PIPER SANDLER COMPANIES - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-31720

PIPER JAFFRAY COMPANIES

(Exact Name of Registrant as specified in its Charter)



DELAWARE		30-0168701
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)
800 Nicollet Mall, Suite 1000 Minneapolis, Minnesota		55402
(Address of Principal Executive Offices)		(Zip Code)
	(612) 303-6000
(Registrant’s Telephone Number, Including Area Code)

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

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

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



Large accelerated filer	þ		Accelerated filer	¨
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨
			Emerging growth company	¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

As of July 26, 2017, the registrant had 15,114,175 shares of Common Stock outstanding.

Piper Jaffray Companies

Index to Quarterly Report on Form 10-Q



PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	3
	Consolidated Statements of Financial Condition as of June 30, 2017 (Unaudited) and December 31, 2016	3
	Consolidated Statements of Operations for the three and six months ended June 30, 2017 and June 30, 2016 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and June 30, 2016 (Unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and June 30, 2016 (Unaudited)	6
	Notes to the Consolidated Financial Statements (Unaudited)	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	43
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	71
ITEM 4.	CONTROLS AND PROCEDURES	71

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	71
ITEM 1A.	RISK FACTORS	72
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	73
ITEM 6.	EXHIBITS	73
	SIGNATURES	74

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Piper Jaffray Companies

Consolidated Statements of Financial Condition



	June 30,			December 31,
	2017			2016
(Amounts in thousands, except share data)	(Unaudited)
Assets
Cash and cash equivalents	$	26,170		$	41,359
Cash and cash equivalents segregated for regulatory purposes	17,065			29,015
Receivables:
Customers	31,394			31,917
Brokers, dealers and clearing organizations	187,435			212,730
Securities purchased under agreements to resell	148,892			159,697

Financial instruments and other inventory positions owned	530,335			464,610
Financial instruments and other inventory positions owned and pledged as collateral	414,156			594,361
Total financial instruments and other inventory positions owned	944,491			1,058,971

Fixed assets (net of accumulated depreciation and amortization of $59,365 and $58,308, respectively)	24,826			25,343
Goodwill	196,218			196,218
Intangible assets (net of accumulated amortization of $77,661 and $70,017, respectively)	29,590			37,234
Investments	164,161			168,057
Other assets	161,091			164,962
Total assets	$	1,931,333		$	2,125,503

Liabilities and Shareholders’ Equity
Short-term financing	$	330,423		$	418,832
Senior notes	125,000			175,000
Payables:
Customers	28,258			29,352
Brokers, dealers and clearing organizations	42,867			40,842
Securities sold under agreements to repurchase	10,795			15,046
Financial instruments and other inventory positions sold, but not yet purchased	330,317			299,357
Accrued compensation	187,823			288,255
Other liabilities and accrued expenses	41,111			42,553
Total liabilities	1,096,594			1,309,237

Shareholders’ equity:
Common stock, $0.01 par value:
Shares authorized: 100,000,000 at June 30, 2017 and December 31, 2016;
Shares issued: 19,511,708 at June 30, 2017 and 19,535,307 at December 31, 2016;
Shares outstanding: 12,873,251 at June 30, 2017 and 12,391,970 at December 31, 2016	195			195
Additional paid-in capital	784,160			788,927
Retained earnings	281,553			257,188
Less common stock held in treasury, at cost: 6,638,457 at June 30, 2017 and 7,143,337 shares at December 31, 2016	(274,729		)	(284,461		)
Accumulated other comprehensive loss	(1,604		)	(2,599		)
Total common shareholders’ equity	789,575			759,250

Noncontrolling interests	45,164			57,016
Total shareholders’ equity	834,739			816,266

Total liabilities and shareholders’ equity	$	1,931,333		$	2,125,503

See Notes to the Consolidated Financial Statements

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Piper Jaffray Companies

Consolidated Statements of Operations

(Unaudited)



	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Amounts in thousands, except per share data)	2017		2016		2017		2016
Revenues:
Investment banking	$	138,528	$	97,414	$	270,778	$	201,352
Institutional brokerage	37,074		48,185		76,210		80,234
Asset management	15,186		14,595		31,193		28,443
Interest	7,766		7,922		15,485		16,751
Investment income	5,453		8,276		15,828		9,213

Total revenues	204,007		176,392		409,494		335,993

Interest expense	6,262		5,909		11,220		11,954

Net revenues	197,745		170,483		398,274		324,039

Non-interest expenses:
Compensation and benefits	134,314		117,148		268,692		221,584
Outside services	9,789		10,184		20,117		18,635
Occupancy and equipment	8,257		8,850		16,719		16,568
Communications	7,273		7,294		14,889		14,624
Marketing and business development	8,282		9,171		15,829		16,175
Trade execution and clearance	1,928		1,916		3,739		3,678
Restructuring and integration costs	—		3,433		—		10,206
Intangible asset amortization expense	3,822		4,094		7,644		7,390
Back office conversion costs	868		—		1,734		—
Other operating expenses	3,345		1,884		6,235		5,228

Total non-interest expenses	177,878		163,974		355,598		314,088

Income before income tax expense	19,867		6,509		42,676		9,951

Income tax expense	4,906		1,996		4,511		2,252

Net income	14,961		4,513		38,165		7,699

Net income applicable to noncontrolling interests	1,388		2,575		4,317		3,324

Net income applicable to Piper Jaffray Companies	$	13,573	$	1,938	$	33,848	$	4,375

Net income applicable to Piper Jaffray Companies’ common shareholders	$	11,522	$	1,577	$	28,412	$	3,685

Earnings per common share
Basic	$	0.89	$	0.12	$	2.24	$	0.28
Diluted	$	0.89	$	0.12	$	2.21	$	0.28

Dividends declared per common share	$	0.31	$	—	$	0.63	$	—

Weighted average number of common shares outstanding
Basic	12,826		12,927		12,711		13,043
Diluted	12,937		12,942		12,930		13,056

See Notes to the Consolidated Financial Statements

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Piper Jaffray Companies

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended					Six Months Ended
	June 30,					June 30,
(Amounts in thousands)	2017		2016			2017		2016
Net income	$	14,961	$	4,513		$	38,165	$	7,699

Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustment	772		(853		)	995		(1,256		)

Comprehensive income	15,733		3,660			39,160		6,443

Comprehensive income applicable to noncontrolling interests	1,388		2,575			4,317		3,324

Comprehensive income applicable to Piper Jaffray Companies	$	14,345	$	1,085		$	34,843	$	3,119

See Notes to the Consolidated Financial Statements

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Piper Jaffray Companies

Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended
	June 30,
(Dollars in thousands)	2017			2016

Operating Activities:
Net income	$	38,165		$	7,699
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of fixed assets	3,486			3,088
Deferred income taxes	8,301			8,184
Stock-based and deferred compensation	12,881			25,884
Amortization of intangible assets	7,644			7,390
Amortization of forgivable loans	3,717			4,567
Decrease/(increase) in operating assets:
Cash and cash equivalents segregated for regulatory purposes	11,950			38,994
Receivables:
Customers	520			(9,071		)
Brokers, dealers and clearing organizations	25,295			47,311
Securities purchased under agreements to resell	12,682			(5,490		)
Net financial instruments and other inventory positions owned	145,440			(5,425		)
Investments	3,896			(12,529		)
Other assets	(7,669		)	(15,927		)
Increase/(decrease) in operating liabilities:
Payables:
Customers	(1,094		)	10,027
Brokers, dealers and clearing organizations	2,025			84,137
Securities sold under agreements to repurchase	(6,128		)	(6,086		)
Accrued compensation	(86,526		)	(105,857		)
Other liabilities and accrued expenses	(1,405		)	(15,547		)

Net cash provided by operating activities	173,180			61,349

Investing Activities:
Business acquisitions, net of cash acquired	—			(71,019		)
Purchases of fixed assets, net	(3,034		)	(4,245		)

Net cash used in investing activities	(3,034		)	(75,264		)

Continued on next page

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Piper Jaffray Companies

Consolidated Statements of Cash Flows – Continued

(Unaudited)



	Six Months Ended
	June 30,
(Dollars in thousands)	2017			2016

Financing Activities:
Increase/(decrease) in short-term financing	$	(88,409	)	$	55,656
Repayment of variable rate senior notes	(50,000		)	—
Decrease in securities sold under agreements to repurchase	—			(5,502		)
Payment of cash dividend	(9,483		)	—
Increase/(decrease) in noncontrolling interests	(16,169		)	9,178
Repurchase of common stock	(23,597		)	(62,142		)
Reduced tax benefit from stock-based compensation	—			(113		)
Proceeds from stock option exercises	1,703			82

Net cash used in financing activities	(185,955		)	(2,841		)

Currency adjustment:
Effect of exchange rate changes on cash	620			(910		)

Net decrease in cash and cash equivalents	(15,189		)	(17,666		)

Cash and cash equivalents at beginning of period	41,359			189,910

Cash and cash equivalents at end of period	$	26,170		$	172,244

Supplemental disclosure of cash flow information –
Cash paid during the period for:
Interest	$	11,134		$	12,361
Income taxes	$	7,843		$	21,559

Non-cash investing activities –
Issuance of common stock related to the acquisition of Simmons & Company International:
25,525 shares for the six months ended June 30, 2016	$	—		$	1,074

Non-cash financing activities –
Issuance of restricted common stock for annual equity award:
198,981 shares and 843,889 shares for the six months ended June 30, 2017 and 2016, respectively	$	16,187		$	35,089

See Notes to the Consolidated Financial Statements

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Index



Note 1	Organization and Basis of Presentation	9
Note 2	Accounting Policies and Pronouncements	10
Note 3	Acquisition of Simmons & Company International	12
Note 4	Financial Instruments and Other Inventory Positions Owned and Financial Instruments and Other Inventory Positions Sold, but Not Yet Purchased	14
Note 5	Fair Value of Financial Instruments	16
Note 6	Variable Interest Entities	26
Note 7	Receivables from and Payables to Brokers, Dealers and Clearing Organizations	27
Note 8	Collateralized Securities Transactions	27
Note 9	Investments	29
Note 10	Other Assets	29
Note 11	Short-Term Financing	30
Note 12	Senior Notes	31
Note 13	Legal Contingencies	31
Note 14	Restructuring	32
Note 15	Shareholders’ Equity	32
Note 16	Compensation Plans	34
Note 17	Earnings Per Share	39
Note 18	Segment Reporting	40
Note 19	Net Capital Requirements and Other Regulatory Matters	42
Note 20	Income Taxes	42

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Note 1 Organization and Basis of Presentation

Organization

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

Capital Markets

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

Asset Management

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

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and the rules and regulations of the Securities and Exchange Commission ("SEC"). Pursuant to this guidance, certain information and disclosures have been omitted that are included within complete annual financial statements. Except as disclosed herein, there have been no material changes in the information reported in the financial statements and related disclosures in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

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

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

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Note 2 Accounting Policies and Pronouncements

Summary of Significant Accounting Policies

Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 for a full description of the Company's significant accounting policies. Changes to the Company's significant accounting policies are described below.

Stock-Based Compensation

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

Adoption of New Accounting Standards

Stock-Based Compensation

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

Under ASU 2016-09, the Company recognizes the income tax effects of stock awards in the income statement when the awards vest or are settled. For the six months ended June 30, 2017, this accounting change resulted in the recording of a $8.7 million tax benefit for stock awards vesting during the period. Prior to the adoption of this ASU, this amount would have been recorded directly to additional paid-in capital. In addition, the Company has elected to account for forfeitures of awards with service conditions as they occur. This will result in dividends originally charged against retained earnings for forfeited, unvested stock-based payment awards to be reclassified to compensation expense in the period in which the forfeiture occurs. Furthermore, tax impacts from the vesting of stock-based compensation are presented as an operating activity on the consolidated statements of cash flows on a prospective basis.

Future Adoption of New Applicable Accounting Standards

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," ("ASU 2014-09"), which supersedes current revenue recognition guidance, including most industry-specific guidance. ASU 2014-09, as amended, requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services, and also requires enhanced disclosures.

The Company has identified its revenues and costs that are within the scope of the new guidance, and continues to evaluate their potential impact on the consolidated results of operations and disclosures. The current broker dealer industry treatment of netting deal expenses with investment banking revenues will change under the new guidance. As a result of adopting ASU 2014-09, the Company expects that deal expenses will generally be presented on a gross basis on the consolidated statements of operations, resulting in higher revenues and higher non-compensation expenses. In addition, the Company expects to defer the recognition of performance fees on its merchant banking, energy and senior living alternative asset management funds until such fees are no longer subject to reversal, which will cause a delay in the recognition of these fees as revenue. The Company does not currently anticipate that its current methods of recognizing investment banking revenues will be materially impacted by the new guidance.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

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

The Company will adopt this guidance effective as of January 1, 2018. The two permitted transition methods under ASU 2014-09 are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, under which the cumulative effect of applying the standard would be recognized at the date of initial application. The Company is in the process of determining its method of adoption, which depends, in part, upon the completion of further analysis.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). The amendments in ASU 2016-01 address certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for annual and interim periods beginning after December 15, 2017. Except for the early application guidance outlined in ASU 2016-01, early adoption is not permitted. The adoption of ASU 2016-01 is not expected to have a material impact on the Company's results of operations or financial position, but may impact the Company's disclosures.

Leases

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability on the consolidated statements of financial position and disclose key information about leasing arrangements. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current U.S. GAAP. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. As of December 31, 2016, the Company had approximately 65 operating leases for office space with aggregate minimum lease commitments of $78.4 million. The Company is evaluating other service contracts which may include embedded leases. Upon adoption of ASU 2016-02, the Company does not expect material changes to the recognition of rent expense in its consolidated statements of operations. The impact of the new guidance on Piper Jaffray’s net capital is expected to be minimal.

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). The new guidance requires an entity to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts as opposed to delaying recognition until the loss was probable of occurring. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.

Statement of Cash Flows

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

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

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Goodwill Impairment

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

Note 3 Acquisition of Simmons & Company International

On February 26, 2016, the Company completed the acquisition of Simmons & Company International ("Simmons"), an employee-owned investment bank and broker dealer focused on the energy industry. The economic value of the acquisition was approximately $140.0 million.

The Company acquired net assets with a fair value of $119.3 million. As part of the purchase price, the Company issued 1,149,340 restricted shares valued at $48.2 million as equity consideration on the acquisition date. Employees must fulfill service requirements in exchange for the rights to the shares. Compensation expense will be amortized on a straight-line basis over the requisite service period of one or three years (a weighted average service period of 2.7 years). The fair value of the restricted stock was determined using the market price of the Company's common stock on the date of the acquisition.

The Company also entered into acquisition-related compensation arrangements with certain employees of $20.6 million which consisted of cash ($9.0 million) and restricted stock ($11.6 million) for retention purposes. Compensation expense related to these arrangements will be amortized on a straight-line basis over the requisite service period of three years. Additional cash compensation may be available to certain investment banking employees subject to exceeding an investment banking revenue threshold during the three year post-acquisition period to the extent they are employed by the Company at the time of payment. Amounts estimated to be payable related to this performance award plan will be recorded as compensation expense on the consolidated statements of operations over the requisite performance period of three years. As of June 30, 2017, the Company had accrued $7.0 million related to this performance award plan.

The acquisition was accounted for pursuant to FASB Accounting Standards Codification Topic 805, "Business Combinations." Accordingly, the purchase price was allocated to the acquired assets and liabilities assumed based on their estimated fair values as of the acquisition date. The excess of the purchase price over the net assets acquired was allocated between goodwill and intangible assets within the Capital Markets segment. The Company recorded $60.7 million of goodwill on its consolidated statements of financial condition, of which $59.4 million is expected to be deductible for income tax purposes. In management's opinion, the goodwill represents the reputation and operating expertise of Simmons.

Identifiable intangible assets purchased by the Company consisted of customer relationships and the Simmons trade name with acquisition-date fair values of $17.5 million and $9.1 million, respectively. Transaction costs of $0.9 million were incurred for the six months ended June 30, 2016, and are included in restructuring and integration costs on the consolidated statements of operations.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Simmons’ results of operations have been included in the Company's consolidated financial statements prospectively beginning on the date of acquisition. The acquisition has been fully integrated with the Company's existing operations. Accordingly, post-acquisition revenues and net income are not discernible. The following unaudited pro forma financial data assumes the acquisition had occurred on January 1, 2015, the beginning of the prior annual period in which the acquisition occurred. Pro forma results have been prepared by adjusting the Company's historical results to include Simmons' results of operations adjusted for the following changes: amortization expense was adjusted to account for the acquisition-date fair value of intangible assets; compensation and benefits expenses were adjusted to reflect such expenses based on the Company’s compensation arrangements and the restricted stock issued as equity consideration; and the income tax effect of applying the Company's statutory tax rates to Simmons’ results of operations. The Company's unaudited pro forma information presented does not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable period presented, does not contemplate anticipated operational efficiencies of the combined entities, nor does it indicate the results of operations in future periods.



	Six Months Ended
(Dollars in thousands)	June 30, 2016
Net revenues	$	331,836
Net income applicable to Piper Jaffray Companies	1,282

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

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



	June 30,		December 31,
(Dollars in thousands)	2017		2016
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	45,412	$	6,363
Convertible securities	71,288		103,486
Fixed income securities	44,672		21,018
Municipal securities:
Taxable securities	61,482		63,090
Tax-exempt securities	350,756		559,329
Short-term securities	52,249		35,175
Mortgage-backed securities	4,251		5,638
U.S. government agency securities	274,810		205,685
U.S. government securities	14,960		29,970
Derivative contracts	24,611		29,217
Total financial instruments and other inventory positions owned	944,491		1,058,971

Less noncontrolling interests (1)	—		(57,700		)
	$	944,491	$	1,001,271

Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	98,548	$	89,453
Fixed income securities	23,962		17,324
U.S. government agency securities	19,362		6,723
U.S. government securities	182,653		180,650
Derivative contracts	5,792		5,207
Total financial instruments and other inventory positions sold, but not yet purchased	330,317		299,357

Less noncontrolling interests (2)	—		(631		)
	$	330,317	$	298,726


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


(2)	Noncontrolling interests attributable to third party ownership in a consolidated municipal bond fund consist of U.S. government securities as of December 31, 2016.

At June 30, 2017 and December 31, 2016, financial instruments and other inventory positions owned in the amount of $414.2 million and $594.4 million, respectively, had been pledged as collateral for short-term financings and repurchase agreements.

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

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Derivative Contract Financial Instruments

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

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

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

Derivatives are reported on a net basis by counterparty (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of offset exists and on a net basis by cross product when applicable provisions are stated in master netting agreements. Cash collateral received or paid is netted on a counterparty basis, provided a legal right of offset exists. The total absolute notional contract amount, representing the absolute value of the sum of gross long and short derivative contracts, provides an indication of the volume of the Company's derivative activity and does not represent gains and losses. The following table presents the gross fair market value and the total absolute notional contract amount of the Company's outstanding derivative instruments, prior to counterparty netting, by asset or liability position:



	June 30, 2017						December 31, 2016
(Dollars in thousands)	Derivative		Derivative		Notional		Derivative		Derivative		Notional
Derivative Category	Assets (1)		Liabilities (2)		Amount		Assets (1)		Liabilities (2)		Amount
Interest rate
Customer matched-book	$	276,205	$	260,806	$	3,224,655	$	288,955	$	272,819	$	3,330,207
Trading securities	383		5,831		327,850		13,952		1,707		423,550
Credit default swap index
Trading securities	—		4,304		110,000		—		127		7,470
	$	276,588	$	270,941	$	3,662,505	$	302,907	$	274,653	$	3,761,227


(1)	Derivative assets are included within financial instruments and other inventory positions owned on the consolidated statements of financial condition.


