Piper Sandler Companies

NYSE:PIPR

Earnings Call Transcript 2020-Q3

[Operator]

[00:00:04] Good morning and welcome to the Piper Sandler company's conference call to discuss the financial results for the third quarter of Twenty twenty 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 are not historical or current. 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 or identified in the company's earnings release and reports on file with the SEC, which are available on the company's website at that Piper Sandler dot com and on the SEC website at Etcetc dot gov. This call will also include statements regarding certain financial measures. The non gap measures should be considered in addition to and not a substitute for measures of financial performance prepared in accordance with Gap. Please refer to the company's earnings release issued today for a reconciliation of these non gap financial measures to the most directly comparable gap measure. The earnings release is available on the investor relations page of the company's website or at the SEC Web site, 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.

[Chad Abraham, Chairman and Chief Executive Officer]

[00:01:29] Good morning, everyone, thank you for joining our third quarter Twenty twenty call. I hope you and your families continue to be in good health during this difficult period. Debuono. Mr. President, Tim Carter, our CFO, and I will go through our prepared remarks and then open up the call for questions. Let me start by providing some overall comments on our financial results before turning to our corporate investment banking businesses to scale and diversity of our business model. Resiliency of our employees and deep client relationships have generated strong and consistent results this quarter and throughout the turbulent twenty twenty adjusted net revenues for the third quarter of twenty twenty or two hundred and ninety eight million up on a sequential basis. And year over year, our record revenues during the quarter were led by exceptional capital raising. We generated a pretext margin of twenty point four percent and adjusted earnings of two dollars and thirty eight cents per share. Your to date we have achieved impressive results with revenues of eight hundred and thirty five year to date, we have achieved impressive results with revenues of eight hundred and thirty five million and EPS of five dollars and seventy three cents, both representing high watermarks for the firm for the first nine months of the year. Our operating margin was also strong at seventeen percent for the year to date period. While many of the challenges presented by the global pandemic persist, corporations and public entities continue to adapt and our clients are consistently turning to us for advice. We are raising capital for clients as they consider current financial conditions.

[00:03:19] We are helping clients reposition balance sheets and portfolios, and we are advising clients on how to best achieve their strategic goals in the current market environment. We are delivering on the investments we have made in the business and benefiting from current market trends, which is driving strong growth for our shareholders. Looking forward, we expect to finish the year strong as advisory revenues start to rebound and our other businesses continue to generate strong results. Turning now to our corporate investment banking results. We generated total corporate investment banking revenues, including advisory services and corporate financing of one hundred and seventy seven million in the third quarter of Twenty twenty, up five percent sequentially, revenues of four hundred and eighty two million for the first nine months of Twenty twenty. We're up thirty four percent year over year. The range of our product expertize and the multiple ways we can assist clients is demonstrated in our year to date revenues, with M&A activity generating forty four percent of revenues, equity financings contributing thirty eight percent and debt and capital advisory engagements producing eighteen percent of total corporate investment banking revenues. Specific to corporate financing. We generated one hundred million of revenues in the third quarter of Twenty twenty and two hundred and eight million during the first nine months of the year. Both our all time records for our firm capital markets remained very active during the third quarter as strong investor demand, rising valuations and stable markets fueled near record new issuance volumes. Activity for us during the third quarter was principally in the health care sector, with contributions from financial services and technology.

[00:05:13] Our health care team completed twenty six transactions during the quarter and served as a book runner on all twenty six, which reflects the strength of our franchise and the trust clients place in our expertize and execution capabilities within health care capital ratios were concentrated in biopharma, one of our areas of strength for sub five billion dollar market cap companies and biopharma. We book ran twenty equity deals during the quarter ranking in the top three and during the first nine months of twenty twenty we book ran forty three deals and maintained our top five ranking in financial services. Activity was focused on debt financing. As banks raise capital at historically low interest rates and position balance sheets for future uncertainty, we offer a comprehensive differentiated value proposition for our banking clients, where we maintain nearly 60 percent market share and debt issuance for community and regional banks. Technology issuance volumes remain strong in the market, and we participated in thirteen offerings during the quarter. On a year to date basis, we participated in nineteen offerings off one hundred and thirty eight percent over the prior year. We have eight publishing research analysts covering over 120 technology stocks, a 50 percent increase in coverage since the beginning of last year, driven by a significant expansion of our software footprint. The technology sector is a large pool where we are under penetrated, representing a growth opportunity for us, supported by our recent activity in October. We believe that our corporate financing results will remain relatively strong in the fourth quarter.

