Piper Sandler Companies

NYSE:PIPR

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, and welcome to the Piper Sandler Companies' Conference Call to discuss the Financial Results for the Second Quarter of 2023. During the question-and-answer session, securities industry professionals may ask questions to 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.

At this time, I would like to turn the call over to Mr. Chad Abraham. Mr. Abraham, you may begin your call.

[Chad Abraham, Chairman and Chief Executive Officer]

Good morning, everyone. Thanks for joining us today to talk about our second quarter results. I'm here with Deb Schoneman, our President, and Tim Carter, our CFO. In a challenging second quarter of 2023, Piper Sandler generated adjusted net revenues of $277 million and adjusted EPS of $1.13. Activity across most of our businesses continued to be muted as a cloudy economic outlook has kept many clients and transactions on the sidelines, waiting for the inflection point to better market conditions.

We remain focused on helping our clients navigate a highly dynamic economic landscape. When markets stabilize, we expect activity levels to accelerate and we believe that we are strongly positioned to help our clients transact across our various product and business lines.

Turning to corporate investment banking. We generated revenues of $167 million during the second quarter of 2023, flat compared to the first quarter. Highlighting the benefits of our diversified product and industry set, increased corporate financing activity offset a decline in advisory service revenues for the quarter. Specific to advisory services, revenues of $130 million for the quarter reflect the continuing challenges in the M&A and debt markets. We completed 61 advisory transactions during the quarter.

Performance was led by our healthcare group with solid contributions from our energy and power and restructuring teams. The decline in our advisory activity for the quarter was largely driven by a market-wide reduction in bank advisory transactions. The outlook for bank M&A over the next six months remains challenging, negatively impacted by company and portfolio valuations, a lack of clarity around credit quality and an uncertain regulatory capital framework. However, the longer-term outlook for consolidation and capital markets activity in the depository space is compelling, and our market-leading bank franchise is well positioned to advise clients when the market improves.

Overall, our performance on a relative basis remained solid. Completed U.S. M&A market activity is down approximately 50% compared to the first half of last year, while our revenues are down 29%. On a year-to-date basis, we maintained our ranking as the number two advisor on announced U.S. M&A transactions under $1 billion. Importantly, the outlook for M&A is improving. We have a number of larger announced deals expected to close in the second half of this year as well as a strong pipeline of deals that have kicked off the sale process. We expect advisory services revenues for the second half of 2023 to be better than the first half.

Turning to corporate financing. The equity financing market improved during the second quarter with lower volatility levels and an increase in investor demand for new issuance. However, activity continues to remain below historic levels. For context, 21 IPOs priced in the market during the second quarter of 2023 compared to an average of 102 IPOs per quarter for the last five years. We generated $37 million of corporate financing revenues during the second quarter of 2023, up on a sequential basis. We completed 24 equity and debt financings, raising $5 billion in capital for corporate clients. Activity was driven by our market-leading healthcare franchise, which ran the books on all 14 deals completed during the quarter, including one of the largest biotech IPOs in history.

Highlighting our strong relative performance, on a year-to-date basis, our economic fees from sub $5 billion market cap companies increased approximately 200% compared to a 30% increase in the fee pool for this market. In addition, we ranked as a top five investment bank based on a number of book run deals for healthcare companies with less than $5 billion of market cap. As we look ahead, we expect financing activities to continue building as we progress through 2023.

Turning to investment banking managing director head count. MD headcount remained flat sequentially, finishing the quarter at 171 managing directors. We added two MDs during the quarter, one to continue growing our real estate team and one to further expand our restructuring practice. These additions were offset by planned attrition. We remain focused on strategically managing headcount and driving productivity, while at the same time continuing to strengthen our sector coverage and product capabilities to ensure we have the resources to execute against market opportunity as conditions improve.

With that, I will turn the call over to Deb to discuss our public finance and brokerage businesses.

