financing
The Company has committed short-term financing available on a secured basis and uncommitted
short-term financing available on both a secured and unsecured basis. The availability of the
Companys uncommitted lines are subject to approval by individual banks each time an advance is
requested and may be denied. In addition, the Company has established arrangements to obtain
financing by another broker dealer at the end of each business day related specifically to its
convertible inventory. Repurchase agreements are also used as a source of funding.
During 2008, the Company entered into a $250 million committed revolving credit facility with
U.S. Bank, N.A. The Company uses this credit facility in the ordinary course of business to fund a
portion of its daily operations, and the amount borrowed under the facility varies daily based on
the Companys funding needs. Advances under this facility are secured by certain marketable
securities. However, of the $250 million in financing available under this facility, $125 million
may only be drawn with specific municipal securities as collateral. The facility includes a
covenant that requires Piper Jaffray to maintain a minimum net capital of $180 million, and the
unpaid principal amount of all advances under this facility will be due on September 25, 2009. The
Company pays a nonrefundable commitment fee on the unused portion of the facility on a quarterly
basis. At June 30, 2009, the Company had no advances against this line of credit.
The Companys short-term financing bears interest at rates based on the federal funds rate.
For the six months ended June 30, 2009 and 2008, the weighted average interest rate on borrowings
was 1.26 percent and 2.96 percent, respectively. At June 30, 2009, and December 31, 2008, no formal
compensating balance agreements existed, and the Company was in compliance with all debt covenants
related to its financing facilities.
Note 13
Legal Contingencies
The Company has been named as a defendant in various legal proceedings arising primarily from
securities brokerage and investment banking activities, including certain class actions that
primarily allege violations of securities laws and seek unspecified damages, which could be
substantial. Also, the Company is involved from time to time in investigations and proceedings by
governmental agencies and self-regulatory organizations.
The Company has established reserves for potential losses that are probable and reasonably
estimable that may result from pending and potential complaints, legal actions, investigations and
proceedings. The Companys reserves totaled $15.1 million and $17.0 million at June 30, 2009, and
December 31, 2008, respectively, which is included within other liabilities and accrued expenses on
the consolidated statements of financial condition. A significant portion of the Companys reserves
at June 30, 2009, and December 31,
2008, will be funded by an insurance receivable, which is recorded within other receivables on
the consolidated statement of financial condition.
As part of the asset purchase agreement between UBS and the Company for the sale of the PCS
branch network, the Company retained liabilities arising from regulatory matters and certain
litigation relating to the PCS business prior to the sale. The amount of exposure for PCS
litigation matters deemed to be probable and reasonably estimable are included in the Companys
established reserves. Adjustments to litigation reserves for matters pertaining to the PCS business
would be included within discontinued operations on the consolidated statements of operations.
Given uncertainties regarding the timing, scope, volume and outcome of pending and potential
litigation, arbitration and regulatory proceedings and other factors, the amounts of reserves are
difficult to determine and of necessity subject to future revision. Subject to the foregoing,
management of the Company believes, based on its current knowledge, after consultation with outside
legal counsel and after taking into account its established reserves, that pending legal actions,
investigations and proceedings will be resolved with no material adverse effect on the consolidated
financial condition of the Company. However, if during any period a potential adverse contingency
should become probable or resolved for an amount in excess of the established reserves, the results
of operations in that period could be materially adversely affected.
Note 14
Restructuring
In 2006, the Company implemented a specific restructuring plan to reorganize the Companys
support infrastructure as a result of the PCS branch network sale to UBS. In 2008 and early 2009,
the Company implemented certain expense reduction measures as a means to better align its cost
infrastructure with its revenues. The following table presents a summary of activity with respect
to the restructuring-related liabilities included in other liabilities and accrued expenses on the
consolidated statements of financial condition:
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
PCS
|
(Dollars in thousands)
|
|
Restructuring
|
|
Restructuring
|
Balance at December 31, 2008
|
|
$
|
8,529
|
|
|
$
|
9,928
|
|
Provision charged to continuing operations
|
|
|
3,196
|
|
|
|
376
|
|
Recovery of provision charged to operations
|
|
|
(274
|
)
|
|
|
-
|
|
Cash outlays
|
|
|
(5,913
|
)
|
|
|
(1,571
|
)
|
Non-cash write-downs
|
|
|
(260
|
)
|
|
|
-
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
5,278
|
|
|
$
|
8,733
|
|
|
|
|
|
|
Note 15
Shareholders Equity
Share Repurchase Program
In the second quarter of 2008, the Companys board of directors authorized the repurchase of
up to $100 million in common shares through June 30, 2010. During the six months ended June 30,
2009, the Company did not repurchase any shares of the Companys common stock under this
authorization. The Company has $85.0 million remaining under this authorization.
Issuance of Shares
During the six months ended June 30, 2009, the Company issued 134,700 common shares out of
treasury stock in fulfillment of $3.8 million in obligations under the Piper Jaffray Companies
Retirement Plan and issued 286,552 common shares out of treasury stock as a result of vesting and
exercise transactions under the Piper Jaffray Companies Amended and Restated 2003 Annual and
Long-Term Incentive Plan.
Note 16
Earnings Per Share
Effective January 1, 2009, the Company adopted FSP EITF 03-6-1. Under FSP EITF 03-6-1,
unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and should be included in the
earnings per share calculation under the two-class method. The Company grants restricted stock as
part of its share-based compensation program, which entitle the recipients to receive
nonforfeitable dividends or dividend equivalents during the vesting period.
Basic earnings per common share is computed by dividing net income/(loss) applicable to common
shareholders by the weighted average number of common shares outstanding for the period. Net
income/(loss) applicable to common shareholders represents net income/(loss) reduced by the
allocation of earnings to participating securities. Losses are not allocated to participating
securities. Diluted earnings per common share is calculated by adjusting the weighted average
outstanding shares to assume conversion of all potentially dilutive stock options. The computation
of earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
11,576
|
|
|
|
|
|
|
$
|
(74
|
)
|
|
|
|
|
|
$
|
8,851
|
|
|
|
|
|
|
$
|
(1,468
|
)
|
|
|
|
|
Earnings allocated to participating stock awards
|
|
|
(2,101
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
(1,582
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to common shareholders (2)
|
|
$
|
9,475
|
|
|
|
|
|
|
$
|
(74
|
)
|
|
|
|
|
|
$
|
7,269
|
|
|
|
|
|
|
$
|
(1,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for basic and diluted calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares used in basic computation
|
|
|
16,104
|
|
|
|
|
|
|
|
16,072
|
|
|
|
|
|
|
|
15,987
|
|
|
|
|
|
|
|
15,951
|
|
|
|
|
|
Stock options
|
|
|
13
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
Restricted stock
|
|
|
-
|
|
|
|
(3)
|
|
|
|
2,467
|
|
|
|
|
|
|
|
-
|
|
|
|
(3)
|
|
|
|
2,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares used in diluted computation
|
|
|
16,117
|
|
|
|
|
|
|
|
18,570
|
|
|
|
|
|
|
|
15,995
|
|
|
|
|
|
|
|
18,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.59
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
0.45
|
|
|
|
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
Diluted
|
|
$
|
0.59
|
|
|
|
|
|
|
$
|
-
|
|
|
|
(1)
|
|
|
$
|
0.45
|
|
|
|
|
|
|
$
|
(0.09
|
)
|
|
|
(1)
|
|
(1)
|
|
In accordance with SFAS 128, earnings per diluted common share is calculated using the
basic weighted average number of common shares outstanding in periods a loss is incurred.
|
|
(2)
|
|
Net income applicable to common shareholders for diluted and basic EPS may differ under the
two-class method as a result of adding the effect of the assumed exercise of stock options to
dilutive shares outstanding, which alters the ratio used to allocate earnings to common
shareholders and participating securities for purposes of calculating diluted and basic EPS.
|
|
(3)
|
|
Participating securities were included in the calculation of diluted EPS using the two-class
method, as this computation was more dilutive than the calculation using the treasury-stock
method.
|
The anti-dilutive effects from stock options was immaterial for the periods ended June
30, 2009 and 2008.
Note 17
Stock-Based Compensation
The Company maintains one stock-based compensation plan, the Piper Jaffray Companies Amended
and Restated 2003 Annual and Long-Term Incentive Plan. The plan permits the grant of equity awards,
including restricted stock and non-qualified stock options, to the Companys employees and
directors for up to 7.0 million shares of common stock. As of June 30, 2009, 1.8 million shares of
common stock from this 7.0 million share authorization were available for equity award grants. The
Company periodically grants shares of restricted stock and options to purchase Piper Jaffray
Companies common stock to employees and grants options to purchase Piper Jaffray Companies common
stock and shares of Piper Jaffray Companies common stock to its non-employee directors. The Company
believes that such awards help align the interests of employees and directors with those of
shareholders and serve as an employee retention tool. The awards granted to employees have the
following vesting periods: approximately 80 percent of the awards have three-year cliff vesting
periods, approximately 10 percent of the awards vest ratably from 2010 through 2013 on the annual
grant date anniversary, and approximately 10 percent of the awards cliff vest upon meeting a
specific performance-based metric prior to May 2013. The director awards are fully vested upon
grant. The maximum term of the stock options granted to employees and directors is ten years. The
plan provides for accelerated vesting of option and restricted stock awards if there is a change in
control of the Company (as defined in the plan), in the event of a participants death, and at the
discretion of the compensation committee of the Companys board of directors.
Prior to January 1, 2006, the Company accounted for stock-based compensation under the fair
value method of accounting as prescribed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, as amended by Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation Transition and Disclosure. As such,
the Company recorded stock-based compensation expense in the consolidated statements of operations
at fair value, net of estimated forfeitures.
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards 123(R), Share Based Payment (SFAS 123(R)), using the modified prospective
transition method. SFAS 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the statements of operations at fair value over the
service period of the award, net of estimated forfeitures.
Employee and director stock options granted prior to January 1, 2006, were expensed by the
Company on a straight-line basis over the option vesting period, based on the estimated fair value
of the award on the date of grant using a Black-Scholes option-pricing model. Employee and director
stock options granted after January 1, 2006, are expensed by the Company on a straight-line basis
over the required service period, based on the estimated fair value of the award on the date of
grant using a Black-Scholes option-pricing model. SFAS 123(R) required the Company to change the
expensing period from the vesting period to the required service period, which shortened the period
over which options are expensed for employees who are retiree-eligible on the date of grant or
become retiree-eligible during the vesting period. The number of employees that fell within this
category at January 1, 2006, was not material. In accordance with SEC guidelines, the Company did
not alter the expense recorded in connection with prior option grants for the change in the
expensing period.
Restricted stock grants are valued at the market price of the Companys common stock on the
date of grant. Restricted stock granted prior to January 1, 2006, was amortized on a straight-line
basis over the vesting period. Restricted stock grants after January 1, 2006, are amortized over
the service period. The majority of the Companys restricted stock grants provide for continued
vesting after termination, so long as the employee does not violate certain post-termination
restrictions. These post-termination restrictions do not meet the criteria for an in-substance
service condition as defined by SFAS 123(R). Accordingly, such restricted stock grants are expensed
in the period in which those awards are deemed to be earned, which is generally the calendar year
preceding the February grant date each year.
