Good morning, and welcome to the Piper Sandler Company's Conference Call to discuss the Financial Results for the Q2 of 2021. During the question and answer session, Securities Industry Professionals may ask questions of management. The company has asked that I remind you that statements on this call that are not historical or core facts, including statements about beliefs and expectations are forward looking statements that 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.pipersendler.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 the Sandler 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's website. As a reminder, this call is being recorded.
And now, I'd like to turn the call over to Mr. Chad Abraham. Mr. Abraham, you may begin your call.
Good morning, everyone. Thank you for joining the call to review our Q2 2021 results. I am here with Deb Schoneman, our President and Tim Carter, our CFO. We will go through our prepared remarks and then open up the call for questions. We delivered the 5th consecutive quarter of increased revenues, highlighting our momentum and demonstrating the earnings capacity of our business model.
While we continue to experience strong client activity across our business segments, broad based investment banking activities Drove the increase in revenues during the Q2. We generated adjusted net revenues of $493,000,000 for the Q2, a 27.7 percent operating margin and adjusted EPS of $5.37 all quarterly records. For the first half of twenty twenty one, we recorded adjusted net revenues of $906,000,000 A 26.4 percent operating margin and adjusted EPS of $9.51 again record setting activity. The outlook for the second half of twenty twenty one remains strong as our pipeline of deals is at peak levels. Our success is resonating with potential new partners and we are continuing to pursue our growth initiatives.
Turning to our Corporate Investment Banking business. We generated total Corporate Investment Banking revenues of $351,000,000 in the Q2 of 2021, up 31% from the previous peak in the Q1 of this year. Performance in the quarter was strong across industry verticals and product offerings, highlighting the scale and diversification of our business. Our Healthcare, Financial Services and Diversified Industrials and Services teams had terrific quarters. Highlights for the quarter included: our Healthcare franchise continues to produce very strong results with performance balanced in both advisory and equity financing during the quarter.
The breadth of our Financial Services Group Was apparent with strong performance across subsectors, including depositories, insurance, real estate and FinTech. Further strengthening our non depository sectors remains an area of focus and growth for us. Diversified Industrials and Services Produced a record quarter driven by outstanding advisory activity, primarily with our private equity client base. We continue to invest in building our sector coverage within this group and we currently have 70 investment banking professionals, including 12 MDs on the platform. Debt activity, both advisory and underwriting, continues to be strong.
Our deep structuring expertise and strong distribution provide us with multiple ways to assist our clients. Collectively, these teams generated over $70,000,000 of revenues for the quarter. And our restructuring business was further enhanced with the acquisition of TRS Advisors and the team is contributing in line with our expectations. During the quarter, M and A and restructuring activity generated 53% of total Corporate Investment Banking Revenues. Equity financings contributed 24% and debt financing and capital advisory engagements produced 23% of revenues.
We expect the mix of our Corporate Investment Banking revenues to shift as our advisory pipeline builds and Equity Capital Markets Activity begins to moderate. Within Corporate Investment Banking, our advisory services business generated record revenues of $249,000,000 during the quarter, up 63% sequentially and 191% over the Q2 of last year. Our performance was strong both on an absolute and relative basis. We completed 58 M and A and restructuring transactions and 40 capital advisory deals during the Q2. Our consistent focus and investments in people, industry coverage and products for our Investment Banking business Continue to drive new highs in our revenues.
M and A activity was strong across industry verticals with high volumes and increased transaction sizes. Our average M and A fee has increased, reflecting our fee discipline and larger average transaction size as our brand continues to strengthen. As an example, our chemicals and materials team, which we added with the 2020 acquisition of Valence, Has recently announced 6 deals with an aggregate transaction value of $14,500,000,000 Ample availability of debt and equity, a favorable rate environment, strong business performance and CEO confidence Continue to drive strong M and A activity. The potential for tax law changes is an added catalyst and may pull forward activity into 2021. As a result, our pipeline of deals is at record levels across most of our industry teams.
