Table of Contents


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

 
 
FORM 10-Q
 
  
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
 
 
Commission File Number 1-12043
 
 
OPPENHEIMER HOLDINGS INC.
(Exact name of registrant as specified in its charter)

 
 
Delaware
98-0080034
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

85 Broad Street
New York, NY 10004
(Address of principal executive offices) (Zip Code)

(212) 668-8000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

 
 


Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock
OPY
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
o
 
Smaller reporting company
o
 
 
 
 
 
Emerging growth company
o
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o    No  x
The number of shares of the Company's Class A non-voting common stock and Class B voting common stock (being the only classes of common stock of the Company) outstanding on May 1, 2020 was 12,619,081 and 99,665 shares, respectively.
 



Table of Contents

OPPENHEIMER HOLDINGS INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

 
 
 
 
 
 
Page No.
PART I
 
Item 1.
 
 
Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019
3
 
Condensed Consolidated Income Statements for the three months ended March 31, 2020 and 2019
4
 
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019
5
 
6
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019
7
 
8
Item 2.
41
Item 3.
53
Item 4.
53
PART II
 
Item 1.
54
Item 1A.
56
Item 2.
56
Item 6.
57
 
58



Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Expressed in thousands, except number of shares and per share amounts)
March 31, 2020
 
December 31, 2019
ASSETS
 
 
 
Cash and cash equivalents
$
23,540

 
$
79,550

Deposits with clearing organizations
119,580

 
48,415

Receivable from brokers, dealers and clearing organizations
198,417

 
163,293

Receivable from customers, net of allowance for credit losses of $528 ($451 in 2019)
964,772

 
796,934

Income tax receivable
6,283

 
5,170

Securities owned, including amounts pledged of $150,547 ($357,120 in 2019), at fair value
309,346

 
799,719

Notes receivable, net of accumulated amortization and allowance for uncollectibles of $31,188 and $3,908 respectively ($38,355 and $3,673, respectively, in 2019)
44,960

 
43,670

Furniture, equipment and leasehold improvements, net of accumulated depreciation of $96,742 ($94,773 in 2019)
30,646

 
31,377

Right-of-use lease assets, net of accumulated amortization of $31,398 ($25,186 in 2019)
156,040

 
160,297

Goodwill
137,889

 
137,889

Intangible assets
32,100

 
32,100

Other assets
116,060

 
166,341

Total assets
$
2,139,633

 
$
2,464,755

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Drafts payable
$
19,066

 
$

Bank call loans
203,100

 

Payable to brokers, dealers and clearing organizations
239,583

 
520,975

Payable to customers
413,646

 
334,735

Securities sold under agreements to repurchase
124,103

 
287,265

Securities sold but not yet purchased, at fair value
34,639

 
100,571

Accrued compensation
102,407

 
207,358

Accounts payable and other liabilities
43,645

 
44,725

Lease liabilities
197,728

 
203,140

Senior secured notes, net of debt issuance costs of $432 ($485 in 2019)
148,142

 
149,515

Deferred tax liabilities, net of deferred tax assets of $37,080 ($43,630 in 2019)
26,844

 
23,749

Total liabilities
1,552,903

 
1,872,033

Commitments and contingencies (note 13)

 

Stockholders' equity
 
 
 
Share capital
 
 
 
Class A non-voting common stock, par value $0.001 per share, 50,000,000 shares authorized, 12,610,740 and 12,698,703 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
44,173

 
46,424

Class B voting common stock, par value $0.001 per share, 99,665 shares authorized, issued and outstanding as of March 31, 2020 and December 31, 2019
133

 
133

 
44,306

 
46,557

Contributed capital
37,945

 
47,406

Retained earnings
503,255

 
496,998

Accumulated other comprehensive income
1,224

 
1,761

Total stockholders' equity
586,730

 
592,722

Total liabilities and stockholders' equity
$
2,139,633

 
$
2,464,755

The accompanying notes are an integral part of these condensed consolidated financial statements.

3



OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS (unaudited)
 
 
 
 
 
For the Three Months Ended
March 31
(Expressed in thousands, except number of shares and per share amounts)
2020
 
2019
REVENUE
 
 
 
Commissions
$
103,249

 
$
79,409

Advisory fees
86,164

 
73,647

Investment banking
25,728

 
28,043

Bank deposit sweep income
18,826

 
33,968

Interest
10,890

 
12,727

Principal transactions, net
(868
)
 
11,438

Other
(9,219
)
 
12,538

Total revenue
234,770

 
251,770

EXPENSES
 
 
 
Compensation and related expenses
157,676

 
160,355

Communications and technology
19,891

 
20,086

Occupancy and equipment costs
16,078

 
15,273

Clearing and exchange fees
5,659

 
5,332

Interest
6,550

 
12,986

Other
18,693

 
21,686

Total expenses
224,547

 
235,718

Income before income taxes
10,223

 
16,052

Income taxes
2,405

 
4,858

Net income
$
7,818

 
$
11,194

 
 
 
 
Net income per share

 
 
Basic
$
0.61

 
$
0.86

Diluted
$
0.58

 
$
0.81

 
 
 
 
Weighted average shares
 
 
 
Basic
12,895,729

 
13,020,344

Diluted
13,456,233

 
13,851,321


The accompanying notes are an integral part of these condensed consolidated financial statements.