Performance-based restricted stock awards granted in 2008 were valued at the market price of
the Companys common stock on the date of grant. The restricted shares are amortized on a
straight-line basis over the period the Company expects the performance target to be met. The
performance condition must be met for the awards to vest and total compensation cost will be
recognized only if the performance condition is satisfied. The probability that the performance
conditions will be achieved and that the awards will vest is reevaluated each reporting period with
changes in actual or estimated outcomes accounted for using a cumulative effect adjustment.
The Company recorded compensation expense, net of estimated forfeitures, of $13.4 million and
$8.0 million for the three months ended June 30, 2009 and 2008, respectively, and $19.8 million and
$14.5 million for the six months ended June 30, 2009 and 2008, respectively, related to employee
restricted stock and stock option grants. The tax benefit related to the total compensation cost
for stock-based compensation arrangements totaled $5.2 million and $3.1 million for the three
months ended June 30, 2009 and 2008, respectively, and $7.7 million and $5.6 million for the six
months ended June 30, 2009 and 2008, respectively.
Equity awards cancelled as a result of recipients violating the post-termination restrictions
prior to award vesting result in the Company recording other income on the consolidated statement
of operations at the lower of the fair value of the award at grant date or the fair value of the
award at the date of cancellation. The amount the Company recorded to other income from
cancellations for the six months ended June 30, 2009 and 2008, was not significant.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes
option-pricing model, which is based on assumptions such as the risk-free interest rate, the
dividend yield, the expected volatility and the expected life of the option. The risk-free interest
rate assumption is derived from the U.S. treasury bill rate with a maturity equal to the expected
life of the option. The dividend yield assumption is derived from the assumed dividend payout over
the expected life of the option. The expected volatility assumption for 2008 grants was derived
from a combination of Company historical data and industry comparisons. The Company has only been a
publicly traded company since the beginning of 2004 and does not have sufficient historical data to
determine an appropriate expected volatility solely from the Companys own historical data. The
expected life assumption is based on an average of the following two factors: 1) industry
comparisons; and 2) the guidance provided by the SEC in Staff Accounting Bulletin No. 110, (SAB
110). SAB 110 allows the use of an acceptable methodology under which the Company can take the
midpoint of the vesting date and the full contractual term. The following table provides a summary
of the valuation assumptions used by the Company to determine the estimated value of stock option
grants in Piper Jaffray Companies common stock for the six months ended June 30, 2008:
|
|
|
|
|
|
|
2008
|
Weighted average assumptions in option valuation:
|
|
|
|
|
Risk-free interest rates
|
|
|
3.03%
|
|
Dividend yield
|
|
|
0.00%
|
|
Stock volatility factor
|
|
|
33.61%
|
|
Expected life of options (in years)
|
|
|
6.00
|
|
Weighted average fair value of options granted
|
|
$
|
15.73
|
|
The Company did not grant stock options during the six months ended June 30, 2009.
The following table summarizes the changes in the Companys outstanding stock options for the
six months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
Remaining
|
|
Aggregate
|
|
|
Options
|
|
Average
|
|
Contractual
|
|
Intrinsic
|
|
|
Outstanding
|
|
Exercise Price
|
|
Term (Years)
|
|
Value
|
December 31, 2008
|
|
|
571,067
|
|
|
$
|
44.25
|
|
|
|
6.7
|
|
|
$
|
322,749
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
571,067
|
|
|
$
|
44.25
|
|
|
|
6.2
|
|
|
$
|
1,572,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2009
|
|
|
421,424
|
|
|
$
|
43.10
|
|
|
|
5.3
|
|
|
$
|
1,271,381
|
|
As of June 30, 2009, there was no unrecognized compensation cost related to stock options
expected to be recognized over future years.
There were no options exercised for the six months ended June 30, 2009. Cash received from
option exercises for the six months ended June 30, 2008, was not significant. The tax benefit
realized for the tax deduction from option exercises was immaterial for the six months ended June
30, 2008.
The following table summarizes the changes in the Companys non-vested restricted stock for
the six months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Non-Vested
|
|
Average
|
|
|
Restricted
|
|
Grant Date
|
|
|
Stock
|
|
Fair Value
|
December 31, 2008
|
|
|
3,177,945
|
|
|
$
|
46.87
|
|
Granted
|
|
|
873,787
|
|
|
|
27.64
|
|
Vested
|
|
|
(453,666
|
)
|
|
|
47.73
|
|
Canceled
|
|
|
(22,457
|
)
|
|
|
46.16
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
3,575,609
|
|
|
$
|
40.96
|
|
As of June 30, 2009, there was $32.9 million of total unrecognized compensation cost related
to restricted stock expected to be recognized over a weighted average period of 2.98 years.
Note 18
Geographic Areas
The following table presents net revenues and long-lived assets by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
120,939
|
|
|
$
|
85,642
|
|
|
$
|
201,611
|
|
|
$
|
168,440
|
|
Europe
|
|
|
5,292
|
|
|
|
9,172
|
|
|
|
7,641
|
|
|
|
14,972
|
|
Asia
|
|
|
6,059
|
|
|
|
2,907
|
|
|
|
6,920
|
|
|
|
10,056
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
132,290
|
|
|
$
|
97,721
|
|
|
$
|
216,172
|
|
|
$
|
193,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
257,442
|
|
|
$
|
269,862
|
|
Europe
|
|
|
1,240
|
|
|
|
1,290
|
|
Asia
|
|
|
12,080
|
|
|
|
11,408
|
|
|
|
|
|
|
Consolidated
|
|
$
|
270,762
|
|
|
$
|
282,560
|
|
|
|
|
|
|
Note 19
Net Capital Requirements and Other Regulatory Matters
Piper Jaffray is registered as a securities broker dealer and an investment advisor with the
SEC and is a member of various self regulatory organizations (SROs) and securities exchanges. The
Financial Industry Regulatory Authority (FINRA) serves as Piper Jaffrays primary SRO. Piper
Jaffray is subject to the uniform net capital rule of the SEC and the net capital rule of FINRA.
Piper Jaffray has elected to use the alternative method permitted by the SEC rule, which requires
that it maintain minimum net capital of the greater of $1.0 million or 2 percent of aggregate debit
balances arising from customer transactions, as such term is defined in the SEC rule. Under its
rules, FINRA may prohibit a member firm from expanding its business or paying dividends if
resulting net capital would be less than 5 percent of aggregate debit balances. Advances to
affiliates, repayment of subordinated debt, dividend payments and other equity withdrawals by Piper
Jaffray are subject to certain notification and other provisions of the SEC and FINRA rules. In
addition, Piper Jaffray is subject to certain notification requirements related to withdrawals of
excess net capital.
At June 30, 2009, net capital calculated under the SEC rule was $293.0 million, and exceeded
the minimum net capital required under the SEC rule by $291.8 million.
Piper Jaffray Ltd., which is a registered United Kingdom broker dealer, is subject to the
capital requirements of the U.K. Financial Services Authority (FSA). As of June 30, 2009, Piper
Jaffray Ltd. was in compliance with the capital requirements of the FSA.
Piper Jaffray Asia Holdings Limited operates three entities licensed by the Hong Kong
Securities and Futures Commission, which are subject to the liquid capital requirements of the
Securities and Futures (Financial Resources) Rules promulgated under the Securities and Futures
Ordinance. As of June 30, 2009, Piper Jaffray Asia regulated entities were in compliance with the
liquid capital requirements of the Hong Kong Securities and Futures Ordinance.
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following information should be read in conjunction with the accompanying unaudited
consolidated financial statements and related notes and exhibits included elsewhere in this report.
Certain statements in this report may be considered forward-looking. Statements that are not
historical or current facts, including statements about beliefs and expectations, are
forward-looking statements. These forward-looking statements include, among other things,
statements other than historical information or statements of current condition and may relate to
our future plans and objectives and results, and also may include our belief regarding the effect
of various legal proceedings, as set forth under Legal Proceedings in Part I, Item 3 of our
Annual Report on Form 10-K for the year ended December 31, 2008 and in our subsequent reports filed
with the SEC. Forward-looking statements involve inherent risks and uncertainties, and important
factors could cause actual results to differ materially from those anticipated, including those
factors discussed below under External Factors Impacting Our Business as well as the factors
identified under Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year
ended December 31, 2008, as updated in our subsequent reports filed with the SEC. These reports are
available at our web site at www.piperjaffray.com and at the SEC web site at www.sec.gov.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation
to update them in light of new information or future events.
Executive Overview
Our business principally consists of providing investment banking, institutional brokerage,
asset management and related financial services to middle-market companies, private equity groups,
public entities, non-profit entities and institutional investors in the United States, Europe and
Asia. We generate revenues primarily through the receipt of advisory and financing fees earned on
investment banking activities, commissions and sales credits earned on equity and fixed income
institutional sales and trading activities, net interest earned on securities inventories, profits
and losses from trading activities related to these securities inventories and asset management
fees.
The securities business is a human capital business. Accordingly, compensation and benefits
comprise the largest component of our expenses, and our performance is dependent upon our ability
to attract, develop and retain highly skilled employees who are motivated and committed to
providing the highest quality of service and guidance to our clients.
During the second quarter of 2009, we were able to capitalize on the favorable fixed income
trading environment and improved equity markets. The positive fixed income sales and trading
results we experienced in the first quarter of 2009 continued into the second quarter driven by
solid client activity and favorable market opportunities. The equity capital market conditions
improved during the second quarter of 2009 and we were able to complete several equity financing
and advisory transactions across all of our focus sectors.
RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009
For the three months ended June 30, 2009, we recorded net income of $11.6 million from
continuing operations, or $0.59 per diluted share, compared with a net loss from continuing
operations of $1.5 million for the corresponding period in the prior year. Net revenues for the
second quarter of 2009 were $132.3 million, an increase of 35.4 percent from $97.7 million reported
in the year-ago period. Higher revenues were recorded in both our investment banking and
institutional brokerage businesses.
For the six months ended June 30, 2009, net income from continuing operations was $8.9
million, or $0.45 per diluted share, compared with a loss of $2.9 million from continuing
operations for the prior-year period. Net revenues for the first half of 2009 increased 11.7
percent to $216.2 million driven by higher fixed income institutional sales and trading revenues.
EXTERNAL FACTORS IMPACTING OUR BUSINESS
Performance in the financial services industry in which we operate is highly correlated to the
overall strength of economic conditions and financial market activity. Overall market conditions
are a product of many factors, which are beyond our control and mostly unpredictable. These factors
may affect the financial decisions made by investors, including their level of participation in the
financial markets. In turn, these decisions may affect our business results. With respect to
financial market activity, our profitability is sensitive to a variety of factors, including the
demand for investment banking services as reflected by the number and size of equity and debt
financings and merger and acquisition transactions, the volatility of the equity and fixed income
markets, changes in interest rates (especially rapid and extreme changes), the level and shape of
various yield curves, the volume and value of trading in securities, and the demand for asset
management services as reflected by the amount of assets under management.
