Oppenheimer(OPY) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Oppenheimer Holdings Inc.'s unaudited condensed consolidated financial statements, along with management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. FINANCIAL STATEMENTS (UNAUDITED) This section presents Oppenheimer Holdings Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, statements of comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, financial instruments, revenue recognition, and other critical financial information for the periods ended June 30, 2022 and December 31, 2021 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific dates Condensed Consolidated Balance Sheets (Expressed in thousands) | Item | June 30, 2022 | December 31, 2021 | | :----------------------------------- | :------------ | :---------------- | | ASSETS | | | | Cash and cash equivalents | $36,606 | $213,759 | | Total assets | $2,920,581 | $3,043,250 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total liabilities | $2,011,448 | $2,090,220 | | Total Stockholders' equity | $781,368 | $825,265 | | Total Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity | $2,920,581 | $3,043,250 | - Total assets decreased by approximately $122.7 million from December 31, 2021, to June 30, 2022, primarily driven by a significant reduction in cash and cash equivalents[9] - Total stockholders' equity decreased by approximately $43.9 million, while total liabilities also saw a reduction of about $78.8 million over the same period[9] Condensed Consolidated Income Statements This section presents the company's financial performance over specific periods, detailing revenues, expenses, and net income or loss Condensed Consolidated Income Statements (Expressed in thousands) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $237,222 | $340,293 | $503,250 | $713,575 | | Total expenses | $243,391 | $297,125 | $495,206 | $618,280 | | Pre-tax income (loss) | $(6,169) | $43,168 | $8,044 | $95,295 | | Net income (loss) attributable to Oppenheimer Holdings Inc. | $(3,874) | $31,159 | $5,418 | $69,817 | | Basic EPS | $(0.32) | $2.46 | $0.44 | $5.53 | | Diluted EPS | $(0.32) | $2.28 | $0.41 | $5.17 | - For the three months ended June 30, 2022, the company reported a net loss of $3.874 million, a significant decline from a net income of $31.159 million in the prior year period, primarily due to a 30.3% decrease in total revenue[12] - For the six months ended June 30, 2022, net income attributable to Oppenheimer Holdings Inc. decreased by 92.2% to $5.418 million from $69.817 million in the same period last year, with total revenue falling by 29.5%[12] Condensed Consolidated Statements of Comprehensive Income This section outlines the company's comprehensive income, including net income and other comprehensive income items like currency translation adjustments Condensed Consolidated Statements of Comprehensive Income (Expressed in thousands) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(4,720) | $31,159 | $5,058 | $69,817 | | Currency translation adjustment | $(2,038) | $537 | $(2,652) | $(299) | | Comprehensive income (loss) | $(6,758) | $31,696 | $2,406 | $69,518 | | Comprehensive income (loss) attributable to Oppenheimer Holdings Inc. | $(5,912) | $31,696 | $2,766 | $69,518 | - Comprehensive income attributable to Oppenheimer Holdings Inc. for the three months ended June 30, 2022, was a loss of $5.912 million, a significant decrease from a gain of $31.696 million in the prior year, largely influenced by a negative currency translation adjustment[13] Condensed Consolidated Statements of Changes in Stockholders' Equity This section details changes in the company's stockholders' equity, including common stock, retained earnings, and other comprehensive income Condensed Consolidated Statements of Changes in Stockholders' Equity (Expressed in thousands) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Ending Balance (Common stock) | $11 | $13 | $11 | $13 | | Ending Balance (Additional paid-in capital) | $35,461 | $81,152 | $35,461 | $81,152 | | Ending Balance (Retained earnings) | $742,614 | $668,193 | $742,614 | $668,193 | | Ending Balance (Accumulated other comprehensive income) | $1,573 | $3,149 | $1,573 | $3,149 | | Total Oppenheimer Holdings Inc. stockholders' equity | $779,659 | $752,507 | $779,659 | $752,507 | | Dividends paid per share | $0.15 | $0.12 | $0.30 | $0.24 | - Total Oppenheimer Holdings Inc. stockholders' equity increased to $779.659 million as of June 30, 2022, from $752.507 million in the prior year period, despite a net loss in the current quarter[15] - The company repurchased Class A non-voting common stock for cancellation, with a significant impact on additional paid-in capital, decreasing it by $30.217 million for the three months and $46.375 million for the six months ended June 30, 2022[15] Condensed Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (Expressed in thousands) for the Six Months Ended June 30 | Item | 2022 | 2021 | | :----------------------------------- | :----------- | :----------- | | Cash flows from operating activities | $(231,371) | $20,140 | | Cash flows from investing activities | $(1,116) | $(5,431) | | Cash flows from financing activities | $55,444 | $(10,335) | | Net (decrease)/increase in cash, cash equivalents and restricted cash | $(177,043) | $4,374 | | Cash, cash equivalents and restricted cash, end of period | $164,481 | $39,798 | - For the six months ended June 30, 2022, the company experienced a net decrease in cash, cash equivalents, and restricted cash of $177.043 million, a significant reversal from a net increase of $4.374 million in the prior