Oppenheimer Holdings Inc. (OPY) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless otherwise noted. Oppenheimer is a middle-market investment bank and full-service broker-dealer, with private client, asset management and capital markets businesses.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $321.7 million | $266.0 million | +20.9% |
| Pre-tax income | $19.0 million | $14.2 million | +34.0% |
| Net income attributable to Oppenheimer Holdings Inc. | $14.6 million | $9.3 million | +57.3% |
| Basic / diluted EPS | $1.32 / $1.22 | $0.75 / $0.69 | +76.0% / +76.8% |
| Cash used in operating activities | $86.1 million | $152.1 million | Use declined |
The income statement reports consolidated net income of $14.5 million in Q1 2023, including a $0.2 million loss attributable to noncontrolling interests; attributable net income was $14.6 million. Total expenses were $302.6 million, including $206.3 million of compensation and $96.3 million of non-compensation expense. The effective tax rate was 24.1%, versus 31.2% a year earlier; management cited favorable permanent items.
At March 31, 2023, total assets were $2.92 billion, total liabilities $2.09 billion, and total stockholders’ equity $800.9 million. Cash and cash equivalents were $30.3 million, plus $25.6 million of restricted cash held in the OHAA SPAC trust. The company used $82.1 million of cash, cash equivalents and restricted cash during the quarter. Management said funds from operations, capital and available credit facilities were sufficient for foreseeable liquidity needs.
Senior secured notes had $113.1 million principal outstanding ($112.5 million net carrying value), bear 5.50% interest and mature in 2025. The company repurchased and cancelled $1.0 million principal in Q1 and reported compliance with note covenants. Operating lease liabilities were $193.4 million. Bank call loans were $19.3 million at quarter-end, compared with none at December 31, 2022.
Material changes and operating performance
- Revenue mix: Bank deposit sweep income rose to $48.9 million from $4.4 million, and interest revenue rose to $24.9 million from $9.5 million, primarily reflecting higher short-term rates. Principal transactions revenue increased to $13.5 million from $2.4 million.
- Market-sensitive fees: Commissions declined to $86.7 million from $98.3 million and advisory fees to $100.5 million from $115.8 million. Management attributed declines to lower client activity and reduced portfolio valuations. Investment banking revenue was $38.0 million, little changed overall, as stronger M&A advisory fees offset weaker underwriting.
- Costs: Compensation expense increased 10.9%; non-compensation expense increased 46.4%, with management citing higher interest expense and legal costs.
- Segments: Private Client revenue rose 34.9% to $203.4 million, largely on deposit-sweep and margin-interest income. Asset Management revenue fell 11.6% to $24.0 million. Capital Markets revenue rose 6.2% to $90.3 million, but the segment recorded a $15.5 million pre-tax loss versus $1.2 million income a year earlier, reflecting higher compensation and other expenses.
- Client assets and staffing: Assets under management were $39.3 billion, down 8.0% year over year; assets under administration were $108.9 billion, down 7.1%. Financial advisor headcount was 959 versus 993.
- Shareholder returns: The company repurchased 95,055 Class A shares for $3.7 million at an average $38.79 per share. It declared a $0.15-per-share quarterly dividend for payment in May 2023.
Outlook, risks and contingencies
The filing gives no numerical earnings or revenue guidance. Management’s stated priorities include recruiting financial advisors and investment bankers, expanding wealth management and capital markets, pursuing selected acquisitions and private-market investments, improving technology and cybersecurity, and managing expenses.
Management noted that Q1 market volatility and regional-bank failures affected client confidence, trading and transaction-based revenue. It reported no direct exposure to Silicon Valley Bank or Signature Bank, but disclosed that a substantial majority of company cash is held at a large global bank, often above FDIC insurance limits. The company said an interruption in access could harm its financial condition. Higher rates benefited sweep and margin-interest income, but may be offset if clients move cash to higher-yielding alternatives; recession risk, lower asset values and reduced capital-markets activity could also pressure results.
- Legal matters: Twenty-two pending Horizon-related arbitrations allege approximately $24 million in specific losses, with additional unspecified claims. Seventeen matters had been settled, settled in principle or resulted in awards, with aggregate settlement payments of approximately $58 million. The company disputes the claims. The filing estimates aggregate reasonably possible losses in excess of accruals of up to $33 million in the financial-statement note, but up to $35 million in the Legal Proceedings section; it says some exposures cannot be estimated.
- SEC proceeding: The SEC sued Oppenheimer over municipal-note disclosure exemption compliance and seeks an injunction and approximately $1.9 million plus interest in disgorgement. The company says it will defend the claim. It also disclosed an SEC inquiry regarding employee text and electronic communications retention.
- Other risks: The filing highlights regulatory and litigation exposure, cybersecurity threats, market and interest-rate volatility, funding access, economic weakness and geopolitical events. Oppenheimer reported all active regulated domestic and international subsidiaries were above minimum regulatory capital requirements.
- OHAA SPAC: The business-combination deadline was extended to October 30, 2023. Following shareholder redemptions, $25.6 million remained in restricted trust cash at March 31, 2023.
Investor facts to verify
- Reconcile the filing’s differing estimates of possible legal losses: up to $33 million in the note versus up to $35 million in Part II.
- Track whether higher-rate-driven sweep and interest revenue can persist if client cash balances continue to fall; cash sweep balances were $4.4 billion versus $8.1 billion a year earlier.
- Monitor Capital Markets segment profitability, compensation growth, legal costs and the company’s ability to convert revenue growth into earnings.
- Review operating cash outflows, funding needs and cash concentrations at banks, including balances above FDIC-insured limits.
- Follow the Horizon arbitrations, SEC municipal-disclosure litigation and electronic-communications inquiry, including any changes in accruals or potential exposure.
- Confirm OHAA’s progress toward a business combination before its October 30, 2023 deadline.