Good morning, and welcome to the Piper Sandler Companies conference call to discuss the financial results for the first quarter of 2023. During the question and answer session, securities industry professionals may ask questions of management. The company will make forward-looking statements on this call that are not historical or current facts, including statements about beliefs and expectations and involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the company's earnings release, and reports on file with the SEC, which are available on the company's website at www.pipersandler.com, and on the SEC website at www.sec.gov. This call will also include statements regarding certain non-GAAP financial measures. The non-GAAP measures should be considered in addition to, and not a substitute for, measures of financial performance prepared in accordance with GAAP.
Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure. The earnings release is available on the investor relations page of the company's website and at the SEC website. As a reminder, this call is being recorded. Now I'd like to turn the call over to Mr. Chad Abraham. Mr. Abraham, you may begin your call.
Good morning, everyone. Thanks for joining us. It's great to be with you to talk about our first quarter results. I am here with Deb Schoneman, our President, and Tim Carter, our CFO. Despite volatility during the first quarter of 2023, our diversified platform generated adjusted net revenues of $289 million, a 14.1% operating margin, and adjusted EPS of $2.35. Persistent inflation, rapid central bank rate increases, and stress on the banking system led to a lack of confidence that continues to reduce overall market activity. Although volatility benefits our equity brokerage business, it adversely impacts our other businesses, which rely on constructive market conditions and a more stable outlook. The bank turmoil has further extended uncertainty and reduced confidence levels, delaying the inflection point to better market conditions. Turning to corporate investment banking.
We generated total corporate investment banking revenues of $167 million during the first quarter of 2023, down from the first quarter of last year, driven by lower advisory revenue. We continue to diversify our platform across sectors, products and clients. Scaling our industry groups and adding new capabilities enhances our ability to deliver strong results against mixed economic conditions. Specific to advisory services, revenues of $141 million for the quarter decreased year-over-year, reflective of the continuing challenges in the M&A and debt markets. Despite this, we completed 69 advisory transactions during the quarter and maintained our position as the number two advisor on announced U.S. M&A transactions under $1 billion. Sector performance was led by our financial services and healthcare groups, with solid contributions from our energy and power and consumer teams.
In addition, following a record year in 2022, our restructuring group started this year strong with record quarterly revenues. The quality of this team, combined with our market-leading industry groups, is driving strong collaboration and positioned us to win two high-profile restructuring assignments. During the first quarter, we advised the FDIC on the sale of substantially all of the deposits and loans of both Silicon Valley Bank and Signature Bank. These advisory assignments demonstrate our market-leading restructuring capabilities and financial services expertise. The near-term outlook for M&A remains soft, driven by economic uncertainty and difficult debt financing conditions, which continue to impact deal timelines and the conversion of our pipeline. We remain cautiously optimistic towards the second half of 2023, but that will depend on sustained market improvements. Turning to corporate financing.
Although our equity financings increased from a year ago, overall market activity remains below historic levels. Commercial banking concerns increased volatility, resulting in a pause in equity financings late in the quarter. We generated $27 million of financing revenues during the first quarter of 2023, up year-over-year. We completed 23 equity, debt and preferred financings, raising over $4 billion for corporate clients. Activity for us was concentrated in the healthcare sector, with additional contributions from financial services and energy and power. Equity Capital Markets have been largely shut down for over 5 quarters, a long period by historical standards. As we look ahead, we expect financing activities to build as we progress through 2023. Turning to investment banking Managing Director headcount. We remain focused on building out our sub-sector coverage.
We added 13 MDs, finishing the quarter at 171 managing directors, the most in our history. Development of our own talent continues to be a priority, and 2023 was a large promote class, adding 10 new managing directors across our industry and product teams. We also hired 3 managing directors to our platform during the quarter, broadening our coverage in healthcare services, asset and wealth management, and real estate.