[Deb Schoneman, President]

Thanks, Chad. During the second quarter of 2023, our public finance business generated $17 million of municipal financing revenues, flat compared to the first quarter. Market conditions remain challenging with higher nominal rates, interest rate volatility, and weak investor demand. For the quarter, we underwrote 109 municipal negotiated transactions raising $2.4 billion of par value for our clients. Our results continued to be disproportionately impacted relative to the overall market issuance due to our meaningful presence in the high yield sector and our middle market focus within the governmental business.

As we look ahead, our pipeline is large and diverse. We have several significant high quality transactions scheduled for the second half of this year and a number of high yield issuers looking to raise capital. As a result, we expect revenue generation to improve modestly during the second half of 2023 with additional upside if there is increased demand for the high yield offering.

Moving to our equity brokerage business. We generated $50 million of revenues for the second quarter, down modestly from the first quarter. Equity markets experienced lower volatility which moderated volumes as well as our results. We traded 2.7 billion shares during the quarter on behalf of our clients, down 4% sequentially relative to a 9% decline in market volumes.

Client research votes and affirmation of the quality and capabilities of our platform continued to increase, and we see opportunity for further market share gains in this business over time. However, with the expectation of reduced volatility in the near term, we expect our equity brokerage revenues in the second half of 2023 to be consistent with the first half.

Moving to fixed income. Market conditions continued to be challenging. The yield curve inversion grew steeper during the quarter keeping investors on the sidelines awaiting more clarity on when the Fed will end its interest rate tightening. For the second quarter of 2023, we generated revenues of $37 million, down compared to the first quarter. The breadth of our client relationship and product capabilities provided some level of resiliency to our results.

Asset managers and public entity clients were active as they found relative value in the short end of the yield curve. Trading among our depository clients remained slow as they continue to focus on building liquidity and evaluating our capital and funding position. Advising clients on hedging strategies drove an increase in derivative activity, and we remain active assisting clients with loan sales. While we expect the near-term outlook to remain challenging, we anticipate more clarity on interest rates as the year progresses, which should provide a turning point to more constructive fixed income markets.

Like our investment banking group, we remain focused on broadening our fixed income platform. Our recruiting pipeline is active, and we see opportunities to continue expanding our market reach. We believe we are well positioned to gain share and assist clients when market conditions improve.

Now, I will turn the call over to Tim to review our financial results and provide an update on capital use.

[Tim Carter, Chief Financial Officer]

Thanks, Deb. Before reviewing our non-GAAP financial results, let me highlight an item impacting our GAAP results this quarter. Consistent with all prior periods, our GAAP results include restructuring and integration costs related to acquisitions and/or headcount reductions. For the second quarter of 2023, our GAAP results include $4 million of restructuring expenses associated with headcount reductions as well as vacated leased office space related to our previous acquisitions.

Now, let me turn to 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 $277 million for the second quarter of 2023, down 4% from the sequential quarter and 20% from the second quarter of last year.

Consistent with the first quarter of this year, market conditions during the second quarter remained difficult for most of our businesses. Corporate investment banking revenues were flat on a sequential basis and continued interest rate uncertainty has kept many of our fixed income and public finance clients on the sidelines.

For the first half of 2023, net revenues totaled $567 million, down 20% year-over-year. That said, our diversified platform is generating solid operating results. We continue to manage the business to reflect current market conditions, while balancing our strategic objectives of growing the long-term earnings capacity of our platform.

Turning to operating expenses and margins. Our compensation ratio for the second quarter of 2023 was 63.8%, slightly higher compared to both the sequential quarter and the second quarter of last year, driven by lower net revenues. For the first half of 2023, our compensation ratio was 63.6%. We continued to maintain our philosophy of managing compensation levels to be a balance of employee retention and investment opportunities, while delivering operating margins and shareholder returns. Based on our current outlook, we expect our compensation ratio to be around a year-to-date level for the remainder of the year.

Non-compensation expenses for the second quarter of 2023, excluding reimbursed deal expenses, were $67 million, an increase of 12% on a sequential basis and 11% compared to the second quarter of last year, primarily due to the write-off of a receivable in our public finance business. On a year-to-date basis, excluding reimbursed deal costs, non-compensation expenses totaled $126 million or an average of $63 million per quarter. Looking ahead, we expect our non-compensation costs, excluding reimbursed deal expenses to be around $62 million per quarter, in line with previous guidance.

