Oppenheimer Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results; dollar figures below are in millions unless stated otherwise. Oppenheimer operates a middle-market investment bank and full-service broker-dealer, with private client, asset management, and capital markets businesses.
Financial performance and key metrics
- Third quarter: Revenue was $315.3 million, up 14.1% year over year. Pretax income rose 72.2% to $37.4 million; net income increased 67.8% to $26.3 million. Basic and diluted EPS were $2.07 and $1.92, respectively, versus $1.25 and $1.19.
- Nine months: Revenue was $1,028.9 million, up 32.6%. Pretax income was $132.7 million, up 140.4%; net income was $96.1 million, versus $41.1 million. Basic and diluted EPS were $7.59 and $7.10, versus $3.24 and $3.12.
- Margins: Pretax margin was approximately 11.9% for Q3 (7.9% prior year) and 12.9% for the nine months (7.1% prior year); net margin was approximately 8.3% and 9.3%, respectively (5.7% and 5.3% prior year).
- Revenue mix: Q3 advisory fees rose 31.8% to $116.8 million and investment banking revenue rose 31.2% to $86.9 million. Commissions declined 1.5% to $90.9 million; bank deposit sweep income declined 15.4% to $3.9 million. For nine months, advisory fees were $332.4 million and investment banking revenue $316.1 million.
- Costs: Q3 compensation expense increased 8.8% to $206.3 million; non-compensation expense increased 10.4% to $71.6 million. Nine-month compensation expense was $693.1 million, up from $526.9 million.
- Cash flow: Operating activities provided $135.2 million in the first nine months, compared with $148.4 million used in the prior-year period. Investing used $5.5 million and financing used $24.3 million. Cash increased $105.4 million to $140.8 million.
- Liquidity and capital: At September 30, cash was $140.8 million and stockholders’ equity was $775.0 million, versus $35.4 million and $685.7 million at December 31, 2020. Broker-dealer receivables and customer receivables were $242.5 million and $1,273.4 million, respectively; these balances primarily arise from securities and customer activity and should not be read as unrestricted cash.
- Debt and obligations: The company reported $125.0 million principal amount of 5.50% senior secured notes due 2025 (carrying value $124.0 million) and $72.3 million of bank call loans. Repurchase-agreement liabilities were $343.9 million; operating lease liabilities were $197.5 million. The company reported compliance with note covenants.
- Business indicators: Client assets under administration were $117.8 billion and assets under management were $43.6 billion. Oppenheimer reported $372.6 million of net capital, $345.6 million above its minimum requirement.
Changes versus comparable periods
- Management said the firm achieved record revenue, net income, and EPS for the first nine months. Q3 revenue growth reflected strong investment banking and advisory fees, alongside higher asset-management fees and steady wealth-management activity.
- Q3 segment revenue grew in Private Client (14.0%), Asset Management (30.4%), and Capital Markets (12.5%). Capital Markets pretax income fell 7.6% to $17.9 million as expenses grew faster than revenue; Private Client and Asset Management pretax income rose 45.3% and 46.5%.
- For the nine months, Capital Markets revenue increased 55.9% and pretax income increased 158.1%. Private Client revenue rose 15.9%, but pretax income was essentially flat. Asset Management revenue and pretax income rose 33.5% and 74.0%.
- Bank deposit sweep income remained pressured by low short-term interest rates. Lower interest expense and higher investment-banking activity contributed to the year-to-date improvement.
Outlook, risks, contingencies, and unusual items
- Outlook: No numerical earnings or revenue guidance was provided. Management described plans to grow private client and asset management through advisor and investment-personnel additions, expand capital markets and investment banking, invest in technology, and pursue selected acquisitions.
- Interest rates and markets: Management said low rates have reduced deposit-sweep earnings; lower rates, higher rates paid to clients, or reduced client cash balances could further pressure results. Inflation, oil prices, Federal Reserve tapering, and congressional uncertainty weighed on equity markets during the quarter. Management noted tapering could contribute to higher rates.
- COVID-19: Remote-work arrangements continued for much of the workforce; a return-to-office plan for fully vaccinated headquarters employees began October 4, 2021. The company cautioned that pandemic effects and market volatility remain uncertain.
- Legal matters: For proceedings where a loss is reasonably possible and estimable, the company estimated aggregate losses in excess of accruals of $0–$7.0 million; some matters could not be estimated, and actual losses could exceed the range. The company also disclosed SEC Division of Enforcement information requests regarding a former advisor and Southport Capital and affiliates, and a new class action concerning Horizon Private Equity III.
- Auction-rate securities: The company reported $31.8 million of ARS at fair value, categorized as Level 3, with a $5.2 million valuation adjustment. It said no ARS purchase commitments remained under regulator settlements or legal settlements, though the filing also describes continuing obligations related to identifying certain investors and potential reimbursement/arbitration processes.
- Other exposures: Risks include securities-market volumes and volatility, interest rates, funding availability, cybersecurity, regulation, litigation, and a potential U.S. government debt default. Management considered a short-lived default unlikely to have a significant direct impact, but warned a prolonged default could disrupt markets and adversely affect the firm. Regulatory capital at overseas subsidiaries is restricted from general use.
- Capital returns: The company repurchased and canceled 108,494 Class A shares for $4.7 million in the first nine months; 292,519 shares remained authorized for repurchase at quarter-end. A $0.15-per-share quarterly dividend was announced October 29, 2021.
Important facts for investors to verify
- Whether strong investment-banking and advisory activity persists, and how Capital Markets expenses and profitability trend after Q3.
- How lower rates, client cash balances, and any rate increases affect sweep income, interest revenue, and client activity.
- The quality and collectability of customer and broker receivables, recruiting notes, and the firm’s liquidity under stressed funding or collateral conditions.
- The valuation and liquidity assumptions for Level 3 ARS, and the scope and potential costs of remaining ARS-related obligations.
- Developments in the disclosed legal and regulatory matters, including the Southport inquiry, and whether potential losses exceed current accruals or the disclosed estimate.
- Regulatory capital, debt-covenant compliance, and cash available for dividends, buybacks, and growth initiatives.