Factors that differentiate our business within the financial services industry also may affect
our financial results. For example, our business focuses on a middle-market clientele in specific
industry sectors. If the business environment for our focus sectors impacts one or more sectors
disproportionately as compared to the economy as a whole or does not recover on pace with other
sectors of the economy, our business and results of operations will be negatively impacted. In
addition, our business could be affected differently than overall market trends. Given the
variability of the capital markets and securities businesses, our earnings may fluctuate
significantly from period to period, and results for any individual period should not be considered
indicative of future results.
OUTLOOK FOR THE REMAINDER OF 2009
During the second quarter of 2009, conditions in the equity capital markets improved, although
revenues remained below our historical quarterly average. Within the U.S. market, there were
thirteen initial public offerings completed industry-wide and we participated in five. We
completed several equity financing and advisory transactions across all our focus sectors. If
markets remain conducive to equity financing, as we experienced in the second quarter, we believe
equity financing activity in our focus sectors will continue. Our public finance business performed
well in the second quarter and we anticipate this business may improve further if the
non-investment grade portion of the tax-exempt markets begins to function. We believe advisory
activity will be challenged in the second half of the year, as buyers remain cautious. We
anticipate U.S. equity and fixed income trading will continue to perform reasonably well, although
we believe the very favorable fixed income sales and trading results we experienced in the first
half of 2009 will moderate as trading spreads tighten.
For the six months ended June 30, 2009, non-compensation expenses were $64.5 million, down 21
percent compared to the first half of 2008. This decline was a result of actions taken in 2008 and
continued expense discipline. All expense categories reflected a decline compared with the year-ago
period. We anticipate going forward in 2009 that our non-compensation expense run-rate will be in
the range of approximately $32 million to $33 million per quarter.
Results of Operations
FINANCIAL SUMMARY FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008
The following table provides a summary of the results of our operations and the results of our
operations as a percentage of net revenues for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage of Net
|
|
|
|
For the Three Months Ended
|
|
Revenues
|
|
|
|
June 30,
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
v2008
|
|
2009
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
62,150
|
|
|
$
|
32,184
|
|
|
|
93.1
|
|
%
|
|
47.0
|
|
%
|
|
33.0
|
|
%
|
Institutional brokerage
|
|
|
60,852
|
|
|
|
51,196
|
|
|
|
18.9
|
|
|
|
46.0
|
|
|
|
52.4
|
|
|
Interest
|
|
|
8,973
|
|
|
|
13,114
|
|
|
|
(31.6
|
)
|
|
|
6.8
|
|
|
|
13.4
|
|
|
Asset management
|
|
|
3,240
|
|
|
|
4,697
|
|
|
|
(31.0
|
)
|
|
|
2.4
|
|
|
|
4.8
|
|
|
Other income/(loss)
|
|
|
(950
|
)
|
|
|
2,356
|
|
|
|
N/M
|
|
|
|
(0.7
|
)
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
134,265
|
|
|
|
103,547
|
|
|
|
29.7
|
|
|
|
101.5
|
|
|
|
106.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,975
|
|
|
|
5,826
|
|
|
|
(66.1
|
)
|
|
|
1.5
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
132,290
|
|
|
|
97,721
|
|
|
|
35.4
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
79,377
|
|
|
|
61,087
|
|
|
|
29.9
|
|
|
|
60.0
|
|
|
|
62.5
|
|
|
Occupancy and equipment
|
|
|
7,680
|
|
|
|
8,133
|
|
|
|
(5.6
|
)
|
|
|
5.8
|
|
|
|
8.3
|
|
|
Communications
|
|
|
5,430
|
|
|
|
5,869
|
|
|
|
(7.5
|
)
|
|
|
4.1
|
|
|
|
6.0
|
|
|
Floor brokerage and clearance
|
|
|
3,232
|
|
|
|
3,899
|
|
|
|
(17.1
|
)
|
|
|
2.5
|
|
|
|
4.0
|
|
|
Marketing and business development
|
|
|
3,419
|
|
|
|
7,381
|
|
|
|
(53.7
|
)
|
|
|
2.6
|
|
|
|
7.6
|
|
|
Outside services
|
|
|
7,415
|
|
|
|
11,308
|
|
|
|
(34.4
|
)
|
|
|
5.6
|
|
|
|
11.6
|
|
|
Restructuring-related expenses
|
|
|
3,572
|
|
|
|
729
|
|
|
|
390.0
|
|
|
|
2.7
|
|
|
|
0.7
|
|
|
Other operating expenses
|
|
|
3,747
|
|
|
|
6,604
|
|
|
|
(43.3
|
)
|
|
|
2.8
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
113,872
|
|
|
|
105,010
|
|
|
|
8.4
|
|
%
|
|
86.1
|
|
|
|
107.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income tax expense/(benefit)
|
|
|
18,418
|
|
|
|
(7,289
|
)
|
|
|
N/M
|
|
|
|
13.9
|
|
|
|
(7.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense/(benefit)
|
|
|
6,842
|
|
|
|
(5,776
|
)
|
|
|
N/M
|
|
|
|
5.1
|
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from continuing operations
|
|
|
11,576
|
|
|
|
(1,513
|
)
|
|
|
N/M
|
|
|
|
8.8
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
|
|
-
|
|
|
|
1,439
|
|
|
|
N/M
|
|
|
|
-
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
11,576
|
|
|
$
|
(74
|
)
|
|
|
N/M
|
|
|
|
8.8
|
|
%
|
|
(0.1
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
9,475
|
|
|
|
N/A
|
|
|
|
N/M
|
|
|
|
7.2
|
|
%
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M - Not meaningful
N/A - Not applicable as no allocation of income was made due to loss position
Our consolidated results of operations for the three months ended June 30, 2009 and June 30,
2008 include the effect of the adoption of FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). For
further discussion, see Note 16, Earnings Per Share, in our unaudited consolidated financial
statements.
For the three months ended June 30, 2009, we recorded net income of $11.6 million. Net
revenues for the three months ended June 30, 2009, were $132.3 million, a 35.4 percent increase
from the year-ago period. For the second quarter of 2009, investment banking revenues increased to
$62.2 million, compared with revenue of $32.2 million in the prior-year period. The increase in
investment banking revenues was attributable to higher equity and public finance activity as well
as increased advisory services revenues. In the second quarter of 2009, institutional brokerage
revenues increased 18.9 percent to $60.9 million, compared with $51.2 million in the corresponding
period in the prior year, driven by higher fixed income sales and trading revenues, including significant increases in both commissions and trading profits, resulting from a
favorable fixed income trading environment. In the second quarter of 2009, net interest income
decreased slightly to $7.0 million, compared with $7.3 million in the second quarter of 2008. For
the three months ended June 30, 2009, asset management fees were $3.2 million, compared with $4.7
million in the prior-year period, driven by lower assets under management resulting from declining
asset valuations. In the second quarter of 2009, other income was a loss of $1.0 million, compared
with income of $2.4 million in the prior-year period. The loss in the second quarter of 2009 was a
result of losses recorded on our principal investments. In the second quarter of 2008, income
associated with the forfeiture of equity awards more than offset losses on our principal
investments. Non-interest expenses increased to $113.9 million for the three months ended June 30,
2009, from $105.0 million in the corresponding period in the prior year, primarily as a result of
higher compensation and benefits expenses resulting from increased revenues.
NON-INTEREST EXPENSES
Compensation and Benefits
- Compensation and benefits expenses, which are the largest
component of our expenses, include salaries, bonuses, benefits, stock-based compensation,
employment taxes and other employee costs. A portion of compensation expense is comprised of
variable incentive arrangements, including discretionary bonuses, the amount of which fluctuates in
proportion to the level of business activity, increasing with higher revenues and operating
profits. Other compensation costs, primarily base salaries and benefits, are more fixed in nature.
The timing of bonus payments, which generally occur in February, have a greater impact on our cash
position and liquidity than is reflected in our statements of operations.
For the three months ended June 30, 2009, compensation and benefits expenses increased 29.9
percent to $79.4 million from $61.1 million in the corresponding period in 2008. This increase was
due to higher variable compensation costs resulting from higher investment banking and
institutional brokerage revenues. Compensation and benefits expenses as a percentage of net
revenues were 60.0 percent for the second quarter of 2009, compared with 62.5 percent for the
second quarter of 2008.
Occupancy and Equipment
- In the second quarter of 2009, occupancy and equipment expenses were
$7.7 million, compared with $8.1 million for the corresponding period in 2008. The decrease was
attributable to prior investments in technology and equipment becoming fully depreciated.
Communications
- Communication expenses include costs for telecommunication and data
communication, primarily consisting of expenses for obtaining third-party market data information.
For the three months ended June 30, 2009, communications expenses were $5.4 million, compared with
$5.9 million for the prior-year period.
Floor Brokerage and Clearance
- For the three months ended June 30, 2009, floor brokerage and
clearance expenses were $3.2 million, compared with $3.9 million for the three months ended June
30, 2008.
Marketing and Business Development
- Marketing and business development expenses include
travel and entertainment and promotional and advertising costs. In the second quarter of 2009,
marketing and business development expenses decreased 53.7 percent to $3.4 million, compared with
$7.4 million in the second quarter of 2008. This decrease was due to a significant decline in
travel expenses as well as cost savings actions taken in late 2008. Additionally, in the second
quarter of 2008, we experienced a high number of travel expense write-offs associated with deals
that were not completed because of the challenging market conditions.
Outside Services
- Outside services expenses include securities processing expenses,
outsourced technology functions, outside legal fees and other professional fees. Outside services
expenses decreased 34.4 percent to $7.4 million in the second quarter of 2009, compared with $11.3
million for the prior-year period, due to a reduction in legal fees as well as reduced credit
facility fees and lower
consulting costs. The second quarter of 2008 included expenses for
non-reimbursable legal fees associated with deals that were not completed because of the
challenging market conditions.
Restructuring-Related Expense
- During the second quarter of 2009, we recorded a pre-tax
restructuring charge of $3.6 million, primarily consisting of employee severance costs and charges
related to leased office space.
Other Operating Expenses
- Other operating expenses include insurance costs, license and
registration fees, expenses related to our charitable giving program, amortization of intangible
assets and litigation-related expenses, which consist of the amounts we reserve and/or pay out
related to legal and regulatory matters. In the second quarter of 2009, other operating expenses
decreased to $3.7 million, compared with $6.6 million in the second quarter of 2008. In the second
quarter of 2008, we recorded $2.9 million in litigation-related expenses.
Income Taxes
- For the three months ended June 30, 2009, our provision for income taxes was
$6.8 million, equating to an effective tax rate of 37.1 percent. For the three months ended June
30, 2008, income taxes from continuing operations was a benefit of $5.8 million, equating an
effective tax rate of 79.2 percent. The 79.2 percent effective tax rate in the second quarter of
2008 was driven by the large amount of tax-exempt municipal interest income and operating losses.
