10-Q 1 d507526d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended March 31, 2013

or

 

¨ 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   (I.R.S. Employer
incorporation or organization)   Identification No.)

85 Broad Street

New York, New York 10004

(Address of principal executive offices) (Zip Code)

(212) 668-8000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes  ¨    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 April 30, 2013 was 13,508,318 and 99,680 shares, respectively.

 

 

 


Table of Contents

OPPENHEIMER HOLDINGS INC.

INDEX

 

          Page
No.
 
PART I   

FINANCIAL INFORMATION

  
Item 1.   

Financial Statements (unaudited)

  
  

Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012

     2   
  

Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012

     4   
  

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2012

     5   
  

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012

     6   
  

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2013 and 2012

     8   
  

Notes to Condensed Consolidated Financial Statements

     9   
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     45   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     60   
Item 4.   

Controls and Procedures

     60   
PART II           

OTHER INFORMATION

  
Item 1.   

Legal Proceedings

     61   
Item 1A.   

Risk Factors

     68   
Item 6.   

Exhibits

     68   
  

Signatures

     69   


Table of Contents

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 

     March 31,      December 31,  
(Expressed in thousands of dollars)    2013      2012  

ASSETS

     

Cash and cash equivalents

   $ 98,778       $ 135,366   

Cash and securities segregated for regulatory and other purposes

     37,164         33,000   

Deposits with clearing organizations

     24,576         25,954   

Receivable from brokers and clearing organizations

     290,955         479,699   

Receivable from customers, net of allowance for credit losses of $2,239 ($2,256 in 2012)

     881,514         817,941   

Income tax receivable

     13,980         451   

Securities owned, including amounts pledged of $391,900 ($569,995 in 2012), at fair value

     848,329         759,742   

Notes receivable, net

     45,030         47,324   

Office facilities, net

     30,938         28,332   

Deferred tax assets, net

     1,780         16,340   

Intangible assets, net

     31,700         31,700   

Goodwill

     137,889         137,889   

Other assets

     186,534         164,282   
  

 

 

    

 

 

 
   $ 2,629,167       $ 2,678,020   
  

 

 

    

 

 

 

 

(Continued on next page)

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

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 

     March 31,      December 31,  
(Expressed in thousands of dollars)    2013      2012  

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Liabilities

     

Drafts payable

   $ 44,927       $ 56,586   

Bank call loans

     204,000         128,300   

Payable to brokers and clearing organizations

     215,612         204,218   

Payable to customers

     607,034         692,378   

Securities sold under agreements to repurchase

     544,136         392,391   

Securities sold, but not yet purchased, at fair value

     63,046         173,450   

Accrued compensation

     97,887         150,434   

Accounts payable and other liabilities

     148,617         180,262   

Senior secured notes

     195,000         195,000   
  

 

 

    

 

 

 
   $ 2,120,259       $ 2,173,019   
  

 

 

    

 

 

 

Stockholders’ equity

     

Share capital

     

Class A non-voting common stock (13,508,318 shares issued and outstanding)

     62,048         62,048   

Class B voting common stock (99,680 shares issued and outstanding)

     133         133   
  

 

 

    

 

 

 
     62,181         62,181   

Contributed capital

     40,291         39,231   

Retained earnings

     401,287         399,121   

Accumulated other comprehensive income

     658         207   
  

 

 

    

 

 

 

Total Oppenheimer Holdings Inc. stockholders’ equity

     504,417         500,740   

Non-controlling interest

     4,491         4,261   
  

 

 

    

 

 

 
     508,908         505,001   
  

 

 

    

 

 

 
   $ 2,629,167       $ 2,678,020   
  

 

 

    

 

 

 

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

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 

     Three Months Ended  
(Expressed in thousands of dollars, except share and per share amounts)    March 31, 2013      March 31, 2012  

REVENUE

     

Commissions

   $ 119,580       $ 125,634   

Principal transactions, net

     15,717         12,555   

Interest

     12,371         13,393   

Investment banking

     18,448         20,087   

Advisory fees

     56,720         50,077   

Other

     16,310         16,468   
  

 

 

    

 

 

 
     239,146         238,214   
  

 

 

    

 

 

 

EXPENSES

     

Compensation and related expenses

     159,209         158,651   

Clearing and exchange fees

     6,042         6,031   

Communications and technology

     15,864         16,138   

Occupancy and equipment costs

     17,565         24,344   

Interest

     6,862         8,792   

Other

     26,891         30,747   
  

 

 

    

 

 

 
     232,433         244,703   
  

 

 

    

 

 

 

Income (loss) before income taxes

     6,713         (6,489

Income tax provision (benefit)

     2,820         (2,606
  

 

 

    

 

 

 

Net income (loss) for the period

     3,893         (3,883

Less net income attributable to non-controlling interest, net of tax

     230         774   
  

 

 

    

 

 

 

Net income (loss) attributable to Oppenheimer Holdings Inc.

   $ 3,663       $ (4,657
  

 

 

    

 

 

 

Earnings (loss) per share attributable to Oppenheimer Holdings Inc.

     

Basic

   $ 0.27       $ (0.34

Diluted

   $ 0.26       $ (0.34

Weighted average shares

     

Basic

     13,607,998         13,597,330   

Diluted

     14,028,715         13,597,330   

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

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

FOR THE THREE MONTHS ENDED MARCH 31,

 

(Expressed in thousands of dollars)    2013      2012  

Net income (loss) for the period

   $ 3,893       $ (3,883

Other comprehensive income (loss) Currency translation adjustment

     451         (366
  

 

 

    

 

 

 

Comprehensive income (loss) for the period

   $ 4,344       $ (4,249
  

 

 

    

 

 

 

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

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE THREE MONTHS ENDED MARCH 31,

 

(Expressed in thousands of dollars)    2013     2012  

Cash flows from operating activities

    

Net income (loss) for the period

   $ 3,893      $ (3,883

Adjustments to reconcile net income (loss) to net cash provided by operating activities

    

Non-cash items included in net income (loss):

    

Depreciation and amortization of office facilities and leasehold improvements

     2,514        2,845   

Deferred income taxes

     14,560        (6,666

Amortization of notes receivable

     4,739        4,870   

Amortization of debt issuance costs

     160        99   

Amortization of intangible assets

     —          3,212   

Provision for (reversal of) credit losses

     (17     178   

Share-based compensation

     1,879        1,259   

Decrease (increase) in operating assets:

    

Cash and securities segregated for regulatory and other purposes

     (4,164     (2,283

Deposits with clearing organizations

     1,378        (20,321

Receivable from brokers and clearing organizations

     188,744        (53,117

Receivable from customers

     (63,556     (34,376

Income tax receivable

     (13,529     4,016   

Securities purchased under agreements to resell

     —          847,199   

Securities owned

     (88,587     (21,883

Notes receivable

     (2,445     (4,412

Other assets

     (21,961     72,769   

Increase (decrease) in operating liabilities:

    

Drafts payable

     (11,659     (10,656

Payable to brokers and clearing organizations

     11,394        38,458   

Payable to customers

     (85,344     63,897   

Securities sold under agreements to repurchase

     151,745        (860,700

Securities sold, but not yet purchased

     (110,404     20,993   

Accrued compensation

     (53,366     (51,436

Accounts payable and other liabilities

     (31,645     (30,965
  

 

 

   

 

 

 

Cash used in operating activities

     (105,671     (40,903
  

 

 

   

 

 

 

 

(Continued on next page)

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

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE THREE MONTHS ENDED MARCH 31,

 

(Expressed in thousands of dollars)    2013     2012  

Cash flows from investing activities

    

Purchase of office facilities

   $ (5,120   $ (4,711
  

 

 

   

 

 

 

Cash used in investing activities

     (5,120     (4,711
  

 

 

   

 

 

 

Cash flows from financing activities

    

Cash dividends paid on Class A non-voting and Class B voting common stock

     (1,497     (1,495

Repurchase of Class A non-voting common stock for cancellation

     —          (1,551

Tax benefit from share-based awards

     —          41   

Increase in bank call loans, net

     75,700        65,100   
  

 

 

   

 

 

 

Cash provided by financing activities

     74,203        62,095   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (36,588     16,481   

Cash and cash equivalents, beginning of period

     135,366        70,329   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 98,778      $ 86,810   
  

 

 

   

 

 

 

Schedule of non-cash financing activities

    

Employee share plan issuance

   $ —        $ 224   

Supplemental disclosure of cash flow information

    

Cash paid during the period for interest

   $ 2,171      $ 4,038   

Cash paid (refunded) during the period for income taxes

   $ 1,725      $ (20

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

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

FOR THE THREE MONTHS ENDED MARCH 31,

 

(Expressed in thousands of dollars)    2013     2012  

Share capital

    

Balance at beginning of period

   $ 62,181      $ 62,726   

Issuance of Class a non-voting common stock

     —          224   

Repurchase of Class A non-voting common stock for cancellation

     —          (1,551
  

 

 

   

 

 

 

Balance at end of period

   $ 62,181      $ 61,399   
  

 

 

   

 

 

 

Contributed capital

    

Balance at beginning of period

   $ 39,231      $ 36,832   

Tax benefit from share-based awards

     —          41   

Share-based expense

     1,060        974   

Vested employee share plan awards

     —          (180
  

 

 

   

 

 

 

Balance at end of period

   $ 40,291      $ 37,667   
  

 

 

   

 

 

 

Retained earnings

    

Balance at beginning of period

   $ 399,121      $ 408,720   

Net income (loss) attributable to Oppenheimer Holdings Inc.

     3,663        (4,657

Dividends paid ($0.11 per share)

     (1,497     (1,495
  

 

 

   

 

 

 

Balance at end of period

   $ 401,287      $ 402,568   
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

    

Balance at beginning of period

   $ 207      $ (208

Currency translation adjustment

     451        (366
  

 

 

   

 

 

 

Balance at end of period

   $ 658      $ (574
  

 

 

   

 

 

 

Stockholders’ equity of Oppenheimer Holdings Inc.

