Oppenheimer Holdings Inc. (OPY) Earnings Call Transcript & Summary

Hello, and welcome to the 2020 Annual Meeting of Stockholders of Oppenheimer Holdings, Inc. [Operator Instructions] You may e-mail that question to [email protected]. It is now my pleasure to turn today's meeting over to Albert Lowenthal, Chairman and CEO of Oppenheimer Holdings Inc. Mr. Lowenthal, the floor is yours.

Thank you, operator. Good afternoon, ladies and gentlemen. I want to welcome you to the 2020 annual meeting of the corporation. As you know, as a result of the COVID-19 pandemic, this meeting was changed from a physical attendance meeting to a virtual meeting. I am Bud Lowenthal, and I will be chairing the meeting. It is now 4:30 p.m., and I would ask that the meeting come to order. I ask Mr. Dennis McNamara, the Secretary of the corporation, to act as secretary of the meeting; and Ms. Erica [ Ortiz Imdar ] of Computershare Shareowner Services, our transfer agent, to act as inspector of election. [ Ms. Ortiz Imdar ] has executed an affidavit to execute her duties faithfully. I direct the secretary to attach the affidavit to the minutes of this meeting. We have posted to our virtual meeting site a copy of our 2020 annual report, consisting of the annual report and the SEC Form 10-K. And I hope that each of you had an opportunity to review it. The first order of business today will be to address the meeting's formalities, after which I will make a presentation regarding the fiscal year 2019 and the first quarter of 2020. The notice calling this meeting, together with the proxy statement was mailed to stockholders on March 23, 2020. A press release announcing that this meeting was to be held in virtual format was filed with the SEC and released to the public on April 23, 2020. I have before me an affidavit of mailing of William Valentin of Computershare relating to the proof of mailing of the notice calling this meeting and the proxy statement in accordance with the bylaws of the corporation as well as a copy of the press release issued by the corporation on April 23, 2020, and I direct this affidavit of mailing and the press release be filed with the minutes of this meeting. I had before me a certified list of the holders of the Class B voting stock at the close of business on March 13, 2020, the record date fixed by the Board of Directors for the purpose of determining the stockholders entitled to vote at this meeting which has been certified by Sharon Barton of Computershare Shareholder Services, our transfer agent. The list indicates that there were 99,665 shares of Class B voting common stock entitled to vote at this meeting. The list will be open for inspection by any stockholder of the corporation for the duration of this meeting. The inspector of elections report has now been received. The number of shares of Class B voting common stock represented in person by stockholders at the meeting is 0. The number of shares of Class B voting common stock represented by proxies received from stockholders is 98,544. There is sufficient representation for a quorum. The total number of shares of Class B voting common stock represented at the meeting represent approximately 98.9% of the issued and outstanding Class B voting common stock of the corporation. Legal notice of the meeting having been given and a quorum being present, I now declare the meeting lawfully called and convened and ready for the transaction of business. I propose to proceed with the formalities of this meeting before addressing you with respect to the year ended December 31, 2019 and the current year and answering any questions you may have. The first order of business is the nomination and election of directors. The nominating Corporate Governance Committee in accordance with its charter has recommended that the 9 persons named in the proxy statement, all of whom currently serve as directors, be nominated. I will now ask a holder of Class B voting shares to nominate the slate of nominees named in the proxy statement for election as directors of the corporation.

I nominate the following persons for election as members of the Board of Directors of the corporation to serve until the next annual meeting of stockholders and until their successors have been elected and qualified: E. Behrens; T. Dwyer; W. Ehrhardt; P. Friedman; T.A. Glasser; A.G. Lowenthal; R.S. Lowenthal; A.W. Oughtred; R.L. Roth.

Is there a second to the motion?

I second the motion.

Are there any other nominees? If not, I will entertain the motion with nominations to be closed.

I move that nominations be closed.

Is there a second to the motion?

I second the motion.