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

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

The Company’s derivative contracts do not qualify for hedge accounting, therefore, unrealized gains and losses are recorded on the consolidated statements of operations. The gains and losses on the related economically hedged inventory positions are not disclosed below as they are not in qualifying hedging relationships. The following table presents the Company’s unrealized gains/(losses) on derivative instruments:



		Three Months Ended						Six Months Ended
(Dollars in thousands)		June 30,						June 30,
Derivative Category	Operations Category	2017			2016			2017			2016
Interest rate derivative contract	Investment banking	$	(483	)	$	(880	)	$	(775	)	$	(2,052	)
Interest rate derivative contract	Institutional brokerage	(2,917		)	(9,363		)	(17,655		)	(7,619		)
Credit default swap index contract	Institutional brokerage	(77		)	3,495			178			3,884
Futures and equity option derivative contracts	Institutional brokerage	—			119			—			148
		$	(3,477	)	$	(6,629	)	$	(18,252	)	$	(5,639	)

Credit risk associated with the Company’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. Credit exposure associated with the Company’s derivatives is driven by uncollateralized market movements in the fair value of the contracts with counterparties and is monitored regularly by the Company’s financial risk committee. The Company considers counterparty credit risk in determining derivative contract fair value. The majority of the Company’s derivative contracts are substantially collateralized by its counterparties, who are major financial institutions. The Company has a limited number of counterparties who are not required to post collateral. Based on market movements, the uncollateralized amounts representing the fair value of the derivative contract can become material, exposing the Company to the credit risk of these counterparties. As of June 30, 2017, the Company had $20.1 million of uncollateralized credit exposure with these counterparties (notional contract amount of $182.1 million), including $15.5 million of uncollateralized credit exposure with one counterparty.

Note 5 Fair Value of Financial Instruments

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

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

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

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

Cash Equivalents

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

Financial Instruments and Other Inventory Positions Owned

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

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

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

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

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

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

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

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

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

U.S. government agency securities – U.S. government agency securities include agency debt bonds and mortgage bonds. Agency debt bonds are valued by using either direct price quotes or price quotes for comparable bond securities and are categorized as Level II. Mortgage bonds include bonds secured by mortgages, mortgage pass-through securities, agency collateralized mortgage-obligation ("CMO") securities and agency interest-only securities. Mortgage pass-through securities, CMO securities and interest-only securities are valued using recently executed observable trades or other observable inputs, such as prepayment speeds and therefore are generally categorized as Level II. Mortgage bonds are valued using observable market inputs, such as market yields ranging from 65-539 basis points ("bps") on spreads over U.S. treasury securities, or models based upon prepayment expectations ranging from 0%-30% conditional prepayment rate ("CPR"). These securities are categorized as Level II.

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

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

Investments

The Company’s investments valued at fair value include equity investments in private companies and partnerships, investments in registered mutual funds, warrants of public and private companies and private company debt. Investments in registered mutual funds are valued based on quoted prices on active markets and classified as Level I. Company-owned warrants, which have a cashless exercise option, are valued based upon the Black-Scholes option-pricing model and certain unobservable inputs. The Company applies a liquidity discount to the value of its warrants in public and private companies. For warrants in private companies, valuation adjustments, based upon management’s judgment, are made to account for differences between the measured security and the stock volatility factors of comparable companies. Company-owned warrants are reported as Level III assets. Investments in private companies are valued based on an assessment of each underlying security, considering rounds of financing, third party transactions and market-based information, including comparable company transactions, trading multiples (e.g., multiples of revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA")) and changes in market outlook, among other factors. These securities are generally categorized as Level III.

Fair Value Option – The fair value option permits the irrevocable fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The fair value option was elected for certain merchant banking and other investments at inception to reflect economic events in earnings on a timely basis. Merchant banking and other equity investments of $13.2 million and $19.7 million, included within investments on the consolidated statements of financial condition, are accounted for at fair value and are classified as Level III assets at June 30, 2017 and December 31, 2016, respectively. The realized and unrealized net gains from fair value changes included in earnings as a result of electing to apply the fair value option to certain financial assets were $0.7 million and $0.2 million for the six months ended June 30, 2017 and 2016, respectively.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

The following table summarizes quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s Level III financial instruments as of June 30, 2017:



	Valuation			Weighted
	Technique	Unobservable Input	Range	Average
Assets:
Financial instruments and other inventory positions owned:
Municipal securities:
Tax-exempt securities	Discounted cash flow	Expected recovery rate (% of par) (2)	5 - 60%	19.4%
Short-term securities	Discounted cash flow	Expected recovery rate (% of par) (2)	66 - 94%	91.0%
Mortgage-backed securities:
Collateralized by residential mortgages	Discounted cash flow	Credit default rates (3)	0 - 4%	0.9%
		Prepayment rates (4)	7 - 22%	16.0%
		Loss severity (3)	0 - 100%	30.7%
		Valuation yields (3)	3 - 6%	4.1%
Derivative contracts:
Interest rate locks	Discounted cash flow	Premium over the MMD curve (1)	9 - 30 bps	24.0 bps
Investments at fair value:
Equity securities in private companies	Market approach	Revenue multiple (2)	2 - 5 times	4.4 times
		EBITDA multiple (2)	11 - 15 times	12.7 times
		Gross profit multiple (2)	8 times	8.0 times

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Derivative contracts:
Interest rate locks	Discounted cash flow	Premium over the MMD curve (1)	2 - 36 bps	16.2 bps

Sensitivity of the fair value to changes in unobservable inputs:


(1)	Significant increase/(decrease) in the unobservable input in isolation would result in a significantly lower/(higher) fair value measurement.


(2)	Significant increase/(decrease) in the unobservable input in isolation would result in a significantly higher/(lower) fair value measurement.


(3)	Significant changes in any of these inputs in isolation could result in a significantly different fair value. Generally, a change in the assumption used for credit default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally inverse change in the assumption for valuation yields.


(4)	The potential impact of changes in prepayment rates on fair value is dependent on other security-specific factors, such as the par value and structure. Changes in the prepayment rates may result in directionally similar or directionally inverse changes in fair value depending on whether the security trades at a premium or discount to the par value.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

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



								Counterparty
								and Cash
								Collateral
(Dollars in thousands)	Level I		Level II		Level III			Netting (1)			Total
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	446	$	44,966	$	—		$	—		$	45,412
Convertible securities	—		71,288		—			—			71,288
Fixed income securities	—		44,672		—			—			44,672
Municipal securities:
Taxable securities	—		61,482		—			—			61,482
Tax-exempt securities	—		349,639		1,117			—			350,756
Short-term securities	—		51,528		721			—			52,249
Mortgage-backed securities	—		—		4,251			—			4,251
U.S. government agency securities	—		274,810		—			—			274,810
U.S. government securities	14,960		—		—			—			14,960
Derivative contracts	—		276,205		383			(251,977		)	24,611
Total financial instruments and other inventory positions owned	15,406		1,174,590		6,472			(251,977		)	944,491

Cash equivalents	1,701		—		—			—			1,701

Investments at fair value	37,461		—		113,885		(2)	—			151,346
Total assets	$	54,568	$	1,174,590	$	120,357		$	(251,977	)	$	1,097,538

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	98,548	$	—	$	—		$	—		$	98,548
Fixed income securities	—		23,962		—			—			23,962
U.S. government agency securities	—		19,362		—			—			19,362
U.S. government securities	182,653		—		—			—			182,653
Derivative contracts	—		265,368		5,573			(265,149		)	5,792
Total financial instruments and other inventory positions sold, but not yet purchased	$	281,201	$	308,692	$	5,573		$	(265,149	)	$	330,317


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


(2)	Noncontrolling interests of $41.2 million are attributable to third party ownership in consolidated merchant banking and senior living funds.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

The following table summarizes the valuation of the Company’s financial instruments by pricing observability levels defined in ASC 820 as of December 31, 2016:



								Counterparty
								and Cash
								Collateral
(Dollars in thousands)	Level I		Level II		Level III			Netting (1)			Total
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	82	$	6,281	$	—		$	—		$	6,363
Convertible securities	—		103,486		—			—			103,486
Fixed income securities	—		21,018		—			—			21,018
Municipal securities:
Taxable securities	—		60,404		2,686			—			63,090
Tax-exempt securities	—		558,252		1,077			—			559,329
Short-term securities	—		34,431		744			—			35,175
Mortgage-backed securities	—		273		5,365			—			5,638
U.S. government agency securities	—		205,685		—			—			205,685
U.S. government securities	29,970		—		—			—			29,970
Derivative contracts	—		288,955		13,952			(273,690		)	29,217
Total financial instruments and other inventory positions owned	30,052		1,278,785		23,824			(273,690		)	1,058,971

Cash equivalents	768		—		—			—			768

Investments at fair value	32,783		—		123,319		(2)	—			156,102
Total assets	$	63,603	$	1,278,785	$	147,143		$	(273,690	)	$	1,215,841

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	89,453	$	—	$	—		$	—		$	89,453
Fixed income securities	—		17,324		—			—			17,324
U.S. government agency securities	—		6,723		—			—			6,723
U.S. government securities	180,650		—		—			—			180,650
Derivative contracts	—		273,166		1,487			(269,446		)	5,207
Total financial instruments and other inventory positions sold, but not yet purchased	$	270,103	$	297,213	$	1,487		$	(269,446	)	$	299,357


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


(2)	Noncontrolling interests of $45.1 million are attributable to third party ownership in consolidated merchant banking and senior living funds.

The Company’s Level III assets were $120.4 million and $147.1 million, or 11.0 percent and 12.1 percent of financial instruments measured at fair value at June 30, 2017 and December 31, 2016, respectively. The value of transfers between levels are recognized at the beginning of the reporting period. There were no significant transfers between Level I, Level II or Level III for the six months ended June 30, 2017.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

The following tables summarize the changes in fair value associated with Level III financial instruments held at the beginning or end of the periods presented:



																					Unrealized gains/
																					(losses) for assets/
	Balance at												Realized			Unrealized			Balance at		liabilities held at
	March 31,							Transfers		Transfers			gains/			gains/			June 30,		June 30,
(Dollars in thousands)	2017		Purchases		Sales			in		out			(losses) (1)			(losses) (1)			2017		2017 (1)
Assets:
Financial instruments and other inventory positions owned:
Municipal securities:
Tax-exempt securities	$	1,117	$	—	$	—		$	—	$	—		$	—		$	—		$	1,117	$	—
Short-term securities	744		—		(25		)	—		—			2			—			721		—
Mortgage-backed securities	5,492		—		(1,065		)	—		—			(18		)	(158		)	4,251		(158		)
Derivative contracts	1,633		5		(1,093		)	—		—			1,088			(1,250		)	383		383
Total financial instruments and other inventory positions owned	8,986		5		(2,183		)	—		—			1,072			(1,408		)	6,472		225

Investments at fair value	110,693		607		(742		)	—		(601		)	742			3,186			113,885		3,186
Total assets	$	119,679	$	612	$	(2,925	)	$	—	$	(601	)	$	1,814		$	1,778		$	120,357	$	3,411

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Derivative contracts	$	3,906	$	—	$	7,758		$	—	$	—		$	(7,758	)	$	1,667		$	5,573	$	4,753
Total financial instruments and other inventory positions sold, but not yet purchased	$	3,906	$	—	$	7,758		$	—	$	—		$	(7,758	)	$	1,667		$	5,573	$	4,753

(1)

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

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)



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

Investments at fair value	116,841		2,521			—			—		—		—			4,386		123,748		4,386
Total assets	$	236,662	$	2,767		$	(62,693	)	$	—	$	—	$	532		$	4,476	$	181,744	$	4,657

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

(1)

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)



																						Unrealized gains/
																						(losses) for assets/
	Balance at													Realized			Unrealized			Balance at		liabilities held at
	December 31,								Transfers		Transfers			gains/			gains/			June 30,		June 30,
(Dollars in thousands)	2016		Purchases			Sales			in		out			(losses) (1)			(losses) (1)			2017		2017 (1)
Assets:
Financial instruments and other inventory positions owned:
Municipal securities:
Taxable securities	$	2,686	$	—		$	(2,703	)	$	—	$	—		$	716		$	(699	)	$	—	$	—
Tax-exempt securities	1,077		—			—			—		—			—			40			1,117		40
Short-term securities	744		—			(25		)	—		—			2			—			721		—
Mortgage-backed securities	5,365		996			(1,854		)	—		—			296			(552		)	4,251		(158		)
Derivative contracts	13,952		245			(11,979		)	—		—			11,733			(13,568		)	383		383
Total financial instruments and other inventory positions owned	23,824		1,241			(16,561		)	—		—			12,747			(14,779		)	6,472		265

Investments at fair value	123,319		7,194			(25,212		)	—		(601		)	9,398			(213		)	113,885		9,680
Total assets	$	147,143	$	8,435		$	(41,773	)	$	—	$	(601	)	$	22,145		$	(14,992	)	$	120,357	$	9,945

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Derivative contracts	$	1,487	$	(719	)	$	7,758		$	—	$	—		$	(7,039	)	$	4,086		$	5,573	$	5,573
Total financial instruments and other inventory positions sold, but not yet purchased	$	1,487	$	(719	)	$	7,758		$	—	$	—		$	(7,039	)	$	4,086		$	5,573	$	5,573

(1)

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)



																						Unrealized gains/
																						(losses) for assets/
	Balance at													Realized			Unrealized			Balance at		liabilities held at
	December 31,								Transfers		Transfers			gains/			gains/			June 30,		June 30,
(Dollars in thousands)	2015		Purchases			Sales			in		out			(losses) (1)			(losses) (1)			2016		2016 (1)
Assets:
Financial instruments and other inventory positions owned:
Municipal securities:
Taxable securities	$	5,816	$	—		$	(611	)	$	—	$	(5,216	)	$	11		$	—		$	—	$	—
Tax-exempt securities	1,177		—			—			—		—			—			—			1,177		—
Short-term securities	720		—			—			—		—			—			28			748		28
Mortgage-backed securities	121,124		26,519			(89,907		)	—		—			1,845			(3,528		)	56,053		153
Derivative contracts	—		246			—			—		—			(246		)	18			18		18
Total financial instruments and other inventory positions owned	128,837		26,765			(90,518		)	—		(5,216		)	1,610			(3,482		)	57,996		199

Investments at fair value	109,444		16,648			—			—		(9,088		)	—			6,744			123,748		6,744
Total assets	$	238,281	$	43,413		$	(90,518	)	$	—	$	(14,304	)	$	1,610		$	3,262		$	181,744	$	6,943

Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Derivative contracts	$	7,148	$	(15,599	)	$	—		$	—	$	—		$	15,599		$	7,637		$	14,785	$	14,785
Total financial instruments and other inventory positions sold, but not yet purchased	$	7,148	$	(15,599	)	$	—		$	—	$	—		$	15,599		$	7,637		$	14,785	$	14,785

(1)

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

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Note 6 Variable Interest Entities ("VIEs")

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

VIEs are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities. The determination as to whether an entity is a VIE is based on the structure and nature of each entity. The Company also considers other characteristics such as the power through voting rights or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance and how the entity is financed.

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 has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

Consolidated VIEs

The Company’s consolidated VIEs at June 30, 2017 include certain alternative asset management funds in which the Company has an investment and, as the managing partner, is deemed to have both the power to direct the most significant activities of the funds and the right to receive benefits (or the obligation to absorb losses) that could potentially be significant to these funds.

The following table presents information about the carrying value of the assets and liabilities of the VIEs which are consolidated by the Company and included on the consolidated statements of financial condition at June 30, 2017. The assets can only be used to settle the liabilities of the respective VIE, and the creditors of the VIEs do not have recourse to the general credit of the Company. The assets and liabilities are presented prior to consolidation, and thus a portion of these assets and liabilities are eliminated in consolidation.



	Alternative Asset
(Dollars in thousands)	Management Funds
Assets:
Receivables from brokers, dealers and clearing organizations	$	15,611
Financial instruments and other inventory positions owned and pledged as collateral	154,852
Investments	97,216
Other assets	6,988
Total assets	$	274,667

Liabilities:
Short-term financing	$	114,038
Payables to brokers, dealers and clearing organizations	25,489
Financial instruments and other inventory positions sold, but not yet purchased	10,933
Other liabilities and accrued expenses	7,914
Total liabilities	$	158,374

The Company has investments in a grantor trust which was established as part of a nonqualified deferred compensation plan. The Company is the primary beneficiary of the grantor trust. Accordingly, the assets and liabilities of the grantor trust are consolidated by the Company on the consolidated statements of financial condition. See Note 16 for additional information on the nonqualified deferred compensation plan.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Nonconsolidated VIEs

The Company determined it is not the primary beneficiary of certain VIEs and accordingly does not consolidate them. These VIEs had net assets approximating $0.6 billion and $0.8 billion at June 30, 2017 and December 31, 2016, respectively. The Company’s exposure to loss from these VIEs is $6.7 million, which is the carrying value of its capital contributions recorded in investments on the consolidated statements of financial condition at June 30, 2017. The Company had no liabilities related to these VIEs at June 30, 2017 and December 31, 2016, respectively. Furthermore, the Company has not provided financial or other support to these VIEs that it was not previously contractually required to provide as of June 30, 2017.

Note 7 Receivables from and Payables to Brokers, Dealers and Clearing Organizations



	June 30,		December 31,
(Dollars in thousands)	2017		2016
Receivable arising from unsettled securities transactions	$	30,277	$	132,724
Deposits paid for securities borrowed	41,252		27,573
Receivable from clearing organizations	33,825		3,293
Deposits with clearing organizations	57,817		35,713
Securities failed to deliver	8,114		975
Other	16,150		12,452
Total receivables from brokers, dealers and clearing organizations	$	187,435	$	212,730



	June 30,		December 31,
(Dollars in thousands)	2017		2016
Payable arising from unsettled securities transactions	$	25,489	$	13,948
Payable to clearing organizations	3,806		15,893
Securities failed to receive	6,386		3,043
Other	7,186		7,958
Total payables to brokers, dealers and clearing organizations	$	42,867	$	40,842

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 8 Collateralized Securities Transactions

The Company’s financing and customer securities activities involve the Company using securities as collateral. In the event that the counterparty does not meet its contractual obligation to return securities used as collateral (e.g., pursuant to the terms of a repurchase agreement), or customers do not deposit additional securities or cash for margin when required, the Company may be exposed to the risk of reacquiring the securities or selling the securities at unfavorable market prices in order to satisfy its obligations to its customers or counterparties. The Company seeks to control this risk by monitoring the market value of securities pledged or used as collateral on a daily basis and requiring adjustments in the event of excess market exposure. The Company also uses unaffiliated third party custodians to administer the underlying collateral for the majority of its short-term financing to mitigate risk.

In a reverse repurchase agreement the Company purchases financial instruments from a seller, typically in exchange for cash, and agrees to resell the same or substantially the same financial instruments to the seller at a stated price plus accrued interest in the future. In a repurchase agreement, the Company sells financial instruments to a buyer, typically for cash, and agrees to repurchase the same or substantially the same financial instruments from the buyer at a stated price plus accrued interest at a future date. Even though repurchase and reverse repurchase agreements involve the legal transfer of ownership of financial instruments, they are accounted for as financing arrangements because they require the financial instruments to be repurchased or resold at maturity of the agreement.

In a securities borrowed transaction, the Company borrows securities from a counterparty in exchange for cash. When the Company returns the securities, the counterparty returns the cash. Interest is generally paid periodically over the life of the transaction.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

In the normal course of business, the Company obtains securities purchased under agreements to resell, securities borrowed and margin agreements on terms that permit it to repledge or resell the securities to others, typically pursuant to repurchase agreements. The Company obtained securities with a fair value of approximately $191.9 million and $192.2 million at June 30, 2017 and December 31, 2016, respectively, of which $171.7 million and $185.2 million, respectively, had been pledged or otherwise transferred to satisfy its commitments under financial instruments and other inventory positions sold, but not yet purchased.

The following is a summary of the Company’s securities sold under agreements to repurchase ("Repurchase Liabilities"), the fair market value of collateral pledged and the interest rate charged by the Company’s counterparty, which is based on LIBOR plus an applicable margin, as of June 30, 2017:



	Repurchase		Fair Market
(Dollars in thousands)	Liabilities		Value		Interest Rate
On demand maturities:
U.S. government securities	$	10,795	$	10,510	0.60%

Reverse repurchase agreements, repurchase agreements and securities borrowed and loaned are reported on a net basis by counterparty when a legal right of offset exists. There were no gross amounts offset on the consolidated statements of financial condition for reverse repurchase agreements, securities borrowed or repurchase agreements at June 30, 2017, as a legal right of offset did not exist.