4


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
 
 
 
 
 
For the Three Months Ended
March 31,
(Expressed in thousands)
2020
 
2019
Net income
$
7,818

 
$
11,194

Other comprehensive income (loss), net of tax
 
 
 
Currency translation adjustment
(537
)
 
563

Comprehensive income
$
7,281

 
$
11,757

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
 
 
 
 
 
For the Three Months Ended
March, 31
(Expressed in thousands, except per share amounts)
2020
 
2019
Share capital
 
 
 
Balance at beginning of period
$
46,557

 
$
53,392

Issuance of Class A non-voting common stock
6,183

 
1,162

Repurchase of Class A non-voting common stock for cancellation
(8,434
)
 
(2,035
)
Balance at end of period
44,306

 
52,519

Contributed capital
 
 
 
Balance at beginning of period
47,406

 
41,776

Share-based expense
2,062

 
1,889

Vested employee share plan awards
(11,523
)
 
(2,176
)
Balance at end of period
37,945

 
41,489

Retained earnings
 
 
 
Balance at beginning of period
496,998

 
449,989

Net income
7,818

 
11,194

Dividends paid
(1,561
)
 
(1,432
)
Balance at end of period
503,255

 
459,751

Accumulated other comprehensive income
 
 
 
Balance at beginning of period
1,761

 
165

Currency translation adjustment
(537
)
 
563

Balance at end of period
1,224

 
728

Total stockholders' equity
$
586,730

 
$
554,487

 
 
 
 
Dividends paid per share
$
0.12

 
$
0.11

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
(Expressed in thousands)
2020
 
2019
Cash flows from operating activities
 
 
 
Net income
$
7,818

 
$
11,194

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Non-cash items included in net income:
 
 
 
Depreciation and amortization of furniture, equipment and leasehold improvements
2,057

 
1,708

Deferred income taxes
3,019

 
1,894

Amortization of notes receivable
3,059

 
3,388

Amortization of debt issuance costs
49

 
64

Write-off of debt issuance costs
4

 

Provision for credit losses
358

 
12

Share-based compensation
(1,376
)
 
3,042

Amortization of right-of-use lease assets
6,213

 

     Gain on repurchase of senior secured notes
(86
)
 

Decrease (increase) in operating assets:
 
 
 
Deposits with clearing organizations
(71,165
)
 
12,609

Receivable from brokers, dealers and clearing organizations
(35,124
)
 
(13,728
)
Receivable from customers
(168,196
)
 
(32,860
)
Income tax receivable
(1,113
)
 
1,014

Securities purchased under agreements to resell

 
(299
)
Securities owned
490,373

 
(73,884
)
Notes receivable
(4,349
)
 
(3,251
)
Other assets
49,744

 
(14,326
)
Increase (decrease) in operating liabilities:
 
 
 
Drafts payable
19,066

 
(2,815
)
Payable to brokers, dealers and clearing organizations
(281,392
)
 
345,126

Payable to customers
78,911

 
(2,240
)
Income taxes payable

 
1,162

Securities sold under agreements to repurchase
(163,162
)
 
(215,597
)
Securities sold but not yet purchased
(65,932
)
 
51,840

Accrued compensation
(101,513
)
 
(61,633
)
Accounts payable and other liabilities
(8,286
)
 
2,907

Cash (used in) provided by operating activities
(241,023
)
 
15,327

Cash flows from investing activities
 
 
 
Purchase of furniture, equipment and leasehold improvements
(1,326
)
 
(3,448
)
Cash used in investing activities
(1,326
)
 
(3,448
)
Cash flows from financing activities
 
 
 
Cash dividends paid on Class A non-voting and Class B voting common stock
(1,561
)
 
(1,432
)
Repurchase of Class A non-voting common stock for cancellation
(8,434
)
 
(2,035
)
Payments for employee taxes withheld related to vested share-based awards
(5,340
)
 
(1,014
)
Repurchase of senior secured notes
(1,426
)
 

Increase (decrease) in bank call loans, net
203,100

 
(15,000
)
Cash provided by (used in) financing activities
186,339

 
(19,481
)
Net decrease in cash and cash equivalents
(56,010
)
 
(7,602
)
Cash and cash equivalents, beginning of period
79,550

 
90,675

Cash and cash equivalents, end of period
$
23,540

 
$
83,073

 
 
 
 
Schedule of non-cash financing activities
 
 
 
Employee share plan issuance
$
10,032

 
$
1,706

 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
9,095

 
$
9,385

Cash paid during the period for income taxes, net
$
516

 
$
792

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


1.    Organization
Oppenheimer Holdings Inc. ("OPY" or the "Parent") is incorporated under the laws of the State of Delaware. The condensed consolidated financial statements include the accounts of OPY and its consolidated subsidiaries (together, the "Company", "we", "our" or "us"). The Company engages in a broad range of activities in the financial services industry, including retail securities brokerage, institutional sales and trading, market-making, research, investment banking (both corporate and public finance), investment advisory and asset management services and trust services.
The Company has 93 retail branch offices in the United States and has institutional businesses located in London, Tel Aviv, and Hong Kong. The principal subsidiaries of OPY are Oppenheimer & Co. Inc. ("Oppenheimer"), a registered broker-dealer in securities and investment adviser under the Investment Advisers Act of 1940; Oppenheimer Asset Management Inc. ("OAM") and its wholly-owned subsidiary, Oppenheimer Investment Management LLC, both registered investment advisers under the Investment Advisers Act of 1940; Oppenheimer Trust Company of Delaware ("Oppenheimer Trust"), a limited purpose trust company that provides fiduciary services such as trust and estate administration and investment management; OPY Credit Corp., which offers syndication as well as trading of issued corporate loans; Oppenheimer Europe Ltd., based in the United Kingdom, with offices in the Isle of Jersey, Germany and Switzerland, which provides institutional equities and fixed income brokerage and corporate finance and is regulated by the Financial Conduct Authority; and Oppenheimer Investments Asia Limited, based in Hong Kong, China, which provides fixed income and equities brokerage services to institutional investors and is regulated by the Securities and Futures Commission.
Oppenheimer owns Freedom Investments, Inc. ("Freedom"), a registered broker dealer in securities, which provides discount brokerage services, and Oppenheimer Israel (OPCO) Ltd., which is engaged in offering investment services in the State of Israel. Oppenheimer holds a trading permit on the New York Stock Exchange and is a member of several other regional exchanges in the United States.
2.    Summary of significant accounting policies and estimates
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America ("U.S. GAAP") for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 (the "Form 10-K"). The accompanying condensed consolidated balance sheet data was derived from the audited consolidated financial statements but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. Although these estimates are based on management's knowledge of current events and actions that the Company may undertake in the future, actual results may differ materially from the estimates. The condensed consolidated results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the results to be expected for any future interim or annual period.

