OPPENHEIMER HOLDINGS INC. — Q3 2015 Form 10-Q
Business context and reporting period. The unaudited filing covers the quarter and nine months ended September 30, 2015, compared with the same 2014 periods. Oppenheimer provides brokerage, asset management, investment banking, capital markets, trust and commercial mortgage banking services. It reported $79.6 billion in client assets under administration and $23.7 billion in assets under management at quarter-end.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $213.5 million | $244.7 million | $698.0 million | $749.5 million |
| Income (loss) before tax | $(1.5) million | $10.9 million | $11.0 million | $16.1 million |
| Net income (loss) attributable to Oppenheimer Holdings | $(0.9) million | $4.5 million | $5.1 million | $6.1 million |
| Basic EPS | $(0.07) | $0.33 | $0.37 | $0.45 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $(89.8) million | $13.7 million |
- Q3 pretax margin was approximately negative 0.7%, versus 4.5% in Q3 2014; nine-month pretax margin was approximately 1.6%, versus 2.2%. Revenue and profit figures are in millions; margins are derived from reported figures.
- For the first nine months, cash used in investing was $3.6 million and cash provided by financing was $76.9 million. Cash and equivalents ended at $47.3 million, down $16.5 million from year-end 2014.
- At September 30, total assets were $2.85 billion and stockholders’ equity was $529.8 million. Senior secured notes were $150 million, bearing 8.75% interest and due April 2018. Bank call loans were $147.7 million, up from $59.4 million at year-end; the commercial mortgage warehouse facility had $30.9 million outstanding.
- Oppenheimer’s U.S. broker-dealer net capital was $143.4 million, $111.6 million above its minimum requirement. The company reported compliance with senior-note covenants.
Material changes versus comparable periods
- Q3 revenue fell 12.7%; nine-month revenue fell 6.9%. Commissions decreased 8.7% in Q3 and 9.9% year to date, reflecting lower transaction volumes. Investment banking revenue fell 51.1% in Q3 and 22.6% year to date.
- Q3 principal transactions recorded a $3.3 million loss, compared with $4.3 million of income a year earlier, reflecting weaker bond trading and lower commercial mortgage rate-lock activity. Nine-month principal transactions revenue fell 32.0%.
- Q3 expenses declined 8.0%, less than the revenue decline. Compensation expense fell 11.5%, but compensation as a share of revenue rose to 66.8% from 65.9%. Nine-month expenses declined 6.3%.
- Year-to-date private client revenue fell 9.1%; capital markets revenue fell 8.6%. Commercial mortgage banking revenue increased 39.8% year to date, while Q3 revenue in that segment declined 4.6%.
- AUM was $23.7 billion at September 30, down 8.8% year over year, including $1.0 billion of depreciation and $1.3 billion of net redemptions. Client assets under administration were down 8.8% from December 2014.
Outlook, risks and unusual items
- No quantitative earnings or revenue guidance was provided. Management described long-term priorities of recruiting experienced advisers, expanding asset management and capital markets capabilities, improving technology, controlling expenses and pursuing suitable acquisitions.
- Operating cash flow was negative despite positive net income, with working-capital movements including securities, broker receivables and repurchase balances contributing to the outflow. Management stated that operations, capital and available credit were expected to meet foreseeable liquidity needs, while noting funding availability can be affected by market conditions and counterparties.
- Liquidity and market risks include reliance on bank call loans, securities lending and repurchase agreements; the filing reports a gross leverage ratio of 5.4. Repurchase agreements and securities lending are collateralized, but market stress or counterparty failures could increase liquidity needs.
- Auction-rate securities (ARS) remain a significant exposure. The company held approximately $101.9 million principal value of ARS and had approximately $9.6 million of purchase commitments under legal settlements and awards, plus $75,000 committed under regulator settlements. Eligible investors held a further approximately $78.5 million principal value potentially subject to future offers. ARS valuations use significant unobservable inputs.
- Legal and regulatory matters include the 2015 SEC and FinCEN settlements relating to reporting, recordkeeping, securities registration and Bank Secrecy Act issues. Payments total $20 million, of which $10 million had been paid by September 30; the remaining $10 million was due before January 27, 2017. The amount had been fully reserved through June 30, 2014. An independent compliance review was ongoing.
- For legal and regulatory proceedings with reasonably possible losses that can be estimated, the company disclosed an aggregate loss range of $0 to approximately $50 million in excess of accruals; certain matters could not be estimated. Other matters include ongoing ARS claims, regulatory inquiries, and an advisory-client review that resulted in approximately $2.8 million of refunds.
- The board authorized a new repurchase program for up to 665,000 Class A shares. During the first nine months, the company repurchased and canceled 328,844 shares for $6.6 million. It declared a quarterly dividend of $0.11 per share after quarter-end.
Most important facts for investors to verify
- Whether weak brokerage transaction activity, investment banking fees and market-related trading results persist, and their effect on earnings.
- Whether the decline in AUM and net client redemptions continue to reduce advisory fees; confirm subsequent-period asset levels.
- Drivers of negative operating cash flow and the company’s capacity to fund liquidity needs if secured or unsecured borrowing becomes less available.
- Potential additional ARS buyback obligations, valuation sensitivity and legal exposure beyond amounts already committed or accrued.
- Progress and findings of the independent compliance review, outstanding regulatory inquiries and any changes to estimated legal losses.