Oppenheimer Holdings Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Oppenheimer is a middle-market investment bank and full-service broker-dealer, with private client, asset management and capital markets businesses. At quarter-end, client assets under administration were $117.3 billion and assets under management were $43.7 billion.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $340.3 million | $264.7 million | $713.6 million | $499.5 million |
| Pre-tax income | $43.2 million | $23.3 million | $95.3 million | $33.5 million |
| Net income | $31.2 million | $17.6 million | $69.8 million | $25.5 million |
| Diluted EPS | $2.28 | $1.34 | $5.17 | $1.92 |
| Operating cash flow | Not separately provided for the quarter | $20.1 million | $(15.9) million |
Q2 revenue increased 28.5% and net income increased 76.5%; first-half revenue rose 42.9% and net income rose 174.1%. Management described the first-half result as the Firm’s best first half. The effective tax rate was 27.8% for Q2 and 26.7% for the first half, up from 24.1% and 23.9%, respectively, in 2020.
Drivers and material changes
- Investment banking and capital markets: Q2 capital markets revenue rose 40.5%, and segment pre-tax income increased 76.4%. Investment banking revenue increased 129.7%, including higher equity underwriting and M&A advisory fees; advisory fees benefited from SPAC-related M&A and PIPE transactions. Sales and trading revenue declined 20.9%, reflecting lower equities volatility and weaker fixed-income revenue.
- Private Client: Revenue rose 17.7%, led by a 46.4% increase in advisory fees and higher retail commissions. Segment pre-tax income fell 11.0% to $21.7 million as compensation costs rose and low rates continued to weigh on results. Bank deposit sweep income declined 47.9% to $3.7 million.
- Asset Management: Revenue increased 45.8% and pre-tax income more than doubled. AUM reached $43.7 billion, up from $32.7 billion a year earlier; management attributed the increase to asset appreciation and net contributions.
- Expenses: Q2 compensation expense increased 28.7% to $231.1 million, faster than revenue, while non-compensation expenses rose 6.6%. Management cited $12.8 million of Q2 compensation expense tied to the Company’s share price, compared with $2.0 million a year earlier.
Cash, capital and debt
- Cash and cash equivalents were $39.8 million at June 30, 2021, versus $35.4 million at year-end 2020. First-half cash increased $4.4 million: operating activities provided $20.1 million, investing used $5.4 million and financing used $10.3 million.
- Total assets were $2.714 billion and stockholders’ equity was $752.5 million, compared with $2.714 billion and $685.7 million, respectively, at December 31, 2020. Management reported record book value of $59.29 per share and tangible book value of $45.90 per share.
- Debt included $125.0 million principal amount of 5.50% senior secured notes due 2025, carried at $123.9 million net of issuance costs. The Company reported compliance with note covenants. Bank call loans were $79.6 million, down from $82.0 million at year-end.
- Operating lease liabilities totaled $204.0 million. Management said liquidity needs are met through internally generated funds and collateralized and uncollateralized borrowings, and believes available resources are sufficient for the foreseeable future. Broker-dealer and international subsidiaries reported regulatory capital above applicable minimums.
Outlook, risks and contingencies
- No specific financial guidance was provided. Management’s stated priorities include recruiting financial advisors and investment professionals, expanding investment banking, investing in technology and compliance, and pursuing selected acquisitions and other growth opportunities.
- Management said low short-term interest rates continue to pressure deposit-sweep income and wealth-management earnings, with lower rates expected to remain a significant factor for the foreseeable future. It planned a broader office re-entry around mid-September 2021 while continuing to monitor COVID-19 and variants.
- Key disclosed risks include market activity and volatility, interest rates, funding availability, regulation, cybersecurity, litigation, foreign operations and COVID-19. Management reported no material business or control-process disruption from remote work to date. Disclosure controls were assessed as effective at period-end.
- For legal and regulatory matters where a loss was reasonably possible and estimable, the Company disclosed an aggregate potential loss range of $0 to $6.0 million in excess of accrued amounts; some matters could not be estimated, and actual losses may exceed the range. The Company also had $443,000 of remaining ARS purchase commitments under regulatory settlements and held auction-rate securities valued at $31.4 million.
- The board approved a 25% increase in the quarterly dividend to $0.15 per share, announced July 29, 2021 and payable August 26, 2021.
Important facts for investors to verify
- Whether elevated investment-banking and SPAC-related fees are sustainable, and how capital markets performance changes with market conditions.
- The sensitivity of sweep income and client activity to interest rates, and whether higher AUM and client assets persist.
- The impact of share-price-linked compensation and other compensation growth on future margins.
- Liquidity and funding exposure from collateralized financing, repurchase agreements, bank call loans and market stress; the filing reports a gross leverage ratio of 3.6.
- Developments in legal proceedings, including the uncertain potential losses and remaining ARS-related obligations.