# PIPER SANDLER COMPANIES (PIPR) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from PIPER SANDLER COMPANIES's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1230245/000123024523000033/pipr-20221231.htm
Accession: 0001230245-23-000033
Filing date: 2023-02-24
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/PIPR/
All MD&A years: /company/PIPR/mda/
Previous year: /company/PIPR/mda/fy2021/ (FY 2021)
Next year: /company/PIPR/mda/fy2023/ (FY 2023)

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following information should be read in conjunction with the accompanying audited consolidated financial statements and related notes and exhibits included elsewhere in this Form 10-K. Certain statements in this Form 10-K may be considered forward-looking. See "Cautionary Note Regarding Forward-Looking Statements" in this Form 10-K for additional information regarding such statements and related risks and uncertainties.

Item 7 in this Form 10-K discusses our 2022 and 2021 results and the year-over-year comparisons between 2022 and 2021. Discussion of our 2020 results and the year-over-year comparisons between 2021 and 2020 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022.

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) interest expense on long-term financing from net revenues, (3) amortization of intangible assets related to acquisitions, (4) compensation and non-compensation expenses from acquisition-related agreements, (5) acquisition-related restructuring and integration costs and (6) the income tax expense allocated to the adjustments. The adjusted weighted average diluted shares outstanding used in the calculation of non-GAAP earnings per diluted common share contains an adjustment to include the common shares for unvested restricted stock awards with service conditions granted pursuant to all acquisitions since January 1, 2020. These adjustments affect the following financial measures: net revenues, compensation expenses, non-compensation expenses, income tax expense, net income applicable to Piper Sandler Companies, earnings per diluted common share, total non-interest expenses, pre-tax income and pre-tax 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.

Executive Overview

Overview of Operations – Our business principally consists of providing investment banking and institutional brokerage services to corporations, private equity groups, public entities, non-profit entities and institutional investors in the United States and Europe. We operate through one reportable business segment.

Investment banking services include financial advisory services, management of and participation in underwritings, and municipal financing 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, corporations, 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, profits and losses from trading these securities, and research checks as clients pay us for research services and corporate access offerings. In order to invest firm capital and to manage capital from outside investors, we have created alternative asset management funds in merchant banking and healthcare. We receive management and performance fees for managing these funds, as well as investment gains and losses.

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Our Business Strategy – Our long-term strategic objectives are to drive revenue growth, expand our market presence, build a stronger and more durable platform, continue to gain market share, and maximize shareholder value. In order to meet these objectives, we are focused on the following:

•Continuing to expand our business through strategic investments and selectively adding partners who share our client-centric culture and who can leverage our platform to better serve clients;

•Growing our investment banking platform through market share gains, accretive combinations, developing internal talent, and continued sector, product and geographic expansion. We also believe there is an opportunity to continue to capitalize on the strength of our U.S. franchises by expanding in Europe;

•Leveraging the scale within the equity brokerage and fixed income services platforms, driven by our expanded client base and product offerings, to continue to grow market share; and

•Prudently managing capital to maintain our balance sheet strength with ample liquidity and flexibility through all market conditions.

Strategic Activities – During 2022, we took the following important steps in the execution of our business strategy.

•On October 7, 2022, we completed the acquisition of DBO Partners Holding LLC, including its subsidiary, DBO Partners LLC (collectively, "DBO Partners"), a technology investment banking firm. The transaction expands the scale of our technology sector and adds general partner advisory services.

•On June 10, 2022, we completed the acquisition of Stamford Partners LLP ("Stamford Partners"), a specialist investment bank offering mergers and acquisitions advisory services to European food and beverage and related consumer sectors. The transaction expands our presence in Europe.

•On February 4, 2022, we completed the acquisition of Cornerstone Macro Research LP, including its subsidiary, Cornerstone Macro LLC (collectively, "Cornerstone Macro"), a research firm focused on providing macro research and equity derivatives trading to institutional investors. The transaction adds a macro research platform and increases the scale of our equity brokerage operations.

•Our corporate investment banking managing directors increased to 159, up 7.4 percent from 2021, contributing to our expanded and more diversified platform. We strengthened and broadened our industry and product coverage in 2022, notably in healthcare services, automotive aftermarket, transportation and logistics, and restructuring. In addition, we continued to invest in our research services and specialized sales and trading teams, both key differentiators in supporting our financing activities.

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Financial Highlights

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(Amounts in thousands, except per share data)","","","","","2022"],["2022","","2021","","v2021"],["U.S. GAAP"],["Net revenues","$","1,425,638","","","$","2,031,061","","","(29.8)","%"],["Compensation and benefits","983,524","","","1,305,166","","","(24.6)"],["Non-compensation expenses","307,745","","","284,383","","","8.2"],["Income before income tax expense","134,369","","","441,512","","","(69.6)"],["Net income applicable to Piper Sandler Companies","110,674","","","278,514","","","(60.3)"],["Earnings per diluted common share","$","6.52","","","$","16.43","","","(60.3)"],["Ratios and margin"],["Compensation ratio","69.0","%","","64.3","%"],["Non-compensation ratio","21.6","%","","14.0","%"],["Pre-tax margin","9.4","%","","21.7","%"],["Effective tax rate","24.7","%","","25.2","%"],["Non-GAAP(1)"],["Adjusted net revenues","$","1,433,713","","","$","1,980,457","","","(27.6)","%"],["Adjusted compensation and benefits","895,999","","","1,188,371","","","(24.6)"],["Adjusted non-compensation expenses","268,561","","","242,134","","","10.9"],["Adjusted operating income","269,153","","","549,952","","","(51.1)"],["Adjusted net income applicable to Piper Sandler Companies","201,317","","","399,037","","","(49.5)"],["Adjusted earnings per diluted common share","$","11.26","","","$","21.92","","","(48.6)"],["Adjusted ratios and margin"],["Adjusted compensation ratio","62.5","%","","60.0","%"],["Adjusted non-compensation ratio","18.7","%","","12.2","%"],["Adjusted operating margin","18.8","%","","27.8","%"],["Adjusted effective tax rate","23.4","%","","26.3","%"]]
[[/GREPCENT_TABLE]]

See the "Results of Operations" section for additional information.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(Amounts in thousands, except per share data)","2022","","2021"],["Net revenues:"],["Net revenues \u2013 U.S. GAAP basis","$","1,425,638","","","$","2,031,061"],["Adjustments:"],["Revenue related to noncontrolling interests","1,575","","","(59,050)"],["Interest expense on long-term financing","6,500","","","8,446"],["Adjusted net revenues","$","1,433,713","","","$","1,980,457"],["Compensation and benefits:"],["Compensation and benefits \u2013 U.S. GAAP basis","$","983,524","","","$","1,305,166"],["Adjustment:"],["Compensation from acquisition-related agreements","(87,525)","","","(116,795)"],["Adjusted compensation and benefits","$","895,999","","","$","1,188,371"],["Non-compensation expenses:"],["Non-compensation expenses \u2013 U.S. GAAP basis","$","307,745","","","$","284,383"],["Adjustments:"],["Non-compensation expenses related to noncontrolling interests","(7,919)","","","(7,196)"],["Acquisition-related restructuring and integration costs","(11,440)","","","(4,724)"],["Amortization of intangible assets related to acquisitions","(15,375)","","","(30,080)"],["Non-compensation expenses from acquisition-related agreements","(4,450)","","","(249)"],["Adjusted non-compensation expenses","$","268,561","","","$","242,134"],["Income before income tax expense:"],["Income before income tax expense \u2013 U.S. GAAP basis","$","134,369","","","$","441,512"],["Adjustments:"],["Revenue related to noncontrolling interests","1,575","","","(59,050)"],["Interest expense on long-term financing","6,500","","","8,446"],["Non-compensation expenses related to noncontrolling interests","7,919","","","7,196"],["Compensation from acquisition-related agreements","87,525","","","116,795"],["Acquisition-related restructuring and integration costs","11,440","","","4,724"],["Amortization of intangible assets related to acquisitions","15,375","","","30,080"],["Non-compensation expenses from acquisition-related agreements","4,450","","","249"],["Adjusted operating income","$","269,153","","","$","549,952"],["Interest expense on long-term financing","(6,500)","","","(8,446)"],["Adjusted income before adjusted income tax expense","$","262,653","","","$","541,506"],["Income tax expense:"],["Income tax expenses \u2013 U.S. GAAP basis","$","33,189","","","$","111,144"],["Tax effect of adjustments:"],["Compensation from acquisition-related agreements","20,872","","","23,646"],["Acquisition-related restructuring and integration costs","2,528","","","1,180"],["Amortization of intangible assets related to acquisitions","3,599","","","6,436"],["Non-compensation expenses from acquisition-related agreements","1,148","","","63"],["Adjusted income tax expense","$","61,336","","","$","142,469"],["Net income applicable to Piper Sandler Companies:"],["Net income applicable to Piper Sandler Companies \u2013 U.S. GAAP basis","$","110,674","","","$","278,514"],["Adjustments:"],["Compensation from acquisition-related agreements","66,653","","","93,149"],["Acquisition-related restructuring and integration costs","8,912","","","3,544"],["Amortization of intangible assets related to acquisitions","11,776","","","23,644"],["Non-compensation expenses from acquisition-related agreements","3,302","","","186"],["Adjusted net income applicable to Piper Sandler Companies","$","201,317","","","$","399,037"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(Amounts in thousands, except per share data)","2022","","2021"],["Earnings per diluted common share:"],["Earnings per diluted common share \u2013 U.S. GAAP basis","$","6.52","","","$","16.43"],["Adjustment for inclusion of unvested acquisition-related stock","(0.60)","","","(1.62)"],["","$","5.92","","","$","14.81"],["Adjustments:"],["Compensation from acquisition-related agreements","3.93","","","5.49"],["Acquisition-related restructuring and integration costs","0.53","","","0.21"],["Amortization of intangible assets related to acquisitions","0.69","","","1.40"],["Non-compensation expenses from acquisition-related agreements","0.19","","","0.01"],["Adjusted earnings per diluted common share","$","11.26","","","$","21.92"],["Weighted average diluted common shares outstanding:"],["Weighted average diluted common shares outstanding \u2013 U.S. GAAP basis","16,965","","","16,955"],["Adjustment:"],["Unvested acquisition-related restricted stock with service conditions","909","","","1,251"],["Adjusted weighted average diluted common shares outstanding","17,874","","","18,206"]]
[[/GREPCENT_TABLE]]

External Factors Impacting Our Business

Performance in the financial services industry in which we operate is highly correlated to the overall strength of macroeconomic conditions, financial market activity and the effect of geopolitical events. 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 advisory transactions, equity and debt corporate financings, and municipal financings; 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; and overall equity valuations.