NET REVENUES FROM OPERATIONS (DETAIL)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2009
|
|
2008
|
|
v2008
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
23,294
|
|
|
$
|
8,705
|
|
|
|
167.6
|
%
|
Debt
|
|
|
20,126
|
|
|
|
15,297
|
|
|
|
31.6
|
|
Advisory services
|
|
|
19,574
|
|
|
|
11,256
|
|
|
|
73.9
|
|
|
|
|
|
|
|
|
|
Total investment banking
|
|
|
62,994
|
|
|
|
35,258
|
|
|
|
78.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional sales and trading
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
30,384
|
|
|
|
35,345
|
|
|
|
(14.0
|
)
|
Fixed income
|
|
|
35,166
|
|
|
|
20,804
|
|
|
|
69.0
|
|
|
|
|
|
|
|
|
|
Total institutional sales and trading
|
|
|
65,550
|
|
|
|
56,149
|
|
|
|
16.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management
|
|
|
3,240
|
|
|
|
4,697
|
|
|
|
(31.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(loss)
|
|
|
506
|
|
|
|
1,617
|
|
|
|
(68.7
|
)
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
132,290
|
|
|
$
|
97,721
|
|
|
|
35.4
|
%
|
|
|
|
|
|
|
|
|
Investment banking revenues comprise all the revenues generated through financing and
advisory services activities including derivative activities that relate to debt financing. To
assess the profitability of investment banking, we aggregate investment banking fees with the net
interest income or expense associated with these activities.
Investment banking revenues increased 78.7 percent to $63.0 million in the second quarter of
2009, compared with $35.3 million in the corresponding period in 2008. For the three months ended
June 30, 2009, equity financing revenues increased to $23.3 million, compared with $8.7 million in
the prior-year period due to increased activity. Equity capital markets activity was depressed in
the second quarter of 2008 due to difficult market conditions, which continued through the first
quarter of 2009. We began to see some improvement during the second quarter of 2009, although
equity financing revenues remain below our historical quarterly average. In the second quarter of
2009, we completed 38 equity financings raising $11.2 billion in capital for our clients. We acted
as book runner on five of these transactions. In the second quarter of 2008, we completed nine
equity financings raising $1.5 billion in capital for our clients, serving as book runner on two of
the nine financings. Debt financing revenues in the second quarter of 2009 increased 31.6 percent
to $20.1 million due to higher public finance underwriting revenues attributable to an increased
number of transactions completed. For the second quarter of 2009, we underwrote 137 tax-exempt
issues with a par value of $3.8 billion, compared with 97 tax-exempt issues with a par value of
$2.5 billion for the prior-year period. For the three months ended June 30, 2009, advisory
services revenues increased 73.9 percent to $19.6 million due to increased merger and acquisition
activity and higher average revenue per transaction. We completed 11 advisory transactions with an
aggregate transaction value of $1.8 billion during the second quarter of 2009, compared with 9
advisory transactions with an aggregate transaction value of $0.6 billion in the second quarter of
2008.
Institutional sales and trading revenues comprise all the revenues generated through trading
activities, which consist primarily of facilitating customer trades. To assess the profitability of
institutional sales and trading 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. 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 and the timing of
transactions based on market opportunities.
For the three months ended June 30, 2009, institutional sales and trading revenues increased
16.7 percent from the prior-year period to $65.6 million, as strong fixed income sales and trading
revenues more than offset the decline in equity sales and trading revenues. Equity institutional
sales and trading revenues were $30.4 million in the second quarter of 2009, compared with $35.3
million in the prior year period due to a decline in net commissions earned per share.
Fixed income institutional sales and trading revenues increased 69.0 percent to $35.2 million in
the second quarter of 2009. The significant increase in revenues was due to significant increases in both commissions and trading profits
and incremental revenues as a result of senior hires. Additionally, in
the second quarter of 2008, we incurred trading losses in our high yield and structured products
business.
For the three months ended June 30, 2009, asset management fees decreased to $3.2 million,
compared with $4.7 million in the prior-year period, due to a decline in assets under management
resulting from a decline in asset valuations. At June 30, 2009, we had $5.9 billion in assets under
management compared with $8.1 billion at June 30, 2008.
Other income/loss includes gains and losses from our investments in private equity and venture
capital funds, other firm investments and income associated with the forfeiture of equity awards.
In the second quarter of 2009, we recorded income of $0.5 million, compared with $1.6 million of
income in the prior year period as we recorded higher income associated with forfeitures of equity
awards in the second quarter of 2008.
DISCONTINUED OPERATIONS
Discontinued operations include the resolution of certain legal matters and revisions to
restructuring estimates related to our Private Client Services (PCS) business, which we sold to
UBS on August 11, 2006.
In the second quarter of 2008, discontinued operations recorded net income of $1.4 million,
which primarily related to a PCS legal settlement.
FINANCIAL SUMMARY FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008
The following table provides a summary of the results of our
operations and the results of our
operations as a percentage of net revenues for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage of Net
|
|
|
|
For the Six Months Ended
|
|
Revenues
|
|
|
|
June 30,
|
|
For the Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
v2008
|
|
2009
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
86,500
|
|
|
$
|
87,449
|
|
|
|
(1.1
|
)
|
%
|
|
40.0
|
|
%
|
|
45.2
|
|
%
|
Institutional brokerage
|
|
|
115,879
|
|
|
|
81,008
|
|
|
|
43.0
|
|
|
|
53.6
|
|
|
|
41.9
|
|
|
Interest
|
|
|
16,261
|
|
|
|
28,273
|
|
|
|
(42.5
|
)
|
|
|
7.5
|
|
|
|
14.6
|
|
|
Asset management
|
|
|
6,249
|
|
|
|
8,670
|
|
|
|
(27.9
|
)
|
|
|
2.9
|
|
|
|
4.5
|
|
|
Other income/(loss)
|
|
|
(4,549
|
)
|
|
|
772
|
|
|
|
N/M
|
|
|
|
(2.1
|
)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
220,340
|
|
|
|
206,172
|
|
|
|
6.9
|
|
|
|
101.9
|
|
|
|
106.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
4,168
|
|
|
|
12,704
|
|
|
|
(67.2
|
)
|
|
|
1.9
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
216,172
|
|
|
|
193,468
|
|
|
|
11.7
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
129,701
|
|
|
|
120,364
|
|
|
|
7.8
|
|
|
|
60.0
|
|
|
|
62.2
|
|
|
Occupancy and equipment
|
|
|
14,198
|
|
|
|
16,243
|
|
|
|
(12.6
|
)
|
|
|
6.6
|
|
|
|
8.4
|
|
|
Communications
|
|
|
11,529
|
|
|
|
12,608
|
|
|
|
(8.6
|
)
|
|
|
5.3
|
|
|
|
6.5
|
|
|
Floor brokerage and clearance
|
|
|
6,114
|
|
|
|
6,553
|
|
|
|
(6.7
|
)
|
|
|
2.8
|
|
|
|
3.4
|
|
|
Marketing and business development
|
|
|
7,864
|
|
|
|
13,477
|
|
|
|
(41.6
|
)
|
|
|
3.6
|
|
|
|
7.0
|
|
|
Outside services
|
|
|
14,934
|
|
|
|
19,950
|
|
|
|
(25.1
|
)
|
|
|
6.9
|
|
|
|
10.3
|
|
|
Restructuring-related expenses
|
|
|
3,572
|
|
|
|
3,583
|
|
|
|
(0.3
|
)
|
|
|
1.7
|
|
|
|
1.8
|
|
|
Other operating expenses
|
|
|
6,298
|
|
|
|
9,068
|
|
|
|
(30.5
|
)
|
|
|
2.9
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
194,210
|
|
|
|
201,846
|
|
|
|
(3.8
|
)
|
%
|
|
89.8
|
|
|
|
104.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income tax expense/(benefit)
|
|
|
21,962
|
|
|
|
(8,378
|
)
|
|
|
N/M
|
|
|
|
10.2
|
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense/(benefit)
|
|
|
13,111
|
|
|
|
(5,471
|
)
|
|
|
N/M
|
|
|
|
6.1
|
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from continuing operations
|
|
|
8,851
|
|
|
|
(2,907
|
)
|
|
|
N/M
|
|
|
|
4.1
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
|
|
-
|
|
|
|
1,439
|
|
|
|
N/M
|
|
|
|
-
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
8,851
|
|
|
$
|
(1,468
|
)
|
|
|
N/M
|
|
|
|
4.1
|
|
%
|
|
(0.8
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
7,269
|
|
|
|
N/A
|
|
|
|
N/M
|
|
|
|
3.4
|
|
%
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M
- Not meaningful
N/A
- Not applicable as no allocation of income was made due to loss position
Our consolidated results of operations for the six months ended
June 30, 2009 and June 30,
2008 include the effect of the adoption of FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). For
further discussion, see Note 16, Earnings Per Share, in our unaudited consolidated financial
statements.
Except as discussed below, the description of non-interest expenses
from continuing
operations, net revenues from continuing operations, and discontinued operations as well as the
underlying reasons for variances to prior year are substantially the same as the comparative
quarterly discussion.
For the six months ended June 30, 2009, net income from
continuing operations totaled $8.9
million, compared with a net loss from continuing operations of $2.9 million in the corresponding
period in 2008. Net revenues from continuing operations were $216.2 million for the six months
ended June 30, 2009, an increase of 11.7 percent from the year-ago period. For the six months ended
June 30, 2009, investment banking revenues were $86.5 million, essentially flat compared with the
first half of 2008. Institutional brokerage revenues increased 43.0 percent to $115.9 million,
compared with revenues of $81.0 million in the prior-year period due to higher fixed income sales
and trading revenues. Net interest income for the first six months of 2009 decreased to $12.1
million, down from $15.6 million for the first six months of 2008. The decrease was primarily the
result of a decline in net interest income earned on net inventory balances as we significantly
reduced our balance sheet exposure in late 2008 and early 2009. For the first half of 2009, asset
management fees were $6.2 million, compared with $8.7 million in the prior-year period, driven by
lower assets under management resulting from declining asset valuations. Other income for the six
months ended June 30, 2009, was a loss of $4.5 million, compared with income of $0.8 million for
the corresponding period in 2008. The change in other income is attributable to higher losses
recorded on our principal investments in the first six months of 2009. Additionally, in the first
six months of 2008 we recorded higher income on forfeitures of equity awards. Non-interest expenses
decreased to $194.2 million for the six months ended June 30, 2009, from $201.8 million in the
corresponding period in the prior year, primarily as a result of cost savings actions completed in
both 2008 and the first half of 2009.
NON-INTEREST EXPENSES
For the six months ended June 30, 2009, non-interest expenses
decreased 3.8 percent to $194.2
million, compared with $201.8 million for the prior year period. The underlying reasons for the
decrease for the six months ended June 30, 2009, when compared with the six months ended June 20,
2008, are the same as those described in the comparative quarterly discussion.