   $ 504,417      $ 501,060   

Non-controlling interest

    

Balance at beginning of period

   $ 4,261      $ 5,333   

Net income attributable to non-controlling interest, net of tax

     230        774   
  

 

 

   

 

 

 

Balance at end of period

   $ 4,491      $ 6,107   
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 508,908      $ 507,167   
  

 

 

   

 

 

 

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

 

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OPPENHEIMER HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation

Oppenheimer Holdings Inc. (“OPY”) is incorporated under the laws of the State of Delaware. The condensed consolidated financial statements include the accounts of OPY and its subsidiaries (together, the “Company”). The principal subsidiaries of OPY are Oppenheimer & Co. Inc. (“Oppenheimer”), a registered broker dealer in securities, Oppenheimer Asset Management Inc. (“OAM”) and its wholly owned subsidiary, Oppenheimer Investment Management Inc. (“OIM”), both registered investment advisors under the Investment Advisors Act of 1940, Oppenheimer Trust Company (“Oppenheimer Trust”), a limited purpose trust company chartered by the State of New Jersey to provide fiduciary services such as trust and estate administration and investment management, Oppenheimer Multifamily Housing and Healthcare Finance, Inc. (“OMHHF”), which is engaged in mortgage brokerage and servicing, and OPY Credit Corp., which offers syndication as well as trading of issued corporate loans. Oppenheimer Europe Ltd., based in the United Kingdom, with an office in the Isle of Jersey, provides institutional equities and fixed income brokerage and corporate financial services and is regulated by the Financial Conduct Authority. Oppenheimer Investments Asia Limited, based in Hong Kong, China, provides assistance in accessing the U.S. equities markets and limited mergers and acquisitions advisory services to Asia-based companies.

Oppenheimer provides its services from 94 offices in 26 states located throughout the United States and in 6 foreign jurisdictions. Oppenheimer owns Freedom Investments, Inc. (“Freedom”), a registered broker dealer in securities, which also operates as the BUYandHOLD division of Freedom, offering on-line discount brokerage and dollar-based investing services, and Oppenheimer Israel (OPCO) Ltd., which is engaged in offering investment services in the State of Israel. Freedom has been approved to operate as a representative office in Beijing, China. Oppenheimer holds a trading permit on the New York Stock Exchange and is a member of several other regional exchanges in the United States.

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, 2012 (the “Form 10-K”). The accompanying December 31, 2012 condensed consolidated statement of balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes and reflects 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 consolidated results of operations for the three month period ended March 31, 2013 is not necessarily indicative of the results to be expected for any future interim or annual period.

Accounting standards require the Company to present non-controlling interests as a separate component of stockholders’ equity on the Company’s condensed consolidated balance sheet. On September 28, 2012, the Company purchased additional shares of OMHHF for $3 million, representing 16.32% of OMHHF. As of March 31, 2013, the Company owned 83.68% of OMHHF and the non-controlling interest recorded in the condensed consolidated balance sheet was $4.5 million.

 

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2. New accounting pronouncements

Recently Adopted

On July 27, 2012, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” which gives entities the option of performing a qualitative assessment before the quantitative analysis. If entities determine the fair value of a reporting unit is more likely than not less than the carrying amount, the impairment needs to be assessed. The ASU is effective for fiscal years beginning after September 15, 2012 and early adoption is permitted. The Company evaluated this ASU and decided to continue to perform quantitative analysis for indefinite-lived intangible assets impairment.

On December 31, 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities”, which requires new disclosures about balance sheet offsetting and related arrangements. For derivatives and financial assets and liabilities, the ASU requires disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. In January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities”. The ASU clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU No. 2011-11. The ASU limits the scope of the new balance sheet offsetting disclosures in ASU No. 2011-11 to derivatives, repurchase agreements, and securities lending transactions. The effective date of the ASU coincides with the effective date of the disclosure requirements in ASU No. 2011-11. The Company adopted this guidance in the period ended March 31, 2013. See Note 5, Financial Instruments.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The Company adopted this guidance in the period ended March 31, 2013.

3. Earnings per share

Basic earnings per share was 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”) Stock outstanding. Diluted earnings per share includes the weighted average number of shares of Class A and Class B Stock outstanding and the effects of the warrants using the treasury method and options to purchase the Class A Stock and restricted stock awards of Class A Stock using the treasury stock method.

 

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Earnings per share has been calculated as follows:

 

    Three months ended March 31,  
(expressed in thousands of dollars, except share and per share amounts)   2013     2012  

Basic weighted average number of shares outstanding

    13,607,998        13,597,330   

Net dilutive effect of warrant, treasury method (1)

    —          —     

Net dilutive effect of share-based awards, treasury method (2)

    420,717        —     
 

 

 

   

 

 

 

Diluted weighted average number of shares outstanding

    14,028,715        13,597,330   
 

 

 

   

 

 

 

Net income (loss) for the period

  $ 3,893      $ (3,883

Net income attributable to non-controlling interest, net of tax

    230        774   
 

 

 

   

 

 

 

Net income (loss) attributable to Oppenheimer Holdings Inc.

  $ 3,663      $ (4,657
 

 

 

   

 

 

 

Basic profit (loss) per share

  $ 0.27      $ (0.34

Diluted profit (loss) per share

  $ 0.26      $ (0.34

 

(1) As part of the consideration for the 2008 acquisition of certain businesses from CIBC World Markets Corp., the Company issued a warrant to CIBC to purchase 1 million shares of Class A Stock of the Company at $48.62 per share exercisable five years from the January 14, 2008 acquisition date. The warrants expire on April 13, 2013. For the three months ended March 31, 2013 and 2012, the effect of the warrants is anti-dilutive.
(2) For the three months ended March 31, 2013, the diluted earnings per share computation does not include the anti-dilutive effect of 1,057,573 shares of Class A Stock granted under share-based compensation arrangements together with the warrant described in (1) above (1,058,048 shares for the three months ended March 31, 2012).

4. Receivable from and Payable to Brokers and Clearing Organizations

 

    March 31,     December 31,  
(expressed in thousands of dollars)   2013     2012  

Receivable from brokers and clearing organizations consist of:

   

Deposits paid for securities borrowed

  $ 186,361      $ 365,642   

Receivable from brokers

    45,507        41,091   

Securities failed to deliver

    30,191        10,031   

Clearing organizations

    —          399   

Omnibus accounts

    28,358        28,212   

Other

    538        34,324   
 

 

 

   

 

 

 
  $ 290,955      $ 479,699   
 

 

 

   

 

 

 

Payable to brokers and clearing organiations consist of:

   

Deposits received for securities loaned

  $ 175,601      $ 190,387   

Securities failed to receive

    32,061        11,315   

Clearing organizations and other

    7,950        2,516   
 

 

 

   

 

 

 
  $ 215,612      $ 204,218   
 

 

 

   

 

 

 

 

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5. Financial instruments

Securities owned and 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. The Company’s other financial instruments are generally short-term in nature or have variable interest rates and as such their carrying values approximate fair value, with the exception of notes receivable from employees which are carried at cost.

Securities Owned and Securities Sold, But Not Yet Purchased at Fair Value

 

     March 31, 2013      December 31, 2012  
(expressed in thousands of dollars)    Owned      Sold      Owned      Sold  

U.S. Government, agency & sovereign obligations

   $ 612,310       $ 12,320       $ 525,255       $ 131,930   

Corporate debt and other obligations

     20,577         6,811         14,428         1,858   

Mortgage and other asset-backed securities

     3,385         25         2,920         18   

Municipal obligations

     61,551         556         59,010         467   

Convertible bonds

     43,871         8,819         49,130         8,868   

Corporate equities

     42,091         34,401         43,708         29,884   

Other

     64,544         114         65,291         425   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 848,329       $ 63,046       $ 759,742       $ 173,450   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities owned and securities sold, but not yet purchased, consist of trading and investment securities at fair values. Included in securities owned at March 31, 2013 are corporate equities with estimated fair values of approximately $13.3 million ($14.0 million at December 31, 2012), which are related to deferred compensation liabilities to certain employees included in accrued compensation on the condensed consolidated balance sheet. As of March 31, 2013, the Company did not have any exposure to European sovereign debt.

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. Treasury Obligations

U.S. Treasury securities are valued using quoted market prices obtained from active market makers and inter-dealer brokers and, accordingly, are categorized in Level 1 of the fair value hierarchy.

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. Actively traded non-callable agency issued debt securities are categorized in Level 1 of the fair value hierarchy. Callable agency issued debt securities and mortgage pass-through securities are generally categorized in Level 2 of the fair value hierarchy.

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. Sovereign obligations are categorized in Level 1 or 2 of the fair value hierarchy.

 

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Table of Contents

Corporate Debt and Other Obligations

The fair value of corporate bonds is estimated using recent transactions, broker quotations and bond spread information. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy.

Mortgage and Other Asset-Backed Securities

The Company holds non-agency securities collateralized by home equity and various other types of collateral which are valued based on external pricing and spread data provided by independent pricing services and are generally categorized in Level 2 of the fair value hierarchy. When specific external pricing is not observable, the valuation is based on yields and spreads for comparable bonds and, consequently, the positions are categorized in Level 3 of the fair value hierarchy.

Municipal Obligations

The fair value of municipal obligations is estimated using recently executed transactions, broker quotations, and bond spread information. These obligations are generally categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the hierarchy.

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. Convertible bonds are generally categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the hierarchy.

Corporate Equities

Equity securities and options are generally valued based on quoted prices from the exchange or market where traded and categorized as Level 1 of the fair value hierarchy. To the extent quoted prices are not available, prices are generally derived using bid/ask spreads, and these securities are generally categorized in Level 2 of the fair value hierarchy.