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 a 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.

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Market Data

The following table provides a summary of relevant market data over the past three years.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","","","","","","","2022","","2021"],["","2022","","2021","","2020","","v2021","","v2020"],["U.S. Market Indices"],["S&P 500 (a)","3,840","","","4,766","","","3,756","","","(19.4)","%","","26.9","%"],["Nasdaq (a)","10,466","","","15,645","","","12,888","","","(33.1)","%","","21.4","%"],["U.S. Middle Market Mergers and Acquisitions"],["Announced transactions (number of transactions) (b)","3,627","","","4,767","","","3,637","","","(23.9)","%","","31.1","%"],["U.S. Equity Capital Markets"],["Completed public equity offerings (number of transactions) (c)","521","","","1,996","","","1,285","","","(73.9)","%","","55.3","%"],["Completed initial public offerings (number of transactions) (d)","156","","","1,008","","","436","","","(84.5)","%","","131.2","%"],["Equity fee pool for overall market (in millions) (e)","$","3,517","","","$","20,365","","","$","15,365","","","(82.7)","%","","32.5","%"],["Equity fee pool for sub-$5 billion (in millions) (f)","$","2,404","","","$","13,640","","","$","8,901","","","(82.4)","%","","53.2","%"],["U.S. Municipal Negotiated Issuances"],["Completed issuances (number of transactions) (g)","5,847","","","8,849","","","8,965","","","(33.9)","%","","(1.3)","%"],["Aggregate par value (in billions) (g)","$","312","","","$","384","","","$","392","","","(18.7)","%","","(2.0)","%"],["Average CBOE Volatility Index (VIX)","26","","","20","","","29","","","30.0","%","","(31.0)","%"],["Average Daily Number of Shares Traded"],["NYSE (shares in millions)","2,355","","","2,258","","","2,402","","","4.3","%","","(6.0)","%"],["Nasdaq (shares in millions)","2,083","","","1,952","","","2,010","","","6.7","%","","(2.9)","%"],["Interest Rates"],["3-month treasury average rate","2.09","%","","0.04","%","","0.25","%","","N/M","","(84.0)","%"],["10-year treasury average rate","2.95","%","","1.45","%","","0.81","%","","103.4","%","","79.0","%"],["Average 10-year MMD to 10-year Treasury Ratio (h)","0.83","","","0.68","","","1.22","","","22.1","%","","(44.3)","%"]]
[[/GREPCENT_TABLE]]

N/M — Not meaningful

(a)Data provided is at period end.

(b)Source: Refinitiv (transactions with reported deal value between $100 million and $1 billion and transactions with an undisclosed deal value that had a financial advisor).

(c)Source: Dealogic and Piper Sandler & Co. Equity Capital Markets (IPOs, follow-on offerings and convertible offerings with reported deal value greater than $10 million).

(d)Source: Dealogic and Piper Sandler & Co. Equity Capital Markets (offerings with reported deal value greater than $10 million).

(e)Source: Dealogic and Piper Sandler & Co. Equity Capital Markets (IPOs, follow-on offerings and convertible offerings with deal values greater than $10 million and PIPEs/RDs greater than $5 million; SPAC IPO fees are represented as the standard two percent upfront fee unless noted differently on the IPO cover).

(f)Source: Dealogic and Piper Sandler & Co. Equity Capital Markets (IPOs, follow-on offerings and convertible offerings with deal values greater than $10 million and PIPEs/RDs greater than $5 million for sub-$5 billion market cap issuers; SPAC IPO fees are represented as the standard two percent upfront fee unless noted differently on the IPO cover).

(g)Source: Refinitiv (sole/senior negotiated and private placement transactions).

(h)Calculated based on the 10-year Municipal Market Data (MMD) index rate divided by the 10-year treasury rate.

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Outlook for 2023

We believe there is a heightened risk of economic recession in 2023 resulting from persistent inflation, supply and demand imbalances, labor shortages and higher interest rates and energy prices. Additionally, geopolitical risks, such as the war in Ukraine, further increased the economic strain on the global economy. These risks contributed to increased financial market volatility and a decline in business confidence in 2022, resulting in a more uncertain economic outlook for 2023.

We believe tightening of U.S. monetary policy will continue to be a critical factor impacting the economy and financial markets. The U.S. Federal Reserve significantly increased its short-term benchmark interest rate in 2022 and is expected to raise rates further in 2023, with its primary near-term focus to slow inflation. Additionally, the U.S. Federal Reserve continues quantitative tightening measures by reducing its holdings of treasury and mortgage-backed securities.

While demand for advisory services remains active, the challenging market environment continues to impact transaction timelines and increase deal risk. Additionally, rising and volatile interest rates have reduced financing options for financial sponsors, which has negatively impacted our deal activity with these clients. Our pipeline across industry teams remains solid, but the current economic conditions make conversion of the pipeline uncertain.

The market for equity capital raising was largely shut in 2022 due to high levels of market volatility, declining equity valuations and reduced investor demand stemming from economic concerns. However, we expect capital markets activity to increase in 2023 as clients requiring access to capital in order to execute on their strategic plans take advantage of market opportunities.

Equity brokerage benefited from elevated volatility and volumes in 2022 as well as market share gains resulting from the addition of Cornerstone Macro to our platform. In 2023, we anticipate a more challenging market environment with a decrease in the research and trading services fee pool as well as expectations of less volatility. We believe these challenges will be mitigated in part through our increase in client votes leading to further market share growth.

Market conditions for our fixed income services business were challenging in the second half of 2022 driven by the sharp increase in rates, increased interest rate volatility, aggressive monetary policy tightening and uncertainty in expectations regarding the terminal level of interest rates. Additionally, inflation has remained elevated and the market has begun pricing in a recession resulting in an inverted yield curve. These market dynamics negatively impacted our client activity in 2022, particularly among our depository clients. In 2023, we expect clients to be more active relative to the second half of 2022 as the fixed income asset class represents an increasingly attractive investment opportunity resulting from higher investment yields.

Our municipal financing business experienced more challenging market conditions in the second half of 2022 driven by increased interest rates and volatility, as well as weakened investor demand. Higher rates sharply curtailed refinancing activity depressing new issuance volumes in 2022; we expect this trend to continue in 2023. While our specialty sector pipeline is strong, it remains uncertain when market conditions will become more conducive to closing these transactions.

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Results of Operations

Financial Summary

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.

[[GREPCENT_TABLE]]
[["","","","","","","","","","As a Percentage of"],["","","","","","","","","","Net Revenues for the"],["","Year Ended December 31,","","Year Ended December 31,"],["","","","","","","","2022","","2021"],["(Amounts in thousands)","2022","","2021","","2020","","v2021","","v2020","","2022","","2021","","2020"],["Revenues:"],["Investment banking","$","1,009,509","","","$","1,553,219","","","$","858,476","","","(35.0)","%","","80.9","%","","70.8","%","","76.5","%","","69.3","%"],["Institutional brokerage","405,267","","","387,577","","","357,753","","","4.6","","","8.3","","","28.4","","","19.1","","","28.9"],["Interest income","20,365","","","6,967","","","13,164","","","192.3","","","(47.1)","","","1.4","","","0.3","","","1.1"],["Investment income/(loss)","(23)","","","94,032","","","23,265","","","N/M","","304.2","","0.0","","","4.6","","","1.9"],["Total revenues","1,435,118","","","2,041,795","","","1,252,658","","","(29.7)","","","63.0","","","100.7","","","100.5","","","101.2"],["Interest expense","9,480","","","10,734","","","14,445","","","(11.7)","","","(25.7)","","","0.7","","","0.5","","","1.2"],["Net revenues","1,425,638","","","2,031,061","","","1,238,213","","","(29.8)","","","64.0","","","100.0","","","100.0","","","100.0"],["Non-interest expenses:"],["Compensation and benefits","983,524","","","1,305,166","","","877,462","","","(24.6)","","","48.7","","","69.0","","","64.3","","","70.9"],["Outside services","53,189","","","45,942","","","38,377","","","15.8","","","19.7","","","3.7","","","2.3","","","3.1"],["Occupancy and equipment","64,252","","","56,946","","","54,007","","","12.8","","","5.4","","","4.5","","","2.8","","","4.4"],["Communications","50,565","","","44,008","","","44,358","","","14.9","","","(0.8)","","","3.5","","","2.2","","","3.6"],["Marketing and business development","42,849","","","20,902","","","13,472","","","105.0","","","55.2","","","3.0","","","1.0","","","1.1"],["Deal-related expenses","31,874","","","42,921","","","38,072","","","(25.7)","","","12.7","","","2.2","","","2.1","","","3.1"],["Trade execution and clearance","20,185","","","16,533","","","18,934","","","22.1","","","(12.7)","","","1.4","","","0.8","","","1.5"],["Restructuring and integration costs","11,440","","","4,724","","","10,755","","","142.2","","","(56.1)","","","0.8","","","0.2","","","0.9"],["Intangible asset amortization","15,375","","","30,080","","","44,728","","","(48.9)","","","(32.7)","","","1.1","","","1.5","","","3.6"],["Other operating expenses","18,016","","","22,327","","","29,500","","","(19.3)","","","(24.3)","","","1.3","","","1.1","","","2.4"],["Total non-interest expenses","1,291,269","","","1,589,549","","","1,169,665","","","(18.8)","","","35.9","","","90.6","","","78.3","","","94.5"],["Income before income tax expense","134,369","","","441,512","","","68,548","","","(69.6)","","","544.1","","","9.4","","","21.7","","","5.5"],["Income tax expense","33,189","","","111,144","","","19,192","","","(70.1)","","","479.1","","","2.3","","","5.5","","","1.5"],["Net income","101,180","","","330,368","","","49,356","","","(69.4)","","","569.4","","","7.1","","","16.3","","","4.0"],["Net income/(loss) applicable to noncontrolling interests","(9,494)","","","51,854","","","8,852","","","N/M","","485.8","","","(0.7)","","","2.6","","","0.7"],["Net income applicable to Piper Sandler Companies","$","110,674","","","$","278,514","","","$","40,504","","","(60.3)","%","","587.6","%","","7.8","%","","13.7","%","","3.3","%"]]
[[/GREPCENT_TABLE]]