On January 30, 2020, the spread of the novel coronavirus ("COVID-19") was declared a Public Health Emergency of International Concern by the World Health Organization ("WHO"). Subsequently, on March 11, 2020, the WHO characterized the COVID-19 outbreak as a pandemic. The United States now has the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported cases of infected individuals. Several states, including the State of New York, where we are headquartered, have declared states of emergency. The COVID-19 Pandemic coupled with the current market volatility has created an economic environment which may have significant accounting and financial reporting implications.




8


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)

The disruption of businesses around the globe due to COVID-19 may be a "trigger event" for companies to reassess valuation and accounting estimates and assumptions such as, impairment of goodwill, valuation allowances of deferred tax assets, fair value of investments and collectability of receivables. We have reviewed the assumptions on which we value our goodwill, as well as valuation allowances on certain assets and the collectability of our receivables as of March 31, 2020 none of which resulted in any impairment or write off.

On March 27, 2020, Congress approved and the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. CARES Act is a tax-and-spending package intend to provide economic relief to address the impact of the COVID-19 Pandemic. The Company is currently evaluating several significant business tax provisions, such as net operating losses and employee retention credits to determine the impact on the Company.

3.    Financial Instruments - Credit Losses

On January 1, 2020, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which replaces the incurred loss methodology with a current expected loss ("CECL") methodology. The Company elected the modified retrospective method which did not result in a cumulative-effect adjustment at the date of adoption.

The Company utilizes the practical expedient for securities borrowed and reverse repurchase agreements as these assets are secured by collateral when the amount of collateral is continually adjusted for fair value changes. No material historical losses have been reported on these assets. See footnote 8 for details.

As of March 31, 2020, the Company has $45.0 million of notes receivable. Notes receivable represents recruiting and retention payments generally in the form of upfront loans to financial advisers and key revenue producers as part of the Company's overall growth strategy. These notes generally amortize over a service period of 3 to 10 years from the initial date of the note or based on productivity levels of employees. All such notes are contingent on the employees' continued employment with the Company. The unforgiven portion of the notes becomes due on demand in the event the employee departs during the service period. At this point any uncollected portion of the notes gets reclassified into a defaulted notes category.

The allowance for uncollectibles is a valuation account that is deducted from the amortized cost basis of the defaulted notes balance to present the net amount expected to be collected. Balances are charged-off against the allowance when management deems the amount to be uncollectible.

The Company reserves 100% of the uncollected balance of defaulted notes which are five years and older and applies an expected loss rate to the remaining balance. The expected loss rate is based on historical collection rates of defaulted notes. The expected loss rate is adjusted for changes in environmental and market conditions such as changes in unemployment rates, changes in interest rates and other relevant factors. For the three months ended March 31, 2020 no adjustments were made to the expected loss rate for these factors. The Company will continuously monitor the effect of these factors on the expected loss rate and adjust it as necessary.

The allowance is measured on a collectible (pool) basis as the Company has determined that the entire defaulted portion of notes receivable has similar risk characteristics.

As of March 31, 2020, the uncollected balance of defaulted notes was $5.3 million and the allowance for uncollectibles was $3.9 million. The allowance for uncollectibles consisted of $2.9 million related to defaulted notes balances (five years and older) and $975,000 (under five years) using an expected loss rate of 40.9%.


9


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


The following table presents the disaggregation of defaulted notes by year of origination as of March 31, 2020:
(Expressed in thousands)
 
 
 
 
As of March 31, 2020
 
 
 
2020
 
$

2019
 
555

2018
 
186

2017
 
769

2016
 
875

2015 and prior
 
2,933

Total
 
$
5,318


The following table presents activity in the allowance for uncollectibles of defaulted notes for the three months ended March 31, 2020:
(Expressed in thousands)
 
 
 
Beginning balance, January 1, 2020 upon adoption of ASU 2016-13
$
3,673

       Additions
235

Ending balance, March 31, 2020
$
3,908


4.    Leases

In the first quarter of 2019, the Company adopted ASU 2016-02, "Leases". The ASU requires the recognition of a right-of-use asset and lease liability on the condensed consolidated balance sheet by lessees for those leases classified as operating leases under previous guidance. The Company elected the modified retrospective method which did not result in a cumulative-effect adjustment at the date of adoption.

The Company and its subsidiaries have operating leases for office space and equipment expiring at various dates through 2034. The Company leases its corporate headquarters at 85 Broad Street, New York, New York which houses its executive management team and many administrative functions for the firm as well as its research, trading, investment banking, and asset management divisions and an office in Troy, Michigan, which among other things, houses its payroll and human resources departments. In addition, the Company has 93 retail branch offices in the United States as well as offices in London, England, St. Helier, Isle of Jersey, Geneva, Switzerland, Frankfurt, Germany, Tel Aviv, Israel and Hong Kong, China.

The majority of the leases are held by the Company's subsidiary, Viner Finance Inc., which is a consolidated subsidiary and 100% owned by the Company.

Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Most leases include an option to renew and the exercise of lease renewal options is at our sole discretion. The Company did not include the renewal options as part of the right-of-use assets and liabilities.

The depreciable life of assets and leasehold improvements is limited by the expected lease term. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.


10


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


As of March 31, 2020, the Company had right-of-use operating lease assets of $156.0 million (net of accumulated amortization of $31.4 million) which are comprised of real estate leases of $152.9 million (net of accumulated amortization of $29.0 million) and equipment leases of $3.1 million (net of accumulated amortization of $2.4 million). As of March 31, 2020, the Company had operating lease liabilities of $197.7 million which are comprised of real estate lease liabilities of $194.6 million and equipment lease liabilities of $3.1 million. As of March 31, 2020, the Company had not made any cash payments for amounts included in the measurement of operating lease liabilities or right-of-use assets obtained in exchange for operating lease obligations. The Company had no finance leases or embedded leases as of March 31, 2020.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date. The Company used the incremental borrowing rate as of the lease commencement date for the operating leases commenced subsequent to January 1, 2019.