Other

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 with the NYAG, the “Regulators”) concluding investigations and administrative proceedings by the Regulators concerning Oppenheimer’s marketing and sale of Auction Rate Securities (“ARS”). Pursuant to those settlements and legal settlements, as of March 31, 2013, the Company purchased and holds approximately $78.2 million in ARS from its clients pursuant to several purchase offers and legal settlements. The Company’s purchases of ARS from its clients will, subject to the terms and conditions of the settlements with the Regulators, continue on a periodic basis pursuant to the settlements with the Regulators. In addition, the Company is committed to purchase another $39.3 million in ARS from clients through 2016. The ultimate amount of ARS to be repurchased by the Company cannot be predicted with any certainty and will be impacted by redemptions by issuers and legal and other actions by clients during the relevant period, which cannot be predicted. The Company also held $150,000 in ARS in its proprietary trading account as of March 31, 2013 as a result of the failed auctions in February 2008. These ARS positions primarily represent Auction Rate Preferred Securities issued by closed-end funds and, to a lesser extent, Municipal Auction Rate Securities which are municipal bonds wrapped by municipal bond insurance and Student Loan Auction Rate Securities which are asset-backed securities backed by student loans.

 

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Interest rates on ARS typically reset through periodic auctions. Due to the auction mechanism and generally liquid markets, ARS have historically been categorized as Level 1 of the fair value hierarchy. Beginning in February 2008, uncertainties in the credit markets resulted in substantially all of the ARS market experiencing failed auctions. Once the auctions failed, the ARS could no longer be valued using observable prices set in the auctions. The Company has used less observable determinants of the fair value of ARS, including the strength in the underlying credits, announced issuer redemptions, completed issuer redemptions, and announcements from issuers regarding their intentions with respect to their outstanding ARS. The Company has also developed an internal methodology to discount for the lack of liquidity and non-performance risk of the failed auctions. Key inputs include spreads on comparable Treasury yields to derive a discount rate, an estimate of the ARS duration, and yields based on current auctions in comparable securities that have not failed. Additional information regarding the valuation technique and inputs used is as follows:

(expressed in thousands of dollars)

Quantitative Information about Level 3 Fair Value Measurements at March 31, 2013

 

Product

   Principal      Valuation
Adjustment
     Fair Value     

Valuation Technique

  

Unobservable
Input

  

Range

Auction Rate Securities(1)

   $ 117,541       $ 7,882       $ 109,659       Discounted Cash Flow    Discount Rate    0.85% to 2.64%
               Duration    5 to 8 Years
               Current Yield(2)    0.20% to 1.33%

 

(1) Includes ARS owned by the Company of $78.2 million included in the condensed consolidated balance sheet at March 31, 2013 as well as additional commitments to purchase ARS from clients of $39.3 million which is disclosed in the notes to the condensed consolidated financial statements.
(2) Based on current auctions in comparable securities that have not failed.

The fair value of ARS is particularly sensitive to movements in interest rates. Increases in short-term interest rates would increase the discount rate input used in the ARS valuation and thus reduce the fair value of the ARS (increase the valuation adjustment). Conversely, decreases in short-term interest rates would decrease the discount rate and thus increase the fair value of ARS (decrease the valuation adjustment). However, an increase (decrease) in the discount rate input would be partially mitigated by an increase (decrease) in the current yield earned on the underlying ARS asset increasing the cash flows and thus the fair value. Furthermore, movements in short term interest rates would likely impact the ARS duration (i.e., sensitivity of the price to a change in interest rates), which would also have a mitigating affect on interest rate movements. For example, as interest rates increase, issuers of ARS have an incentive to redeem outstanding securities as servicing the interest payments gets prohibitively expensive which would lower the duration assumption thereby increasing the ARS fair value. Alternatively, ARS issuers are less likely to redeem ARS in a lower interest rate environment as it is a relatively inexpensive source of financing which would increase the duration assumption thereby decreasing the ARS fair value.

Due to the less observable nature of these inputs, the Company categorizes ARS in Level 3 of the fair value hierarchy. As of March 31, 2013, the Company had a valuation adjustment (unrealized loss) of $7.9 million for ARS.

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. Due to the illiquid nature of these investments and difficulties in obtaining observable inputs, these investments are included in Level 3 of the fair value hierarchy.

 

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The following table provides information about the Company’s investments in Company-sponsored funds at March 31, 2013:

 

(expressed in thousands of dollars)   Fair Value     Unfunded
Commitments
    Redemption
Frequency
  Redemption
Notice Period

Hedge funds (1)

  $ 623      $  —        Quarterly - Annually   30 - 120 Days

Private equity funds (2)

    3,771        927      N/A   N/A

Distressed opportunities investment trust (3)

    7,525        —        N/A   N/A
 

 

 

   

 

 

     
  $ 11,919      $ 927       
 

 

 

   

 

 

     

 

(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.
(3) Special purpose vehicle that holds the interest in securities formerly held by one of the Company’s funds which utilized Lehman Brothers International (Europe) as a prime broker.

Derivative Contracts

From time to time, the Company transacts in exchange-traded and over-the-counter derivative transactions to manage its interest rate risk. Exchange-traded derivatives, namely U.S. Treasury futures, Federal funds futures and Eurodollar futures, are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Over-the-counter derivatives, namely interest rate swap and interest rate cap contracts, are valued using a discounted cash flow model and the Black-Scholes model, respectively, using observable interest rate inputs and are categorized in Level 2 of the fair value hierarchy.

As described below in “Credit Concentrations”, the Company participates in loan syndications and operates as underwriting agent in leveraged financing transactions where it utilizes a warehouse facility provided by a commercial bank to extend financing commitments to third-party borrowers identified by the Company. The Company uses broker quotations on loans trading in the secondary market as a proxy to determine the fair value of the underlying loan commitment which is categorized in Level 3 of the fair value hierarchy. The Company also purchases and sells loans in its proprietary trading book. The Company uses broker quotations to determine the fair value of loan positions held which are categorized in Level 2 of the fair value hierarchy.

The Company from time to time enters into securities financing transactions that mature on the same date as the underlying collateral (referred to as “repo-to-maturity” transactions). Such transactions are treated as a sale of financial assets and a forward repurchase commitment, or conversely as a purchase of financial assets and a forward reverse repurchase commitment. The forward repurchase and reverse repurchase commitments are valued based on the spread between the market value of the government security and the underlying collateral and are categorized in Level 2 of the fair value hierarchy. As of March 31, 2013, the Company did not have any repo-to-maturity transactions.

 

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Fair Value Measurements

The Company’s assets and liabilities, recorded at fair value on a recurring basis as of March 31, 2013 and December 31, 2012, 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, 2013

 

     Fair Value Measurements at March 31, 2013  
(expressed in thousands of dollars)    Level 1      Level 2      Level 3      Total  

Assets

           

Cash equivalents

   $ 50,909       $ —         $ —         $ 50,909   

Securities segregated for regulatory and other purposes

     17,092         —           —           17,092   

Deposits with clearing organizations

     3,499         —           —           3,499   

Securities owned

           

U.S Treasury securities

     571,923         —           —           571,923   

U.S. Agency securities

     10,859         28,725         —           39,584   

Sovereign obligations

     —           803         —           803   

Corporate debt and other obligations

     2,574         18,003         —           20,577   

Mortgage and other asset-backed securities

     —           3,333         52         3,385   

Municipal obligations

     —           51,248         10,303         61,551   

Convertible bonds

     —           43,871         —           43,871   

Corporate equities

     30,333         11,758         —           42,091   

Other

     2,055         —           62,489         64,544   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities owned, at fair value

     617,744         157,741         72,844         848,329   

Investments (1)

     936         41,822         12,779         55,537   

TBAs

     —           3,111         —           3,111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 690,180       $ 202,674       $ 85,623       $ 978,477   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Securities sold, but not yet purchased

           

U.S Treasury securities

   $ 12,290       $ —         $ —         $ 12,290   

U.S. Agency securities

     —           30         —           30   

Corporate debt and other obligations

     —           6,811         —           6,811   

Mortgage and other asset-backed securities

     —           25         —           25   

Municipal obligations

     —           556         —           556   

Convertible bonds

     —           8,819         —           8,819   

Corporate equities

     17,852         16,549         —           34,401   

Other

     14         —           100         114   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities sold, but not yet purchased at fair value

     30,156         32,790         100         63,046   

Investments

     270         —           —           270   

Derivative contracts

     360         71         2,094         2,525   

TBAs

     —           281         —           281   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,786       $ 33,142       $ 2,194       $ 66,122   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Included in other assets on the condensed consolidated balance sheet.

 

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Assets and liabilities measured at fair value on a recurring basis as of December 31, 2012

 

     Fair Value Measurements at December 31, 2012  
(expressed in thousands of dollars)    Level 1      Level 2      Level 3      Total  

Assets

           

Cash equivalents

   $ 58,945       $ —         $ —         $ 58,945   

Securities segregated for regulatory and other purposes

     11,499         —           —           11,499   

Deposits with clearing organizations

     9,095         —           —           9,095   

Securities owned

           

U.S Treasury securities

     497,546         —           —           497,546   

U.S. Agency securities

     —           27,690         —           27,690   

Sovereign obligations

     —           19         —           19   

Corporate debt and other obligations

     2,459         11,969         —           14,428   

Mortgage and other asset-backed securities

     —           2,880         40         2,920   

Municipal obligations

     —           49,616         9,394         59,010   

Convertible bonds

     —           49,130         —           49,130   

Corporate equities

     31,958         11,750         —           43,708   

Other

     2,328         —           62,963         65,291   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities owned, at fair value

     534,291         153,054         72,397         759,742   

Investments (1)

     10,477         37,088         12,954         60,519   

TBAs

     —           3,188         —           3,188   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 624,307       $ 193,330       $ 85,351       $ 902,988   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Securities sold, but not yet purchased

           

U.S Treasury securities

   $ 131,899       $ —         $ —         $ 131,899   

U.S. Agency securities

     —           31         —           31   

Corporate debt and other obligations

     —           1,858         —           1,858   

Mortgage and other asset-backed securities

     —           18         —           18   

Municipal obligations

     —           467         —           467   

Convertible bonds

     —           8,868         —           8,868   

Corporate equities

     20,946         8,938         —           29,884   

Other

     325         —           100         425   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities sold, but not yet purchased at fair value

     153,170         20,180         100         173,450   

Investments

     258         —           —           258   

Derivative contracts

     286         124         2,647         3,057   

TBAs

     —           175         —           175   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 153,714       $ 20,479       $ 2,747       $ 176,940   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Included in other assets on the condensed consolidated balance sheet.

