Oppenheimer Holdings Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Oppenheimer is a diversified financial-services firm spanning brokerage, asset management, capital markets and commercial mortgage banking.
Financial results and liquidity
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $218.7 million | $245.6 million; down 10.9% |
| Total expenses | $226.7 million | $235.7 million; down 3.8% |
| Pre-tax income (loss) | $(8.0) million | $9.9 million |
| Net income (loss) attributable to Oppenheimer Holdings | $(3.8) million; $(0.29) per diluted share | $5.7 million; $0.40 diluted EPS |
| Operating cash flow | $(41.4) million | $(36.6) million |
| Cash and cash equivalents | $62.5 million | $63.4 million at December 31, 2015 |
| Total assets / total equity | $2.62 billion / $516.3 million | $2.69 billion / $525.1 million at December 31, 2015 |
| Bank call loans | $148.3 million | $100.2 million at December 31, 2015 |
| Senior secured notes | $150 million principal; 8.75%, due April 2018 | Carrying amount $149.0 million |
Operating cash use was partly offset by $42.2 million of financing cash flow, including a $48.1 million increase in bank call loans; cash declined $0.9 million overall. The company reported a gross leverage ratio of 5.1. Management said operating funds, capital and available credit facilities were sufficient for foreseeable liquidity needs, while noting that financing availability depends on market conditions. Broker-dealer assets and liabilities include substantial customer, collateralized and trading balances, so headline cash and total liabilities should be interpreted in that context.
Compensation expense fell 7.2% to $151.4 million, but compensation as a share of revenue rose to 69.2% from 66.4%. Non-compensation expenses rose 3.7%, primarily due to legal, regulatory and consulting costs. The reported tax benefit was $4.1 million; the 51.1% benefit rate reflected nontaxable life-insurance benefits.
Material changes and business drivers
- Commissions fell 5.3% to $103.8 million, which management attributed to lower retail transaction volumes. Advisory fees decreased 7.0% to $66.0 million, reflecting lower traditional managed-product fees and lower prior-period AUM.
- Investment banking revenue fell 54.6% to $12.4 million, principally from weak equity underwriting. Net principal-transactions revenue dropped 91.7% to $1.5 million; management cited fewer new commercial mortgage rate-lock commitments.
- Interest revenue increased 21.2% to $13.4 million, mainly from higher holdings of U.S. government and agency securities. Other revenue rose to $21.5 million from $8.0 million, primarily from FDIC-insured deposit fees and commercial mortgage service fees.
- Capital Markets revenue decreased 15.4% to $61.1 million and swung to a $6.8 million pre-tax loss from $6.7 million income. Equity underwriting fees were down 79.1%.
- Commercial Mortgage Banking revenue declined 55.4% to $3.7 million and the segment recorded a $0.7 million pre-tax loss. Fewer loan modifications were partly offset by higher originations: 10 loans totaling $110.9 million versus 2 totaling $8.7 million.
- AUM was $23.7 billion at quarter-end, down 10.9% from $26.6 billion a year earlier. Q1 flows included $578 million contributions, $678 million redemptions and $264 million depreciation. Client assets under administration were $78.7 billion, unchanged from year-end.
- Commercial mortgage servicing portfolio unpaid principal balance was $3.9 billion. The company’s share repurchase program bought and canceled 240,274 shares for $3.6 million, at an average $15.13 per share. The quarterly dividend remained $0.11 per share.
Outlook, risks and contingencies
- No earnings or revenue guidance was provided. Management described long-term priorities including recruiting experienced advisers, expanding asset management and capital-markets capabilities, investing in technology and controlling expenses.
- In March 2016, the board authorized management to evaluate a potential disposition of one or more commercial mortgage banking assets if attractive prices can be obtained; no completed sale or proceeds were reported.
- The new U.S. Department of Labor fiduciary rules for retirement advice are expected by management to require significant operational changes and could negatively affect retirement-account revenue and commission-based compensation. Compliance is phased in, with most requirements scheduled from 2017 and certain exemptions later.
- Legal and regulatory matters remain material uncertainties. For proceedings where a loss is reasonably possible and estimable, the company reported an aggregate potential loss range of $0 to approximately $49 million in excess of accrued amounts; some matters could not be estimated, and actual losses could exceed the range.
- Auction-rate securities (ARS) remain a liquidity and valuation exposure. The company held approximately $87.1 million principal value of ARS and had $32.5 million of purchase commitments under client legal settlements and awards through 2020. Eligible investors held a further $37.3 million of ARS potentially subject to future offers; the company was not committed to buy those securities at quarter-end. ARS fair value is sensitive to interest rates and illiquidity.
- The company had accrued the remaining $10 million due in connection with SEC and FinCEN matters, with second payments of $5 million to each agency due before January 27, 2017. It was also cooperating with SEC and FINRA inquiries, including matters involving a former adviser and sales practices.
- Other stated risks include volatile securities markets and transaction volumes, funding availability and costs, regulatory changes, litigation, cybersecurity threats and the potential effect of stress on liquidity. The company said disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue and segment profitability recover from Q1’s market-sensitive declines, particularly in equity underwriting, trading and commercial mortgage banking.
- Whether AUM redemptions and depreciation continue, and how the resulting asset base affects advisory-fee revenue.
- Liquidity and funding capacity as bank call loans rose, including the availability and terms of secured and unsecured financing under stressed markets.
- Potential cash and earnings effects of ARS commitments, unresolved legal and regulatory matters, and the $10 million remaining SEC/FinCEN payments.
- The status and terms, if any, of a sale of commercial mortgage banking assets and the financial effect of the new fiduciary rules.