The following table presents the weighted average lease term and weighted average discount rate for our operating leases as of March 31, 2020 and December 31, 2019:
 
 
 
 
 
As of
 
March 31, 2020
 
December 31, 2019
 
 
 
 
Weighted average remaining lease term (in years)
8.16
 
8.31
Weighted average discount rate
7.85%
 
7.89%

The following table presents operating lease costs recognized for the three months ended March 31, 2020 and 2019 which are included in occupancy and equipment costs on the condensed consolidated income statement:    
(Expressed in thousands)
 
 
 


For the Three Months Ended
March 31,
 
2020
 
2019
Operating lease costs:
 
 
 
      Real estate leases - Right-of-use lease asset amortization
$
5,740

 
$
6,332

      Real estate leases - Interest expense
3,911

 
3,443

      Equipment leases - Right-of-use lease asset amortization
473

 
465

      Equipment leases - Interest expense
54

 
57

    











11


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


The maturities of lease liabilities as of March 31, 2020 and December 31, 2019 are as follows:    
(Expressed in thousands)
 
 
 
 
As of
 
March 31, 2020
 
December 31, 2019
 
 
 
 
2020
$
31,798

 
$
42,585

2021
38,115

 
37,531

2022
33,959

 
33,416

2023
31,424

 
31,187

2024
27,463

 
27,234

After 2025
108,112

 
108,098

Total lease payments
$
270,871

 
$
280,051

Less interest
(73,143
)
 
(76,911
)
Present value of lease liabilities
$
197,728

 
$
203,140


As of March 31, 2020, the Company had $11.2 million of additional operating leases that have not yet commenced ($11.1 million as of December 31, 2019).

5.    Revenue from contracts with customers
Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by transferring the promised goods or services to customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring the Company's progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for those promised goods or services (i.e., the "transaction price"). In determining the transaction price, the Company considers multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, the Company considers the range of possible outcomes, the predictive value of its past experiences, the time period when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of the Company's influence, such as market volatility or the judgment and actions of third parties.

The Company earns revenue from contracts with customers and other sources (principal transactions, interest and other). The following provides detailed information on the recognition of the Company's revenue from contracts with customers:
Commissions
Commissions from Sales and Trading — The Company earns commission revenue by executing, settling and clearing transactions with clients primarily in exchange-traded and over-the-counter corporate equity and debt securities, money market instruments and exchange-traded options and futures contracts. A substantial portion of Company's revenue is derived from commissions from private clients through accounts with transaction-based pricing. Trade execution and clearing services, when provided together, represent a single performance obligation as the services are not separately identifiable in the context of the contract. Commission revenue associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, is recognized at a point in time on trade date when the performance obligation is satisfied.


12


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


Commission revenue is generally paid on settlement date, which is generally two business days after trade date for equity securities and corporate bond transactions and one day for government securities, options, and commodities transactions. The Company records a receivable on the trade date and receives a payment on the settlement date.
Mutual Fund Income — The Company earns mutual fund income for sales and distribution of mutual fund shares. Many mutual fund companies pay distribution fees to intermediaries, such as broker-dealers, for selling their shares. The fees are operational expenses of the mutual fund and are included in its expense ratio. The Company recognizes mutual fund income at a point in time on trade date when the performance obligation is satisfied which is when the mutual fund interest is sold to the investor. Mutual fund income is generally received within 90 days.
Advisory Fees
The Company earns management and performance (or incentive) fees in connection with the advisory and asset management services it provides to various types of funds and investment vehicles through its subsidiaries. Management fees are generally based on the account value at the valuation date per the respective asset management agreements and are recognized over time as the customer receives the benefits of the services evenly throughout the term of the contract. Performance fees are recognized when the return on client AUM exceeds a specified benchmark return or other performance targets over a 12-month measurement period. Performance fees are considered variable as they are subject to fluctuation and/or are contingent on a future event over the measurement period and are not subject to adjustment once the measurement period ends. Such fees are computed as of the fund's year-end when the measurement period ends and generally are recorded as earned in the fourth quarter of the Company's fiscal year. Both management and performance fees are generally received within 90 days.
Investment Banking
The Company earns underwriting revenues by providing capital raising solutions for corporate clients through initial public offerings, follow-on offerings, equity-linked offerings, private investments in public entities, and private placements. Underwriting revenues are recognized at a point in time on trade date, as the client obtains the control and benefit of the capital markets offering at that point. These fees are generally received within 90 days after the transactions are completed. Transaction-related expenses, primarily consisting of legal, travel and other costs directly associated with the transaction, are deferred and recognized in the same period as the related investment banking transaction revenue. Underwriting revenues and related expenses are presented gross on the condensed consolidated income statements.
Revenue from financial advisory services includes fees generated in connection with mergers, acquisitions and restructuring transactions and such revenue and fees are primarily recorded at a point in time when services for the transactions are completed and income is reasonably determinable, generally as set forth under the terms of the engagement. Payment for advisory services is generally due upon completion of the transaction or milestone. Retainer fees and fees earned from certain advisory services are recognized ratably over the service period as the customers receive the benefit of the services throughout the term of the contracts, and such fees are collected based on the terms of the contracts.

Bank Deposit Sweep Income
Bank deposit sweep income consists of revenue earned from the FDIC-insured bank deposit program. Under this program, client funds are swept into deposit accounts at participating banks and are eligible for FDIC deposit insurance up to FDIC standard maximum deposit insurance amounts. Fees are earned over time and are generally received within 30 days.