The following table provides information about the offsetting of these instruments and related collateral amounts at December 31, 2016:



			Gross Amount			Net Amounts		Gross Amounts Not Offset
			Offset on the			Presented on the		on the Consolidated Statements
	Gross		Consolidated			Consolidated		of Financial Condition
(Dollars in thousands)	Recognized		Statements of			Statements of		Financial		Collateral			Net
Description	Assets		Financial Condition			Financial Condition		Instruments		Received (1)			Amount
Reverse repurchase agreements	$	161,574	$	(1,877	)	$	159,697	$	—	$	(159,697	)	$	—
Securities borrowed (3)	27,573		—			27,573		—		(27,573		)	—

Gross Amount

Net Amount

Gross Amount Not Offset

Offset on the

Presented on the

on the Consolidated Statements

Gross

Consolidated

of Financial Condition

(Dollars in thousands)

Recognized

Statements of

Financial

Collateral

Net

Description

Liabilities

Financial Condition

Instruments

Pledged (2)

Amount

Repurchase agreements

16,923

(1,877

)

15,046

—

(15,046

)

—


(1)	Includes securities received by the Company from the counterparty. These securities are not included on the consolidated statements of financial condition unless there is an event of default.


(2)	Includes the fair value of securities pledged by the Company to the counterparty. These securities are included on the consolidated statements of financial condition unless the Company defaults.


(3)	Deposits paid for securities borrowed are included in receivables from brokers, dealers and clearing organizations on the consolidated statements of financial condition. See Note 7 for additional information on receivables from brokers, dealers and clearing organizations.

The Company had no outstanding securities lending arrangements as of June 30, 2017 or December 31, 2016. See Note 4 for information related to the Company's offsetting of derivative contracts.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Note 9 Investments

The Company’s investments include investments in private companies and partnerships, registered mutual funds, warrants of public and private companies and private company debt.



	June 30,			December 31,
(Dollars in thousands)	2017			2016
Investments at fair value	$	151,346		$	156,102
Investments at cost	2,819			2,755
Investments accounted for under the equity method	9,996			9,200
Total investments	164,161			168,057

Less investments attributable to noncontrolling interests (1)	(41,247		)	(45,123		)
	$	122,914		$	122,934


(1)	Noncontrolling interests are attributable to third party ownership in consolidated merchant banking and senior living funds.

At June 30, 2017, investments carried on a cost basis had an estimated fair market value of $4.4 million. Because valuation estimates were based upon management’s judgment, investments carried at cost would be categorized as Level III assets in the fair value hierarchy, if they were carried at fair value.

Investments accounted for under the equity method include general and limited partnership interests. The carrying value of these investments is based on the investment vehicle’s net asset value. The net assets of investment partnerships consist of investments in both marketable and non-marketable securities. The underlying investments held by such partnerships are valued based on the estimated fair value determined by management in the Company's capacity as general partner or investor and, in the case of investments in unaffiliated investment partnerships, are based on financial statements prepared by the unaffiliated general partners.

Note 10 Other Assets



	June 30,		December 31,
(Dollars in thousands)	2017		2016
Net deferred income tax assets	$	89,532	$	97,833
Income tax receivables	10,453		—
Fee receivables	21,423		22,840
Accrued interest receivables	8,187		9,259
Forgivable loans, net	8,926		9,307
Prepaid expenses	6,327		6,363
Secured loan receivables	2,975		6,236
Other	13,268		13,124
Total other assets	$	161,091	$	164,962

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Note 11 Short-Term Financing



	Outstanding Balance				Weighted Average Interest Rate
	June 30,		December 31,		June 30,		December 31,
(Dollars in thousands)	2017		2016		2017		2016
Commercial paper (secured)	$	112,386	$	147,021	2.65	%	2.12	%
Prime broker arrangements	114,037		271,811		1.96	%	1.49	%
Bank lines (secured)	104,000		—		2.06	%	N/A
Total short-term financing	$	330,423	$	418,832

The Company issues secured commercial paper to fund a portion of its securities inventory. The commercial paper notes ("CP Notes") can be issued with maturities of 27 days to 270 days from the date of issuance. The CP Notes are issued under three separate programs, CP Series A, CP Series II A and CP Series III A, and are secured by different inventory classes. As of June 30, 2017, the weighted average maturity of CP Series A, CP Series II A and CP Series III A was 25 days, 16 days and 21 days, respectively. The CP Notes are interest bearing or sold at a discount to par with an interest rate based on LIBOR plus an applicable margin. CP Series III A includes a covenant that requires the Company’s U.S. broker dealer subsidiary to maintain excess net capital of $120 million.

The Company has established arrangements to obtain financing with prime brokers related to its municipal bond fund and convertible securities. Financing under these arrangements is primarily secured by municipal securities, and collateral limitations could reduce the amount of funding available under the arrangements. Prime broker financing activities are recorded net of receivables from trading activity. The funding is at the discretion of the prime brokers subject to a notice period.

The Company has committed short-term bank line financing available on a secured basis and uncommitted short-term bank line financing available on both a secured and unsecured basis. The Company uses these credit facilities in the ordinary course of business to fund a portion of its daily operations and the amount borrowed under these credit facilities varies daily based on the Company’s funding needs.

The Company’s committed short-term bank line financing at June 30, 2017 consisted of a one-year $200 million committed revolving credit facility with U.S. Bank, N.A., which was renewed in December 2016. Advances under this facility are secured by certain marketable securities. The facility includes a covenant that requires the Company’s U.S. broker dealer subsidiary to maintain minimum net capital of $120 million, and the unpaid principal amount of all advances under this facility will be due on December 16, 2017. The Company pays a nonrefundable commitment fee on the unused portion of the facility on a quarterly basis. At June 30, 2017, the Company had $104.0 million in advances against this line of credit.

The Company’s uncommitted secured lines at June 30, 2017 totaled $185 million with two banks and are dependent on having appropriate collateral, as determined by the bank agreement, to secure an advance under the line. The availability of the Company’s uncommitted lines are subject to approval by the individual banks each time an advance is requested and may be denied. At June 30, 2017, the Company had no advances against these lines of credit.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Note 12 Senior Notes

The Company has entered into variable and fixed rate senior notes with certain entities advised by Pacific Investment Management Company ("PIMCO"). The following table presents the outstanding balance by note class:



	Outstanding Balance
	June 30,		December 31,
(Dollars in thousands)	2017		2016
Class A Notes	$	—	$	50,000
Class C Notes	125,000		125,000
Total senior notes	$	125,000	$	175,000

On October 8, 2015, the Company entered into a second amended and restated note purchase agreement ("Second Amended and Restated Note Purchase Agreement") under which the Company issued $125 million of fixed rate Class C Notes. The Class C Notes bear interest at an annual fixed rate of 5.06 percent, are payable semi-annually and mature on October 9, 2018. The unpaid principal amount is due in full on the maturity date and may not be prepaid by the Company. The variable rate Class A Notes were repaid by the Company upon maturity on May 31, 2017.

The Second Amended and Restated Note Purchase Agreement includes customary events of default and covenants that, among other things, require the Company to maintain a minimum consolidated tangible net worth and regulatory net capital, limit the Company's leverage ratio and require the Company to maintain a minimum ratio of operating cash flow to fixed charges. At June 30, 2017, the Company was in compliance with all covenants.

The senior notes are recorded at amortized cost. As of June 30, 2017, the fair value of the fixed rate Class C Notes was approximately $125.9 million.

Note 13 Legal Contingencies

The Company has been named as a defendant in various legal actions, including complaints and litigation and arbitration claims, arising from its business activities. Such actions include claims related to securities brokerage and investment banking activities, and 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 ("SROs") which could result in adverse judgments, settlement, penalties, fines or other relief.

The Company has established reserves for potential losses that are probable and reasonably estimable that may result from pending and potential legal actions, investigations and regulatory proceedings. Reasonably possible losses in excess of amounts accrued at June 30, 2017 are not material. In many cases, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount or range of any potential loss, particularly where proceedings may be in relatively early stages or where plaintiffs are seeking substantial or indeterminate damages. Matters frequently need to be more developed before a loss or range of loss can reasonably be estimated.

Given uncertainties regarding the timing, scope, volume and outcome of pending and potential legal actions, investigations and regulatory proceedings and other factors, the amounts of reserves and ranges of reasonably possible losses are difficult to determine and of necessity subject to future revision. Subject to the foregoing, management of the Company believes, based on currently available information, after consultation with outside legal counsel and taking into account its established reserves, that pending legal actions, investigations and regulatory proceedings will be resolved with no material adverse effect on the consolidated statements of financial condition, results of operations or cash flows 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 and cash flows in that period and the financial condition as of the end of that period could be materially adversely affected. In addition, there can be no assurance that material losses will not be incurred from claims that have not yet been brought to the Company’s attention or are not yet determined to be reasonably possible.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Note 14 Restructuring

The Company incurred the following pre-tax restructuring charges within the Capital Markets segment primarily in conjunction with the Simmons acquisition discussed in Note 3.



	Three Months Ended		Six Months Ended
(Dollars in thousands)	June 30, 2016		June 30, 2016
Severance, benefits and outplacement costs	$	1,207	$	6,608
Vacated redundant leased office space	1,320		1,320
Contract termination costs	422		1,026
Total pre-tax restructuring charges	$	2,949	$	8,954

Note 15 Shareholders’ Equity

Share Repurchases

Effective August 14, 2015, the Company's board of directors authorized the repurchase of up to $150.0 million in common shares through September 30, 2017. During the six months ended June 30, 2017, the Company repurchased 27,530 shares at an average price of $72.63 per share for an aggregate purchase price of $2.0 million related to this authorization. During the six months ended June 30, 2016, the Company repurchased 1,351,015 shares at an average price of $38.76 per share for an aggregate purchase price of $52.4 million related to this authorization. The Company has $69.8 million remaining under this authorization.

The Company also purchases shares of common stock from restricted stock award recipients upon the award vesting as recipients sell shares to meet their employment tax obligations. The Company purchased 293,357 shares and 233,431 shares, or $21.6 million and $9.8 million of the Company’s common stock for this purpose during the six months ended June 30, 2017 and 2016, respectively.

Issuance of Shares

The Company issues common shares out of treasury stock as a result of employee restricted share vesting and exercise transactions as discussed in Note 16. During the six months ended June 30, 2017 and 2016, the Company issued 800,044 shares and 674,981 shares, respectively, related to these obligations.

Dividends

Beginning in 2017, the Company initiated the payment of a quarterly cash dividend to holders of its common stock. The Company's board of directors determines the declaration and payment of dividends on a quarterly basis, and is free to change the Company's dividend policy at any time.

On July 27, 2017, the board of directors declared a cash dividend of $0.3125 per share to be paid on September 15, 2017, to shareholders of record as of the close of business on August 28, 2017. During the six months ended June 30, 2017, the Company declared and paid dividends of $0.625 per share, totaling $9.5 million.

Noncontrolling Interests

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. Noncontrolling interests represent equity interests in consolidated entities that are not attributable, either directly or indirectly, to Piper Jaffray Companies. Noncontrolling interests include the minority equity holders’ proportionate share of the equity in a merchant banking fund of $37.1 million and a senior living fund aggregating $8.1 million as of June 30, 2017. As of December 31, 2016, noncontrolling interests included the minority equity holders’ proportionate share of the equity in a merchant banking fund of $35.0 million, a municipal bond fund with employee investors of $9.2 million and a senior living fund aggregating $12.8 million.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Ownership interests in entities held by parties other than the Company’s common shareholders are presented as noncontrolling interests within shareholders’ equity, separate from the Company’s own equity. Revenues, expenses and net income or loss are reported on the consolidated statements of operations on a consolidated basis, which includes amounts attributable to both the Company’s common shareholders and noncontrolling interests. Net income or loss is then allocated between the Company and noncontrolling interests based upon their relative ownership interests. Net income applicable to noncontrolling interests is deducted from consolidated net income to determine net income applicable to the Company. There was no other comprehensive income or loss attributed to noncontrolling interests for the six months ended June 30, 2017 and 2016, respectively.

The following table presents the changes in shareholders' equity for the six months ended June 30, 2017:



	Common		Common						Total
	Shares		Shareholders’			Noncontrolling			Shareholders’
(Amounts in thousands, except share amounts)	Outstanding		Equity			Interests			Equity
Balance at December 31, 2016	12,391,970		$	759,250		$	57,016		$	816,266
Net income	—		33,848			4,317			38,165
Dividends	—		(9,483		)	—			(9,483		)
Amortization/issuance of restricted stock (1)	—		26,725			—			26,725
Issuance of treasury shares for options exercised	26,149		1,703			—			1,703
Issuance of treasury shares for restricted stock vestings	773,895		—			—			—
Repurchase of common stock through share repurchase program	(27,530	)	(1,999		)	—			(1,999		)
Repurchase of common stock for employee tax withholding	(293,357	)	(21,598		)	—			(21,598		)
Shares reserved/issued for director compensation	2,124		134			—			134
Other comprehensive income	—		995			—			995
Fund capital distributions, net	—		—			(16,169		)	(16,169		)
Balance at June 30, 2017	12,873,251		$	789,575		$	45,164		$	834,739


(1)	Includes amortization of restricted stock as part of deal consideration for the acquisition of Simmons. See Note 3 for further discussion.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Note 16 Compensation Plans

Stock-Based Compensation Plans

The Company maintains two stock-based compensation plans, the Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan (the "Incentive Plan") and the 2016 Employment Inducement Award Plan (the "Inducement Plan"). The Company’s equity awards are recognized on the consolidated statements of operations at grant date fair value over the service period of the award less forfeitures.

The following table provides a summary of the Company’s outstanding equity awards (in shares or units) as of June 30, 2017:



Incentive Plan
Restricted Stock
Annual grants	920,517
Sign-on grants	273,727
	1,194,244
Inducement Plan
Restricted Stock	260,231

Total restricted stock related to compensation	1,454,475

Simmons Deal Consideration (1)	837,225

Total restricted stock outstanding	2,291,700

Incentive Plan
Restricted Stock Units
Leadership grants	295,151


(1)	The Company issued restricted stock with service conditions as part of deal consideration for the acquisition of Simmons. See Note 3 for further discussion.

Incentive Plan

The Incentive Plan permits the grant of equity awards, including restricted stock, restricted stock units and non-qualified stock options, to the Company’s employees and directors for up to 8.2 million shares of common stock (0.9 million shares remained available for future issuance under the Incentive Plan as of June 30, 2017). 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 Incentive Plan provides for accelerated vesting of awards if there is a severance event, a change in control of the Company (as defined in the Incentive Plan), in the event of a participant’s death, and at the discretion of the compensation committee of the Company’s board of directors.

Restricted Stock Awards

Restricted stock grants are valued at the market price of the Company’s common stock on the date of grant and are amortized over the requisite service period. The Company grants shares of restricted stock to employees as part of year-end compensation ("Annual Grants") and upon initial hiring or as a retention award ("Sign-on Grants").

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

The Company’s Annual Grants are made each year in February. Annual Grants vest ratably over three years in equal installments. The Annual Grants provide for continued vesting after termination of employment, so long as the employee does not violate certain post-termination restrictions set forth in the award agreement or any agreements entered into upon termination. The Company determined the service inception date precedes the grant date for the Annual Grants, and that the post-termination restrictions do not meet the criteria for an in-substance service condition, as defined by ASC 718. Accordingly, restricted stock granted as part of the Annual Grants is expensed in the one-year period in which those awards are deemed to be earned, which is generally the calendar year preceding the February grant date. For example, the Company recognized compensation expense during fiscal 2016 for its February 2017 Annual Grant. If an equity award related to the Annual Grants is forfeited as a result of violating the post-termination restrictions, the lower of the fair value of the award at grant date or the fair value of the award at the date of forfeiture is recorded within the consolidated statements of operations as a reversal of compensation expense.

Sign-on Grants are used as a recruiting tool for new employees and are issued to current employees as a retention tool. These awards have both cliff and ratable vesting terms, and the employees must fulfill service requirements in exchange for rights to the awards. Compensation expense is amortized on a straight-line basis from the grant date over the requisite service period, generally one to five years. Employees forfeit unvested shares upon termination of employment and a reversal of compensation expense is recorded.

Annually, the Company grants stock to its non-employee directors. The stock-based compensation paid to non-employee directors is fully expensed on the grant date and included within outside services expense on the consolidated statements of operations.

Restricted Stock Units

The Company grants restricted stock units to its leadership team ("Leadership Grants").

2017 Leadership Grant

Restricted stock units granted in 2017 will vest and convert to shares of common stock at the end of the performance period only if the Company satisfies predetermined performance and/or market conditions over the 36-month performance period from January 1, 2017 through December 31, 2019. Under the terms of the award, the number of units that will actually vest and convert to shares will be based on the extent to which the Company achieves specified targets during the performance period. The maximum payout leverage under this grant is 150 percent.

Up to 75 percent of the award can be earned based on the Company achieving certain average adjusted return on equity targets, as defined in the terms of the award agreement. The fair value of this portion of the award was based on the closing price of the Company's common stock on the grant date. If the Company determines that it is probable that the performance condition will be achieved, compensation expense is amortized on a straight-line basis over the 36-month performance period. The probability that the performance condition will be achieved is reevaluated each reporting period with changes in estimated outcomes accounted for using a cumulative effect adjustment to compensation expense. Compensation expense will be recognized only if the performance condition is met. Employees forfeit unvested share units upon termination of employment with a corresponding reversal of compensation expense. As of June 30, 2017, the Company has determined that the performance condition is probable of achieving 50 percent of the grant award.

Up to 75 percent of the award can be earned based on the Company’s total shareholder return relative to members of a predetermined peer group. The market condition must be met for the award to vest and compensation cost will be recognized regardless if the market condition is satisfied. Compensation expense is amortized on a straight-line basis over the 36-month requisite service period. Employees forfeit unvested share units upon termination of employment with a corresponding reversal of compensation expense. For this portion of the award, the fair value on the grant date was determined using a Monte Carlo simulation with the following assumptions:



	Risk-free	Expected Stock
Grant Year	Interest Rate	Price Volatility
2017	1.62%	35.9%

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Because the market condition portion of the award vesting depends on the Company’s total shareholder return relative to a peer group, the valuation modeled the performance of the peer group as well as the correlation between the Company and the peer group. The expected stock price volatility assumption was determined using historical volatility, as correlation coefficients can only be developed through historical volatility. The risk-free interest rate was determined based on the three-year U.S. Treasury bond yield.

Leadership Grants Prior to 2017

Restricted stock units granted prior to 2017 contain market condition criteria and will vest and convert to shares of common stock at the end of each 36-month performance period only if the Company's stock performance satisfies predetermined market conditions over the performance period. Under the terms of the grants, the number of units that will vest and convert to shares will be based on the Company's stock performance achieving specified targets during each performance period. Compensation expense is recognized over each 36-month performance period.

Up to 50 percent of these awards can be earned based on the Company’s total shareholder return relative to members of a predetermined peer group and up to 50 percent of the awards can be earned based on the Company’s total shareholder return. The fair value of the awards on the grant date was determined using a Monte Carlo simulation with the following assumptions:



	Risk-free	Expected Stock
Grant Year	Interest Rate	Price Volatility
2016	0.98%	34.9%
2015	0.90%	29.8%
2014	0.82%	41.3%

The expected stock price volatility assumptions were determined using historical volatility, as correlation coefficients can only be developed through historical volatility. The risk-free interest rates were determined based on three-year U.S. Treasury bond yields.

Stock Options

The Company previously granted options to purchase Piper Jaffray Companies common stock to employees and non-employee directors in fiscal years 2004 through 2008. Employee and director options were 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. As described above pertaining to the Company’s Annual Grants of restricted shares, stock options granted to employees were expensed in the calendar year preceding the annual February grant date. For example, the Company recognized compensation expense during fiscal 2007 for its February 2008 option grant. The maximum term of the stock options granted to employees and directors was ten years. The Company has not granted stock options since 2008, and all awards have been exercised or expired as of March 31, 2017.