[00:07:00] Turning to advisory, our advisory practice slowed in the early months of the pandemic as many engagements were put on hold until business conditions became more clear. That said, we maintained our market position and we believe Q3 will mark the trough in the cycle. We're seeing a nice increase in the number of new M&A assignments and older assignments that were POS have been restarted. Further active discussions with clients remain very encouraging, increasing our confidence as our M&A pipeline builds, valuations remain strong. Financing markets are open with historically low interest rates for debt, capital and CEO confidence is building. We generated 70 and CEO confidence is building. We generated seventy seven million of revenues for the third quarter of Twenty twenty, down 10 percent sequentially. We completed a total of sixty six transactions during the quarter, consisting of thirty one M&A deals spread across our industry verticals and thirty five capital advisory transactions which were concentrated in financial services. As the team continues to advise on a high volume of debt transactions, revenues for the first nine months of the year were two hundred and seventy four million, down eight percent compared to an M&A market that was down approximately 30 percent. We believe that this demonstrates the quality of our team as well as the breadth and scale of our advisory business. A key component of our strategy is to drive overall market share gains through accretive combinations and selective hiring. And our strong relative performance on a year to date basis illustrates successful execution of this strategy. As an example, we've retained our leading position in bank M&A this year, having worked on seven of the 10 largest bank mergers, video value in the U.S.

[00:09:01] and every bank merger in the U.S. with an announced deal value greater than one billion secular drivers of M&A like innovation, a changing market landscape and low organic growth are driving client activity. Also pointing to an improved outlook. M&A deal announcements market wide increase during the third quarter. And more recently, we've seen several announcements of large cash transactions. We also have seen an increase in new M&A deal announcements in our areas of strength, specifically health care, financial services, consumer and energy. As I noted earlier, our M&A pipeline continues to build and we expect to see advisory revenues grow in the fourth quarter and continue into twenty twenty one before turning the call over to Deb, I want to reiterate the importance of investing in and growing our corporate investment banking platform. Our investment banking managing director, headcount of one hundred and thirty seven is up seven percent from the beginning of the year and represents one of the deepest and broadest platforms among our peers. Just as our strong relative performance, market leadership and broad product capabilities are helping us to build client relationships, they are also making our platform a destination of choice for talent, looking to best serve their clients. Our pipeline of hires is robust, with several bankers looking to partner with us to help grow our product, sector and geographic capabilities. Now I will turn the call over to Deb to discuss our public finance and brokerage businesses.

[Deb Schoneman, Managing Director and President]

[00:10:46] Thanks, Chad. Let me begin with an update on our equity brokerage business. We generated revenues of thirty three million for the third quarter of Twenty twenty, down eighteen percent on a sequential basis. As expected, equity market volumes declined in the third quarter as the market took a breather from the tumultuous first half of the year. Early August marks the one year anniversary of our combination with Wheaton, and we couldn't be more pleased with the success of integrating the team into our platform. With Wheaton's trading, expertize and our research capabilities, we are a premier destination for clients. Our institutional vote ranks continue to improve with clients of all sizes, and we are capturing mind and market share. On year to date basis, we've recorded one hundred and twenty two million of revenues of one hundred and twenty percent from the prior year, the quality of our research and specialized equity sales distribution, our key differentiators for us in supporting our record equity financing activity, we continue to build out our research platform. And based on a number of stocks under coverage, we are ranked number one in small cap and number three in mid-cap. And based on the Greenwich survey of mid-cap portfolio managers, our sales force is ranked number one in the health care, financials and consumer sectors. We expect our equity brokerage revenues to increase in the fourth quarter as market volumes pick up.

[00:12:11] And there's potential for increased volatility stemming from the upcoming US election next. Let me turn to fixed income services. The Federal Reserve continues to inject liquidity into the market and has signaled low interest rates will extend into twenty twenty three. We generated fixed income revenues of fifty three million in the third quarter of Twenty twenty, up 10 percent sequentially and on a year to date basis revenues totaled one hundred and forty three million, up one hundred and forty five percent over the prior year. We continue to benefit from the synergies of our combination with Sandler by capitalizing on our expanded client base and success of our combination with Sandler by capitalizing on our expanded client base and successfully cross-selling the unique product and strategic capabilities of both of our firms. All of our client verticals were active in the quarter. Clients have continued to reposition their balance sheets and portfolios as they adjust their strategies to accommodate the prolonged low rate environment by putting more cash to work and seeking any available yield curve or spread opportunities. In addition, our market leadership in both public finance and community bank that underwriting continues to provide proprietary deal flow that differentiates us with clients and drives incremental secondary sales and trading activity.