N/M — Not meaningful

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For the year ended December 31, 2022, we recorded net income applicable to Piper Sandler Companies of $110.7 million. Net revenues for the year ended December 31, 2022 decreased 29.8 percent to $1.43 billion, compared with $2.03 billion in the year-ago period. In 2022, investment banking revenues decreased 35.0 percent to $1.01 billion, compared with $1.55 billion in 2021, primarily driven by lower advisory services and corporate financing revenues, as well as lower municipal financing revenues. For the year ended December 31, 2022, institutional brokerage revenues were $405.3 million, up 4.6 percent compared with $387.6 million in 2021, as higher equity brokerage revenues were partially offset by lower fixed income services revenues. In 2022, net interest income was $10.9 million, compared to net interest expense of $3.8 million in 2021, primarily resulting from increased interest income driven by higher rates on our long inventory and cash balances. Non-interest expenses were $1.29 billion for the year ended December 31, 2022, down 18.8 percent compared with $1.59 billion in the prior year, primarily due to decreased compensation expenses resulting from lower revenues.

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, reversal of expenses associated with the forfeiture of stock-based compensation and other employee-related costs. A significant 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. In conjunction with our acquisitions, we have granted restricted stock and restricted cash with service conditions, which are amortized to compensation expense over the service period. We have also entered into forgivable loans with service conditions, which are amortized to compensation expense over the loan term. Additionally, expense estimates related to revenue-based earnout arrangements with service conditions entered into as part of our acquisitions are amortized to compensation expense over the service period.

The following table summarizes our future acquisition-related compensation expense for restricted stock, restricted cash and forgivable loans with service conditions, as well as expense estimates related to revenue-based earnout arrangements:

[[GREPCENT_TABLE]]
[["(Amounts in thousands)"],["2023","$","51,828"],["2024","42,292"],["2025","23,535"],["2026","15,668"],["2027","9,411"],["Total","$","142,734"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2022, compensation and benefits expenses decreased 24.6 percent to $983.5 million from $1.31 billion in 2021, due to lower revenues. Compensation and benefits expenses as a percentage of net revenues was 69.0 percent in 2022, compared with 64.3 percent in 2021. Excluding the impact of noncontrolling interests, our compensation ratio increased to 68.9 percent in 2022, compared with 66.2 percent in 2021, due to lower net revenues, partially offset by a decrease in acquisition-related compensation expenses.

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 increased 15.8 percent to $53.2 million in 2022, compared with $45.9 million in 2021, primarily due to higher professional fees.

Occupancy and Equipment – For the year ended December 31, 2022, occupancy and equipment expenses increased 12.8 percent to $64.3 million, compared with $56.9 million in 2021, primarily due to incremental occupancy costs related to our acquisition of Cornerstone Macro, as well as office space expansion.

Communications – Communication expenses include costs for telecommunication and data communication, primarily consisting of expenses for obtaining third party market data information. For the year ended December 31, 2022, communication expenses increased 14.9 percent to $50.6 million, compared with $44.0 million in 2021, due to higher market data services expenses resulting in part from incremental costs related to our acquisition of Cornerstone Macro.

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Marketing and Business Development – Marketing and business development expenses include travel and entertainment costs, advertising and third party marketing fees. In 2022, marketing and business development expenses increased 105.0 percent to $42.8 million, compared with $20.9 million for the year ended December 31, 2021. The increase was due to higher travel expenses driven by the end of pandemic-related travel restrictions and overall inflationary impact on costs. As a result, our travel costs have reverted to more normalized levels in 2022.

Deal-Related Expenses – Deal-related expenses include costs we incurred over the course of a completed investment banking deal, which primarily consist of legal fees, offering expenses, and travel and entertainment costs. For the year ended December 31, 2022, deal-related expenses were $31.9 million, compared with $42.9 million for the year ended December 31, 2021. The amount of deal-related expenses is principally dependent on the level of deal activity and may vary from period to period as the recognition of deal-related costs typically coincides with the closing of a transaction.

Trade Execution and Clearance – For the year ended December 31, 2022, trade execution and clearance expenses increased 22.1 percent to $20.2 million, compared with $16.5 million for the year ended December 31, 2021. The increase in trade execution and clearance expenses is reflective of higher trading volumes compared with the prior year.

Restructuring and Integration Costs – For the year ended December 31, 2022, we incurred acquisition-related restructuring and integration costs of $11.4 million. The expenses consisted of $5.2 million of transaction costs primarily related to our 2022 acquisitions, $5.6 million for vacated leased office space associated with our acquisitions of The Valence Group ("Valence") and Cornerstone Macro and $0.6 million of severance benefits.

For the year ended December 31, 2021, we incurred acquisition-related restructuring and integration costs of $4.7 million. The expenses consisted of $1.0 million of transaction costs primarily related to our acquisitions of Cornerstone Macro and Stamford Partners, $3.4 million for vacated leased office space associated with our acquisitions of Valence and TRS Advisors LLC ("TRS") and $0.3 million of severance benefits.

Intangible Asset Amortization – Intangible asset amortization includes the amortization of definite-lived intangible assets consisting of customer relationships and internally developed software. For the year ended December 31, 2022, intangible asset amortization was $15.4 million, compared with $30.1 million in 2021. The decrease was due to lower intangible asset amortization expense associated with our 2020 acquisitions, partially offset by incremental intangible asset amortization expense associated with our 2022 acquisitions. In 2023, we anticipate incurring a full year of intangible asset amortization expense related to the acquisition of DBO Partners.

The following table summarizes the future aggregate amortization expense of our intangible assets with determinable lives:

[[GREPCENT_TABLE]]
[["(Amounts in thousands)"],["2023","$","19,440"],["2024","9,445"],["2025","7,887"],["2026","7,253"],["2027","3,480"],["Thereafter","2,732"],["Total","$","50,237"]]
[[/GREPCENT_TABLE]]

Other Operating Expenses – Other operating expenses primarily 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 $18.0 million in 2022, compared with $22.3 million in 2021. The decrease was primarily due to lower expense related to our charitable giving program driven by lower operating profits. This decrease was partially offset by $4.5 million in expense for the earnout with no service requirements related to Cornerstone Macro.

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Income Taxes – For the year ended December 31, 2022, our provision for income taxes was $33.2 million, which included a $5.6 million tax benefit related to stock-based compensation awards vesting at values greater than the grant price and a one-time tax benefit of $4.6 million related to the full reversal of our U.K. subsidiary's deferred tax valuation allowance, as a result of improved operating results in the U.K. Excluding the impact of these benefits and noncontrolling interests, our effective tax rate was 30.2 percent.

For the year ended December 31, 2021, our provision for income taxes was $111.1 million, which included a $2.7 million tax benefit related to stock-based compensation awards vesting at values greater than the grant price. Excluding the impact of this benefit and noncontrolling interests, our effective tax rate was 29.2 percent, which includes the impact of non-deductible covered employee compensation expense.

Financial Performance

Our activities as an investment bank and institutional securities firm constitute a single business segment.

Throughout this section, we have presented results on both a U.S. GAAP and non-GAAP basis. Management believes that presenting results and measures on an adjusted, non-GAAP basis in conjunction with the corresponding 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 results should be considered in addition to, not as a substitute for, the results prepared in accordance with U.S. GAAP.

The adjusted financial results exclude (1) revenues and expenses related to noncontrolling interests, (2) interest expense on long-term financing from net revenues, (3) amortization of intangible assets related to acquisitions, (4) compensation and non-compensation expenses from acquisition-related agreements and (5) acquisition-related restructuring and integration costs. For U.S. GAAP purposes, these items are included in each of their respective line items on the consolidated statements of operations.

Adjusted operating income and adjusted operating margin present the results of operations excluding the impact resulting from the consolidation of noncontrolling interests in alternative asset management funds. Consolidation of these funds results in the inclusion of the proportionate share of the income or loss attributable to the equity interests in consolidated funds that are not attributable, either directly or indirectly, to us (i.e., noncontrolling interests). This proportionate share is reflected in net income/(loss) applicable to noncontrolling interests in the accompanying consolidated statements of operations, and has no effect on our overall financial performance, as ultimately, this income or loss is not income or loss for us. Included in adjusted operating income and adjusted operating margin is the actual proportionate share of the income or loss attributable to us as an investor in such funds.