Inducement Plan

The Company established the Inducement Plan in conjunction with the acquisition of Simmons. The Company granted $11.6 million (286,776 shares) in restricted stock under the Inducement Plan on May 15, 2016. These shares cliff vest in three years. Inducement Plan awards are amortized as compensation expense on a straight-line basis over the vesting period. Employees forfeit unvested Inducement Plan shares upon termination of employment and a reversal of compensation expense is recorded.

Stock-Based Compensation Activity

The Company recorded compensation expense of $12.1 million and $13.7 million for the three months ended June 30, 2017 and 2016, respectively, and $12.3 million and $24.1 million for the six months ended June 30, 2017 and 2016, respectively, related to employee restricted stock and restricted stock unit awards. Forfeitures were $0.6 million and $0.2 million for the three months ended June 30, 2017 and 2016, respectively, and $2.3 million and $0.2 million, for the six months ended June 30, 2017 and 2016, respectively. The tax benefit related to stock-based compensation totaled $5.5 million and $2.7 million for the three months ended June 30, 2017 and 2016, respectively, and $11.6 million and $6.7 million for the six months ended June 30, 2017 and 2016, respectively.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

The following table summarizes the changes in the Company’s unvested restricted stock:



	Unvested		Weighted Average
	Restricted Stock		Grant Date
	(in Shares)		Fair Value
December 31, 2016	2,874,117		$	43.12
Granted	233,280		78.68
Vested	(650,499	)	45.30
Canceled	(165,198	)	41.96
June 30, 2017	2,291,700		$	46.20

The following table summarizes the changes in the Company’s unvested restricted stock units:



	Unvested		Weighted Average
	Restricted		Grant Date
	Stock Units		Fair Value
December 31, 2016	374,460		$	21.63
Granted	35,981		84.10
Vested	(115,290	)	23.42
Canceled	—		—
June 30, 2017	295,151		$	28.55

As of June 30, 2017, there was $34.3 million of total unrecognized compensation cost related to restricted stock and restricted stock units expected to be recognized over a weighted average period of 1.8 years.

The following table summarizes the changes in the Company’s outstanding stock options:



					Weighted Average
			Weighted		Remaining
	Options		Average		Contractual Term	Aggregate
	Outstanding		Exercise Price		(in Years)	Intrinsic Value
December 31, 2016	30,613		$	65.86	0.3	$	203,291
Granted	—		—
Exercised	(26,149	)	65.13
Canceled	—		—
Expired	(4,464	)	70.13
June 30, 2017	—		$	—	0.0	$	—

As of June 30, 2017, there was no unrecognized compensation cost related to stock options expected to be recognized over future years. The intrinsic value of options exercised was $0.3 million and the resulting tax benefit realized was $0.1 million for the six months ended June 30, 2017. The intrinsic value of options exercised and the resulting tax benefit realized were immaterial for the six months ended June 30, 2016.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Deferred Compensation Plans

The Company maintains various deferred compensation arrangements for employees.

The nonqualified deferred compensation plan is an unfunded plan which allows certain highly compensated employees, at their election, to defer a percentage of their base salary, commissions and/or cash bonuses. The deferrals vest immediately and are non-forfeitable. The amounts deferred under this plan are held in a grantor trust. The Company invests, as a principal, in investments to economically hedge its obligation under the nonqualified deferred compensation plan. Investments in the grantor trust, consisting of mutual funds, totaled $29.1 million and $24.4 million as of June 30, 2017 and December 31, 2016, respectively, and are included in investments on the consolidated statements of financial condition. The compensation deferred by the employees is expensed in the period earned. The deferred compensation liability was $29.2 million and $24.5 million as of June 30, 2017 and December 31, 2016, respectively. Changes in the fair value of the investments made by the Company are reported in investment income and changes in the corresponding deferred compensation liability are reflected as compensation and benefits expense on the consolidated statements of operations.

The Piper Jaffray Companies Mutual Fund Restricted Share Investment Plan is a fully funded deferred compensation plan which allows eligible employees to elect to receive a portion of the incentive compensation they would otherwise receive in the form of restricted stock, instead in restricted mutual fund shares ("MFRS Awards") of investment funds. MFRS Awards are awarded to qualifying employees in February of each year, and represent a portion of their compensation for performance in the preceding year similar to the Company's Annual Grants. MFRS Awards vest ratably over three years in equal installments and provide for continued vesting after termination of employment so long as the employee does not violate certain post-termination restrictions set forth in the award agreement or any agreement entered into upon termination. Forfeitures are recorded as a reduction of compensation and benefits expense within the consolidated statements of operations. MFRS Awards are owned by employee recipients (subject to aforementioned vesting restrictions) and as such are not included on the consolidated statements of financial condition.

The Company has also granted MFRS Awards to new employees as a recruiting tool. Employees must fulfill service requirements in exchange for rights to the awards. Compensation expense from these awards are amortized on a straight-line basis over the requisite service period of two to five years.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Note 17 Earnings Per Share

The Company calculates earnings per share using the two-class method. Basic earnings per common share is computed by dividing net income applicable to Piper Jaffray Companies’ common shareholders by the weighted average number of common shares outstanding for the period. Net income applicable to Piper Jaffray Companies’ common shareholders represents net income applicable to Piper Jaffray Companies reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities. All of the Company’s unvested restricted shares are deemed to be participating securities as they are eligible to share in the profits (e.g., receive dividends) of the Company. The Company’s restricted stock units are not participating securities as they are not eligible to receive dividends, or the dividends are forfeitable until vested. Diluted earnings per common share is calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive stock options and restricted stock units.

The computation of earnings per share is as follows:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Amounts in thousands, except per share data)	2017			2016			2017			2016
Net income applicable to Piper Jaffray Companies	$	13,573		$	1,938		$	33,848		$	4,375
Earnings allocated to participating securities (1)	(2,051		)	(361		)	(5,436		)	(690		)
Net income applicable to Piper Jaffray Companies’ common shareholders (2)	$	11,522		$	1,577		$	28,412		$	3,685

Shares for basic and diluted calculations:
Average shares used in basic computation	12,826			12,927			12,711			13,043
Stock options	—			15			—			13
Restricted stock units	111			—			219			—
Average shares used in diluted computation	12,937			12,942			12,930			13,056

Earnings per common share:
Basic	$	0.89		$	0.12		$	2.24		$	0.28
Diluted	$	0.89		$	0.12		$	2.21		$	0.28

(1)

Represents the allocation of earnings to participating securities. Losses are not allocated to participating securities. Participating securities include all of the Company’s unvested restricted shares. The weighted average participating shares outstanding were 2,296,080 and 2,951,985 for the three months ended June 30, 2017 and 2016, respectively, and 2,462,486 and 2,445,372 for the six months ended June 30, 2017 and 2016, respectively.

(2)

Net income applicable to Piper Jaffray Companies’ 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 and restricted stock units to dilutive shares outstanding, which alters the ratio used to allocate earnings to Piper Jaffray Companies’ common shareholders and participating securities for purposes of calculating diluted and basic EPS.

The anti-dilutive effects from stock options and restricted stock units were immaterial for the six months ended June 30, 2017 and 2016, respectively.

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Note 18 Segment Reporting

Basis for Presentation

The Company structures its segments primarily based upon the nature of the financial products and services provided to customers and the Company’s management organization. The Company evaluates performance and allocates resources based on segment pre-tax operating income or loss and segment pre-tax operating margin. Revenues and expenses directly associated with each respective segment are included in determining their operating results. Other revenues and expenses that are not directly attributable to a particular segment are allocated based upon the Company’s allocation methodologies, including each segment’s respective net revenues, use of shared resources, headcount or other relevant measures. Segment assets are based on those directly associated with each segment, and include an allocation of certain assets based on the most relevant measures applicable, including headcount and other factors. The substantial majority of the Company's net revenues and long-lived assets are located in the U.S.

Reportable segment financial results are as follows:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2017			2016			2017			2016

Capital Markets
Investment banking
Financing
Equities	$	24,730		$	16,786		$	48,112		$	23,352
Debt	21,971			33,325			38,379			49,297
Advisory services	92,507			48,112			185,389			129,741
Total investment banking	139,208			98,223			271,880			202,390

Institutional sales and trading
Equities	20,569			22,612			40,675			42,281
Fixed income	19,221			28,952			42,461			46,006
Total institutional sales and trading	39,790			51,564			83,136			88,287

Management and performance fees	1,497			1,794			3,494			2,759

Investment income	5,307			7,451			15,815			9,537

Long-term financing expenses	(2,029		)	(2,293		)	(4,267		)	(4,585		)

Net revenues	183,773			156,739			370,058			298,388

Operating expenses (1)	164,233			152,028			328,293			290,883

Segment pre-tax operating income	$	19,540		$	4,711		$	41,765		$	7,505

Segment pre-tax operating margin	10.6		%	3.0		%	11.3		%	2.5		%

Continued on next page

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2017			2016			2017			2016

Asset Management
Management and performance fees
Management fees	$	13,689		$	12,801		$	27,699		$	25,684
Performance fees	—			—			—			—
Total management and performance fees	13,689			12,801			27,699			25,684

Investment income/(loss)	283			943			517			(33		)

Net revenues	13,972			13,744			28,216			25,651

Operating expenses (1)	13,645			11,946			27,305			23,205

Segment pre-tax operating income	$	327		$	1,798		$	911		$	2,446

Segment pre-tax operating margin	2.3		%	13.1		%	3.2		%	9.5		%


Total
Net revenues	$	197,745		$	170,483		$	398,274		$	324,039

Operating expenses (1)	177,878			163,974			355,598			314,088

Pre-tax operating income	$	19,867		$	6,509		$	42,676		$	9,951

Pre-tax operating margin	10.0		%	3.8		%	10.7		%	3.1		%

(1)Operating expenses include intangible asset amortization expense as set forth in the table below:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2017		2016		2017		2016
Capital Markets	$	2,545	$	2,707	$	5,089	$	4,616
Asset Management	1,277		1,387		2,555		2,774
Total intangible asset amortization expense	$	3,822	$	4,094	$	7,644	$	7,390

Reportable segment assets are as follows:



	June 30,		December 31,
(Dollars in thousands)	2017		2016
Capital Markets	$	1,750,374	$	1,934,528
Asset Management	180,959		190,975
Total assets	$	1,931,333	$	2,125,503

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Piper Jaffray Companies

Notes to the Consolidated Financial Statements

(Unaudited)

Note 19 Net Capital Requirements and Other Regulatory Matters

Piper Jaffray is registered as a securities broker dealer with the SEC and is a member of various SROs and securities exchanges. The Financial Industry Regulatory Authority, Inc. ("FINRA") serves as Piper Jaffray’s 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 SEC and FINRA rules.

At June 30, 2017, net capital calculated under the SEC rule was $215.1 million, and exceeded the minimum net capital required under the SEC rule by $214.1 million.

The Company’s committed short-term credit facility and its senior notes include covenants requiring Piper Jaffray to maintain minimum net capital of $120 million. CP Notes issued under CP Series III A include a covenant that requires Piper Jaffray to maintain excess net capital of $120 million.

Piper Jaffray Ltd., a broker dealer subsidiary registered in the United Kingdom, is subject to the capital requirements of the Prudential Regulation Authority and the Financial Conduct Authority. As of June 30, 2017, Piper Jaffray Ltd. was in compliance with the capital requirements of the Prudential Regulation Authority and the Financial Conduct Authority.

Piper Jaffray Hong Kong Limited is licensed by the Hong Kong Securities and Futures Commission, which is subject to the liquid capital requirements of the Securities and Futures (Financial Resources) Rule promulgated under the Securities and Futures Ordinance. At June 30, 2017, Piper Jaffray Hong Kong Limited was in compliance with the liquid capital requirements of the Hong Kong Securities and Futures Commission.

Note 20 Income Taxes

The Company recorded income tax expense of $4.9 million for the three months ended June 30, 2017. Income tax expense was reduced by a tax benefit of $1.8 million related to stock-based compensation awards vesting at values greater than the grant price. See Note 2 regarding the tax impact from the adoption of ASU 2016-09.

The Company had income tax expense of $2.0 million for the three months ended June 30, 2016, resulting in an effective tax rate, excluding noncontrolling interests, of 50.7 percent. The effective tax rate was unusually high because the Company recorded a 100 percent valuation allowance against tax benefits generated from net operating losses within Piper Jaffray Ltd.

The Company's effective tax rate, excluding noncontrolling interests, for the six months ended June 30, 2017 was 11.8 percent, compared to 34.0 percent for the six months ended June 30, 2016. The effective tax rate was lower for the six months ended June 30, 2017 due to a tax benefit of $8.7 million related to stock-based compensation awards vesting at values greater than the grant price.

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ITEM 2.	MANAGEMENT’S 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, 2016 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, 2016, as updated in our subsequent reports filed with the SEC and under "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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.

Explanation of Non-GAAP Financial Measures

We have included financial measures that are not prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). These non-GAAP financial measures include adjustments to exclude (1) revenues and expenses related to noncontrolling interests, (2) amortization of intangible assets related to acquisitions, (3) compensation and non-compensation expenses from acquisition-related agreements and (4) restructuring and acquisition integration costs. These adjustments affect the following financial measures: net revenues, compensation expenses, non-compensation expenses, net income applicable to Piper Jaffray Companies, earnings per diluted common share, return on average common shareholders' equity, segment net revenues, segment operating expenses, segment pre-tax operating income and segment pre-tax operating margin. Management believes that presenting these results and measures on an adjusted basis in conjunction with the corresponding U.S. GAAP measures provides the most meaningful basis for comparison of our operating results across periods, and enhances the overall understanding of our current financial performance by excluding certain items that may not be indicative of our core operating results. The non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of financial performance prepared in accordance with U.S. GAAP.

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Executive Overview

Our business principally consists of providing investment banking, institutional brokerage, asset management and related financial services to corporations, private equity groups, public entities, non-profit entities and institutional investors in the United States and Europe. We operate through two reportable business segments: Capital Markets and Asset Management. Refer to our Annual Report on Form 10-K for the year ended December 31, 2016 for a full description of our business, including our strategic growth initiatives.

With respect to our Asset Management segment, an extended cycle of investors favoring passive investment vehicles over active management, along with certain products having investment performance below their benchmarks, have combined to reduce assets under management ("AUM") and revenues in our value equity products. We have added new investment strategies in an effort to increase AUM and revenues to this business, however, the costs associated with hiring new investment teams combined with AUM outflows from existing equity strategies, and the resultant reduction in revenue, has lowered our profitability for this business. Further decline in the profitability of our Asset Management segment may result in an impairment of our Asset Management goodwill. For more information on our goodwill impairment testing in this area, please refer to our "Critical Accounting Policies" section.

Financial Highlights



	Three Months Ended						Six Months Ended
(Amounts in thousands, except per share data)	June 30,		June 30,		Percent		June 30,		June 30,		Percent
(Amounts in thousands, except per share data)	2017		2016		Inc/(Dec)		2017		2016		Inc/(Dec)
U.S. GAAP
Net revenues	$	197,745	$	170,483	16.0	%	$	398,274	$	324,039	22.9	%
Compensation and benefits expenses	134,314		117,148		14.7		268,692		221,584		21.3
Non-compensation expenses	43,564		46,826		(7.0	)	86,906		92,504		(6.1	)
Net income applicable to Piper Jaffray Companies	13,573		1,938		600.4		33,848		4,375		673.7
Earnings per diluted common share	$	0.89	$	0.12	641.7		$	2.21	$	0.28	689.3

Non-GAAP⁽¹⁾
Adjusted net revenues	$	195,778	$	167,188	17.1	%	$	392,410	$	319,395	22.9	%
Adjusted compensation and benefits expenses	126,223		107,086		17.9		252,700		208,216		21.4
Adjusted non-compensation expenses	38,992		38,579		1.1		77,458		73,588		5.3
Adjusted net income applicable to Piper Jaffray Companies	21,274		13,938		52.6		48,755		24,547		98.6
Adjusted earnings per diluted common share	$	1.40	$	0.88	59.1		$	3.18	$	1.58	101.3

For the three months ended June 30, 2017


•	Net revenues increased 16.0 percent from the year-ago period as significantly higher advisory services revenues, as well as increased equity financing revenues, were partially offset by lower debt financing and institutional brokerage revenues.


•	Compensation and benefits expenses increased 14.7 percent compared with the prior-year period due to increased revenues.


•	Non-compensation expenses were down 7.0 percent compared to the year-ago period. In the second quarter of 2016, non-compensation expenses included $3.4 million of restructuring and integration costs primarily related to the acquisition of Simmons & Company International ("Simmons"), which we acquired on February 26, 2016.


•	Our second quarter 2017 results include a $1.8 million tax benefit related to restricted stock vesting at values greater than the grant price. The tax benefit increased earnings per diluted common share by $0.12 in the second quarter of 2017.

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For the six months ended June 30, 2017


•	Net revenues increased 22.9 percent from the year-ago period. Higher advisory services and equity financing revenues, as well as higher investment income, were partially offset by lower debt financing and institutional brokerage revenues.


•	Compensation and benefits expenses increased 21.3 percent compared with the prior-year period due to increased revenues, as well as higher acquisition-related compensation costs.

•

Non-compensation expenses were down 6.1 percent compared to the year-ago period. In the first half of 2016, non-compensation expenses included $10.2 million of restructuring and integration costs primarily related to the acquisition of Simmons. Incremental back office conversion costs, as well as higher outside services expenses, partially offset the lower restructuring costs in the current period.


•	For the six months ended June 30, 2017, we recorded a tax benefit of $8.7 million related to restricted stock vesting at values greater than the grant price. The tax benefit increased earnings per diluted common share by $0.57 in the first half of 2017.

•

For the twelve months ended June 30, 2017, our rolling twelve month return on average common shareholders' equity was 1.0 percent, compared with 2.8 percent for the rolling twelve months ended June 30, 2016. On an adjusted basis, we generated a rolling twelve month return on average common shareholders' equity of 12.4 percent⁽²⁾for the twelve months ended June 30, 2017, compared with 6.7 percent⁽²⁾ for the rolling twelve months ended June 30, 2016.


(1)	Reconciliation of U.S. GAAP to adjusted non-GAAP financial information



	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Amounts in thousands, except per share data)	2017			2016			2017			2016
Net revenues:
Net revenues – U.S. GAAP basis	$	197,745		$	170,483		$	398,274		$	324,039
Adjustments:
Revenue related to noncontrolling interests	(1,967		)	(3,295		)	(5,864		)	(4,644		)
Adjusted net revenues	$	195,778		$	167,188		$	392,410		$	319,395

Compensation and benefits:
Compensation and benefits – U.S. GAAP basis	$	134,314		$	117,148		$	268,692		$	221,584
Adjustments:
Compensation from acquisition-related agreements	(8,091		)	(10,062		)	(15,992		)	(13,368		)
Adjusted compensation and benefits	$	126,223		$	107,086		$	252,700		$	208,216

Non-compensation expenses:
Non-compensation expenses – U.S. GAAP basis	$	43,564		$	46,826		$	86,906		$	92,504
Adjustments:
Non-compensation expenses related to noncontrolling interests	(579		)	(720		)	(1,547		)	(1,320		)
Restructuring and integration costs	—			(3,433		)	—			(10,206		)
Amortization of intangible assets related to acquisitions	(3,822		)	(4,094		)	(7,644		)	(7,390		)
Non-compensation expenses from acquisition-related agreements	(171		)	—			(257		)	—
Adjusted non-compensation expenses	$	38,992		$	38,579		$	77,458		$	73,588

Net income applicable to Piper Jaffray Companies:
Net income applicable to Piper Jaffray Companies – U.S. GAAP basis	$	13,573		$	1,938		$	33,848		$	4,375
Adjustments:
Compensation from acquisition-related agreements	5,248			6,623			10,054			8,643
Restructuring and integration costs	—			2,876			—			7,014
Amortization of intangible assets related to acquisitions	2,348			2,501			4,695			4,515
Non-compensation expenses from acquisition-related agreements	105			—			158			—
Adjusted net income applicable to Piper Jaffray Companies	$	21,274		$	13,938		$	48,755		$	24,547

Earnings per diluted common share:
Earnings per diluted common share – U.S. GAAP basis	$	0.89		$	0.12		$	2.21		$	0.28
Adjustments:
Compensation from acquisition-related agreements	0.34			0.42			0.65			0.56
Restructuring and integration costs	—			0.18			—			0.45
Amortization of intangible assets related to acquisitions	0.15			0.16			0.30			0.29
Non-compensation expenses from acquisition-related agreements	0.01			—			0.01			—
Adjusted earnings per diluted common share	$	1.40		$	0.88		$	3.18		$	1.58

(2)

Adjusted return on average common shareholders' equity, a non-GAAP financial measure, is computed by dividing adjusted net income applicable to Piper Jaffray Companies for the last 12 months by average monthly common shareholders' equity. For a detailed explanation of the components of adjusted net income, see "Reconciliation of U.S. GAAP to adjusted non-GAAP financial information" in footnote (1).