[00:13:33] We expect our fixed income revenues to remain strong as clients continue to strategically reposition in a changing market, barring a potential pause in activity related to the upcoming US elections. Turning to our public finance business for the third quarter of Twenty twenty, we generated twenty six million of municipal financing revenues, down 14 percent sequentially and up twenty one percent year over year. Our public finance business is benefiting from a stable market, low yields, strong investor demand and market share gain. We completed two hundred negotiated transactions, the number two issuer nationally raising four point five billion for clients. During the quarter, we saw strong governmental issuance, especially for school districts where we have market leadership in multiple states. For the first nine months of twenty twenty, we generated revenues of eighty million, an increase of fifty three percent over the prior year through negotiated and private placement transactions, we raised in aggregate value of fourteen point one billion for clients up eighty three percent year over year relative to the market that was up thirty six percent, demonstrating significant market share gains. We expect Q4 revenues to remain strong as market conditions are conducive to new issuance and refinancings. Now I will turn the call over to Jim to review our financial results and provide an update on capital use. Thanks, Dell.

[Tim Carter, Managing Director and Chief Financial Officer]

[00:15:01] As a reminder, my comments will be focused on our adjusted non-GAAP financial results. We generated revenues of two hundred ninety eight million for the third quarter of twenty twenty, up two percent sequentially and forty seven percent year over year. Corporate financing revenues, which hit a record high for our company and strong fixed income brokerage activity, drove the sequential improvement. While, as expected, revenues from advisory services and equity brokerage moderated during the quarter, revenues on a year to date basis totaled eight hundred and thirty five million, up fifty three percent compared to the prior year. Reflecting the investments we have made through our acquisitions and organic growth from the market leadership we have achieved in many of our businesses, we remain well-positioned to serve our clients in more ways than ever while generated strong financial results for our shareholders. Turning to operating expenses, our compensation ratio for the third quarter of twenty twenty was sixty one percent, down from the sequential quarter. As the result of strong performance and an improved outlook, our comp ratio is largely variable to revenues and we continue to manage compensation levels while considering investments in employee retention and business outlook. This can drive some additional variability in our compensation ratio from quarter to quarter, as we have seen this year, our year to date compensation. Ratio was sixty three percent, and we expect that on a full year basis or comp ratio in the year near this level, non compensation expenses for the third quarter of twenty twenty, excluding reimbursable expenses, we're forty two million. Reflecting the continued pause on travel and entertainment, as well as lower trade execution and clearing expenses from reduced equity volumes on a year to date basis, excluding deal expenses, noncom costs were one hundred and thirty eight million, up twenty eight percent over the prior year, compared to a fifty three percent increase in revenues.

[00:17:04] We expect non comp expenses to remain at or close to these levels in the near term and we will continue to actively manage costs as they are an important driver. Margin expansion for the third quarter of twenty twenty, we generated an operating margin of twenty point four percent, a two hundred and seventy basis point improvement from the second quarter. Our operating margin for the first nine months of twenty twenty was seventeen percent, up two hundred and forty basis points over the prior year period. Driven by the increased scale of our platform and the successful integration of both Weeden and Sandler, our tax rate for the third quarter of twenty twenty was twenty six point nine percent on a year to date basis. Our tax rate of twenty three point seven percent reflects income tax credits recorded in the first half of twenty twenty related to provisions in the Carers Act recorded in the first half of twenty twenty. Related to provisions in the Carers Act, we continue to expect our tax rate will be within our targeted range of twenty six to twenty eight percent. Going forward. We generated two dollars and thirty eight cents of diluted EPS for the third quarter of twenty twenty, an increase of twenty three percent on a sequential basis, driven primarily by record revenues and our improved margin diluted EPS on a year to date basis was a record five dollars and seventy three cents, up twenty eight percent over the prior year, resulting from our strong revenues expense discipline in the accretive impact of our acquisitions.

