# PIPER SANDLER COMPANIES (PIPR) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from PIPER SANDLER COMPANIES's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1230245/000123024522000039/pipr-20211231.htm
Accession: 0001230245-22-000039
Filing date: 2022-02-25
Report date: 2021-12-31
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/
Next year: /company/PIPR/mda/fy2022/ (FY 2022)

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 2021 and 2020 results and the year-over-year comparisons between 2021 and 2020. Discussion of our 2019 results and the year-over-year comparisons between 2020 and 2019 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, 2020, filed with the SEC on February 25, 2021.

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 and (5) acquisition-related restructuring and integration costs. 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 the acquisitions of SOP Holdings, LLC and its subsidiaries, including Sandler O'Neill & Partners, L.P. (collectively, "Sandler O'Neill"), The Valence Group ("Valence") and TRS Advisors LLC ("TRS"). 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, 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 continuing operations principally consist 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 two alternative asset management funds in merchant banking and one alternative asset management fund in the healthcare sector. We receive management and performance fees for managing these funds, as well as investment gains and losses. We historically generated revenue through strategic trading activities, which focused on investments in municipal bonds; however, we ceased these activities in the first half of 2020.

Discontinued Operations – Discontinued operations includes the operating results of ARI, our traditional asset management subsidiary which we sold in the third quarter of 2019. See Note 4 to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for further discussion of our discontinued operations.

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Our Business Strategy – Our long-term strategic objectives are to drive revenue growth, 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 transform our business and expand our deep sector expertise 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 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 grow market share; and

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

Strategic Activities – Since early 2020, we have taken the following important steps in the execution of our business strategy.

•On February 4, 2022, we completed the acquisition of Cornerstone Macro, an independent research firm focused on providing macro research and equity derivatives trading to institutional investors. The transaction increases the scale of our institutional equities brokerage business and adds a highly ranked macro research platform.

•On January 5, 2022, we announced a definitive agreement to acquire Stamford Partners LLP ("Stamford Partners"), a specialist investment bank offering financial advisory and corporate development services in the European food and beverage and related consumer sectors. The transaction is expected to close in the first half of 2022, subject to obtaining required regulatory approvals and other customary closing conditions.

•During 2021, we continued to strengthen our specialty sector business within public finance, as illustrated by the special district group. We entered this space in late 2020 with six senior hires and currently have more than 20 dedicated professionals. We believe there is an opportunity to expand this expertise to more states and leverage our geographic reach and local relationships.

•We continued to grow organically by expanding sub-sector capabilities across business lines in 2021. Our corporate investment banking managing directors increased to 148, up seven percent from 2020, contributing to our larger and more diversified platform. In addition, our focus on high quality equity research and the build-out of a specialized sales and trading team are key differentiators in supporting our finance activity.

•On December 31, 2020, we completed the acquisition of TRS, an advisory firm offering restructuring and reorganization services to companies in public, private and governmental settings. The transaction expanded the scale of our restructuring advisory business.

•On April 3, 2020, we completed the acquisition of Valence, an investment bank offering mergers and acquisitions advisory services to companies and financial sponsors with a focus on the chemicals, materials and related sectors. The transaction added a new industry sector and expanded our presence in Europe.

•On January 3, 2020, we completed the acquisition of Sandler O'Neill, a full-service investment banking firm and broker dealer focused on the financial services industry. The acquisition of Sandler O'Neill expanded our advisory services revenues, diversified and enhanced scale in corporate financings, added a differentiated fixed income services business, and increased scale in our equity brokerage business.