We believe the M and A market is experiencing strong secular growth and we are well positioned to benefit. Turning to corporate financing. During the Q2 of 2021, We generated $102,000,000 of revenues and completed $67,000,000 equity, debt and preferred financings, raising $24,000,000,000 in new capital for our clients. With strong equity valuations, low interest rates, Reduced market volatility and high demand from investors, market conditions remain conducive for equity and debt capital raising during the quarter. Our healthcare team led the quarter followed by Financial Services and Technology.
In Healthcare, we continue to be a market leader where we ran the books on 22 of the 24 deals we completed during the quarter. In Financial Services, we were particularly active in subordinated debt financing for community and regional banks, where we maintain over 50% market share based on deal value. Technology is an important area of growth for us And we have made significant progress on increasing the number of book run deals and average fee size. It was an active quarter in terms of recruiting and we finished the 2nd quarter with 145 MDs in Investment Banking and Capital Markets, Hiring 5 new Managing Directors to strengthen our presence in Healthcare Services, Medtech, Renewables and Clean Energy, Oilfield Services and Equipment and Industrial Software and Technology. Our success and momentum continue to resonate in the marketplace.
Our strong performance during the Q2 of 2021 also resulted in Corporate Investment Banking revenues crossing the $1,000,000,000 mark for the last 12 month period. Our people and expanding expertise makes us increasingly diverse and well positioned to take advantage of secular growth. We continue to expand our sector coverage, develop new product capabilities, increase market share and add great talent to our platform. I would like to thank our team for making Piper Sandler a leading brand and destination of choice for our clients. Now I will turn the call over to Deb.
Thanks, Chad. I'll begin with our equity brokerage business. For the Q2 of 2021, we generated equity brokerage revenues of $35,000,000 down 19% sequentially and 14% from the 2nd of last year. Equity markets saw reduced volatility and volumes during the Q2. Market indices marched higher, driven by strengthening economic conditions and accommodative Federal Reserve policies providing ample liquidity.
Specific to research, we continue to build out our industry coverage, which in 2021 included expanding our coverage of the technology sector. Based on our current roster of publishing analysts, we rank number 1 in terms of the number of SMID cap companies under coverage And in total, we have over 9 50 stocks under coverage. Turning to municipal financing. For the 2nd quarter, our public finance Business generated $36,000,000 of financing revenues, up 33% from the Q1 of this year and 17% compared to the 2nd of last year. We underwrote 239 municipal negotiated issuances during the quarter raising $4,300,000,000 for our clients.
With low interest rates and a strong credit outlook, municipal market issuance continues to remain strong, driven by new money issuance as well as continued refinancing activity. While our governmental business, which drove Our results last year remain strong. The upside to our performance this quarter was driven by great results from our specialty sector clients, which include special districts, healthcare, Senior Living, Education, Hospitality, Housing and Transportation. We were able to assist our clients in pricing a number of higher margin transactions in the quarter. Our high yield platform within public finance centered around specialty sectors differentiates us in the Businesses in the market and these segments continue to be an important growth driver for us.
On a year to date basis, Municipal financing revenues of $63,000,000 represent our strongest first half on record. Our relative performance was also strong with first half revenues up 18% from 2020 relative to a 3% increase in the overall market based on par value of municipal negotiated Issuances. Looking forward, our pipeline remains strong and we expect the second half of this year to be similar to the first half. Turning to fixed income. For the Q2, we generated fixed income revenues of 61,000,000 down 8% on a sequential basis and up 25% compared to the Q2 of last year.