[00:18:35] Now turning to capital, our capital liquidity positions are strong and our leverage remains low. For the first nine months of twenty twenty, we generated one hundred and three million of adjusted net income, up fifty nine percent over the prior year, reflecting our scale and ability to generate significant amounts of cash from operations turning to dividends. Given our strong performance and improved outlook, the quarterly dividend will return to pre pandemic levels. The board approved a quarterly dividend of thirty seven and a half cents per share to be paid on December 11th. Twenty twenty to shareholders of record as of the close of business on November twenty fourth, twenty twenty. On a full year basis, we expect to maintain our dividend policy of returning 30 to 50 percent of our adjusted earnings through a special MAIKOL dividend paid in the first quarter of each year. Consistent with the prior year, we anticipate the payout ratio for fiscal year twenty twenty to be at the low end of the range. We are pleased with our strong results for the first nine months of twenty twenty. Our combinations with Wieden and Sandler have added material scale and operating leverage to our business. We remain focused on investing in our business to grow revenues and earnings with significant opportunity to grow market share across cycles, our proven financial performance and leadership. Across several franchises, we believe we represent a unique opportunity to drive shareholder value over the long term. Thanks. And we can now open up the call for questions.

[Operator]

[00:20:08] Ladies and gentlemen, at this time, if you would like to ask a question, please, press star and then the number one on your telephone keypad. Once again, that is star and the number one. And your first question comes from the line of Devin Ryan with GAAP security.

[Devin Ryan, JMP Securities]

[00:20:25] Great, good morning, everyone. Maybe a start here on some of the commentary on the M&A outlook, just be great that a little bit of a finer point on, you know, the the tone and for business right now and how it's recovered over the past few months and really just trying to get a sense of whether we're back to call it the pre pandemic pace or what feels different today if we're not in just also the deals that you're seeing are the deals that were temporarily put on hold with a pandemic or maybe even pulled forward because of potential tax changes that come with a different administration to try to get a little more flavor for what you guys are seeing in the M&A outlook.

[Chad Abraham, Chairman and Chief Executive Officer]

[00:21:14] Yeah, thanks, Devon. I definitely think we're certainly more upbeat about the M&A pipeline and what we're seeing and you know, that that really started to change at the end of the summer and September and has really continued. And I would say, you know, as we said, it's sort of a combination of both. We have definitely restarted some of the deals that were put on hold. But we're also have, you know, several new pitches. So, you know, I think I think the interesting question is going to be, you know, September, October has been very busy starting a lot of deals and it'll just be a race to the finish to see, you know, how much we get done by December and, you know, how much gets done in Q1. Specific to the tax question, you know, I can definitely think of a few transactions that are driven by, you know, trying to get something done this year. But I wouldn't say that the vast majority and then just relative to the you know, are we back at pre pandemic run rate?

[00:22:18] I think it's significantly, significantly improved, but not in every sector and in all areas. So, no, I wouldn't say we're back at the pre pandemic run rate, but but a lot better than than where we've been.

[Devin Ryan, JMP Securities]

[00:22:35] Ok, terrific, very helpful. And then just another one here, just on potential implications of the election next week, and to the extent there is a change in administration and, you know, obviously people are talking about the potential for higher tax rates. Any thoughts around how that could impact the public finance business? It was clearly when we had tax reform, kind of a big topic of conversation when we had tax reform, kind of a big topic of conversation until anything that you guys are gearing internally around potential for changes that could impact the money underwriting business or on the trading side as well.

[Deb Schoneman, Managing Director and President]

[00:23:18] And I think the main aspect that that impacts is really the appetite for municipals relative to other products. And so that's where we may have seen some decline historically, although maybe not even as much as we may have anticipated. So while it is part of the discussion around what could be helpful for the business going forward, I wouldn't say it's been a dramatic topic that we've talked about, but obviously would have some positive impact on the appetite for that security yet, I guess.

[Chad Abraham, Chairman and Chief Executive Officer]

[00:23:49] And I would just add relative to the. Just public finance, obviously, we've seen a really nice nine months in public finance and in a lot of people taking advantage of low interest rates, you know, I think there's an argument to be made, you know, depending on the election year next year, it could be really big on infrastructure spend. So, you know, even though a lot of companies have a lot of entities in public entities have refinanced, you know, there's certainly an argument that it's going to be very active next year with lots of projects and frankly, continued low tax rates.

[Devin Ryan, JMP Securities]

[00:24:27] Ok, and then another one here on the brokerage business, you know, I think this environment is really validated, the business model and the diversification and resiliency of your model. And clearly, you know, coming into this year with the volatility, you know, as the investment banking outlook maybe soured a bit, even though it's, I think, done better than people thought, the brokerage business has been tremendous and picked up a lot of slack here. And what I'm trying to think about is the fact that you have a couple of acquisitions in here. It kind of makes the comparisons relative to last year difficulties. We're trying to think about what maybe a more normal brokerage backdrop could look like to the extent volatility does decline, if that's that assumption we want to make here. So is there any way to think about kind of what a pro forma business has done over the past nine months relative to last year, if you were to include acquisitions in last year? And how are you guys thinking about, you know, the the potential for that business to potentially moderate? If, you know, obviously the environment improves and some of the other businesses that are pro cyclical continue to improve like M&A.