13


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


Disaggregation of Revenue
The following presents the Company's revenue from contracts with customers disaggregated by major business activity and other sources of revenue for the three months ended March 31, 2020 and 2019:
(Expressed in thousands)
For the Three Months Ended March 31, 2020
 
Reportable Segments
 
Private Client
 
Asset Management
 
Capital Markets
 
Corporate/Other
 
Total
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
Commissions from sales and trading
$
47,105

 
$

 
$
46,287

 
$
20

 
$
93,412

Mutual fund income
9,827

 
3

 
3

 
4

 
9,837

Advisory fees
66,883

 
19,270

 
2

 
9

 
86,164

Investment banking - capital markets
3,950

 

 
11,942

 

 
15,892

Investment banking - advisory

 

 
9,836

 

 
9,836

Bank deposit sweep income
18,826

 

 

 

 
18,826

Other
3,131

 

 
640

 
101

 
3,872

Total revenue from contracts with customers
149,722

 
19,273

 
68,710

 
134

 
237,839

Other sources of revenue:
 
 
 
 
 
 
 
 
 
Interest
7,680

 

 
2,824

 
386

 
10,890

Principal transactions, net
(2,715
)
 

 
3,984

 
(2,137
)
 
(868
)
Other
(13,269
)
 
3

 
24

 
151

 
(13,091
)
Total other sources of revenue
(8,304
)
 
3

 
6,832

 
(1,600
)
 
(3,069
)
Total revenue
$
141,418

 
$
19,276

 
$
75,542

 
$
(1,466
)
 
$
234,770

(Expressed in thousands)
For the Three Months Ended March 31, 2019
 
Reportable Segments
 
Private Client
 
Asset Management
 
Capital Markets
 
Corporate/Other
 
Total
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
Commissions from sales and trading
$
37,477

 
$

 
$
32,316

 
$
2

 
$
69,795

Mutual fund income
9,614

 
(6
)
 
1

 
5

 
9,614

Advisory fees
57,044

 
16,589

 
5

 
9

 
73,647

Investment banking - capital markets
2,749

 

 
8,593

 

 
11,342

Investment banking - advisory

 

 
16,701

 

 
16,701

Bank deposit sweep income
33,968

 

 

 

 
33,968

Other
3,278

 

 
319

 
256

 
3,853

Total revenue from contracts with customers
144,130

 
16,583

 
57,935

 
272

 
218,920

Other sources of revenue:
 
 
 
 
 
 
 
 
 
Interest
9,408

 

 
2,835

 
484

 
12,727

Principal transactions, net
1,684

 

 
10,157

 
(403
)
 
11,438

Other
8,305

 
3

 
34

 
343

 
8,685

Total other sources of revenue
19,397

 
3

 
13,026

 
424

 
32,850

Total revenue
$
163,527

 
$
16,586

 
$
70,961

 
$
696

 
$
251,770



14


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


Contract Balances
The timing of the Company's revenue recognition may differ from the timing of payment by its customers. The Company records receivables when revenue is recognized prior to payment and it has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied.
The Company had receivables related to revenue from contracts with customers of $22.7 million and $28.9 million at March 31, 2020 and December 31, 2019, respectively. The Company had no significant impairments related to these receivables during the three months ended March 31, 2020.
Deferred revenue relates to IRA fees received annually in advance on customers' IRA accounts managed by the Company and the retainer fees and fees earned from certain advisory transactions where the performance obligations have not yet been satisfied. Total deferred revenue was $2.2 million and $408,000 at March 31, 2020 and December 31, 2019, respectively.
The following presents the Company's contract assets and deferred revenue balances from contracts with customers, which are included in other assets and other liabilities, respectively, on the condensed consolidated balance sheet:
(Expressed in thousands)
 
 
 
 
As of
 
March 31, 2020
 
December 31, 2019
Contract assets (receivables):
 
 
 
Commission (1)
$
4,298

 
$
2,824

Mutual fund income (2)
6,736

 
6,746

Advisory fees (3)
1,080

 
1,594

Bank deposit sweep income (4)
1,610

 
3,454

Investment banking fees (5)
4,392

 
9,284

  Other
4,560

 
4,986

Total contract assets
$
22,676

 
$
28,888

Deferred revenue (payables):
 
 
 
Investment banking fees (6)
$
289

 
$
408

IRA fees (7)
1,906

 

Total deferred revenue
$
2,195

 
$
408

(1)
Commission recorded on trade date but not yet settled.
(2)
Mutual fund income earned but not yet received.
(3)
Management and performance fees earned but not yet received.
(4)
Fees earned from FDIC-insured bank deposit program but not yet received.
(5)
Underwriting revenue and advisory fees earned but not yet received.
(6)
Retainer fees and fees earned from certain advisory transactions where the performance obligations have not yet been satisfied.
(7)
Fee received in advance on an annual basis.



15


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


6.    Earnings per share
Basic earnings per share is computed by dividing net income attributable to Oppenheimer Holdings Inc. by the weighted average number of shares of Class A non-voting common stock ("Class A Stock") and Class B voting common stock ("Class B Stock") outstanding. Diluted earnings per share includes the weighted average number of shares of Class A Stock and Class B Stock outstanding and options to purchase Class A Stock and unvested restricted stock awards of Class A Stock using the treasury stock method.
Earnings per share have been calculated as follows:
(Expressed in thousands, except number of shares and per share amounts)
 
 
 
 
For the Three Months Ended
March 31,
 
2020
 
2019
Basic weighted average number of shares outstanding
12,895,729

 
13,020,344

Net dilutive effect of share-based awards, treasury method (1)
560,504

 
830,977

Diluted weighted average number of shares outstanding
13,456,233

 
13,851,321

 
 
 
 
Net income
$
7,818

 
$
11,194

 
 
 
 
Net income per share
 
 
 
       Basic
$
0.61

 
$
0.86

       Diluted
$
0.58

 
$
0.81

(1) For the three months ended March 31, 2020, the diluted net income per share computation does not
include the anti-dilutive effect of 10,770 shares of Class A Stock granted under share-based compensation
arrangements (7,628 shares for the three months ended March 31, 2019).