The 10 year treasury rate decreased from 1.74 percent at March 31 to 1.47% at June 30. The reduction in yields has driven some market participants to the sidelines awaiting more clarity in the direction of rates. However, Activity within our financial services clients continues to remain strong as banks are flushed with excess liquidity. Our deep expertise, market leadership and breadth of relationships has enabled us to advise these clients on repositioning their balance sheets and investing was softer relative to the Q1 of this year as tight spreads and low yields led clients to remain on the sidelines resulting in a decline in secondary trading, particularly in tax exempt municipals. We continued to build our to our platform capabilities to grow their book of business.
As part of that initiative, we hired 2 senior salespeople in the 2nd quarter, both specializing in non agency structured products. In addition to hiring, we see opportunities to increase client penetration and the productivity of our existing sales force by leveraging our platform's full capabilities and serving clients with advice and product expertise that goes far beyond From an outlook perspective, with the current low rates and uncertainty over the direction of interest rates, In July, we have experienced a slowdown in client activity. 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. We generated record net revenues of $493,000,000 for the Q2 of 2021, an increase of 19% over the sequential quarter and 68% from the Q2 of last year. Our performance in the quarter was driven by strong contributions from our Investment Banking businesses, including record advisory services revenues. Net revenues for the first half of twenty twenty one totaled $906,000,000 An increase of 69% over the prior year period as we benefited from the significant recovery of Investment Banking as well as robust brokerage activity.
Turning to operating expenses and margin. Our compensation ratio was 60.7% for the Q2 of 2021, down from 61.5% for the Q1 of this year, reflecting our strong performance in the quarter and first half of this year. On a year to date basis, our compensation ratio was 61%. We continue to manage compensation levels while considering investments, employee retention and business outlook. Based on our current market outlook and pipeline of growth opportunities, we expect our full year compensation ratio to be near 61%.
Non compensation expenses excluding reimbursed deal expenses were $49,000,000 for the Q2 of 2021, An increase of 10% on a sequential basis as we are starting to see a pickup in travel related costs. We generated operating income of $136,000,000 and an operating margin of 27.7 percent, both of which represent quarterly records. These strong results represent the 3rd consecutive quarter with over $100,000,000 of operating income and the 4th consecutive quarter with an operating margin in excess of 20%. On a year to date basis, we generated operating income of $239,000,000 an increase of 196% over the prior year. Our margin for the first half of twenty twenty one was 26.4%.
Our operating income and margin reflect the increased scale we have built, the successful integration of our acquisitions and the benefit of lower travel related expenses. We continue to demonstrate our ability to drive operating margin expansion It was 26.6 percent for the Q2 of 2021 and within our guided range. Our adjusted tax rate for the first half of twenty twenty one was 25.8%, slightly below our range as we recorded the tax benefit in the Q1 related to restricted stock vesting at prices Higher than the grant date price. We continue to expect our full year adjusted tax rate will be within our targeted range of 26 28% going forward. Turning to earnings.
For the Q2 of 2021, we generated net income of $99,000,000 up 31% sequentially, driven by higher revenues and an improved margin. Diluted EPS for the 2nd quarter was $5.37 representing our strongest quarter on record and an increase of 29% over the previous peak. For the first half of twenty twenty one, Net income totaled $174,000,000 and diluted EPS was $9.51 Compared to the first half of twenty twenty, We nearly tripled net income and diluted EPS driven by the significant improvement in markets and our strong execution. Let me finish with an update on capital. With record earnings and no significant increase in operating capital usage, excess liquidity continues to build And our capital position remains strong.
We're committed to returning capital to shareholders to drive total returns. During the first half of twenty twenty one, we paid an aggregate of $41,000,000 to our shareholders through our quarterly and annual special dividends and repurchased approximately 321,000 shares or $36,000,000 of common stock in order to offset dilution from annual stock grants. In addition, the Board approved a quarterly dividend of $0.55 per share to be paid on September 10, 2021 to shareholders of record as of the close of business on August 27. This quarterly cash dividend represents a 22% increase compared to the quarterly cash dividend paid for the Q1 of this year. Overall, we are thrilled with our record second quarter and first half results.
