Oppenheimer Holdings Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results. Oppenheimer provides brokerage, investment banking, asset management and related financial services.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $264.7m | $250.9m | $499.5m | $502.7m |
| Pre-tax income | $23.3m | $17.4m | $33.5m | $33.4m |
| Net income | $17.6m | $12.4m | $25.5m | $23.6m |
| Diluted EPS | $1.34 | $0.89 | $1.92 | $1.70 |
- Q2 revenue rose 5.5% and net income rose 42.6% year over year. Q2 pre-tax margin was approximately 8.8%, versus 6.9% a year earlier; net margin was approximately 6.7%, versus 4.9%.
- For the first half, revenue declined 0.6%, while net income increased 8.1%. First-half pre-tax margin was approximately 6.7%, broadly unchanged year over year.
- Q2 commissions were $101.6m, advisory fees $76.0m, investment banking revenue $46.2m and bank deposit sweep income $7.1m. Compensation expense increased 15.3% to $179.6m; non-compensation expenses declined 20.4% to $61.9m. Compensation was 67.8% of Q2 revenue, compared with 62.1% a year earlier.
- Capital Markets drove Q2 improvement: revenue increased 46.6% to $105.3m and pre-tax income was $22.3m, versus a $1.8m loss. Private Client revenue declined 12.4% to $141.8m and pre-tax income fell 43.9% to $24.3m. Asset Management revenue fell 5.9% to $17.5m and pre-tax income fell 25.1% to $4.0m.
- Six-month operating cash flow was negative $15.9m, versus negative $38.0m in 2019. Investing cash outflow was $3.2m; financing cash outflow was $9.2m. Cash decreased $28.3m to $51.2m from year-end 2019.
- At June 30, total assets were $2.36bn and stockholders’ equity was $601.1m. Senior secured notes, net, were $148.2m, bearing 6.75% and due 2022; bank call loans were $13.0m. Operating lease liabilities were $202.0m. Management said available operating funds, capital and credit facilities were sufficient for foreseeable liquidity needs.
- Client assets under administration were $89.7bn and assets under management were $32.7bn. AUM reached a record, up 8.3% from June 2019.
Material changes and management commentary
- Strong equity and fixed-income trading and underwriting activity, higher retail participation and market recovery offset lower deposit sweep income and weaker M&A advisory fees. Investment banking revenue reached $46.2m, its strongest quarter since Q4 2010.
- Bank deposit sweep income fell 77.6% year over year in Q2, primarily because of lower short-term interest rates; interest revenue also declined. Management said Federal Reserve rate cuts negatively affected first- and second-quarter earnings and would continue to weigh on future periods.
- COVID-19 prompted a broad shift to remote work. Management reported no significant business or control-process disruption to date, but anticipated that the pandemic could affect the economy and the Company into 2021, with many employees working remotely for an indefinite period.
- Management viewed the quarter as resilient despite the low-rate environment. It noted that Q2 market recovery lifted AUM, which it expected to support Q3 advisory-fee billings. Strong market volatility and capital-markets activity could support second-half results, but this was conditional commentary, not numerical guidance.
- The Company repurchased 600,548 Class A shares for $12.3m in the first half and paid $0.24 per share in dividends. A further quarterly dividend of $0.12 per share was announced after quarter-end.
Risks, contingencies and unusual items
- COVID-19, market volatility, recession, interest-rate changes, reduced client activity and remote-work effectiveness pose risks to revenue, liquidity and operations. The filing identifies cybersecurity, regulatory, legal, funding and foreign-operation risks as well.
- Legal and regulatory proceedings are ongoing. For matters where a loss was reasonably possible and estimable, the Company reported an aggregate potential loss range of $0–$4.0m in excess of accrued amounts; it could not estimate losses for certain proceedings.
- Auction-rate-securities (ARS) holdings were $29.6m, with a $5.1m valuation adjustment. The Company reported $2.4m of remaining ARS purchase commitments under regulatory settlements; it had completed purchase obligations arising from legal settlements and awards.
- The Company adopted the expected-credit-loss standard on January 1, 2020, with no opening cumulative-effect adjustment. It reported no COVID-related goodwill impairment or asset write-off as of June 30. Management said the Company was in compliance with its debt covenants and regulatory capital requirements.
- Regulation Best Interest compliance became effective June 30, 2020. The Company anticipated possible limits on some business practices and higher compliance and litigation costs.
Important facts for investors to verify
- Whether low interest rates continue to suppress sweep and interest revenue, and whether higher client cash balances can offset the impact.
- Whether Q2 trading and underwriting strength persists, and whether weaker M&A activity and Private Client profitability recover.
- The sustainability of record AUM, net client flows and the expected contribution of higher June-end AUM to subsequent advisory fees.
- Cash-flow drivers, access to short-term funding, collateral demands and the level of bank call loans and repurchase financing.
- Developments in COVID-19-related disruption, legal and regulatory matters, ARS commitments, and the costs and revenue effects of Regulation Best Interest.