OPPENHEIMER HOLDINGS INC annual report, FY2022

Oppenheimer Holdings Inc. — FY 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022; filed February 28, 2023. Oppenheimer is a middle-market investment bank and full-service broker-dealer, with private-client, asset-management and capital-markets businesses. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial performance

Metric20222021Change
Total revenue$1,110.9$1,394.0(20.3%)
Pre-tax income$45.6$224.6(79.7%)
Net income$32.1$159.0(79.8%)
Net income attributable to Oppenheimer Holdings$32.4$159.0(79.6%)
Diluted EPS$2.57$11.70Lower
Pre-tax margin4.1%16.1%Lower
Compensation and related expenses$740.8$886.8(16.5%)
Compensation as % of revenue66.7%63.6%Higher
Cash provided by operating activities$64.5$227.8Lower

Revenue drivers: commissions were $370.4 million (down 7.8%); advisory fees $425.6 million (down 5.7%); investment banking $127.5 million (down 70.7%); bank deposit sweep income $104.6 million (up 572.1%); interest revenue $60.7 million (up 66.4%); and principal transactions $21.0 million (down 12.3%). Sweep and interest income benefited from Federal Reserve rate increases, partly offsetting weaker activity and asset values.

Segments and material changes

  • Private Client: Revenue $675.7 million, up 1.6%; pre-tax income $142.3 million, up 40.6%. Higher sweep and margin-loan interest income and lower compensation costs offset weaker commissions, advisory fees and other revenue. Client assets under administration fell 14.0% to $105.0 billion; advisor headcount declined to 968 from 996.
  • Asset Management: Revenue $99.2 million, down 5.1%; pre-tax income $35.8 million, essentially flat. AUM declined 20.3% to $36.8 billion, reflecting $7.6 billion of depreciation and $1.8 billion of net distributions.
  • Capital Markets: Revenue $337.8 million, down 46.0%; pre-tax loss of $25.7 million versus $204.1 million pre-tax income in 2021. Investment-banking revenue fell 71.5%, while sales-and-trading revenue rose 2.0%.
  • Management attributed the overall decline to inflation concerns, rising rates, geopolitical uncertainty, lower equity and fixed-income valuations, and reduced transaction volumes. IPOs, secondary offerings and M&A activity weakened, following unusually strong 2021 results.

Liquidity, capital and balance sheet

  • Total assets were $2.714 billion, down 10.8% from $3.043 billion. Cash and cash equivalents were $112.4 million; restricted cash was $25.5 million, compared with $213.8 million and $127.8 million, respectively, at year-end 2021. Cash, cash equivalents and restricted cash together decreased $203.6 million.
  • Cash flow from operations was $64.5 million; investing activities used $14.1 million and financing activities used $253.9 million. Financing outflows included $60.6 million of Class A share repurchases, $11.0 million of note repurchases and $103.5 million in redemptions of redeemable noncontrolling interests.
  • Senior secured notes had $114.05 million principal outstanding at year-end, carry a 5.50% coupon and mature October 1, 2025. The balance-sheet carrying amount, net of issuance costs, was $113.4 million. Operating lease liabilities were $182.6 million. The company reported compliance with note covenants.
  • Bank call loans were zero at year-end versus $69.5 million in 2021, although the 2022 average daily balance was $79.4 million. Management said operations, capital and available credit facilities were sufficient for foreseeable liquidity needs.
  • Oppenheimer & Co. reported regulatory net capital of $432.5 million, $408.3 million above its minimum; all active regulated domestic and international subsidiaries were reported above minimum requirements.
  • The company repurchased and cancelled 1.684 million Class A shares for $60.6 million, or $36 per share on average, and paid $0.60 per share in dividends during 2022. The board declared a further $0.15-per-share quarterly dividend payable in February 2023.

Outlook, risks and unusual items

  • No specific earnings or revenue guidance was provided. Management described priorities including growing private-client and asset-management businesses, recruiting experienced professionals, selective acquisitions and private-market investments, expanding capital-markets capabilities, and continued investment in technology, security and compliance.
  • Management expected further Federal Reserve rate increases in early 2023, noting that higher rates could support sweep and margin-loan income but also weaken economic activity, asset values, transaction volumes and fee revenue. The Fed raised rates another 25 basis points on February 1, 2023.
  • Legal matters are significant. Oppenheimer reported 11 Horizon-related arbitrations settled or settled in principle, involving approximately 41 claimants and aggregate payments of about $48.6 million. Twenty-six arbitrations remained pending, with specified claimed losses of approximately $36.4 million plus some unspecified claims. Separately, the SEC sued over municipal-note disclosure practices and sought approximately $1.9 million plus interest; the company disputes the claim. The filing estimates aggregate reasonably possible losses in excess of accrued amounts of up to $40 million for matters it can estimate, while noting actual losses may exceed that range.
  • The SEC also requested information about employee text messaging and retention of business communications; the company said it responded and was cooperating. The filing does not quantify any possible outcome.
  • Other key risks include market and interest-rate volatility, credit and funding access, litigation and regulatory enforcement, employee recruitment and retention, cybersecurity and operational disruption, competition and pricing pressure, and effects from the Russia-Ukraine war. The company noted its Class A stock is non-voting and said it expected removal from the Russell 3000 around May 2023 because voting rights reside in the privately held Class B shares.
  • The company reported effective internal control over financial reporting and received unqualified audit opinions on its financial statements and internal controls. The auditor identified asset-based advisory fee revenue as a critical audit matter because its calculation depends on data from multiple systems.

Important facts for investors to verify

  • Track whether the investment-banking downturn and lower AUM persist, and whether sweep and margin-loan income continue to offset those pressures.
  • Review the timing, payments, accruals and eventual outcomes of the Horizon arbitrations and SEC municipal-disclosure litigation; compare developments with the stated possible-loss estimate.
  • Reconcile year-end cash and restricted cash, cash-flow movements, subsidiary regulatory-capital constraints and the company’s capacity to fund operations, dividends and buybacks.
  • Confirm the outstanding note principal, 2025 maturity, covenant compliance and any further debt or share repurchases.
  • Assess the effect of lower advisor headcount, the 2022 decline in client assets, and the company’s non-voting Class A structure and anticipated index removal on future growth and stock liquidity.