year[19] - Operating activities used $231.371 million in cash in 2022, compared to providing $20.140 million in 2021, primarily due to changes in accrued compensation and securities sold but not yet purchased[19] - Financing activities provided $55.444 million in cash in 2022, driven by an increase in bank call loans, offsetting cash used for share repurchases and dividend payments[19] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the accounting policies, financial instruments, and other critical information supporting the financial statements 1. Organization This note describes Oppenheimer Holdings Inc.'s business, its principal subsidiaries, and global operational footprint - Oppenheimer Holdings Inc. (OPY) is a leading middle market investment bank and full-service broker-dealer, offering retail securities brokerage, institutional sales and trading, investment banking, equity and fixed income research, market-making, trust services, and investment advisory and asset management services[21] - The Company operates through principal subsidiaries including Oppenheimer & Co. Inc., Oppenheimer Asset Management Inc., Oppenheimer Trust Company of Delaware, OPY Credit Corp., Oppenheimer Europe Ltd., and Oppenheimer Investments Asia Limited, with offices across the U.S., London, Tel Aviv, and Hong Kong[22] 2. Summary of significant accounting policies and estimates This note outlines the key accounting principles and estimates used in preparing the financial statements, including reclassifications and consolidations - The condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim reporting, requiring management estimates and assumptions that may differ from actual results[24] - Effective this quarter, the Company reclassified certain stockholders' equity amounts, separating common stock par value and combining share capital with contributed capital into additional paid-in capital, with no impact on total stockholders' equity[25] - Oppenheimer Acquisition Corp. I (OHAA), a special purpose acquisition company sponsored by the Company's subsidiary, is consolidated in the financial statements, with $127.8 million in restricted cash held in a trust account for a potential Business Combination[27][28] - Oppenheimer Principal Investments LLC (OPI) is consolidated to retain and reward talented employees through profit interests in private market investments and non-cash compensation from investment banking, aligning Company, client, and employee interests[32] 3. Financial Instruments - Credit Losses This note details the company's accounting for credit losses on financial instruments, including notes receivable and related allowances - The Company follows ASU 2016-13 for credit losses, electing to measure allowance for credit losses using the fair value of collateral for securities borrowed, margin loans, and reverse repurchase agreements, with no material historical losses reported[36] - Notes receivable, primarily recruiting and retention payments to financial advisors, totaled $59.1 million as of June 30, 2022, amortizing over 3 to 10 years contingent on continued employment[37] - As of June 30, 2022, the uncollected balance of defaulted notes was $7.4 million, with an allowance for uncollectibles of $5.1 million, which includes a 100% reserve for notes five years and older and an expected loss rate for newer balances[40] Allowance for Uncollectibles of Defaulted Notes Activity (Expressed in thousands) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Beginning balance | $5,247 | $4,766 | $4,923 | $4,234 | | Additions and other adjustments | $(141) | $(65) | $183 | $467 | | Ending balance | $5,106 | $4,701 | $5,106 | $4,701 | 4. Leases This note describes the company's operating lease arrangements for office space and equipment, including related assets and liabilities - The Company has operating leases for office space and equipment expiring through 2034, including its corporate headquarters and 91 retail branch offices, with short-term leases (12 months or less) not recorded on the balance sheet[43][45] - As of June 30, 2022, right-of-use operating lease assets totaled $146.1 million (net) and operating lease liabilities were $187.5 million, primarily for real estate[48] Operating Lease Costs (Expressed in thousands) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Real estate leases - Right-of-use lease asset amortization | $6,189 | $6,062 | $12,346 | $12,118 | | Real estate leases - Interest expense | $3,267 | $3,607 | $6,623 | $7,203 | | Equipment leases - Right-of-use lease asset amortization | $410 | $445 | $824 | $890 | | Equipment leases - Interest expense | $35 | $37 | $67 | $76 | 5. Revenue from contracts with customers This note explains the company's revenue recognition policies and disaggregates revenue by key streams and operating segments - Revenue from contracts with customers is recognized when performance obligations are satisfied, either over time or at a point in time, with variable consideration included when probable that a significant reversal will not occur[53][54] - Key revenue streams include commissions (sales and trading, mutual fund income), advisory fees (management and performance fees), investment banking (underwriting, financial advisory), and bank deposit sweep income[55][57][59][60][61][62] Total Revenue by Segment (Expressed in thousands) | Segment | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Private Client | $144,471 | $166,863 | $295,318 | $330,886 | | Asset Management | $24,315 | $25,544 | $51,432 | $49,774 | | Capital Markets | $71,274 | $147,945 | $156,325 | $331,544 | | Corporate/Other | $(2,838) | $(59) | $175 | $1,371 | | Total Revenue | $237,222 | $340,293 | $503,250 | $713,575 | - Total contract assets (receivables) decreased from $37.192 million at December 31, 2021, to $25.108 million at June 30, 2022, while total deferred revenue increased from $235,000 to $2.010 million[72] 6. Earnings per share This note provides details on the calculation of basic and diluted earnings per share, including the impact of share-based compensation Earnings Per Share Attributable to Oppenheimer Holdings Inc. (Expressed in thousands, except per share amounts) | Item | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(3,874) | $31,159 | $5,418 | $69,817 | | Basic EPS | $(0.32) | $2.46 | $0.44 | $5.53 | | Diluted EPS | $(0.32) | $2.28 | $0.41 | $5.17 | | Basic weighted average shares outstanding | 11,980,115 | 12,689,191 | 12,222,527 | 12,634,464 | | Diluted weighted average shares outstanding | 11,980,115 | 13,681,146 | 13,141,538 | 13,495,589 | - For the three months ended June 30, 2022, basic and diluted EPS were $(0.32), a significant decrease from $2.46 and $2.28 respectively in the prior year, reflecting the net loss[76] - The diluted net loss per share computation for Q2 2022 did not include the anti-dilutive effect of 1,267,733 shares of Class A Stock granted under share-based compensation arrangements[76] 7. Receivable from and payable to brokers, dealers and clearing organizations This note details the company's balances with brokers, dealers, and clearing organizations, including securities borrowed, loaned, and failed transactions Receivable from Brokers, Dealers and Clearing Organizations (Expressed in thousands) | Item | June 30, 2022 | December 31, 2021 | | :----------------------------------- | :------------ | :---------------- | | Securities borrowed | $79,038 | $99,752 | | Receivable from brokers | $42,255 | $39,716 | | Securities failed to deliver | $26,705 | $9,212 | | Clearing organizations | $19,355 | $19,518 | | Other | $545 | $1,704 | | Total | $167,898 | $169,902 | Payable to Brokers, Dealers and Clearing Organizations (Expressed in thousands) | Item | June 30, 2022 | December 31, 2021 | | :----------------------------------- | :------------ | :---------------- | | Securities loaned | $281,407 | $244,223 | | Securities failed to receive | $50,028 | $6,457 | | Payable to brokers | $3,357 | $2,077 | | Clearing organizations and other | $53,675 | $169,300 | | Total | $388,467 | $422,057 | - Receivable from brokers, dealers and clearing organizations remained relatively stable at $167.898 million as of June 30, 2022, compared to $169.902 million at December 31, 2021, with a notable decrease in securities borrowed offset by an increase in securities failed to deliver[77] - Payable to brokers, dealers and clearing organizations decreased to $388.467 million from $422.057 million, primarily due to a significant reduction in amounts owed to clearing organizations and other payables, partially offset by an increase in securities loaned and failed to receive[77] 8. Fair value measurements This note describes the company's fair value measurement policies for financial instruments, categorizing assets and liabilities by valuation input levels - The Company values securities owned, securities sold but not yet purchased, investments, and derivative contracts at fair value, recognizing changes in earnings each period, using various valuation techniques for different asset classes[79][80][81][82][83][84][85][86][87] - As of June 30, 2022, the Company owned $32.0 million of Auction Rate Securities (ARS), valued at the tender offer price and categorized in Level 3 due to their illiquid nature, with a valuation adjustment of $5.2 million[91][92][93] Assets Measured at Fair Value (Expressed in thousands) as of June 30, 2022 | Item | Level 1 | Level 2 | Level 3 | Total | | :----------------------------------- | :------ | :------ | :------ | :------ | | Deposits with clearing organizations | $41,189 | $— | $— | $41,189 | | Securities owned, at fair value | $394,752 | $194,543 | $31,977 | $621,272 | | Investments | $— | $9,150 | $— | $9,150 | | Total Assets | $435,941 | $203,693 | $31,977 | $671,611 | Liabilities Measured at Fair Value (Expressed in thousands) as of June 30, 2022 | Item | Level 1 | Level 2 | Level 3 | Total | | :----------------------------------- | :------ | :------ | :------ | :------ | | Securities sold but not yet purchased, at fair value | $243,881 | $10,771 | $— | $254,652 | | Derivative contracts, total | $371 | $3 | $— | $374 | | Total Liabilities | $244,252 | $10,774 | $— | $255,026 | 9. Collateralized transactions This note explains the company's use of collateralized borrowing and lending, including bank call loans and repurchase agreements, and related risk management - The Company uses collateralized borrowing and lending transactions, including bank call loans, securities borrowed, and repurchase/reverse repurchase agreements, to meet customer needs, finance trading inventory, and obtain securities for settlement[138][142] - As of June 30, 2022, outstanding bank call loans were $177.3 million, collateralized by Company and customer securities, and the Company had approximately $1.7 billion of customer securities under margin loans available to be pledged[139][140] Gross Obligation by Collateral Class (Expressed in thousands) as of June 30, 2022 | Item | Overnight and Open | | :----------------------------------- | :----------------- | | Repurchase agreements: U.S. Government and Agency securities | $411,713 | | Securities loaned: Equity securities | $281,407 | | Gross amount of recognized liabilities | $693,120 | - The Company manages