The adjusted, non-GAAP financial results also exclude amortization of intangible assets and compensation and non-compensation expenses from acquisition-related agreements. These amounts are excluded on a non-GAAP basis as they represent expenses specifically related to acquisitions and therefore are not part of our on-going operations. The acquisition-related restructuring and integration costs excluded from the adjusted financial results represent charges that resulted from severance benefits, contract termination costs, vacating redundant leased office space and professional fees related to the respective transactions. These restructuring and integration costs are excluded from our non-GAAP financial measures as they relate to acquisitions and excluding these amounts provides a better understanding of our core non-compensation expenses. Interest expense on long-term financing is an adjustment from net revenues as these arrangements were used to fund the acquisitions of Valence and SOP Holdings, LLC and its subsidiaries, including Sandler O'Neill & Partners, L.P. (collectively, "Sandler O'Neill"). Management believes that presenting adjusted financial results excluding the acquisition-related amounts provides clarity on the financial results generated by the core operating components of our business.

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The following table sets forth the adjusted, non-GAAP financial results and adjustments necessary to reconcile to our consolidated U.S. GAAP financial results for the periods presented:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["","","","Adjustments (1)","","","","","","Adjustments (1)"],["","Total","","Noncontrolling","","Other","","U.S.","","Total","","Noncontrolling","","Other","","U.S."],["(Amounts in thousands)","Adjusted","","Interests","","Adjustments","","GAAP","","Adjusted","","Interests","","Adjustments","","GAAP"],["Investment banking"],["Advisory services","$","776,428","","","$","\u2014","","","$","\u2014","","","$","776,428","","","$","1,026,138","","","$","\u2014","","","$","\u2014","","","$","1,026,138"],["Corporate financing","125,342","","","\u2014","","","\u2014","","","125,342","","","362,797","","","\u2014","","","\u2014","","","362,797"],["Municipal financing","107,739","","","\u2014","","","\u2014","","","107,739","","","164,284","","","\u2014","","","\u2014","","","164,284"],["Total investment banking","1,009,509","","","\u2014","","","\u2014","","","1,009,509","","","1,553,219","","","\u2014","","","\u2014","","","1,553,219"],["Institutional brokerage"],["Equity brokerage","210,314","","","\u2014","","","\u2014","","","210,314","","","154,067","","","\u2014","","","\u2014","","","154,067"],["Fixed income services","194,953","","","\u2014","","","\u2014","","","194,953","","","233,510","","","\u2014","","","\u2014","","","233,510"],["Total institutional brokerage","405,267","","","\u2014","","","\u2014","","","405,267","","","387,577","","","\u2014","","","\u2014","","","387,577"],["Interest income","20,365","","","\u2014","","","\u2014","","","20,365","","","6,967","","","\u2014","","","\u2014","","","6,967"],["Investment income/(loss)","1,552","","","(1,575)","","","\u2014","","","(23)","","","34,982","","","59,050","","","\u2014","","","94,032"],["Total revenues","1,436,693","","","(1,575)","","","\u2014","","","1,435,118","","","1,982,745","","","59,050","","","\u2014","","","2,041,795"],["Interest expense","2,980","","","\u2014","","","6,500","","","9,480","","","2,288","","","\u2014","","","8,446","","","10,734"],["Net revenues","1,433,713","","","(1,575)","","","(6,500)","","","1,425,638","","","1,980,457","","","59,050","","","(8,446)","","","2,031,061"],["Total non-interest expenses","1,164,560","","","7,919","","","118,790","","","1,291,269","","","1,430,505","","","7,196","","","151,848","","","1,589,549"],["Pre-tax income","$","269,153","","","$","(9,494)","","","$","(125,290)","","","$","134,369","","","$","549,952","","","$","51,854","","","$","(160,294)","","","$","441,512"],["Pre-tax margin","18.8","%","","","","","","9.4","%","","27.8","%","","","","","","21.7","%"]]
[[/GREPCENT_TABLE]]

(1)     The following is a summary of the adjustments needed to reconcile our consolidated U.S. GAAP financial results to the adjusted, non-GAAP financial results:

Noncontrolling interests – The impacts of consolidating noncontrolling interests in our alternative asset management funds are not included in our adjusted financial results.

Other adjustments – The following items are not included in our adjusted financial results:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(Amounts in thousands)","2022","","2021"],["Interest expense on long-term financing","$","6,500","","","$","8,446"],["Compensation from acquisition-related agreements","87,525","","","116,795"],["Acquisition-related restructuring and integration costs","11,440","","","4,724"],["Amortization of intangible assets related to acquisitions","15,375","","","30,080"],["Non-compensation expenses from acquisition-related agreements","4,450","","","249"],["","118,790","","","151,848"],["Total other adjustments","$","125,290","","","$","160,294"]]
[[/GREPCENT_TABLE]]

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Net revenues on a U.S. GAAP basis were $1.43 billion for the year ended December 31, 2022, compared with $2.03 billion in the prior-year period. For the year ended December 31, 2022, adjusted net revenues were $1.43 billion, compared with $1.98 billion for the year ended December 31, 2021. The variance explanations for net revenues and adjusted net revenues are consistent on both a U.S. GAAP and non-GAAP basis unless stated otherwise.

The following table provides supplemental business information:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["Advisory services"],["Completed M&A and restructuring transactions","217","","","279"],["Completed capital advisory transactions","84","","","146"],["Total completed advisory transactions","301","","","425"],["Corporate financings"],["Total equity transactions priced","55","","","214"],["Book run equity transactions priced","45","","","141"],["Total debt and preferred transactions priced","30","","","53"],["Book run debt and preferred transactions priced","19","","","26"],["Municipal negotiated issues"],["Aggregate par value of issues priced (in billions)","$","14.6","","","$","19.3"],["Total issues priced","571","","","977"],["Equity brokerage"],["Number of shares traded (in billions)","11.0","","","9.9"]]
[[/GREPCENT_TABLE]]

Investment banking revenues comprise all of the revenues generated through advisory services activities, which include M&A, equity and debt private placements, debt and restructuring advisory, and municipal financial advisory transactions. Collectively, debt advisory transactions and equity and debt private placements are referred to as capital advisory transactions. Investment banking revenues also include equity and debt corporate financing activities and municipal financings.

In 2022, investment banking revenues were $1.01 billion, down 35.0 percent compared to $1.55 billion in the prior-year period. For the year ended December 31, 2022, advisory services revenues were $776.4 million, down 24.3 percent compared with $1.03 billion in 2021, due to fewer completed transactions, offset in part by higher average M&A and restructuring fees. The market environment during most of the year was impacted by macroeconomic uncertainty, which prolonged transaction timelines and the conversion of our pipelines. For the year ended December 31, 2022, corporate financing revenues were $125.3 million, down 65.5 percent compared to $362.8 million in the prior-year period, as the market for equity capital raising remained largely shut resulting from high levels of market volatility, declining valuations and a cautious investor outlook stemming from economic concerns. Activity for us during the year was principally in the healthcare and financial services sectors. Municipal financing revenues for the year ended December 31, 2022 were $107.7 million, down 34.4 percent compared to $164.3 million in the year-ago period, due to a decline in issuance activity, particularly lower refinancing activity and high-yield new issuances. Market conditions became more challenging during the second half of 2022 resulting from increased interest rates and volatility, combined with weakened investor demand, which drove the decline in market issuances.

Institutional brokerage revenues comprise all of the revenues generated through trading activities, which consist of facilitating customer trades and executing competitive municipal underwritings, as well as fees received for our research services and corporate access offerings. Our results may vary from quarter to quarter as a result of changes in trading margins, trading gains and losses, net interest spreads, trading volumes, the timing of payments for research services and the timing of transactions based on market opportunities.

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For the year ended December 31, 2022, institutional brokerage revenues increased to $405.3 million, compared with $387.6 million in the prior-year period. Equity brokerage revenues increased 36.5 percent to $210.3 million in 2022, compared with $154.1 million in 2021, due to the addition of Cornerstone Macro to our platform as well as elevated volatility driving increased client activity. For the year ended December 31, 2022, fixed income services revenues were $195.0 million, down 16.5 percent compared with $233.5 million in the prior-year period, due to lower activity, particularly among our depository clients. Market conditions were more challenging during the year resulting from the sharp increase in rates combined with interest rate volatility.

Interest income represents amounts earned from holding long inventory positions. For the year ended December 31, 2022, interest income increased to $20.4 million, compared with $7.0 million in 2021, reflecting higher interest rates on our long inventory and cash balances.

Investment income/(loss) includes realized and unrealized gains and losses on investments, including amounts attributable to noncontrolling interests, in our merchant banking and healthcare funds, as well as management and performance fees generated from those funds. For the year ended December 31, 2022, we recorded an investment loss of $23 thousand, compared to investment income of $94.0 million in 2021. In 2022, unrealized losses were offset by realized gains on our investments and the noncontrolling interests in the alternative asset management funds that we manage. Excluding the impact of noncontrolling interests, adjusted investment income was $1.6 million in 2022, compared with $35.0 million in 2021.

Interest expense represents amounts associated with financing, economically hedging and holding short inventory positions, including interest paid on our long-term financing arrangements, as well as commitment fees on our line of credit and revolving credit facility. For the year ended December 31, 2022, interest expense decreased to $9.5 million, compared with $10.7 million in 2021. The decrease was primarily due to lower interest paid on long-term financings, partially offset by higher interest rates on short inventory balances. We repaid the $50 million of Class A unsecured senior notes upon maturity on October 15, 2021. Excluding the impact of interest expense on long-term financing, adjusted interest expense was $3.0 million and $2.3 million for the years ended December 31, 2022 and 2021, respectively.

