Piper Sandler(PIPR) - 2023 Q4 - Annual Report

Part I Business Piper Sandler Companies is a U.S.-based investment bank and institutional securities firm operating as a single segment, providing financial advisory, capital raising, brokerage, research, and asset management services to middle-market clients, and is subject to extensive regulation - Piper Sandler operates as an investment bank and institutional securities firm, serving corporations, private equity, public entities, and institutional investors in the U.S. and internationally (London, Aberdeen, Hong Kong)[14] - The company's business is organized into one reportable segment that encompasses Investment Banking (M&A, capital raising), Equity and Fixed Income Institutional Brokerage (advisory, trade execution, research), and Alternative Asset Management Funds[15][16][18] - As of December 31, 2023, the company had 1,725 full-time employees, including 169 corporate investment banking managing directors The substantial majority of its net revenues and long-lived assets are located in the U.S[20][24] - The company is heavily regulated by U.S. federal and state agencies, SROs like FINRA, and international bodies including the U.K.'s Financial Conduct Authority and Hong Kong's Securities and Futures Commission[32][34][35] Risk Factors The company faces material risks including sensitivity to economic conditions, intense competition for talent, reliance on clearing brokers, potential counterparty defaults with a $6.7 million interest rate swap exposure, operational dependency on technology, cybersecurity threats, and ongoing SEC/CFTC record-keeping investigations - The business is highly sensitive to market and economic conditions In 2023, efforts by the U.S. Federal Reserve to combat inflation led to higher interest rates and macroeconomic uncertainty, which muted client activity across advisory, equity capital markets, and fixed income businesses[51][53] - The company faces significant human capital risk due to intense competition for qualified employees in the financial services industry The loss of a small number of high-revenue-producing employees could adversely affect results[67][69] - The company is exposed to credit risk from third-party defaults As of December 31, 2023, this included a $6.7 million credit exposure to four non-publicly rated counterparties in its matched-book interest rate swap program[85][86] - A significant operational risk is the reliance on third-party clearing brokers, particularly Pershing LLC, for most customer transactions Any failure by the clearing agent could significantly disrupt operations[96] - The company is subject to extensive regulation and faces legal risks, including ongoing investigations by the SEC and CFTC regarding compliance with recordkeeping requirements for business-related communications on unapproved electronic channels[112][113] - The company's dividend policy, which targets returning 30% to 50% of adjusted net income, is discretionary and can be changed at any time by the board of directors[123] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - There are no unresolved staff comments[126] Cybersecurity The company's cybersecurity risk management is overseen by the audit committee and managed by the Chief Information and Operations Officer, aligning with NIST framework, undergoing annual third-party assessments, and having no material incidents to date - The company's cybersecurity program utilizes the National Institute of Standards and Technology (NIST) Cybersecurity Framework and undergoes annual assessments by a third-party consultant[130] - Oversight is provided by the audit committee of the board of directors, with the Chief Information and Operations Officer leading the information security and technology departments[128][129] - The company is not aware of any cybersecurity threats or incidents that have materially affected or are reasonably likely to materially affect its business, strategy, operations, or financial condition[137] Properties As of February 20, 2024, Piper Sandler operates from 59 principal leased offices across 31 states, D.C., London, Aberdeen, and Hong Kong, with a new 15-year lease signed for its future Minneapolis headquarters - The company conducts operations through 59 principal leased offices in 31 states, Washington D.C., and internationally in London, Aberdeen, and Hong Kong[138] - A new 15-year lease agreement was signed in December 2022 for a future principal executive office in Minneapolis, Minnesota[138] Legal Proceedings The company is involved in various legal and regulatory proceedings, notably cooperating with ongoing SEC and CFTC investigations into recordkeeping, for which it has accrued an estimated $20.0 million for potential civil penalties - The company is cooperating with SEC and CFTC investigations into compliance with recordkeeping requirements for business-related communications on unapproved electronic messaging channels[504] - As of December 31, 2023, the company has accrued $20.0 million for estimated civil penalties related to these investigations[504] - The high end of the range of reasonably estimable losses in excess of amounts accrued for all legal matters was approximately $3.0 million