Oppenheimer Holdings Inc. — Q2 2017 Form 10-Q Summary
Business and period. The filing covers the quarter and six months ended June 30, 2017; financial statements are unaudited. Oppenheimer provides brokerage, capital-markets, investment-banking, asset-management and trust services. At quarter-end, it administered approximately $81.2 billion of client assets and managed $26.1 billion. The former commercial mortgage banking business is reported as discontinued operations.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $215.9 million, up 1.8% from $212.1 million | $429.1 million, up 0.5% from $427.0 million |
| Expenses | $217.5 million, versus $217.3 million | $437.8 million, down 0.4% from $439.6 million |
| Pre-tax loss from continuing operations | $1.6 million, improved from $5.2 million | $8.7 million, improved from $12.6 million |
| Net income (loss) attributable to Oppenheimer Holdings | $(1.3) million, or $(0.10) per share; prior year income was $5.2 million, or $0.39 per share | $(6.2) million, or $(0.46) per share; prior year income was $1.3 million, or $0.10 per share |
| Net income from discontinued operations | $0.1 million, versus $9.6 million | $0.6 million, versus $8.9 million |
| Compensation as a percentage of revenue | 66.1%, versus 66.8% | 66.8%, versus 68.0% |
Continuing-operations pre-tax margin was approximately (0.8)% in Q2 2017 versus (2.5)% in Q2 2016, and approximately (2.0)% for the first half versus (2.9)% in the prior-year period. The prior-year comparison for attributable net income includes substantial discontinued-operation income, principally a $14.9 million gain on the 2016 sale of mortgage assets.
- Q2 revenue mix: Commissions fell 9.4% to $83.9 million, reflecting lower retail and institutional transaction activity and fewer financial advisers. Advisory fees rose 10.1% to $72.8 million, supported by higher managed assets. Investment banking fell 18.5% to $15.4 million, mainly on lower M&A advisory fees. Principal transactions declined 30.0% to $5.3 million. Other revenue rose 72.5% to $25.7 million, primarily from fees on client deposits in the FDIC-insured bank deposit program.
- First-half revenue mix: Commissions decreased 13.2% to $170.6 million; advisory fees increased 7.6% to $142.2 million; investment banking rose 6.9% to $33.4 million; interest revenue fell 6.6% to $23.4 million; principal transactions declined 24.8% to $10.7 million; and other revenue increased 74.9% to $48.9 million.
- Segments: Q2 Private Client revenue was $140.3 million and pre-tax income $28.1 million, up from $14.3 million. Asset Management revenue was $19.3 million and pre-tax income $4.1 million, both down year over year; the fee allocation between these segments changed in 2017. Capital Markets revenue fell 18.0% to $53.7 million and swung to an $11.0 million pre-tax loss from $4.0 million of income. Corporate/Other recorded a $22.8 million pre-tax loss.
Financial position, cash flow and funding
- At June 30, 2017, cash and cash equivalents were $116.6 million, versus $64.9 million at December 31, 2016. Total assets were $2.61 billion, up 16.6%; total liabilities were $2.11 billion; and total stockholders’ equity was $501.1 million, down from $513.3 million.
- For the first half, operating activities used $70.4 million of cash, compared with $40.1 million used in 2016. Investing activities used $0.9 million, versus $40.7 million provided in 2016, which included asset-sale proceeds. Financing provided $122.9 million, including $200 million of new notes, $150 million of note redemptions and an $84.6 million increase in bank call loans. Cash increased by $51.7 million.
- Bank call loans were $230.4 million, up from $145.8 million at year-end; they are generally payable on demand and collateralized. Repurchase-agreement liabilities were $457.8 million. The company reported a gross leverage ratio of 5.2.
- On June 23, the company issued $200 million of 6.75% senior secured notes due 2022 and arranged redemption of the remaining $120 million of 8.75% notes due 2018. The old notes were fully redeemed on July 23, 2017. The new notes are secured by a first-priority interest in substantially all assets of the company and guarantors and include restrictive covenants. The company reported compliance with covenants at June 30. S&P upgraded its rating to B+ with stable outlook; Moody’s affirmed its ratings and stable outlook.
- Oppenheimer’s U.S. broker-dealer had $130.2 million of net capital, $107.8 million above its minimum requirement. Management said operating funds, capital and available credit facilities were sufficient for foreseeable liquidity needs, while noting funding availability may depend on external market conditions.
Outlook, risks and notable items
- No quantified earnings or revenue guidance is provided. Management’s stated priorities include growing Private Client and Asset Management, recruiting experienced advisers, improving technology and compliance capabilities, expanding capital-markets capacity, controlling expenses and pursuing suitable acquisitions.
- Management cited lower market transaction volumes and adviser headcount as commission headwinds, while higher client assets supported advisory fees. Regulatory changes—including the DOL fiduciary rule and MIFID II—may affect compensation, retirement-account business and research economics. Brexit adds uncertainty to the London operation and employees’ ability to serve EU markets.
- The company recorded $1.2 million of Q2 charges related to the debt refinancing. It paid approximately $8.0 million in May to settle an Israeli VAT assessment; the amount had been fully reserved through March 31, 2017. The company also noted higher first-half non-compensation expense in part from the VAT assessment, offset by lower legal and regulatory costs.
- Legal and regulatory proceedings remain material uncertainties. For matters where a loss is reasonably possible and estimable, the company estimated aggregate losses in excess of accruals of $0 to approximately $34 million; some matters could not be estimated, and actual losses could exceed the range.
- Auction-rate securities (ARS) remain a distinct exposure: the company held approximately $109.2 million principal value of ARS and had purchase commitments of approximately $15.0 million principal value at quarter-end, with a $2.3 million total valuation adjustment. Eligible investors held another approximately $29.4 million principal value potentially subject to future offers, but those offers were not yet commitments and are excluded from the booked adjustment. ARS valuations use significant unobservable inputs and are sensitive to interest rates and liquidity.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the first half.
Important facts for investors to verify
- Reconcile continuing-operations losses with reported net results, especially the prior-year discontinued-operation gain and the remaining 2017 discontinued-operation income.
- Review the drivers and sustainability of other revenue growth, including client-deposit program fees, and monitor commissions, adviser headcount and Capital Markets profitability.
- Check the refinancing cash flows, July 23 redemption completion, ongoing interest expense, note covenants and dependence on demand bank loans and collateralized funding.
- Assess the range and potential timing of litigation and regulatory losses, including the distinction between the stated $0–$34 million estimated range and ARS purchase exposures.
- Track future ARS buyback offers, issuer redemptions, valuation assumptions and the liquidity of the company’s ARS holdings.
- Monitor the effects of DOL and MIFID II requirements, Brexit, cybersecurity threats and compliance remediation costs on revenue, expenses and operations.