7.    Receivable from and payable to brokers, dealers and clearing organizations
(Expressed in thousands)
 
 
 
 
As of
 
March 31, 2020
 
December 31, 2019
Receivable from brokers, dealers and clearing organizations consists of:
 
 
 
Securities borrowed
$
102,844

 
$
99,635

Receivable from brokers
37,588

 
19,024

Securities failed to deliver
26,694

 
7,173

Clearing organizations
28,463

 
36,269

Other
2,828

 
1,192

Total
$
198,417

 
$
163,293

Payable to brokers, dealers and clearing organizations consists of:
 
 
 
Securities loaned
$
181,745

 
$
234,343

Payable to brokers
5,079

 
4,548

Securities failed to receive
45,593

 
14,603

Other
7,166

 
267,481

Total
$
239,583

 
$
520,975

 


16


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


8.    Fair value measurements
Securities owned, securities sold but not yet purchased, investments and derivative contracts are carried at fair value with changes in fair value recognized in earnings each period.
Valuation Techniques
A description of the valuation techniques applied, and inputs used in measuring the fair value of the Company's financial instruments is as follows:
U.S. Government Obligations
U.S. Treasury securities are valued using quoted market prices obtained from active market makers and inter-dealer brokers.
U.S. Agency Obligations
U.S. agency securities consist of agency issued debt securities and mortgage pass-through securities. Non-callable agency issued debt securities are generally valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. The fair value of mortgage pass-through securities are model driven with respect to spreads of the comparable to-be-announced ("TBA") security.
Sovereign Obligations
The fair value of sovereign obligations is determined based on quoted market prices when available or a valuation model that generally utilizes interest rate yield curves and credit spreads as inputs.
Corporate Debt and Other Obligations
The fair value of corporate bonds is estimated using recent transactions, broker quotations and bond spread information.
Mortgage and Other Asset-Backed Securities
The Company values non-agency securities collateralized by home equity and various other types of collateral based on external pricing and spread data provided by independent pricing services. When specific external pricing is not observable, the valuation is based on yields and spreads for comparable bonds.
Municipal Obligations
The fair value of municipal obligations is estimated using recently executed transactions, broker quotations, and bond spread information.
Convertible Bonds
The fair value of convertible bonds is estimated using recently executed transactions and dollar-neutral price quotations, where observable. When observable price quotations are not available, fair value is determined based on cash flow models using yield curves and bond spreads as key inputs.
Corporate Equities
Equity securities and options are generally valued based on quoted prices from the exchange or market where traded. To the extent quoted prices are not available, fair values are generally derived using bid/ask spreads.

17


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


Auction Rate Securities ("ARS")
Background
In February 2010, Oppenheimer finalized settlements with each of the New York Attorney General's office ("NYAG") and the Massachusetts Securities Division ("MSD") and, together (the "Regulators") concluding proceedings by the Regulators concerning Oppenheimer's marketing and sale of ARS. Pursuant to the settlements with the Regulators, Oppenheimer agreed to extend offers to repurchase ARS from certain of its clients. Over the last ten years, the Company has bought back $140.2 million of ARS pursuant to these settlements. These buybacks coupled with ARS issuer redemptions and tender offers have significantly reduced the level of ARS held by Eligible Investors. As of March 31, 2020, the Company had $2.3 million of ARS to purchase from Eligible Investors related to the settlements with the Regulators. In addition to the settlements with the Regulators, Oppenheimer has also reached settlements of and received adverse awards in legal proceedings with various clients where the Company is obligated to purchase ARS. Over the last ten years, the Company has purchased $102.3 million of ARS pursuant to these legal settlements and awards. As of March 31, 2020, the Company had one remaining commitment to purchase $3.7 million in ARS by July 2020.
As of March 31, 2020, the Company owned $26.3 million of ARS. This amount represents the unredeemed or unsold amount that the Company holds as a result of ARS buybacks pursuant to the settlements with the Regulators and legal settlements and awards referred to above.
Valuation
The Company’s ARS owned and ARS purchase commitments referred to above have, for the most part, been subject to recent issuer tender offers. As a result, the Company has valued the ARS securities owned and the ARS purchase commitments at the observable tender offer price which provides the basis to categorize them in Level 2 of the fair value hierarchy. The ARS purchase commitments related to the settlements with the Regulators and legal settlements and awards are considered derivative assets or liabilities. The ARS purchase commitments represent the difference between the principal value and the fair value of the ARS the Company is committed to purchase.
As of March 31, 2020, the Company had a valuation adjustment (unrealized loss) totaling $5.1 million which consists of $4.2 million for ARS owned (which is included as a reduction to securities owned on the condensed consolidated balance sheet) and $887,000 for ARS purchase commitments from legal settlements and awards and settlements with regulators (which is included in accounts payable and other liabilities on the condensed consolidated balance sheet).
Investments
In its role as general partner in certain hedge funds and private equity funds, the Company, through its subsidiaries, holds direct investments in such funds. The Company uses the net asset value of the underlying fund as a basis for estimating the fair value of its investment.
The following table provides information about the Company's investments in Company-sponsored funds as of March 31, 2020:
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value
 
Unfunded
Commitments
 
Redemption
Frequency
 
Redemption
Notice Period
Hedge funds (1)
$
1,164

 
$

 
Quarterly - Annually
 
30 - 120 Days
Private equity funds (2)
3,815

 
1,399

 
N/A
 
N/A
 
$
4,979

 
$
1,399

 
 
 
 
(1)
Includes investments in hedge funds and hedge fund of funds that pursue long/short, event-driven, and activist strategies.
(2)
Includes private equity funds and private equity fund of funds with a focus on diversified portfolios, real estate and global natural resources.