Our business continues to be well positioned for growth against the strong market backdrop and we are confident in our ability to grow and deliver shareholder value by executing on our long term strategic objectives. Thanks. And we can now open up the call for questions.
We will now begin our Q and A session. Our first question comes from the line of Devin Ryan of JMP Securities. Your line is open.
Good morning, everyone. How are you?
Good. Hi, Devin.
Maybe start with a question or a couple of questions On the M and A Advisory business, Chad, maybe just to dig in a little bit on some of the outlook commentary. Clearly, A very good environment right now. We're hearing that middle market M and A is incredibly active and you guys are Clearly participating in that. I'm just curious as you kind of look out, it sounds like perhaps there could be some pull forward into this year For tax reasons or other reasons, I'm just kind of curious what the biggest drivers are of activity there. And then the other part of the question just is on balance.
Specifically, you highlighted it, we've seen some Really nice productivity there, some large deals. So curious if that's just a function of their business momentum that they already had or their benefits that they're already seeing being on the Piper platform.
Yes. Thanks, Devin. Yes, We're obviously seeing really good activity in advisory and really happy with Q2, but continue to see Very good pipeline. I would say, as I think about the drivers for advisory, one of the things across the M and A market, if I just compare Other years in the past where it's been strong is, it's just really strong across so many industry groups and segments. So you're just getting broad based Participation in the M and A market.
And then I like we commented, there's definitely a secular Change in M and A, that's somewhat just driven by sponsor activity. I mean, there is just so much capital in various And Private Equity that, that is having a big impact on business. Obviously, financing is good. I think at the beginning of the year, we got asked the question about tax rate and future tax rate. We had started to hear that on a few transactions.
As the year has progressed, there's definitely some processes That we started over the summer that want to finish by year end. So I also think that's helping the year. I don't think that's Overwhelmingly driving the timing of some things, but it's just another factor. And then specifically To your Valence question, yes, if you just remember, we closed on this transaction last spring, not Obviously, the greatest timing we closed, very little revenue in the back half of the year, but they have just had a Spectacular first half. And I would say, frankly, most of that revenue is to come because a lot of these transactions were just announced.
And several of them are were quite large, many of them involve private equity. There's definitely examples of where being on our platform has helped, but most This is just years of building the expertise and being thought of as a really good partner in that space and it's just resulted in some really key marquee transactions that are frankly pretty large, some middle market, but Several pretty large, so great backlog of transactions to close here in the second half and early next year.
Okay. Terrific color. Thanks, Chad. Maybe one for Deb on the fixed income brokerage opportunities that you alluded to. I'm just curious if you can give any more specifics around potential scale that you could see from some of these initiatives to expand The platform and then whether that implies more capital need in some of those areas as you expand?
Yes, Devin. So it's really about continuing to build out the breadth of our product expertise, that as you know now with the combination with Sandler goes way beyond just normal bonds, CUSIP business, derivatives, loan trades and securitizations, some areas we're focused on even specifically with Securitizations is one that we think there's some opportunity to build out. I would say we still have not fully realized the benefit of the combination And either while we've seen really nice revenue growth from what was the 2 separate businesses now combined, there's still Work that we're doing to leverage the broad products that we have that was very complementary between the two businesses across The combined sales force and focused on driving really strong analytics and tools focused on various client verticals that we've talked about. Relative to your question on capital, as you have seen, we have reduced the amount of capital that we have used Partly given the scale and just the breadth of the products we have, we do not see a need for dramatically increasing capital in any way to grow the business. So that's not part of the focus.
So I don't know if that answers your question fully, Devin, but my thoughts.
Yes. No, very helpful. Thanks, Tim. And maybe if I can just squeeze one more in, give one for Tim as well here. So just on the on the comp ratio, I heard the guidance that probably end up closer to 61%.
I think you previously were talking about 62%.
