Oppenheimer Holdings Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods unless noted. Amounts are USD. The company operates a middle-market investment bank and full-service broker-dealer across Private Client, Asset Management, and Capital Markets.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $294.1m | $315.3m | $797.4m | $1,028.9m |
| Pre-tax income | $7.2m | $37.4m | $15.3m | $132.7m |
| Net income attributable to OPY | $4.5m | $26.3m | $9.9m | $96.1m |
| Basic / diluted EPS | $0.40 / $0.37 | $2.07 / $1.92 | $0.84 / $0.78 | $7.59 / $7.10 |
| Pre-tax margin | 2.5% | 11.9% | 1.9% | 12.9% |
Q3 revenue declined 6.7%, while pre-tax income fell 80.6%. For the first nine months, revenue declined 22.5% and pre-tax income 88.5%. The effective tax rate was 35.5% for Q3 and 36.4% year to date, versus 29.8% and 27.6%, respectively, in 2021.
- Revenue mix and changes: Q3 investment banking revenue fell 54.9% to $37.0m, including lower advisory fees and equity underwriting. Capital Markets revenue declined 29.3% to $90.9m, and segment pre-tax income fell to $2.4m from $17.9m. Equities and fixed-income sales and trading rose 13.0% and 18.3%, respectively, but did not offset the investment banking decline.
- Rate-sensitive income: Private Client revenue increased 11.0% to $178.6m, mainly as bank deposit sweep income rose to $35.8m from $3.9m and interest revenue rose to $14.5m from $7.6m. Lower client activity and asset valuations reduced commissions and advisory fees. Private Client pre-tax income nevertheless declined 19.9% to $30.0m.
- Asset Management: Q3 revenue declined 7.5% to $24.9m and pre-tax income declined 11.6% to $8.3m. AUM was $35.3bn, down 19.0% year over year; the quarter’s decrease reflected asset depreciation and net distributions.
- Costs: Q3 compensation expense declined 13.2% to $179.1m, while non-compensation expense rose 50.4% to $107.7m. Management attributed the increase primarily to an adverse arbitration decision. Total expenses rose 3.2% despite lower revenue.
Cash flow, balance sheet, and capital
- Cash flow: For the nine months, operating cash flow was negative $83.1m, versus positive $135.2m in 2021; investing cash flow was negative $10.4m and financing cash flow negative $83.1m. The net decrease in cash, cash equivalents, and restricted cash was $176.7m. The filing does not attribute this change to a single cause; movements included lower accrued compensation and customer payables, as well as $59.6m of share repurchases.
- Liquidity: At September 30, cash and cash equivalents were $36.6m and restricted cash was $128.3m, largely funds held in the OHAA SPAC trust. Total cash, cash equivalents, and restricted cash was $164.9m. Management says operating funds, capital, and available credit facilities should meet foreseeable liquidity needs, while noting financing availability may depend on external market conditions.
- Debt and obligations: Senior secured notes had $125.0m principal outstanding, with a $124.3m carrying value, at 5.50% due October 2025. Bank call loans were $53.6m, down from $69.5m at year-end 2021. Operating lease liabilities were $189.3m. The company reported compliance with note covenants.
- Balance sheet and capital: Total assets were $2.856bn, down from $3.043bn at December 31, 2021; total liabilities were $1.956bn. Stockholders’ equity was $772.6m, plus $127.8m of redeemable noncontrolling interests. The company repurchased 1.676m Class A shares for $60.4m in the first nine months; 152,726 shares remained authorized for repurchase. Q3 dividend was $0.15 per share; the same amount was declared for payment in November.
- Client assets: Client assets under administration were $100.3bn, down 14.9% year over year; AUM was $35.3bn, down 19.0%. Book value per share was $70.23 and tangible book value per share $54.74 at September 30.
Outlook, risks, contingencies, and unusual items
- Outlook: No numerical earnings or revenue guidance is provided. Management’s stated priorities include growing wealth and asset management through advisor hiring, pursuing selective acquisitions and private-market investments, expanding capital-markets capabilities, investing in technology and cybersecurity, and managing expenses.
- Markets and rates: Management noted the Federal Reserve raised rates by 300 basis points in the first nine months of 2022 and expected further increases at the time of filing. Higher rates supported deposit sweep and margin interest revenues, but market volatility, lower asset values, and weaker transaction activity pressured commissions, advisory fees, and investment banking. Inflation, potential recession, and Russia’s invasion of Ukraine and related sanctions were identified as risks.
- Legal matters: A FINRA arbitration panel awarded $36.7m in the Robinson matter on September 6, 2022. Oppenheimer moved to vacate the award; claimants petitioned to confirm it. The company also disclosed 28 Horizon-related arbitrations; claims specifying damages totaled about $45.3m, with additional unspecified claims. Separately, the SEC filed a complaint alleging municipal-securities disclosure violations and sought an injunction and approximately $1.9m plus interest. The company disputes the claims and intends to defend itself. The filing estimates possible aggregate losses above amounts accrued at $0–$47m for proceedings where estimates can be made; actual losses could exceed that range, and some matters cannot be estimated.
- Other risks and items: The company identified cybersecurity threats, regulatory and litigation exposure, funding and liquidity risks, and market, credit, operational, and foreign-operation risks. It held $33.1m of auction-rate securities classified as Level 3 and subject to valuation uncertainty. The 1% federal excise tax on certain stock repurchases was scheduled to take effect after December 31, 2022; management did not expect the Inflation Reduction Act to have a material financial-statement impact, though future buybacks could be taxed.
Important facts for investors to verify
- Developments, accounting treatment, and potential cash impact of the $36.7m Robinson arbitration award and the other Horizon-related arbitrations.
- Progress and potential resolution of the SEC municipal-securities case, including any disgorgement, penalties, or injunction.
- Whether deposit-sweep and margin-interest gains can offset continued weakness in advisory assets, investment banking, and client activity.
- Drivers of negative year-to-date operating cash flow, liquidity available excluding restricted SPAC trust funds, and access to collateralized funding in stressed markets.
- Future AUM and client-asset trends, share repurchases and dividends, and the effect of the post-2022 stock-buyback excise tax.