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Financial Highlights

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(Amounts in thousands, except per share data)","","","","","2021"],["2021","","2020","","v2020"],["U.S. GAAP"],["Net revenues","$","2,031,061","","","$","1,238,213","","","64.0","%"],["Compensation and benefits","1,305,166","","","877,462","","","48.7"],["Non-compensation expenses","284,383","","","292,203","","","(2.7)"],["Income from continuing operations before income tax expense","441,512","","","68,548","","","544.1"],["Net income applicable to Piper Sandler Companies","278,514","","","40,504","","","587.6"],["Earnings per diluted common share","$","16.43","","","$","2.72","","","504.0"],["Ratios and margin"],["Compensation ratio","64.3","%","","70.9","%"],["Non-compensation ratio","14.0","%","","23.6","%"],["Pre-tax margin","21.7","%","","5.5","%"],["Non-GAAP(1)"],["Adjusted net revenues","$","1,980,457","","","$","1,234,960","","","60.4","%"],["Adjusted compensation and benefits","1,188,371","","","764,066","","","55.5"],["Adjusted non-compensation expenses","242,134","","","220,606","","","9.8"],["Adjusted operating income","549,952","","","250,288","","","119.7"],["Adjusted net income applicable to Piper Sandler Companies","399,037","","","177,555","","","124.7"],["Adjusted earnings per diluted common share","$","21.92","","","$","10.02","","","118.8"],["Adjusted ratios and margin"],["Adjusted compensation ratio","60.0","%","","61.9","%"],["Adjusted non-compensation ratio","12.2","%","","17.9","%"],["Adjusted operating margin","27.8","%","","20.3","%"]]
[[/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)","2021","","2020"],["Net revenues:"],["Net revenues \u2013 U.S. GAAP basis","$","2,031,061","","","$","1,238,213"],["Adjustments:"],["Revenue related to noncontrolling interests","(59,050)","","","(12,881)"],["Interest expense on long-term financing","8,446","","","9,628"],["Adjusted net revenues","$","1,980,457","","","$","1,234,960"],["Compensation and benefits:"],["Compensation and benefits \u2013 U.S. GAAP basis","$","1,305,166","","","$","877,462"],["Adjustment:"],["Compensation from acquisition-related agreements","(116,795)","","","(113,396)"],["Adjusted compensation and benefits","$","1,188,371","","","$","764,066"],["Non-compensation expenses:"],["Non-compensation expenses \u2013 U.S. GAAP basis","$","284,383","","","$","292,203"],["Adjustments:"],["Non-compensation expenses related to noncontrolling interests","(7,196)","","","(4,029)"],["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)"],["Adjusted non-compensation expenses","$","242,134","","","$","220,606"],["Income from continuing operations before income tax expense:"],["Income from continuing operations before income tax expense \u2013 U.S. GAAP basis","$","441,512","","","$","68,548"],["Adjustments:"],["Revenue related to noncontrolling interests","(59,050)","","","(12,881)"],["Interest expense on long-term financing","8,446","","","9,628"],["Non-compensation expenses related to noncontrolling interests","7,196","","","4,029"],["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"],["Adjusted operating income","$","549,952","","","$","250,288"],["Interest expense on long-term financing","(8,446)","","","(9,628)"],["Adjusted income before adjusted income tax expense","$","541,506","","","$","240,660"],["Net income applicable to Piper Sandler Companies:"],["Net income applicable to Piper Sandler Companies \u2013 U.S. GAAP basis","$","278,514","","","$","40,504"],["Adjustments:"],["Compensation from acquisition-related agreements","93,149","","","85,940"],["Acquisition-related restructuring and integration costs","3,544","","","8,712"],["Amortization of intangible assets related to acquisitions","23,644","","","33,383"],["Non-compensation expenses from acquisition-related agreements","186","","","9,016"],["Adjusted net income applicable to Piper Sandler Companies","$","399,037","","","$","177,555"],["Earnings per diluted common share:"],["Earnings per diluted common share \u2013 U.S. GAAP basis","$","16.43","","","$","2.72"],["Adjustment for inclusion of unvested acquisition-related stock","(1.62)","","","(1.89)"],["","$","14.81","","","$","0.83"],["Adjustments:"],["Compensation from acquisition-related agreements","5.49","","","5.76"],["Acquisition-related restructuring and integration costs","0.21","","","0.58"],["Amortization of intangible assets related to acquisitions","1.40","","","2.24"],["Non-compensation expenses from acquisition-related agreements","0.01","","","0.61"],["Adjusted earnings per diluted common share","$","21.92","","","$","10.02"],["Weighted average diluted common shares outstanding:"],["Weighted average diluted common shares outstanding \u2013 U.S. GAAP basis","16,955","","","14,901"],["Adjustment:"],["Unvested acquisition-related restricted stock with service conditions","1,251","","","2,814"],["Adjusted weighted average diluted common shares outstanding","18,206","","","17,715"]]
[[/GREPCENT_TABLE]]

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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,"],["","","","","","","","2021","","2020"],["","2021","","2020","","2019","","v2020","","v2019"],["U.S. Market Indices"],["S&P 500 (a)","4,766","","","3,756","","","3,231","","","26.9","%","","16.2","%"],["Nasdaq (a)","15,645","","","12,888","","","8,973","","","21.4","%","","43.6","%"],["U.S. Middle Market Mergers and Acquisitions"],["Announced transactions (number of transactions) (b)","4,625","","","3,637","","","3,013","","","27.2","%","","20.7","%"],["U.S. Equity Capital Markets"],["Completed public equity offerings (number of transactions) (c)","1,996","","","1,285","","","887","","","55.3","%","","44.9","%"],["Completed initial public offerings (number of transactions) (d)","1,008","","","436","","","206","","","131.2","%","","111.7","%"],["Equity fee pool for sub-$5 billion (in millions) (e)","$","13,640","","","$","8,901","","","$","4,379","","","53.2","%","","103.3","%"],["U.S. Municipal Negotiated Issuances"],["Completed issuances (number of transactions) (f)","8,537","","","8,965","","","7,505","","","(4.8)","%","","19.5","%"],["Aggregate par value (in billions) (f)","$","378","","","$","392","","","$","327","","","(3.5)","%","","19.7","%"],["Average CBOE Volatility Index (VIX)","20","","","29","","","15","","","(31.0)","%","","93.3","%"],["Average Daily Number of Shares Traded"],["NYSE (shares in millions)","2,258","","","2,402","","","1,690","","","(6.0)","%","","42.1","%"],["Nasdaq (shares in millions)","1,952","","","2,010","","","1,381","","","(2.9)","%","","45.5","%"],["Interest Rates"],["3-month treasury average rate","0.04","%","","0.25","%","","2.11","%","","(84.0)","%","","(88.2)","%"],["10-year treasury average rate","1.45","%","","0.81","%","","2.14","%","","79.0","%","","(62.1)","%"],["Average 10-year MMD to 10-year Treasury Ratio (g)","0.68","","","1.22","","","0.79","","","(44.3)","%","","54.4","%"]]
[[/GREPCENT_TABLE]]

(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 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).

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

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

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External Factors Impacting Our Business

Performance in the financial services industry in which we operate is highly correlated to the overall strength of economic conditions and financial market activity. Overall market conditions are a product of many factors, which are beyond our control, often unpredictable and at times inherently volatile. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services as reflected by the number and size of 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.

We continue to monitor the ongoing and expected future impacts of COVID-19 on our business, as well as the resulting economic and market conditions. We have endeavored to protect the health and well-being of our employees and our clients while ensuring the continuity of business operations for our clients. As a result, a significant portion of our employees continue to work remotely. Our business continuity plan is operating effectively without any significant disruptions to our business, operations or control processes.

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Outlook for 2022

We expect the economy to continue growing in 2022. Economic fundamentals remain strong for growth, although uncertainty remains about the length and scope of the COVID-19 pandemic. Concerns also persist related to supply chain constraints, labor shortages and higher energy prices. Geopolitical risks, such as Russia's invasion of Ukraine, have contributed to increased market volatility and uncertainty, and could result in a decline in the outlook for the continued U.S. and global economic recovery. Future legislative actions and policies by the U.S. federal government, including on levels of taxation and spending, may also impact economic growth.