During the second quarter of 2023, we generated operating income of $26 million and an operating margin of 9.5%. For the first half of 2023, operating income totaled $67 million and an operating margin of 11.9%. Our income tax rate was 18.2% for the second quarter of 2023 and 2.1% for the first half of the year. Income tax expense for the year-to-date period was reduced by $15 million of tax benefits related to restricted stock vestings. Excluding these benefits, our year-to-date tax rate was 25.3%. We expect our tax rate for the second half of 2023 to be within our range of 27% to 29%, excluding the impact from stock vestings. During the second quarter of 2023, we generated net income of $20 million and diluted EPS of $1.13. For the first half of this year, net income totaled $63 million and diluted EPS was $3.49.

Let me finish with an update on capital allocation. We remain committed to returning capital to shareholders through market cycles. During the second quarter of 2023, we returned an aggregate of $16 million to shareholders, primarily through the quarterly dividend. For the first half, we returned an aggregate of $128 million to shareholders. On a year-to-date basis, we repurchased approximately 447,000 shares of our common stock, or $64 million which more than offset the share count dilution from this year's annual stock grants. We also paid an aggregate of $64 million, or $2.45 per share, to our shareholders through our quarterly and special cash dividends.

In addition, today, the Board approved a quarterly cash dividend of $0.60 per share to be paid on September 8th to shareholders of record as of the close of business on August 25th. While our second quarter and year-to-date results reflect the continued challenging market conditions, we've made significant strides over the last few years to increase the long-term earnings power of our platform. Once markets open up, we believe we are in a position of strength to continue to realize the benefits of our expanded and diversified business.

With that, we'll open up the call for questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Devin Ryan with JMP Securities. Your line is open. Please go ahead.

[Devin Ryan, JMP Securities]

Hey, thanks. Good morning, everyone.

[Chad Abraham, Chairman and Chief Executive Officer]

Hey, Devin.

[Deb Schoneman, President]

Good morning.

[Devin Ryan, JMP Securities]

Hey. Just want to start on the equity financing market. Obviously, you saw some improving results there, and I think healthcare showed some strength and that helped offset some of the softness in advisory. So, just wanted to maybe dig in a little bit around, what you're seeing the equity issuance environment, whether you're seeing activity kind of building outside of just healthcare? And then, the bigger picture is really you had a better quarter from the first quarter, but you're kind of just back to the second half of last year levels and then clearly far off of the 2021 record, which also wasn't normal. But just trying to get a sense of like how you guys think about what a normalization in that business line could look like for Piper, especially since you've been adding resources and bankers?

[Chad Abraham, Chairman and Chief Executive Officer]

Yeah. So, I guess, first of all on the ECM question. Yes, it certainly continues to be better than the last few quarters, but the total overall fee pool in ECM is still down significantly from the averages from the last four or five years, but it's improving. I would say, for us, it has been concentrated in healthcare, but you're slowly seeing some IPOs, obviously we were on a restaurant IPO, we did a couple of financial services deals secondaries. So, I would say it's -- we're usually concentrated more than half in healthcare, that's still the case. We're slowly seeing it branch out, expect it to continue to get a little better, but it's not like it's fantastic levels of ECM at all. It's just better than how bad it's been.

And then, relative to just overall revenue levels and where things are, we've definitely in the last couple of months seen a pickup in our deal announcements, certainly our deal announcements with any size, we announced a couple of significant depository transactions this week. And certainly, every few days, we are seeing more announcements, obviously some of that will trickle into Q3 and Q4, and so we made the comment that the advisory's definitely going to be better in the second half. I would say, though, it's not like the COVID snap back in 2020, it feels like recovery is slow build, it's definitely getting better. We're definitely able to get some of the sponsor deals financed. But it's slowly better, it's not racing back.