Pre-tax margin for 2022 was 9.4 percent, compared with 21.7 percent for 2021. Adjusted pre-tax margin decreased to 18.8 percent in 2022, compared with 27.8 percent in 2021. In 2022, the decrease in pre-tax margin on both a U.S. GAAP and adjusted basis was driven by lower net revenues, a higher compensation ratio and increased non-compensation expenses driven by higher travel expense and additional non-compensation expenses associated with our 2022 acquisitions.

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The following table sets forth the adjusted, non-GAAP financial results and adjustments necessary to reconcile to our consolidated U.S. GAAP financial results for the periods presented:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","","","Adjustments (1)","","","","","","Adjustments (1)"],["","Total","","Noncontrolling","","Other","","U.S.","","Total","","Noncontrolling","","Other","","U.S."],["(Amounts in thousands)","Adjusted","","Interests","","Adjustments","","GAAP","","Adjusted","","Interests","","Adjustments","","GAAP"],["Investment banking"],["Advisory services","$","1,026,138","","","$","\u2014","","","$","\u2014","","","$","1,026,138","","","$","443,327","","","$","\u2014","","","$","\u2014","","","$","443,327"],["Corporate financing","362,797","","","\u2014","","","\u2014","","","362,797","","","295,333","","","\u2014","","","\u2014","","","295,333"],["Municipal financing","164,284","","","\u2014","","","\u2014","","","164,284","","","119,816","","","\u2014","","","\u2014","","","119,816"],["Total investment banking","1,553,219","","","\u2014","","","\u2014","","","1,553,219","","","858,476","","","\u2014","","","\u2014","","","858,476"],["Institutional brokerage"],["Equity brokerage","154,067","","","\u2014","","","\u2014","","","154,067","","","161,445","","","\u2014","","","\u2014","","","161,445"],["Fixed income services","233,510","","","\u2014","","","\u2014","","","233,510","","","196,308","","","\u2014","","","\u2014","","","196,308"],["Total institutional brokerage","387,577","","","\u2014","","","\u2014","","","387,577","","","357,753","","","\u2014","","","\u2014","","","357,753"],["Interest income","6,967","","","\u2014","","","\u2014","","","6,967","","","13,164","","","\u2014","","","\u2014","","","13,164"],["Investment income","34,982","","","59,050","","","\u2014","","","94,032","","","10,384","","","12,881","","","\u2014","","","23,265"],["Total revenues","1,982,745","","","59,050","","","\u2014","","","2,041,795","","","1,239,777","","","12,881","","","\u2014","","","1,252,658"],["Interest expense","2,288","","","\u2014","","","8,446","","","10,734","","","4,817","","","\u2014","","","9,628","","","14,445"],["Net revenues","1,980,457","","","59,050","","","(8,446)","","","2,031,061","","","1,234,960","","","12,881","","","(9,628)","","","1,238,213"],["Total non-interest expenses","1,430,505","","","7,196","","","151,848","","","1,589,549","","","984,672","","","4,029","","","180,964","","","1,169,665"],["Pre-tax income","$","549,952","","","$","51,854","","","$","(160,294)","","","$","441,512","","","$","250,288","","","$","8,852","","","$","(190,592)","","","$","68,548"],["Pre-tax margin","27.8","%","","","","","","21.7","%","","20.3","%","","","","","","5.5","%"]]
[[/GREPCENT_TABLE]]

(1)     The following is a summary of the adjustments needed to reconcile our consolidated U.S. GAAP financial results to the adjusted, non-GAAP financial results:

Noncontrolling interests – The impacts of consolidating noncontrolling interests in our alternative asset management funds are not included in our adjusted financial results.

    Other adjustments – The following items are not included in our adjusted financial results:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(Amounts in thousands)","2021","","2020"],["Interest expense on long-term financing","$","8,446","","","$","9,628"],["Compensation from acquisition-related agreements","116,795","","","113,396"],["Acquisition-related restructuring and integration costs","4,724","","","10,755"],["Amortization of intangible assets related to acquisitions","30,080","","","44,728"],["Non-compensation expenses from acquisition-related agreements","249","","","12,085"],["","151,848","","","180,964"],["Total other adjustments","$","160,294","","","$","190,592"]]
[[/GREPCENT_TABLE]]

Discussion of the year-over-year comparisons between 2021 and 2020 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022.

Recent Accounting Pronouncements

Recent accounting pronouncements are set forth in Note 3 to our consolidated financial statements included in Part II, Item 8 of this Form 10-K, and are incorporated herein by reference.

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Critical Accounting Policies and Estimates

Our accounting and reporting policies comply with U.S. GAAP and conform to practices within the securities industry. The preparation of financial statements in compliance with U.S. GAAP and industry practices requires us to make estimates and assumptions that could materially affect amounts reported in our consolidated financial statements. Critical accounting policies are those policies that we believe to be the most important to the portrayal of our financial condition and results of operations and that require us to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by us to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical, including whether the estimates are significant to the consolidated financial statements taken as a whole, the nature of the estimates, the ability to readily validate the estimates with other information (e.g., third party or independent sources), the sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be used under U.S. GAAP.

For a full description of our significant accounting policies, see Note 2 to our consolidated financial statements included in Part II, Item 8 of this Form 10-K. We believe that of our significant accounting policies, the following are our critical accounting policies and estimates.

Valuation of Financial Instruments

Financial instruments and other inventory positions owned, financial instruments and other inventory positions sold, but not yet purchased, and investments on our consolidated statements of financial condition consist of financial instruments recorded at fair value, as required by accounting guidance. 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 an orderly transaction between market participants at the measurement date (the exit price). Based on the nature of our business and our role as a "dealer" in the securities industry or as a manager of alternative asset management funds, the fair values of our financial instruments are determined internally. See Note 2 and Note 6 to our consolidated financial statements for additional information on the valuation of our financial instruments and our fair value processes, including specific control processes to determine the reasonableness of the fair value of our financial instruments.

Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 820, "Fair Value Measurement," establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to inputs with little or no pricing observability (Level III measurements). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Substantially all of our financial instruments categorized as Level III are investments related to our alternative asset management funds. These investments in private companies are valued based on an assessment of each underlying security, considering rounds of financing, the financial condition and operating results of the private company, third party transactions and market-based information, including comparable company transactions, trading multiples (e.g., multiples of revenue and EBITDA), discounted cash flow analyses and changes in market outlook, among other factors. See Note 6 to our consolidated financial statements for additional discussion of our assets and liabilities in the fair value hierarchy.

Goodwill and Intangible Assets

We record all assets acquired and liabilities assumed in acquisitions, including goodwill and other intangible assets, at fair value. Determining the fair value of assets and liabilities acquired requires certain management estimates. At December 31, 2022, we had goodwill of $301.2 million and intangible assets of $135.6 million.

We are required to perform impairment tests of goodwill and indefinite-life intangible assets annually and on an interim basis when circumstances exist that could indicate possible impairment. We have elected to test goodwill for impairment in the fourth quarter of each calendar year. We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after making an assessment, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then further analysis is unnecessary. However, if we conclude otherwise, then we are required to perform a quantitative goodwill test, which requires management to make judgments in determining what assumptions to use in the calculation. The quantitative goodwill test compares the fair value of the reporting unit to its carrying value, including allocated goodwill. An impairment is recognized for the excess amount of a reporting unit's carrying value over its fair value. See Note 2 and Note 11 to our consolidated financial statements for additional information on our impairment testing.

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The initial recognition of goodwill and other intangible assets and the subsequent quantitative impairment analysis involves significant judgment in determining the estimates of future cash flows, discount rates, economic forecast and other assumptions which are then used in acceptable valuation techniques, such as the market approach (earnings and/or transaction multiples) and/or the income approach (discounted cash flow method). Changes in these estimates and assumptions could have a significant impact on the fair value and any resulting impairment of goodwill. Our estimated cash flows, by their nature, are difficult to determine over an extended time period. Events and factors that may significantly affect the estimates include, among others, competitive forces and changes in revenue growth trends, cost structures, technology and market conditions. To assess the reasonableness of cash flow estimates and validate assumptions used in our estimates, we review historical performance of the underlying assets or similar assets. In assessing the fair value of our reporting unit, the volatile nature of the securities markets and our industry requires us to consider the business and market cycle and assess the stage of the cycle in estimating the timing and extent of future cash flows. In addition to discounted cash flows, we consider earnings multiples of comparable public companies and multiples of recent M&A transactions of similar businesses in our subsequent impairment analysis.

We elected to perform a qualitative assessment to test goodwill for impairment. The following relevant events and circumstances were evaluated in concluding that it was not more likely than not that goodwill was impaired: macroeconomic conditions, industry and market considerations and the overall financial performance of our reporting unit. Our annual goodwill impairment testing, performed as of October 31, 2022, resulted in no impairment.

We also evaluated our intangible assets (indefinite and definite-lived) and concluded there was no impairment in 2022.

Stock-Based Compensation Plans

As part of our compensation to employees and directors, we use stock-based compensation, consisting of restricted stock, restricted stock units and stock options. We account for equity awards in accordance with FASB Accounting Standards Codification Topic 718, "Compensation–Stock Compensation," ("ASC 718"), which requires all share-based payments to employees, including grants of employee stock options, to be recognized on the consolidated statements of operations at grant date fair value. Compensation expense related to share-based awards which require future service are amortized over the service period of the award. Forfeitures of awards with service conditions are accounted for when they occur. Share-based awards that do not require future service are recognized in the year in which the awards are deemed to be earned.

See Note 19 to our consolidated financial statements for additional information about our stock-based compensation plans.

