Oppenheimer Holdings Inc. (NYSE: OPY) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. Oppenheimer provides retail brokerage, institutional sales and trading, investment banking, asset management, and trust services. It reported 93 U.S. branches, $79.1 billion in client assets under administration, and $28.0 billion in assets under management at quarter-end.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $234.8 million | $251.8 million | Down 6.8% |
| Expenses | $224.5 million | $235.7 million | Down 4.7% |
| Income before taxes | $10.2 million | $16.1 million | Down 36.3% |
| Net income | $7.8 million | $11.2 million | Down 30.2% |
| Basic / diluted EPS | $0.61 / $0.58 | $0.86 / $0.81 | Lower |
| Pre-tax margin | 4.4% | 6.4% | Down |
| Net margin | 3.3% | 4.4% | Down |
- Revenue mix: Commissions rose 30.0% to $103.2 million and advisory fees rose 17.0% to $86.2 million. Investment banking declined 8.3% to $25.7 million; bank deposit sweep income fell 44.6% to $18.8 million; interest revenue fell 14.4% to $10.9 million. Principal transactions were a loss of $0.9 million versus income of $11.4 million; other revenue was a loss of $9.2 million versus income of $12.5 million.
- Cash flow: Operating cash flow was negative $241.0 million, versus positive $15.3 million a year earlier. The filing attributes large movements to changes in brokerage and customer balances, securities, deposits, repurchase financing, and compensation accruals. Investing cash outflow was $1.3 million; financing inflow was $186.3 million, including $203.1 million of increased bank call loans. Cash decreased $56.0 million to $23.5 million.
- Balance sheet and funding: Total assets were $2.14 billion, down from $2.46 billion at year-end 2019; stockholders’ equity was $586.7 million, compared with $592.7 million. Bank call loans were $203.1 million, up from zero at year-end. Senior secured notes had $148.6 million principal outstanding, due 2022 at 6.75%; the company repurchased $1.4 million in principal during the quarter and recorded an $86,000 gain. Lease liabilities were $197.7 million.
- Regulatory capital: Oppenheimer’s broker-dealer net capital was $250.9 million, $224.1 million above its minimum. The filing states regulated domestic and international subsidiaries were above minimum requirements.
Material changes and management commentary
- Q1 results reflected sharply divergent market conditions: markets rose through mid-February, then sold off amid COVID-19 uncertainty and extreme volatility. Management said results were solid until the pandemic’s economic effects intensified in mid-March.
- Federal Reserve rate cuts, including a 1.50 percentage-point reduction in March, reduced earnings. Management identified a $15.1 million year-over-year decline in bank deposit sweep income and expected near-zero rates to continue weighing on future periods.
- Higher transaction activity lifted commissions, while higher year-end 2019 assets supported Q1 advisory fees. Client assets under administration fell 12.2% from year-end to $79.1 billion. AUM was $28.0 billion at March 31, down from $29.5 billion a year earlier; the quarter’s AUM change included $2.8 billion of depreciation and $1.3 billion of net contributions.
- By segment, Private Client revenue declined 13.5% to $141.4 million and pre-tax income fell 22.1% to $33.4 million. Asset Management revenue increased 16.2% to $19.3 million and pre-tax income rose to $4.3 million. Capital Markets revenue increased 6.5% to $75.5 million, with a $0.1 million pre-tax loss, improved from a $2.6 million loss.
- Compensation expense was $157.7 million; the compensation-to-revenue ratio increased to 67.2% from 63.7%. The company recorded a $3.4 million compensation credit related to its OARs plan as its share price declined. Non-compensation expenses fell 11.3% to $66.9 million, including lower legal, regulatory, and interest costs.
Outlook, risks, and contingencies
- The filing provides no quantitative earnings or revenue guidance. Management described longer-term plans to grow private client, asset management, and capital markets businesses through hiring, technology investment, and selective acquisitions, while controlling expenses and risk.
- Management said the duration of shutdowns and timing of economic recovery were uncertain and that prolonged restrictions could materially harm results. Remote work had been implemented for most employees, with no significant business or control-process disruption reported through the filing date; continuity depends on remote operations remaining effective.
- COVID-19 risks include market volatility, reduced client activity and revenues, operational disruption, personnel availability, and effects on clients and investments. The company said it was too early to determine the pandemic’s full impact and reported no impairment or write-off from its review of goodwill, certain asset valuation allowances, and receivable collectability as of March 31.
- Other sensitivities include interest rates, market and credit conditions, funding availability, regulatory costs, cybersecurity, and legal or regulatory outcomes. Regulation Best Interest compliance was scheduled for June 30, 2020; the company anticipated possible compliance costs, operational changes, and revenue limitations.
- Legal and regulatory proceedings are ongoing. For matters where a loss was reasonably estimable and at least reasonably possible, estimated aggregate loss in excess of accruals was $0 to $3.0 million; some matters could not be estimated, and actual losses could exceed the range.
- Auction-rate-security obligations included $2.3 million of purchases related to regulatory settlements and a separate $3.7 million purchase commitment due by July 2020. The company owned $26.3 million of auction rate securities at quarter-end.
- On May 1, 2020, the company announced a $0.12-per-share quarterly dividend, payable May 29 to holders of record May 15. The company was in compliance with its senior-note covenants at March 31.
Key facts for investors to verify
- Whether near-zero interest rates, reduced sweep balances, and COVID-19 market conditions continue to pressure revenue and margins.
- Whether client asset levels and AUM recover or further declines reduce advisory fees and client activity.
- How the negative operating cash flow and increased reliance on bank call loans develop; these loans are generally payable on demand and collateralized.
- Actual outcomes and costs of legal, regulatory, and auction-rate-security matters, including commitments due in 2020.
- Whether the company maintains regulatory capital, funding access, and effective remote-work and cybersecurity controls under continuing market stress.