[Devin Ryan, JMP Securities]

Okay. Terrific. Thanks, Chad. And then just a similar kind of framework for the advisory business. So, appreciate some of the commentary, it sounds like some of the early indicators of business there are improving. So, I'd love to just dig in a little bit around that and if you can provide more perspective around either anecdotally or quantifying what you're seeing around some of these early indicators. And really, is it a function of just deals that you've been mandated on and maybe people are feeling like, let's kind of start to move these forward at a faster pace or are you seeing kind of an uptick in new activity coming in or sponsors saying, okay, it's now been quite some time since we've done something, markets are more interesting now and so maybe the risk isn't as extreme. Like what is the tone? And then, this recovery in your mind, is it uneven where you have maybe the best assets trade and assets that are more cyclical or macro-centric just sit and so it's not a kind of a normal recovery in a sense of like everything is improving at the same time.

[Chad Abraham, Chairman and Chief Executive Officer]

Yeah. I would just say the signals for us is a bunch of the larger deal announcements and fees that we sort of announced the last couple of months that haven't closed, obviously that gives us visibility into the second half. I would definitely say on our sponsor business, anything of size that needed credit was very difficult. I wouldn't say it's great in the credit markets. But we're definitely getting financing packages. Some of those seller expectations are common in line. So with some financing package, some seller expectations coming in line, we're able to get more transactions done obviously in some of our industry groups, industrials and consumer and some of the ones that are heavy sponsor focus. We've launched quite a few deals in the last couple of months and those are six-month processes. So, we'll see what closes. What I would say is, we're getting -- you get plenty of bids at the beginning, and at the end of the process, there's not as many buyers standing as there certainly were a year or two. But we're getting more and more of those over the finish line.

So, I would say there is financing. And then, I guess, I would also add certain sectors are obviously easier than others in the sponsor space, but really across the board in industrials and healthcare and consumer and energy, we're definitely seeing private equity get more active.

[Devin Ryan, JMP Securities]

Okay, got it. That's great. And then, just if I can sneak one more in here for Tim. Just on the write-off of the receivable. I'm assuming that's just a complete one-off here with a one-off client to make sure understand that and make sure there is nothing else kind of to note there on the expenses? Thanks.

[Tim Carter, Chief Financial Officer]

Yeah. Devin, you're thinking about that right. I mean, it's a specific client who had a pretty unique situation, we've determined we should write-off that receivable, so we've fully written that off, there is no more exposure there.

[Devin Ryan, JMP Securities]

Okay, great. Good stuff. All right. Thank you. I'll leave it there. Thanks, guys.

[Operator]

Our next question comes from James Yaro with Goldman Sachs. Your line is open, sir. Please go ahead.

[James Yaro, Goldman Sachs]

Good morning, and thank you so much for taking my questions.

[Deb Schoneman, President]

Good morning.

[Tim Carter, Chief Financial Officer]

Hey, James.

[James Yaro, Goldman Sachs]

Hey, maybe just start with the muni finance business. I appreciate your comments, Deb, but maybe just thinking about the longer-term trajectory of that business. What's the timeline over which you think the business fully normalizes? And then, I guess, with higher terminal rates, is there any reason to expect it can't fully return to the previous revenue run rate?

[Deb Schoneman, President]

Yeah. So, first of all, just thinking about the path here. It's a little hard to predict exactly, because one of the bigger drivers for us, for our business, is our specialty businesses, meaning the biggest driver of the improvement. And we need to see more inflows into high yield funds. And while that stabilizes here and there has been some modest inflows, it's less than 10% of the outflows that we saw last year. So, that's something to watch, I guess, I would say, as it relates to how soon the recovery comes in that business.

And I would say, relative to your comment on overall rates and where those are, so the refinancing side of our public finance business, that obviously is impacted, and I would say as we move forward, you look back to the peak in 2021 that was driving part of it, so I would say we are focused on continuing to recruit and add to be able to build a business that's bigger than that, but you're accurate in that interest rates will impact the ability to get back to that sort of level.