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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, often unpredictable and at times inherently volatile. 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 relative level of volatility of the equity and fixed income markets, changes in interest rates and credit spreads (especially rapid and extreme changes), overall market liquidity, the level and shape of various yield curves, the volume and value of trading in securities, overall equity valuations, and the demand for active asset management services.

Factors that differentiate our business within the financial services industry also may affect our financial results. For example, our capital markets business focuses on specific industry sectors while serving principally middle-market clientele. If the business environment for our focus sectors is impacted adversely, our business and results of operations could reflect these impacts. In addition, our business, with its specific areas of focus and investment, may not track 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 2017

We would expect the U.S. economy to continue to grow at a slow and steady pace through the second half of 2017. Administrative and legislative policies, including increased fiscal spending, deregulation and tax reform, may provide catalysts to accelerate economic growth. However, uncertainty over the details of these policies, their timing, the probability of implementation and their transition, as well as political or economic instability internationally, may inject periods of heightened volatility into the U.S. equity and debt markets. The U.S. Federal Reserve increased short-term interest rates two times in the first half of 2017 on the expectation of stronger economic growth. We anticipate that the U.S. Federal Reserve will attempt to pursue a gradual and steady path to rate normalization, absent significant shifts in tax and monetary policy. Exogenous conditions, however, may trigger episodes of volatility with respect to interest rates. A rising or volatile interest rate environment could manifest itself in changes to the yield curve or relative spreads which may have a mixed impact on certain of our businesses.

We expect conditions in the equity markets to remain conducive to our equity capital raising and advisory activities for the remainder of 2017. While lower volatility benefits our capital raising business, it has the inverse effect on our equity sales and trading business. If we experience sustained bouts of higher volatility or a material market correction, however, our equity brokerage business may benefit while our equity capital raising and advisory businesses may suffer. We believe our advisory services business will continue to perform well in the second half of 2017 on the strength of our market position, recent investments, readily available capital and a combination of high CEO and small business confidence levels. Advisory services revenues for any given quarter are impacted by the timing and size of the deals closing, which can result in fluctuations in revenues period over period.

While higher interest rates across the yield curve would be favorable to our fixed income institutional brokerage business, the move to higher rates could adversely impact our public finance business in the short-term as the level of refunding activity eases while greater economic growth has not yet spurred a ramp in new money issuance volumes. We believe that the level of municipal debt underwriting activity will decline in 2017 after record market issuance volumes in 2016. Our geographic range, product capabilities, and industry expertise should serve to mitigate over time the impact of less favorable market conditions on the performance of our public finance business.

As economic growth continues, we would expect rising market valuations, which have a positive impact on our asset management business. However, this impact may be eroded by the shift to passive investment strategies as extremely low volatility in a market with slow but steady growth favors lower-cost passive investment vehicles. We would expect that active asset managers, ourselves included, will remain under pressure to create alpha for their clients and to maintain or grow AUM.

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Results of Operations

Financial Summary for the three months ended June 30, 2017 and June 30, 2016

The following table provides a summary of the results of our operations on a U.S. GAAP basis and the results of our operations as a percentage of net revenues for the periods indicated.



							As a Percentage of
							Net Revenues for the
	Three Months Ended						Three Months Ended
	June 30,						June 30,
					2017
(Dollars in thousands)	2017		2016		v2016		2017		2016
Revenues:
Investment banking	$	138,528	$	97,414	42.2	%	70.1	%	57.1	%
Institutional brokerage	37,074		48,185		(23.1	)	18.7		28.3
Asset management	15,186		14,595		4.0		7.7		8.6
Interest	7,766		7,922		(2.0	)	3.9		4.6
Investment income	5,453		8,276		(34.1	)	2.8		4.9
Total revenues	204,007		176,392		15.7		103.2		103.5

Interest expense	6,262		5,909		6.0		3.2		3.5

Net revenues	197,745		170,483		16.0		100.0		100.0

Non-interest expenses:
Compensation and benefits	134,314		117,148		14.7		67.9		68.7
Outside services	9,789		10,184		(3.9	)	5.0		6.0
Occupancy and equipment	8,257		8,850		(6.7	)	4.2		5.2
Communications	7,273		7,294		(0.3	)	3.7		4.3
Marketing and business development	8,282		9,171		(9.7	)	4.2		5.4
Trade execution and clearance	1,928		1,916		0.6		1.0		1.1
Restructuring and integration costs	—		3,433		N/M		—		2.0
Intangible asset amortization expense	3,822		4,094		(6.6	)	1.9		2.4
Back office conversion costs	868		—		N/M		0.4		—
Other operating expenses	3,345		1,884		77.5		1.7		1.1
Total non-interest expenses	177,878		163,974		8.5		90.0		96.2

Income before income tax expense	19,867		6,509		205.2		10.0		3.8

Income tax expense	4,906		1,996		145.8		2.5		1.2

Net income	14,961		4,513		231.5		7.6		2.6

Net income applicable to noncontrolling interests	1,388		2,575		(46.1	)	0.7		1.5

Net income applicable to Piper Jaffray Companies	$	13,573	$	1,938	600.4	%	6.9	%	1.1	%

N/M – Not meaningful

For the three months ended June 30, 2017, we recorded net income applicable to Piper Jaffray Companies of $13.6 million. Net revenues for the three months ended June 30, 2017 were $197.7 million, a 16.0 percent increase compared to $170.5 million in the year-ago period. In the second quarter of 2017, investment banking revenues were $138.5 million, up 42.2 percent compared with $97.4 million in the prior-year period, as higher advisory services and equity financing revenues were partially offset by lower debt financing revenues. For the three months ended June 30, 2017, institutional brokerage revenues decreased 23.1 percent to $37.1 million, compared with $48.2 million in the second quarter of 2016, driven by lower fixed income institutional brokerage

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revenues. In the second quarter of 2017, asset management fees of $15.2 million were up 4.0 percent compared with $14.6 million in the second quarter of 2016 due to higher management fees from our master limited partnership ("MLP") product offerings. For the three months ended June 30, 2017, net interest income was $1.5 million, down from $2.0 million in the prior-year period. In the second quarter of 2017, investment income was $5.5 million, compared with $8.3 million in the prior-year period. In the second quarter of 2016, we recorded higher gains on our firm investments. Non-interest expenses were $177.9 million for the three months ended June 30, 2017, up 8.5 percent compared to $164.0 million in the prior-year period, due primarily to increased compensation expenses driven by higher revenues. This increase was partially offset by lower restructuring costs. In the second quarter of 2016, we recorded $3.4 million of restructuring and integration costs primarily related to the acquisition of Simmons.

Consolidated Non-Interest Expenses

Compensation and Benefits – Compensation and benefits expenses, which are the largest component of our expenses, include salaries, incentive compensation, benefits, stock-based compensation, employment taxes, income associated with the forfeiture of stock-based compensation and other employee-related costs. A portion of compensation expense is comprised of variable incentive arrangements, including discretionary incentive compensation, 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 incentive compensation payments, which generally occur in February, has a greater impact on our cash position and liquidity than is reflected on our consolidated statements of operations. We have granted restricted stock with service conditions as a component of our acquisition deal consideration, which is amortized to compensation expense over the service period.

For the three months ended June 30, 2017, compensation and benefits expenses increased to $134.3 million, compared with $117.1 million in the corresponding period of 2016, due to higher revenues. Compensation and benefits expenses as a percentage of net revenues was 67.9 percent in the second quarter of 2017, compared with 68.7 percent in the second quarter of 2016.

Outside Services – Outside services expenses include securities processing expenses, outsourced technology functions, outside legal fees, fund expenses associated with our consolidated alternative asset management funds and other professional fees. Outside services expenses decreased 3.9 percent to $9.8 million in the second quarter of 2017, compared with $10.2 million in the corresponding period of 2016. Excluding the portion of expenses from non-controlled equity interests in our consolidated alternative asset management funds, outside services expenses were flat.

Occupancy and Equipment – For the three months ended June 30, 2017, occupancy and equipment expenses decreased 6.7 percent to $8.3 million, compared with $8.9 million for the three months ended June 30, 2016.

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, 2017, communication expenses were flat at $7.3 million, compared with the three months ended June 30, 2016.

Marketing and Business Development – Marketing and business development expenses include travel and entertainment costs, advertising and third party marketing fees. For the three months ended June 30, 2017, marketing and business development expenses decreased 9.7 percent to $8.3 million, compared with $9.2 million in the corresponding period of 2016. The decrease was driven by lower travel expenses.

Trade Execution and Clearance – For the three months ended June 30, 2017, trade execution and clearance expenses were $1.9 million, flat compared with the corresponding period of 2016.

Restructuring and Integration Costs – In the second quarter of 2016, we recorded restructuring and integration costs of $3.4 million primarily related to the acquisition of Simmons. The expenses consisted of $1.3 million for vacated redundant leased office space, $1.2 million of severance, benefits and outplacement costs, $0.5 million of transaction costs, and $0.4 million of contract termination costs.

Intangible Asset Amortization Expense – Intangible asset amortization expense includes the amortization of definite-lived intangible assets consisting of customer relationships and the Simmons trade name. For the three months ended June 30, 2017, intangible asset amortization expense was $3.8 million, compared with $4.1 million in the corresponding period of 2016.

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Back Office Conversion Costs – In the third quarter of 2017, we will be migrating to a fully disclosed clearing model and no longer be self clearing. Back office conversion costs include costs incurred to transition to a fully disclosed clearing model, such as contract termination fees, vendor migration fees, other professional fees, and severance benefits for impacted personnel. For the three months ended June 30, 2017, we incurred back office conversion costs of $0.9 million. We expect to incur costs of approximately $3.0 million between 2016 and 2017, of which $1.4 million was incurred in 2016 and the first quarter of 2017. We anticipate a meaningful reduction in our trade clearing expenses by moving to a fully disclosed model.

Other Operating Expenses – Other operating expenses include insurance costs, license and registration fees, expenses related to our charitable giving program and litigation-related expenses, which consist of the amounts we reserve and/or pay out related to legal and regulatory matters. Other operating expenses were $3.3 million in the second quarter of 2017, compared with $1.9 million in the second quarter of 2016. The increase was primarily due to higher expense related to our charitable giving program driven by our increased profitability, as well as increased insurance costs. Additionally, in the second quarter of 2016 we recorded foreign currency gains from our foreign cash accounts versus losses in the second quarter of 2017.

Income Taxes – For the three months ended June 30, 2017, income tax expense was $4.9 million, equating to an effective tax rate, excluding noncontrolling interests, of 26.5 percent. In the second quarter of 2017, we recorded a $1.8 million tax benefit related to stock-based compensation awards vesting at values greater than the grant price. As discussed in Note 2, "Accounting Policies and Pronouncements" in the notes to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, effective as of January 1, 2017, new accounting guidance requires us to recognize the income tax effects of stock-based compensation awards in the income statement when the awards vest, rather than as additional paid-in capital. The amount recognized in the income statement in future periods may vary depending upon, among other things, the number of restricted shares vesting and their change in value since the grant date. We would expect that the impact of this guidance will be more meaningful in the first half of each year as the majority of our restricted stock vestings related to our employees' incentive compensation occurs in February. For the three months ended June 30, 2016, our provision for income taxes was $2.0 million equating to an effective tax rate, excluding noncontrolling interests, of 50.7 percent. In the second quarter of 2016, we recorded a 100.0 percent valuation allowance against tax benefits generated from net operating losses within Piper Jaffray Ltd.

Segment Performance

We measure financial performance by business segment. Our two reportable segments are Capital Markets and Asset Management. We determined these segments based upon the nature of the financial products and services provided to customers and our management organization. Segment pre-tax operating income and segment pre-tax operating margin are used to evaluate and measure segment performance by our chief operating decision maker in deciding how to allocate resources and in assessing performance in relation to our competitors. Revenues and expenses directly associated with each respective segment are included in determining segment operating results. Revenues and expenses that are not directly attributable to a particular segment are allocated based upon our allocation methodologies, generally based on each segment’s respective net revenues, use of shared resources, headcount or other relevant measures.

Throughout this section, we have presented segment results on both a U.S. GAAP and non-GAAP basis. Management believes that presenting adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin in conjunction with the U.S. GAAP measures provides a more meaningful basis for comparison of its operating results and underlying trends between periods, and enhances the overall understanding of our current financial performance by excluding certain items that may not be indicative of our core operating results. The non-GAAP segment results should be considered in addition to, not as a substitute for, the segment results prepared in accordance with U.S. GAAP.

Adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin exclude (1) revenues and expenses related to noncontrolling interests, (2) amortization of intangible assets related to acquisitions, (3) compensation and non-compensation expenses from acquisition-related agreements and (4) restructuring and acquisition integration costs. For U.S. GAAP purposes, these items are included in each of their respective line items on the consolidated statements of operations.

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Capital Markets

The following table sets forth the Capital Markets adjusted segment financial results and adjustments necessary to reconcile to our consolidated U.S. GAAP pre-tax operating income and pre-tax operating margin for the periods presented:



	Three Months Ended June 30,
	2017											2016
				Adjustments (1)											Adjustments (1)
	Total			Noncontrolling		Other			U.S.			Total			Noncontrolling		Other			U.S.
(Dollars in thousands)	Adjusted			Interests		Adjustments			GAAP			Adjusted			Interests		Adjustments			GAAP
Investment banking
Financing
Equities	$	24,730		$	—	$	—		$	24,730		$	16,786		$	—	$	—		$	16,786
Debt	21,971			—		—			21,971			33,325			—		—			33,325
Advisory services	92,507			—		—			92,507			48,112			—		—			48,112
Total investment banking	139,208			—		—			139,208			98,223			—		—			98,223

Institutional sales and trading
Equities	20,569			—		—			20,569			22,612			—		—			22,612
Fixed income	19,221			—		—			19,221			28,212			740		—			28,952
Total institutional sales and trading	39,790			—		—			39,790			50,824			740		—			51,564

Management and performance fees	1,497			—		—			1,497			1,794			—		—			1,794

Investment income	3,340			1,967		—			5,307			4,896			2,555		—			7,451

Long-term financing expenses	(2,029		)	—		—			(2,029		)	(2,293		)	—		—			(2,293		)

Net revenues	181,806			1,967		—			183,773			153,444			3,295		—			156,739

Operating expenses	152,847			579		10,807			164,233			135,106			720		16,202			152,028

Segment pre-tax operating income	$	28,959		$	1,388	$	(10,807	)	$	19,540		$	18,338		$	2,575	$	(16,202	)	$	4,711

Segment pre-tax operating margin	15.9		%						10.6		%	12.0		%						3.0		%


(1)	The following is a summary of the adjustments needed to reconcile our consolidated U.S. GAAP segment pre-tax operating income and segment pre-tax operating margin to the adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin:

Noncontrolling interests – The impacts of consolidating noncontrolling interests in our alternative asset management funds are not included in adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin.

Other adjustments – The following table sets forth the items not included in adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin for the periods presented:



	Three Months Ended June 30,
(Dollars in thousands)	2017		2016
Compensation from acquisition-related agreements	$	8,091	$	10,062
Restructuring and integration costs	—		3,433
Amortization of intangible assets related to acquisitions	2,545		2,707
Non-compensation expenses from acquisition-related agreements	171		—
	$	10,807	$	16,202

Capital Markets net revenues on a U.S. GAAP basis were $183.8 million for the three months ended June 30, 2017, compared with $156.7 million in the prior-year period. For the three months ended June 30, 2017, adjusted net revenues were $181.8 million, compared with $153.4 million in the second quarter of 2016. The variance explanations for net revenues and adjusted net revenues are consistent on both a U.S. GAAP and non-GAAP basis.

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Investment banking revenues comprise all of the revenues generated through equity and debt financing and advisory services activities, which include mergers and acquisitions, equity private placements, debt advisory, and municipal financial advisory transactions. To assess the profitability of investment banking, we aggregate investment banking fees with the net interest income or expense associated with these activities.

In the second quarter of 2017, investment banking revenues increased 41.7 percent to $139.2 million, compared with $98.2 million in the corresponding period of the prior year. For the three months ended June 30, 2017, advisory services revenues were $92.5 million, up 92.3 percent compared to $48.1 million in the second quarter of 2016. Our results reflect a strong relative performance and broad-based contributions across our advisory business. The investments we have made across industry groups have produced strong results. We completed 46 transactions with an aggregate enterprise value of $8.1 billion in the second quarter of 2017, compared with 22 transactions with an aggregate enterprise value of $2.4 billion in the second quarter of 2016. For the three months ended June 30, 2017, equity financing revenues were $24.7 million, up 47.3 percent compared with $16.8 million in the prior-year period. Market conditions were constructive for equity capital raising activity during the quarter. The revenue synergies that have materialized as a result of our expansion into the energy sector contributed to our performance in the current quarter. During the second quarter of 2017, we completed 17 equity financings, raising $3.9 billion for our clients, compared with 16 equity financings, raising $3.5 billion for our clients in the comparable year-ago period. Debt financing revenues for the three months ended June 30, 2017 were $22.0 million, down 34.1 percent compared with $33.3 million in a strong year-ago period. In the second quarter of 2016, we experienced robust refunding activity in response to low interest rate levels. During the second quarter of 2017, we completed 140 negotiated municipal issues with a total par value of $3.5 billion, compared with 192 negotiated municipal issues with a total par value of $5.0 billion during the prior-year period.

Institutional sales and trading revenues comprise all of the revenues generated through trading activities, which consist of facilitating customer trades, executing competitive municipal underwritings and our strategic trading activities in municipal bonds, mortgage-backed securities and U.S. government agency securities. To assess the profitability of institutional brokerage activities, we aggregate institutional brokerage revenues with the net interest income or expense associated with financing, economically hedging and holding long or short inventory positions. 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, 2017, institutional brokerage revenues were $39.8 million, a decrease of 22.8 percent compared with $51.6 million in the prior-year period, due to lower equity and fixed income institutional brokerage revenues. Equity institutional brokerage revenues were $20.6 million in the second quarter of 2017, down 9.0 percent compared with $22.6 million in the corresponding period of 2016. Low volatility resulted in lower trading volumes in the second quarter of 2017. For the three months ended June 30, 2017, fixed income institutional brokerage revenues were $19.2 million, down 33.6 percent compared with $29.0 million in the prior-year period. Our fixed income business confronted challenging market conditions during the quarter, characterized by low volatility, a flattening yield curve and low interest rate levels on an absolute basis. These conditions resulted in light levels of customer flow activity and limited trading opportunities, which reduced our revenues.

Management and performance fees include the fees generated from our merchant banking, energy and senior living funds with outside investors. For the three months ended June 30, 2017, management and performance fees were $1.5 million, compared with $1.8 million in the prior-year period.

Investment income includes realized and unrealized gains and losses on investments, including amounts attributable to noncontrolling interests, in our merchant banking fund, energy and senior living funds, and other firm investments. For the three months ended June 30, 2017, investment income was $5.3 million, compared to $7.5 million in the corresponding period of 2016. In the second quarter of 2016, we recorded higher gains on our firm investments. Excluding the impact of noncontrolling interests, adjusted investment income was $3.3 million for the three months ended June 30, 2017.

Long-term financing expenses primarily represent interest paid on our senior notes. For the three months ended June 30, 2017, long-term financing expenses decreased to $2.0 million, from $2.3 million in the prior-year period. We repaid the $50 million of Class A senior notes upon maturity on May 31, 2017.