There were no significant transfers between Level 1 and Level 2 assets and liabilities in the three months ended March 31, 2013.

 

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The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2013 and 2012:

 

    Level 3 Assets and Liabilities  
    For the Three Months Ended March 31, 2013  
(expressed in thousands of dollars)   Beginning
Balance
    Total Realized
and Unrealized
Gains

(Losses) (4)(5)
    Purchases
and Issuances
    Sales and
Settlements
    Transfers
In (Out)
    Ending
Balance
 

Assets

           

Mortgage and other asset-backed securities (1)

  $ 40      $ 7      $ 23      $ (18   $ —        $ 52   

Municipals

    9,394        (141     1,200        (150     —          10,303   

Other (2)

    62,963        (549     3,050        (2,975     —          62,489   

Investments (3)

    12,954        329        —          (504     —          12,779   

Liabilities

           

Mortgage and other asset-backed securities (1)

    —          —          —          —          —          —     

Other (2)

    100        —          —          —          —          100   

Derivative contracts

    2,647        553        —          —          —          2,094   

 

(1) Represents private placements of non-agency collateralized mortgage obligations.
(2) Represents auction rate securities that failed in the auction rate market.
(3) Primarily represents general partner ownership interests in hedge funds and private equity funds sponsored by the Company.
(4) Included in principal transactions on the condensed consolidated statement of operations, except for investments which are included in other income on the condensed consolidated statement of operations.
(5) Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.

 

    Level 3 Assets and Liabilities  
    For the Three Months Ended March 31, 2012  
(expressed in thousands of dollars)   Beginning
Balance
    Total Realized
and Unrealized
Gains (Losses) (4)(5)
    Purchases and
Issuances
    Sales and
Settlements
    Transfers
In (Out)
    Ending
Balance
 

Assets

           

Mortgage and other asset-backed securities (1)

  $ 16      $ 17      $ 80      $ (15   $ —        $ 98   

Municipals

    3,562        (1,078     9,305        —          —          11,789   

Other (2)

    65,001        (1,499     10,300        (6,971     —          66,831   

Investments (3)

    12,482        515        124        —          11        13,132   

Liabilities

           

Mortgage and other asset-backed securities (1)

    —          —          —          —          —          —     

Other (2)

    50        —          (50     —          —          —     

Derivative contracts

    2,347        —          1,560        —          —          3,907   

 

(1) Represents private placements of non-agency collateralized mortgage obligations.
(2) Represents auction rate securities that failed in the auction rate market.
(3) Primarily represents general partner ownership interests in hedge funds and private equity funds sponsored by the Company.
(4) Included in principal transactions on the condensed consolidated statement of operations, except for investments which are included in other income on the condensed consolidated statement of operations.
(5) Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.

 

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Table of Contents

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 in the condensed consolidated balance sheet. The table below excludes non-financial assets and liabilities (e.g., fixed assets 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 (e.g., cash and receivables from customers) approximates fair value because of the relatively short period of time between their origination and expected maturity. The fair value of the Senior Secured Note (“Notes”), categorized in Level 2 of the fair value hierarchy, is based on quoted prices from the market in which the Notes trade.

The fair value of Mortgage Servicing Rights (“MSRs”) is based on observable and unobservable inputs and thus categorized as Level 3 in the fair value hierarchy. The fair value of MSRs is based on a discounted cash flow valuation methodology on a loan level basis that determines the present value of future cash flows expected to be realized. The fair value considers estimated future servicing fees and ancillary revenue, offset by the estimated costs to service the loans. The discounted cash flow model considers portfolio characteristics, contractually specified servicing fees, prepayment speed assumptions, delinquency rates, costs to service, late charges, and other ancillary revenue, and other economic factors such as interest rates. The fair value of MSRs is sensitive to changes in interest rates, including the effect on prepayment speeds. MSRs typically decrease in value when interest rates decline as declining interest rates tend to increase prepayments and therefore reduce the expected life of the net servicing cash flows that make up the MSR asset.

 

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Table of Contents

Assets and liabilities not measured at fair value on a recurring basis as of March 31, 2013

 

                Fair Value Measurement: Assets  
    As of March 31, 2013     As of March 31, 2013  
(expressed in thousands of dollars)   Carrying Value     Fair Value     Level 1     Level 2     Level 3     Total  

Cash

  $ 47,869      $ 47,869      $  47,869      $ —        $ —        $ 47,869   

Cash and securities segregated for regulatory and other purposes

    20,072        20,072        20,072        —          —          20,072   

Deposits with clearing organization

    21,077        21,077        21,077        —          —          21,077   

Receivable from brokers and clearing organizations

           

Deposits paid for securities borrowed

    186,361        186,361        —          186,361        —          186,361   

Receivables from brokers

    45,507        45,507        —          45,507        —          45,507   

Securities failed to deliver

    30,191        30,191        —          30,191        —          30,191   

Omnibus accounts

    28,358        28,358        —          28,358        —          28,358   

Other

    538        538        —          538        —          538   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    290,955        290,955        —          290,955        —          290,955   

Receivable from customers

    881,514        881,514        —          881,514        —          881,514   

Notes receivable

    45,030        45,030        —          —          45,030        45,030   

Other assets

           

Mortgage servicing rights (MSRs)

    27,187        34,350        —          —          34,350        34,350   

Mortgage receivable (1)

    25,685        25,685        —          25,685        —          25,685   

Loan receivable (2)

    7,126        7,126        —          —          7,126        7,126   

Escrow deposit (3)

    25,000        25,000        25,000        —          —          25,000   

 

(1) Mortgage receivable balance represents loan amounts outstanding after funding but prior to GNMA securitization. Amount funded by warehouse facility (warehouse payable) which is included in Accounts payable and other liabilities on condensed consolidated balance sheet (see note 4 below).

Residual amount between asset and liability is funded with internally generated funds.

(2) Loan receivable represents outstanding loan purchased out of GNMA pool on property that is in default. Amount funded by third- party and is included in Accounts payable and other liabilities on condensed consolidated balance sheet (see note 5 below).
(3) Represent escrow monies deposited with commercial bank. Offsets with payable to third party in Accounts payable and other liabilities on condensed consolidated balance sheet (see note 6 below).

 

                Fair Value Measurement: Liabilities  
    As of March 31, 2013     As of March 31, 2013  
(expressed in thousands of dollars)   Carrying Value     Fair Value     Level 1     Level 2     Level 3     Total  

Drafts payable

  $ 44,927      $ 44,927      $ 44,927      $ —        $ —        $ 44,927   

Bank call loans

    204,000        204,000        204,000        —          —          204,000   

Payables to brokers and clearing organizations

           

Deposits received for securities loaned

    175,601        175,601        —          175,601        —          175,601   

Securities failed to receive

    32,061        32,061        —          32,061        —          32,061   

Clearing organizations and other

    7,950        7,950        —          7,950        —          7,950   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    215,612        215,612        —          215,612        —          215,612   

Payables to customers

    607,034        607,034        —          607,034        —          607,034   

Securities sold under agreements to repurchase

    544,136        544,136        —          544,136        —          544,136   

Accounts payable and other liabilities

           

Warehouse payable (4)

    24,374        24,374        —          24,374        —          24,374   

Loan payable (5)

    7,126        7,126        —          —           7,126        7,126   

Payable to third party (6)

    25,000        25,000        25,000        —           —          25,000   

Senior secured note

    195,000        209,742        —          209,742        —          209,742   

 

(4) Warehouse payable represents loans outstanding under warehouse facility, provided by commercial bank, prior to GNMA securitization. Used to fund Mortgage receivable in Other assets on condensed consolidated balance sheet (see note 1 above).
(5) Loan payable represents amount funded by third-party for loan purchased out of GNMA pool on property that is in default. Offsets with Loan receivable in Other assets on condensed consolidated balance sheet (see note 2 above).
(6) Offsets with Escrow deposit in Other assets on condensed consolidated balance sheet (see note 3 above).

 

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Fair Value Option

The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The Company may make a fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has elected to apply the fair value option to its loan trading portfolio which resides in OPY Credit Corp. and is included in other assets on the condensed consolidated balance sheet. Management has elected this treatment as it is consistent with the manner in which the business is managed as well as the way that financial instruments in other parts of the business are recorded. There were no loan positions held in the secondary loan trading portfolio at March 31, 2013 or December 31, 2012.

The Company also elected the fair value option for those 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 or that are not accounted for as purchase and sale agreements (such as repo-to-maturity transactions). The Company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. At March 31, 2013, the fair value of the reverse repurchase agreements and repurchase agreements were $nil and $nil, respectively.

Fair Value of Derivative Instruments

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. Interest rate swaps and interest rate caps are entered into to manage the Company’s interest rate risk associated with floating-rate borrowings. All derivative instruments are measured at fair value and are recognized as either assets or liabilities on the condensed consolidated balance sheet. The Company designates interest rate swaps and interest rate caps as cash flow hedges of floating-rate borrowings.

Cash flow hedges used for asset and liability management

For derivative instruments that were designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative was reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains or losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

On January 20, 2009, the Company entered into an interest rate cap contract, incorporating a series of purchased caplets with fixed maturity dates ending December 31, 2012, to hedge the interest payments associated with its floating rate Subordinated Note, which was subject to change due to changes in 3-Month LIBOR. With the repayment of the Subordinated Note in the second quarter of 2011, this cap was no longer designated as a cash flow hedge. The cap expired worthless on December 31, 2012. The Company recorded $19,200 in interest expense with respect to the interest rate cap for the three months ended March 31, 2012.

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 Shekels. Such hedges have not been designated as accounting hedges. At March 31, 2013, there were no forward or option contracts outstanding.

 

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“To-be-announced” securities

The Company also transacts in pass-through mortgage-backed securities eligible to be sold in the “To-Be-Announced” or TBA market. 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. Unrealized gains and losses on TBAs are recorded in the condensed consolidated balance sheets in receivable from brokers and clearing organizations and payable to brokers and clearing organizations, respectively, and in the condensed consolidated statement of operations as principal transactions revenue.