In the fourth quarter of 2021, the U.S. Federal Reserve began tapering its quantitative easing measures and is anticipated to eliminate the program by the end of March 2022. The U.S. Federal Reserve is expected to raise its short-term benchmark interest rate multiple times in 2022. In determining the timing of each interest rate hike, the U.S. Federal Reserve will continue to monitor the level of inflation, which rose at the highest level in decades during 2021, along with the unemployment rate.

Capital raising activity benefited from strong investor demand and healthy valuations combined with relatively stable rising markets. We expect the level of equity capital raising activity will decline substantially in 2022 compared to the record levels of activity during the last two years.

We experienced a high level of advisory services activity across our industry sectors in 2021 driven by ample availability of debt and equity, a favorable interest rate environment, strong business performance, CEO confidence and undeployed capital within the financial sponsor community. Our strong relative performance and the focused investments we have made to grow our advisory platform contributed to our robust performance in 2021. Our pipeline remains strong across our industry teams and we believe that our advisory services business is well positioned to benefit from favorable market conditions in 2022.

In our equity brokerage business, the addition of Cornerstone Macro will be complementary to our company-specific research services and offer cross-selling opportunities and market share gains. Additionally, there are a number of catalysts that could elevate client activity in 2022, including higher energy prices, labor and supply chain constraints impacting company earnings, significant new U.S. federal government spending and the enactment of tax legislation.

Client activity was muted in our fixed income services business in the fourth quarter of 2021 due to the changing interest rate outlook and uncertain governmental fiscal policies. We anticipate a solid performance in 2022 as we assist clients in navigating a changing interest rate environment. Inflation and increased uncertainty with interest rates may result in more volatility in revenue generation as clients react to the changing environment.

Our municipal financing revenues in 2021 reflected strong contributions from both our governmental business and specialty sectors. We expect overall municipal market issuance levels in 2022 to be consistent with the previous two years as new money issuances continue to increase and refunding opportunities decline.

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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,"],["","","","","","","","2021","","2020"],["(Amounts in thousands)","2021","","2020","","2019","","v2020","","v2019","","2021","","2020","","2019"],["Revenues:"],["Investment banking","$","1,553,219","","","$","858,476","","","$","629,392","","","80.9","%","","36.4","%","","76.5","%","","69.3","%","","75.4","%"],["Institutional brokerage","387,577","","","357,753","","","167,891","","","8.3","","","113.1","","","19.1","","","28.9","","","20.1"],["Interest income","6,967","","","13,164","","","26,741","","","(47.1)","","","(50.8)","","","0.3","","","1.1","","","3.2"],["Investment income","94,032","","","23,265","","","22,275","","","304.2","","","4.4","","","4.6","","","1.9","","","2.7"],["Total revenues","2,041,795","","","1,252,658","","","846,299","","","63.0","","","48.0","","","100.5","","","101.2","","","101.4"],["Interest expense","10,734","","","14,445","","","11,733","","","(25.7)","","","23.1","","","0.5","","","1.2","","","1.4"],["Net revenues","2,031,061","","","1,238,213","","","834,566","","","64.0","","","48.4","","","100.0","","","100.0","","","100.0"],["Non-interest expenses:"],["Compensation and benefits","1,305,166","","","877,462","","","516,090","","","48.7","","","70.0","","","64.3","","","70.9","","","61.8"],["Outside services","45,942","","","38,377","","","36,184","","","19.7","","","6.1","","","2.3","","","3.1","","","4.3"],["Occupancy and equipment","56,946","","","54,007","","","36,795","","","5.4","","","46.8","","","2.8","","","4.4","","","4.4"],["Communications","44,008","","","44,358","","","30,760","","","(0.8)","","","44.2","","","2.2","","","3.6","","","3.7"],["Marketing and business development","20,902","","","13,472","","","28,780","","","55.2","","","(53.2)","","","1.0","","","1.1","","","3.4"],["Deal-related expenses","42,921","","","38,072","","","25,823","","","12.7","","","47.4","","","2.1","","","3.1","","","3.1"],["Trade execution and clearance","16,533","","","18,934","","","10,186","","","(12.7)","","","85.9","","","0.8","","","1.5","","","1.2"],["Restructuring and integration costs","4,724","","","10,755","","","14,321","","","(56.1)","","","(24.9)","","","0.2","","","0.9","","","1.7"],["Intangible asset amortization","30,080","","","44,728","","","4,298","","","(32.7)","","","940.7","","","1.5","","","3.6","","","0.5"],["Other operating expenses","22,327","","","29,500","","","12,350","","","(24.3)","","","138.9","","","1.1","","","2.4","","","1.5"],["Total non-interest expenses","1,589,549","","","1,169,665","","","715,587","","","35.9","","","63.5","","","78.3","","","94.5","","","85.7"],["Income from continuing operations before income tax expense","441,512","","","68,548","","","118,979","","","544.1","","","(42.4)","","","21.7","","","5.5","","","14.3"],["Income tax expense","111,144","","","19,192","","","24,577","","","479.1","","","(21.9)","","","5.5","","","1.5","","","2.9"],["Income from continuing operations","330,368","","","49,356","","","94,402","","","569.4","","","(47.7)","","","16.3","","","4.0","","","11.3"],["Discontinued operations:"],["Income from discontinued operations, net of tax","\u2014","","","\u2014","","","23,772","","","N/M","","N/M","","\u2014","","","\u2014","","","2.8"],["Net income","330,368","","","49,356","","","118,174","","","569.4","","","(58.2)","","","16.3","","","4.0","","","14.2"],["Net income applicable to noncontrolling interests","51,854","","","8,852","","","6,463","","","485.8","","","37.0","","","2.6","","","0.7","","","0.8"],["Net income applicable to Piper Sandler Companies","$","278,514","","","$","40,504","","","$","111,711","","","587.6","%","","(63.7)","%","","13.7","%","","3.3","%","","13.4","%"]]
[[/GREPCENT_TABLE]]