credit exposure and market risk from these transactions through master netting agreements, collateral arrangements, and continuous monitoring of collateral market values[153][155] 10. Variable interest entities ("VIEs") This note outlines the company's consolidation of Variable Interest Entities, including Oppenheimer Acquisition Corp. I, and their financial impact - The Company consolidates subsidiaries where it has a controlling financial interest and Variable Interest Entities (VIEs) where it is the primary beneficiary, having power over economic performance and obligation to absorb significant losses or right to receive significant benefits[157] - Oppenheimer Acquisition Corp. I (OHAA) and its Sponsor are consolidated VIEs because the Company and its employees control OHAA through the Sponsor's ownership of Class A founder shares[160][161] Total Assets and Liabilities of Consolidated VIEs (Expressed in thousands) as of June 30 | Item | 2022 | 2021 | | :---------------- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $1,458 | $— | | Restricted Cash | $127,875 | $— | | Other Assets | $568 | $— | | Total Assets | $129,901 | $— | | Liabilities | | | | Other Liabilities | $123 | $— | | Total Liabilities | $123 | $— | 11. Long-term debt This note details the company's long-term debt, specifically the 5.50% Senior Secured Notes, including terms, guarantees, and covenants Long-term Debt (Expressed in thousands) | Item | June 30, 2022 | December 31, 2021 | | :----------------------------------- | :------------ | :---------------- | | 5.50% Senior Secured Notes | $125,000 | $125,000 | | Unamortized Debt Issuance Cost | $(800) | $(926) | | Total | $124,200 | $124,074 | - The Company has $125.0 million aggregate principal amount of 5.50% Senior Secured Notes due 2025, issued in a private offering in September 2020, with interest payable semi-annually[165][166] - The Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by Subsidiary Guarantors and are secured by a first-priority security interest in substantially all of the Parent's and Subsidiary Guarantors' assets[171] - The indenture governing the Notes contains covenants restricting indebtedness, dividend payments, equity repurchases, asset sales, and liens, with the Company in compliance as of June 30, 2022[168][170] 12. Income taxes This note provides information on the company's effective income tax rates for the reported periods and factors influencing them - The effective income tax rate for the three months ended June 30, 2022, was 23.5%, compared to 27.8% in the prior year, negatively impacted by a valuation allowance on foreign operations[173] - For the six months ended June 30, 2022, the effective income tax rate was 37.1%, compared to 26.7% in the prior year, reflecting the Company's annual estimate adjusted for certain discrete items[173] 13. Stockholder's Equity This note describes the company's authorized and outstanding stock, including details on share repurchase programs and their impact - The Company's authorized shares include 50,000,000 Class A non-voting common stock and 99,665 Class B voting common stock, with Class A and Class B shares being equal in all respects except voting rights[176][177] Class A Stock Outstanding | Period | Beginning of Period | Issued (share-based compensation) | Repurchased and Canceled | End of Period | | :----------------------- | :------------------ | :-------------------------------- | :----------------------- | :------------ | | Three Months Ended June 30, 2022 | 12,156,174 | — | (885,230) | 11,270,944 | | Six Months Ended June 30, 2022 | 12,447,036 | 86,451 | (1,262,543) | 11,270,944 | - During the three months ended June 30, 2022, the Company repurchased and canceled 885,230 shares of Class A Stock for $30.2 million ($34.13 per share), and 1,262,543 shares for $46.4 million ($36.73 per share) during the six months, under its share repurchase program[182] - As of June 30, 2022, 29,278 shares remained available for repurchase under the program, which is expected to continue indefinitely[182][183] 14. Contingencies This note addresses the company's exposure to legal actions, arbitrations, and regulatory investigations, including estimated loss ranges - The Company faces substantial liability risks from legal actions, arbitrations, class actions, and governmental/self-regulatory agency investigations related to its securities brokerage, asset management, and investment banking activities[186] - For legal and regulatory proceedings with at least a reasonable possibility of loss, the Company estimates an aggregate loss range of $0 to $41.3 million as of June 30, 2022, acknowledging that actual losses may exceed this estimate[190] - Oppenheimer is a defendant in a class action and twenty-four FINRA arbitrations related to investments in Horizon Private Equity, III, LLC, with alleged damages of approximately $41.3 million in the arbitrations, which the Company intends to vigorously defend[191][193] - The Company received a 'Wells Notice' from the SEC regarding potential violations related to sales of municipal notes, which it believes to be without merit and intends to defend against[194] 15. Regulatory requirements This note outlines the company's compliance with various regulatory capital requirements for its U.S. and international broker-dealer subsidiaries - Oppenheimer's U.S. broker-dealer subsidiary, Oppenheimer & Co. Inc., had net capital of $435.6 million as of June 30, 2022, exceeding its minimum requirement by $404 million under SEC Rule 15c3-1[195] - Oppenheimer Europe Ltd. is in compliance with the FCA's Investment Firms' Prudential Regime (IFPR), with