Capital Markets segment pre-tax operating margin for the three months ended June 30, 2017 was 10.6 percent, compared with 3.0 percent for the corresponding period of 2016. Pre-tax operating margin was higher in the second quarter of 2017 compared to the prior-year period due primarily to a lower non-compensation ratio driven by an increase in revenues and lower levels of restructuring costs. In the year-ago period, we recorded $3.4 million of restructuring and integration costs primarily related to the acquisition of Simmons. Adjusted segment pre-tax operating margin for the three months ended June 30, 2017 was 15.9 percent, compared with 12.0 percent for the corresponding period of 2016. Adjusted pre-tax operating margin was higher compared to the second

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quarter of 2016 primarily due to operating leverage as a result of higher revenues. Adjusted net revenues increased 18.5 percent and adjusted operating expenses increased 13.1 percent compared to the second quarter of 2016, reflecting operating leverage in the business and expense discipline.

Asset Management

The following table sets forth the Asset Management segment financial results and adjustments necessary to reconcile to our consolidated U.S. GAAP pre-tax operating income and pre-tax operating margin for the periods presented:



	Three Months Ended June 30,
	2017											2016
				Adjustments (1)											Adjustments (1)
	Total			Noncontrolling		Other			U.S.			Total			Noncontrolling		Other			U.S.
(Dollars in thousands)	Adjusted			Interests		Adjustments			GAAP			Adjusted			Interests		Adjustments			GAAP
Management fees
Equity	$	6,521		$	—	$	—		$	6,521		$	6,588		$	—	$	—		$	6,588
MLP	7,168			—		—			7,168			6,213			—		—			6,213
Total management fees	13,689			—		—			13,689			12,801			—		—			12,801

Performance fees
Equity	—			—		—			—			—			—		—			—
MLP	—			—		—			—			—			—		—			—
Total performance fees	—			—		—			—			—			—		—			—

Total management and performance fees	13,689			—		—			13,689			12,801			—		—			12,801

Investment income	283			—		—			283			943			—		—			943

Total net revenues	13,972			—		—			13,972			13,744			—		—			13,744

Operating expenses	12,368			—		1,277			13,645			10,559			—		1,387			11,946

Segment pre-tax operating income	$	1,604		$	—	$	(1,277	)	$	327		$	3,185		$	—	$	(1,387	)	$	1,798

Segment pre-tax operating margin	11.5		%						2.3		%	23.2		%						13.1		%

Adjusted segment pre-tax operating margin excluding investment income (2)	9.7		%									17.5		%


(1)	Other Adjustments – Consists of amortization of acquisition-related intangible assets of $1.3 million and $1.4 million for the three months ended June 30, 2017 and 2016, respectively.


(2)	Management believes that presenting adjusted segment pre-tax operating margin excluding investment income, a non-GAAP measure, provides the most meaningful basis for comparison of Asset Management operating results across periods.

Management and performance fee revenues comprise the revenues generated from management and investment advisory services performed for separately managed accounts, registered funds and partnerships. Client asset inflows and outflows and investment performance have a direct effect on management and performance fee revenues. Management fees are generally based on the level of AUM measured monthly or quarterly, and an increase or reduction in AUM, due to market price fluctuations or net client asset flows, will result in a corresponding increase or decrease in management fees. Fees vary with the type of assets managed and the vehicle in which they are managed. Performance fees are earned when the investment return on AUM exceeds certain benchmark targets or other performance targets over a specified measurement period. The level of performance fees earned can vary significantly from period to period and these fees may not necessarily be correlated to changes in total AUM. The majority of performance fees, if earned, are generally recorded in the fourth quarter of the applicable year or upon withdrawal of client assets. At June 30, 2017, approximately four percent of our AUM was eligible to earn performance fees.

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For the three months ended June 30, 2017, management fees were $13.7 million, an increase of 6.9 percent, compared with $12.8 million in the prior-year period, due to higher management fees from our MLP product offerings. In the second quarter of 2017, management fees related to our equity strategies were $6.5 million, flat compared to the corresponding period of 2016 as higher average AUM was offset by a lower average effective revenue yield. The lower yield resulted from changes in our product mix. The average effective revenue yield (total annualized management fees as a percentage of our average month-end AUM) for our equity strategies was 62 basis points for the second quarter of 2017, compared with 69 basis points for the prior-year period. Management fees from our MLP strategies increased 15.4 percent in the second quarter of 2017 to $7.2 million, compared with $6.2 million in the second quarter of 2016, due primarily to higher average AUM.

Investment income includes gains and losses from our investments in registered funds and private funds or partnerships that we manage. For the three months ended June 30, 2017, investment income was $0.3 million compared with $0.9 million for the prior-year period.

Segment pre-tax operating margin for the three months ended June 30, 2017 was 2.3 percent, compared to 13.1 percent for the three months ended June 30, 2016. Excluding investment income on firm capital invested in our strategies, adjusted operating margin declined from 17.5 percent in the second quarter of 2016 to 9.7 percent in the second quarter of 2017. Pre-tax operating margin decreased compared to the second quarter of 2016 due to a higher compensation ratio. The hiring of new investment teams, which increased compensation expenses, combined with AUM outflows from existing equity strategies and the resultant reduction in revenues, has lowered our pre-tax operating margin.

The following table summarizes the changes in our AUM for the periods presented:



							Twelve
	Three Months Ended						Months Ended
	June 30,						June 30,
(Dollars in millions)	2017			2016			2017
Equity
Beginning of period	$	4,081		$	3,983		$	3,681
Net inflows/(outflows)	173			(375		)	(25		)
Net market appreciation	22			73			620
End of period	$	4,276		$	3,681		$	4,276

MLP
Beginning of period	$	4,681		$	3,522		$	4,410
Net inflows/(outflows)	(9		)	66			(245		)
Net market appreciation/(depreciation)	(368		)	822			139
End of period	$	4,304		$	4,410		$	4,304

Total
Beginning of period	$	8,762		$	7,505		$	8,091
Net inflows/(outflows)	164			(309		)	(270		)
Net market appreciation/(depreciation)	(346		)	895			759
End of period	$	8,580		$	8,091		$	8,580

Total AUM was $8.6 billion at June 30, 2017. Equity AUM increased to $4.3 billion at June 30, 2017 due to net client inflows of $0.2 billion during the quarter. This amount reflects inflows resulting from our strategy to diversify our product platform which was partially offset by outflows in our other equity product offerings, particularly our domestic and international equity strategies. MLP AUM decreased to $4.3 billion at June 30, 2017 as we experienced net market depreciation of $0.4 billion during the quarter.

We have taken steps to restructure our business around more scalable and potentially higher margin products. We intend to exit our Japan value products and related international strategies which will reduce our AUM by approximately $1.0 billion in the third quarter of 2017. This reduction will be partially offset by client inflows into our new global dividend strategy during the quarter. This product, which we added in the first quarter of 2017, is part of our strategy to remix our product offerings. In the near term, the impact of our remix strategy will not offset the deleterious effect of persistent outflows from our domestic value products, historically one of our most profitable products.

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Financial Summary for the six months ended June 30, 2017 and June 30, 2016

The following table provides a summary of the results of our operations on a U.S. GAAP basis and the results of our operations as a percentage of net revenues for the periods indicated.



							As a Percentage of
							Net Revenues for the
	Six Months Ended						Six Months Ended
	June 30,						June 30,
					2017
(Dollars in thousands)	2017		2016		v2016		2017		2016
Revenues:
Investment banking	$	270,778	$	201,352	34.5	%	68.0	%	62.1	%
Institutional brokerage	76,210		80,234		(5.0	)	19.1		24.8
Asset management	31,193		28,443		9.7		7.8		8.8
Interest	15,485		16,751		(7.6	)	3.9		5.2
Investment income	15,828		9,213		71.8		4.0		2.8
Total revenues	409,494		335,993		21.9		102.8		103.7

Interest expense	11,220		11,954		(6.1	)	2.8		3.7

Net revenues	398,274		324,039		22.9		100.0		100.0

Non-interest expenses:
Compensation and benefits	268,692		221,584		21.3		67.5		68.4
Outside services	20,117		18,635		8.0		5.1		5.8
Occupancy and equipment	16,719		16,568		0.9		4.2		5.1
Communications	14,889		14,624		1.8		3.7		4.5
Marketing and business development	15,829		16,175		(2.1	)	4.0		5.0
Trade execution and clearance	3,739		3,678		1.7		0.9		1.1
Restructuring and integration costs	—		10,206		N/M		—		3.1
Intangible asset amortization expense	7,644		7,390		3.4		1.9		2.3
Back office conversion costs	1,734		—		N/M		0.4		—
Other operating expenses	6,235		5,228		19.3		1.6		1.6
Total non-interest expenses	355,598		314,088		13.2		89.3		96.9

Income before income tax expense	42,676		9,951		328.9		10.7		3.1

Income tax expense	4,511		2,252		100.3		1.1		0.7

Net income	38,165		7,699		395.7		9.6		2.4

Net income applicable to noncontrolling interests	4,317		3,324		29.9		1.1		1.0

Net income applicable to Piper Jaffray Companies	$	33,848	$	4,375	673.7	%	8.5	%	1.4	%

N/M – Not meaningful

Except as discussed below, the description of non-interest expense and net revenues as well as the underlying reasons for variances to prior year are substantially the same as the comparative quarterly discussion.

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For the six months ended June 30, 2017, we recorded net income applicable to Piper Jaffray Companies of $33.8 million. Net revenues for the six months ended June 30, 2017 were $398.3 million, compared to $324.0 million in the year-ago period. In the first half of 2017, investment banking revenues were $270.8 million, up 34.5 percent compared with $201.4 million in the prior-year period as higher advisory services and equity financing revenues were partially offset by lower debt financing revenues. For the six months ended June 30, 2017, institutional brokerage revenues decreased 5.0 percent to $76.2 million, compared with $80.2 million in the first half of 2016, due to lower fixed income and equity institutional brokerage revenues. In the first half of 2017, asset management fees increased 9.7 percent to $31.2 million, compared with $28.4 million in the first half of 2016, due primarily to higher management fees from our MLP product offerings which were partially offset by lower management fees from our value equity product offerings. In the first six months of 2017, net interest income decreased to $4.3 million, compared with $4.8 million in the prior-year period. For the six months ended June 30, 2017, investment income was $15.8 million, compared with $9.2 million in the prior-year period, due to higher gains on our investment and the noncontrolling interests in the merchant banking fund that we manage. Non-interest expenses were $355.6 million for the six months ended June 30, 2017, compared with $314.1 million in the year-ago period. The increase was primarily due to higher compensation expense driven by increased revenues, as well as incremental costs related to our back office conversion. These increases were partially offset by lower restructuring costs.

Consolidated Non-Interest Expenses

Outside Services – For the six months ended June 30, 2017, outside services expenses increased 8.0 percent to $20.1 million, compared with $18.6 million in the corresponding period in 2016. Excluding the portion of expenses from non-controlled equity interests in our consolidated alternative asset management funds, outside service expenses increased 6.5 percent due to higher professional fees.

Occupancy and Equipment – For the six months ended June 30, 2017, occupancy and equipment expenses were essentially flat at $16.7 million, compared with the corresponding period in 2016.

Intangible Asset Amortization Expense – For the six months ended June 30, 2017, intangible asset amortization expense was $7.6 million, compared with $7.4 million in the corresponding period of 2016.

Income Taxes – For the six months ended June 30, 2017, our provision for income taxes was $4.5 million equating to an effective tax rate, excluding noncontrolling interests, of 11.8 percent, compared with $2.3 million in the prior-year period equating to an effective tax rate, excluding noncontrolling interests, of 34.0 percent. In the first half of 2017, we recorded a $8.7 million tax benefit related to stock-based compensation awards vesting at values greater than the grant price.

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Segment Performance

Capital Markets



	Six Months Ended June 30,
	2017											2016
				Adjustments ⁽¹⁾											Adjustments ⁽¹⁾
	Total			Noncontrolling		Other			U.S.			Total			Noncontrolling		Other			U.S.
(Dollars in thousands)	Adjusted			Interests		Adjustments			GAAP			Adjusted			Interests		Adjustments			GAAP
Investment banking
Financing
Equities	$	48,112		$	—	$	—		$	48,112		$	23,352		$	—	$	—		$	23,352
Debt	38,379			—		—			38,379			49,297			—		—			49,297
Advisory services	185,389			—		—			185,389			129,741			—		—			129,741
Total investment banking	271,880			—		—			271,880			202,390			—		—			202,390

Institutional sales and trading
Equities	40,675			—		—			40,675			42,281			—		—			42,281
Fixed income	42,461			—		—			42,461			45,266			740		—			46,006
Total institutional sales and trading	83,136			—		—			83,136			87,547			740		—			88,287

Management and performance fees	3,494			—		—			3,494			2,759			—		—			2,759

Investment income	9,951			5,864		—			15,815			5,633			3,904		—			9,537

Long-term financing expenses	(4,267		)	—		—			(4,267		)	(4,585		)	—		—			(4,585		)

Net revenues	364,194			5,864		—			370,058			293,744			4,644		—			298,388

Operating expenses	305,408			1,547		21,338			328,293			261,382			1,320		28,181			290,883

Segment pre-tax operating income	$	58,786		$	4,317	$	(21,338	)	$	41,765		$	32,362		$	3,324	$	(28,181	)	$	7,505

Segment pre-tax operating margin	16.1		%						11.3		%	11.0		%						2.5		%


(1)	The following is a summary of the adjustments needed to reconcile our consolidated U.S. GAAP pre-tax operating income and pre-tax operating margin to the adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin:

Other adjustments – The following table sets forth the items not included in adjusted segment pre-tax operating income and adjusted segment pre-tax operating margin for the periods presented:



	Six Months Ended June 30,
(Dollars in thousands)	2017		2016
Compensation from acquisition-related agreements	$	15,992	$	13,368
Restructuring and integration costs	—		10,197
Amortization of intangible assets related to acquisitions	5,089		4,616
Non-compensation expenses from acquisition-related agreements	257		—
	$	21,338	$	28,181

Capital Markets net revenues on a U.S. GAAP basis were $370.1 million for the six months ended June 30, 2017, compared with $298.4 million in the prior-year period. In the first half of 2017, Capital Markets adjusted net revenues were $364.2 million, compared with $293.7 million in the first half of 2016. The variance explanations for net revenues and adjusted net revenues are consistent on both a U.S. GAAP and non-GAAP basis.

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In the first half of 2017, investment banking revenues increased to $271.9 million, compared with $202.4 million in the corresponding period of the prior year. For the six months ended June 30, 2017, advisory services revenues increased 42.9 percent to $185.4 million, compared with $129.7 million in the first half of 2016, due to more completed transactions as market conditions were conducive for advisory activities in the first half of 2017. We completed 75 transactions with an aggregate enterprise value of $16.5 billion in the first half of 2017, compared with 58 transactions with an aggregate enterprise value of $8.3 billion in the first half of 2016. For the six months ended June 30, 2017, equity financing revenues were $48.1 million, up 106.0 percent compared with $23.4 million in the prior-year period, due to a rebound in capital raising in the first half of 2017 compared to tepid conditions in the first half of 2016. On a year-to-date basis, the overall fee pool in our markets was up approximately 115 percent compared to the corresponding period of the prior year. During the first half of 2017, we completed 44 equity financings, raising $10.1 billion for our clients, compared with 23 equity financings, raising $4.8 billion for our clients in the year-ago period. Debt financing revenues for the six months ended June 30, 2017 were $38.4 million, down 22.1 percent compared with $49.3 million in the year-ago period, due to lower public finance revenues as we experienced robust refinancing activity during the second quarter of 2016. During the first half of 2017, we completed 269 negotiated municipal issues with a total par value of $6.9 billion, compared with 321 negotiated municipal issues with a total par value of $7.8 billion during the prior-year period.

For the six months ended June 30, 2017, institutional brokerage revenues decreased 5.8 percent to $83.1 million, compared with $88.3 million in the prior-year period, due to lower equity and fixed income institutional brokerage revenues. Equity institutional brokerage revenues decreased 3.8 percent to $40.7 million in the first half of 2017, compared with $42.3 million in the corresponding period of 2016, due to lower client trading volumes. Incremental revenues from our expansion into the energy sector in the first quarter of 2016 partially offset the impact of lower trading volumes driven by lower volatility. For the six months ended June 30, 2017, fixed income institutional brokerage revenues were $42.5 million, down 7.7 percent compared with $46.0 million in the prior-year period, due to fewer opportunities for trading gains.

For the six months ended June 30, 2017, management and performance fees were $3.5 million, up compared with $2.8 million in the prior-year period, due primarily to higher performance fees from our merchant banking fund.

For the six months ended June 30, 2017, investment income was $15.8 million, compared to $9.5 million in the corresponding period of 2016. In the first half of 2017, we recored higher gains in our merchant banking fund. Excluding the impact of noncontrolling interests, adjusted investment income was $10.0 million for the six months ended June 30, 2017.

For the six months ended June 30, 2017, long-term financing expenses decreased to $4.3 million, compared with $4.6 million in the prior-year period. We repaid the $50 million of Class A senior notes upon maturity on May 31, 2017.

Capital Markets segment pre-tax operating margin for the six months ended June 30, 2017 was 11.3 percent, compared with 2.5 percent for the corresponding period of 2016. The increased pre-tax operating margin was primarily due to a lower non-compensation ratio driven by an increase in revenues and lower levels of restructuring costs. In the year-ago period, we recorded $10.2 million of restructuring and integration costs primarily related to the acquisition of Simmons. Adjusted segment pre-tax operating margin for the six months ended June 30, 2017 was 16.1 percent, compared with 11.0 percent for the corresponding period of 2016, primarily due to operating leverage as a result of higher revenues.

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Asset Management



	Six Months Ended June 30,
	2017											2016
				Adjustments ⁽¹⁾											Adjustments ⁽¹⁾
	Total			Noncontrolling		Other			U.S.			Total			Noncontrolling		Other			U.S.
(Dollars in thousands)	Adjusted			Interests		Adjustments			GAAP			Adjusted			Interests		Adjustments			GAAP
Management fees
Equity	$	13,182		$	—	$	—		$	13,182		$	14,301		$	—	$	—		$	14,301
MLP	14,517			—		—			14,517			11,383			—		—			11,383
Total management fees	27,699			—		—			27,699			25,684			—		—			25,684

Performance fees
Equity	—			—		—			—			—			—		—			—
MLP	—			—		—			—			—			—		—			—
Total performance fees	—			—		—			—			—			—		—			—

Total management and performance fees	27,699			—		—			27,699			25,684			—		—			25,684

Investment income/(loss)	517			—		—			517			(33		)	—		—			(33		)

Total net revenues	28,216			—		—			28,216			25,651			—		—			25,651

Operating expenses	24,750			—		2,555			27,305			20,422			—		2,783			23,205

Segment pre-tax operating income	$	3,466		$	—	$	(2,555	)	$	911		$	5,229		$	—	$	(2,783	)	$	2,446

Segment pre-tax operating margin	12.3		%						3.2		%	20.4		%						9.5		%

Adjusted segment pre-tax operating margin excluding investment income/(loss) (2)	10.6		%									20.5		%


(1)	Other Adjustments – Primarily consists of amortization of acquisition-related intangible assets of $2.6 million and $2.8 million for the six months ended June 30, 2017 and 2016, respectively.


(2)	Management believes that presenting adjusted segment pre-tax operating margin excluding investment income/(loss), a non-GAAP measure, provides the most meaningful basis for comparison of Asset Management operating results across periods.

For the six months ended June 30, 2017, management fees were $27.7 million, an increase of 7.8 percent, compared with $25.7 million in the prior-year period as higher management fees from our MLP product offerings were partially offset by lower management fees from our equity product offerings. In the first half of 2017, management fees related to our equity strategies were $13.2 million, down 7.8 percent compared to $14.3 million in the corresponding period of 2016, due to a lower average effective revenue yield. The average effective revenue yield for our equity strategies was 64 basis points for the six months ended June 30, 2017, down from 72 basis points for the six months ended June 30, 2016. Management fees from our MLP strategies increased 27.5 percent in the first half of 2017 to $14.5 million, compared with $11.4 million in the first half of 2016, due to higher average AUM.