[Chad Abraham, Chairman and Chief Executive Officer]

Yeah. And I would just add. I mean, obviously, the vast majority of projects we're financing are eventually going to happen. And so, yeah, we will get back to the run rate. Some of the project finance, project development, real estate type stuff that is specific to can you get it financed with that package, that may be on the margin in a much higher rate environment more difficult, but most of the rest of the public finance stuff or projects that are happening, I mean, they are eventually going to happen.

[James Yaro, Goldman Sachs]

Okay. That's really clear. Thank you for that. Chad, maybe, I could just ask you about the competitive environment for hiring. On the one hand, the bulge bracket is pulling back and there have been some recent deals that have actually taken out some of the publicly traded and independent peers, and I would suspect that means more capacity against that number or maybe all of your independent peers have talked about this being a golden hiring opportunity.

So, how is -- how have these two things impacted the ability and cost of bringing in new hires today?

[Chad Abraham, Chairman and Chief Executive Officer]

Yes. I would say, I mean, certainly for me, the last four or five months, we're spending more time than ever talking to candidates. I think you just look across the board, the amount of successful platforms. It's a smaller number. So, there are certain places people want to be, the reality though is just because someone makes a move -- wants to make a move doesn't mean it's necessarily a great hire. So, it's just a lot of scrutiny on quality, lot of scrutiny on in tough markets can people perform, and we really don't want more bankers that are just good in great markets. So, we're definitely seeing more hiring.

I would say relative -- I mean, part of why it is interesting is the packages the way they're structured, they're not as extreme as they've been in 2021 when things were great, so that does make it more interesting, but I would also say, for us, we're conscious of the fact that over the last few years, we've grown faster than most. So, the reality is we're still adding, we're going to add at a measured pace, but it's not like, I mean we don't need to add anybody to get significant uplift because you know productivity is at pretty low point historically.

So, I think, we'll keep adding like we have at a pretty measured pace. We'll also stay very focused on quality and productivity, and we'll continue to manage out underperformers or people that after a couple of tough years, it's sort of obvious they're not hitting productivity.

[James Yaro, Goldman Sachs]

That makes lot of sense. And then just one more, just sort of out of left field. But,we just saw the Basel III endgame proposal for the big banks, there's clearly declining capacity for trading balance sheet across both the U.S. and Europe. I think the proposal yesterday for the U.S. was worse than expectation. So, I guess, -- and there are not that many independent full service investment banks like yourselves out there. So, when you think about the opportunities, does this additional regulation at all change your ability to take market share in some of your more balance sheet intensive businesses?

[Chad Abraham, Chairman and Chief Executive Officer]

Yeah. I mean, I'll let Deb comment on the fixed income side. I mean, obviously, relative to the regulatory side, I've said this on the call last time. I think everybody was so excited with sort of what happened, was there going to be a lot more consolidation and depositories, and we sort of said that, yes, eventually that will happen, but it came to a screeching halt until people get some clarity. This is the first week we announced a couple of very significant transactions in the depository space. We are definitely seeing activity pickup. Obviously, there is a long closed cycle on that, and whether that's a slow build or it starts to pick up and really accelerate at the beginning of next year, what we do know is we're going to be -- it's difficult for everybody. We're still gaining market share in depository, so eventually it's going to be very good for us. And, I'll let Deb talk about some of the rules relative to balance sheet.

[Deb Schoneman, President]

Yeah. And what I would say relative to the fixed income business, depositories are a large part of our business. It's actually the primary reason why we're seeing the softness in our fixed income results right now, because there is such a lack of clarity on interest rates, etc. So, as we think about our business, I would think about it much more as advisory in nature, working with banks across their asset and liability management. Right now, we're doing a lot of work with banks on helping them manage interest rates through our derivative product, creating liquidity by selling loans. So, it's not a use our balance sheet to drive business, it's much different and much more advisory based.

[James Yaro, Goldman Sachs]

Okay. That's very clear. Thank you so much.

[Deb Schoneman, President]

Thank you.