The following table summarizes the notional and fair values of the TBAs as of March 31, 2013 and December 31, 2012:

 

     March 31, 2013      December 31, 2012  
     Notional             Notional         
(expressed in thousands of dollars)    Amount      Fair Value      Amount      Fair Value  

Sale of TBAs (1)

   $ 345,168       $ 3,111       $ 449,065       $ 3,188   

Purchase of TBAs

   $ 44,749       $ 281       $ 117,573       $ 175   

Funding Commitments

     264,035            304,390      
  

 

 

       

 

 

    
   $ 308,784          $ 421,963      

 

(1) TBAs are used to offset exposures related to commitments to provide funding for Federal Housing Administration (“FHA”) loans at OMHHF. At March 31, 2013, the loan commitments balance was $264.0 million ($304.4 million at December 31, 2012). In addition, at March 31, 2013, OMHHF had a loan receivable balance (included in other assets in the condensed consolidated balance sheet) of $25.7 million ($22.9 million at December 31, 2012) which relates to prior loan commitments that have been funded but have not yet been securitized. The “when issued” securitizations of these loans have been sold to market counter-parties.

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 futures contracts the Company used include U.S. Treasury notes, Federal Funds and Eurodollar contracts. At March 31, 2013, the Company had 388 open short contracts for 10-year U.S. Treasury notes with a fair value of $360,000 used primarily as an economic hedge of interest rate risk associated with a portfolio of fixed income investments. At March 31, 2013, the Company had 1,466 open contracts for Federal Funds futures with a fair value of approximately $71,000 used primarily as an economic hedge of interest rate risk associated with government trading activities.

From time-to-time, the Company enters into securities financing transactions that mature on the same date as the underlying collateral (referred to as “repo-to-maturity” transactions). These transactions are treated as a sale of financial assets and a forward repurchase commitment, or conversely as a purchase of financial assets and a forward reverse repurchase commitment. As of March 31, 2013, the Company did not have any repo-to-maturity transactions.

 

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The notional amounts and fair values of the Company’s derivatives at March 31, 2013 and December 31, 2012 by product were as follows:

 

    

Fair Value of Derivative Instruments at March 31, 2013

 
(expressed in thousands of dollars)   

Description

   Notional      Fair Value  

Liabilities

        

Derivatives not designated as hedging instruments (1)

        

Commodity contracts

   U.S. Treasury Futures (2)    $ 57,600       $ 360   
  

Federal Funds Futures (2)

     7,330,000         71   

Other contracts

   Auction rate securities purchase commitments (3)      39,301         2,094   
     

 

 

    

 

 

 
      $ 7,426,901       $ 2,525   
     

 

 

    

 

 

 

 

(1) See “Fair Value of Derivative Instruments” above for description of derivative financial instruments.
(2) Included in payable to brokers and clearing organizations on the condensed consolidated balance sheet.
(3) Included in other liabilities on the condensed consolidated balance sheet.

 

    

Fair Value of Derivative Instruments at December 31, 2012

 
(expressed in thousands of dollars)   

Description

   Notional      Fair Value  

Liabilities

        

Derivatives not designated as hedging instruments (1)

        

Commodity contracts

   U.S. Treasury Futures (2)    $ 56,000       $ 286   
  

Federal Funds Futures (2)

     6,070,000         120   
  

Euro Dollars Futures (2)

     15,000         4   

Other contracts

   Auction rate securities purchase commitments (3)      38,343         2,647   
     

 

 

    

 

 

 
      $ 6,179,343       $ 3,057   
     

 

 

    

 

 

 

 

(1) See “Fair Value of Derivative Instruments” above for description of derivative financial instruments.
(2) Included in payable to brokers and clearing organizations on the condensed consolidated balance sheet.
(3) Included in other liabilities on the condensed consolidated balance sheet.

The following table presents the location and fair value amounts of the Company’s derivative instruments and their effect on the condensed consolidated statement of operations for the three months ended March 31, 2013 and 2012:

 

                     
     The Effect of Derivative Instruments on the Statement of               
    

Operations for the Three Months Ended March 31, 2013

              
(expressed in thousands of dollars)        

Recognized in Income on Derivatives (pre-tax)

    Reclassified from
Accumulated Other
Comprehensive
Income into Income
Effective Portion (1)
(after-tax)
 

Types

  

Description

  

Location

   Gain (Loss)     Location      Gain (Loss)  

Commodity contracts

   U.S. Treasury Futures    Principal transaction revenue    $ (119     None       $  —     
   Federal Funds Futures    Principal transaction revenue      55        None         —     

Other contracts

   Auction rate securities purchase Commitment    Principal transaction revenue      1,794        None         —     
        

 

 

      

 

 

 
         $ 1,730         $ —     
        

 

 

      

 

 

 

 

(1) There is no ineffective portion included in income for the period ended March 31, 2013.

 

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Table of Contents
     The Effect of Derivative Instruments on the Statement of               
     Operations for the Three Months Ended March 31, 2012               
(expressed in thousands of dollars)        

Recognized in Income on Derivatives
(pre-tax)

    Reclassified from
Accumulated Other
Comprehensive
Income into Income
Effective Portion (1)
(after-tax)
 

Types

  

Description

  

Location

   Gain (Loss)     Location      Gain (Loss)  

Interest rate contracts

  

Caps (2)

  

Interest expense

   $ (11     None       $  —     

Commodity contracts

  

U.S. Treasury Futures

  

Principal transaction revenue

     257        None         —     
  

Federal Funds Futures

  

Principal transaction revenue

     188        None         —     

Other contracts

  

Auction rate securities purchase Commitment

  

Principal transaction revenue

     (1,560     None         —     
        

 

 

      

 

 

 
         $ (1,126      $ —     
        

 

 

      

 

 

 

 

(1) There is no ineffective portion included in income for the period ended March 31, 2012.
(2) As noted above in “Cash flow hedges used for asset and liability management”, interest rate caps are used to hedge interest rate risk associated with the Subordinated Note. With the repayment of the Subordinated Note in the second quarter of 2011, this cap is no longer designated as a cash flow hedge. The cap expired worthless on December 31, 2012.

Collateralized Transactions

The Company enters into collateralized borrowing and lending transactions in order to meet customers’ needs and earn residual interest rate spreads, obtain securities for settlement and finance trading inventory positions. Under these transactions, the Company either receives or provides collateral, including U.S. government and agency, asset-backed, corporate debt, equity, and non-U.S. government and agency securities.

The Company obtains short-term borrowings primarily through bank call loans. Bank call loans are generally payable on demand and bear interest at various rates but not exceeding the broker call rate. At March 31, 2013, bank call loans were $204.0 million ($128.3 million at December 31, 2012).

At March 31, 2013, the Company had collateralized loans, collateralized by firm and customer securities with market values of approximately $141.5 million and $278.2 million, respectively, with commercial banks. At March 31, 2013, the Company had approximately $1.2 billion of customer securities under customer margin loans that are available to be pledged, of which the Company has re-pledged approximately $154.6 million under securities loan agreements.

At March 31, 2013, the Company had deposited $336.2 million of customer securities directly with the Options Clearing Corporation to secure obligations and margin requirements under option contracts written by customers.

At March 31, 2013, the Company had no outstanding letters of credit.

The Company enters into reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance the Company’s inventory positions. Except as described below, repurchase and reverse repurchase agreements, principally involving government and agency securities, are carried at amounts at which the securities subsequently will be resold or reacquired as specified in the respective agreements and include accrued interest. Repurchase and reverse repurchase agreements are presented on a net-by-counterparty basis, when the repurchase and reverse repurchase agreements are executed with the same counterparty, have the same explicit settlement date, are executed in accordance with a master netting arrangement, the securities underlying the repurchase and reverse repurchase agreements exist in “book entry” form and certain other requirements are met.

 

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Table of Contents

The following tables present the gross amounts and the offsetting amounts of reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions at March 31, 2013 and December 31, 2012:

 

As of March 31, 2013  
                                          
     Gross     

Gross
Amounts

Offset in the

    

Net Amounts

of Assets

     Gross Amounts Not Offset
on the Balance Sheet
        
(expressed in thousands of dollars)    Amounts of
Recognized
Assets
     Statement of
Financial
Position
     Presented on
the Balance
Sheet
     Financial
Instruments
    Cash
Collateral
Received
     Net Amount  

Reverse repurchase agreements

   $ 3,862,697       $ 3,862,697       $ —         $ —        $  —         $  —     

Securities borrowed (1)

     186,361         —           186,361         (186,361     —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,049,058       $ 3,862,697       $  186,361       $  (186,361)      $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Included in receivable from brokers and clearing organizations on the condensed consolidated balance sheet.

 

     Gross      Gross
Amounts
Offset in the
     Net Amounts
of Liabilities
     Gross Amounts Not Offset
on the Balance Sheet
        
     Amounts of
Recognized
Liabilities
     Statement of
Financial
Position
     Presented on
the Balance
Sheet
     Financial
Instruments
    Cash
Collateral
Pledged
     Net
Amount
 

Repurchase agreements

   $ 4,406,833       $ 3,862,697       $ 544,136       $ (544,136   $ —         $ —     

Securities loaned (2)

     175,601         —           175,601         (175,601     —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,582,434       $ 3,862,697       $ 719,737       $ (719,737   $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(2) Included in payable to brokers and clearing organizations on the condensed consolidated balance sheet.

 

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Table of Contents

As of December 31, 2012

 

     Gross      Gross
Amounts
Offset in the
     Net Amounts
of Assets
     Gross Amounts Not Offset
on the Balance Sheet
        
(expressed in thousands of dollars)    Amounts of
Recognized
Assets
     Statement of
Financial
Position
     Presented on
the Balance
Sheet
     Financial
Instruments
    Cash
Collateral
Received
     Net Amount  

Reverse repurchase agreements

   $ 1,160,239       $ 1,160,239       $ —         $ —        $  —         $  —     

Securities borrowed (1)

     365,642         —           365,642         (365,642     —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,525,881       $ 1,160,239       $  365,642       $  (365,642)      $       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Included in receivable from brokers and clearing organizations on the condensed consolidated balance sheet.