N/M — Not meaningful

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For the year ended December 31, 2021, we recorded net income from continuing operations applicable to Piper Sandler Companies of $278.5 million. Net revenues from continuing operations for the year ended December 31, 2021 increased 64.0 percent to $2.03 billion, compared with $1.24 billion in the year-ago period. In 2021, investment banking revenues increased 80.9 percent to $1.55 billion, compared with $858.5 million in 2020, driven by a significant increase in advisory services revenues, as well as higher corporate and municipal financing revenues. For the year ended December 31, 2021, institutional brokerage revenues were $387.6 million, up 8.3 percent compared with $357.8 million in 2020, as higher fixed income services revenues were partially offset by lower equity brokerage revenues. In 2021, net interest expense was $3.8 million, compared to $1.3 million in 2020, resulting from a decline in interest income on our long inventory positions. For the year ended December 31, 2021, investment income was $94.0 million, compared with $23.3 million in 2020. In 2021, we recorded higher gains on our investments and the noncontrolling interests in the merchant banking funds that we manage. Non-interest expenses from continuing operations were $1.59 billion for the year ended December 31, 2021, up 35.9 percent compared with $1.17 billion in the prior year, due to higher compensation expenses resulting from increased revenues and profitability.

Consolidated Non-Interest Expenses from Continuing Operations

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. Additionally, expense estimates related to revenue-based earnout arrangements 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 and restricted cash with service conditions, as well as expense estimates related to revenue-based earnout arrangements:

[[GREPCENT_TABLE]]
[["(Amounts in thousands)"],["2022","$","86,131"],["2023","32,967"],["2024","21,887"],["2025","5,256"],["Total","$","146,241"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2021, compensation and benefits expenses increased 48.7 percent to $1.31 billion from $877.5 million in 2020, driven by higher revenues and operating profits. Compensation and benefits expenses as a percentage of net revenues was 64.3 percent in 2021, compared with 70.9 percent in 2020. The lower compensation ratio was due to the impact of fixed compensation costs on an increased revenue base.

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 19.7 percent to $45.9 million in 2021, compared with $38.4 million in 2020. Excluding the portion of expenses from non-controlled equity interests in our consolidated alternative asset management funds, outside services expenses increased 15.9 percent, primarily due to higher professional fees associated with business expansion.

Occupancy and Equipment – For the year ended December 31, 2021, occupancy and equipment expenses increased 5.4 percent to $56.9 million, compared with $54.0 million in 2020. The increase was primarily the result of higher software maintenance costs.

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, 2021, communication expenses were $44.0 million, down slightly compared with $44.4 million in 2020.

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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 2021, marketing and business development expenses increased 55.2 percent to $20.9 million, compared with $13.5 million for the year ended December 31, 2020. The increase was driven by higher travel and entertainment costs due to the easing of COVID-19 restrictions.

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, 2021, deal-related expenses were $42.9 million, compared with $38.1 million for the year ended December 31, 2020. 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, 2021, trade execution and clearance expenses were $16.5 million, compared with $18.9 million for the year ended December 31, 2020. The decrease in trade execution and clearance expenses is reflective of higher trading volumes in the first quarter of 2020 driven by record levels of trading volatility.

Restructuring and Integration Costs – 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 acquisition of Cornerstone Macro and the announced acquisition of Stamford Partners, $3.4 million for vacated leased office space associated with our acquisitions of Valence and TRS and $0.3 million of severance benefits. We expect to incur additional restructuring and integration costs in the first half of 2022.

For the year ended December 31, 2020, we incurred acquisition-related restructuring and integration costs of $10.8 million. The expenses consisted of $4.4 million of transaction costs related to our acquisitions of Sandler O'Neill, Valence and TRS, $2.5 million for vacated leased office space, $3.0 million of severance benefits and $0.9 million of contract termination costs.

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, 2021, intangible asset amortization was $30.1 million, compared with $44.7 million in 2020. The decrease was due to lower intangible asset amortization expense related to identifiable intangible assets associated with the acquisition of Sandler O'Neill, partially offset by incremental intangible asset amortization expense related to identifiable intangible assets associated with the acquisitions of Valence and TRS. In 2022, we anticipate incurring additional intangible asset amortization expense related to the acquisitions of Cornerstone Macro and Stamford Partners.

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

[[GREPCENT_TABLE]]
[["(Amounts in thousands)"],["2022","$","9,344"],["2023","7,442"],["2024","6,292"],["2025","5,302"],["2026","4,825"],["Thereafter","1,173"],["Total","$","34,378"]]
[[/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 $22.3 million in 2021, compared with $29.5 million in 2020. The decrease was due to a $12.1 million fair value adjustment recorded in the first quarter of 2020 related to the earnout for former Weeden & Co. L.P. ("Weeden & Co.") equity owners who did not transition to our platform following the acquisition in 2019. We recorded the full value of the projected earnout as the non-employee equity owners do not have service requirements. This decrease was partially offset by higher expense related to our charitable giving program driven by higher operating profits.

Income Taxes – For the year ended December 31, 2021, our provision for income taxes was $111.1 million. Excluding the impact of noncontrolling interests, our effective tax rate was 28.5 percent, which includes the impact of non-deductible covered employee compensation expense.

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For the year ended December 31, 2020, our provision for income taxes was $19.2 million. Excluding the impact of noncontrolling interests, our effective tax rate was 32.1 percent, which was driven by the impact of non-deductible covered employee compensation expense, partially offset by $2.4 million of income tax benefits related to the tax provisions in the Coronavirus Aid, Relief, and Economic Security Act.