Income Taxes
For the six months ended June 30,
2009, our provision for income taxes was
$13.1 million, equating to an effective tax rate of 59.7 percent. For the six months ended June
30, 2008, income taxes from continuing operations was a benefit of $5.5 million, equating to an
effective tax rate of 65.3 percent. The effect tax rate of 59.7 percent for the first half of 2009
included $3 million of one-time items that increased tax expense. Additionally in the first half of
2009, we did not record a tax benefit related to some foreign subsidiary net operating loss
carryforward deductions.
NET REVENUES FROM CONTINUING OPERATIONS (DETAIL)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
2009
|
|
2008
|
|
v2008
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
27,357
|
|
|
$
|
25,223
|
|
|
|
8.5
|
|
%
|
Debt
|
|
|
32,514
|
|
|
|
34,667
|
|
|
|
(6.2
|
)
|
|
Advisory services
|
|
|
28,389
|
|
|
|
36,581
|
|
|
|
(22.4
|
)
|
|
|
|
|
|
|
|
|
|
Total investment banking
|
|
|
88,260
|
|
|
|
96,471
|
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional sales and trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
61,046
|
|
|
|
66,525
|
|
|
|
(8.2
|
)
|
|
Fixed income
|
|
|
62,971
|
|
|
|
23,143
|
|
|
|
172.1
|
|
|
|
|
|
|
|
|
|
|
Total institutional sales and trading
|
|
|
124,017
|
|
|
|
89,668
|
|
|
|
38.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management
|
|
|
6,249
|
|
|
|
8,670
|
|
|
|
(27.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(loss)
|
|
|
(2,354
|
)
|
|
|
(1,341
|
)
|
|
|
75.5
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
216,172
|
|
|
$
|
193,468
|
|
|
|
11.7
|
|
%
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2009, investment banking
revenues decreased to $88.3
million, compared with $96.5 million in the prior-year period. Equity financing revenues increased
to $27.4 million in the first half of 2009, compared with $25.2 million in the corresponding period
in the prior year. During the six months ended June 30, 2009, we completed 42 equity financings,
raising $11.3 billion in capital for our clients. During the six months ended June 30, 2008, we
completed 24 equity financings, raising $3.7 billion in capital, excluding the $19.7 billion of
capital raised from the VISA initial public offering, on which we were a co-lead manager. In the
first half of 2009, debt financing revenues declined to $32.5 million, compared with $34.7 million
in the corresponding period in 2008 as increased public finance revenues were more than offset by a
decline in corporate debt and derivative financing revenues. Advisory services revenues for the
first six months of 2009 declined 22.4 percent to $28.4 million due to a decline in activity. For
the six months ended June 30, 2009, we completed 17 advisory transactions, compared with 26
advisory transactions in the first half of 2008.
For the six months ended June 30, 2009, institutional sales
and trading revenues increased
38.3 percent to $124.0 million, compared with the prior-year period. Equity institutional sales and
trading revenue decreased 8.2 percent to $61.0 million in the first half of 2009, compared with
$66.5 million in the first half of 2008. Performance in the U.S. high touch equities business was
solid in the first half of 2009, but revenues were lower due to a decline in net commissions
earned. Fixed income institutional sales and trading revenues increased significantly to $63.0
million for the six months ended June 30, 2009, compared with $23.1 million for the corresponding
period in 2008, driven by a favorable fixed income trading environment resulting in strong
performance across municipal and taxable products. Additionally, in the first half of 2008, we
recorded a net loss in high yield and structured products driven by lower commissions and trading
losses. Market conditions for high yield corporate bonds and structured products were difficult in
the first half of 2008, and we have since liquidated certain of our inventories in high yield and
structured products to reduce our exposure in this business.
For the six months ended June 30, 2009, other income/loss
recorded a loss of $2.4 million,
compared with a net loss of $1.3 million in the corresponding period in 2008. The increased loss
in the first half of 2009 was a result of higher income associated with the forfeiture of equity
awards in the year-ago period.
DISCONTINUED OPERATIONS
For the six months ended June 30, 2008, discontinued
operations recorded net income of $1.4
million. The underlying reasons for income recorded to discontinued operations for the six months
ended June 30, 2008, are the same as those described in the discussion for the three months ended
June 30, 2008.
Recent Accounting Pronouncements
Recent accounting pronouncements are set forth in Note 3 to our
unaudited consolidated
financial statements, and are incorporated herein by reference.
Critical Accounting Policies
Our accounting and reporting policies comply with generally
accepted accounting principles
(GAAP) and conform to practices within the securities industry. The preparation of financial
statements in compliance with 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 GAAP.
For a full description of our significant accounting policies, see
Note 2 to our consolidated
financial statements included in our Annual Report on Form 10-K for the year-ended December 31,
2008. We believe that of our significant accounting policies, the following are our critical
accounting policies.
VALUATION OF FINANCIAL INSTRUMENTS
Financial instruments and other inventory positions owned,
financial instruments and other
inventory positions owned and pledged as collateral, financial instruments and other inventory
positions sold, but not yet purchased, and securitized municipal tender option bonds on our
consolidated statements of financial condition consist of financial instruments recorded at fair
value. 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 current transaction between willing parties, other than in a forced or liquidation
sale. When available, we use observable market prices, observable market parameters, or broker or
dealer prices (bid and ask prices) to derive the fair value of the instrument. In the case of
financial instruments transacted on recognized exchanges, the observable market prices represent
quotations for completed transactions from the exchange on which the financial instrument is
principally traded. Bid prices represent the highest price a buyer is willing to pay for a
financial instrument at a particular time. Ask prices represent the lowest price a seller is
willing to accept for a financial instrument at a particular time.
A substantial percentage of the fair value of our trading
securities owned, trading securities
owned and pledged as collateral, and trading securities sold, but not yet purchased, are based on
observable market prices, observable market parameters, or derived from broker or dealer prices.
The availability of observable market prices and pricing parameters can vary from product to
product. Where available, observable market prices and pricing or market parameters in a product
may be used to derive a price without requiring significant judgment. In certain markets,
observable market prices or market parameters are not available for all products, and fair value is
determined using techniques appropriate for each particular product. These techniques involve some
degree of judgment.
For investments in illiquid securities that do not have readily
determinable fair values, the
determination of fair value requires us to estimate the value of the securities using the best
information available. Among the factors considered by us in determining the fair value of such
financial instruments are the cost, terms and liquidity of the investment, the financial condition
and operating results of the issuer, the quoted market price of publicly traded securities with
similar quality and yield, and other factors generally pertinent to the valuation of investments.
In instances where a security is subject to transfer restrictions, the value of the security is
based primarily on the quoted price of a similar security without restriction but may be reduced by
an amount estimated to reflect such restrictions. Even where the value of a security is derived
from an independent source, certain assumptions may be required to determine the securitys fair
value. For example, we assume that the size of positions that we hold would not be large enough to
affect the quoted price of the securities if we sell them, and that any such sale would happen in
an orderly manner. The actual value realized upon disposition could be different from the current
estimated fair value.
Derivatives are valued using quoted market prices when available or
pricing models based on
the net present value of estimated future cash flows. Management deemed the net present value of
estimated future cash flows model to be the best estimate of fair value as most of our derivative
products are interest rate products. The valuation models used require inputs including contractual
terms, market prices, yield curves, credit curves and measures of volatility. The valuation models
are monitored over the life of the derivative product. If there are any changes in the underlying
inputs, the model is updated for those new inputs.
Financial instruments carried at contract amounts have short-term
maturities (one year or
less), are repriced frequently or bear market interest rates and, accordingly, those contracts are
carried at amounts approximating fair value. Financial instruments carried at contract amounts on
our consolidated statements of financial condition include receivables from and payables to
brokers, dealers and clearing organizations, securities purchased under agreements to resell,
securities sold under agreements to repurchase, receivables from and payables to customers and
short-term financing.
SFAS 157 establishes a fair value hierarchy that prioritizes the
inputs to valuation
techniques used to measure fair value. The objective of a fair value measurement is to determine
the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (the exit price). The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III
measurements). Assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement.
Instruments that trade infrequently and therefore have little or no
price transparency are
classified within Level III based on the results of our price verification process. The Companys
Level III assets were $68.0 million and $46.6 million as of June 30, 2009 and December 31, 2008,
respectively, and represented approximately 11.7 percent and 7.6 percent of financial instruments
measured at fair value. At June 30, 2009, this balance primarily consisted of auction-rate
securities for which the market has been dislocated and largely ceased to function; asset-backed
securities, principally collateralized by aircraft, that have experienced low volumes of executed
transactions, such that unobservable inputs had to be utilized for the fair value measurements; and
corporate bonds where there was less frequent or nominal market activity. Our auction-rate
securities are valued based upon our expectations of issuer refunding plans and using internal
models.
Asset-backed securities are valued using cash flow models that utilize unobservable
inputs that include airplane lease rates, utilization rates, trust costs, aircraft residual values
and assumptions on timing of costs. Corporate bonds are valued using prices from comparable
securities. We could experience reductions in the value of these inventory positions, which would
have a negative impact on our business and results of operations.
During the first half of 2009, we recorded net purchases of
$12.9 million of Level III assets,
primarily consisting of asset-backed securities and corporate bonds. We had net transfers of $3.8
million of assets from Level III to Level II in the first six months of 2009 and $11.3 million of
net transfers of assets from Level II to Level III. Transfers of assets from Level III to Level II
were primarily related to convertible securities transaction activity as liquidity increased and
external prices became more observable. Transfers of assets from Level II to Level III primarily
consisted of asset-backed securities, principally collateralized by aircraft, that experienced low
volume of executed transactions, such that unobservable inputs had to be utilized for the fair
value measurement. Our valuation adjustments (realized and unrealized) increased Level III assets
by $1.1 million.
During the six months ended June 30, 2009, we recorded net
purchases of $0.4 million of Level
III asset-backed liabilities. We had $1.3 million of liabilities transfer from Level II to Level
III, related to asset-backed securities. Our valuation adjustments (realized and unrealized)
decreased Level III liabilities by $0.5 million.
GOODWILL AND INTANGIBLE ASSETS
We record all assets and liabilities acquired in purchase
acquisitions, including goodwill and
other intangible assets, at fair value as required by Statement of Financial Accounting Standards
No. 141, Business Combinations. Determining the fair value of assets and liabilities acquired
requires certain management estimates. At June 30, 2009, we had goodwill of $160.4 million. Of this
goodwill balance, $105.5 million is a result of the 1998 acquisition by U.S. Bancorp of our
predecessor, Piper Jaffray Companies Inc., and its subsidiaries.