[Deb Schoneman, Managing Director and President]

[00:25:44] Yeah, I'll take that Devon, and I'll take it in two pieces, both equity and then fixed income on the equity side, we definitely benefited from the market in Q1, obviously with the extreme level of volatility. When we originally talked about the combination of really all the businesses we spoke to that because there wasn't good historical data to it being somewhere around one hundred and thirty million dollar business. What I would say is we are seeing less synergies than we may have originally anticipated. And so I think if you look at the last two quarters run rate here, you know, after we got past the volatility of of Q1, you're going to see something that's a little more normalized. I mean, to your point will ultimately depend on the level of activity in the market. But just to give you some some sense of that, on the fixed income side, we had talked about that nearly doubling our revenue and we had somewhere around an 80 million dollar business in twenty nineteen prior to the Sandler acquisition. And here, too, I would say while the market has been very conducive to fixed income business, you're seeing a lot of prepayments, refinancings, driving cash into our clients balance sheets and portfolios and their need to redeploy that, trying to go out a little in duration to capture some yield that they're losing through that through the refinances and prepayments. So there is a conducive market. The other thing I would say, though, is we have done a lot of work to fully combine a fixed income businesses, integrate the trading desks and integrate the analytics teams so that we're able to capture and leverage the complementary both products and and skill sets across the expanded client base. So that one's a little trickier for me to determine exactly how much is market driven, given what I spoke to versus, you know, having the sell one plus one equals two. But I would say we continue to believe, at least as we go into Twenty twenty one, that we'll see the strength that we're seeing today.

[Devin Ryan, JMP Securities]

[00:27:55] Ok, thanks. Just last one here on thinking about operating margins moving forward, and we appreciate you this quarter, maybe the comp ratios a little bit. We appreciate you this quarter. Maybe the comp ratios a little bit below normal. As you know, the outlook for the full year improved. And so there was some adjustment there. But, you know, the firm generated over 20 percent operating margin. So I'm trying to think about kind of where that margin can go. Is 20 percent a level that you potentially could be operating at as we look out? And if you were to assume the revenue backdrop remains healthy and what I'm getting at is the mix of business may shift around a little bit. And so, you know, the bigger driver probably is on the comp ratio here and trying to think about, you know, can the competition move down from the Twenty twenty level? And this is around 20 percent operating margin, maybe aspirational type level, or is that a reasonable level that the firm could be operating at and a better revenue backdrop?

[Tim Carter, Managing Director and Chief Financial Officer]

[00:29:01] Yeah, maybe I'll take that, you know, I think, you know, you certainly see the leverage that we can get in the business, you know, as we did this quarter. I think it's also informative to think about it from a year to day basis and at a 17 percent level, you know that that margin has continued to move up over the last several years. But I do think, you know, if you look out a couple of years, you know, a 20 percent margin is where we're where we're marching towards. And I think you're right in terms of thinking about the comp ratio. I mean, for this year, we're we're likely to within our our guidance range. But, you know, if things begin to normalize, you know, we're always thinking about investment and and what we do through the comp ratio. But, you know, there is an ability I think if things normalize that you can think of next year, you know, maybe moving towards the lower end of that range and you continue to get some some leverage through the comp ratio. But, you know, that's always going to be a little dependent on what we're doing from an investment standpoint and how we think about about the business. But, yeah, you know, getting to a 20 percent margin is is is sort of where we're.

[Chad Abraham, Chairman and Chief Executive Officer]

[00:30:20] Yeah. And I would just add I would just add, Devin, when we did the Sandler deal and we announced the deal, we certainly felt like a conservative range for our operating margin was 17 to 19 percent. And we thought it would be aspirational to get to 20 percent. I definitely think in this current operating environment with some of the expenses that aren't going to go back and the fact that we're seeing a bit of an increased scale, you know, I think when we did when we did Sandler, you know, we knew we'd be real happy if we were having 300 million dollar quarters, which we come close to the last couple of quarters. So I think all of that combined has certainly moved in our thinking, you know, that we should have, you know, several 20 percent margin corridors. You know, it may take a year or two for that to be consistent and show up on a full year basis. But we've definitely moved that target in.

[Devin Ryan, JMP Securities]

[00:31:19] Ok, great. Appreciate all the color guys all back into the Q.

[Operator]

[00:31:24] Thanks, Don. Your next question comes from the line of Michael Brown with KBW.