18


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


Assets and Liabilities Measured at Fair Value
The Company's assets and liabilities, recorded at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, have been categorized based upon the above fair value hierarchy as follows:
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2020:
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value Measurements as of March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Deposits with clearing organizations
$
36,593

 
$

 
$

 
$
36,593

Securities owned:
 
 
 
 
 
 
 
U.S. Treasury securities
156,304

 

 

 
156,304

U.S. Agency securities
2,642

 
9,854

 


 
12,496

Sovereign obligations

 
1,776

 

 
1,776

Corporate debt and other obligations

 
16,463

 

 
16,463

Mortgage and other asset-backed securities

 
2,243

 

 
2,243

Municipal obligations

 
45,448

 

 
45,448

Convertible bonds

 
21,781

 

 
21,781

Corporate equities
25,582

 

 

 
25,582

Money markets
917

 

 

 
917

Auction rate securities

 
26,336

 

 
26,336

Securities owned, at fair value
185,445

 
123,901

 

 
309,346

Derivative contracts:
 
 
 
 
 
 
 
TBAs

 
638

 

 
638

Total
$
222,038

 
$
124,539

 
$

 
$
346,577

Liabilities
 
 
 
 
 
 
 
Securities sold but not yet purchased:
 
 
 
 
 
 
 
U.S. Treasury securities
$
10,679

 
$

 
$

 
$
10,679

U.S. Agency securities

 
8

 

 
8

Sovereign obligations

 
1,389

 

 
1,389

Corporate debt and other obligations

 
5,131

 

 
5,131

Convertible bonds

 
3,880

 

 
3,880

Corporate equities
13,552

 

 

 
13,552

Securities sold but not yet purchased, at fair value
24,231

 
10,408

 

 
34,639

Derivative contracts:
 
 
 
 
 
 
 
Futures
1,161

 

 

 
1,161

Foreign exchange forward contracts
31

 

 

 
31

TBAs

 
643

 

 
643

ARS purchase commitments

 
887

 

 
887

Derivative contracts, total
1,192

 
1,530

 

 
2,722

Total
$
25,423

 
$
11,938

 
$

 
$
37,361

 
    




19


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


Assets and liabilities measured at fair value on a recurring basis as of December 31, 2019:
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value Measurements as of December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Deposits with clearing organizations
$
25,118

 
$

 
$

 
$
25,118

Securities owned:
 
 
 
 
 
 
 
U.S. Treasury securities
613,030

 

 

 
613,030

U.S. Agency securities
19,917

 
15,974

 

 
35,891

Sovereign obligations

 
11,405

 

 
11,405

Corporate debt and other obligations

 
8,310

 

 
8,310

Mortgage and other asset-backed securities

 
2,697

 

 
2,697

Municipal obligations

 
40,260

 

 
40,260

Convertible bonds

 
29,816

 

 
29,816

Corporate equities
32,215

 

 

 
32,215

Money markets
781

 

 

 
781

Auction rate securities

 
25,314

 

 
25,314

Securities owned, at fair value
665,943

 
133,776

 

 
799,719

Total
$
691,061

 
$
133,776

 
$

 
$
824,837

Liabilities
 
 
 
 
 
 
 
Securities sold but not yet purchased:
 
 
 
 
 
 
 
U.S. Treasury securities
$
52,882

 
$

 
$

 
$
52,882

U.S. Agency securities

 
18

 

 
18

Sovereign obligations

 
6,405

 

 
6,405

Corporate debt and other obligations

 
664

 

 
664

Convertible bonds

 

 

 

Corporate equities
21,978

 

 

 
21,978

Securities sold but not yet purchased, at fair value
74,860

 
25,711

 

 
100,571

Derivative contracts:
 
 
 
 
 
 
 
Futures
267

 

 

 
267

Foreign exchange forward contracts

 

 

 

TBAs

 
124

 

 
124

ARS purchase commitments

 
1,023

 

 
1,023

Derivative contracts, total
267

 
1,147

 

 
1,414

Total
$
75,127

 
$
26,858

 
$

 
$
101,985

 
    
For the three months ended March 31, 2020, there were no balances or changes in Level 3 assets and liabilities.

Financial Instruments Not Measured at Fair Value
The table below presents the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value on the condensed consolidated balance sheets. The table below excludes non-financial assets and liabilities (e.g., right-of-use lease assets, lease liabilities, furniture, equipment and leasehold improvements and accrued compensation).
The carrying value of financial instruments not measured at fair value categorized in the fair value hierarchy as Level 1 or Level 2 approximates fair value because of the relatively short-term nature of the underlying assets. The fair value of the Company's senior secured notes, categorized in Level 2 of the fair value hierarchy, is based on quoted prices from the market in which the notes trade.

20


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


Assets and liabilities not measured at fair value as of March 31, 2020:
(Expressed in thousands)
 
 
Fair Value Measurement: Assets
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
23,540

 
$
23,540

 
$

 
$

 
$
23,540

Deposits with clearing organization
82,987

 
82,987

 

 

 
82,987

Receivable from brokers, dealers and clearing organizations:
 
 
 
 
 
 
 
 
 
Securities borrowed
102,844

 

 
102,844

 

 
102,844

Receivables from brokers
37,588

 

 
37,588

 

 
37,588

Securities failed to deliver
26,694

 

 
26,694

 

 
26,694

Clearing organizations
28,463

 

 
28,463

 

 
28,463

Other
2,833

 

 
2,833

 

 
2,833

 
198,422

 

 
198,422

 

 
198,422

Receivable from customers
964,772

 

 
964,772

 

 
964,772

Notes receivable, net
44,960

 

 
44,960

 

 
44,960

Investments (1)
60,631

 

 
60,631

 

 
60,631

 
(1) Included in other assets on the condensed consolidated balance sheet.
(Expressed in thousands)
 
 
Fair Value Measurement: Liabilities
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Drafts payable
$
19,066

 
$
19,066

 
$

 
$

 
$
19,066

Bank call loans
203,100

 

 
203,100

 

 
203,100

Payables to brokers, dealers and clearing organizations:
 
 
 
 
 
 
 
 
 
Securities loaned
181,745

 

 
181,745

 

 
181,745

Payable to brokers
5,079

 

 
5,079

 

 
5,079

Securities failed to receive
45,593

 

 
45,593

 

 
45,593

Other
6,005

 

 
6,005

 

 
6,005

 
238,422

 

 
238,422

 

 
238,422

Payables to customers
413,646

 

 
413,646

 

 
413,646

Securities sold under agreements to repurchase
124,103

 

 
124,103

 

 
124,103

Senior secured notes
148,574

 

 
140,624

 

 
140,624

 

21


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


Assets and liabilities not measured at fair value as of December 31, 2019:
(Expressed in thousands)
 
 
Fair Value Measurement: Assets
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
79,550

 
$
79,550

 
$

 
$

 
$
79,550

Deposits with clearing organization
23,297

 
23,297

 

 