Under Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible
Assets, we are required to perform impairment tests of our goodwill and indefinite-lived
intangible assets annually and on an interim basis when certain events or circumstances exist. We
have elected to test for goodwill impairment in the fourth quarter of each calendar year. The
goodwill impairment test is a two-step process, which requires management to make judgments in
determining what assumptions to use in the
calculation. The first step of the process consists of estimating the fair value of our two
principal reporting units based on the following factors: our market capitalization, a discounted
cash flow model using revenue and profit forecasts, public market comparables and multiples of
recent mergers and acquisitions of similar businesses. Valuation multiples may be based on
revenues, price-to-earnings and tangible capital ratios of comparable public companies and business
segments. These multiples may be adjusted to consider competitive differences including size,
operating leverage and other factors. The estimated fair values of our reporting units are compared
with their carrying values, which includes the allocated goodwill. If the estimated fair value is
less than the carrying values, a second step is performed to compute the amount of the impairment
by determining an implied fair value of goodwill. The determination of a reporting units
implied fair value of goodwill requires us to allocate the estimated fair value of the reporting
unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the
implied fair value of goodwill, which is compared to its corresponding carrying value.
As noted above, the initial recognition of goodwill and other
intangible assets and the
subsequent impairment analysis requires management to make subjective judgments concerning
estimates of how the acquired assets or businesses will perform in the future using valuation
methods including discounted cash flow analysis. Our estimated cash flows typically extend for five
years and, 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, discount rates 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.
We completed our annual goodwill impairment testing as of
November 30, 2008, which resulted in
a non-cash goodwill impairment charge of $130.5 million. This charge related to our capital markets
reporting unit and primarily pertained to goodwill created from the 1998 acquisition of our
predecessor, Piper Jaffray Companies Inc., and its subsidiaries by U.S. Bancorp, which was retained
by us when we spun-off from U.S. Bancorp on December 31, 2003. The factors used by us in estimating
our capital markets reporting unit fair value included the following factors: our market
capitalization, a discounted cash flow model, public market comparables and multiples of recent
mergers and acquisitions. Our market capitalization was measured based on the average closing price
for Piper Jaffray Companies common stock over the month of November 2008 and was adjusted to
include an estimate for a control premium. Our discounted cash flow model was based on our
five-year plan and included an estimated terminal value based upon historical transaction
valuations. Public market industry peers were valued based on revenues and tangible common equity.
Recent mergers and acquisitions were not a significant factor in the 2008 goodwill evaluation. The
impairment charge resulted from deteriorating economic and market conditions in 2008, which led to
reduced valuations in the factors discussed above.
Further deterioration in economic or market conditions during
future periods could result in
additional impairment charges, which could materially adversely affect the results of operations in
that period.
Our annual goodwill impairment testing resulted in no impairment
associated with our asset
management reporting unit, principally comprised of FAMCO. In addition, we tested the
definite-lived intangible assets acquired as part of the FAMCO acquisition and concluded there was
no impairment.
STOCK-BASED COMPENSATION
As part of our compensation to employees and directors, we use
stock-based compensation,
consisting of restricted stock and stock options. Prior to January 1, 2006, we elected to account
for stock-based employee compensation on a prospective basis under the fair value method, as
prescribed by Statement of Financial Accounting Standards No. 123, Accounting and Disclosure of
Stock-Based Compensation, and as amended by Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure. The fair value method
required stock based compensation to be expensed in the consolidated statement of operations at
their fair value, net of estimated forfeitures.
Effective January 1, 2006, we adopted the provisions of
Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, (SFAS 123(R)), using the modified prospective
transition method. SFAS 123(R) requires all stock-based compensation to be expensed in the
consolidated statement of operations at fair value over the service period of the award.
Compensation paid to employees in the form of restricted stock or
stock options is generally
accrued or amortized on a straight-line basis over the required service period of the award and is
included in our results of operations as compensation expense. The majority of these awards have a
three-year cliff vesting schedule. The majority of our restricted stock and option grants provide
for continued vesting after termination, so long as the employee does not violate certain
post-termination restrictions as set forth in the award agreements or any agreements entered into
upon termination. These post-termination restrictions do not meet the criteria for an
in-substance service condition as defined by SFAS 123(R). Accordingly, such restricted stock
and option grants are expensed in the period in which those awards are deemed to be earned, which
is generally the calendar year preceding our annual February equity grant. If any of these awards
are cancelled, the lower of the fair value at grant date or the fair value at the date of
cancellation is recorded within other income in the consolidated statements of operations.
In 2008, we granted performance-based restricted stock awards.
These restricted shares are
amortized on a straight-line basis over the period we expect the performance target to be met. The
performance condition must be met for the awards to vest and total compensation cost will be
recognized only if the performance condition is satisfied. The probability that the performance
conditions will be achieved and that the awards will vest is reevaluated each reporting period with
changes in actual or estimated compensation expense accounted for using a cumulative effect
adjustment.
Stock-based compensation granted to our non-employee directors is
in the form of unrestricted
common shares of Piper Jaffray Companies stock. Stock-based compensation paid to directors is
immediately expensed and is included in our results of operations as outside services expense as of
the date of grant.
In determining the estimated fair value of stock options, we use
the Black-Scholes
option-pricing model. This model requires management to exercise judgment with respect to certain
assumptions, including the expected dividend yield, the expected volatility, and the expected life
of the options. The expected dividend yield assumption is derived from the assumed dividend payout
over the expected life of the option. The expected volatility assumption for grants subsequent to
December 31, 2006 is derived from a combination of our historical data and industry comparisons, as
we have limited information on which to base our volatility estimates because we have only been a
public company since the beginning of 2004. The expected volatility assumption for grants prior to
December 31, 2006 were based solely on industry comparisons. The expected life of options
assumption is derived from the average of the following two factors: industry comparisons and the
guidance provided by the SEC in Staff Accounting Bulletin No. 110 (SAB 110). SAB 110 allows the
use of an acceptable methodology under which we can take the midpoint of the vesting date and the
full contractual term. We believe our approach for calculating an expected life to be an
appropriate method in light of the limited historical data regarding employee exercise behavior or
employee post-termination behavior. Additional information regarding assumptions used in the
Black-Scholes pricing model can be found in Note 17 to our unaudited consolidated financial
statements.
CONTINGENCIES
We are involved in various pending and potential legal proceedings
related to our business,
including litigation, arbitration and regulatory proceedings. Some of these matters involve claims
for substantial amounts, including claims for punitive and other special damages. We have, after
consultation with outside legal counsel and consideration of facts currently known by management,
recorded estimated losses in accordance with Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies, to the extent that claims are probable of loss and the amount of
the loss can be reasonably estimated. The determination of these reserve amounts requires
significant judgment on the part of management. In making these determinations, we consider many
factors, including, but not limited to, the loss and damages sought by the plaintiff or claimant,
the basis and validity of the claim, the likelihood of a successful defense against the claim, and
the potential for, and magnitude of, damages or settlements from such pending and potential
litigation and arbitration proceedings, and fines and penalties or orders from regulatory agencies.
As part of the asset purchase agreement for the sale of our PCS
branch network to UBS that
closed in August 2006, we have retained liabilities arising from regulatory matters and certain PCS
litigation arising prior to the sale. Adjustments to litigation reserves for matters pertaining to
the PCS business would be included within discontinued operations on the consolidated statements of
operations.
Given the uncertainities regarding timing, size, volume and outcome
of pending and potential
legal proceedings and other factors, the amounts of reserves are difficult to determine and of
necessity subject to future revision. Subject to the foregoing, we believe, based on our current
knowledge, after appropriate consultation with outside legal counsel and after taking into account
our established reserves, that pending litigation, arbitration and regulatory proceedings will be
resolved with no material adverse effect on our financial condition. However, if, during any
period, a potential adverse contingency should become probable or resolved for an amount in excess
of the established reserves and indemnification available to us, the results of operations in that
period could be materially adversely affected.
INCOME TAXES
We file a consolidated U.S. federal income tax return, which
includes all of our qualifying
subsidiaries. We also are subject to income tax in various states and municipalities and those
foreign jurisdictions in which we operate. Amounts provided for income taxes are based on income
reported for financial statement purposes and do not necessarily represent amounts currently
payable. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and for tax loss carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Deferred income taxes are provided for temporary differences in
reporting certain items, principally, amortization of share-based compensation. The realization of
deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more
likely than not that any portion of the deferred tax asset will not be realized. We believe that
our future taxable profits will be sufficient to recognize our U.S. deferred tax assets. If
however, our projections of future taxable profits do not materialize, we may conclude that a
valuation allowance is needed.
We record deferred tax benefits for future tax deductions expected
upon the vesting of
share-based compensation. If deductions reported on our tax return for share-based compensation
(i.e., the value of the share-based compensation at the time of vesting) exceed the cumulative cost
of those instruments recognized for financial reporting (i.e., the grant date fair value of the
compensation computed in accordance with SFAS 123(R)), we record the excess tax benefit as
additional paid-in capital. Conversely, if deductions reported on our tax return for share-based
compensation are less than the cumulative cost of those instruments recognized for financial
reporting, we offset the deficiency first to any previously recognized excess tax benefits recorded
as additional paid-in capital and any remaining deficiency is recorded as income tax expense. As of
June 30, 2009, we do not have any available excess tax benefits within additional paid-in capital.
We establish reserves for uncertain income tax positions in
accordance with Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement 109 when, it is not more likely than not that a certain position
or component of a position will be ultimately upheld by the relevant taxing authorities.
Significant judgment is required in evaluating uncertain tax positions. Our tax provision and
related accruals include the impact of estimates for uncertain tax positions and changes to the
reserves that are considered appropriate. To the extent the probable tax outcome of these matters
changes, such change in estimate will impact the income tax provision in the period of change.
Liquidity, Funding and Capital Resources
Liquidity 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, including our cash
and net capital positions, and we have implemented 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.
The majority of our tangible assets consist of assets readily
convertible into cash. Financial
instruments and other inventory positions are stated at fair value and are generally readily
marketable in most market conditions. Receivables and payables with customers and brokers and
dealers usually settle within a few days. As part of our liquidity strategy, we emphasize
diversification of funding sources to the extent possible and maximize our lower-cost financing
alternatives. Our assets are financed by our cash flows from operations, equity capital, proceeds
from securities sold under agreements to repurchase and bank lines of credit. The fluctuations in
cash flows from financing activities are directly related to daily operating activities from our
various businesses.
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 compensation is paid
in an annual discretionary
bonus. The timing of these bonus payments, which generally are paid in February, has a significant
impact on our cash position and liquidity when paid.
We currently do not pay cash dividends on our common stock.
On April 16, 2008, we announced that our board of directors
had authorized the repurchase of
up to $100 million in shares of our common stock. The program expires on June 30, 2010. In the
second quarter of 2009, we did not repurchase any shares of our common stock under this
authorization. Based upon prior repurchases, $85 million of this authorization remains.
FUNDING SOURCES
Short-term funding is obtained through the use of repurchase
agreements and bank loans and are
typically collateralized by the firms securities inventory. Short-term funding is generally
obtained at rates based upon the federal funds rate. We have available both committed and
uncommitted short-term financing with a diverse group of banks.