Financial Performance from Continuing Operations

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 applicable to noncontrolling interests in the accompanying consolidated statements of operations, and has no effect on our overall financial performance, as ultimately, this income is not income for us. Included in adjusted operating income and adjusted operating margin is the actual proportionate share of the income 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 Sandler O'Neill and Valence acquisitions. 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,"],["","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"],["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]]

Net revenues on a U.S. GAAP basis were $2.03 billion for the year ended December 31, 2021, compared with $1.24 billion in the prior-year period. For the year ended December 31, 2021, adjusted net revenues were $1.98 billion compared with $1.23 billion for the year ended December 31, 2020. 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.

Investment banking revenues comprise all of the revenues generated through advisory services activities, which includes 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.

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In 2021, investment banking revenues were $1.55 billion, up 80.9 percent compared to $858.5 million in the prior-year period. For the year ended December 31, 2021, advisory services revenues were $1.03 billion, up 131.5 percent compared with $443.3 million in 2020. Our strong relative performance was driven by higher average fees and more completed transactions. In 2021, market conditions were conducive and our revenues reflect the significant market recovery in advisory services activity compared to the year-ago period. In addition, economic growth, CEO confidence and capital availability drove robust demand for advisory services. In the prior-year period, market-wide decreases in completed and announced deals reflected a pause in advisory services activity earlier in 2020 as companies evaluated the changing and uncertain environment due to COVID-19. For the year ended December 31, 2021, corporate financing revenues were $362.8 million, up 22.8 percent compared to $295.3 million in the prior-year period, driven by more completed and book run equity deals. Market conditions remained very favorable for capital raising activity in 2021 despite moderated issuance volumes in the second half of the year. Activity for us during the year was principally in the healthcare sector, and we served as book runner on 92 of the 97 healthcare equity deals we completed. In the year-ago period, capital raising activity substantially halted in March 2020 as volatility spiked; however, market conditions became favorable for capital raising during the second quarter of 2020, which continued through the remainder of the year. Municipal financing revenues for the year ended December 31, 2021 were $164.3 million compared to $119.8 million in the year-ago period. Our revenues increased approximately 37 percent relative to the overall market that was essentially flat based on the par value of municipal negotiated issuances. Our results for the year ended December 31, 2021 were driven by strong execution in our governmental business and growth in our specialty sectors.

The following table provides investment banking deal information:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(Dollars in billions)","2021","","2020"],["Advisory services"],["M&A and restructuring transactions","274","","","167"],["Capital advisory transactions","145","","","105"],["Corporate financings"],["Total equity transactions","214","","","137"],["Book run equity transactions","141","","","99"],["Total debt and preferred transactions","53","","","58"],["Book run debt and preferred transactions","26","","","37"],["Municipal negotiated issues"],["Aggregate par value","$","18.4","","","$","19.1"],["Total issues","933","","","855"]]
[[/GREPCENT_TABLE]]

Institutional brokerage revenues comprise all of the revenues generated through trading activities, which consist of facilitating customer trades and executing competitive municipal underwritings. Also, we have historically generated trading gains and losses through strategic trading activities in municipal bonds; however, we ceased these activities in the first half of 2020. Our results may vary from quarter to quarter as a result of changes in trading margins, trading gains and losses, net interest spreads, trading volumes, the timing of payments for research services and the timing of transactions based on market opportunities.

For the year ended December 31, 2021, institutional brokerage revenues increased to $387.6 million, compared with $357.8 million in the prior-year period. Equity brokerage revenues were $154.1 million in 2021, down 4.6 percent compared with $161.4 million in 2020. The prior-year period benefited from significant volatility and volumes related to the COVID-19 pandemic. For the year ended December 31, 2021, fixed income services revenues were $233.5 million, up 19.0 percent compared with $196.3 million in the prior-year period as activity was more robust among our financial services clients. We provided strategic advice to these clients on repositioning their balance sheets and portfolios, and investing in a changing interest rate environment. Additionally, results in the first quarter of 2020 include trading losses in municipal securities due to the sharp and sudden market dislocation.

Interest income represents amounts earned from holding long inventory positions. For the year ended December 31, 2021, interest income decreased 47.1 percent to $7.0 million, compared with $13.2 million in 2020, reflecting lower average long inventory balances.

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Investment income 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, 2021, investment income was $94.0 million, compared to $23.3 million in 2020. In 2021, we recorded higher gains on our investments and the noncontrolling interests in the merchant banking funds that we manage. Excluding the impact of noncontrolling interests, adjusted investment income was $35.0 million in 2021 and $10.4 million in 2020.

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, 2021, interest expense decreased to $10.7 million, compared with $14.4 million in 2020. The decrease was primarily due to lower funding balances, as well as lower average short inventory balances. Additionally, the interest paid on long-term financing decreased as we repaid the $20 million of unsecured promissory notes related to the acquisition of Valence (the "Valence Notes") in the first quarter of 2021. We also 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 $2.3 million and $4.8 million for the years ended December 31, 2021 and 2020, respectively.

Pre-tax margin for 2021 was 21.7 percent, up compared with 5.5 percent for 2020. Adjusted pre-tax margin increased to 27.8 percent in 2021, compared with 20.3 percent in 2020. In 2021, pre-tax margin on both a U.S. GAAP and adjusted basis was driven by higher revenue levels. Additionally, adjusted pre-tax margin increased due to a lower compensation ratio in 2021.