 
23,297

Receivable from brokers, dealers and clearing organizations:
 
 
 
 
 
 
 
 
 
Securities borrowed
99,635

 

 
99,635

 

 
99,635

Receivables from brokers
19,024

 

 
19,024

 

 
19,024

Securities failed to deliver
7,173

 

 
7,173

 

 
7,173

Clearing organizations
36,269

 

 
36,269

 

 
36,269

Other
1,316

 

 
1,316

 

 
1,316

 
163,417

 

 
163,417

 

 
163,417

Receivable from customers
796,934

 

 
796,934

 

 
796,934

Notes receivable, net
43,670

 

 
43,670

 

 
43,670

Investments (1)
73,971

 

 
73,971

 

 
73,971

 
(1) Included in other assets on the condensed consolidated balance sheet.
(Expressed in thousands)
 
 
Fair Value Measurement: Liabilities
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Payables to brokers, dealers and clearing organizations:
 
 
 
 
 
 
 
 
 
Securities loaned
$
234,343

 
$

 
$
234,343

 
$

 
$
234,343

Payable to brokers
4,548

 

 
4,548

 

 
4,548

Securities failed to receive
14,603

 

 
14,603

 

 
14,603

Other
267,214

 

 
267,214

 

 
267,214

 
520,708

 

 
520,708

 

 
520,708

Payables to customers
334,735

 

 
334,735

 

 
334,735

Securities sold under agreements to repurchase
287,265

 

 
287,265

 

 
287,265

Senior secured notes
150,000

 

 
154,988

 

 
154,988

Fair Value Option
The Company elected the fair value option for securities sold under agreements to repurchase ("repurchase agreements") and securities purchased under agreements to resell ("reverse repurchase agreements") that do not settle overnight or have an open settlement date. The Company has elected the fair value option for these instruments to reflect more accurately market and economic events in its earnings and to mitigate a potential mismatch in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. As of March 31, 2020, the Company did not have any repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date.
Derivative Instruments and Hedging Activities
The Company transacts, on a limited basis, in exchange traded and over-the-counter derivatives for both asset and liability management as well as for trading and investment purposes. Risks managed using derivative instruments include interest rate risk and, to a lesser extent, foreign exchange risk. All derivative instruments are measured at fair value and are recognized as either assets or liabilities on the condensed consolidated balance sheet.

22


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


Foreign exchange hedges
From time to time, the Company also utilizes forward and options contracts to hedge the foreign currency risk associated with compensation obligations to Oppenheimer Israel (OPCO) Ltd. employees denominated in New Israeli Shekel ("NIS"). Such hedges have not been designated as accounting hedges. Unrealized gains and losses on foreign exchange forward contracts are recorded in other assets on the condensed consolidated balance sheet and other income in the condensed consolidated statement of income.
Derivatives used for trading and investment purposes
Futures contracts represent commitments to purchase or sell securities or other commodities at a future date and at a specified price. Market risk exists with respect to these instruments. Notional or contractual amounts are used to express the volume of these transactions and do not represent the amounts potentially subject to market risk. The Company uses futures contracts, including U.S. Treasury notes, Federal Funds, General Collateral futures and Eurodollar contracts primarily as an economic hedge of interest rate risk associated with government trading activities. Unrealized gains and losses on futures contracts are recorded on the condensed consolidated balance sheet in payable to brokers, dealers and clearing organizations and in the condensed consolidated statement of income as principal transactions revenue, net.
To-be-announced securities
The Company also transacts in pass-through mortgage-backed securities eligible to be sold in the TBA market as economic hedges against mortgage-backed securities that it owns or has sold but not yet purchased. TBAs provide for the forward or delayed delivery of the underlying instrument with settlement up to 180 days. The contractual or notional amounts related to these financial instruments reflect the volume of activity and do not reflect the amounts at risk. Net unrealized gains and losses on TBAs are recorded on the condensed consolidated balance sheet in receivable from brokers, dealers and clearing organizations or payable to brokers, dealers and clearing organizations and in the condensed consolidated statement of income as principal transactions revenue, net.

The notional amounts and fair values of the Company's derivatives as of March 31, 2020 and December 31, 2019 by product were as follows:
(Expressed in thousands)
 
 
 
 
 
 
Fair Value of Derivative Instruments as of March 31, 2020
 
Description
 
Notional
 
Fair Value
Assets:
 
 
 
 
 
Derivatives not designated as hedging instruments (1)
 
 
 
 
 
Other contracts
TBAs
 
$
18,900

 
$
638

 
 
 
$
18,900

 
$
638

Liabilities:
 
 
 
 
 
Derivatives not designated as hedging instruments (1)
 
 
 
 
 
Commodity contracts
Futures
 
$
1,555,000

 
$
1,161

Other contracts
Foreign exchange forward contracts
 
800

 
31

       Other contracts
TBAs
 
18,900

 
643

 
ARS purchase commitments
 
6,074

 
887

 
 
 
$
1,580,774

 
$
2,722

 
(1)
See "Derivative Instruments and Hedging Activities" above for description of derivative financial instruments. Such derivative instruments are not subject to master netting agreements, thus the
related amounts are not offset.




23


OPPENHEIMER HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (unaudited)


(Expressed in thousands)
 
 
 
 
 
 
Fair Value of Derivative Instruments as of December 31, 2019
 
Description
 
Notional
 
Fair Value
Liabilities:
 
 
 
 
 
Derivatives not designated as hedging instruments (1)
 
 

 

Commodity contracts
Futures
 
$
5,209,000

 
$
267

       Other contracts
TBAs
 
13,245

 
124

 
ARS purchase commitments
 
7,128

 
1,023

 
 
 
$
5,229,373

 
$
1,414

(1)
See "Derivative Instruments and Hedging Activities" above for a description of derivative financial instruments. Such derivative instruments are not subject to master netting agreements,
thus the related amounts are not offset.
The following table presents the location and fair value amounts of the Company's derivative instruments and their effect in the condensed consolidated statements of income for the three months ended March 31, 2020 and 2019:
(Expressed in thousands)