Oppenheimer(OPY) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements (unaudited) The unaudited financial statements show total assets increased to $3.09 billion, a Q2 2023 net loss of $9.6 million driven by legal reserves, and a six-month net income of $4.9 million Condensed Consolidated Balance Sheets (in thousands) | | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $3,092,375 | $2,714,392 | | Total Liabilities | $2,278,005 | $1,893,971 | | Total Stockholders' Equity | $788,422 | $794,955 | | Total Liabilities and Stockholders' Equity | $3,092,375 | $2,714,392 | Condensed Consolidated Income Statements (in thousands) | | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $306,189 | $237,222 | $627,868 | $503,250 | | Total Expenses | $317,888 | $243,391 | $620,518 | $495,206 | | Pre-tax income (loss) | $(11,699) | $(6,169) | $7,350 | $8,044 | | Net Income (Loss) | $(9,568) | $(4,720) | $4,896 | $5,058 | | Diluted EPS | $(0.85) | $(0.32) | $0.44 | $0.41 | Condensed Consolidated Statements of Cash Flows (in thousands) | For the Six Months Ended June 30, | 2023 | 2022 | | :--- | :--- | :--- | | Cash used in operating activities | $(150,811) | $(231,371) | | Cash used in investing activities | $(9,179) | $(1,116) | | Cash provided by financing activities | $76,971 | $55,444 | | Net decrease in cash, cash equivalents and restricted cash | $(83,019) | $(177,043) | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, revenue recognition, fair value measurements, significant legal contingencies including the Horizon Private Equity matter, long-term debt, and share repurchase program details - The company is a middle-market investment bank and full-service broker-dealer with operations including retail brokerage, institutional sales, investment banking, and asset management, with 92 retail branches in the US and several international offices[19][20] - The company faces significant legal proceedings, primarily related to the Horizon Private Equity fraud scheme involving a former employee, having settled 31 related arbitrations for approximately $78.5 million, with an estimated aggregate potential loss up to $31 million in excess of accrued amounts for ongoing matters[196][200][201] - The company is also responding to inquiries from the SEC and CFTC regarding the use and retention of electronic communications like text messaging by employees[197] Disaggregation of Revenue (Six Months Ended June 30, 2023, in thousands) | Revenue Source | Private Client | Asset Management | Capital Markets | Total (incl. Corp/Other) | | :--- | :--- | :--- | :--- | :--- | | Commissions | $92,013 | $0 | $83,206 | $175,241 | | Advisory fees | $155,394 | $46,150 | $0 | $201,559 | | Investment banking | $3,475 | $0 | $54,468 | $57,943 | | Bank deposit sweep income | $92,969 | $0 | $0 | $92,969 | | Interest | $42,982 | $0 | $7,138 | $52,261 | | Total Revenue | $404,666 | $46,157 | $169,864 | $627,868 | - As of June 30, 2023, the company had $113.05 million in 5.50% Senior Secured Notes due 2025 outstanding, having repurchased and cancelled $1.0 million of these notes during Q1 2023[166][170] - The company has an active share repurchase program, purchasing and canceling 191,190 shares of Class A Stock for $7.3 million during the six months ended June 30, 2023, with 495,844 shares remaining available for repurchase[187][188] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the Q2 2023 net loss to a significant legal reserve, despite strong revenue growth driven by interest-sensitive income, with strategic focus on business expansion and maintaining strong liquidity - The company's overall Q2 results were adversely impacted by the accrual of a significant legal reserve, which management believes will cover anticipated costs related to a previously disclosed matter, despite causing a net loss for the quarter[226] - Revenue growth was primarily driven by a rise in interest-sensitive income, including margin interest and bank deposit sweep income, due to the Federal Reserve's interest rate increases[224][233] - The company's strategic focus includes growing its private client and asset management businesses, expanding private market investments, and adding experienced bankers to its investment banking practice[220] - In response to its Class A stock being removed from the Russell 2000 and 3000 indices, the company launched a "Dutch Auction" tender offer, repurchasing 437,183 shares for $17.49 million in July 2023[225][228] Business Segments Analysis Q2 2023 saw Private Client revenue grow significantly due to interest income despite a pre-tax income drop from legal reserves, Asset Management revenue declined but AUM increased, and Capital Markets revenue rose with improved advisory and underwriting fees