Income Taxes

We file a consolidated U.S. federal income tax return, which includes all of our qualifying subsidiaries. We also are subject to income tax in various states and municipalities and those foreign jurisdictions in which we operate. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and for tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income taxes are provided for temporary differences in reporting certain items, principally restricted compensation (i.e., restricted stock, restricted stock units, restricted mutual fund shares, and deferred compensation). The realization of deferred tax assets is assessed and a valuation allowance is recognized to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized. We believe that our future taxable profits will be sufficient to recognize our U.S. deferred tax assets, with the exception of $0.2 million of state net operating loss carryforwards. However, if our projections of future taxable profits do not materialize, we may conclude that a valuation allowance is necessary, which would impact our results of operations in that period. In the fourth quarter of 2022, we reversed the full amount of our U.K. subsidiary's deferred tax asset valuation allowance based upon improved operating results in the U.K. This resulted in a $4.6 million tax benefit to our results of operations.

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We record deferred tax benefits for future tax deductions expected upon the vesting of stock-based compensation. We recognize the income tax effects of stock-based compensation awards in the income statement when the awards vest. If deductions reported on our tax return for stock-based compensation (i.e., the value of the stock-based compensation at the time of vesting) exceed the cumulative cost of those instruments recognized for financial reporting (i.e., the grant date fair value of the compensation computed in accordance with ASC 718), we record the excess tax benefit as income tax benefit. Conversely, if deductions reported on our tax return for stock-based compensation are less than the cumulative cost of those instruments recognized for financial reporting, the deficiency is recorded as income tax expense. For the year ended December 31, 2022, we recorded a $5.6 million tax benefit for stock awards vesting during the period. As of February 17, 2023, approximately 1,119,000 shares have vested at share prices greater than the grant date fair values, resulting in $5.7 million of excess tax benefits recorded as income tax benefit in the first quarter of 2023. An additional 454,000 shares are expected to vest prior to March 31, 2023, generating an estimated $7.8 million in additional excess tax benefits based upon the February 17, 2023 share price.

We establish reserves for uncertain income tax positions in accordance with FASB Accounting Standards Codification Topic 740, "Income Taxes," when it is not more likely than not that a certain position or component of a position will be ultimately upheld by the relevant taxing authorities. Significant judgment is required in evaluating uncertain tax positions. Our tax provision and related accruals include the impact of estimates for uncertain tax positions and changes to the reserves that are considered appropriate. To the extent the probable tax outcome of these matters changes, such change in estimate will impact the income tax provision in the period of change and, in turn, our results of operations. In 2022, we recorded a liability of $2.2 million for uncertain state income tax positions.

Liquidity, Funding and Capital Resources

We regularly monitor our liquidity position, which is of critical importance to our business. Accordingly, we maintain a liquidity strategy designed to enable our business to continue to operate even under adverse circumstances, although there can be no assurance that our strategy will be successful under all circumstances. Insufficient liquidity resulting from adverse circumstances contributes to, and may be the cause of, financial institution failure.

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

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

A significant component of our employees' 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.

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Our dividend policy is intended to return between 30 percent and 50 percent of our fiscal year adjusted net income to shareholders. Our board of directors determines the declaration and payment of dividends and is free to change our dividend policy at any time. Our board of directors declared the following dividends on shares of our common stock:

[[GREPCENT_TABLE]]
[["Declaration Date","","Dividend Per Share","","Record Date","","Payment Date"],["Related to 2019:"],["January 31, 2020","(1)","$","0.750","","","March 2, 2020","","March 13, 2020"],["Related to 2020:"],["January 31, 2020","","$","0.375","","","March 2, 2020","","March 13, 2020"],["May 1, 2020","","$","0.200","","","May 29, 2020","","June 12, 2020"],["July 31, 2020","","$","0.300","","","August 28, 2020","","September 11, 2020"],["October 30, 2020","","$","0.375","","","November 24, 2020","","December 11, 2020"],["February 4, 2021","(1)","$","1.850","","","March 3, 2021","","March 12, 2021"],["Related to 2021:"],["February 4, 2021","","$","0.400","","","March 3, 2021","","March 12, 2021"],["April 30, 2021","","$","0.450","","","May 28, 2021","","June 11, 2021"],["July 30, 2021","","$","0.550","","","August 27, 2021","","September 10, 2021"],["October 29, 2021","(1)","$","3.000","","","November 23, 2021","","December 10, 2021"],["October 29, 2021","","$","0.550","","","November 23, 2021","","December 10, 2021"],["February 10, 2022","(1)","$","4.500","","","March 2, 2022","","March 11, 2022"],["Related to 2022:"],["February 10, 2022","","$","0.600","","","March 2, 2022","","March 11, 2022"],["April 29, 2022","","$","0.600","","","May 27, 2022","","June 10, 2022"],["July 29, 2022","","$","0.600","","","August 26, 2022","","September 9, 2022"],["October 28, 2022","","$","0.600","","","November 23, 2022","","December 9, 2022"],["February 3, 2023","(1)","$","1.250","","","March 3, 2023","","March 17, 2023"],["Related to 2023:"],["February 3, 2023","","$","0.600","","","March 3, 2023","","March 17, 2023"]]
[[/GREPCENT_TABLE]]

(1)Represents a special cash dividend.

Our board of directors has declared a special cash dividend on our common stock of $1.25 per share related to 2022 adjusted net income. This special dividend will be paid on March 17, 2023, to shareholders of record as of the close of business on March 3, 2023. Including this special cash dividend, we will have returned $3.65 per share, or approximately 32 percent of our fiscal year 2022 adjusted net income to shareholders. The return to our shareholders related to fiscal year 2022 was lower compared to the prior year due to the amount of capital deployed for our 2022 acquisitions of DBO Partners, Stamford Partners and Cornerstone Macro, and repurchases of our common stock during the year.

As part of our capital management strategy, we repurchase our common stock over time in order to offset the dilutive effect of our employee stock-based compensation awards and our grants of acquisition-related restricted stock, as well as to return capital to shareholders.

Effective May 6, 2022, our board of directors authorized the repurchase of up to $150.0 million in common shares through December 31, 2024. At December 31, 2022, we had $138.2 million remaining under this authorization. Effective January 1, 2022, our board of directors authorized the repurchase of up to $150.0 million in common shares through December 31, 2023, and we repurchased the full amount of this authorization during 2022. In 2022, we repurchased 1,245,221 shares of our common stock at an average price of $129.95 per share for an aggregate purchase price of $161.8 million related to these authorizations.

We also purchase shares of common stock from restricted stock award recipients upon the award vesting or as recipients sell shares to meet their employment tax obligations. During 2022, we purchased 172,156 shares of our common stock at an average price of $148.25 per share for an aggregate purchase price of $25.5 million for these purposes.

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Cash Flows

Cash and cash equivalents at December 31, 2022 were $365.6 million, a decrease of $605.3 million from December 31, 2021. Operating activities used $224.9 million of cash, driven by a decrease in operating liabilities. The decrease in operating liabilities was primarily due to a decrease in accrued compensation of $296.4 million, the result of lower compensation costs in 2022 from decreased revenues and operating profits. In 2022, investing activities used $127.1 million, of which $96.5 million was used for the acquisitions of DBO Partners, Stamford Partners and Cornerstone Macro. We also used $30.6 million for the purchase of fixed assets. Cash of $250.1 million was used in financing activities as we paid $107.5 million in dividends and repurchased $187.3 million of common stock during 2022.

Cash and cash equivalents at December 31, 2021 were $971.0 million, an increase of $463.0 million from December 31, 2020. Operating activities provided $707.1 million of cash, driven by cash generated from earnings and an increase in operating liabilities. The increase in operating liabilities was primarily due to an increase in accrued compensation of $330.9 million, the result of higher compensation costs in 2021 from increased revenues and operating profits. The increase in operating assets was primarily due to an increase in investments related to our alternative asset management funds. In 2021, investing activities used $20.6 million for the purchase of fixed assets. Cash of $223.1 million was used in financing activities as we repaid $70 million of long-term financing arrangements. In the first quarter of 2021, we repaid the unsecured promissory notes related to the acquisition of Valence totaling $20 million. We also repaid the Class A unsecured senior notes of $50 million upon maturity on October 15, 2021. In addition, we paid $99.4 million in dividends and repurchased $69.9 million of common stock during 2021.

Leverage

The following table presents total assets, adjusted assets, total shareholders' equity and tangible common shareholders' equity with the resulting leverage ratios:

[[GREPCENT_TABLE]]
[["","December 31,","","December 31,"],["(Dollars in thousands)","2022","","2021"],["Total assets","$","2,181,557","","","$","2,565,307"],["Deduct: Goodwill and intangible assets","(436,788)","","","(347,286)"],["Deduct: Right-of-use lease asset","(87,730)","","","(71,341)"],["Deduct: Assets from noncontrolling interests","(201,541)","","","(168,675)"],["Adjusted assets","$","1,455,498","","","$","1,978,005"],["Total shareholders' equity","$","1,254,028","","","$","1,226,855"],["Deduct: Goodwill and intangible assets","(436,788)","","","(347,286)"],["Deduct: Noncontrolling interests","(199,955)","","","(164,645)"],["Tangible common shareholders' equity","$","617,285","","","$","714,924"],["Leverage ratio (1)","1.7","","","2.1"],["Adjusted leverage ratio (2)","2.4","","","2.8"]]
[[/GREPCENT_TABLE]]

(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 that can be deployed in a liquid manner. The right-of-use lease asset is also subtracted from total assets in determining adjusted assets as it is not an operating asset that can be deployed in a liquid manner. Amounts attributed to noncontrolling interests are subtracted from total assets and total shareholders' equity in determining adjusted assets and tangible common shareholders' equity, respectively, as they represent assets and equity interests in consolidated entities that are not attributable, either directly or indirectly, to Piper Sandler 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, 2021, due to a decline in cash and cash equivalents driven by the payment of annual incentive compensation in the first quarter of 2022 and our 2022 acquisitions.