[Michael Brown, Keefe, Bruyette & Woods, Inc.]

[00:31:32] Hi, good morning, everyone. Hi. So capital raising has just remained red hot, and it really sounds like they can continue here. So I think the challenge is really how long and can it go on? So what I'm interested in hearing from your perspective is what is what is kind of a bull bear case here that could cause levels to stay, stay where they're at or even accelerate and what could cause it to just kind of fall off from here?

[Chad Abraham, Chairman and Chief Executive Officer]

[00:32:05] Yeah, I think for for us, it was going to be very industry specific, I mean, there is no question that the amount of stimulus and capital and the fact that, you know, people don't have great places to invest, I mean, it is definitely pushing money in the equity markets and pushing valuations for us specifically. You have to you have to look at where we're driving a lot of that business, by far the two biggest areas for us and financing, you know, number one by a vast, vast margin is health care. You know, that's the vast majority of our ECM revenue. So, you know, you'd have to have a perspective on the health care markets. I think we've said for a while, you know, there's a long term trend, you know, with a lot of new technology and things going right in the biotech market and investors that that have had that made a lot of money, still have a lot of dry powder. So we we in the health care market and, you know, with innovation, certainly see that that continuing. You know, if I was suddenly see that that continuing, you know, if I was to paint a better case, you know, sometimes when you get a lot of new regulation in health care, if there's a lot going to be tons of commentary on drug prices, tons of regulation, and, you know, you see health care stocks go down, you know, that's not going to be good for our health care financing business. The other part of our financing business that is just doing incredibly well is the, you know, lots of small and medium. You know, community banks are financing. And in this capital wave, they're doing it through debt financing. And we have high share. And, you know, we we certainly still think we're in the middle innings for that. And I mean, there's there's lots of banks that haven't refinanced. So those are the two biggest pieces for us. You know, there's other markets, obviously, technology. Fantastic. And tech stocks and software stocks and new IPOs. You know, we've participated. But that but that's a a big opportunity as well. So, yeah, I think people like to say, well, hey, is this just financing bubble and is it one quarter or two? But I do think with the stimulus and capital backdrop, you know, this potentially has some legs.

[Michael Brown, Keefe, Bruyette & Woods, Inc.]

[00:34:30] Yeah, great, appreciate the color, Jack. Want to ask for your fixed income trading business? I guess what I'm trying to think about is the operating backdrop for fixed income next year. And you talked about the Fed committing to lower rates through 23. And so how does how does that lower rate environment play out for you and your mix on the fixed income side? And then as we think about the transition away from from labor, or do you expect that to drive elevated trading activity in twenty twenty one?

[Deb Schoneman, Managing Director and President]

[00:35:04] So first of all, just on the overall lower rates, I think this really going to be a function of, as I was speaking to before, the amount of refinancing and, you know, prepayments on the mortgage side that continue to come in. And so if these rates stay low, we do expect that to continue, which obviously also is a function in the capital raising side, as Chad was speaking to on the corporate debt and also in our municipal business, which tends to have a helpful impact on the overall training trading environment when you're having a strong issuance relative to LIBOR. I think for our business specifically, I don't see it having a huge impact in our trading activity going forward. So I guess that's what I would say about that. Not a huge impact.

[Michael Brown, Keefe, Bruyette & Woods, Inc.]

[00:35:53] Ok, great. Appreciate the color on that. I want to ask about capital return. So going into the pandemic, you know, you guys reduce the dividend. You have very conservative action at that time. And as a result of really exceeded expectations, you've now brought them back to to where they were recovered. So, one, how should we think about your capital return plan going forward? And then to just from our side, given the difference between the adjusted net income and the gap netting from our side, how should we think about what your capital return potential is in terms of buybacks and dividends? We're thinking about like a payout perspective.

[Chad Abraham, Chairman and Chief Executive Officer]

[00:36:36] Maybe I'll start and let him take the second part, like, I mean, our our view has sort of returned to where we were. We really need all of the tools. You know, I think at the scale we are and with the cash we're generating, you know, we certainly look at buybacks. We look at the regular quarterly dividend, we look at the special. And then, you know, obviously we're going to keep trying to deploy capital through investing and and acquisitions. And, you know, there's no question, had we we used a lot of excess capital with Sandler and Balance and so certainly had put a lot of cash to work there, which which, you know, probably put a little pressure on our buybacks and other ways we were going to use capital. All of that being said, you know, now we're back to generating a lot of cash. And I think in hindsight, you know, you could criticize, you know, should we have cut the dividend? I think we were just looking at that and a point of time and being conservative. And so I think our perspective now is we need all of the avenues to deploy cash. It'll depend on, you know, what the bigger opportunities are on the acquisition and investment side. But we'll continue to look at the rate of our quarterly dividend. We we've said all along we're going to continue to pay the special and will be active with buyback.