[Operator]

[Operator Instructions] We'll go next to Steven Chubak with Wolfe Research. Your line is open. Please go ahead.

[Brendan O’Brien]

Good morning. This is Brendan O'Brien filling in for Steven. I guess, to start, I want to ask a bigger picture question. Last year, you outlined a target of growing the corporate and investment banking business to over $2 billion. At that time, you obviously were not anticipating the slowdown that we have endured. But at the same time, these types of environments do tend to offer better opportunities to both recruit and acquire new talent and platforms.

I was hoping you could discuss some of the areas that you have been investing in and are looking to invest in further to hit this target, and whether there's any interest in doing a more meaningful acquisition in the current market, and maybe you could speak to your confidence in being able to hit that $2 billion number, I believe, it was by 2026?

[Chad Abraham, Chairman and Chief Executive Officer]

Yes. What I would say is, I mean, when we did that, we had a lot of analysis, sort of, by industry team on what the opportunity was. And frankly, even in our two biggest sectors in healthcare, we've always been traditionally really good in med tech and biotech, and we thought services could be a third leg on the stool. We've continued to invest there. Absolutely still believe that, even in financial services where it's a very significant business and in the middle market, we're the leader. There was a huge opportunity for us in terms of outside of depositories and we've significantly done that, invested in our insurance business, asset management business, the real estate business. And so, we think that opportunity is significant.

One of the biggest areas of opportunity was could we ever have a tech business that was the same size as financial services and healthcare. Obviously, we're undersized relative to some peers there, but that market certainly presents that opportunity, and we continue to invest in tech. Obviously, we did DBO. We talked about some of the products we weren't big in. Obviously, we did TRS in restructuring and frankly that's gone incredibly well, keeps growing, and eventually we'll get to the size and scale where it becomes counter-cyclical to some of the advisory businesses. And then, even our other teams, there's lots of white space.

So, I would say, we still believe in that $2 billion banking target, it's still out there for us. Do I think it's going to happen for 2026? Obviously, that depends on the recovery. When we talked about this, we sort of said, it doesn't really matter if it happens in five years, seven years, eight years, but getting that sort of continued growth path is important to us. And then, I would say, relative to other transactions, what definitely is happening in the marketplace, I mean people have seen the success we had with valence in chemicals in the TRS team in restructuring and obviously what we did with Sandler and Simmons in energy.

So, yes, we're getting lots of good looks, I would say the bigger deals get tougher because we don't like to do a lot of transactions that have a lot of people overlap, but the pace of things we're looking at and seeing is quite good, and I would also say we're starting to get to a zone where new boutiques or TMC aren't talking about 2021 results, there's sort of being more realism on sort of the current market and that will help us get something executed.

[Brendan O’Brien]

That's great color. Thank you. I guess, switching gears here. Wanted to talk on the fixed income business took another step down this quarter, and it feels like it's been a story of one step forward and two steps back for the fixed income environment in general. However, in the past, you've talked about activity picking up once there's rate volatility -- less rate volatility and it does feel like we're closer to the end of this rate hike cycle. Just wanted to get a sense as to how we should be thinking about the outlook for this business from here? And Deb, I know you mentioned like yield curve inversion, whether or not that needs to resolve itself before we actually see activity pick up or if there's some other indicators we should be looking at?

[Deb Schoneman, President]

Yes. I would agree that it feels like we're heading towards the end of that Fed rate cycle, and there's just still uncertainty around that, which is driving lack of activity. And as I just mentioned, again the primary driver of the challenges in the business have been within the depository space and their lack of activity. So, you can think about that in terms of when banks are able to get back.

And in terms of your question on the yield curve, the inversion doesn't have to be reversed. It's just that we need to see that there is a belief that the Fed has ended, that rates are going to start coming down, and that's going to drive more investment out on the curve and longer duration. So, it does -- the inversion doesn't have to go away, but we need to feel like it's at the end and it's going to start moving the other way.

