Oppenheimer Holdings Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods unless noted. Oppenheimer is a financial-services firm spanning brokerage, investment banking, trading, asset management and trust services. It reported 94 U.S. offices and client assets administered of $78.7 billion at quarter-end.
Financial results and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue from continuing operations | $212.1 million | $228.0 million | $427.0 million | $465.1 million |
| Expenses | $217.3 million | $229.1 million | $439.6 million | $460.4 million |
| Pre-tax income (loss), continuing operations | $(5.2) million | $(1.1) million | $(12.6) million | $4.7 million |
| Net income (loss), continuing operations | $(2.6) million | $(1.5) million | $(6.1) million | $2.2 million |
| Net income attributable to Oppenheimer Holdings Inc. | $5.2 million | $0.3 million | $1.3 million | $6.0 million |
| Basic earnings per share | $0.39 | $0.02 | $0.10 | $0.44 |
Q2 2016 total earnings included $9.3 million of net income from discontinued operations; that business recorded a $14.9 million gain on sale. Continuing operations remained loss-making. The six-month comparison also deteriorated: continuing operations moved from profit to loss, while attributable net income fell 77.7%.
- Revenue mix and changes: Q2 commissions fell 10.6% to $92.6 million, advisory fees fell 8.5% to $66.1 million, and investment banking fell 34.9% to $18.9 million. Net principal transactions rose to $7.6 million from $3.5 million; other revenue rose to $14.9 million from $8.3 million. Management cited lower retail transaction volumes, fewer financial advisers, lower assets under management, and weaker M&A and equity underwriting activity.
- Costs and margins: Q2 compensation expense declined 7.9% to $141.7 million; compensation was 66.8% of revenue versus 67.5%. Six-month compensation was 68.0% of revenue versus 67.6%. Six-month non-compensation expense rose 2.5%, with higher legal, regulatory, consulting, communications and technology costs.
- Cash flow: For the six months, operating cash flow was negative $40.7 million, investing cash flow was positive $40.7 million (including $43.3 million proceeds from asset sales), and financing cash flow was positive $44.2 million. Cash increased $44.2 million to $107.5 million. Operating cash flow was less negative than the prior-year $126.4 million outflow.
- Balance sheet and debt: Total assets were $2.576 billion, down from $2.698 billion at year-end 2015; stockholders’ equity was $522.1 million versus $525.1 million. Senior secured notes were $150 million principal, bearing 8.75% and due April 2018. Bank call loans were $151.9 million, up from $100.2 million. Repurchase-agreement liabilities fell to $432.9 million from $651.4 million. The filing reports a gross leverage ratio of 4.9.
- Liquidity and capital: Management said operations, capital and available credit facilities should meet foreseeable liquidity needs, while noting funding availability may depend on market conditions. Broker-dealer net capital exceeded minimum requirements: Oppenheimer had $120.5 million, $98.7 million above its minimum; Freedom had $5.7 million, $5.6 million above its minimum.
Material changes, outlook and risks
- Mortgage-business wind-down: OMHHF sold its permanent-loan portfolio and associated servicing rights on June 20 for approximately $45 million cash; $1.4 million was withheld pending resolution of one loan. The sale generated a $14.9 million gain. The business and its results are classified as discontinued operations. On July 21, OMHHF agreed to sell its remaining construction-loan portfolio and servicing rights for $3.7 million; completion was expected in the next reporting period.
- Management outlook: No quantified earnings or revenue guidance was provided. Management described plans to grow private-client and asset-management businesses, hire experienced advisers, expand technology and capital-markets capabilities, and manage expenses. The company was reviewing operating-model implications of the new Department of Labor fiduciary rules, which management expected could pressure retirement-account revenue and commission-based business.
- Legal and regulatory exposure: For proceedings where loss was reasonably possible and estimable, the company reported an aggregate potential loss range of $0–$54 million in excess of accruals; some matters could not be estimated. A $2.3 million FINRA fine and approximately $717,000 restitution for leveraged/inverse ETF sales had been accrued. The company was fully reserved for $10 million of remaining SEC/FinCEN payments due before January 27, 2017. A July 2016 Michigan agreement added a $650,000 fine and $250,000 contribution over five years.
- Other risks and contingencies: The company held $90.7 million of auction-rate securities (ARS) at fair value of $89.1 million and had $26.9 million of purchase commitments through 2020. Eligible investors also held about $34.3 million of ARS potentially subject to future offers; timing and amounts are uncertain. The filing highlights market volumes and volatility, interest rates, funding access, regulatory costs, litigation, cybersecurity and foreign-operation risks. Oppenheimer continued to cooperate with SEC and FINRA inquiries regarding a former adviser’s alleged insider trading and other matters.
- Capital actions: The company repurchased 251,254 Class A shares for $3.8 million in the first half and paid $0.22 per share in dividends. A $0.11 quarterly dividend was declared after quarter-end. Moody’s and S&P affirmed their respective B2 and B ratings and revised outlooks to positive.
Key facts for investors to verify
- Whether continuing-business revenue and profitability recover from the first-half decline, particularly commissions, advisory fees and investment banking.
- How much of reported earnings and cash generation depends on the OMHHF disposal, including final proceeds, withheld consideration and completion of the construction-loan sale.
- Liquidity and financing sensitivity: bank call loans are generally payable on demand, and repurchase and securities-financing balances are substantial and collateral-dependent.
- The ultimate cost and timing of ARS purchases, legal proceedings and regulatory matters, including exposures beyond recorded accruals.
- Effects of the Department of Labor fiduciary rules and continuing compliance, technology and cybersecurity investments on revenue and expenses.
- Ability to service or refinance the 8.75% notes due in 2018 and compliance with their covenants; asset-sale proceeds may trigger a note repurchase offer unless used as specified by the indenture.