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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.

Our day-to-day funding and liquidity is obtained primarily through the use of cash from our operating activities, as well as through the use of a clearing arrangement with Pershing, a clearing arrangement with bank financing, and a bank line of credit, which are 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 or cash from our operating activities. Our committed line has been established to mitigate changes in the liquidity of our inventory based on changing market conditions, and is available to us regardless of changes in market liquidity conditions through the end of its term, although there may be limitations on the type of securities available to pledge. Our 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.

Pershing Clearing Arrangement – We have established an arrangement to obtain financing from Pershing related to the majority of our trading activities. Under our fully disclosed clearing agreement, all of our securities inventories with the exception of convertible securities, and all of our customer activities are held by or cleared through Pershing. Financing under this arrangement is secured primarily by securities, and collateral limitations could reduce the amount of funding available under this arrangement. Our clearing arrangement activities are recorded net from trading activity and reported within receivables from or payables to brokers, dealers and clearing organizations. The funding is at the discretion of Pershing (i.e., uncommitted) and could be denied without a notice period. Our fully disclosed clearing agreement includes a covenant requiring Piper Sandler & Co., our U.S. broker dealer subsidiary, to maintain excess net capital of $120 million. At December 31, 2022, we had less than $0.1 million of financing outstanding under this arrangement.

Clearing Arrangement with Bank Financing – In the second quarter of 2021, we established a financing arrangement with a U.S. branch of Canadian Imperial Bank of Commerce ("CIBC") related to our convertible securities inventories. Under this arrangement, our convertible securities inventories are cleared through a broker dealer affiliate of CIBC, and held and financed by CIBC. Our convertible securities inventories are generally economically hedged by the underlying common stock or the stock options of the underlying common stock. Financing under this arrangement is secured primarily by convertible securities and collateral limitations could reduce the amount of funding available. The funding is at the discretion of CIBC (i.e., uncommitted) and could be denied subject to a notice period. This arrangement is reported within receivables from or payables to brokers, dealers and clearing organizations, net of trading activity. At December 31, 2022, we had $28.2 million of financing outstanding under this arrangement.

Prime Broker Arrangement – We previously had an overnight financing arrangement with a broker dealer related to our convertible securities inventories. In the second quarter of 2021, we replaced this arrangement with the clearing arrangement with bank financing.

Committed Line – We elected to decrease our committed line from $100 million to $80 million in the fourth quarter of 2022. Advances under this facility are secured by certain marketable securities. The facility includes a covenant that requires Piper Sandler & Co. to maintain a minimum regulatory net capital of $120 million, and the unpaid principal amount of all advances under the facility will be due on December 8, 2023. This credit facility has been in place since 2008 and was renewed for another one-year term in the fourth quarter of 2022. At December 31, 2022, we had no advances against this line of credit.

Revolving Credit Facility – Our parent company, Piper Sandler Companies, elected to increase its unsecured revolving credit facility with U.S. Bank N.A from $65 million to $75 million in the fourth quarter of 2022. The credit agreement will terminate on December 19, 2025, unless otherwise terminated, and is subject to a one-year extension exercisable at our option. This credit facility has been in place since 2019 and was renewed in the fourth quarter of 2022. At December 31, 2022, there were no advances against this credit facility.

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This credit facility includes customary events of default and covenants that, among other things, require Piper Sandler & Co. to maintain a minimum regulatory net capital of $120 million, limit our leverage ratio, require maintenance of a minimum ratio of operating cash flow to fixed charges, and impose certain limitations on our ability to make acquisitions and make payments on our capital stock. At December 31, 2022, we were in compliance with all covenants.

The following tables present the average balances outstanding for our various funding sources by quarter for 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Average Balance for the Three Months Ended"],["(Amounts in millions)","Dec. 31, 2022","","Sept. 30, 2022","","June 30, 2022","","Mar. 31, 2022"],["Funding source:"],["Pershing clearing arrangement","$","8.5","","","$","38.8","","","$","19.7","","","$","3.8"],["Clearing arrangement with bank financing","62.3","","","69.0","","","83.3","","","110.3"],["Prime broker arrangement","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total","$","70.8","","","$","107.8","","","$","103.0","","","$","114.1"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","","Average Balance for the Three Months Ended"],["(Amounts in millions)","","","","Dec. 31, 2021","","Sept. 30, 2021","","June 30, 2021","","Mar. 31, 2021"],["Funding source:"],["Pershing clearing arrangement","","","","$","4.1","","","$","12.1","","","$","5.2","","","$","6.9"],["Clearing arrangement with bank financing","","","","92.7","","","84.2","","","49.9","","","\u2014"],["Prime broker arrangement","","","","\u2014","","","\u2014","","","8.0","","","57.2"],["Total","","","","$","96.8","","","$","96.3","","","$","63.1","","","$","64.1"]]
[[/GREPCENT_TABLE]]

The average funding in the fourth quarter of 2022 decreased to $70.8 million, compared with $96.8 million during the fourth quarter of 2021 and $107.8 million during the third quarter of 2022, primarily due to lower inventory balances.

The following table presents the maximum daily funding amount by quarter for 2022 and 2021:

[[GREPCENT_TABLE]]
[["(Amounts in millions)","","2022","","2021"],["First Quarter","","$","366.3","","","$","141.5"],["Second Quarter","","$","409.5","","","$","306.2"],["Third Quarter","","$","996.5","","","$","228.1"],["Fourth Quarter","","$","246.2","","","$","170.3"]]
[[/GREPCENT_TABLE]]

The higher maximum daily funding amount for the third quarter of 2022 was the result of accommodating a shortened settlement timeframe for one of our equity clients.

Long-Term Financing

Our long-term financing consists of $125 million of Class B unsecured fixed rate senior notes ("Class B Notes"). The initial holders of the Class B Notes were certain entities advised by Pacific Investment Management Company ("PIMCO"). The Class B Notes bear interest at an annual fixed rate of 5.20 percent and mature on October 15, 2023. Interest is payable semi-annually. The unpaid principal amount is due in full on the maturity date and may not be prepaid.

The Class B Notes include customary events of default and covenants that, among other things, require Piper Sandler & Co. to maintain a minimum regulatory net capital, limit our leverage ratio and require maintenance of a minimum ratio of operating cash flow to fixed charges. At December 31, 2022, we were in compliance with all covenants.

Contractual Obligations

In December 2022, we entered into a lease agreement for approximately 113,000 square feet of office space related to our future corporate headquarters location in Minneapolis, Minnesota. Our contractual rental obligations over the 15-year lease term are $53.1 million. For further discussion of our contractual rental obligations, see Note 15 to our consolidated financial statements included in Part II, Item 8 of this Form 10-K.

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Capital Requirements

As a registered broker dealer and member firm of FINRA, Piper Sandler & Co. is subject to the uniform net capital rule of the SEC and the net capital rule of FINRA. We have elected to use the alternative method permitted by the uniform net capital rule which requires that we maintain minimum net capital of $1.0 million. 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 December 31, 2022, our net capital under the SEC's uniform net capital rule was $198.5 million, and exceeded the minimum net capital required under the SEC rule by $197.5 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, revolving credit facility and Class B Notes include covenants requiring Piper Sandler & Co. to maintain a minimum regulatory net capital of $120 million. Our fully disclosed clearing agreement with Pershing includes a covenant requiring Piper Sandler & Co. to maintain excess net capital of $120 million.

At December 31, 2022, Piper Sandler Ltd., our broker dealer subsidiary registered in the U.K., was subject to, and was in compliance with, the capital requirements of the Prudential Regulation Authority and the Financial Conduct Authority pursuant to the Financial Services Act of 2012.

Piper Sandler 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 December 31, 2022, Piper Sandler Hong Kong Limited was in compliance with the liquid capital requirements of the Hong Kong Securities and Futures Commission.

Off-Balance Sheet Arrangements

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

[[GREPCENT_TABLE]]
[["","Expiration Per Period at December 31,","","Total Contractual Amount"],["","","","","","","","2026","","2028","","","","December 31,","","December 31,"],["(Amounts in thousands)","2023","","2024","","2025","","- 2027","","- 2029","","Later","","2022","","2021"],["Customer matched-book derivative contracts (1) (2)","$","1,080","","","$","12,180","","","$","\u2014","","","$","15,337","","","$","117,402","","","$","1,208,882","","","$","1,354,881","","","$","1,630,056"],["Trading securities derivative contracts (2)","129,750","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","5,000","","","134,750","","","65,925"],["Investment commitments (3)","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","96,280","","","80,562"]]
[[/GREPCENT_TABLE]]

(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 $154.1 million at December 31, 2022) 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 December 31, 2022, we had $10.8 million of credit exposure with these counterparties, including $6.2 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 December 31, 2022 and 2021, the net fair value of these derivative contracts approximated $7.8 million and $19.8 million, respectively.

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

Derivatives

Derivatives' 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 discussion of our activities related to derivative products, see Note 5 to our consolidated financial statements included in Part II, Item 8 of this Form 10-K.

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Investment Commitments

We have investments, including those made as part of our alternative asset management activities, in limited partnerships or limited liability companies that make direct or indirect equity or debt investments in companies. We commit capital and/or act as the managing partner of these entities. We have committed capital of $96.3 million to certain entities and these commitments generally have no specified call dates. For additional information on our activities related to these types of entities, see Note 7 to our consolidated financial statements included in Part II, Item 8 of this Form 10-K.

Replacement of Interbank Offered Rates ("IBORs"), including LIBOR

Central banks and regulators in a number of major jurisdictions (e.g., U.S., U.K., European Union, Switzerland and Japan) have implemented suitable replacements for IBORs. On March 5, 2021, the U.K. Financial Conduct Authority, which regulates LIBOR, formally announced the dates after which LIBOR will cease publication. The publication of certain USD LIBOR tenors and all non-USD LIBOR tenors ceased after December 31, 2021, which did not impact our operations. The remaining USD LIBOR tenors will continue publication until June 30, 2023.

