Oppenheimer Holdings Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; financial statements are unaudited. Oppenheimer provides brokerage, capital markets, investment banking, asset management and trust services. At quarter-end it administered $87.3 billion in client assets, including $30.2 billion of AUM, and operated 94 U.S. branches.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $250.9m | $242.6m | $502.7m | $477.1m |
| Income before tax | $17.4m | $12.5m | $33.4m | $22.1m |
| Net income | $12.4m | $8.9m | $23.6m | $15.6m |
| Diluted EPS | $0.89 | $0.63 | $1.70 | $1.11 |
- Q2 revenue grew 3.5%, pretax income 38.9%, and net income 39.8% year over year. First-half revenue rose 5.4%, pretax income 51.1%, and net income 51.5%.
- Q2 pretax margin was approximately 6.9% versus 5.2%; net margin was approximately 4.9% versus 3.7%. For the first half, pretax margin was approximately 6.7% versus 4.6%, and net margin approximately 4.7% versus 3.3%.
- Q2 revenue drivers included advisory fees (+4.4%), investment banking (+14.7%) and bank deposit sweep income (+10.3%). Commissions fell 2.4%; net principal transaction revenue declined 52.4%, including a $2.4m unrealized ARS-related loss. Other revenue rose 43.0%, partly from life-insurance value/proceeds and a favorable legal settlement.
- Compensation was 62.1% of Q2 revenue versus 62.6% a year earlier. Total expenses increased 1.5% in Q2; higher interest and technology costs were partly offset by lower legal and regulatory costs.
- At June 30, total assets were $2.652bn, liabilities $2.089bn and equity $563.6m. Cash and equivalents were $71.3m, down from $90.7m at year-end 2018. Operating cash flow was negative $38.0m for the first half; capital spending was $6.9m, and cash declined $19.4m.
- Senior secured notes had $200m principal outstanding, due 2022, bearing 6.75%. Bank call loans were $50.1m, versus $15.0m at year-end. Repurchase-agreement liabilities were $521.8m and are part of the firm’s securities-financing operations. The filing reports a gross leverage ratio of 4.7.
- The balance sheet includes $210.3m of lease liabilities and $166.6m of right-of-use assets following adoption of the lease accounting standard in Q1; this adoption had no cumulative-effect adjustment.
Changes, outlook and material items
- Private Client revenue rose 3.4% in Q2 and pretax income rose 29.5%; Capital Markets revenue rose 5.3% but the segment remained loss-making, with a $1.8m pretax loss. Asset Management revenue rose 5.2% and pretax income rose 34.4%.
- Management attributed stronger results to favorable equity markets, higher AUM, bank-sweep income from higher short-term rates, improved investment banking activity and lower legal/regulatory costs. It cited continued pressure on transaction-based retail commissions as clients shift toward passive strategies.
- Management’s stated strategy is to grow Private Client and Asset Management through adviser and talent additions, invest in technology and capital markets, manage expenses, and consider targeted acquisitions. No quantitative earnings or revenue guidance was provided.
- Management said short-term rate decreases, higher rates paid on client deposits, or a significant decline in client cash balances could hurt earnings. It considers funds from operations, capital and available credit facilities sufficient for foreseeable liquidity needs, while noting financing availability and cost depend partly on external markets.
- After quarter-end, the company announced redemption of $50m principal (25%) of its notes on August 25, 2019, at 103.375% plus accrued interest. It expected a $1.7m call-premium cost and $3.8m annual interest-cost savings, leaving $150m principal outstanding. It also announced a $0.12-per-share quarterly dividend and authorized repurchases of up to 640,000 additional shares, supplementing 26,192 shares still available under the prior program.
- ARS exposures remain: $48.5m of ARS held, $2.0m of purchases remaining under regulatory settlements, and a separate $3.6m client purchase commitment due by June 2020. The company recorded a $6.8m total ARS valuation adjustment at quarter-end.
- Legal and regulatory matters include an estimated $0–$3.0m aggregate possible loss in excess of accruals for matters where an estimate can be made; other matters cannot be reasonably estimated. The FINRA inquiry into supervision of unit investment trust sales continued. A long-running bankruptcy-related case was expected to proceed to trial in 2019. The company also reported that a separate Oklahoma dispute settled in July with no payment by either party.
- Regulation Best Interest compliance is required by June 30, 2020. Management anticipated enhanced documentation, possible changes to business practices, and additional compliance, technology and litigation costs. Cybersecurity, market activity, interest rates, funding and legal/regulatory developments remain stated risks.
- All active regulated domestic and international subsidiaries were reported above minimum capital requirements. The company was in compliance with its senior-note covenants at June 30; Moody’s and S&P had affirmed ratings and changed outlooks to positive during 2019.
Investor verification priorities
- Assess whether the first-half earnings improvement is sustainable given reliance on market levels, short-term rates, sweep balances, investment banking activity and nonrecurring other-revenue items.
- Track operating cash use, cash balances, collateralized financing and the effect of the planned note redemption, including the premium and resulting interest savings.
- Monitor ARS purchase obligations, valuation marks, legal contingencies and the outcome of the FINRA inquiry and other proceedings.
- Evaluate the cost and business impact of Regulation Best Interest implementation and continuing technology, cybersecurity and compliance investment.
- Review the effects of the new buyback authorization and higher dividend on capital, liquidity and share count.