a Common Equity Tier 1 ratio of 130% (required 56.0%) and a Total Capital ratio of 174% (required 100.0%) as of June 30, 2022[196][197] - Oppenheimer Investments Asia Limited also met its regulatory capital requirements, holding $4.8 million, which was $4.4 million in excess of the required amount as of June 30, 2022[197] 16. Segment information This note presents financial data disaggregated by the company's reportable segments and geographic areas, highlighting revenue and profitability - The Company's reportable segments are Private Client, Asset Management, Capital Markets, and Corporate/Other, with performance evaluated based on profitability[199][200][201][202] Revenue by Segment (Expressed in thousands) | Segment | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Private Client | $144,471 | $166,863 | $295,318 | $330,886 | | Asset Management | $24,315 | $25,544 | $51,432 | $49,774 | | Capital Markets | $71,274 | $147,945 | $156,325 | $331,544 | | Corporate/Other | $(2,838) | $(59) | $175 | $1,371 | | Total Revenue | $237,222 | $340,293 | $503,250 | $713,575 | Pre-Tax Income (Loss) by Segment (Expressed in thousands) | Segment | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Private Client | $38,800 | $21,673 | $62,946 | $45,936 | | Asset Management | $8,120 | $8,638 | $17,594 | $16,191 | | Capital Markets | $(17,935) | $39,373 | $(16,769) | $89,364 | | Corporate/Other | $(35,154) | $(26,516) | $(55,727) | $(56,196) | | Total | $(6,169) | $43,168 | $8,044 | $95,295 | Revenue by Geographic Area (Expressed in thousands) | Region | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Americas | $225,500 | $326,485 | $477,410 | $683,192 | | Europe/Middle East | $10,474 | $12,501 | $22,451 | $27,911 | | Asia | $1,248 | $1,307 | $3,389 | $2,472 | | Total | $237,222 | $340,293 | $503,250 | $713,575 | 17. Subsequent events This note discloses significant events occurring after the reporting period, including dividend declarations and new share repurchase authorizations - On July 29, 2022, the Company announced a quarterly dividend of $0.15 per share, payable on August 26, 2022[208] - On July 28, 2022, the Board of Directors approved a new share repurchase program authorizing the purchase of up to 536,500 shares of Class A Stock, supplementing the remaining 4,278 shares from the previous program[209] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, highlighting the impact of macroeconomic factors, segment performance, liquidity, capital resources, and regulatory developments for the periods presented Background This section provides an overview of Oppenheimer Holdings Inc.'s business, services, operational footprint, and key statistics - Oppenheimer Holdings Inc. is a leading middle market investment bank and full-service broker-dealer, offering a broad range of financial services including retail brokerage, institutional sales and trading, investment banking, and asset management[211] - As of June 30, 2022, the Company operated from 91 offices in 25 U.S. states and international locations, with Client Assets Under Administration (CAUA) totaling $104.0 billion and Assets Under Management (AUM) at $37.1 billion[211] - The Company employed 2,913 individuals, including 990 financial advisors, as of June 30, 2022[211] Outlook This section outlines the company's strategic focus on growing its private client and asset management businesses, expanding capital markets, and investing in technology - The Company is focused on growing its private client and asset management businesses by adding experienced financial advisors and money management personnel, and expanding through targeted acquisitions[212] - Strategic initiatives include creating and investing in private market opportunities, expanding capital market businesses with experienced personnel, and continuously investing in technology to support client service and compliance[212][213] - Long-term growth plans involve expanding existing offices, acquiring operating branch offices, opening new branches, and pursuing acquisitions that align with corporate goals and provide incremental shareholder value[213][214] Impact of Interest Rates This section discusses the effects of rising interest rates on the company's interest-based revenues and potential impacts on economic activity and market valuations - The Federal Reserve increased the FED Funds Rate multiple times in 2022 (25bps in March, 50bps in May, 75bps in June, and 75bps in July), with further increases expected due to high inflation[215] - Rising interest rates are favorable for the Company's interest-based revenues, increasing fees from FDIC-insured client deposits and rates charged on margin balances, positively impacting earnings[215] - However, these rate increases may reduce economic activity, increase financial market volatility, and decrease the value of fixed income investments and equity share prices[215] Ukraine War This section addresses the impact of the Ukraine war on global commodity prices, supply chains, and consumer confidence, and its potential adverse effects on financial markets - The ongoing Ukraine war and associated sanctions against Russia have increased hydrocarbon and agricultural product prices, disrupting supplies and exacerbating global inflationary pressures[216] - The conflict has indirectly lowered consumer confidence and spending, which could adversely impact financial markets and the Company's business[216] CORONAVIRUS DISEASE 2019 ("COVID-19 PANDEMIC") This section describes the company's ongoing response to the COVID-19 pandemic, including remote work arrangements and business continuity measures - The