Segment pre-tax operating margin for the six months ended June 30, 2017 was 3.2 percent, compared to 9.5 percent for the six months ended June 30, 2016. Excluding investment income/(loss) on firm capital invested in our strategies, adjusted operating margin declined from 20.5 percent in the first half of 2016 to 10.6 percent in the first half of 2017, due primarily to a higher compensation ratio.

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The following table summarizes the changes in our AUM for the periods presented:



							Twelve
	Six Months Ended						Months Ended
	June 30,						June 30,
(Dollars in millions)	2017			2016			2017
Equity
Beginning of period	$	4,115		$	4,954		$	3,681
Net inflows/(outflows)	30			(1,276		)	(25		)
Net market appreciation	131			3			620
End of period	$	4,276		$	3,681		$	4,276

MLP
Beginning of period	$	4,616		$	3,924		$	4,410
Net outflows	(30		)	(71		)	(245		)
Net market appreciation/(depreciation)	(282		)	557			139
End of period	$	4,304		$	4,410		$	4,304

Total
Beginning of period	$	8,731		$	8,878		$	8,091
Net outflows	—			(1,347		)	(270		)
Net market appreciation/(depreciation)	(151		)	560			759
End of period	$	8,580		$	8,091		$	8,580

Recent Accounting Pronouncements

Recent accounting pronouncements are set forth in Note 2 to our unaudited consolidated financial statements, and are incorporated herein by reference.

Critical Accounting Policies

Our accounting and reporting policies comply with 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.

We believe that of our significant accounting policies, the following are our critical accounting policies:


•	Valuation of Financial Instruments


•	Goodwill and Intangible Assets


•	Compensation Plans


•	Income Taxes

See the "Critical Accounting Policies" section and Note 2, "Summary of Significant Accounting Policies" to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for further information. See also Note 2, "Accounting Policies and Pronouncements" in the notes to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for changes to our significant accounting policies, as well as the impact from the adoption of new accounting standards.

We complete our annual goodwill and intangible asset impairment testing in the fourth quarter of each year or earlier if impairment indicators are present. Impairment charges resulting from this valuation analysis could materially adversely affect our results of operations.

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At June 30, 2017, $114.4 million of our goodwill balance related to our Asset Management segment. Our Asset Management segment has experienced a decline in profitability as revenues have decreased in product offerings with higher margins, which has not been fully offset with earnings from new product offerings. For the six months ended June 30, 2017, management and performance fees have increased 7.8 percent compared to the prior-year period, however, profitability has declined 62.8 percent over the same time period. Future changes in the assumptions underlying projected cash flows from the reporting unit or its EBITDA multiple, such as those resulting from market conditions or other factors, could result in an impairment of goodwill related to our Asset Management segment.

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 and maintain a liquidity strategy designed to enable our business to continue to operate even under adverse circumstances, although there can be no assurance that our strategy will be successful under all circumstances.

The majority of our tangible assets consist of assets readily convertible into cash. Financial instruments and other inventory positions owned are stated at fair value and are generally readily marketable in most market conditions. Receivables and payables with brokers, dealers and clearing organizations usually settle within a few days. As part of our liquidity strategy, we emphasize diversification of funding sources to the extent possible while considering tenor and cost. Our assets are financed by our cash flows from operations, equity capital, and our funding arrangements. The fluctuations in cash flows from financing activities are directly related to daily operating activities from our various businesses. One of our most important risk management disciplines is our ability to manage the size and composition of our balance sheet. While our asset base changes due to client activity, market fluctuations and business opportunities, the size and composition of our balance sheet reflect our overall risk tolerance, our ability to access stable funding sources and the amount of equity capital we hold.

Certain market conditions can impact the liquidity of our inventory positions, requiring us to hold larger inventory positions for longer than expected or requiring us to take other actions that may adversely impact our results.

A significant component of our employees’ compensation is paid in annual discretionary incentive compensation. The timing of these incentive compensation payments, which generally are made in February, has a significant impact on our cash position and liquidity.

Beginning in 2017, we initiated the payment of a quarterly cash dividend to holders of our common stock. Our board of directors determines the declaration and payment of dividends on a quarterly basis, and is free to change our dividend policy at any time.

Our board of directors declared the following dividends:



Declaration Date	Dividend Per Share		Record Date	Payment Date
February 2, 2017	$	0.3125	February 20, 2017	March 13, 2017
April 27, 2017	$	0.3125	May 26, 2017	June 15, 2017
July 27, 2017	$	0.3125	August 28, 2017	September 15, 2017

Effective August 14, 2015, our board of directors authorized the repurchase of up to $150.0 million in common shares through September 30, 2017. During the six months ended June 30, 2017, we repurchased 27,530 shares of our common stock at an average price of $72.63 per share for an aggregate purchase price of $2.0 million related to this authorization. We have $69.8 million remaining under this authorization.

We also purchase shares of common stock from restricted stock award recipients upon the award vesting as recipients sell shares to meet their employment tax obligations. During the first half of 2017, we purchased 293,357 shares or $21.6 million of our common stock for this purpose.

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Leverage

The following table presents total assets, adjusted assets, total shareholders’ equity and tangible shareholders’ equity with the resulting leverage ratios as of:



	June 30,			December 31,
(Dollars in thousands)	2017			2016
Total assets	$	1,931,333		$	2,125,503
Deduct: Goodwill and intangible assets	(225,808		)	(233,452		)
Deduct: Assets from noncontrolling interests	(48,226		)	(109,179		)
Adjusted assets	$	1,657,299		$	1,782,872

Total shareholders' equity	$	834,739		$	816,266
Deduct: Goodwill and intangible assets	(225,808		)	(233,452		)
Deduct: Noncontrolling interests	(45,164		)	(57,016		)
Tangible common shareholders' equity	$	563,767		$	525,798

Leverage ratio (1)	2.3			2.6

Adjusted leverage ratio (2)	2.9			3.4


(1)	Leverage ratio equals total assets divided by total shareholders’ equity.


(2)	Adjusted leverage ratio equals adjusted assets divided by tangible common shareholders’ equity.

Adjusted assets and tangible common shareholders’ equity are non-GAAP financial measures. Goodwill and intangible assets are subtracted from total assets and total shareholders’ equity in determining adjusted assets and tangible common shareholders’ equity, respectively, as we believe that goodwill and intangible assets do not constitute operating assets which can be deployed in a liquid manner. Amounts attributed to noncontrolling interests are subtracted from total assets and total shareholders' equity in determining adjusted assets and tangible common shareholders' equity, respectively, as they represent assets and equity interests in consolidated entities that are not attributable, either directly or indirectly, to Piper Jaffray Companies. We view the resulting measure of adjusted leverage, also a non-GAAP financial measure, as a more relevant measure of financial risk when comparing financial services companies. Our adjusted leverage ratio decreased from December 31, 2016 primarily as a result of lower inventory balances.

Funding and Capital Resources

The primary goal of our funding activities is to ensure adequate funding over a wide range of market conditions. Given the mix of our business activities, funding requirements are fulfilled through a diversified range of short-term and long-term financing. We attempt to ensure that the tenor of our borrowing liabilities equals or exceeds the expected holding period of the assets being financed. Our ability to support increases in total assets is largely a function of our ability to obtain funding from external sources. Access to these external sources, as well as the cost of that financing, is dependent upon various factors, including market conditions, the general availability of credit and credit ratings. We currently do not have a credit rating, which could adversely affect our liquidity and competitive position by increasing our financing costs and limiting access to sources of liquidity that require a credit rating as a condition to providing the funds.

In the third quarter of 2017, we will be migrating to a fully disclosed clearing model and will no longer be self clearing. The conversion will provide us with a new funding source through our clearing firm and, as a result, change our mix of current funding sources.

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Short-term financing

Our day-to-day funding and liquidity is obtained primarily through the use of commercial paper issuance, repurchase agreements, prime broker agreements, and bank lines of credit, and is typically collateralized by our securities inventory. These funding sources are critical to our ability to finance and hold inventory, which is a necessary part of our institutional brokerage business. The majority of our inventory is liquid and is therefore funded by short-term facilities. Certain of these short-term facilities (i.e., committed line and commercial paper) have been established to mitigate changes in the liquidity of our inventory based on changing market conditions. In the case of our committed line, it is available to us regardless of changes in market liquidity conditions through the end of its term, although there may be limitations on the type of securities available to pledge. Our commercial paper program helps mitigate changes in market liquidity conditions given it is not an overnight facility, but provides funding with a term of 27 to 270 days. Our funding sources are also dependent on the types of inventory that our counterparties are willing to accept as collateral and the number of counterparties available. Funding is generally obtained at rates based upon the federal funds rate or the London Interbank Offer Rate.

Commercial Paper Program – Our U.S. broker dealer subsidiary, Piper Jaffray & Co., issues secured commercial paper to fund a portion of its securities inventory. This commercial paper is issued under three separate programs, CP Series A, CP Series II A and CP Series III A, and is secured by different inventory classes, which is reflected in the interest rate paid on the respective program. The programs can issue commercial paper with maturities of 27 to 270 days. CP Series III A includes a covenant that requires Piper Jaffray & Co. to maintain excess net capital of $120 million. The following table provides information about our commercial paper programs at June 30, 2017:



(Dollars in millions)	CP Series A		CP Series II A		CP Series III A
Maximum amount that may be issued	$	300.0	$	150.0	$	125.0
Amount outstanding	30.0		20.0		62.4

Weighted average maturity, in days	25		16		21
Weighted average maturity at issuance, in days	28		28		32

Prime Broker Arrangements – We have established an arrangement to obtain overnight financing by a single prime broker related to certain strategic trading activities in municipal securities. Additionally, we have established a second overnight financing arrangement with another broker dealer related to our convertible securities inventories. Financing under these arrangements is secured primarily by securities, and collateral limitations could reduce the amount of funding available under these arrangements. Our prime broker financing activities are recorded net of receivables from trading activity. The funding is at the discretion of the prime brokers and could be denied subject to a notice period. At June 30, 2017, we had $114.0 million of financing outstanding under these prime broker arrangements.

Committed Lines – We elected to decrease our committed line from $250 million to a one-year $200 million revolving secured credit facility in 2016 based on our liquidity needs and the expected back office conversion which will provide us with an additional funding source. 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. The facility includes a covenant that requires Piper Jaffray & Co. to maintain minimum net capital of $120 million, and the unpaid principal amount of all advances under the facility will be due on December 16, 2017. This credit facility has been in place since 2008 and we renewed the facility for another one-year term in the fourth quarter of 2016. At June 30, 2017, we had $104.0 million in advances against this line of credit.

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 $185 million with two 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 an uncommitted unsecured facility with one of these banks. All of these uncommitted lines are discretionary and are not a commitment by the bank to provide an advance under the line. More specifically, these lines are subject to approval by the respective bank each time an advance is requested and advances may be denied, which may be particularly true during times of market stress or market perceptions of our exposures. We manage our relationships with the banks that provide these uncommitted facilities in order to have appropriate levels of funding for our business. At June 30, 2017, we had no advances against these lines of credit.

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The following tables present the average balances outstanding for our various short-term funding sources by quarter for 2017 and 2016, respectively.



	Average Balance for the Three Months Ended
(Dollars in millions)	June 30, 2017		Mar. 31, 2017
Funding source:
Commercial paper	$	117.1	$	137.7
Prime broker arrangements	103.7		127.2
Short-term bank loans	67.1		2.5
Total	$	287.9	$	267.4



	Average Balance for the Three Months Ended
(Dollars in millions)	Dec. 31, 2016		Sept. 30, 2016		Jun 30, 2016		Mar. 31, 2016
Funding source:
Repurchase agreements	$	3.5	$	14.8	$	28.9	$	30.5
Commercial paper	165.8		235.8		279.7		279.2
Prime broker arrangements	225.6		200.6		169.2		159.0
Short-term bank loans	5.3		—		6.4		0.8
Total	$	400.2	$	451.2	$	484.2	$	469.5

The average funding in the second quarter of 2017 increased to $287.9 million, compared with $267.4 million during the first quarter of 2017, due to an increase in average inventory balances and the payoff of our Class A senior notes. Average funding decreased compared to the corresponding period of 2016 as we have used excess cash to reduce funding. Also, a reduction in strategic trading activities in municipal securities decreased financing through prime broker arrangements.

The following table presents the maximum daily funding amount by quarter for 2017 and 2016, respectively.



(Dollars in millions)	2017		2016
First Quarter	$	543.4	$	576.4
Second Quarter	$	538.3	$	669.7
Third Quarter			$	525.6
Fourth Quarter			$	445.9

Senior Notes

We have entered into variable and fixed rate senior notes with certain entities advised by Pacific Investment Management Company ("PIMCO"). The following table presents the outstanding balance by note class:



	Outstanding Balance
	June 30,		December 31,
(Dollars in thousands)	2017		2016
Class A Notes	$	—	$	50,000
Class C Notes	125,000		125,000
Total senior notes	$	125,000	$	175,000

On October 8, 2015, we entered into a second amended and restated note purchase agreement ("Second Amended and Restated Note Purchase Agreement") under which we issued $125 million of fixed rate Class C Notes. The Class C Notes bear interest at an annual fixed rate of 5.06 percent, are payable semi-annually and mature on October 9, 2018. The unpaid principal amount is due in full on the maturity date and may not be prepaid. The $50 million of variable rate Class A Notes issued in 2014 were repaid in full on the May 31, 2017 maturity date.

The Second Amended and Restated Note Purchase Agreement includes customary events of default and covenants that, among other things, require us to maintain a minimum consolidated tangible net worth and minimum regulatory net capital, limit our leverage ratio and require maintenance of a minimum ratio of operating cash flow to fixed charges. At June 30, 2017, we were in compliance with all covenants.

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Contractual Obligations

Our contractual obligations have not materially changed from those reported in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016, except for our purchase commitments. On June 30, 2017, we entered into a new agreement to move to a fully disclosed clearing model for all of our currently self clearing operations.



	Remainder of		2018		2020		2022 and
(Dollars in millions)	2017		- 2019		- 2021		thereafter		Total
Purchase commitments	$	15.2	$	17.1	$	6.7	$	18.7	$	57.7

Purchase commitments include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase commitments with variable pricing provisions are included in the table based on the minimum contractual amounts. Certain purchase commitments contain termination or renewal provisions. The table reflects the minimum contractual amounts likely to be paid under these agreements assuming the contracts are not terminated.

Capital Requirements

As a registered broker dealer and member firm of the Financial Industry Regulatory Authority, Inc. ("FINRA"), Piper Jaffray & Co., our U.S. broker dealer subsidiary, is subject to the uniform net capital rule of the SEC and the net capital rule of FINRA. We have elected to use the alternative method permitted by the uniform net capital rule, which requires that we maintain minimum net capital of 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 approvals, notifications and other provisions of the uniform net capital rules. We expect that these provisions will not impact our ability to meet current and future obligations. At June 30, 2017, our net capital under the SEC’s uniform net capital rule was $215.1 million, and exceeded the minimum net capital required under the SEC rule by $214.1 million.

Although we operate with a level of net capital substantially greater than the minimum thresholds established by FINRA and the SEC, a substantial reduction of our capital would curtail many of our Capital Markets revenue producing activities.

Our committed short-term credit facility and our senior notes with PIMCO include covenants requiring Piper Jaffray & Co. to maintain minimum net capital of $120 million. CP Notes issued under CP Series III A include a covenant that requires Piper Jaffray & Co. to maintain excess net capital of $120 million.

At June 30, 2017, Piper Jaffray Ltd., our broker dealer subsidiary registered in the United Kingdom, was subject to, and was in compliance with, the capital requirements of the Prudential Regulation Authority and the Financial Conduct Authority pursuant to the Financial Services Act of 2012.

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Off-Balance Sheet Arrangements

In the ordinary course of business we enter into various types of off-balance sheet arrangements. The following table summarizes the notional contract value of our off-balance sheet arrangements for the periods presented:



	Expiration Per Period at December 31,												Total Contractual Amount
							2020		2022				June 30,		December 31,
(Dollars in thousands)	2017		2018		2019		- 2021		- 2023		Later		2017		2016
Customer matched-book derivative contracts (1) (2)	$	22,100	$	—	$	32,850	$	42,560	$	163,040	$	2,964,105	$	3,224,655	$	3,330,207
Trading securities derivative contracts (2)	277,600		20,500		—		—		—		29,750		327,850		423,550
Credit default swap index contracts (2)	—		—		—		—		110,000		—		110,000		7,470
Investment commitments (3)	—		—		—		—		—		—		21,385		22,776

(1)

Consists of interest rate swaps. We have minimal market risk related to these matched-book derivative contracts; however, we do have counterparty risk with one major financial institution, which is mitigated by collateral deposits. In addition, we have a limited number of counterparties (contractual amount of $182.1 million at June 30, 2017) who are not required to post collateral. The uncollateralized amounts, representing the fair value of the derivative contracts, expose us to the credit risk of these counterparties. At June 30, 2017, we had $20.1 million of credit exposure with these counterparties, including $15.5 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, 2017 and December 31, 2016, the net fair value of these derivative contracts approximated $18.8 million and $24.0 million, respectively.


(3)	The investment commitments have no specified call dates. The timing of capital calls is based on market conditions and investment opportunities.

Derivatives

Derivatives’ notional or contract amounts are not reflected as assets or liabilities on our consolidated statements of financial condition. Rather, the fair value of the derivative transactions are reported on the consolidated statements of financial condition as assets or liabilities in financial instruments and other inventory positions owned and financial instruments and other inventory positions sold, but not yet purchased, as applicable. For a complete discussion of our activities related to derivative products, see Note 4, "Financial Instruments and Other Inventory Positions Owned and Financial Instruments and Other Inventory Positions Sold, but Not Yet Purchased," in the notes to our unaudited consolidated financial statements.

Investment Commitments

We have investments, including those made as part of our merchant banking activities, in various limited partnerships that provide financing or make investments in private equity companies. We commit capital and/or act as the managing partner of these entities.

We have committed capital to certain entities and these commitments generally have no specified call dates. We had $21.4 million of commitments outstanding at June 30, 2017, of which $11.6 million relate to an affiliated merchant banking fund and $3.8 million relate to an affiliated fund, which provides financing for senior living facilities.

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Risk Management

Risk is an inherent part of our business. The principal risks we face in operating our business include: strategic risk, market risk, liquidity risk, credit risk, operational risk, human capital risk, and legal and regulatory risks. The extent to which we properly identify and effectively manage each of these risks is critical to our financial condition and profitability. We have a formal risk management process to identify, assess and monitor each risk and mitigating controls in accordance with defined policies and procedures. The risk management functions are independent of our business lines. Our management takes an active role in the risk management process, and the results are reported to senior management and the Board of Directors.

The audit committee of the Board of Directors oversees management’s processes for identifying and evaluating our major risks, and the policies, procedures and practices employed by management to govern its risk assessment and risk management processes. The nominating and governance committee of the Board of Directors oversees the Board of Directors’ committee structures and functions as they relate to the various committees’ responsibilities with respect to oversight of our major risk exposures. With respect to these major risk exposures, the audit committee is responsible for overseeing management’s monitoring and control of our major risk exposures relating to market risk, credit risk, liquidity risk, legal and regulatory risk, operational risk, and human capital risk relating to misconduct, fraud, and legal and compliance matters. Our compensation committee is responsible for overseeing management’s monitoring and control of our major risk exposures relating to compensation, organizational structure, and succession. Our Board of Directors is responsible for overseeing management’s monitoring and control of our major risk exposures related to our corporate strategy. Our Chief Executive Officer, Chief Financial Officer and Senior Vice President of Finance meet with the audit committee on a quarterly basis to discuss our market, liquidity, and legal and regulatory risks, and provide updates to the Board of Directors, audit committee, and compensation committee concerning the other major risk exposures on a regular basis.