The replacement of the remaining USD LIBOR tenors does not impact our financing arrangements, as each arrangement has either already transitioned to a replacement rate or includes terms identifying a replacement rate that will become effective once the remaining USD LIBOR tenors cease publication.

Our limited number of contractual agreements, which use the remaining USD LIBOR tenors, are primarily within our customer matched-book derivatives portfolio. Substantially all of these instruments mature after June 30, 2023 and use interest rates based on LIBOR. The International Swaps and Derivatives Association ("ISDA") created the IBOR Fallback Protocol to facilitate amending references to benchmark interest rates in derivative contracts governed by Master ISDA Agreements. If a benchmark interest rate is no longer published, it will "fall back" to a new benchmark interest rate in those contracts where both counterparties have agreed to adhere to the protocol. We are working with our clients to ensure adherence to the protocol. As a result, we do not expect the transition from the remaining USD LIBOR tenors to a replacement rate to have a significant impact on our operations.

Risk Management

Risk is an inherent part of our business. The principal risks we face in operating our business include: strategic risk, market risk, liquidity risk, credit risk, operational risk, human capital risk, and legal and regulatory risks. The extent to which we properly identify and effectively manage each of these risks is critical to our financial condition and profitability. We have a formal risk management process to identify, assess and monitor each risk and mitigating controls in accordance with defined policies and procedures. The risk management functions are independent of our business lines. Our management takes an active role in the risk management process, and the results are reported to senior management and the 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 risks, operational risk (including cybersecurity), and human capital risk relating to misconduct, fraud, and legal and compliance matters. Our compensation committee is responsible for overseeing management'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 and Chief Financial Officer 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.

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

With respect to market risk and credit risk, the cornerstone of our risk management process is daily communication among traders, trading department management and senior management concerning our inventory positions 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.

Market Risk

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

Our different types of market risk include:

Interest Rate Risk — Interest rate risk represents the potential volatility from changes in market interest rates. We are exposed to interest rate risk arising from changes in the level and volatility of interest rates, changes in the slope of the yield curve, changes in credit spreads, and the rate of prepayments on our interest-earning assets (e.g., inventories) and our funding sources (e.g., short-term financing) which finance these assets. Interest rate risk is managed by selling short U.S. government securities, agency securities, corporate debt securities and derivative contracts. See Note 5 to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information on our derivative contracts. Our interest rate hedging strategies may not work in all market environments and as a result may not be effective in mitigating interest rate risk. Also, we establish limits on our long fixed income securities inventory, monitor these limits on a daily basis and manage within those limits. Our limits include but are not limited to the following: position and concentration size, dollar duration (i.e., DV01), credit quality and aging.

We estimate that a parallel 50 basis point adverse change in the market would result in a decrease of approximately $0.1 million in the carrying value of our fixed income securities inventory as of December 31, 2022, including the effect of the hedging transactions.

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We also measure and monitor the aging and turnover of our long fixed income securities inventory. Turnover is evaluated based on a five-day average by category of security. The vast majority of our fixed income securities inventory generally turns over within three weeks.

In addition to the measures discussed above, we monitor and manage market risk exposure through evaluation of spread DV01 and the MMD basis risk for municipal securities to movements in U.S. treasury securities. All metrics are aggregated by asset concentration and are used for monitoring limits and exception approvals. In times of market volatility, we may also perform ad hoc stress tests and scenario analysis as market conditions dictate.

Equity Price Risk — Equity price risk represents the potential loss in value due to adverse changes in the level or volatility of equity prices. We are exposed to equity price risk through our trading activities primarily in the U.S. market. We attempt to reduce the risk of loss inherent in our market-making and in our inventory of equity securities by establishing limits on our long inventory, monitoring these limits on a daily basis, and by managing net position levels within those limits.

Foreign Exchange Risk — Foreign exchange risk represents the potential volatility to earnings or capital arising from movement in foreign exchange rates. A modest portion of our business is conducted in currencies other than the U.S. dollar, and changes in foreign exchange rates relative to the U.S. dollar can therefore affect the value of non-U.S. dollar net assets, revenues and expenses.

Liquidity Risk

Liquidity risk is the risk that we are unable to timely access necessary funding sources in order to operate our business, as well as the risk that we are unable to timely divest securities that we hold in connection with our market-making and sales and trading 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.

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

See the section entitled "Liquidity, Funding and Capital Resources" for information regarding our liquidity and how we manage liquidity risk.

Credit Risk

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

A key tenet of our risk management procedures related to credit risk is the daily monitoring of the credit quality of our long fixed income securities inventory. These rating trends and the credit quality mix are regularly reviewed with the executive financial risk committee. The following table summarizes the credit rating for our long corporate fixed income, municipal (taxable and tax-exempt), and U.S. government and agency securities as a percentage of the total of these asset classes as of December 31, 2022:

[[GREPCENT_TABLE]]
[["","AAA","","AA","","A","","BBB","","BB","","Not Rated"],["Corporate fixed income securities","\u2014","%","","1.1","%","","\u2014","%","","0.1","%","","\u2014","%","","\u2014","%"],["Municipal securities - taxable and tax-exempt","16.5","%","","56.9","%","","10.8","%","","\u2014","%","","\u2014","%","","6.8","%"],["U.S. government and agency securities","\u2014","%","","7.8","%","","\u2014","%","","\u2014","%","","\u2014","%","","\u2014","%"],["","16.5","%","","65.8","%","","10.8","%","","0.1","%","","\u2014","%","","6.8","%"]]
[[/GREPCENT_TABLE]]

Convertible and preferred securities are excluded from the table above as they are typically unrated.

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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 creditworthiness. We are exposed to credit spread risk with the debt instruments held in our trading inventory. We enter into transactions to hedge our exposure to credit spread risk with derivatives and certain other financial instruments. These hedging strategies may not work in all market environments and as a result may not be effective in mitigating credit spread risk.

Deterioration/Default Risk — Deterioration/default risk represents the risk due to an issuer, counterparty or borrower failing to fulfill its obligations. We are exposed to deterioration/default risk in our role as a trading counterparty to dealers and customers, as a holder of securities, and as a member of exchanges. The risk of default depends on the creditworthiness of the counterparty and/or issuer of the security. We mitigate this risk by establishing and monitoring individual and aggregate position limits for each counterparty relative to potential levels of activity, holding and marking to market collateral on certain transactions. Our risk management functions also evaluate the potential risk associated with institutional counterparties with whom we hold derivatives, TBAs and other documented institutional counterparty agreements that may give rise to credit exposure.

Collections Risk — Collections risk arises from ineffective management and monitoring of collecting outstanding debts and obligations, including those related to our customer trading activities. 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. Our risk management functions have credit risk policies establishing appropriate credit limits and collateralization thresholds for our customers and counterparties.

Concentration Risk — Concentration risk is the risk due to concentrated exposure to a particular product; individual issuer, borrower or counterparty; financial instrument; or geographic area. We are subject to concentration risk if we hold large individual securities positions, execute large transactions with individual counterparties or groups of related counterparties, or make substantial underwriting commitments. Potential concentration risk is monitored through review of counterparties and borrowers and is managed using policies and limits established by senior management.

We have concentrated counterparty credit exposure with four non-publicly rated entities totaling $10.8 million at December 31, 2022. This counterparty credit exposure is part of our matched-book derivative program related to our public finance business, consisting primarily of interest rate swaps. One derivative counterparty represented 58.0 percent, or $6.2 million, of this exposure. Credit exposure associated with our derivative counterparties is driven by uncollateralized market movements in the fair value of the interest rate swap contracts and is monitored regularly by our financial risk committee. We attempt to minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by senior management.

Operational Risk

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

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

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In order to mitigate and control operational risk, we have developed and continue to enhance policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization. Important aspects of these policies and procedures include segregation of duties, management oversight, internal control over financial reporting and independent risk management activities within such functions as Risk Management, Compliance, Operations, Internal Audit, Treasury, Finance, Information Technology and Legal. Internal Audit oversees, monitors, evaluates, analyzes and reports on operational risk across the firm. We also have business continuity plans in place that we believe will cover critical processes on a company-wide basis, and redundancies are built into our systems as we have deemed appropriate. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our various businesses are operating within established corporate policies and limits.

We operate under a fully disclosed clearing model for all of our securities inventories with the exception of convertible securities, and for all of our client clearing activities. In a fully disclosed clearing model, we act as an introducing broker for client transactions and rely on Pershing, our clearing broker dealer, to facilitate clearance and settlement of our clients' securities transactions. The clearing services provided by Pershing are critical to our business operations, and similar to other services performed by third party vendors, any failure by Pershing with respect to the services we rely upon Pershing to provide could cause financial loss, significantly disrupt our business, damage our reputation, and adversely affect our ability to serve our clients and manage our exposure to risk.

Human Capital Risk

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

Legal and Regulatory Risk

Legal and regulatory risk includes the risk of non-compliance with applicable legal and regulatory requirements and loss to our reputation we may suffer as a result of failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to our business activities. We are generally subject to extensive regulation in the various jurisdictions in which we conduct our business. We have established procedures that are designed to ensure compliance with applicable statutory and regulatory requirements, such as public company reporting obligations, regulatory net capital requirements, sales and trading practices, potential conflicts of interest, anti-money laundering, privacy and financial and electronic 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 occupancy costs, communications charges and travel costs, which may not be readily recoverable in the price of services we offer to our clients. To the extent inflation results in rising interest rates and has adverse effects upon the securities markets, it may adversely affect our financial position and results of operations.