[Tim Carter, Managing Director and Chief Financial Officer]

[00:38:04] Yeah. And Mike, maybe just, you know, on the gap versus non gap, you know, obviously, you know, the you know, the expense that's coming through from a gap perspective is is, you know, the expense that's coming through from a gap perspective is is, you know, significantly related to all of our acquisitions. And, you know that that is really a non non-cash, you know, amortization charge, whether it's amortization of deal consideration or amortization of intangible. Those, you know, those are the primary components of that. So, you know, we really think about sort of that, you know, the ability to to deploy capital based off of those, you know, based off of our adjusted non-GAAP results so that that really becomes the driver. That's how we set the, you know, the dividend payout of the 30 to 50 percent. And, you know, those items are taken into account when we think about it from a gap perspective. So, you know, again, yeah, it's really the focus on that cash generation which which generates the capital that we've got the ability to deploy.

[Michael Brown, Keefe, Bruyette & Woods, Inc.]

[00:39:15] Ok, great, so sticking with the 30 to 50 percent payout ratio relative to the adjusted earnings kind of right way to think about it. And then just a quick follow up on the on the non and on gap adjustments. So with the acquisition of Sandler and Violence and Weed and I guess those expenses, if I remember correctly, a lot of the restricted stock consideration in that retention rolls off over, I think the average was roughly three years or so. Can you just remind us that that's. That's right. And then is the intangible asset amortization? How does that that tend to trend down over the next two years or so just to make sure you kind of have the pieces correct there?

[Tim Carter, Managing Director and Chief Financial Officer]

[00:40:02] Yeah, Mike. So you're right. You know, in terms of the deal consideration, you know, we've got things going out sort of three to five years. You know, a lot of that is more heavily weighted over the first three to four years. So so you'll see that come through in a little bit more of a, you know, recurring way over that time period. I think on the intangible, more specifically, you know, that can become a little bit of a longer term. But but it's much more front end weighted. So, you know, you see a significant component of that come through in the first two years and then it drops off significantly after that.

[Michael Brown, Keefe, Bruyette & Woods, Inc.]

[00:40:44] Ok, great.

[Chad Abraham, Chairman and Chief Executive Officer]

[00:40:45] Yes, yes, Mike, I would just say that is that another way over the next four or five years, you'll see that the gap gap in non gap converge.

[Michael Brown, Keefe, Bruyette & Woods, Inc.]

[00:40:55] Right. OK. OK, great. And just one thing on top, we return just to close the loop on that. One thing I guess we didn't talk about is the potential for other acquisitions. Is that something that now you've got integrated into the Sammler and Balance and WHEADON acquisitions? Would you consider going back out and looking to make any other bolt on acquisitions here, or are you still at the point where you're trying to get the synergies out of each of those acquisitions and feel comfortable with your strategic mix?

[Chad Abraham, Chairman and Chief Executive Officer]

[00:41:28] Yeah, I think I think what we'd we'd say what I said last quarter, which is, frankly, they're all going quite well, you know, we think, you know, having been pretty active, that we know how to integrate acquisitions. We know how to create opportunities based on on the acquisitions. We're really pleased. With the results, you know, obviously, we've got a good track record here now of a few quarters with Sandler and Wheadon results, all of that being said, we're conscious of the fact that we did a few big things. And so I think it's unlikely in the next couple of quarters, you know, for us to look at larger transactions. But we're going to continue to be opportunistic. And I think like we've done in the past, we will continue to look at smaller boutiques and things that give us product, expertize, industry expertize, places where it's just not going to be possible for us to grow fast enough organically. And so I do think we'll continue to be active. And I think just given our relative strength and performance and and, you know, revenue and cash generation, you know, we think we're in a position of strength. So we do think we'll be active over the next six or nine months. But I think it'll be on, you know, some of the smaller stuff.

[Tim Carter, Managing Director and Chief Financial Officer]

[00:42:51] And Mike, maybe just as a follow up to that, you know, related to the dividend payout ratio, 30 to 50 percent. I mean, you know, we certainly take into consideration, you know, what we're thinking about from a you know, from an acquisition perspective. And you have referenced, you know, on your first question around, you know, all of the levers. I mean, it's the dividend, it's the buybacks and the ability to have capital to do acquisitions. So we think about all of those, you know, in combination when we we think about all of those, you know, in combination when we set some of these levels.