Uncommitted Lines
- We use uncommitted lines in the ordinary
course of business to fund a
portion of our daily operations, and the amount borrowed under our uncommitted lines varies daily
based on our funding needs. Our uncommitted secured lines total $285 million with four banks and
are 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
these secured lines. We also have a $100 million uncommitted unsecured facility with one of these
banks. These uncommitted lines are discretionary and are not a commitment by the bank to provide an
advance under the line. For example, these lines are subject to approval by the respective bank
each time an advance is requested and advances may be denied. We continue to manage our
relationships with all the banks that provide these uncommitted facilities in order to have
appropriate levels of funding for our business.
Committed Lines
- Our committed line is a $250 million
revolving secured credit facility. We
use this 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.
Advances under this facility are secured by certain marketable securities. However, of the $250
million in financing available under this facility, $125 million may only be drawn with specific
municipal securities as collateral. The facility includes a covenant that requires our U.S. broker
dealer subsidiary to maintain a minimum net capital of $180 million, and the unpaid principal
amount of all advances under the facility will be due on September 25, 2009. On June 30, 2009, we
had no advances against this line.
To finance customer and trade-related receivables we utilized an
average of $38 million in
short-term bank loans during the second quarter of 2009. This compares to an average of $95 million
in short-term bank loans during the second quarter of 2008. Average net repurchase agreements
(excluding repurchase agreements used to facilitate economic hedges) of $90 million and $173
million during the second quarter of 2009 and 2008, respectively, were primarily used to finance
inventory. The decrease in average financing agreements in the second quarter of 2009 was primarily
a result of lower inventory balances. Growth in our securities inventory is generally financed
through a combination of repurchase agreements and bank financing.
We currently do not have a credit rating, which may adversely
affect our liquidity and
increase our borrowing costs by limiting access to sources of liquidity that require a credit
rating as a condition to providing funds.
CONTRACTUAL OBLIGATIONS
Our contractual obligations have not materially changed from those
reported in our Annual
Report to Shareholders on Form 10-K for the year ended December 31, 2008.
CAPITAL REQUIREMENTS
As a registered broker dealer and member firm of FINRA, 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 the greater of $1.0 million or 2 percent of aggregate debit
balances arising from customer transactions, as this is defined in the rule. FINRA may prohibit a
member firm from expanding its business or paying dividends if resulting net capital would be less
than 5 percent of aggregate debit balances. Advances to affiliates, repayment of subordinated
liabilities, dividend payments and other equity withdrawals are subject to certain notification and
other provisions of the uniform net capital rule and the net capital rule of FINRA. We expect that
these provisions will not impact our ability to meet current and future obligations. We also are
subject to certain notification requirements related to withdrawals of excess net capital from our
broker dealer subsidiary. At June 30, 2009, our net capital under the SECs Uniform Net Capital
Rule was $293.0 million, and exceeded the minimum net capital required under the SEC rule by $291.8
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 revenue producing activities.
Piper Jaffray Ltd., our broker dealer subsidiary registered in the
United Kingdom, is subject
to the capital requirements of the U.K. Financial Services Authority. Each of our Piper Jaffray
Asia entities licensed by the Hong Kong Securities and Futures Commission is subject to the liquid
capital requirements of the Securities and Futures (Financial Resources) Rule promulgated under the
Securities and Futures Ordinance.
Off-Balance Sheet Arrangements
In the ordinary course of business we enter into various types of
off-balance sheet
arrangements. The following table summarizes our off-balance-sheet arrangements at June 30, 2009
and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Amount
|
Expiration Per Period at June 30, 2009
|
|
|
|
|
|
|
|
|
|
2011-
|
|
2013-
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(
Dollars in thousands)
|
|
2009
|
|
2010
|
|
2012
|
|
2014
|
|
Later
|
|
2009
|
|
2008
|
Customer matched-book derivative contracts (1)(2)
|
|
$
|
38,550
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
75,430
|
|
|
$
|
6,778,775
|
|
|
$
|
6,892,755
|
|
|
$
|
6,834,402
|
|
Trading securities derivative contracts (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211,500
|
|
|
|
211,500
|
|
|
|
114,500
|
|
Securitization transactions derivative contracts (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,740
|
|
|
|
|
|
|
|
28,740
|
|
|
|
144,400
|
|
Loan commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity and other principal investments (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,399
|
|
|
|
3,694
|
|
|
|
|
(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 $271.7 million at June 30, 2009) who are not required
to post collateral. Based on market movements, the uncollateralized amounts representing the
fair value of the derivative contract can become material, exposing us to the credit risk of
these counterparties. As of June 30, 2009, we had $22.6 million of credit exposure with these
counterparties, including $10.5 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 June 30, 2009 and December 31, 2008, the net fair value of these derivative contracts
approximated $23.3 million and $21.8 million, respectively.
|
|
(3)
|
|
The fund commitments have no specified call dates. The timing of capital calls is based on
market conditions and investment opportunities.
|
DERIVATIVES
Derivatives notional contract amounts are not reflected as
assets or liabilities on our
consolidated statements of financial condition. Rather, the market, or 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. Derivatives
are presented on a net-by-counterparty basis when a legal right of offset exists and on a
net-by-cross product basis when applicable provisions are stated in a master netting agreement.
We enter into derivative contracts in a principal capacity as a
dealer to satisfy the
financial needs of clients. We also use derivative products to hedge the interest rate and market
value risks associated with our security positions. 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. For a complete discussion of our activities related to derivative products, see Note 5,
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.
SPECIAL PURPOSE ENTITIES
We enter into arrangements with various special-purpose entities
(SPEs). SPEs may be
corporations, trusts or partnerships that are established for a limited purpose. There are two
types of SPEs qualified SPEs (QSPEs) and variable interest entities (VIEs). A QSPE generally
can be described as an entity whose permitted activities are limited to passively holding financial
assets and distributing cash flows to investors based on pre-set terms. SPEs that do not meet the
QSPE criteria because their permitted activities are not limited sufficiently or control remains
with one of the owners are referred to as VIEs. Under FIN 46(R), we consolidate a VIE if we are the primary beneficiary of the entity. The primary beneficiary is
the party that either (i) absorbs a majority of the VIEs expected losses; (ii) receives a majority
of the VIEs expected residual returns; or (iii) both.
At June 30, 2009, we had one securitization transaction in
which highly rated fixed rate
municipal bonds were sold into an SPE trust, whereby control remained with us and we are the
primary beneficiary of the VIE. Accordingly, we have recorded an asset for the underlying bonds of
$28.8 million (par value $28.7 million). The trust was funded by the sale of variable rate
certificates to institutional customers seeking variable rate tax-free investment products. These
variable rate certificates reprice weekly. We have recorded a liability for the certificates sold
by the trust for $28.7 million as of June 30, 2009. We have contracted with a major third-party
financial institution to act as the liquidity provider for this trust, and we have agreed to
reimburse the liquidity provider for any losses associated with providing liquidity to the trust.
See Note 7, Securitizations, in the notes to our unaudited consolidated financial statements for
a complete discussion of our securitization activities.
In addition, we have investments in various entities, typically
partnerships or limited
liability companies, established for the purpose of investing in private or public equity
securities and various partnership entities. We commit capital or act as the managing partner or
member of these entities. Some of these entities are deemed to be VIEs. For a complete discussion
of our activities related to these types of entities, see Note 8, Variable Interest Entities, to
our unaudited consolidated financial statements.
LOAN COMMITMENTS
We may commit to short-term bridge-loan financing for our clients
or make commitments to
underwrite corporate debt. We had no loan commitments outstanding at June 30, 2009.
PRIVATE EQUITY AND OTHER PRINCIPAL INVESTMENTS
We have committed capital to certain non-consolidated
private-equity funds. We also may
advance amounts to a non-consolidated entity that acts as the general partner of these private
equity funds to account for timing differences between commitments made and investments received.
OTHER OFF-BALANCE SHEET EXPOSURE
Our other types of off-balance-sheet arrangements include
contractual commitments. For a
discussion of our activities related to these off-balance sheet arrangements, see Note 16,
Contingencies, Commitments and Guarantees, to our consolidated financial statements included in
our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2008.
Enterprise Risk Management
Risk is an inherent part of our business. In the course of
conducting business operations, we
are exposed to a variety of risks. Market risk, liquidity risk, credit risk, operational risk,
legal, regulatory and compliance risk, and reputational risk are the principal risks we face in
operating our business. We seek to identify, assess and monitor each risk in accordance with
defined policies and procedures. The extent to which we properly identify and effectively manage
each of these risks is critical to our financial condition and profitability.
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 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 goals 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 mark-to-market pricing.
In addition to supporting daily risk management processes on the
trading desks, our risk
management functions support our market and credit risk committee. This committee oversees risk
management practices, including defining acceptable risk tolerances and approving risk management
policies.
MARKET RISK
Market risk represents the risk of 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, to our
market-making activities and our proprietary 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 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 shape of the yield curve, changes in credit spreads,
and the rate of prepayments. Interest rate risk is managed through the use of appropriate hedging
in U.S. government securities, agency securities, mortgage-backed securities, corporate debt
securities, interest rate swaps, options, futures and forward contracts. We utilize interest rate
swap contracts to hedge a portion of our fixed income inventory, to hedge residual cash flows from
our tender option bond program, and to hedge rate lock agreements and forward bond purchase
agreements we may enter into with our public finance customers. 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. These interest rate swap contracts are recorded at fair value with
the changes in fair value recognized in earnings.
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 in the U.S. and European markets on both listed and over-the-counter equity
markets. 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 inventory and by managing
net position levels with those limits.
Currency Risk
Currency risk arises from the
possibility that fluctuations in foreign
exchange rates will impact the value of financial instruments. A 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 to the stockholders equity section of our consolidated statements of financial
condition.
VALUE-AT-RISK
Value-at-Risk (VaR) is the potential loss in value of
our trading positions 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, exchange traded options, and all associated economic hedges. These positions
encompass both customer-related activities and proprietary investments. We use a VaR model because
it 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 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 add 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.
The following table quantifies the model-based VaR simulated for
each component of market risk
for the periods presented 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 1 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.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
Interest Rate Risk
|
|
$
|
1,189
|
|
|
$
|
2,494
|
|
Equity Price Risk
|
|
|
121
|
|
|
|
334
|
|
Diversification Effect
(1)
|
|
|
(137
|
)
|
|
|
(416
|
)
|
|
|
|
|
|
|
|
Total Value-at-Risk
|
|
$
|
1,173
|
|
|
$
|
2,412
|
|
|
|
|
(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
value-at-risk calculated for each component of market risk during the six months ended June 30,
2009 and the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2009
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
High
|
|
|
Low
|
|
|
Average
|
Interest Rate Risk
|
|
$
|
1,832
|
|
|
$
|
531
|
|
|
$
|
1,084
|
|
Equity Price Risk
|
|
|
951
|
|
|
|
75
|
|
|
|
310
|
|
Diversification Effect
(1)
|
|
|
|
|
|
|
|
|
|
|
(351
|
)
|
Total Value-at-Risk
|
|
|
1,810
|
|
|
|
513
|
|
|
|
1,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2008
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
High
|
|
|
Low
|
|
|
Average
|
Interest Rate Risk
|
|
$
|
4,357
|
|
|
$
|
554
|
|
|
$
|
1,956
|
|
Equity Price Risk
|
|
|
1,836
|
|
|
|
78
|
|
|
|
489
|
|
Diversification Effect
(1)
|
|
|
|
|
|
|
|
|
|
|
(602
|
)
|
Total Value-at-Risk
|
|
|
3,704
|
|
|
|
584
|
|
|
|
1,843
|
|
|
|
|
(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 incurred on a single day exceeded our 95% one-day
VaR on five occasions during
the first half of 2009.