Each holder of shares of Class B voting common stock entitled to vote will have the right to 1 vote for each share recorded in his or her name. The 9 nominees for directors receiving the highest number of votes shall be elected. Any Class B common stockholder who wishes to vote in person by ballot should submit their vote by pressing the Vote button on your screen now. [Voting]

The inspector's report having been filed, I report on the voting as followed. Each of the nominees for director has been elected to serve as a director of the corporation until the next annual meeting of stockholders and until his or her respective successor has been elected and qualified, each nominee having received at least 98,068 votes in favor of his or her election. I now propose to move to the ratification of the appointment of auditors for this fiscal year. The Audit Committee of your Board of Directors has, pursuant to its charter, the sole authority and responsibility to appoint independent auditors for ratification by the stockholders. The Audit Committee has selected Deloitte & Touche LLP for appointment as the corporation's independent registered public accounting firm for 2020. Accordingly, I request that a holder of Class B voting common stock move that the selection by the Audit Committee of Deloitte & Touche LLP as the corporation's auditors for the 2020 fiscal year be ratified.

I move that Deloitte & Touche LLP be appointed as the corporation's independent registered public accounting firm for the corporation's 2020 fiscal year at a remuneration to be fixed by the Audit Committee.

Is there a second to the motion?

I second to the motion.

Each holder of shares of Class B voting common stock entitled to vote will have the right to 1 vote for each share recorded in his or her name. To pass, this matter requires the approval of a simple majority of the votes cast by the holders of Class B voting stock represented in person or by proxy at this meeting. Any Class B common stockholder who wishes to vote in person by ballot should submit their vote by pressing the cast your vote button on your screen now. [Voting]

The inspector's report having been filed, I report that the appointment of Deloitte & Touche LLP as the corporation's independent registered public accounting firm for the corporation's 2020 fiscal year at a rate of remuneration to be set by the Audit committee has been ratified, having received 98,533 votes in favor of the proposal. I now propose to move to the say-on-pay proposal. I will now ask a holder of Class B voting stock to move the approval on an advisory nonbinding basis of the 2019 compensation paid to Oppenheimer Holding, Inc.'s named executives, including the compensation discussion and analysis, compensation tables and narrative discussions set forth in the proxy statement.

Mr. Chairman, I move that the 2019 compensation paid to Oppenheimer Holdings, Inc. named executive officers as disclosed pursuant to the Securities and Exchange Commission's compensation disclosure rules, including the compensation discussion and analysis, compensation tables and narrative discussions set forth on Pages 40 to 56 of the corporation's proxy statement be approved.

Is there a second to the motion?

I second the motion.

Each holder of shares of Class B voting common stock entitled to vote will have the right to 1 vote for each share recorded in his or her name. To pass, this resolution requires the approval of a simple majority of the votes cast by the holders of Class B voting stock represented in person or by proxy at this meeting. Any Class B common stockholder who wishes to vote in person by ballot should submit their vote by pressing the cast your vote button on their screen now. [Voting]

The inspector's report having been filed, I report that the advisory nonbinding vote on 2019 executive compensation has been approved having received 98,022 votes in favor of the proposal. I now propose to move to the say-when-on-pay proposal. I will now ask a holder of Class B voting stock to move the approval on an advisory nonbinding basis that the frequency of a stockholder vote on executive compensation be held every 3 years.

Mr. Chairman, I move that an advisory nonbinding proposal with the frequency of a stockholder vote on compensation of the corporation's executives to be named in the corporation's proxy statement be held every 3 years be approved.

Is there a second to the motion?

I second the motion.

Each holder of shares of Class B voting common stock entitled to vote will have the right to 1 vote for each share recorded in his or her name. To pass, this resolution requires the approval of a simple majority of the votes cast by the holders of Class B voting stock represented in person or by proxy at this meeting. Any Class B common stockholder who wishes to vote in person by ballot should submit their vote by pressing the cast your vote button on their screen now. [Voting]

The inspector's report having been filed, I report that the advisory nonbinding vote on the frequency of a stockholder vote on executive compensation every 3 years has been approved having received 98,029 votes in favor of the proposal. I now propose to move to the approval of an amendment to the corporation's 2014 incentive plan as described in the proxy statement. I will now ask a holder of Class B voting stock to move the approval of the amendment to the corporation's 2014 incentive plan, providing for the issue of up to 1,250,000 shares of Class A stock as described in the proxy statement.