Company continues to monitor and respond to the COVID-19 pandemic, maintaining enhanced cleaning practices, limiting business travel, and implementing self-quarantine protocols[217] - The Business Continuity Plan enabled most employees to work remotely, significantly expanding technology infrastructure use, with no significant business disruptions to date[217] - While increased workplace attendance is observed due to loosened regulations and vaccinations, the Company anticipates maintaining flexible work arrangements and continues to monitor the situation[217] Executive Summary This section provides a high-level overview of the company's financial performance, highlighting the impact of macroeconomic factors and segment contributions - Macroeconomic factors, including high inflation and rising interest rates, led to significantly higher volatility and lower valuations in equity and fixed income markets, resulting in lower results for Q2 2022[218] - The downturn in equity capital market issuance, particularly IPOs, secondary offerings, and the SPAC market, dramatically reduced capital markets revenues by 52% compared to the prior year[218] - Wealth Management delivered solid results, driven by high assets under management and increased fees from the FDIC program, partially offsetting the impact of lower capital markets revenue and increased operating costs[219] - The Company maintained a strong balance sheet and capital level, repurchasing 885,230 Class A common shares for $30.2 million in Q2 2022, and achieving record book value and tangible book value per share[220][225] Results of Operations This section presents a detailed analysis of the company's financial results, including revenue, expenses, net income, and key per-share metrics Key Financial Results (Expressed in thousands, except Per Share Amounts) | Item | 2Q-2022 | 2Q-2021 | Change | % Change | | :----------------------------------- | :------ | :------ | :----- | :------- | | Revenue | $237,222 | $340,293 | $(103,071) | (30.3)% | | Compensation expense | $177,979 | $231,140 | $(53,161) | (23.0)% | | Non-compensation expense | $65,412 | $65,985 | $(573) | (0.9)% | | Pre-Tax Income (Loss) | $(6,169) | $43,168 | $(49,337) | (114.3)% | | Net Income (Loss) attributable to Oppenheimer Holdings Inc. | $(3,874) | $31,159 | $(35,033) | (112.4)% | | Basic EPS | $(0.32) | $2.46 | $(2.78) | (113.0)% | | Diluted EPS | $(0.32) | $2.28 | $(2.60) | (114.0)% | | Book Value Per Share | $68.57 | $59.29 | $9.28 | 15.7% | | Tangible Book Value Per Share | $53.62 | $45.90 | $7.72 | 16.8% | | CAUA ($ billions) | $104.0 | $117.3 | $(13.3) | (11.3)% | | AUM ($ billions) | $37.1 | $43.7 | $(6.6) | (15.1)% | - The Company reported a net loss of $3.9 million, or $(0.32) basic EPS, for Q2 2022, a 112.4% decrease from net income of $31.2 million in Q2 2021, driven by a 30.3% decline in revenue[221] - Book value and tangible book value per share reached record levels at June 30, 2022, largely due to share buybacks[225] Business Segments This section analyzes the financial performance of the company's key business segments: Private Client, Asset Management, and Capital Markets Private Client This section details the Private Client segment's revenue, expenses, and pre-tax income, highlighting trends in commissions, advisory fees, and bank deposit sweep income Private Client Segment Performance (Expressed in thousands, except headcount) | Item | 2Q-2022 | 2Q-2021 | Change | % Change | | :----------------------------------- | :------ | :------ | :----- | :------- | | Revenue | $144,471 | $166,863 | $(22,392) | (13.4)% | | Retail commissions | $45,916 | $53,753 | $(7,837) | (14.6)% | | Advisory fee revenue | $83,085 | $85,598 | $(2,513) | (2.9)% | | Bank deposit sweep income | $14,845 | $3,712 | $11,133 | 300% | | Interest | $10,369 | $7,235 | $3,134 | 43.3% | | Other revenue | $(9,744) | $16,565 | $(26,309) | * | | Total Expenses | $105,671 | $145,190 | $(39,519) | (27.2)% | | Compensation | $77,342 | $117,564 | $(40,222) | (34.2)% | | Non-compensation | $28,329 | $27,626 | $703 | 2.5% | | Pre-tax Income | $38,800 | $21,673 | $17,127 | 79.0% | | Financial advisor headcount | 990 | 1,004 | (14) | (1.4)% | | Client Asset Under Administration (billions) | $104.0 | $117.3 | $(13.3) | (11.3)% | | Cash Sweep Balances (billions) | $7.5 | $7.3 | $0.2 | 26.0% | - Private Client revenue decreased by 13.4% to $144.5 million in Q2 2022, primarily due to lower commissions and decreases in Company-owned life insurance cash surrender value, partially offset by a 300% increase in bank deposit sweep income[227][232] - Pre-tax income for Private Client increased by 79.0% to $38.8 million, driven by a 34.2% decrease in compensation expenses due to lower production and reduced share-based and deferred compensation costs[227][232] Asset Management This section reviews the Asset Management segment's financial performance, focusing on advisory fee revenue, expenses, and changes in Assets Under Management Asset Management Segment Performance (Expressed in thousands, except AUM) | Item | 2Q-2022 | 2Q-2021 | Change | % Change | | :----------------------------------- | :------ | :------ | :----- | :------- | | Revenue | $24,315 | $25,544 | $(1,229) | (4.8)% | | Advisory fee revenue | $24,311 | $25,541 | $(1,230) | (4.8)% | | Total Expenses | $16,195 | $16,906 | $(711) | (4.2)% | | Compensation | $6,697 | $6,261 | $436 | 7.0% | | Non-compensation | $9,498 | $10,645 | $(1,147) | (10.8)% | | Pre-tax Income | $8,120 | $8,638 | $(518) | (6.0)% | | AUM (billions) | $37.1 | $43.7 | $(6.6) | (15.1)% | - Asset Management revenue decreased by 4.8% to $24.3 million