Adding new MD talent is critical to our strategic goals and key to driving incremental revenues over time. We continue to increase the earnings power of our franchise, and we see significant opportunity to grow our market share further over the long term. We remain focused on helping our clients navigate a highly dynamic economic landscape. When markets stabilize, we expect activity levels to accelerate from both sponsor and strategic clients, and we believe that we are uniquely positioned to advise our clients to meet their objectives. We remain focused on our strategic goals, scaling our industry groups, consistently expanding market reach and share over time, increasing transaction fee size, and adding MDs and competencies. With that, I will turn the call over to Deb to discuss our public finance and brokerage businesses.
Thanks, Chad. During the first quarter of 2023, our public finance business generated $17 million of municipal financing revenues, down year-over-year. With higher nominal rates, increased interest rate volatility, and weak investor demand, municipal issuance has declined significantly across the industry. Market issuance during the quarter was approximately $75 billion, down roughly 25% from a year ago, and represented one of the slowest quarters in the last decade. High-yield new issuance volume declined even more by approximately 57% relative to the first quarter of last year. This negatively impacted our relative performance as a meaningful component of our public finance business is in high-yield specialty sectors. As we look ahead, our pipeline is large and diverse, but we believe a period of sustained municipal fund inflows and interest rate stability is needed for issuance to increase from current levels.
Our equity brokerage business was a bright spot as it generated quarterly revenues of $54 million, up from the first quarter of last year. Equity markets saw elevated volatility during March. However, overall volatility and volumes for the first quarter of 2023 were lower year-over-year. Market share gains and the addition of Cornerstone Macro drove our strong relative performance. We traded 2.8 billion shares during the quarter on behalf of our clients as they repositioned portfolios and set our premier trade execution capabilities. In periods of heightened volatility, clients consistently trust our brand and broad trading expertise to execute quickly and efficiently. With client research votes continuing to increase and our ability to further cross-sell products to clients, we see opportunity for continued market share gains in this business over time, which should help mitigate a declining fee pool and less volatility.
Moving to fixed income, for the first quarter of 2023, we generated revenues of $42 million, down compared to the first quarter of last year. Market conditions in fixed income were challenging during the quarter with large interest rate swings. Uncertainty on the direction of interest rates largely kept most clients on the sidelines. Trading among our depository clients was particularly slow as banks focused on building liquidity and continued to evaluate their capital and funding position. Activity among our municipal-centric clients was also subdued as municipal bonds remain expensive on a relative basis compared to treasuries driven by the lack of new supply. The breadth of our client relationships and product capabilities provided some level of resiliency to our results. Insurance companies and public entity clients were active as they found relative value in the short end of the yield curve.
Advising clients on hedging strategies drove an increase in derivative activity. However, we expect the near-term outlook to remain challenging. Like our investment banking group, we remained focused on broadening our fixed income platform, and during the quarter, we hired five talented and seasoned professionals to help build out our trading and distribution capabilities, primarily in non-agency structured credit. Our recruiting pipeline is robust, and we see opportunities to continue expanding our market reach. Now, I will turn the call over to Tim to review our financial results and provide an update on capital use.
Thanks, Deb. As a reminder, my comments will be focused on our adjusted non-GAAP financial results, which should be considered in addition to and not a substitute for the corresponding GAAP financial measures. We generated net revenues of $289 million for the first quarter of 2023, down 26% from the fourth quarter of 2022, and 20% from the first quarter of last year. Market conditions remain uncertain and have largely kept our investment banking and fixed income clients on the sidelines. Equity brokerage continues to be a highlight, generating their second-strongest quarterly revenues on record. Despite tough conditions, we generated solid results and continue to manage the business to reflect current market conditions. Turning to operating expenses and margin.
Our compensation ratio for the first quarter of 2023 was 63.3%, slightly elevated from both the fourth and first quarters of last year, driven by lower net revenues. We continue to maintain our philosophy of managing compensation levels to be a balance of employee retention, investment opportunities, and operating margins. Based on our current outlook, we expect our compensation ratio to be around Q1 levels, but will be dependent on recruiting opportunities which could accelerate. Non-compensation expenses for the first quarter of 2023, excluding reimbursed deal expenses, were $59 million, slightly below our expectations as we focus on managing our costs and benefited from the timing of certain expenses.