Mr. Chairman, I move that the amendment to the corporation's 2014 incentive plan as described in the proxy statement, providing for the issue of up to 1,250,000 shares of Class A stock be approved, ratified and confirmed and the proper officers and directors of the corporation be authorized and directed to take all such action and execute all such documents as are necessary to implement the terms of the foregoing resolution.

Is there a second to the motion?

I second the motion.

Each holder of shares of Class B voting common stock entitled to vote will have the right to 1 vote for each share recorded in his or her name. To pass, this matter requires the approval of a simple majority of the votes cast by the holders of Class B voting stock represented in person or by proxy at this meeting. Any Class B common stockholder who wishes to vote in person by ballot should submit their vote by pressing the cast your vote button on your screen now. [Voting]

The inspector's report having been filed, I report that the amendments to the corporation's 2014 incentive plan as described in the proxy statement, providing for the issue of up to 1,250,000 shares of Class A stock has been approved and the proper officers and directors of the corporation have been authorized and directed to take all such action and execute such documents as necessary to implement the terms of the foregoing resolution, each proposal having received 98,026 votes in favor thereof. Is there any additional business to properly come before the meeting? There being no additional business, I ask that a holder of Class B voting common stock move that the meeting be adjourned. Thereafter, I will address the corporation's results for the fiscal year 2019 and the first quarter of 2020.

I move that the meeting be adjourned.

Is there a second to the motion?

I second the motion.

All in favor, please say aye. [Voting]