as of December 31, 2023[505] Mine Safety Disclosures Not applicable to the company - Not applicable[140] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Piper Sandler's common stock trades on the NYSE under 'PIPR', with a dividend policy targeting 30% to 50% of adjusted net income, and an authorized $150.0 million share repurchase program with $138 million remaining as of year-end 2023 - The company's common stock is listed on the New York Stock Exchange under the symbol 'PIPR'[142] - The dividend policy targets a return of 30% to 50% of fiscal year adjusted net income to shareholders A special dividend of $1.00 per share and a quarterly dividend of $0.60 per share were declared payable in March 2024[143][144] Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares Yet to be Purchased Under the Plans or Programs | | :--- | :--- | :--- | :--- | | October 2023 | 14,088 | $144.13 | $138 million | | November 2023 | 1,787 | $152.51 | $138 million | | December 2023 | 4,326 | $174.87 | $138 million | | Total | 20,201 | $151.45 | $138 million | - A share repurchase program of up to $150.0 million was authorized effective May 6, 2022, through December 31, 2024 As of December 31, 2023, approximately $138 million remained available under this authorization[148] Management's Discussion and Analysis of Financial Condition and Results of Operations For fiscal year 2023, Piper Sandler reported a 5.4% decrease in GAAP net revenues to $1.35 billion and a 22.8% decrease in GAAP net income to $85.5 million, driven by challenging market conditions and increased non-compensation expenses due to a $20.0 million regulatory accrual, while maintaining strong liquidity and an adjusted leverage ratio of 2.2 Executive Overview and Financial Highlights In 2023, Piper Sandler faced a challenging market, resulting in a 5.4% decrease in GAAP net revenues to $1.35 billion and a 22.8% drop in net income to $85.5 million, with adjusted EPS falling to $9.28 from $11.26 in 2022, while strategically expanding its corporate investment banking managing directors by 6.3% to 169 and building out its non-agency structured credit business, with non-GAAP results excluding $21.5 million in expenses related to potential regulatory settlements 2023 vs 2022 Financial Highlights (U.S. GAAP) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net revenues | $1,347,967 | $1,425,638 | (5.4%) | | Net income attributable to Piper Sandler Companies | $85,491 | $110,674 | (22.8%) | | Earnings per diluted common share | $4.96 | $6.52 | (23.9%) | 2023 vs 2022 Financial Highlights (Non-GAAP) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Adjusted net revenues | $1,330,197 | $1,433,713 | (7.2%) | | Adjusted net income attributable to Piper Sandler Companies | $166,393 | $201,317 | (17.3%) | | Adjusted earnings per diluted common share | $9.28 | $11.26 | (17.6%) | - Non-GAAP results for 2023 exclude $21.5 million in non-compensation expenses related to potential regulatory settlements with the SEC and CFTC regarding recordkeeping requirements[157] - Strategic activities in 2023 included increasing corporate investment banking managing directors to 169 (up 6.3%) and expanding the fixed income services team's non-agency structured credit capabilities[160] Results of Operations In 2023, net revenues fell 5.4% to $1.35 billion, with investment banking revenues decreasing 8.5% to $923.8 million and institutional brokerage revenues falling 6.8% to $377.5 million, while total non-interest expenses decreased 5.1% to $1.23 billion, though other operating expenses surged 157.7% to $46.4 million due to a $20.0 million regulatory accrual and a $7.5 million receivable write-off Revenues by Source (2023 vs 2022) | Revenue Source | 2023 (in thousands) | 2022 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Investment banking | $923,812 | $1,009,509 | (8.5%) | | - Advisory services | $709,316 | $776,428 | (8.6%) | | - Corporate financing | $131,077 | $125,342 | 4.6% | | - Municipal financing | $83,419 | $107,739 | (22.6%) | | Institutional brokerage | $377,539 | $405,267 | (6.8%) | | - Equity brokerage | $209,512 | $210,314 | (0.4%) | | - Fixed income services | $168,027 | $194,953 | (13.8%) | | Total Net Revenues | $1,347,967 | $1,425,638 | (5.4%) | - Compensation and benefits expense decreased 8.8% to $897.0 million, corresponding to lower revenues The compensation ratio was 66.5% in 2023, down from 69.0% in 2022[184] - Other operating expenses increased significantly to $46.4 million in 2023 from $18.0 million in 2022, primarily due to a $20.0 million accrual for estimated civil penalties for regulatory settlements and a $7.5 million write-off of an uncollectible receivable[195] - The provision for income taxes was $23.6 million, resulting in an effective tax rate of 19.3% This included $16.6 million in tax benefits related to stock-based compensation[196] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant management estimation and judgment, including the valuation of financial instruments, particularly Level III assets, the annual impairment assessment of goodwill and intangible assets, accounting for stock-based compensation, and determining income tax provisions and reserves for uncertain tax positions - Valuation