[Michael Brown, Keefe, Bruyette & Woods, Inc.]

[00:43:29] Ok, great, that's very helpful clarification. Take my questions.

[Chad Abraham, Chairman and Chief Executive Officer]

[00:43:32] Thank you.

[Deb Schoneman, Managing Director and President]

[00:43:34] Thank you.

[Operator]

[00:43:37] In your next question comes from the line of Mike Grondahl with Northland Securities.

[Mike Grondahl, Northland Securities]

[00:43:44] Hey, good morning, guys, and congrats on the quarter. Three questions and I'll just maybe ask them all. One, the M&A pipeline today, how does that kind of compare to maybe the three year average? Are you kind of sitting at 60 percent of it? 90 percent of it. But secondly, I saw you recently led a back deal in the financial services area. Kind of what's your kind of thought on that area going forward? And any thoughts on maybe a health care deal or an energy deal? And then lastly, clearly there's less travel going on with covid. Do you think that's affecting the business at all? Do you think you didn't get on any deals because of a lack of travel? So those three, if you don't mind.

[Chad Abraham, Chairman and Chief Executive Officer]

[00:44:40] Yeah, and maybe I'll just I'll just take those in order relative to the pipeline, it's grown a lot the last couple of months. As I said, I don't think it's back to sort of where we were sitting in January. You know, whether that's 80 or 90 percent, it's probably close with with certain industry teams. It's certainly back or even greater. And certainly in certain industries, you know, it's not necessarily at full capacity. One of the areas we've you know, we're we're pretty heavily weighted in certain of our industry teams is private equity. And I would say in Q2, we just weren't seeing a lot of that come back in Q3. Activity has really picked up. Private equity is very active looking at transactions. So, you know, it'll be interesting. You know, we're conscious of the fact that, you know, a lot of this will depend on what happens with the virus and shutdowns and travel and, you know, how private equity looks at doing deals the next three months. But if the last couple of months are an indication and we have a couple of months like that, I do think we'll be back at at a full M&A pipeline relatively early into next year. Secondly, on the back question, yes, we did us back in financial services. I think you know this. But, you know, this has been an incredibly active year. We do not have a history of doing a lot of us back transactions that were much more active. Now the market's become much more mainstream. You look at the investors in this fact that has certainly evolved and the list is much longer.

[00:46:23] Some of that's just being driven by there's so much extra liquidity in cash that it's a it's viewed as a good place to put your money. So I do think that parts of that market are here to stay. Where we're going to participate is where we really believe in the management teams, where we have experience with those teams and in sectors that we know incredibly well. So you sort of said, would we look at energy and health care? Yes, we did this one in financial services. So those are the logical places where we've got that expertize and those relationships with the team that we will be active. And the last question. Oh, yeah, the last question was travel. Yeah, that's still at really low levels. I will I will say in Q4, I'm definitely seeing more and more bankers, more research analysts, you know, more salespeople travel. Certainly not everybody and certainly not every client base is sort of open to that. I think I've said this before. I do think there is, you know, roughly half of our travel that that will only come back in some capacity or some fraction and then, you know, some half of our travel that will come back in a big way. You know, I had a couple conversations with certain bankers this week and, you know, they were traveling every week and having no problems with clients wanting to see him and and felt like that was a real competitive advantage.

[00:47:56] So we're obviously staying very flexible with what our clients want, what our what our producer, our producers want to do. But as I said, I don't think that will expense will come back the way it was. I think there will be permanent savings, but I don't think our current run rate is going to stay where it is.

[Mike Grondahl, Northland Securities]

[00:48:18] Gotcha. OK. Hey, thanks a lot.

[Deb Schoneman, Managing Director and President]

[00:48:20] Thanks Mike.

[Operator]

[00:48:23] And we have no further questions on the phone lines, I'd like to turn the. And we have no further questions on the phone lines, I'd like to turn the call back to Mr. Abraham for any closing remarks.

[Chad Abraham, Chairman and Chief Executive Officer]

[00:48:36] Ok, thanks, operator. We're very happy with our results through the nine months and we're encouraged that we're seeing increased advisory activity. We very much look forward to updating you all in Q4 on and our full year twenty twenty results early next year. Thank you, everyone. Have a nice day.

[Operator]

[00:48:56] Ladies and gentlemen. This concludes today's conference call. We thank you for your participation. You may now disconnect.