We use internal committees to assist in governing risk and ensure that our business activities are properly assessed, monitored and managed. Our financial risk committees manage our market, liquidity and credit risks, and oversee risk management practices related to these risks, including defining acceptable risk tolerances and approving risk management policies. Membership is comprised of senior leadership, including but not limited to, our Chief Executive Officer, Chief Financial Officer, Senior Vice President of Finance, General Counsel, Treasurer, Head of Market and Credit Risk, Head of Public Finance, Head of Fixed Income Services and Firm Investments and Trading, and Head of Equities. Other committees that help evaluate and monitor risk include underwriting, leadership team and operating committees. These committees help manage risk by ensuring that business activities are properly managed and within a defined scope of activity. Our valuation committee, comprised of members of senior management and risk management, provide oversight and overall responsibility for the internal control processes and procedures related to fair value measurements. Additionally, our operational risk committees address and monitor risk related to information systems and security, legal, regulatory and compliance matters, and third parties such as vendors and service providers.

With respect to market risk and credit risk, the cornerstone of our risk management process is daily communication among traders, trading department management and senior management concerning our inventory positions, including those associated with our strategic trading activities, and overall risk profile. Our risk management functions supplement this communication process by providing their independent perspectives on our market and credit risk profile on a daily basis. The broader objectives of our risk management functions are to understand the risk profile of each trading area, to consolidate risk monitoring company-wide, to assist in implementing effective hedging strategies, to articulate large trading or position risks to senior management, and to ensure accurate fair values of our financial instruments.

Risk management techniques, processes and strategies may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, and any risk management failures could expose us to material unanticipated losses.

Strategic Risk

Strategic risk represents the risk associated with executive management failing to develop and execute on the appropriate strategic vision which demonstrates a commitment to our culture, leverages our core competencies, appropriately responds to external factors in the marketplace, and is in the best interests of our clients, employees and shareholders.

Our leadership team is responsible for managing our strategic risks. The Board of Directors oversees the leadership team in setting and executing our strategic plan.

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Market Risk

Market risk represents the risk of losses, or financial volatility that may result from the change in value of a financial instrument due to fluctuations in its market price. Our exposure to market risk is directly related to our role as a financial intermediary for our clients, to our market-making activities and our strategic trading activities. Market risks are inherent to both cash and derivative financial instruments. The scope of our market risk management policies and procedures includes all market-sensitive financial instruments.

Our different types of market risk include:

Interest Rate Risk — Interest rate risk represents the potential volatility from changes in market interest rates. We are exposed to interest rate risk arising from changes in the level and volatility of interest rates, changes in the slope of the yield curve, changes in credit spreads, and the rate of prepayments on our interest-earning assets (e.g., inventories) and our funding sources (e.g., short-term financing) which finance these assets. Interest rate risk is managed by selling short U.S. government securities, agency securities, corporate debt securities and derivative contracts. See Note 4 of our accompanying unaudited consolidated financial statements for additional information on our derivative contracts. Our interest rate hedging strategies may not work in all market environments and as a result may not be effective in mitigating interest rate risk. Also, we establish limits on the notional level of our fixed income securities inventory and manage net positions within those limits.

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. market. We attempt to reduce the risk of loss inherent in our market-making and in our inventory of equity securities by establishing limits on the notional level of our inventory and by managing net position levels within those limits.

Foreign Exchange Risk — Foreign exchange risk represents the potential volatility to earnings or capital arising from movement in foreign exchange rates. A modest portion of our business is conducted in currencies other than the U.S. dollar, and changes in foreign exchange rates relative to the U.S. dollar can therefore affect the value of non-U.S. dollar net assets, revenues and expenses. A change in the foreign currency rates could create either a foreign currency transaction gain/loss (recorded in our consolidated statements of operations) or a foreign currency translation adjustment (recorded to accumulated other comprehensive income/ (loss) within the shareholders’equity section of our consolidated statements of financial condition and other comprehensive income/ (loss) within the consolidated statements of comprehensive income).

Value-at-Risk ("VaR")

We use the statistical technique known as VaR to measure, monitor and review the market risk exposures in our trading portfolios. VaR is the potential loss in value of our trading positions, excluding noncontrolling interests, due to adverse market movements over a defined time horizon with a specified confidence level. We perform a daily VaR analysis on substantially all of our trading positions, including fixed income, equities, convertible bonds, mortgage-backed securities and all associated economic hedges. These positions encompass both customer-related and strategic trading activities. A VaR model provides a common metric for assessing market risk across business lines and products. Changes in VaR between reporting periods are generally due to changes in levels of risk exposure, volatilities and/or correlations among asset classes and individual securities.

We use a Monte Carlo simulation methodology for VaR calculations. We believe this methodology provides VaR results that properly reflect the risk profile of all our instruments, including those that contain optionality, and also accurately models correlation movements among all of our asset classes. In addition, it provides improved tail results as there are no assumptions of distribution, and can provide additional insight for scenario shock analysis.

Model-based VaR derived from simulation has inherent limitations including: reliance on historical data to predict future market risk; VaR calculated using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or offset with hedges within one day; and published VaR results reflect past trading positions while future risk depends on future positions.

The modeling of the market risk characteristics of our trading positions involves a number of assumptions and approximations. While we believe that these assumptions and approximations are reasonable, different assumptions and approximations could produce materially different VaR estimates. When comparing our VaR numbers to those of other firms, it is important to remember that different methodologies, assumptions and approximations could produce significantly different results.

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The following table quantifies the model-based VaR simulated for each component of market risk for the periods presented, which are computed using the past 250 days of historical data. When calculating VaR we use a 95 percent confidence level and a one-day time horizon. This means that, over time, there is a one in 20 chance that daily trading net revenues will fall below the expected daily trading net revenues by an amount at least as large as the reported VaR. Shortfalls on a single day can exceed reported VaR by significant amounts. Shortfalls can also accumulate over a longer time horizon, such as a number of consecutive trading days. Therefore, there can be no assurance that actual losses occurring on any given day arising from changes in market conditions will not exceed the VaR amounts shown below or that such losses will not occur more than once in a 20-day trading period.



	June 30,			December 31,
(Dollars in thousands)	2017			2016
Interest Rate Risk	$	790		$	696
Equity Price Risk	49			41
Diversification Effect (1)	(42		)	(26		)
Total Value-at-Risk	$	797		$	711


(1)	Equals the difference between total VaR and the sum of the VaRs for the two risk categories. This effect arises because the two market risk categories are not perfectly correlated.

We view average VaR over a period of time as more representative of trends in the business than VaR at any single point in time. The table below illustrates the daily high, low and average VaR calculated for each component of market risk during the six months ended June 30, 2017 and the year ended December 31, 2016, respectively.



(Dollars in thousands)	High		Low		Average
For the Six Months Ended June 30, 2017
Interest Rate Risk	$	1,235	$	480	$	799
Equity Price Risk	178		32		96
Diversification Effect (1)					(70		)
Total Value-at-Risk	$	1,244	$	506	$	825



(Dollars in thousands)	High		Low		Average
For the Year Ended December 31, 2016
Interest Rate Risk	$	990	$	251	$	533
Equity Price Risk	412		6		150
Diversification Effect (1)					(72		)
Total Value-at-Risk	$	1,049	$	362	$	611


(1)	Equals the difference between total VaR and the sum of the VaRs for the two risk categories. This effect arises because the two market risk categories are not perfectly correlated. Because high and low VaR numbers for these risk categories may have occurred on different days, high and low numbers for diversification benefit would not be meaningful.

Trading losses exceeded our one-day VaR on one occasion during the first half of 2017.

The aggregate VaR as of June 30, 2017 was higher than the reported VaR on December 31, 2016. The increase in VaR was due to increased average inventory levels in asset classes that are accretive to VaR in the second quarter of 2017 compared to the end of 2016.

In addition to VaR, we also employ additional measures to monitor and manage market risk exposure including net market position, duration exposure, option sensitivities, and inventory turnover. All metrics are aggregated by asset concentration and are used for monitoring limits and exception approvals. In times of market volatility, we also perform ad hoc stress tests and scenario analysis as market conditions dictate. Unlike our VaR, which measures potential losses within a given confidence level, stress scenarios do not have an associated implied probability. Rather, stress testing is used to estimate the potential loss from market moves outside our VaR confidence levels.

Liquidity Risk

Liquidity risk is the risk that we are unable to timely access necessary funding sources in order to operate our business, as well as the risk that we are unable to timely divest securities that we hold in connection with our market-making, sales and trading, and strategic trading activities. We are exposed to liquidity risk in our day-to-day funding activities, by holding potentially illiquid inventory positions and in our role as a remarketing agent for variable rate demand notes.

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See the section entitled "Liquidity, Funding and Capital Resources" in Part I, Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," in this Quarterly Report on Form 10-Q for information regarding our liquidity and how we manage liquidity risk.

Our inventory positions, including those associated with strategic trading activities, subject us to potential financial losses from the reduction in value of illiquid positions. Market risk can be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Depending on the specific security, the structure of the financial product, and/or overall market conditions, we may be forced to hold a security for substantially longer than we had planned or forced to liquidate into a challenging market if funding becomes unavailable.

Credit Risk

Credit risk refers to the potential for loss due to the default or deterioration in credit quality of a counterparty, customer, borrower or issuer of securities we hold in our trading inventory. The nature and amount of credit risk depends on the type of transaction, the structure and duration of that transaction and the parties involved. Credit risk also results from an obligor's failure to meet the terms of any contract with us or otherwise fail to perform as agreed. This may be reflected through issues such as settlement obligations or payment collections.

Our different types of credit risk include:

Credit Spread Risk — Credit spread risk arises from the possibility that changes in credit spreads will affect the value of financial instruments. Credit spreads represent the credit risk premiums required by market participants for a given credit quality (e.g., the additional yield that a debt instrument issued by a AA-rated entity must produce over a risk-free alternative). Changes in credit spreads result from potential changes in an issuer’s credit rating or the market’s perception of the issuer’s credit worthiness. We are exposed to credit spread risk with the debt instruments held in our trading inventory, including those held for strategic trading activites. We enter into transactions to hedge our exposure to credit spread risk through the use of derivatives and certain other financial instruments. These hedging strategies may not work in all market environments and as a result may not be effective in mitigating credit spread risk.

Deterioration/Default Risk — Deterioration/default risk represents the risk due to an issuer, counterparty or borrower failing to fulfill its obligations. We are exposed to deterioration/default risk in our role as a trading counterparty to dealers and customers, as a holder of securities and as a member of exchanges and clearing organizations. The risk of default depends on the creditworthiness of the counterparty and/or issuer of the security. We mitigate this risk by establishing and monitoring individual and aggregate position limits for each counterparty relative to potential levels of activity, holding and marking to market collateral on certain transactions and conducting business through clearing organizations, which guarantee performance. Our risk management functions also evaluate the potential 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.

Collections Risk — Collections risk arises from ineffective management and monitoring of collecting outstanding debts and obligations, including those related to our customer trading activities and margin lending. Our client activities involve the execution, settlement and financing of various transactions. Client activities are transacted on a delivery versus payment, cash or margin basis. Our credit exposure to institutional client business is mitigated by the use of industry-standard delivery versus payment through depositories and clearing banks. Credit exposure associated with our customer margin accounts in the U.S. is monitored daily. Our risk management functions have credit risk policies establishing appropriate credit limits and collateralization thresholds for our customers utilizing margin lending.

Concentration Risk— Concentration risk is the risk due to concentrated exposure to a particular product; individual issuer, borrower or counterparty; financial instrument; or geographic area. We are subject to concentration risk if we hold large individual securities positions, execute large transactions with individual counterparties or groups of related counterparties, or make substantial underwriting commitments. Concentration risk can occur by industry, geographic area or type of client. Securities purchased under agreements to resell consist primarily of securities issued by the U.S. government or its agencies. The counterparties to these agreements typically are primary dealers of U.S. government securities and major financial institutions. Inventory and investment positions taken and commitments made, including underwritings, may result in exposure to individual issuers and businesses. Potential concentration risk is carefully monitored through review of counterparties and borrowers and is managed through the use of policies and limits established by senior management.

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We have concentrated counterparty credit exposure with five non-publicly rated entities totaling $20.1 million at June 30, 2017. This counterparty credit exposure is part of our matched-book derivative program related to our public finance business, consisting primarily of interest rate swaps. One derivative counterparty represents 77.2 percent, or $15.5 million, of this exposure. Credit exposure associated with our derivative counterparties is driven by uncollateralized market movements in the fair value of the interest rate swap contracts and is monitored regularly by our financial risk committee. We attempt to minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by senior management.

Operational Risk

Operational risk is the risk of loss, or damage to our reputation, resulting from inadequate or failed processes, people and systems or from external events. We rely on the ability of our employees and our systems, both internal and at computer centers operated by third parties, to process a large number of transactions. Our systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control. In the event of a breakdown or improper operation of our systems or improper action by our employees or third party vendors, we could suffer financial loss, a disruption of our businesses, regulatory sanctions and damage to our reputation. We also face the risk of operational failure or termination of any of the exchanges, clearing houses, fully disclosed clearing firms, or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and manage our exposure to risk.

Our operations rely on secure processing, storage and transmission of confidential and other information in our internal and outsourced computer systems and networks. Our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have an information security impact. The occurrence of one or more of these events could jeopardize our or our clients' or counterparties' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients', our counterparties' or third parties' operations. We take protective measures and endeavor to modify them as circumstances warrant.

In order to mitigate and control operational risk, we have developed and continue to enhance policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization. We also have business continuity plans in place that we believe will cover critical processes on a company-wide basis, and redundancies are built into our systems as we have deemed appropriate. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our various businesses are operating within established corporate policies and limits.

In the third quarter of 2017, we will be migrating to a fully disclosed clearing model for all of our currently self clearing operations. The migration process introduces unique risks that could cause disruptions in our business or create other unexpected capital charges or losses. We have preventative measures in place, including a project governance committee comprised of members of senior management, as well as senior management at our third party partner. In order to mitigate and control operational risk inherent in the migration, we have developed procedures specific to the project implementation process, including parallel system operations, mock conversion testing, and ongoing monitoring and reporting to members of the project governance committee. We also have the ability to obtain additional methods of financing from existing creditors in the event unknown capital charges arise.

Human Capital Risk

Our business is a human capital business and our success is dependent upon the skills, expertise and performance of our employees. Human capital risks represent the risks posed if we fail to attract and retain qualified individuals who are motivated to serve the best interests of our clients, thereby serving the best interests of our company. Attracting and retaining employees depends, among other things, on our company's culture, management, work environment, geographic locations and compensation. There are risks associated with the proper recruitment, development and rewards of our employees to ensure quality performance and retention.

Legal and Regulatory Risk

Legal and regulatory risk includes the risk of non-compliance with applicable legal and regulatory requirements and loss to our reputation we may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. We are generally subject to extensive regulation in the various jurisdictions in which we conduct our business. We have established procedures that are designed to ensure compliance with applicable statutory and regulatory requirements, such as public company reporting obligations, regulatory net capital requirements, sales and trading practices, potential conflicts of interest, use and safekeeping of customer funds and securities, anti-money laundering, privacy and

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recordkeeping. We have also established procedures that are designed to require that our policies relating to ethics and business conduct are followed. The legal and regulatory focus on the financial services industry presents a continuing business challenge for us.

Our business also subjects us to the complex income tax laws of the jurisdictions in which we have business operations, and these tax laws may be subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. We must make judgments and interpretations about the application of these inherently complex tax laws when determining the provision for income taxes.

Effects of Inflation

Because our assets are liquid and generally short-term in nature, they are not significantly affected by inflation. However, the rate of inflation affects our expenses, such as employee compensation, office space leasing costs and communications charges, which may not be readily recoverable in the price of services we offer to our clients. To the extent inflation results in rising interest rates and has adverse effects upon the securities markets, it may adversely affect our financial position and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information under the caption "Risk Management" in Part I, Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," in this Quarterly Report on Form 10-Q is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES.

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (a) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange 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 ending December 31, 2017, 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 discussion of our business and operations should be read together with the legal proceedings contained in Part I, Item 3 "Legal Proceedings" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

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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, 2016, 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. The following information updates the risk factor of the same heading from our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

The use of estimates and valuations in measuring fair value involve significant estimation and judgment by management.

We make various estimates that affect reported amounts and disclosures. Broadly, those estimates are used in measuring fair value of certain financial instruments, investments in private companies, accounting for goodwill and intangible assets, establishing provisions for potential losses that may arise from litigation, and regulatory proceedings and tax examinations. Estimates are based on available information and judgment. Therefore, actual results could differ from our estimates and that difference could have a material effect on our consolidated financial statements. With respect to accounting for goodwill, we complete our annual goodwill and intangible asset impairment testing in the fourth quarter of each year or earlier if goodwill impairment indicators are present. Impairment charges resulting from this valuation analysis could materially adversely affect our results of operations. In 2016, we recorded an $82.9 million non-cash impairment charge to reduce the carrying value of the goodwill associated with our Asset Management segment following significant net client outflows of AUM in 2016, primarily from our value equity strategies, due to investment performance below benchmarks and an extended cycle of investors favoring passive investment vehicles over active management. In 2017, our Asset Management segment has experienced a further decline in profitability as revenues have decreased in product offerings with higher margins, which has not been fully offset with earnings from new product offerings. Future changes in the assumptions we had made underlying projected cash flows from our Asset Management segment or its EBITDA multiple, such as those resulting from market conditions or other factors, could result in a further impairment of goodwill related to our Asset Management segment.

Financial instruments and other inventory positions owned, and financial instruments and other inventory positions sold but not yet purchased, are recorded at fair value, and unrealized gains and losses related to these financial instruments are reflected on our consolidated statements of operations. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments' complexity. Difficult market environments, such as those experienced in 2008, may cause financial instruments to become substantially more illiquid and difficult to value, increasing the use of valuation models. Our future results of operations and financial condition may be adversely affected by the valuation adjustments that we apply to these financial instruments.

Investments in private companies are valued based on an assessment of each underlying security, considering rounds of financing, third party transactions and market-based information, including comparable company transactions, trading multiples (e.g., multiples of revenue and EBITDA) and changes in market outlook, among other factors. These valuation techniques require significant management estimation and judgment.

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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, 2017.



				Total Number of Shares	Approximate Dollar
				Purchased as Part of	Value of Shares Yet to be
	Total Number of	Average Price		Publicly Announced	Purchased Under the
Period	Shares Purchased	Paid per Share		Plans or Programs	Plans or Programs (1)
Month #1
(April 1, 2017 to April 30, 2017)	345	$	53.87	—	$	70	million
Month #2
(May 1, 2017 to May 31, 2017)	62,746	$	60.24	—	$	70	million
Month #3
(June 1, 2017 to June 30, 2017)	169	$	60.20	—	$	70	million
Total	63,260	$	60.20	—	$	70	million


(1)	Effective August 14, 2015, our board of directors authorized the repurchase of up to $150.0 million of common stock through September 30, 2017.

ITEM 6. EXHIBITS.



Exhibit		Method
Number	Description	of Filing

10.1	Separation Agreement and General Release, dated August 1, 2017, between Piper Jaffray & Co. and Jeff Klinefelter.	Filed herewith
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer.	Filed herewith
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.	Filed herewith
32.1	Section 1350 Certifications.	Filed herewith
101	Interactive data files pursuant to Rule 405 Registration S-T: (i) the Consolidated Statements of Financial Condition as of June 30, 2017 and December 31, 2016, (ii) the Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016, (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 and (v) the notes to the Consolidated Financial Statements.	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on August 4, 2017.



PIPER JAFFRAY COMPANIES

By		/s/ Andrew S. Duff
Its		Chairman and Chief Executive Officer

By		/s/ Debbra L. Schoneman
Its		Chief Financial Officer

Exhibit Index



Exhibit		Method
Number	Description	of Filing

10.1	Separation Agreement and General Release, dated August 1, 2017, between Piper Jaffray & Co. and Jeff Klinefelter.	Filed herewith
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer.	Filed herewith
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.	Filed herewith
32.1	Section 1350 Certifications.	Filed herewith
101	Interactive data files pursuant to Rule 405 Registration S-T: (i) the Consolidated Statements of Financial Condition as of June 30, 2017 and December 31, 2016, (ii) the Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016, (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 and (v) the notes to the Consolidated Financial Statements.	Filed herewith