of financial instruments, especially Level III assets like investments in private companies, requires significant management estimation using techniques such as discounted cash flow analyses and comparable company multiples[222][224] - Goodwill and intangible assets, totaling $301.8 million and $116.2 million respectively at year-end, are tested for impairment annually in the fourth quarter The 2023 test, a qualitative assessment, resulted in no impairment[225][228] - The company establishes reserves for uncertain tax positions As of December 31, 2023, a $1.8 million liability was recorded for uncertain state income tax positions[235] Liquidity, Funding and Capital Resources The company maintains a diversified funding strategy, including clearing arrangements, a $100 million unsecured revolving credit facility, and a $50 million committed line, having repaid $125 million of Class B Notes in 2023, ending the year with an adjusted leverage ratio of 2.2, and its broker-dealer subsidiary remaining well-capitalized with net capital of $247.9 million - Cash and cash equivalents increased by $17.5 million to $383.1 million at year-end 2023 Operating activities provided $275.6 million in cash[244] Leverage Ratios | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets (in thousands) | $2,140,983 | $2,181,557 | | Total Shareholders' Equity (in thousands) | $1,299,473 | $1,254,028 | | Leverage Ratio | 1.6 | 1.7 | | Adjusted Leverage Ratio | 2.2 | 2.4 | - Primary funding sources include clearing arrangements with Pershing and CIBC, a $100 million unsecured revolving credit facility (renewed and upsized in Q4 2023), and a $50 million committed line (renewed and downsized in Q4 2023)[251][252][253][255] - The company's U.S. broker-dealer subsidiary, Piper Sandler & Co., had net capital of $247.9 million, exceeding the SEC's minimum requirement by $246.9 million as of December 31, 2023[261] - The company has off-balance sheet investment commitments of $95.1 million to various limited partnerships or LLCs with no specified call dates[269][507] Risk Management The company employs a formal, independent risk management process overseen by the board's audit committee, managing market risk where a 50 basis point adverse change in rates would decrease fixed income portfolio value by an estimated $0.3 million, and credit risk with over 93% of its rated fixed income portfolio rated 'A' or higher, noting a $6.7 million uncollateralized credit exposure to four non-publicly rated entities in its derivative program - The audit committee of the board of directors oversees management's risk processes, with specific risk oversight delegated to various committees and senior leadership[274] - For market risk, the company estimates that a parallel 50 basis point adverse change in interest rates would result in a decrease of approximately $0.3 million in the carrying value of its fixed income inventory as of December 31, 2023[283] Credit Rating of Long Fixed Income Securities (as of Dec 31, 2023) | Rating | % of Total Portfolio | | :--- | :--- | | AAA | 20.8% | | AA | 50.3% | | A | 22.6% | | BBB | 1.5% | | BB | —% | | Not Rated | 4.8% | - The company has a concentrated counterparty credit exposure of $6.7 million with four non-publicly rated entities within its matched-book derivative program, with one counterparty representing $5.8 million of this exposure[299] Quantitative and Qualitative Disclosures About Market Risk This section incorporates by reference the information provided under the 'Risk Management' section in Item 7, detailing the company's exposure to and management of strategic, market, liquidity, credit, operational, human capital, and legal risks - The information required for this item is incorporated by reference from the "Risk Management" section of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations[308] Financial Statements and Supplementary Data This section contains the company's consolidated financial statements for the fiscal year ended December 31, 2023, along with the independent auditor's report, including the Consolidated Statements of Financial Condition, Operations, Comprehensive Income, Changes in Shareholders' Equity, and Cash Flows, plus detailed notes and unaudited quarterly data Management's Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, concluding that the company maintained effective internal control as of December 31, 2023, based on the COSO 2013 framework, with Ernst & Young LLP issuing an unqualified opinion on its effectiveness - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the criteria set forth by COSO in the Internal Control-Integrated Framework (2013)[311] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[312][315] Consolidated Financial Statements The consolidated financial statements present the company's financial position as of December 31, 2023 and 2022, and its results of operations and cash flows for the three years ended December 31, 2023, with key 2023 figures including total assets of $2.14 billion, total liabilities of $841.5 million, total shareholders' equity of $1.30 billion, and net income of $85.5 million or $4.96 per diluted share Consolidated Statement of Financial Condition (Year-End) | (in