 

     Gross      Gross
Amounts
Offset in the
     Net Amounts
of Liabilities
     Gross Amounts Not Offset
on the Balance Sheet
        
     Amounts of
Recognized
Liabilities
     Statement of
Financial
Position
     Presented on
the Balance
Sheet
     Financial
Instruments
    Cash
Collateral
Pledged
     Net Amount  

Repurchase agreements

   $ 1,552,630         1,160,239         392,391         (392,391     —         $  —     

Securities loaned (2)

     190,387         —           190,387         (190,387     —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,743,017       $ 1,160,239       $ 582,778       $ (582,778   $  —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(2) Included in payable to brokers and clearing organizations on the condensed consolidated balance sheet.

Certain of the Company’s repurchase agreements and reverse repurchase agreements are carried at fair value as a result of the Company’s fair value option election. The Company elected the fair value option for those repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date or that are not accounted for as purchase and sale agreements (such as repo-to-maturity transactions described above). The Company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. At March 31, 2013, the fair value of the reverse repurchase agreements and repurchase agreements was $nil and $nil, respectively.

The Company receives collateral in connection with securities borrowed and reverse repurchase agreement transactions and customer margin loans. Under many agreements, the Company is permitted to sell or re-pledge the securities received (e.g., use the securities to enter into securities lending transactions, or deliver to counterparties to cover short positions). At March 31, 2013, the fair value of securities received as collateral under securities borrowed transactions and reverse repurchase agreements was $181.3 million ($354.0 million at December 31, 2012) and $3.9 billion ($1.2 billion at December 31, 2012), respectively, of which the Company has sold and re-pledged approximately $14.7 million ($14.3 million at December 31, 2012) under securities loaned transactions and $3.9 billion under repurchase agreements ($1.2 billion at December 31, 2012).

The Company pledges certain of its securities owned for securities lending and repurchase agreements and to collateralize bank call loan transactions. The carrying value of pledged securities owned that can be sold or re-pledged by the counterparty was $391.9 million, as presented on the face of the condensed consolidated balance sheet at March 31, 2013 ($570.0 million at December 31, 2012). The carrying value of securities owned by the Company that have been loaned or pledged to counterparties where those counterparties do not have the right to sell or re-pledge the collateral was $141.8 million at March 31, 2013 ($159.4 million at December 31, 2012).

 

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Table of Contents

The Company manages credit exposure arising from repurchase and reverse repurchase agreements by, in appropriate circumstances, entering into master netting agreements and collateral arrangements with counterparties that provide the Company, in the event of a customer default, the right to liquidate and the right to offset a counterparty’s rights and obligations. The Company also monitors the market value of collateral held and the market value of securities receivable from others. It is the Company’s policy to request and obtain additional collateral when exposure to loss exists. In the event the counterparty is unable to meet its contractual obligation to return the securities, the Company may be exposed to off-balance sheet risk of acquiring securities at prevailing market prices.

As of December 31, 2011, the interest in securities formerly held by one of the Company’s funds which utilized Lehman Brothers International (Europe) as a prime broker was transferred to an investment trust. As of March 31, 2013, the fair value of the Company’s investment in the securities held by Lehman Brothers International (Europe) that were segregated and not re-hypothecated was $7.5 million. This investment has been included in the condensed consolidated financial statements of the Company.

Credit Concentrations

Credit concentrations may arise from trading, investing, underwriting and financing activities and may be impacted by changes in economic, industry or political factors. In the normal course of business, the Company may be exposed to risk in the event customers, counterparties including other brokers and dealers, issuers, banks, depositories or clearing organizations are unable to fulfill their contractual obligations. The Company seeks to mitigate these risks by actively monitoring exposures and obtaining collateral as deemed appropriate. Included in receivable from brokers and clearing organizations as of March 31, 2013 are receivables from three major U.S. broker-dealer totaling approximately $104.3 million.

Warehouse Facilities

Through OPY Credit Corp., the Company utilized a warehouse facility provided by CIBC to extend financing commitments to third party borrowers identified by the Company. This warehouse arrangement terminated on July 15, 2012. However, the Company will remain contingently liable for some minimal expenses in relation to this facility related to commitments made by CIBC to borrowers introduced by the Company until such borrowings are repaid by the borrower or until 2016, whichever is the sooner to occur. All such owed amounts will continue to be reflected in the Company’s consolidated statement of operations as incurred.

The Company reached an agreement with RBS Citizens, NA (“Citizens”) that was announced in July 2012, whereby the Company, through OPY Credit Corp., will introduce lending opportunities to Citizens, which Citizens can elect to accept and in which the Company will participate in the fees earned from any related commitment by Citizens. The Company can also in certain circumstances assume a portion of Citizen’s syndication and lending risk under such loans, and if it does so it shall be obligated to secure such obligations via a cash deposit determined through risk based formulas. Neither the Company nor Citizens is obligated to make any specific loan or to commit any minimum amount of lending capacity to the relationship. The agreement also calls for Citizens and the Company at their option to jointly participate in the arrangement of various loan syndications. At March 31, 2013, there were no loans in place.

 

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Table of Contents

The Company is obligated to settle transactions with brokers and other financial institutions even if its clients fail to meet their obligations to the Company. Clients are required to complete their transactions on settlement date, generally one to three business days after trade date. If clients do not fulfill their contractual obligations, the Company may incur losses. The Company has clearing/participating arrangements with the National Securities Clearing Corporation (“NSCC”), the Fixed Income Clearing Corporation (“FICC”), R.J. O’Brien & Associates (commodities transactions) and others. With respect to its business in reverse repurchase and repurchase agreements, substantially all open contracts at March 31, 2013 are with the FICC. In addition, the Company recently began clearing its non-U.S. international equities business carried on by Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Ltd. through BNP Paribas Securities Services. The clearing corporations have the right to charge the Company for losses that result from a client’s failure to fulfill its contractual obligations. Accordingly, the Company has credit exposures with these clearing brokers. The clearing brokers can re-hypothecate the securities held on behalf of the Company. As the right to charge the Company has no maximum amount and applies to all trades executed through the clearing brokers, the Company believes there is no maximum amount assignable to this right. At March 31, 2013, the Company had recorded no liabilities with regard to this right. The Company’s policy is to monitor the credit standing of the clearing brokers and banks with which it conducts business.

OMHHF, which is engaged in mortgage brokerage and servicing, has obtained an uncommitted warehouse facility line through PNC Bank (“PNC”) under which OMHHF pledges Federal Housing Administration (“FHA”)—guaranteed mortgages for a period of up to 10 business days and PNC table funds the principal payment to the mortgagee. OMHHF repays PNC upon the securitization of the mortgage by the Government National Mortgage Association (“GNMA”) and the delivery of the security to the counter- party for payment pursuant to a contemporaneous sale on the date the mortgage is funded. At March 31, 2013, OMHHF had $2.8 million outstanding under the warehouse facility line at a variable interest rate of 1 month LIBOR plus 1.85%. Interest expense for the three months ended March 31, 2013 was $219,600 ($243,000 for the three months ended March 31, 2012).

As discussed in Note 5, Financial Instruments, the Company enters into TBA transactions to offset exposures related to commitments to provide funding for FHA loans at OMHHF. In the normal course of business, the Company may be exposed to the risk that counterparties to these TBAs are unable to fulfill their contractual obligations.

Variable Interest Entities (“VIEs”)

The Company’s policy is to consolidate all subsidiaries in which it has a controlling financial interest, as well as any VIEs where the Company is deemed to be the primary beneficiary, when it has the power to make the decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb significant losses or the right to receive benefits that could potentially be significant to the VIE. The Company reviews factors, including the rights of the equity holders and obligations of equity holders to absorb losses or receive expected residual returns, to determine if the investment is a VIE. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly or indirectly by the Company. The consolidation analysis is generally performed qualitatively. This analysis, which requires judgment, is performed at each reporting date. Accounting Standards Update (“ASU”) No. 2010-10, “Amendments for Certain Investment Funds,” defers the application of the revised consolidation rules for a reporting entity’s interest in an entity if certain conditions are met. An entity that qualifies for the deferral will continue to be assessed for consolidation under the overall guidance on VIEs, before its amendment, and other applicable consolidation guidance. Generally, the Company would consolidate those entities when it absorbs a majority of the expected losses or a majority of the expected residual returns, or both, of the entities.

For entities that the Company has concluded are not VIEs, the Company then evaluates whether the fund is a partnership or similar entity. If the fund is a partnership or similar entity, the Company evaluates the fund under the partnership consolidation guidance. Pursuant to that guidance, the Company consolidates funds in which it is the general partner and/or manages through a contract, unless presumption of control by the Company can be overcome. This presumption is overcome only when unrelated investors in the fund have the substantive ability to liquidate the fund or otherwise remove the Company as the general partner without cause, based on a simple majority vote of unaffiliated investors, or have other substantive participating rights. If the presumption of control can be overcome, the Company accounts for its interest in the fund pursuant to the equity method of accounting.

 

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Table of Contents

A subsidiary of the Company serves as general partner of hedge funds and private equity funds that were established for the purpose of providing investment alternatives to both its institutional and qualified retail clients. The Company holds variable interests in these funds as a result of its right to receive management and incentive fees. The Company’s investment in and additional capital commitments to these hedge funds and private equity funds are also considered variable interests. The Company’s additional capital commitments are subject to call at a later date and are limited in amount.

The Company assesses whether it is the primary beneficiary of the hedge funds and private equity funds in which it holds a variable interest in the context of the total general and limited partner interests held in these funds by all parties. In each instance, the Company has determined that it is not the primary beneficiary and therefore need not consolidate the hedge funds or private equity funds. The subsidiaries’ general partnership interests, additional capital commitments, and management fees receivable represent its maximum exposure to loss. The subsidiaries’ general partnership interests and management fees receivable are included in other assets on the condensed consolidated balance sheet.

