Business context and reporting period
Oppenheimer Holdings Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company provides retail brokerage, institutional sales and trading, investment banking, asset management and trust services. It reported 91 U.S. branches, $86.9 billion in client assets administered, $29.6 billion in assets under management (AUM), and 2,977 employees at quarter-end.
Financial performance and position
Amounts below are in millions except per-share data; comparisons are with the same 2017 period.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $237.8 | $226.2 | $714.9 | $655.4 |
| Expenses | $230.7 | $214.4 | $685.6 | $652.2 |
| Continuing pretax income | $7.1 | $11.8 | $29.3 | $3.2 |
| Net income attributable to Oppenheimer Holdings | $5.1 | $7.8 | $20.6 | $1.6 |
| Diluted EPS | $0.36 | $0.57 | $1.47 | $0.12 |
- Q3 revenue grew 5.1%, but expenses rose 7.6%; pretax income declined 39.6%. Compensation was 64.3% of revenue versus 62.8% a year earlier.
- Nine-month revenue rose 9.1% and pretax income increased to $29.3 million from $3.2 million. The comparison is against a weak 2017 period; 2017 also included discontinued-operations income of $1.1 million for the first nine months.
- Key revenue movements: nine-month investment banking rose 47.2% to $84.4 million and bank deposit sweep income rose 58.9% to $84.2 million; commissions declined 0.9% to $245.9 million. Higher short-term rates supported sweep income.
- Q3 interest expense nearly doubled to $12.9 million; nine-month interest expense rose 75.2% to $32.8 million. Management cited higher interest costs and compensation growth as expense pressures.
- Nine-month operating cash flow was $118.3 million, compared with cash used of $34.4 million in 2017. Investing used $6.8 million and financing used $122.1 million; cash decreased $10.6 million to $37.5 million.
- At September 30, total assets were $2.36 billion, down 3.4% from year-end 2017; equity was $543.9 million. Customer receivables were $797.8 million, largely collateralized by marketable securities.
- Debt included $200 million principal of 6.75% senior secured notes due 2022 (carrying value $199.0 million). The company reported compliance with note covenants. Bank call loans fell to $3.0 million from $118.3 million at year-end; repurchase-agreement liabilities were $606.0 million.
- Broker-dealer regulatory capital remained above stated minimums: Oppenheimer had $184.3 million net capital, $165.0 million above its minimum. The company reported a gross leverage ratio of 4.3.
Material changes, outlook and risks
- Q3 results included losses associated with auction rate securities (ARS) tender offers and stock-price-linked compensation. Management said these items reduced quarterly net income by $9.2 million, including $6.0 million from ARS sales and $3.2 million of compensation. Separately, the note disclosures report $8.1 million of recognized ARS losses for the quarter, including realized and unrealized components; these measures have different stated scopes.
- ARS held by the company had $40.8 million principal and $37.7 million fair value. It was committed to purchase a further $7.2 million principal through 2020 under legal settlements and awards. Eligible investors still held about $7.7 million of ARS potentially subject to future regulatory offers; the timing and amount of any such purchases are uncertain.
- AUM reached a record $29.6 billion, up 8.8% year over year, reflecting $1.7 billion of appreciation and $0.7 billion of net contributions. Client assets administered were unchanged from December 2017 at $86.9 billion.
- Management described growth plans focused on recruiting financial advisers and investment professionals, technology, capital-markets capabilities, and selective acquisitions. No quantitative earnings or revenue guidance was provided.
- The company expects adoption of the lease accounting standard in 2019 to add estimated right-of-use assets and lease liabilities of $170 million to $190 million, principally for real estate leases.
- Risks include market activity and interest-rate changes, funding and liquidity availability, regulatory and compliance costs, cybersecurity and operational disruption, and foreign-market uncertainty. Management cited possible effects from proposed SEC Regulation Best Interest, MiFID II research rules, and Brexit; the company was planning a Frankfurt office in anticipation of possible post-Brexit operating needs.
- Legal and regulatory matters include ongoing SEC and FINRA inquiries, an SEC examination of the company’s implementation of compliance recommendations, and participation in the SEC share-class disclosure initiative, which may require client disgorgement of 12b-1 fees. For proceedings where losses were reasonably estimable, the company disclosed a possible aggregate loss range of $0 to approximately $30 million above accruals; some matters could not be estimated, and actual losses could exceed the range.
- The board declared a $0.11-per-share quarterly dividend on October 26, 2018, payable November 23, 2018. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the different ARS loss disclosures and assess the remaining owned positions, purchase commitments, and potential future regulatory buybacks.
- Review whether higher interest costs, compensation growth, and ARS-related charges continue to pressure quarterly profitability.
- Track liquidity and funding needs, including repo financing, bank borrowing variability, and the availability of external financing under stress.
- Monitor the outcome and potential costs of legal, regulatory, and compliance matters, including the SEC share-class initiative and possible losses not included in the estimated range.
- Assess the effects of evolving SEC rules, Brexit and MiFID II on the company’s brokerage, research, and international businesses.
- Confirm the estimated balance-sheet impact and implementation timing of the new lease standard.