in Q2 2022, primarily due to lower net Assets Under Management (AUM)[230][233] - AUM decreased by $6.6 billion (15.1%) to $37.1 billion at June 30, 2022, comprising $6.0 billion from lower asset values and $0.6 billion from net asset distributions[233][234] - Pre-tax income for Asset Management decreased by 6.0% to $8.1 million, with compensation expenses up 7.0% due to fixed compensation increases, while non-compensation expenses decreased by 10.8%[230][233] Capital Markets This section analyzes the Capital Markets segment's revenue and profitability, distinguishing between investment banking and sales and trading activities Capital Markets Segment Performance (Expressed in thousands) | Item | 2Q-2022 | 2Q-2021 | Change | % Change | | :----------------------------------- | :------ | :------ | :----- | :------- | | Revenues | $71,274 | $147,945 | $(76,671) | (51.8)% | | Investment Banking | $14,699 | $99,045 | $(84,346) | (85.2)% | | Advisory fees | $8,284 | $50,515 | $(42,231) | (83.6)% | | Equities underwriting | $2,751 | $39,371 | $(36,620) | (93.0)% | | Fixed income underwriting | $3,259 | $8,835 | $(5,576) | (63.1)% | | Sales and Trading | $55,978 | $48,630 | $7,348 | 15.1% | | Equities | $37,126 | $30,218 | $6,908 | 22.9% | | Fixed Income | $18,852 | $18,412 | $440 | 2.4% | | Total Expenses | $89,209 | $108,572 | $(19,363) | (17.8)% | | Compensation | $67,172 | $85,663 | $(18,491) | (21.6)% | | Non-compensation | $22,037 | $22,909 | $(872) | (3.8)% | | Pre-tax Income (Loss) | $(17,935) | $39,373 | $(57,308) | * | | Compensation Ratio | 94.2% | 57.9% | 3,630 | 62.7% | | Non-compensation Ratio | 30.9% | 15.5% | 1,540 | 99.4% | | Pre-tax Margin | (25.2)% | 26.6% | (51.8)% | * | - Capital Markets revenue decreased by 51.8% to $71.3 million in Q2 2022, resulting in a pre-tax loss of $17.9 million, a significant decline from a pre-tax income of $39.4 million in the prior year[239] - Investment Banking revenue plummeted by 85.2%, with advisory fees down 83.6% and equity underwriting fees down 93.0% due to a significant decrease in activity, particularly in SPAC issuances[242] - Sales and Trading revenue increased by 15.1%, driven by a 22.9% rise in equities sales and trading due to increased market volatility, partially offsetting the decline in investment banking[242] Critical Accounting Policies This section confirms the company's adherence to U.S. GAAP and notes no material changes to critical accounting policies during the period - The Company's condensed consolidated financial statements adhere to U.S. GAAP, and no material changes occurred in critical accounting policies during the three months ended June 30, 2022, as discussed in the prior Annual Report on Form 10-K[243][244][245] Liquidity and Capital Resources This section discusses the company's financial position, including asset changes, financing strategies, regulatory capital, and liquidity management - Total assets decreased by 4.0% from December 31, 2021, to June 30, 2022, with short-term financing met through internally generated funds, collateralized/uncollateralized borrowings, and uncommitted lines of credit[246] - Bank call loans increased to $177.3 million at June 30, 2022, from $69.5 million at December 31, 2021, collateralized by Company and customer securities[246] - Overseas subsidiaries are subject to local regulatory capital requirements, restricting capital utilization, and the Company permanently reinvests eligible foreign earnings, not accruing U.S. income taxes on repatriation[247][248][249] - The Company manages liquidity to meet obligations and regulatory requirements, conducting stress analyses to plan for potential liquidity disruptions, and holds Company-owned life insurance policies with a cash surrender value of $74.4 million for additional liquidity[265][266][267] Cash Flow Summary (Expressed in thousands) for the Six Months Ended June 30 | Item | 2022 | 2021 | | :----------------------------------- | :----------- | :----------- | | Cash (used in)/provided by operating activities | $(231,371) | $20,140 | | Cash used in investing activities | $(1,116) | $(5,431) | | Cash provided by/(used in) financing activities | $55,444 | $(10,335) | | Net (decrease)/increase in cash, cash equivalents and restricted cash | $(177,043) | $4,374 | Cybersecurity This section highlights the company's ongoing efforts to enhance cybersecurity policies and procedures in response to increasing cybercrime risks and regulatory scrutiny - The Company continuously reviews and enhances its cybersecurity policies and procedures to protect client data and its network, especially given increased cybercrime risks and attacks on data processing infrastructure[272][273] - Regulatory oversight of cybersecurity planning and protections for financial service providers is intensifying, leading the Company to significantly increase resources dedicated to this effort, with potential for further increases[273] Regulatory Matters and Developments This section outlines the impact of key regulatory changes, including Reg BI and DOL exemptions, and addresses specific regulatory inquiries and notices - The SEC's Regulation Best Interest (Reg BI) imposes a federal standard of conduct for broker-dealers with retail clients, requiring enhanced documentation, cessation of certain practices, and increased compliance costs, which the Company has addressed through structural, technological, and operational changes[275][276] - The DOL's final prohibited transaction exemption (PTE) for investment advice fiduciaries, effective February 1, 2022, provides a flexible approach to resolving conflicts under ERISA, with the Company