Business context and reporting period
Oppenheimer Holdings Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The financial-services business includes retail brokerage, institutional sales and trading, investment banking, asset management and trust services. It operated from 92 offices and reported $79.7 billion of client assets administered and $24.6 billion of assets under management (AUM). The commercial mortgage banking subsidiary, OMHHF, was substantially wound down after sales of most of its assets; its results are presented as discontinued operations.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Continuing-operations revenue | 211.8 | 207.5 | 638.8 | 672.6 |
| Continuing-operations pretax income (loss) | (1.8) | (2.6) | (14.4) | 2.1 |
| Continuing-operations net income (loss) | (1.1) | (1.1) | (7.2) | 1.0 |
| Net income (loss) attributable to Oppenheimer Holdings | (0.7) | (0.9) | 0.6 | 5.1 |
| Basic earnings (loss) per share | (0.05) | (0.07) | 0.05 | 0.37 |
- Q3 continuing revenue rose 2.1%, while expenses increased 1.7% to $213.6 million. Compensation was 67.2% of revenue, versus 67.1% a year earlier.
- Nine-month continuing revenue fell 5.0%; expenses declined 2.6%. Compensation was 67.7% of revenue, versus 67.5%. The company moved from a $2.1 million continuing pretax profit to a $14.4 million loss.
- Q3 revenue drivers were mixed: commissions declined 11.1% and advisory fees 3.0%, while investment banking rose 22.6%, principal transactions rose $2.6 million, and other revenue rose $13.8 million. Other revenue included higher bank-deposit fees, customer service charges and deferred-compensation-related amounts.
- Nine-month commissions declined 8.9%, advisory fees 6.2% and investment banking 29.3%; principal transactions rose 33.2% and other revenue more than doubled. Management cited reduced retail trading activity and lower adviser headcount, as well as weaker investment-banking results.
- Discontinued operations contributed $9.4 million of net income for the first nine months, including a $14.9 million gain on the sale of mortgage assets. Without that contribution, continuing operations were loss-making.
At September 30, 2016, total assets were $2.584 billion, down 4.2% from year-end 2015; cash and cash equivalents were $99.0 million, up from $63.4 million. Total liabilities were $2.068 billion and total stockholders’ equity was $516.0 million. Receivables from customers were $798.0 million. Securities owned were $1.028 billion, including $90.0 million of auction-rate securities (ARS) at fair value.
Nine-month cash used in operating activities was $24.5 million, compared with $89.8 million used in 2015. Investing activities provided $43.2 million, including $47.6 million in proceeds from asset sales; financing activities provided $17.1 million. Cash increased $35.7 million to $99.0 million. These cash flows reflect substantial movements in trading and customer-related balances as well as the OMHHF asset sale.
Debt included $150.0 million principal amount of 8.75% senior secured notes due April 2018 (carrying value $149.2 million) and $132.0 million of bank call loans, up from $100.2 million at year-end. Repurchase-agreement liabilities were $528.1 million, down from $651.4 million. Management said funds from operations, capital and available credit facilities were expected to meet liquidity needs in the foreseeable future, while noting that access to external financing depends on market conditions. Oppenheimer’s regulatory net capital was $124.2 million, $104.1 million above its minimum requirement; the filing also reported the relevant subsidiaries above their stated regulatory capital minimums.
Material changes, outlook and key risks
- Business disposal: OMHHF sold its permanent mortgage-loan portfolio and related servicing rights for approximately $45.0 million in June 2016, with $1.4 million of the price initially withheld and recognized in Q3 after a loan was modified. It also sold its construction-loan portfolio and related servicing rights for approximately $3.8 million in Q3. The company said it had substantially completed winding down the business.
- Business trends: Q3 Private Client revenue and pretax income improved, aided by fees from the FDIC-insured bank-deposit program. However, financial-adviser headcount fell to 1,177 from 1,262 a year earlier, and management expected further reductions. AUM was $24.6 billion at September 30, up 3.8% from a year earlier, principally due to market appreciation despite net redemptions.
- No quantified earnings guidance: Management described long-term plans to grow private-client and asset-management businesses, expand capital-markets capabilities, invest in technology and manage expenses. It provided no numerical earnings or revenue guidance.
- Regulatory and legal exposure: For proceedings where a loss was at least reasonably possible and estimable, the company disclosed an aggregate potential loss range of $0 to $62.0 million in excess of amounts accrued; some matters could not be estimated, and actual losses could exceed the range. Oppenheimer received a FINRA Wells Notice in September 2016 concerning filing and supervisory matters. Separately, it settled a FINRA inquiry into leveraged and inverse ETFs for a $2.3 million fine and approximately $717,000 in client restitution.
- ARS commitments and valuation: The company held approximately $92.0 million principal value of ARS and reported $25.5 million of purchase commitments under legal settlements and awards through 2020. The filing’s disclosures on regulator-related commitments are inconsistent: one section reports $3.0 million outstanding, while another says none were outstanding. Eligible investors still held approximately $33.8 million of ARS potentially subject to future offers. ARS are illiquid and valued using Level 3 inputs.
- Other risks and contingencies: The company had $10.0 million remaining in SEC and FinCEN payments, fully reserved, due before January 27, 2017. Its $137.9 million goodwill balance was not impaired in an August 2016 interim test, but management warned that prolonged low short-term rates and declining transaction commissions or adviser headcount could create impairment risk. Management also cited the new Department of Labor fiduciary rules, Brexit-related uncertainty, cybersecurity, regulatory costs and market-dependent revenues as risks.
- Capital returns and credit: The company declared a $0.11-per-share quarterly dividend payable November 25, 2016. Moody’s and S&P affirmed their respective B2 and B ratings on the company and notes in 2016 and revised their outlooks to positive.
Most important facts to verify
- Whether the $3.0 million regulator-related ARS commitment was outstanding at quarter-end, given the inconsistent filing disclosures, and how much of the $33.8 million remaining eligible-investor ARS could lead to future purchases.
- The sustainability of revenue and profitability given declining commissions, adviser headcount and nine-month investment-banking revenue, and reliance on other revenue and discontinued-operation gains.
- Liquidity and funding capacity under market stress, including the level of bank call loans, repurchase financing and collateral availability.
- The ultimate cost and timing of legal and regulatory matters, including potential losses beyond the disclosed $0–$62.0 million estimable range and the FINRA Wells Notice.
- Progress on the OMHHF wind-down, the use of asset-sale proceeds under the senior-note indenture, and the ability to service or refinance the 2018 notes.