Non-compensation costs, excluding reimbursed deal expenses, increased 8% compared to the first quarter of last year, primarily because of the additions of Cornerstone Macro, Stamford, and DBO to our platform. Looking ahead, we expect our non-compensation costs, excluding reimbursed deal expenses, to be closer to our previously provided guidance of around $62 million per quarter. During the first quarter of 2023, we generated adjusted operating income of $41 million and an operating margin of 14.1%, demonstrating the resiliency of our diversified platform. For the current quarter, adjusted income tax expense was reduced by $14 million of tax benefits related to restricted stock vestings, which resulted in a net adjusted income tax benefit for the quarter. Excluding these benefits, our first quarter adjusted tax rate was 28%.
We continue to expect our full year 2023 adjusted tax rate will be within a range of 27%-29%, excluding the impact from stock vestings. During the first quarter of 2023, we generated net income of $42 million and diluted EPS of $2.35. We've made great strides over the last few years to increase the long-term earnings power of our platform. Our results this quarter reflect the challenging market conditions, we believe we are in a position of strength once markets open up to continue to realize the benefits of our expanded and more diversified business. Let me finish with an update on capital allocation. During the first quarter of 2023, we returned an aggregate of $112 million to shareholders through buybacks and dividends paid.
We repurchased approximately 426,000 shares of our common stock, or $61 million, which more than offset the share count dilution from this year's annual stock grants. We also paid an aggregate of $51 million, or $1.85 per share to our shareholders through our quarterly and special dividends. In addition, today the board approved a quarterly cash dividend of $0.60 per share to be paid on June 9th to shareholders of record as of the close of business on May 26th. With that, we'll open up the call for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Devin Ryan with JMP Securities. Please go ahead.
Thanks. Good morning, everyone.
Hey, Devin.
Good morning.
Hey. Maybe just start on the M&A advisory business. Appreciate we're in a pretty uncertain moment here in the market. Love to just get a little bit more color around just the pipeline or maybe the pipeline of mandates, just to get a sense of like where dialogue are today. Appreciate stuff's moving slowly, but just how active dialogues are and maybe where mandates are relative to a year ago. Also on the sponsor side of the business what you think the trigger point will be to kind of maybe speed things back up again.
Yeah, I mean, obviously, the, like, the Q1 advisory number was slower than Q4 in the quarters last year. You know, some of that had to do with just how much stuff we started in Q3 and Q4 of last year, which was a smaller number. What I would say, and then even the stuff that was contemplating started you ran into quite a bit of volatility in the back half of March with things going on with the banks. You know, not that it's a long period of time, but I would say, in April, we've definitely been more active launching transactions. It's early in that cycle to know are you gonna meet sort of expectations on price?
Are you gonna get all of the financing right? Certainly encouraged by the pace of new launches and some of the feedback on some of the deals that were taken to sponsors, at least, so far. Although acknowledge that that's early.
Okay. got it. Maybe I'll dig in a little bit more on the bank side and, just financials more broadly in the, in the wake of kind of the recent banking stress. you know, are you seeing this play out in terms of kind of capital raising demand or maybe kind of a building pipeline of capital raising that might need to happen? I'm assuming your M&A is still potentially gonna be challenged in the bank space, but, yeah, just maybe other types of strategic advice that's going to be needed here in the intermediate term to navigate through what's still a pretty, uncertain moment for the industry.
Yeah, I would say we're stuck in this phase where we're a little bit frozen. I mean, obviously, people sort of are seeing lots of the banks report, and it's been tough for quarters. You know, I definitely think longer term this is gonna spur more advisory activity, but that's gonna take some time to start. then obviously, we all know that regulatory environment, it takes time to close. I think it's we certainly expect more capital raising, but I think we're gonna need a little more guidance to see what shakes out regulatorily here, what's sort of expected what other peers are doing. I would say in general, we view this turmoil as gonna be
Quite good long term for our depository business, but it's gonna take a little bit of time. I mean, that's not gonna make a big impact in the next quarter or two.