[Chad Abraham, Chairman and Chief Executive Officer]

Yes. And the one thing I would say, I mean, we obviously were asked about recruiting and investment banking. Since my time as CEO, I haven't seen more opportunities coming to us in fixed income, I think because it's difficult. Most places people know we have a pretty special platform, and I would say things like loan trading, non-agency trading, things we're doing in credit unions, I mean, we've made some interesting additions and frankly in the fixed income market outside of some of the stuff we're doing in depositories, there's actually some areas of strength.

So, we certainly acknowledge that we're -- this is a very difficult year, obviously 2021 was a very good year. But we're still bullish on long-term opportunity size of the market, our sort of position in that market, and again we are seeing some great opportunities to hire in fixed income.

[Brendan O’Brien]

That's great color. Thank you for taking my questions guys.

[Deb Schoneman, President]

Yes. Thanks.

[Operator]

We'll go next to Mike Grondahl with Northland Securities. Your line is open. Please go ahead.

[Mike Grondahl, Northland Securities]

Hey guys. Thanks. First question, I think I'm hearing advisory is having a better second half, but not a blowout. Capital financing is also kind of continuing to improve and continuing to build. Am I right in thinking hey, it's kind of steady recovery, low to modest, but you're not seeing anything more than that at this point, is that fair?

[Chad Abraham, Chairman and Chief Executive Officer]

Yeah. I think, that's fair. I mean, I think, what we need to see -- I mean, we certainly have the deals in the market, we need to see the close rate continue to improve in advisory. And what I would say about the financing ECM business, we've sort of been at this steady, okay for three quarters. Obviously, in Q3, we always have August which is lighter, and then when we pick up in September, you sort of lose the first week with Labor Day. But for us, the financing markets, it's fine. We're doing business again. The whole first half of last year, it was shut down. The question about is it broadening to consumer and what we really haven't seen is a sort of a broadening to tech. Now, there's a few interesting tech IPOs, I think that will come to market towards the end of the back half that will certainly help the tech market.

So, I think you characterized that right. We're definitely seeing improvement. We're definitely gaining confidence on sort of revenue improvement, but it's not a snap back like we saw in 2020. It's a slow recovery.

[Mike Grondahl, Northland Securities]

Got it. And then my second question was just, which sectors are sort of facing the greatest challenges for you? And I think you kind of answered that with tech, maybe slowest to recover. Any others that stick out?

[Chad Abraham, Chairman and Chief Executive Officer]

Yes. I would say that the two toughest by far is in financial services depositories. I mean, we were down significantly in Q2 in depositories even from end of last year and the beginning of this year. And then, yeah, relative to tech, we haven't seen much ECM activity in a long time, and that's a big business for us. And frankly, the M&A transactions in tech have been more difficult. Now, you're seeing a big rebound in some of the software multiples and valuations. So that will work itself out, but if I would have to pick two of our most difficult teams, it would be the depository half of financials and tech in general.

[Mike Grondahl, Northland Securities]

Got it. Maybe lastly, Chad and Tim, how are you guys feeling about the cost structure today?

[Chad Abraham, Chairman and Chief Executive Officer]

Yes, I mean, what I would say about the cost structure is, I think, we're watching it very carefully. We did take a charge, we did some small headcount reductions in certain areas where we're not seeing that rebound. The reality though is we still have what I would say is a couple of hundred employees more than we had at the 2020 level. And frankly, non-comps are higher now than where they were back then. So, I think, it's something we're watching very carefully, being very, very careful about new hires, obviously watching attrition, obviously managing out underperformance and productivity of some of our producers. But I think we'll continue to watch that and be very careful there because when we get -- if we're only getting marginal revenue improvements the next couple of quarters, we're going to want to get more leverage on the bottom line.

[Mike Grondahl, Northland Securities]

Fair enough, guys, Thank you.

[Operator]

Thank you. With no other questions holding, I will turn the conference back to Mr. Abraham for any additional or closing comments.

[Chad Abraham, Chairman and Chief Executive Officer]

Okay. Thank you, operator and everyone that joined. We look forward to updating you on our third quarter results. Have a great day and weekend.

[Operator]

Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time.