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,"],["","2020","","2019"],["","","","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","$","443,327","","","$","\u2014","","","$","\u2014","","","$","443,327","","","$","440,695","","","$","\u2014","","","$","\u2014","","","$","440,695"],["Corporate financing","295,333","","","\u2014","","","\u2014","","","295,333","","","105,256","","","\u2014","","","\u2014","","","105,256"],["Municipal financing","119,816","","","\u2014","","","\u2014","","","119,816","","","83,441","","","\u2014","","","\u2014","","","83,441"],["Total investment banking","858,476","","","\u2014","","","\u2014","","","858,476","","","629,392","","","\u2014","","","\u2014","","","629,392"],["Institutional brokerage:"],["Equity brokerage","161,445","","","\u2014","","","\u2014","","","161,445","","","87,555","","","\u2014","","","\u2014","","","87,555"],["Fixed income services","196,308","","","\u2014","","","\u2014","","","196,308","","","80,336","","","\u2014","","","\u2014","","","80,336"],["Total institutional brokerage","357,753","","","\u2014","","","\u2014","","","357,753","","","167,891","","","\u2014","","","\u2014","","","167,891"],["Interest income","13,164","","","\u2014","","","\u2014","","","13,164","","","26,741","","","\u2014","","","\u2014","","","26,741"],["Investment income","10,384","","","12,881","","","\u2014","","","23,265","","","11,506","","","10,769","","","\u2014","","","22,275"],["Total revenues","1,239,777","","","12,881","","","\u2014","","","1,252,658","","","835,530","","","10,769","","","\u2014","","","846,299"],["Interest expense","4,817","","","\u2014","","","9,628","","","14,445","","","9,885","","","\u2014","","","1,848","","","11,733"],["Net revenues","1,234,960","","","12,881","","","(9,628)","","","1,238,213","","","825,645","","","10,769","","","(1,848)","","","834,566"],["Non-interest expenses","984,672","","","4,029","","","180,964","","","1,169,665","","","687,410","","","4,306","","","23,871","","","715,587"],["Pre-tax income","$","250,288","","","$","8,852","","","$","(190,592)","","","$","68,548","","","$","138,235","","","$","6,463","","","$","(25,719)","","","$","118,979"],["Pre-tax margin","20.3","%","","","","","","5.5","%","","16.7","%","","","","","","14.3","%"]]
[[/GREPCENT_TABLE]]

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(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)","2020","","2019"],["Interest expense on long-term financing","$","9,628","","","$","1,848"],["Compensation from acquisition-related agreements","113,396","","","5,138"],["Acquisition-related restructuring and integration costs","10,755","","","14,321"],["Amortization of intangible assets related to acquisitions","44,728","","","4,298"],["Non-compensation expenses from acquisition-related agreements","12,085","","","114"],["","180,964","","","23,871"],["Total other adjustments","$","190,592","","","$","25,719"]]
[[/GREPCENT_TABLE]]

Discussion of the year-over-year comparisons between 2020 and 2019 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, 2020, filed with the SEC on February 25, 2021.

Discontinued Operations

Discontinued operations includes our traditional asset management subsidiary, ARI, which we sold in the third quarter of 2019. ARI's results, previously reported in our Asset Management segment, have been presented as discontinued operations for the year ended December 31, 2019.

The components of discontinued operations were as follows:

[[GREPCENT_TABLE]]
[["","","","","","","Year Ended"],["(Amounts in thousands)","","","","","","December 31, 2019"],["Net revenues","","","","","","$","26,546"],["Operating expenses","","","","","","22,589"],["Intangible asset amortization and impairment (1)","","","","","","5,465"],["Restructuring costs","","","","","","10,268"],["Total non-interest expenses","","","","","","38,322"],["Loss from discontinued operations before income tax benefit","","","","","","(11,776)"],["Income tax benefit","","","","","","(2,522)"],["Net loss from discontinued operations before gain on sales","","","","","","(9,254)"],["Gain on sales, net of tax","","","","","","33,026"],["Income from discontinued operations, net of tax","","","","","","$","23,772"]]
[[/GREPCENT_TABLE]]

(1)Includes $2.9 million of intangible asset impairment related to the ARI trade name.

Restructuring costs of $10.3 million for the year ended December 31, 2019 primarily related to transaction costs and payments associated with the sale of the business.

See Note 4 to our consolidated financial statements in Part II, Item 8 of this Form 10-K for further discussion of our discontinued operations.

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Critical Accounting Policies

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

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.

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) 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, 2021, we had goodwill of $227.5 million and intangible assets of $119.8 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 in our capital markets reporting unit 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 the capital markets reporting unit. Our annual goodwill impairment testing, performed as of October 31, 2021, resulted in no impairment.

We also evaluated our intangible assets (indefinite and definite-lived) and concluded there was no impairment in 2021.

Compensation Plans

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. As of December 31, 2021, we have recorded a deferred tax asset valuation allowance of $4.9 million related to net operating loss carryforwards in the U.K. for Piper Sandler Ltd.

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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, 2021, we recorded a $2.7 million tax benefit from continuing operations for stock awards vesting during the period. In the first quarter of 2022, approximately 793,000 shares vested at share prices greater than the grant date fair values, resulting in $5.6 million of excess tax benefits recorded as income tax benefit in the first quarter of 2022.

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 2021, we recorded a $1.7 million liability for uncertain state income tax positions. In 2020, we recorded a reversal of $3.2 million related to the $4.1 million liability for uncertain income tax positions associated with our acquisition of Weeden & Co. that was recorded in 2019. These amounts were recorded as measurement period adjustments in accordance with FASB Accounting Standards Codification Topic 805, "Business Combinations," and included a corresponding indemnification asset. We also paid a settlement of $0.9 million, for which we were indemnified.

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.

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.