Got it. Okay, that's helpful. I'll just close out here on the restructuring business. You had another nice hire over the last couple days there and you've been building out that team and capability and it sounds like you've had some momentum there. Maybe just, if possible, kind of size scale where you are in that business today, and then also the opportunity ahead how much appetite there is to grow that and the white space you see just particularly as we're getting into a little bit of a restructuring cycle, but could be an extended moment if interest rates stay higher here for the next couple years.
Yes. Just a reminder, we really got into the, we had a very small team. We got into the restructuring business at the end of 2020 with TRS. We've absolutely grown that team and pretty much grown revenues, but off of a small base for us. I would say we're starting to see an inflection point and some transactions and the size of it continue to grow. We absolutely expect it'll be another record for us in that business this year. It's still off of a small base where it's starting to impact the total advisory line. You know, it's gonna take us a couple more years of scale.
Really happy with the hires we've made, but we we're certainly starting to see where that's gonna make a overall impact on our advisory line.
Got it. Okay, great. I will hop back in the queue. We got a couple more. Let other people ask. Thanks.
Great. Thanks.
We'll take the next question from James Yaro with Goldman Sachs. Please go ahead.
Good morning. Thanks for taking my questions. Maybe we could just start with the hiring backdrop that you're seeing. A number of your peers have talked about this being a much stronger backdrop on the recruitment side, and this could impact their comp ratios from here. Does like the higher comp ratio that you put up this quarter already discount better hiring backdrop? What do you see as the opportunity to expand the business from here?
Yeah, I mean, I would certainly agree. In the last couple months in particular, I've certainly seen more opportunities for more of our industry teams, more of our product groups. You know, we've been fairly consistent in hiring and and even in the last few tougher quarters have added to that headcount. You can see our MD headcount. I would say, yeah, we're even at another inflection point here this spring with the number of dialogues and things going on. I would say we're pretty careful when we look at the comp rate on a quarterly basis to think about where we're going with hiring. Could the comp rate go high?
I think if the comp rate goes higher from here, it will be marginally, and it will be based on do we accelerate some of the hiring even further. you know, I would agree, we're seeing more opportunity. We won't be afraid to take the comp rate, a bit higher, but that's a relative basis relative to some of the other comments and things you've heard from peers.
Okay, that's very helpful. Maybe just turn to fixed income. I think the results there were impacted by market volatility, which I would imagine has in part to do with the recent banking stress. Maybe just speak to whether client engagement has improved so far in the second quarter, or if not, what you think the timing will be for this part of the business to inflect positively?
James, we I mean, if you think about the end of 2022, we started seeing this happening, particular with the banks and credit unions as their liquidity was not as strong, and that's been only that issue has been increasing. The banks in particular, we have seen a reduction in activity. Conversations with those banks just around helping them with asset liability management, and helping them hedge interest rate risk with our derivative strategies has been there. The issue is if they don't have the liquidity and aren't active in the market, there's not much we can do about that. We are not seeing that pick up yet in the second quarter.
It's one of those things where we need to see a reduction in just the volatility of rates, I would say primarily. You know, it can turn quickly, but I guess it's not something that I can predict when that will happen. Related to the rest of our client verticals, we saw some help from the diversification of things like public entities and insurance companies that took advantage of maybe the shorter end of the curve and some trading strategies. There too, overall, we're seeing clients really taking a pause as they try to understand where rates are going and at what point do they actually wanna go out on the curve from a duration perspective.
Okay, that's very helpful. Thank you for taking my questions.
Thank you.
We'll take the next question from Steven Chubak with Wolfe Research. Please go ahead.
Good morning. This is Brendan O'Brien filling in for Steven. I guess to start on the advisory side, we've heard from you and a number of your peers talk about a few different conditions that are needed for an M&A recovery, including the narrowing of bid-ask spreads, greater macro clarity, and more financing availability. Want to get a mark to market on these various factors at the moment relative to where we were last quarter and how you see them evolving.