Should we think about kind
of 61% as maybe the bottom range here now going forward to the extent Revenues are remain strong or is there room for even more leverage off of that to the extent there's Opportunity for revenue growth into next year or just how we should think about kind of the flex on the comp ratio, especially given that it's probably going to have better than we were previously predicting?
Yes. Devin, I think you're thinking about that right in terms of what we've talked about before and where we're currently at. I think This is sort of the right level based on revenue levels at current activity. In that range, I mean, there's still room for more leverage, but we're still very focused on what we From an investment perspective within that 61%, what we're thinking about in terms of just overall retention. So I don't see a large move on that rate with revenue levels sort of Where they're currently at.
Okay, great. All right. Well, I'll leave it there. Thank you, guys. Congrats on a nice quarter.
Thank you.
Thanks, Kevin.
Your next question comes from the line of Mike Grondahl of Northland Securities. Your line is open.
Hey, thanks guys and congratulations. After December March, it's really Tricky to have an encore, but you clearly did. Chad, just in relation to your comments on sort of the advisory business at peak levels. Can you maybe comment a little bit about where you think we're in the M and A cycle? How much of this business is coming from financial sponsors and just kind of who you're seeing as your competition today?
Yes, I would we definitely I mean, obviously, With the results, we're sort of at new peak levels for advisory. But I would Say, we feel like this has room to run. You just looking at our pipelines, I mean, really across Almost every industry team were at record levels for pipelines. So some of it, Whether we're at the end of a cycle or beginning of a cycle, that's a tough question. I mean, I personally believe we're in a Secular growth market for M and A across many industries.
I mean, obviously, private equity is at record levels, record Levels of cash, but I also think strategic acquirers just the pace of change and The businesses they want to enter across many of the segments are very good. So I really believe we've got a lot of room to run here in Advisory. And then just help me with your second question again. Financial sponsors,
how much of that M and A advisory business is coming there. And then just, I guess, part 3 was kind of who are you considering your competitors today? Yes. So
we financial sponsors continue to be very active. I think Still somewhat north of 50% influenced in most of our transactions, Which is fairly close to the middle market. What I would say relative to our competitors is that Really just depends on the industry team. I mean, we have very different competitors in bank M and A and FSG. We obviously have different competitors in advisory for healthcare.
There's certainly other boutiques, Lots of the big transactions we do in healthcare and other spaces. We compete with the bulge bracket and then across just The bread and butter private equity business in industrial and consumers, that's a lot of the middle market sort of boutique. So It's really hard to answer that question unless we're talking about a particular industry team.
Sure. And Maybe I meant a little bit more the level of competition. Is it getting more intense? How are you seeing the overall level?
Yes. I wouldn't say it's any necessarily more competitive. I mean, for sure, we know we are at And other firms are at capacity in certain levels. So we've got the opportunity to be awfully choosy about kind of which Transactions we take on, which really helps increase an already good close rate even higher. It certainly gives us leverage on Fee structures.
So, it's a competitive market. Lots of advisory groups are doing well, but I think frankly just The pace of activity is even just outpacing capacity amongst all of us.
Got it. And then, hey, just lastly quick, recruiting plan, you mentioned the 5 new MDs this year. Should we expect you to see you guys kind of continue to layer in at about that pace?
Yes. What I would say is obviously adding 5 in the first half was really good. We're Proud of doing that in a competitive market. It is true that we add more in the front half of the year than the back half of the year, obviously, with A very good year, Investment Bank. Your bankers are doing well, firms are doing well.
It's going to get tougher to add as the Year goes on. We're still working on the group the growth initiatives. We have some interesting team hire discussions. We have Others, but I don't see the pace staying the same just based on the time of year. But for several quarters now, we've continued to grow MD headcount.
So I don't know if that continues Every quarter, but the long term trend is we've got quite a bit of room to run there as well.
That's fair. Hey, congratulations again. Thank you.
Thank you.