implementing additional processes to ensure compliance[277] - Oppenheimer is responding to SEC information requests regarding a former financial advisor and received a 'Wells Notice' concerning potential violations related to municipal note sales, which it intends to vigorously defend against[280][281][282] Factors Affecting "Forward-Looking Statements" This section identifies various risks and uncertainties that could impact forward-looking statements, including market volatility, regulatory changes, and geopolitical events - Forward-looking statements are subject to various risks and uncertainties beyond the Company's control, including securities market volatility, interest rate fluctuations, changes in regulatory requirements, general economic conditions, and competition[283] - Other significant factors include potential cybersecurity threats, legal developments, changes in tax laws, the impact of Reg BI and other regulations, geopolitical events like the Ukraine war, and risks related to the COVID-19 pandemic[283] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there were no material changes to the Company's quantitative and qualitative disclosures about market risk during the six months ended June 30, 2022, compared to the information provided in its Annual Report on Form 10-K - No material changes occurred in the Company's quantitative and qualitative disclosures about market risk during the six months ended June 30, 2022[285] Item 4. Controls and Procedures This section confirms that the Company's disclosure controls and procedures were effective as of June 30, 2022, and that there were no material changes in internal control over financial reporting during the period - The Company's management, including the CEO and Interim CFO, concluded that disclosure controls and procedures were effective as of June 30, 2022[286][288] - A control system provides only reasonable, not absolute, assurance against error and fraud, acknowledging inherent limitations such as faulty judgments, simple errors, collusion, or management override[287] - No material changes in internal control over financial reporting occurred during the six months ended June 30, 2022[289] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, equity sales, and exhibits Item 1. LEGAL PROCEEDINGS This section details the Company's involvement in various legal and regulatory proceedings, including customer complaints, lawsuits, and arbitrations, and provides an estimated range of potential losses - The Company is subject to substantial liability risks from routine litigation, regulatory investigations, and customer complaints arising from its financial services activities[291] - Management believes the resolution of these matters will not have a material adverse effect on the condensed consolidated balance sheet and statement of cash flows, but results of operations could be affected if liabilities differ from estimates[292] - For legal or regulatory proceedings with a reasonable possibility of loss, the Company estimates an aggregate loss range of $0 to $41.3 million as of June 30, 2022, acknowledging that actual losses may be materially higher[295] - Oppenheimer is defending against a class action and twenty-four FINRA arbitrations related to investments in Horizon Private Equity, III, LLC, with specific monetary damages claimed in arbitrations totaling approximately $41.3 million[296][297] Item 1A. RISK FACTORS This section states that there were no material changes to the Company's risk factors during the six months ended June 30, 2022, compared to those disclosed in its Annual Report on Form 10-K - No material changes occurred in the Company's risk factors during the six months ended June 30, 2022, as compared to the Annual Report on Form 10-K[298] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's share repurchase activities for Class A non-voting common stock during the second quarter of 2022, including the number of shares purchased, average price, and remaining authorization under its publicly announced plans Issuer Purchases of Equity Securities (Class A Stock) | Period | Total Shares Purchased | Average Price Paid Per Share | Total Shares Purchased as Part of Publicly Announced Plans | Maximum Shares That May Yet Be Purchased Under Plans | | :------------------- | :--------------------- | :--------------------------- | :------------------------------------------------------- | :--------------------------------------------------- | | April 1 - 30, 2022 | 24,518 | $43.83 | 24,518 | 339,990 | | May 1 - 31, 2022 | 346,051 | $32.84 | 346,051 | 543,939 | | June 1 - 30, 2022 | 514,661 | $34.54 | 514,661 | 29,278 | | Q2 2022 Total | 885,230 | $34.13 | 885,230 | 29,278 | - During Q2 2022, the Company repurchased a total of 885,230 shares of Class A non-voting common stock at an average price of $34.13 per share[299] - As of June 30, 2022, 29,278 shares remained available for purchase under the Company's share repurchase programs, which do not have an expiration date[299][300] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and interactive data files - Exhibits include certifications from Albert G. Lowenthal and Salvatore F. Agosta (31.1, 31.2, 32) and interactive data files (101) pursuant to Rule 405 of Regulation S-T[303] Signatures This section contains the official signatures of the Company's Chairman and Chief Executive Officer and Interim Chief Financial Officer, affirming the filing of the report - The report was duly signed on July 29, 2022, by Albert G. Lowenthal, Chairman and Chief Executive Officer, and Salvatore F. Agosta, Interim Chief Financial Officer[305][306]