I would say probably top on the list is just macro environment, you know. Especially on the strategic side of the business I always look for CEO confidence and people have to feel good about their own next couple of quarters before they're gonna transact. You know, I don't really think we've seen a reflection point there. You know, you definitely gonna need for a lot of pickup to see some macro improvement. I think relative to the financing environment, I do think we see green shoots, and we can kinda see that from our debt advisory business. It kinda depends on the part of the market you're in.
At least in the middle market, in some of the smaller transactions, relative to sponsors, they might write a bigger equity check. If maybe they were getting 6 times leverage, maybe they're getting 5 times. I would say that market's not frozen. It is open. It's just tougher, based on a lower leverage ratio, higher amount you're paying. It's just harder to transact. It's certainly open. On lots of our deals, at least in the middle market, we do see a path to financing. I can't remember what your third part was, Brendan.
bid-ask spreads and valuation.
Yeah, I would say we're valuation bid-ask spreads that always takes a few quarters, but we're at least 3 or 4 quarters into that. You know, that's probably the part I start to feel the best about. You know, certainly with some of private equity, I mean, they've been out of the market on some of their sell sides. You know, many of them are always raising money and they don't go an entire year without some liquidity, some in, some out. Again, on the bid-ask spread, I think we're a lot closer to seeing transactions there.
Right. That's great color . Thanks for that. I guess pivoting to the corporate finance business. You saw a fairly sizable step down this quarter after seeing momentum steadily build throughout the last year. We heard from some of your peers that they're beginning to see underwriting pipelines build and that they believe that activity could inflect positively in the back half. Could you speak to what you're seeing in terms of pipelines and dialogues in the business and whether you feel there's an increased need from biotech or healthcare firms to get out and raise capital, given we're now as you indicated in the prepared remarks, five quarters into this ECM slowdown?
For us we've got a couple pieces in that corporate financing line. We've obviously got ECM, and then we've got some of the debt capital raising in particular financial services. I would say relative to ecm January, February were frankly sort of the same run rates we saw the back half of last year, which by no means was a good market, but certainly better than the first half of last year. We saw that in January, February. that with the turmoil going on with the banks, kinda came to a screeching halt in the after the first 10 days of March. That really impacted ECM for March.
I would say relative to April, we're kinda right back where we were in January, February. Okay market. We're getting some transactions done in healthcare. We can see a path to launching. We do expect that to continue to get better especially if volatility stays low here. You know, how big that fee pool gets, I mean, these are still relatively small numbers, but we would see continued improvement throughout the year.
Good. Thanks for taking my questions.
As a reminder, it's star one to ask a question. We'll take our next question from Mike Grondahl with Northland Securities. Please go ahead.
Hey, thanks, guys. A lot of my questions have been asked, but Chad, maybe an update on the DBO Partners acquisition from last fall. You know, the tech investment there, and how's that going?
Yeah. we're obviously we're 4 or 5 months into that. We're really happy with the team. Frankly, we pretty much fully integrated that from a leadership perspective, from the way we're working on transactions from sort of how we're dividing up accounts and sectors. I think we're happy in terms of where we're at. Obviously, that is probably one of the tougher sectors relative to announcement level, that's certainly not playing through in terms of new transactions. I would say when we've done these deals before, we're pretty patient on how long that's gonna take, how it's gonna work, and really happy with sort of the platform we have now to do business.
You know, think in the back half and certainly, going forward, that's gonna make a big impact on our advisory business.
Great. you know, in the last several years, there's been a bunch of these tuck-in acquisitions. Any others to really call out that are performing nicely above plan?
I mean, it obviously depends on the stage and the quarter we're in. You know, I would say, obviously now, trs had a really good end to last year, a really good start to this year in the restructuring market. Obviously, the market's pretty conducive to that. frankly one of the best performers is Cornerstone with our macro business. You know, obviously the environment was really good for that last year. You know, continued volatility in Q1 was really good for that. You know, those would probably be a couple examples I'd give you.
Great. Good luck the rest of 2023.
Thank you.
It appears there are no further questions at this time. I'll turn the conference back to Mr. Abraham for any additional or closing remarks.
All right. Thank you, operator. Thanks, everyone. We look forward to updating you on our second quarter results. Have a great day. Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.