The aggregate VaR as of June 30, 2009 decreased compared to
levels reported as of December 31,
2008. This was primarily due to the reduction of TOB program exposure, lower overall volatility
during the period and on-going improvements in the management of our exposures.
In addition to VaR, we also employ supplementary measures to
monitor and manage market risk
exposure including the following: 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.
LIQUIDITY RISK
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 onto a security for substantially longer than we had planned. Our inventory
positions subject us to potential financial losses from the reduction in value of illiquid
positions.
We are also exposed to liquidity risk in our day-to-day funding
activities. We have a
relatively low leverage ratio of 1.7 as of June 30, 2009 and net capital of $293.0 million in our
U.S. broker dealer as of June 30, 2009. We manage liquidity risk by diversifying our funding
sources across products and among individual counterparties within those products. For example, our
treasury department actively manages the use of repurchase agreements and secured and unsecured
bank borrowings each day depending on pricing, availability of funding, available collateral and lending parameters from any one of these
sources. We also added a committed bank line to our funding sources during 2008 to further manage
liquidity risk.
In addition to managing our capital and funding, the treasury
department oversees the
management of net interest income risk and the overall use of our capital, funding, and balance
sheet.
We currently act as the remarketing agent for approximately
$6.8 billion of variable rate
demand notes, all of which have a financial institution providing a liquidity guarantee. As
remarketing agent for our clients variable rate demand notes, we are the first source of liquidity
for sellers of these instruments. At certain times, demand from buyers of variable rate demand
notes is less than the supply generated by sellers of these instruments. In times of supply and
demand imbalance we may (but are not obligated to) facilitate liquidity by purchasing variable rate
demand notes from sellers for our own account. Our liquidity risk related to variable rate demand
notes is ultimately mitigated by our ability to tender these securities back to the financial
institution providing the liquidity guarantee.
CREDIT RISK
Credit risk in our business arises from potential non-performance
by counterparties,
customers, borrowers or issuers of securities we hold in our trading inventory. The global credit
crisis also has created increased credit risk, particularly counterparty risk, as the
interconnectedness of the financial markets has caused market participants to be impacted by
systemic pressure, or contagion, that results from the failure or expected failure of large market
participants.
We have concentrated counterparty credit exposure with six
non-publicly rated entities
totaling $22.6 million at June 30, 2009. This counterparty credit exposure is part of our
matched-book derivative program, consisting primarily of interest rate swaps. One derivative
counterparty represents 46 percent, or $10.5 million, of this credit 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 market and credit
risk committee.
We are exposed to credit risk in our role as a trading counterparty
to dealers and customers,
as a holder of securities and as a member of exchanges and clearing organizations. 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. and Hong Kong is
monitored daily. Our risk management functions have created credit risk policies establishing
appropriate credit limits and collateralization thresholds for our customers utilizing margin
lending. In the fourth quarter of 2008, we made a determination to exit the Hong Kong retail
business, which reduced our margin lending exposure in early 2009.
Credit exposure associated with our bridge-loan financings is
monitored regularly by our
market and credit risk committee. Bridge-loan financings that have been funded are recorded in
other assets at amortized cost on the consolidated statement of financial condition. At June 30,
2009 we had two bridge-loan financings funded totaling $19.6 million. One of these bridge loans
totaling $12.6 million is in default as of June 30, 2009; however, we currently believe that the
value of our secured collateral exceeds $12.6 million and accordingly we have not recorded an
impairment loss on this loan as of June 30, 2009.
Our risk management functions review risk associated with
institutional counterparties with
whom we hold repurchase and resale agreement facilities, stock borrow or loan facilities,
derivatives, TBAs and other documented institutional counterparty agreements that may give rise to
credit exposure. Counterparty levels are established relative to the level of counterparty ratings
and potential levels of activity. In the third quarter of 2008 a major investment bank, Lehman
Brothers Holdings Inc., filed for bankruptcy protection exposing us to $3.0 million in unsecured
receivables for which we are fully reserved.
We are subject to credit concentration risk if we hold large
individual securities positions,
execute large transactions with individual counterparties or groups of related counterparties,
extend large loans to individual borrowers or make substantial underwriting commitments.
Concentration risk can occur by industry, geographic area or type of client. Potential credit
concentration risk is carefully monitored and is managed through the use of policies and limits.
We also are exposed to the risk of loss related to changes in the
credit spreads of debt
instruments. Credit spread risk arises from potential changes in an issuers credit rating or the
markets perception of the issuers credit worthiness.
OPERATIONAL RISK
Operational risk refers to the risk of direct or indirect loss
resulting from inadequate or
failed internal processes, personnel and systems or from external events. We rely on the ability of
our employees, our internal systems and processes and systems at computer centers operated by third
parties to process a large number of transactions. In the event of a breakdown or improper
operation of our systems or processes or improper action by our employees or third-party vendors,
we could suffer financial loss, regulatory sanctions and damage to our reputation. We 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 operations policies and procedures are being followed and that our various
businesses are operating within established corporate policies and limits.
LEGAL, REGULATORY AND COMPLIANCE RISK
Legal, regulatory and compliance risk includes the risk of
non-compliance with applicable
legal and regulatory requirements and the risk that a counterpartys performance obligations will
be unenforceable. We are 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, including, but not limited to, those related to
regulatory net capital requirements, sales and trading practices, use and safekeeping of customer
funds and securities, credit extension, money-laundering, privacy and recordkeeping.
We have established internal policies relating to ethics and
business conduct, and compliance
with applicable legal and regulatory requirements, as well as training and other procedures
designed to ensure that these policies are followed.
REPUTATION AND OTHER RISK
We recognize that maintaining our reputation among clients,
investors, regulators and the
general public is critical. Maintaining our reputation depends on a large number of factors,
including the conduct of our business activities and the types of clients and counterparties with
whom we conduct business. We seek to maintain our reputation by conducting our business activities
in accordance with high ethical standards and performing appropriate reviews of clients and
counterparties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption Enterprise Risk
Management in Item 2, Managements
Discussion and Analysis of Financial Condition and Results of Operations, in this 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). 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 Exchange Act is (a) recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission 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 second quarter of our fiscal
year ended December 31, 2009, 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)
that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following supplements and amends our discussion set forth under Item 3 Legal Proceedings
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Municipal Contract Matters
Regarding the class action complaints, which have been consolidated in
In re Municipal
Derivatives Antitrust Litigation
, MDL No. 1950 (Master Docket No. 08-2516), defendants motion for
summary judgment was granted on April 29, 2009. On June 18, 2009, plaintiffs filed a second
consolidated amended class action complaint naming us among various other parties and which is now
pending before the court.
Auction Rate Securities
On July 10, 2009, we were advised by the SEC that it had completed its investigation and did
not intend to recommend any enforcement action by the Commission. Under SEC guidelines, such a
communication means only that the staff has completed its investigation and that no enforcement
action has been recommended at that time; it is not to be construed as indicating that a party has
been exonerated or that no action may ultimately result from the staffs investigation.
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 our Annual Report on Form 10-K for the fiscal year ended December
31, 2008 filed with the SEC, as updated in our subsequent reports on Form 10-Q filed with the SEC.
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.
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 Jaffray Companies or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the
Securities Exchange Act of 1934), of our common stock during the quarter ended June 30, 2009.
In addition, a third-party trustee makes open-market purchases of our common stock from time
to time pursuant to the Piper Jaffray Companies Retirement Plan, under which participating
employees may allocate assets to a company stock fund.
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Total Number of
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Shares Purchased as
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Approximate Dollar Value
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Total Number
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Part of Publicly
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of Shares that May Yet Be
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of Shares
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Average Price Paid
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Announced Plans or
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Purchased Under the Plans
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Period
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Purchased
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per Share
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Programs
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or Programs(1)
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Month #1
(April 1, 2009 to April 30, 2009)
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183
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(2)
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$ 25.69
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0
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$85 million
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Month #2
(May 1, 2009 to May 31, 2009)
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3,786
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(2)
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$ 31.72
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0
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$85 million
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Month #3
(June 1, 2009 to June 30, 2009)
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978
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(2)
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$ 39.88
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0
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$85 million
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Total
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4,947
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$ 33.11
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0
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$85 million
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(1)
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On April 16, 2008, we announced that our board of directors had authorized the repurchase of
up to $100 million of common stock through June 30, 2010.
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(2)
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Consists of shares of common stock withheld from recipients of restricted stock to pay taxes
upon the vesting of the restricted stock.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a)
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The Companys 2009 annual meeting of shareholders was held on May 7, 2009. The holders of
16,774,567 shares of common stock, 85 percent of the outstanding shares entitled to vote as of
the record date, were represented at the meeting in person or by proxy.
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(c)
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At the annual meeting, Michael R. Francis, B. Kristine Johnson, Addison L. Piper, Lisa K.
Polsky and Jean M. Taylor were elected as directors to serve a one-year term expiring at the
annual meeting of shareholders in 2009. The following table shows the vote totals for each of
these individuals:
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Name
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Votes For
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Authority Withheld
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Michael R. Francis
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15,385,943
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1,388,624
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B. Kristine Johnson
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14,209,834
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2,564,733
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Addison L. Piper
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15,899,944
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874,623
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Lisa K. Polsky
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15,125,858
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1,648,709
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Jean M. Taylor
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15,542,496
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1,232,071
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At the annual meeting, our shareholders also approved the Piper Jaffray Companies Amended and
Restated 2003 Annual and Long-Term Incentive Plan. The following table indicates the
specific voting results for this proposal:
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Broker
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Proposal
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Votes For
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Votes Against
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Abstentions
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Non-Votes
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Approval of the Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan
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10,097,538
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5,070,379
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73,735
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1,532,915
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ITEM 6. EXHIBITS
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Exhibit
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Method of
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Number
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Description
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Filing
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10.1
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Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan
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Filed herewith
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
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Filed herewith
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
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Filed herewith
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32.1
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Certifications furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on July
31, 2009.
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PIPER JAFFRAY COMPANIES
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By /s/ Andrew S. Duff
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Its Chairman and Chief Executive Officer
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By /s/ Debbra L. Schoneman
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Its Chief Financial Officer
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Exhibit Index
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Exhibit
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Method of
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Number
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Description
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Filing
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10.1
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Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan
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Filed herewith
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
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Filed herewith
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
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Filed herewith
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32.1
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Certifications furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Filed herewith
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