I declare the meeting adjourned. We have now completed the formalities of the meeting, and I will address the meeting. May we go to the next slide, please? I would like to report that for 2019, the company's revenue was $1.033 billion. Our shareholders' equity was $587 million at the end of the first quarter compared to $592.7 million at the end of the fiscal year. Our book value per share was $46.16 at the end of the first quarter compared to $46.31 at the end of the fiscal year. Our tangible book value was 32.79 -- $32.79 compared to $33.03 at year-end. At the end of the first quarter, we had 2,946 employees compared to 2,971 at year-end; and the number of financial advisers, 1,029 compared to 1,032 at the end of the year. Our client assets under administration were $79.1 billion compared to $91 billion at year-end, and our assets under management on a fee basis was $28 billion compared to $32.1 billion at the end of the calendar year. At the end of the year, our wealth management revenues represented 72% of our total revenues. Next slide, please. The COVID-19 pandemic has had a significant impact on the world at large and certainly on our company. Cases recorded in the United States was 1.2 million, with more than 75,000 deaths. At the present time, there are closures of all nonessential businesses and slowly they are opening as shelter-in-place orders are being revoked. New York has been hit particularly hard with over 330,000 cases. As a result of the pandemic, the S&P at its lowest was down over 34% from its all-time high of February '19. As a result of this, the Federal Reserve cut short-term interest rates by a total of 150 basis points as well as commencing a $700 billion quantitative easing program. The effective Fed funds rate stood at 8 basis points on the end of the fiscal quarter March 31 with a target range of only 0 to 25 basis points. The global oversupply of oil put pressure on oil prices, which ended the quarter at $20.28 a barrel. In the U.S. 10-year treasury reached a historical intraday low of 32 basis points during the month of March. The impact on Oppenheimer during the first quarter was that 85% of our employees have been and are currently working remotely and not reporting to their offices. However, our commission revenue ended the period up substantially 30% due to transaction-based commissions on both retail and institutional side of trades. Our asset management fees were up 17% during the first quarter due to record-high asset values of client portfolios as of December 31. The largest impact on our results for the first quarter was a decrease in short-term interest rates resulting in a decline of bank deposit sweep income of $15 million compared to the first quarter of 2019. Our investment banking revenues were down 8% due to the pandemic's effect on clients' risk appetite and the resulting cancellation of some active mandates. However, our trading losses were quite modest, less than $1 million, due to our company's strong risk management in reducing trading exposure during the period. Next slide, please. As you may know, the company has 93 offices in the United States spread across the continent. We have 6 international offices located in London, Geneva, St. Helier of the island of Jersey, Frankfurt, Germany, Tel Aviv and Hong Kong. Among our 2,946 employees, we have 1,029 financial advisers, 185 institutional sales professionals and 40 senior research analysts. Next slide, please. We set a number of company records for 2019. We had the highest gross revenue since 2010, the highest net income and earnings per share since 2007. We had record assets under management of $32.1 billion at December 31. We had record client assets under administration at $91 billion at December 31. Our incentive fees earned for the fiscal year December 31, 2019 was $38.3 million, the highest since 2007. We also had the highest investment banking quarterly and full year revenue since 2010. At year-end, shareholders' equity stood at $592.7 million, a record high, and our book value per share was $46.31 with tangible book value of $33.03, both record highs as of December 31. Next slide. For the calendar year, the company had $1.033 billion in total revenue for the period compared to $958 million, up 7.9% increase for the calendar year. Our advisory fees were higher due to higher incentive fees earned on alternative investments. Our investment banking fees increased due to higher M&A fees and debt underwriting income. For the year, the bank deposit sweep income increased due to higher short-term interest rates over the comparable period in the prior year. Compensation as a percentage of revenue was 63.6% for the fiscal year 2019 compared to 63.4% in fiscal year 2018. Our basic net income per share was $4.10, up 88.1% compared to the prior year $2.18. Next slide, please. For the first quarter, our commission revenue was up 23.1% to $103 million. Our advisory fees were up 14.5% to $86,164,000. Lower short-term interest rates negatively impacted bank deposit sweep income with small trading losses. Compensation as a percentage of revenue was 67.2%, in the first quarter of 2020 compared to 63.7% in the first quarter of 2019. Our basic net income per share was $0.61 per share compared to 86% (sic) [ $0.86 ] for a 41% decline during the first quarter. Next slide, please. Our shareholders' equity stood at $587 million as of 3/31/2020. A return on equity for the trailing 12 months ending 3/31 was 8.4%. As previously mentioned, our earnings per share for 2019 were $4.10. And as of the trailing 12 months of 3/31/20, $3.86. Book value $46.16 at 3/31/20 compared to $32.79 of tangible book value. Next slide, please. On the company's balance sheet, the total assets as of March 31, 2020 was $2.139 billion with shareholders' equity standing at $586 million and long-term debt at $148,600,000, a total capitalization of $735,330,000. During the first quarter of 2020, the company redeemed a total of $1.4 million of its senior secured notes. Our value at risk increased during the first quarter was significant where it increased from 14.38 on February 19, 2020, to a high of 82.69 on March 16, 2020. At the end of the quarter, our value at risk stood at $1,806,000, still a very modest amount for a company of our size. Our debt-to-equity ratio was 25.3% and