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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"],["February 1, 2019 (1)","","$","1.010","","","February 25, 2019","","March 15, 2019"],["February 1, 2019","","$","0.375","","","February 25, 2019","","March 15, 2019"],["April 26, 2019","","$","0.375","","","May 24, 2019","","June 14, 2019"],["July 26, 2019","","$","0.375","","","August 23, 2019","","September 13, 2019"],["October 30, 2019","","$","0.375","","","November 22, 2019","","December 13, 2019"],["January 31, 2020 (2)","","$","0.750","","","March 2, 2020","","March 13, 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 (3)","","$","1.850","","","March 3, 2021","","March 12, 2021"],["February 4, 2021","","$","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 (4)","","$","3.000","","","November 23, 2021","","December 10, 2021"],["October 29, 2021","","$","0.550","","","November 23, 2021","","December 10, 2021"],["February 10, 2022 (5)","","$","4.500","","","March 2, 2022","","March 11, 2022"],["February 10, 2022","","$","0.600","","","March 2, 2022","","March 11, 2022"]]
[[/GREPCENT_TABLE]]

(1)Represents a special cash dividend based on our fiscal year 2018 results.

(2)Represents a special cash dividend based on our fiscal year 2019 results.

(3)Represents a special cash dividend based on our fiscal year 2020 results.

(4)Represents a special cash dividend based on our financial results for the nine months ended September 30, 2021.

(5)Represents a special cash dividend based on our fiscal year 2021 results.

Our board of directors has declared an additional special cash dividend on our common stock of $4.50 per share related to 2021 adjusted net income. This special dividend will be paid on March 11, 2022, to shareholders of record as of the close of business on March 2, 2022. Including this special cash dividend, we will have returned $9.45 per share, or approximately 43 percent of our fiscal year 2021 adjusted net income to shareholders.

Effective January 1, 2020, our board of directors authorized the repurchase of up to $150.0 million in common shares, which expired on December 31, 2021. In 2021, we repurchased 417,903 shares of our common stock at an average price of $125.03 per share for an aggregate purchase price of $52.3 million related to this authorization.

On November 18, 2021, our board of directors authorized the repurchase of up to $150.0 million in common shares. This authorization is effective from January 1, 2022 through December 31, 2023.

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 2021, we purchased 154,117 shares or $17.7 million of our common stock for these purposes.

Cash Flows

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 Valence Notes 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.

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Cash and cash equivalents at December 31, 2020 were $507.9 million, an increase of $257.9 million from December 31, 2019. Operating activities provided $779.8 million of cash, driven by cash generated from earnings and a reduction in operating assets. The decrease in operating assets resulted from a $203.8 million decline in net financial instruments and other inventory positions owned as we focused on only carrying inventory where clients need liquidity within our areas of expertise, as well as a $254.3 million decrease in receivables from brokers, dealers and clearing organizations. The increase in operating liabilities was primarily due to an increase in accrued compensation of $132.8 million, the result of higher compensation costs in 2020 from increased revenues and incremental headcount from the acquisitions of Sandler O'Neill and Valence. In 2020, investing activities used $435.0 million, of which $417.4 million was used for the acquisitions of Sandler O'Neill, Valence and TRS. We also used $17.6 million for the purchase of fixed assets. Cash of $87.6 million was used in financing activities as we reduced amounts due under our short-term financing by $50.0 million. We repaid the amount outstanding under our commercial paper program in full upon maturity in the fourth quarter of 2020. We also paid $28.2 million in dividends and repurchased $22.0 million of common stock during 2020.

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)","2021","","2020"],["Total assets","$","2,565,307","","","$","1,997,140"],["Deduct: Goodwill and intangible assets","(347,286)","","","(377,366)"],["Deduct: Right-of-use lease asset","(71,341)","","","(82,543)"],["Deduct: Assets from noncontrolling interests","(168,675)","","","(97,375)"],["Adjusted assets","$","1,978,005","","","$","1,439,856"],["Total shareholders' equity","$","1,226,855","","","$","926,082"],["Deduct: Goodwill and intangible assets","(347,286)","","","(377,366)"],["Deduct: Noncontrolling interests","(164,645)","","","(96,657)"],["Tangible common shareholders' equity","$","714,924","","","$","452,059"],["Leverage ratio (1)","2.1","","","2.2"],["Adjusted leverage ratio (2)","2.8","","","3.2"]]
[[/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, 2020, due to higher tangible common shareholders' equity driven by strong net income in 2021.

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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 our clearing arrangement with Pershing, a clearing arrangement with bank financing, and a bank line of credit, and is typically collateralized by our securities inventory. These funding sources are critical to our ability to finance and hold inventory, which is a necessary part of our institutional brokerage business. The majority of our inventory is liquid and is therefore funded by short-term facilities. 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 or LIBOR.

Pershing Clearing Arrangement – We have established an arrangement to obtain financing from Pershing related to the majority of our trading activities. Under our fully disclosed clearing agreement, 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, 2021, we had $0.2 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 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, 2021, we had $93.4 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 – Our committed line is a one-year $100 million revolving secured credit facility. 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 9, 2022. This credit facility has been in place since 2008 and we renewed the facility for another one-year term in the fourth quarter of 2021. At December 31, 2021, we had no advances against this line of credit.

Commercial Paper Program – Piper Sandler & Co. previously issued secured commercial paper ("CP") to fund a portion of its securities inventory. We retired the CP Series A program in January 2020 and retired the CP Series II A program in April 2021.

Revolving Credit Facility – Our parent company, Piper Sandler Companies, has an unsecured $65 million revolving credit facility with U.S. Bank N.A. The credit agreement will terminate on December 20, 2022, unless otherwise terminated, and is subject to a one-year extension exercisable at our option. At December 31, 2021, 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, requires Piper Sandler & Co. to maintain a minimum regulatory net capital of $120 million, limits our leverage ratio, requires maintenance of a minimum ratio of operating cash flow to fixed charges, and imposes certain limitations on our ability to make acquisitions and make payments on our capital stock. At December 31, 2021, we were in compliance with all covenants.