thousands) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $2,140,983 | $2,181,557 | | Cash and cash equivalents | $383,098 | $365,624 | | Goodwill | $301,760 | $301,151 | | Total Liabilities | $841,510 | $927,529 | | Accrued compensation | $486,145 | $565,738 | | Total Shareholders' Equity | $1,299,473 | $1,254,028 | Consolidated Statement of Operations (Full Year) | (in thousands, except per share) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Revenues | $1,347,967 | $1,425,638 | $2,031,061 | | Total Non-interest Expenses | $1,225,381 | $1,291,269 | $1,589,549 | | Net Income Attributable to Piper Sandler Companies | $85,491 | $110,674 | $278,514 | | Diluted EPS | $4.96 | $6.52 | $16.43 | Notes to the Consolidated Financial Statements The notes provide detailed information supporting the consolidated financial statements, including accounting policies for revenue recognition, fair value measurements, and business combinations, detailing 2022 acquisitions, Level III assets at $233.0 million, a $20.0 million accrual for regulatory investigations, and $93.8 million in unrecognized stock-based compensation cost - The company completed three acquisitions in 2022: DBO Partners (technology investment banking), Stamford Partners (European consumer M&A), and Cornerstone Macro (macro research)[400][407][410] - As of Dec 31, 2023, the company had $233.0 million in Level III assets measured at fair value, representing 21.9% of total financial instruments measured at fair value These assets require significant management judgment for valuation[453] - The company has accrued $20.0 million for estimated civil penalties related to ongoing SEC and CFTC investigations into recordkeeping requirements for business-related communications[504] - As of Dec 31, 2023, there was $93.8 million of total unrecognized compensation cost related to unvested restricted stock and restricted stock units, expected to be recognized over a weighted average period of 2.9 years[556] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None[605] Controls and Procedures Based on management's evaluation, including the CEO and CFO, the company's disclosure controls and procedures were deemed effective as of December 31, 2023, with no material changes to internal control over financial reporting during the fourth quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures are effective[606] - No changes in the system of internal control over financial reporting occurred during the fourth quarter of 2023 that materially affected, or are reasonably likely to materially affect, internal controls[607] Other Information No director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fourth quarter ended December 31, 2023 - No director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fourth quarter ended December 31, 2023[609] Part III Directors, Executive Officers and Corporate Governance Information regarding executive officers, directors, the audit committee, and codes of ethics is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - This section incorporates by reference information from the registrant's Proxy Statement for its 2024 Annual Meeting of Shareholders[8][612] Executive Compensation Information regarding executive and director compensation, including compensation committee interlocks and insider participation, is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - This section incorporates by reference information from the registrant's Proxy Statement for its 2024 Annual Meeting of Shareholders[8][613] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by beneficial owners, management, and directors, as well as details on equity compensation plans, is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - This section incorporates by reference information from the registrant's Proxy Statement for its 2024 Annual Meeting of Shareholders[8][614] Certain Relationships and Related Transactions, and Director Independence Information regarding director independence and the review and approval of transactions with related persons is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - This section incorporates by reference information from the registrant's Proxy Statement for its 2024 Annual Meeting of Shareholders[8][615] Principal Accountant Fees and Services Information regarding fees paid to the principal accountant and the audit committee's pre-approval policies for auditor services is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - This section incorporates by reference information from the registrant's Proxy Statement for its 2024 Annual Meeting of Shareholders[8][616] Part IV Exhibit and Financial Statement Schedules This section lists the financial statements, included in Item 8, and notes that all required financial statement schedules are either included, inapplicable, or not required, also providing a detailed index of all exhibits filed with the Form 10-K - The Consolidated Financial Statements are included in Part II, Item 8 of the Form 10-K[617] - All financial statement schedules have been included in the Consolidated Financial Statements or related footnotes, or are inapplicable[618] Form 10-K Summary The company reports that no Form 10-K summary is provided - None[623]