our gross leverage ratio stood at 3.6x. Our regulatory net capital was $250 million, almost $251 million, excess net capital of $224 million. Next slide, please. During the period, the company continued to buy back its stock under its buyback approval. For the first quarter of 2020, we bought back 409,504 shares at an average price of $20.60 for a total cost to the company of $8.43 million. And the shares outstanding at the end of the first quarter was 12.6 million. As in prior periods, the company has an active buyback program, and the outstanding shares have declined from 13.3 million at the end of 2015 to 12.6 million at 3/31/2020. Next slide, please. Interest and fee revenue for the period. Our FDIC insured bank deposit program balance of $6.4 billion at 3/31/2020 increased substantially from year-end 12/31/19 when it stood at $4.9 billion. Our income for the 12 months ending 3/31/20 was $102.3 million. Our margin lending on average customer debits of $764 million which provided revenue of $31.6 million for the trailing 12 months ending 3/31/2020. Next slide, please. Looking at business segment results. Our Wealth Management division for the year ending 12/31/19 provided $742 million of revenue for 7.1% increase from the prior year. Our capital markets revenue was $291 million or a 6.2% increase and the company's overall revenue increased to $1.033 billion from $958 million for a 7.3% increase to 12 months ending 12/31/2019. On a contribution basis, the Wealth Management division provided $195 million of net contribution, a 14.2% increase from the prior year, whereas our Capital Markets division provided a loss of $13.7 million, although that was an increase of 2.2% from the prior year. Overall, the company's net income was 74.9 -- $74.9 million compared to $44.8 or a 40.1% increase for the calendar year 2019. For the 3-month period ending March 31, 2020, our Wealth Management division provided $160 million of revenue compared to $180 million or 12.1% decline. This decline when compared to the first quarter of 2019 was primarily due to lower bank deposit sweep income of $15.1 million and lower asset values underlying deferred compensation plans of $20.3 million. Our capital markets in the first quarter provided $75 million of revenue compared to $71 million in the prior period for a 6.1% increase. And the overall revenue of the company fell to $234 million from $251 million in the prior year, a decline of 7.2%. Our wealth management contribution was $37.6 million compared to $45 million in the same period for 2019, representing a 19.6% decrease. Our overall contribution of net income was $10.2 million for the first quarter compared to $16 million or a decline of 57% for the first quarter of 2020. Next slide, please. Oppenheimer's Wealth Management platform is a well-recognized brand and one of the few independent nonbank broker-dealers with full-service capabilities. As previously mentioned, our revenue for 2019 was 740 million -- $742 million from wealth management and for the first quarter of 2020 was $161 million. Our client assets per financial adviser for the first quarter of 2019 was $82.4 million and declined as a result of the declining market to $76.8 million at the end of the first quarter of 2020. Our Wealth Management profit margin for the full year of 2019 was 26.3%, falling to 23.4% at the end of the first quarter of 2020. Next slide, please. Our advisory fee business continues to be a significant driver of revenues in the Wealth Management business, providing 63% of Wealth Management revenues for both the full year of 2019 as well as the trailing 12 months ending March 31, 2020. Our total client assets under administration at the first -- end of the first quarter of 2019 were $87.5 million and declined to $79.1 million at the end of the first quarter of 2020. Client assets under fee-based programs and under management were $32.1 billion at the end of 2019 and fell to $28 billion at the end of the first quarter of 2020 compared to $29.5 billion at the end of the first quarter of 2019. Next slide, please. Our Capital Markets segment includes Investment Banking, Institutional Equities and our Global Fixed Income platform. Our revenue breakdown among the 3 areas providing a total of $290 million of revenue in the first -- in the fiscal year ending 2019 was $123 million coming from institutional equities, 42%; $86.7 million coming from fixed income for 30%; and $81.1 million coming from investment banking, 28%. Our capital markets revenue from 2018 to 2019 increased from $273 million to $291 million. And in the first quarter of 2020 increased to $76 million from $71 million in the prior period. Next slide. The opportunities the company sees moving forward includes the fact that we will continue to opportunistically purchase outstanding shares in the open market. We have a remaining authorization of 180,000 shares. We will also look for inorganic growth opportunities including looking at opportunities in the independent channel of our business as well as -- and we believe that, that may become more available to us as the repricing of that sector has been improved given the poor investment environment we're in right -- at the present time. We also -- as we've previously discussed, we purchased $1.4 million of notes at a discount of $94 during the first quarter of 2020, and we will continue to opportunistically purchase notes in the open market. As you may know, the call price of the bond that are outstanding decreases from 103.375% to 101.6875% at June 30 of this calendar year. We also will be exploring refinancing alternatives in the low interest rate environment which we find ourselves. We feel that the company is well-positioned for the future even in the unusual environment of COVID-19. We are grateful to all of our associates for the remarkable way in which they have responded in these past several months, and we're confident they will continue to do so. That's the end of my prepared remarks. Mr. McNamara, do we have any questions?

We have received no questions during the meeting.

In that case, we will end the meeting here. Thank you all for your attendance today. Operator, the meeting is concluded.

Ladies and gentlemen, this concludes the conference. You may now disconnect. Everyone, have a wonderful day.