Oppenheimer Holdings Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted. Oppenheimer provides brokerage, investment banking and advisory, asset management, and commercial mortgage banking services.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $238.9 | $249.7 | $484.5 | $504.9 |
| Income before taxes | $2.6 | $0.1 | $12.5 | $5.2 |
| Net income attributable to Oppenheimer | $0.3 | $(1.6) | $6.0 | $1.7 |
| Basic EPS | $0.02 | $(0.11) | $0.44 | $0.12 |
| Dividends declared per share | $0.11 | $0.11 | $0.22 | $0.22 |
Q2 pre-tax margin was approximately 1.1%, versus approximately 0.1% a year earlier; first-half pre-tax margin was approximately 2.6%, versus 1.0%. These margins are calculated from reported revenue and pre-tax income. Q2’s effective tax rate was 75.5%, reflecting tax reserves, nondeductible regulatory charges, and lower international earnings.
- Revenue mix: Q2 commissions fell 10.8% to $103.6 million and net principal transactions fell 85.5% to $1.7 million. Advisory fees rose 2.6% to $72.2 million, investment banking rose 8.3% to $29.0 million, and other revenue rose 69.0% to $20.4 million. The increase in other revenue was primarily associated with commercial mortgage loan modifications.
- Expenses: Total expenses declined 5.3% in Q2 to $236.3 million, faster than revenue. Compensation was $158.2 million, or 66.2% of revenue, compared with 64.0% a year earlier. Non-compensation expenses fell 13.0%, primarily due to lower legal and regulatory costs.
- Balance sheet and liquidity: At June 30, total assets were $2.93 billion and stockholders’ equity was $538.6 million. Cash and cash equivalents were $50.3 million, down from $63.8 million at year-end 2014. Cash segregated for regulatory purposes was $0.9 million, versus $18.6 million at year-end.
- Cash flow: First-half operating cash use was $126.4 million, compared with $13.4 million in the prior-year period. Financing provided $114.8 million, including a $118.1 million net increase in bank call loans. Cash declined $13.5 million in the period.
- Borrowings: Bank call loans increased to $177.5 million from $59.4 million at year-end. Senior secured notes remained $150.0 million, bear interest at 8.75%, and mature April 15, 2018. The company reported compliance with note covenants. Gross leverage ratio was 5.4.
Material changes and business trends
- Private Client Q2 revenue declined 8.0%, while pre-tax income increased 77.3% to $13.4 million, primarily reflecting lower legal and regulatory costs. Client assets under administration were $84.9 billion, down 2.7% from year-end 2014.
- Assets under management were $25.6 billion at June 30, down from $26.6 billion at March 31. The quarter’s AUM table shows $723 million in contributions, $1.795 billion in redemptions, and $21 million in appreciation.
- Capital Markets Q2 revenue fell 3.7% and pre-tax income fell 48.8% to $3.6 million, with weakness in taxable fixed income among the drivers.
- Commercial Mortgage Banking Q2 revenue increased 57.6% to $11.0 million, largely due to loan modifications; pre-tax income increased 3.5% to $3.7 million. The company modified 14 loans in the quarter, compared with three a year earlier.
- First-half revenue decreased 4.0%, while expenses fell 5.5%; first-half attributable net income rose to $6.0 million from $1.7 million.
Outlook, risks, contingencies, and unusual items
- Outlook: Management described plans to grow through recruiting experienced financial advisers, expanding asset management and capital markets capabilities, and selectively pursuing acquisitions. It also emphasized technology investment, expense management, and continued compliance and risk-management spending. No quantified earnings or revenue guidance was provided.
- Regulatory matters: A 2015 SEC settlement required a $10 million payment and an independent compliance consultant; FinCEN separately assessed a $10 million penalty related primarily to the same matters. The company had fully reserved the combined $20 million through June 30, 2014, and paid $5 million to each agency in early 2015; the remaining $5 million to each is due before January 27, 2017. Other matters include a $685,000 Delaware regulatory fine and a $400,000 SEC municipal-underwriting settlement, both with compliance-related conditions or consultant requirements.
- Legal exposure: For proceedings where losses were reasonably estimable and reasonably possible, the company estimated aggregate losses in excess of accruals at $0 to approximately $35 million; some matters could not be estimated, and actual losses could exceed the range. The company continued to face ARS-related claims and repurchase obligations.
- Auction-rate securities (ARS): The company held approximately $107.6 million principal of ARS, carried at $100.4 million fair value, and had $16.7 million of purchase commitments through 2017. Eligible investors still held approximately $85.3 million principal of ARS that was not yet committed for repurchase. The company said future offers depend on periodic financial and regulatory reviews; additional potential losses related to future buybacks were not estimable.
- Funding and market risks: Bank call loans are generally payable on demand; the company relies on collateralized borrowing, securities lending, repurchase agreements, and mortgage warehouse financing. Management said available resources were sufficient for foreseeable needs, while warning that tighter credit markets or reduced lender availability could impair funding or raise costs. Other cited risks include market volumes and volatility, interest rates, regulatory change, litigation, cybersecurity, and international conditions.
- On July 31, 2015, the board declared a further $0.11 per-share quarterly dividend, payable August 28, 2015. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the six-month period.
Important facts for investors to verify
- Whether commission and trading revenue stabilize, and whether AUM redemptions continue to pressure future advisory fees.
- Whether operating cash use and higher bank call borrowings reverse, and how much liquidity is available after regulatory and collateral constraints.
- The status and cash timing of the remaining $10 million SEC and FinCEN payments, the independent compliance reviews, and other regulatory proceedings.
- Potential costs of ARS commitments and unresolved claims, including the uncommitted eligible-investor ARS balance and the disclosed $0–$35 million estimated excess-loss range for certain legal matters.
- Commercial mortgage banking results’ dependence on loan modifications, origination volumes, warehouse financing, and servicing asset valuations.