Segment Pre-Tax Income (Loss) (Q2 2023 vs Q2 2022, in thousands) | Segment | Q2 2023 | Q2 2022 | % Change | | :--- | :--- | :--- | :--- | | Private Client | $20,794 | $38,800 | (46.4)% | | Asset Management | $6,533 | $8,120 | (19.5)% | | Capital Markets | $(14,051) | $(17,935) | (21.7)% | | Corporate/Other | $(24,975) | $(35,154) | (29.0)% | | Total | $(11,699) | $(6,169) | 89.6% | - Private Client pre-tax income was significantly impacted by a substantial increase in non-compensation expenses (185.7% YoY), primarily due to the accrual of a significant legal reserve[236][240] - Asset Management AUM increased to $41.2 billion at June 30, 2023, up from $37.1 billion a year prior, driven by market appreciation of $3.7 billion and net new assets of $0.4 billion[239][241] - Capital Markets performance was boosted by a 32.1% increase in advisory fees from M&A activity and a 99.1% increase in equities underwriting fees, though fixed income underwriting fell 42.7%[244][245] Liquidity and Capital Resources The company maintains strong liquidity, with increased total assets, meeting short-term needs through internal funds and various facilities, managing long-term capital, and exceeding regulatory capital requirements - The company's assets are mostly liquid, consisting of cash, receivables collateralized by marketable securities, and readily marketable securities[260] - At June 30, 2023, the company had $94.4 million of bank call loans outstanding, compared to zero at December 31, 2022[249][262] - Long-term cash requirements include $112.5 million for Senior Secured Notes due in 2025 and $196.9 million for operating lease obligations[271] - The company has Company-owned life insurance policies with a cash surrender value of $83.5 million as of June 30, 2023, which could provide additional liquidity if needed[269] Quantitative and Qualitative Disclosures About Market Risk There were no material changes to the company's quantitative and qualitative market risk disclosures compared to its 2022 Annual Report on Form 10-K - There were no material changes to the market risk disclosures from the company's 2022 Annual Report on Form 10-K[289] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report[291] - There have been no changes in the Company's internal controls over financial reporting during the six months ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the controls[294] PART II OTHER INFORMATION Legal Proceedings The company faces significant legal and regulatory actions, including 45 arbitrations related to the Horizon Private Equity fraud with $78.5 million in settlements and potential losses up to $31 million, alongside SEC and CFTC inquiries - The company faces 45 arbitrations related to the Horizon Private Equity, LLC fraudulent scheme involving a former employee, having settled or had awards rendered in 31 of these arbitrations for aggregate payments totaling approximately $78.5 million[301][302] - For legal proceedings where a loss is at least reasonably possible, the company estimates a range of aggregate loss up to $31 million in excess of amounts already accrued[300] - The SEC filed a complaint against Oppenheimer alleging violations of municipal securities disclosure rules (Rule 15c2-12) and is seeking disgorgement of approximately $1.9 million plus interest, which the company believes is without merit and is defending vigorously[305] Risk Factors There were no material changes to the company's risk factors compared to its previous Form 10-Q and 2022 Annual Report on Form 10-K - There were no material changes to the risk factors from the company's previous 10-Q and 2022 Annual Report on Form 10-K[307] Unregistered Sales of Equity Securities and Use of Proceeds In Q2 2023, the company repurchased 96,135 Class A shares under its buyback program and issued 4,987 shares to employees via share-based compensation plans Issuer Purchases of Equity Securities (Q2 2023) | Period | Total number of shares purchased | Average price paid per share | Maximum number of shares that may yet be purchased under the plans or programs | | :--- | :--- | :--- | :--- | | April 1 - 30, 2023 | 20,000 | $38.65 | 571,979 | | May 1 - 31, 2023 | 76,135 | $37.11 | 495,844 | | June 1 - 30, 2023 | — | $— | 495,844 | | Q2 2023 Total | 96,135 | — | 495,844 | - In Q2 2023, the Company issued 4,987 shares of Class A Stock to employees pursuant to share-based compensation plans, exempt from registration under Section 4(a)(2) of the Securities Act[309] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications, a lease agreement amendment, and interactive data files - Exhibits filed include CEO/CFO certifications (31.1, 31.2, 32), a Third Amendment to a lease agreement (10.12), and interactive data files (101)[311]