The following tables present the average balances outstanding for our various funding sources by quarter for 2021 and 2020:

[[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"],["Commercial paper","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Revolving credit facility","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total","$","96.8","","","$","96.3","","","$","63.1","","","$","64.1"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","","Average Balance for the Three Months Ended"],["(Amounts in millions)","","","","Dec. 31, 2020","","Sept. 30, 2020","","June 30, 2020","","Mar. 31, 2020"],["Funding source:"],["Pershing clearing arrangement","","","","$","16.1","","","$","3.3","","","$","17.7","","","$","117.8"],["Prime broker arrangement","","","","97.5","","","90.2","","","81.9","","","72.3"],["Commercial paper","","","","11.4","","","50.0","","","50.0","","","50.0"],["Revolving credit facility","","","","4.9","","","29.3","","","50.0","","","7.1"],["Total","","","","$","129.9","","","$","172.8","","","$","199.6","","","$","247.2"]]
[[/GREPCENT_TABLE]]

The average funding in the fourth quarter of 2021 decreased to $96.8 million, compared with $129.9 million during the fourth quarter of 2020, primarily due to the accumulation of cash from operations. Also, we repaid the outstanding balances under our commercial paper program and revolving credit facility in the fourth quarter of 2020.

The following table presents the maximum daily funding amount by quarter for 2021 and 2020:

[[GREPCENT_TABLE]]
[["(Amounts in millions)","","2021","","2020"],["First Quarter","","$","141.5","","","$","642.1"],["Second Quarter","","$","306.2","","","$","378.3"],["Third Quarter","","$","228.1","","","$","401.7"],["Fourth Quarter","","$","170.3","","","$","482.3"]]
[[/GREPCENT_TABLE]]

Long-Term Financing

Senior Notes – On October 15, 2019, we entered into a note purchase agreement ("Note Purchase Agreement") under which we issued unsecured fixed rate senior notes ("Notes") in the amount of $175 million. The initial holders of the Notes are certain entities advised by Pacific Investment Management Company ("PIMCO"). The Notes consisted of two classes, Class A Notes and Class B Notes, with principal amounts of $50 million and $125 million, respectively. The Class A Notes were repaid in full on the October 15, 2021 maturity date. 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.

Given our level of capital and strong cash generation from earnings, we decided not to renew our Class A Notes.

The Note Purchase Agreement includes customary events of default and covenants that, among other things, requires Piper Sandler & Co. to maintain a minimum regulatory net capital, limits our leverage ratio and requires maintenance of a minimum ratio of operating cash flow to fixed charges. At December 31, 2021, we were in compliance with all covenants.

Valence Notes – On April 3, 2020, we entered into unsecured promissory notes as part of the acquisition of Valence totaling $20 million. The Valence Notes were repaid in the first quarter of 2021.

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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, 2021, our net capital under the SEC's uniform net capital rule was $362.5 million, and exceeded the minimum net capital required under the SEC rule by $361.5 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 with PIMCO 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, 2021, 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, 2021, 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"],["","","","","","","","2025","","2027","","","","December 31,","","December 31,"],["(Amounts in thousands)","2022","","2023","","2024","","- 2026","","- 2028","","Later","","2021","","2020"],["Customer matched-book derivative contracts (1) (2)","$","11,320","","","$","3,020","","","$","17,930","","","$","11,210","","","$","59,160","","","$","1,527,416","","","$","1,630,056","","","$","1,955,131"],["Trading securities derivative contracts (2)","56,550","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","9,375","","","65,925","","","55,375"],["Investment commitments (3)","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","80,562","","","66,043"]]
[[/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 $157.8 million at December 31, 2021) 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, 2021, we had $20.7 million of credit exposure with these counterparties, including $16.3 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, 2021 and 2020, the net fair value of these derivative contracts approximated $19.8 million and $18.1 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 various 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 $80.6 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 convened working groups to find, and implement the transition to, suitable replacements for IBORs. On March 5, 2021, the U.K. Financial Conduct Authority, which regulates LIBOR, formally announced the dates after which LIBOR will cease publication. The publication of certain USD LIBOR tenors and all non-USD LIBOR tenors ceased after December 31, 2021, which did not impact our operations. The remaining USD LIBOR tenors will continue publication until June 30, 2023.

Our limited number of contractual agreements, which use the remaining USD LIBOR tenors, are primarily within our customer matched-book derivatives portfolio. Substantially all of these instruments mature after June 30, 2023 and use interest rates based on LIBOR. The International Swaps and Derivatives Association ("ISDA") created the IBOR Fallback Protocol to facilitate amending references to benchmark interest rates in derivative contracts governed by Master ISDA Agreements. If a benchmark interest rate is no longer published, it will "fall back" to a new benchmark interest rate in those contracts where both counterparties have agreed to adhere to the protocol. We 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 $0.7 million in the carrying value of our fixed income securities inventory as of December 31, 2021, 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, 2021:

[[GREPCENT_TABLE]]
[["","AAA","","AA","","A","","BBB","","BB","","Not Rated"],["Corporate fixed income securities","\u2014","%","","0.1","%","","\u2014","%","","0.6","%","","\u2014","%","","\u2014","%"],["Municipal securities - taxable and tax-exempt","23.6","%","","50.5","%","","7.2","%","","0.1","%","","\u2014","%","","4.4","%"],["U.S. government and agency securities","\u2014","%","","13.3","%","","0.1","%","","\u2014","%","","\u2014","%","","0.1","%"],["","23.6","%","","63.9","%","","7.3","%","","0.7","%","","\u2014","%","","4.5","%"]]
[[/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 $20.7 million at December 31, 2021. 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 78.6 percent, or $16.3 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 recordkeeping. We have also established procedures that are designed to require that our policies relating to ethics and business conduct are followed. The legal and regulatory focus on the financial services industry presents a continuing business challenge for us.

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

Effects of Inflation

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