The following tables set forth the total VIE assets, the carrying value of the subsidiaries’ variable interests, and the Company’s maximum exposure to loss in Company-sponsored non-consolidated VIEs in which the Company holds variable interests and other non-consolidated VIEs in which the Company holds variable interests at March 31, 2013 and December 31, 2012:

 

     March 31, 2013  
                                 Maximum  
                                 Exposure  
            Carrying Value of the             to Loss in  
     Total      Company’s Variable Interest      Capital      Non-consolidated  
(expressed in thousands of dollars)    VIE Assets (1)      Assets (2)      Liabilities      Commitments      VIEs  

Hedge funds

   $ 1,879,864       $ 320       $ —         $ —         $ 320   

Private equity funds

     130,128         32         —           8         40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,009,992       $ 352       $ —         $ 8       $ 360   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the total assets of the VIEs and does not represent the Company’s interests in the VIEs.
(2) Represents the Company’s interests in the VIEs and is included in other assets on the condensed consolidated balance sheet.

 

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     December 31, 2012  
                                 Maximum  
                                 Exposure  
            Carrying Value of the             to Loss in  
     Total      Company’s Variable Interest      Capital      Non-consolidated  
(expressed in thousands of dollars)    VIE Assets (1)      Assets (2)      Liabilities      Commitments      VIEs  

Hedge funds

   $ 1,868,178       $ 372       $ —         $ —         $ 372   

Private equity funds

     171,169         32         —           8         40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,039,347       $ 404       $ —         $ 8       $ 412   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the total assets of the VIEs and does not represent the Company’s interests in the VIEs.
(2) Represents the Company’s interests in the VIEs and is included in other assets on the condensed consolidated balance sheet.

6. Commercial mortgage banking

OMHHF is engaged in the business of originating and servicing Federal Housing Administration (“FHA”) insured multifamily and healthcare facility loans and securitizing these loans into Ginnie Mae (“GNMA”) mortgage backed securities. OMHHF also offers mortgage services to developers of commercial properties including apartments, elderly housing and nursing homes that satisfy FHA criteria. OMHHF maintains a mortgage servicing portfolio for which it provides a full array of services, including the collection of mortgage payments from mortgagees which are passed on to the mortgage holders, construction loan management and asset management.

The Company owns an 83.68% controlling interest in OMHHF. The 16.32% non-controlling interest belongs to one related third party who is the President of OMHHF.

Loan Origination Fees

OMHHF receives origination fees and incurs other direct origination costs when it originates mortgage loans. Due to the nature of its business and pre-selling loans to third parties, OMHHF recognizes origination fees and other direct origination costs at the time of the origination. As an inducement to have customers refinance, OMHHF absorbs the cost of customer’s prepayment penalties. Prepayment penalties are recorded as contra-revenue. The prepayment penalties were $3.0 million and $1.1 million for the period ended March 31, 2013 and March 31, 2012, respectively.

Funding Commitments

OMHHF provides its clients with commitments to fund FHA-insured permanent or constructions loans. Upon providing these commitments to fund, OMHHF enters into TBA transactions directly, or indirectly through its affiliate, Oppenheimer, with counterparties to offset its exposures related to these funding commitments. See Note 5, Financial Instruments, for more information.

Mortgage Receivables

OMHHF advances funds from its own cash reserves in addition to obtaining financing through warehouse facilities in order to fund initial loan closing and subsequent construction loan draws. Prior to the GNMA securitization of a loan, a loan receivable is recorded in other assets with an equal and offsetting liability for the warehouse facility payable, which is recorded in other liabilities on the condensed consolidated balance sheet.

 

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Escrows Held in Trust

Custodial escrow accounts relating to loans serviced by OMHHF totaled $228.3 million at March 31, 2013 ($242.7 million at December 31, 2012). These amounts are not included on the condensed consolidated statements of financial condition as such amounts are not OMHHF’s assets. Certain cash deposits at financial institutions exceeded the FDIC insured limits. The combined uninsured balance with relation to escrow accounts at March 31, 2013 is approximately $122.4 million. OMHHF places these deposits with major financial institutions where they believe the risk is minimal, and that meet or exceed GNMA required credit ratings.

Mortgage Servicing Rights (“MSR’s”)

OMHHF purchases or originates mortgage loans that are sold and securitized into GNMA mortgage backed securities. OMHHF retains the servicing responsibilities for the loans securitized and recognizes either a MSR asset or a MSR liability for that servicing contract. OMHHF receives annual servicing fees equal to a percentage of the outstanding principal balance of the loans being serviced.

OMHHF estimates the initial fair value of the servicing rights based on the present value of future net servicing income, adjusted for factors such as discount rate and prepayment. OMHHF uses the amortization method for subsequent measurement, subject to annual impairment. The fair value of the servicing rights on the loan portfolio was $34.4 million and $33.0 million at March 31, 2013 and December 31, 2012, respectively (carrying value of $27.2 million and $27.0 million at March 31, 2013 and December 31, 2012, respectively). The following tables summarize the changes in MSR’s for the three months ended March 31, 2013 and March 31, 2012:

 

(expressed in thousands of dollars)       

Balance, as of December 31, 2012

   $ 26,983   

Originations (1)

     1,540   

Purchases

     186   

Disposals (1)

     (882

Amortization expense

     (640
  

 

 

 

Balance, as of March 31, 2013

   $ 27,187   
  

 

 

 

 

(1) Includes refinancing.

 

(expressed in thousands of dollars)       

Balance, as of December 31, 2011

   $ 22,795   

Originations (1)

     1,299   

Purchases

     1,252   

Disposals (1)

     (448

Amortization expense

     (672
  

 

 

 

Balance, as of March 31, 2012

   $ 24,226   
  

 

 

 

 

(1) Includes refinancing.

 

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Servicing rights are amortized using the straight-line method over 10 years. Amortization expense for the next five years is as follows:

 

(expressed in thousands of dollars)       

2013

   $ 3,309   

2014

     3,291   

2015

     3,291   

2016

     3,286   

2017

     3,259   

Thereafter

     10,751   
  

 

 

 
   $ 27,187   
  

 

 

 

The Company receives fees during the course of servicing the mortgage loans. The amount of these fees for the three months ended March 31, 2013 and 2012 were as follows:

 

     For the Three months ended March 31,  
(expressed in thousands of dollars)    2013      2012  

Servicing fees

   $ 1,208       $ 927   

Late fees

     62         23   

Ancillary fees

     57         97   
  

 

 

    

 

 

 

Total MSR fees

   $ 1,327       $ 1,047   
  

 

 

    

 

 

 

7. Long-term debt

 

(expressed in thousands of dollars)                   

Issued

   Maturity Date      March 31, 2013    December 31, 2012  

Senior Secured Notes

     4/15/2018       $195,000    $ 195,000   

On April 12, 2011, the Company completed the private placement of $200.0 million in aggregate principal amount of 8.75 percent Senior Secured Notes due April 15, 2018 at par (the “Notes”). The interest on the Notes is payable semi-annually on April 15th and October 15th. Proceeds from the private placement were used to retire the Senior Secured Credit Note due 2013 ($22.4 million) and the Subordinated Note due 2014 ($100.0 million) and for other general corporate purposes. The private placement resulted in the fixing of the interest rate over the term of the Notes compared to the variable rate debt that was retired and an extension of the debt maturity dates as described above. The cost to issue the Notes was approximately $4.6 million which was capitalized in the second quarter of 2011 and is amortized over the period of the Notes.

The indenture for the Notes contains covenants which place restrictions on the incurrence of indebtedness, the payment of dividends, sale of assets, mergers and acquisitions and the granting of liens. The Notes provide for events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. The Company’s obligations under the Notes are guaranteed, subject to certain limitations, by the same subsidiaries that guaranteed the obligations under the Senior Secured Credit Note and the Subordinated Note which were retired. These guarantees may be shared, on a senior basis, under certain circumstances, with newly incurred debt outstanding in the future. At March 31, 2013, the Company was in compliance with all of its covenants.

 

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On July 12, 2011, the Company’s Registration Statement on Form S-4 filed to register the exchange of the Notes for fully registered Notes was declared effective by the SEC. The Exchange Offer was completed in its entirety on August 9, 2011.

In November 2011, the Company repurchased $5.0 million of its Notes at a cost of $4.7 million resulting in the recording of a gain of $300,000 during the fourth quarter of 2011. The Company continued to hold these Notes at March 31, 2013.

On April 4, 2012, the Company’s Registration Statement on Form S-3 filed to enable the Company to act as a market maker in connection with the Notes was declared effective by the SEC.

Interest expense for the three months ended March 31, 2013 on the Notes was $4.3 million ($4.3 million for the three months ended March 31, 2012).

At March 31, 2013, the Notes were trading at $107.56 per $100.

8. Share capital

The Company’s authorized share capital consists of (a) 50,000,000 shares of Preferred Stock, par value $0.001 per share; (b) 50,000,000 shares of Class A non-voting common stock, par value $0.001 per share ; and (c) 99,680 shares of Class B voting common stock, par value $0.001 per share . No Preferred Stock has been issued. 99,680 shares of Class B Stock have been issued and are outstanding.

The Class A and the Class B Stock are equal in all respects except that the Class A Stock is non-voting.

The following table reflects changes in the number of shares of Class A Stock outstanding for the periods indicated:

 

     Three months ended March 31,  
     2013      2012  

Class A Stock outstanding, beginning of period

     13,508,318         13,572,265   

Issued pursuant to shared-based compensation plans

     —           16,797   

Repuchsed and cancelled pursuant to the stock buy-back

     —           (99,900
  

 

 

    

 

 

 

Class A Stock outstanding, end of period

     13,508,318         13,489,162   
  

 

 

    

 

 

 

Stock buy-back

On October 7, 2011, the Company announced its intention to purchase up to 675,000 shares of its Class A Stock in compliance with the rules and regulations of the New York Stock Exchange and the SEC and the terms of its senior secured debt. The 675,000 shares represented approximately 5% of its then 13,572,265 issued and outstanding shares of Class A Stock. Any such purchases will be made by the Company in the open market at the prevailing open market price using cash on hand. All shares purchased will be cancelled. The repurchase program is expected to continue indefinitely. The repurchase program does not obligate the Company to repurchase any dollar amount or number of shares of Class A Stock. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time without prior notice.