Your next question comes from the line of Michael Brown of KBW. Your line is open.
Okay, great. Hey, Chad, Tim, how are you guys? Hi. Hi. So I wanted to, I guess, start with advisory.
Obviously, really strong first half, up over 100% year over year. Chad, you made a comment about the momentum there and an expectation for I don't I forgot the exact wording you used, but basically a good second half here. I guess my question is a lot of your peers have talked about The potential for the second half to be stronger than the first half, I think you had a bit of an outperformance in the first half relative to your peers. But is there any way to kind of put some stakes in the ground on the expectations for the second half based on what you're seeing in the pipeline? Is it possible to Meet or exceed the first half?
Yes. I think the way we think about advisory, we would agree with you. I think if you look at everybody's that's Reported and others that are out there, we think on an advisory level, we've outperformed in the first half. And so while we think We're going to continue to have a very strong second half. I'm not going to stand here and predict that it's going to be up from the first half.
But Based on what we're seeing in the pipeline deals we have announced, level of activity, we feel good about Trying to replicate the first half and the second half for advisory.
Okay, great. And then during the quarter, the Biden administration basically Urged for greater scrutiny on M and A transactions, kind of greater antitrust Considerations on M and A deals. And one of the areas was kind of a specific spotlight on bank M and A and encouraging the FDIC, OCC, DOJ and Fed to take a more robust Review of mergers there. Can you speak to what your expectations are there It appears to be a bit more focused on large cap bank M and A, but I wanted to hear your thoughts if that could certainly Move down to the smaller community sized banks as well.
Yes. We certainly recognize across All industries, some of the commentary from the administration, if we see this in several industries, I mean, it's certainly hard to argue that It wouldn't have an effect on the M and A business. All I can tell you is just from the level of activity, it's hard to see How that's going to unfold, specifically with financial institutions and depositories, there has been specific commentary. I personally think they will be focused on the much larger transactions. I mean, if you really think about it, A lot of the middle market transactions we're doing and even some of the larger regional transactions, I would argue that is giving These banks an opportunity to compete better, offer better level of services to the consumers and compete with the larger banks.
I'm not sure I generally agree with sort of the philosophy, but there's no question there's been commentary. What I can say is You can just look at our deals and deals announced across the street in the last month or 2 since that came out. It hasn't slowed Activity at all and the level of conversation is high and the amount of deals we have announced is high. So I think your The way you phrased that question is correct. I think there's going to be a lot of scrutiny at the very, very large deal size.
Okay. Yes, I appreciate the thoughts there, Chad. Maybe just one last one for me on the dividends. Great to see another increase there. I just want to make sure I didn't miss it.
I guess Changing the payout expectations, is that still the right way to think about it? Or are you Maybe kind of run with a little bit higher dividend payout now or is this just kind of speak to the fact that you're seeing a higher Like durability to your higher EPS here going forward?
Yes, Mike, maybe I'll take that. We yes, our dividend payout ratio of 30% to 50%, that's still The plan and what we have in place, which includes the 4 quarterlies and then the special, I We've run over the last couple of years more at the lower end of that range because we've been deploying a lot through corporate development. I think we've talked over the last quarter or 2 where given the amount of cash generation we've got, we likely move more up in That range. And you're right, in terms of just again the overall level of earnings and this consistency of a higher level Of EPS, we do feel like it's the right thing to remix in some ways to more of a quarterly. And that would obviously bring the special down a little bit more.
So we're thinking about that mix, but the dividend payout ratio of 30 to 50 stays, it's just, yes, we're likely more at the higher end of that range given the results.
Okay, great. Thanks Tim.
And there are no further questions At this time, I would like to turn it back to Mr. Chad Abraham for the closing remarks.
Thank you, operator. I'll close by thanking all of my employee partners for their continued hard work and dedication to our clients. Thanks to everyone that joined the call. We very much look forward to updating
And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.