 

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9. Contingencies

Many aspects of the Company’s business involve substantial risks of liability. In the normal course of business, the Company has been named as defendant or co-defendant in various legal actions, including arbitrations, class actions, and other litigation, creating substantial exposure. Certain of the actual or threatened legal matters include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. These proceedings arise primarily from securities brokerage, asset management and investment banking activities. The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company’s business which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The investigations include, among other things, inquiries from the SEC, the Financial Industry Regulatory Authority (“FINRA”) and various state regulators. The Company is named as a respondent in a number of arbitrations by its current or former clients as well as lawsuits related to its sale of ARS.

The Company accrues for estimated loss contingencies related to legal and regulatory matters when available information indicates that it is probable a liability had been incurred at the date of the condensed consolidated financial statements and the Company can reasonably estimate the amount of that loss. In many proceedings, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is often not possible to reasonably estimate the size of the possible loss or range of loss or additional losses or range of additional losses.

For certain legal and regulatory proceedings, the Company cannot reasonably estimate such losses, particularly for proceedings that are in their early stages of development or where plaintiffs seek substantial, indeterminate or special damages. Numerous issues may need to be reviewed, analyzed or resolved, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for any proceeding. Even after lengthy review and analysis, the Company, in many legal and regulatory proceedings, may not be able to reasonably estimate possible losses or range of losses.

For certain other legal and regulatory proceedings, the Company can estimate possible losses, or, ranges of loss in excess of amounts accrued, but does not believe, based on current knowledge and after consultation with counsel, that such losses individually or in the aggregate, will have a material adverse effect on the Company’s condensed consolidated financial statements as a whole.

For legal proceedings where there is at least a reasonable possibility that a loss or an additional loss may be incurred, the Company estimates a range of aggregate loss in excess of amounts accrued of $0 to approximately $125.5 million. This estimated aggregate range is based upon currently available information for those legal proceedings in which the Company is involved, where an estimate for such losses can be made. For certain cases, the Company does not believe that an estimate can currently be made. The foregoing estimate is based on various factors, including the varying stages of the proceedings (including the fact that many are currently in preliminary stages), the numerous yet-unresolved issues in many of the proceedings and the attendant uncertainty of the various potential outcomes of such proceedings. Accordingly, the Company’s estimate will change from time to time, and actual losses may be more than the current estimate.

 

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10. Regulatory requirements

The Company’s U.S. broker dealer subsidiaries, Oppenheimer and Freedom, are subject to the uniform net capital requirements of the SEC under Rule 15c3-1 (the “Rule”) promulgated under Securities Exchange Act of 1934, as amended (the “Exchange Act”). Oppenheimer computes its net capital requirements under the alternative method provided for in the Rule which requires that Oppenheimer maintain net capital equal to two percent of aggregate customer-related debit items, as defined in SEC Rule 15c3-3. At March 31, 2013, the net capital of Oppenheimer as calculated under the Rule was $154.2 million or 12.4% of Oppenheimer’s aggregate debit items. This was $129.3 million in excess of the minimum required net capital at that date. Freedom computes its net capital requirement under the basic method provided for in the Rule, which requires that Freedom maintain net capital equal to the greater of $250,000 or 6-2/3% of aggregate indebtedness, as defined. At March 31, 2013, Freedom had net capital of $4.7 million, which was $4.4 million in excess of the $250,000 required to be maintained at that date.

At March 31, 2013, Oppenheimer and Freedom had $20.1 million and $16.1 million, respectively, in cash and U.S. Treasury securities segregated under Federal and other regulations.

At March 31, 2013, the regulatory capital of Oppenheimer Europe Ltd. was $5.7 million which was $2.3 million in excess of the $3.4 million required to be maintained at that date. Oppenheimer Europe Ltd. computes its regulatory capital pursuant to the Fixed Overhead Method prescribed by the Financial Services Authority of the United Kingdom.

At March 31, 2013, the regulatory capital of Oppenheimer Investments Asia Ltd. was $917,000, which was $531,000 in excess of the $386,000 required to be maintained on that date. Oppenheimer Investments Asia Ltd. computes its regulatory capital pursuant to the requirements of the Securities and Futures Commission in Hong Kong.

In accordance with the SEC’s No-Action Letter dated November 3, 1998, the Company has computed a reserve requirement for the proprietary accounts of introducing firms as of March 31, 2013. The Company had no deposit requirements as of March 31, 2013.

11. Related party transactions

The Company does not make loans to its officers and directors except under normal commercial terms pursuant to client margin account agreements. These loans are fully collateralized by employee-owned securities.

12. Segment information

The Company has determined its reportable segments based on the Company’s method of internal reporting, which disaggregates its retail business by branch and its proprietary and investment banking businesses by product. The Company evaluates the performance of its segments and allocates resources to them based upon profitability.

Due to the recent growth in the Company’s commercial loan origination and servicing business operated out of OMHHF, the Company has broken out the results of this business in a reportable segment titled “Commercial Mortgage Banking.” This operating segment engages in business activities in which it earns revenues and incurs expenses that are distinct from the Company’s other reportable segments, its operating results are reviewed by the Company’s CEO who makes decisions about resources to be allocated to this business, and separate financial information is available for the legal entity from which it operates. The Commercial Mortgage Banking segment not only meets these qualitative criteria but, as a result of its recent growth, also meets one of the quantitative thresholds for segment reporting. Previously reported segment information has been revised to reflect this new operating segment.

 

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The Company’s segments are:

Private Clientincludes commission and fee income earned on client transactions, net interest earnings on client margin loans and cash balances, fees from money market funds, net contributions from stock loan activities and financing activities, and direct expenses associated with this segment;

Asset Management—includes fees from investment management services of Oppenheimer Asset Management Inc. and Oppenheimer’s asset management divisions employing various programs to professionally manage client assets either in individual accounts or in funds, and direct expenses associated with this segment;

Capital Markets—includes investment banking, institutional equities sales, trading, and research, taxable fixed income sales, trading, and research, public finance and municipal trading, as well as the Company’s operations in the United Kingdom, Hong Kong, and Israel, and direct expenses associated with this segment; and

Commercial Mortgage Bankingincludes loan origination and servicing fees from the Company’s subsidiary, OMHHF. The Company has added this business segment due to the significant growth and profitability of this line of business over the last several quarters. In prior periods, this business had been part of the Capital Markets business segment.

The Company does not allocate costs associated with certain infrastructure support groups that are centrally managed to its operating segments. These areas include, but are not limited to, legal, compliance, operations, accounting, and internal audit. Costs associated with these groups are separately reported in a Corporate/Other category and include, for example, compensation and benefits, rent expense, information technology, legal and professional.

The table below presents information about the reported revenue and net income before taxes of the Company for the three months ended March 31, 2013 and 2012. Asset information by reportable segment is not reported, since the Company does not produce such information for internal use.

 

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     Three months ended March 31,  
(expressed in thousands of dollars)    2013     2012  

Revenue

    

Private client division

   $ 143,369      $ 144,263   

Asset management

     20,956        19,044   

Capital markets

     65,131        69,329   

Commercial mortgage banking

     8,066        8,054   

Corporate/Other

     1,624        (2,476
  

 

 

   

 

 

 

Total

   $ 239,146      $ 238,214   
  

 

 

   

 

 

 

Income (loss) before income taxes

    

Private client division

   $ 17,327      $ 14,962   

Asset management

     6,543        4,990   

Capital markets

     3,533        (1,655

Commercial mortgage banking

     2,878        3,830   

Corporate/Other

     (23,568     (28,616
  

 

 

   

 

 

 

Total

   $ 6,713      $ (6,489
  

 

 

   

 

 

 

Revenue, classified by the major geographic areas in which it was earned for the three months ended March 31, 2013 and 2012, was as follows:

 

     Three months ended March 31,  
(expressed in thousands of dollars)    2013      2012  

United States

   $ 228,693       $ 225,635   

Europe/Middle East

     8,403         9,913   

Asia

     825         190   

South America

     1,225         2,476   
  

 

 

    

 

 

 

Total

   $ 239,146       $ 238,214   
  

 

 

    

 

 

 

13. Subsequent events

On April 25, 2013, the Company announced a quarterly dividend in the amount of $0.11 per share, payable on May 24, 2013 to holders of Class A non-voting and Class B voting common stock of record on May 10, 2013.

 

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14. Supplemental guarantor condensed consolidated financial statements

The Company’s Notes (see Note 7) are jointly and severally and fully and unconditionally guaranteed on a senior basis by E.A. Viner International Co. and Viner Finance Inc. (together, the “Guarantors”), unless released as described below. Each of the Guarantors is 100% owned by the Company. The following consolidating financial statements present the financial position, results of operations and cash flows of the Company (referred to as “Parent” for purposes of this note only), the Guarantor subsidiaries, the Non-Guarantor subsidiaries and elimination entries necessary to consolidate the Company. Investments in subsidiaries are accounted for using the equity method for purposes of the consolidated presentation.

Each Guarantor will be automatically and unconditionally released and discharged upon: the sale, exchange or transfer of the capital stock of a Guarantor and the Guarantor ceases to be a direct or indirect subsidiary of the Company if such sale does not constitute an asset sale under the indenture for the Notes or does not constitute an asset sale effected in compliance with the asset sale and merger covenants of the debenture for the Notes; a Guarantor being dissolved or liquidated; a Guarantor being designated unrestricted in compliance with the applicable provisions of the Notes; or the exercise by the Company of its legal defeasance option or covenant defeasance option or the discharge of the Company’s obligations under the indenture for the Notes in accordance with the terms of such indenture.

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MARCH 31, 2013

 

(expressed in thousands of dollars)

   Parent      Guarantor
subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

           

Cash and cash equivalents

   $ 40       $ 31,394      $ 67,344      $ —        $ 98,778   

Cash and securities segregated for regulatory and other purposes

     —           —          37,164        —          37,164   

Deposits with clearing organizations

     —           —          24,576        —          24,576   

Receivable from brokers and clearing organizations

     —           —          290,955        —          290,955   

Receivable from customers, net of allowance for credit losses of $2,239

     —           —          881,514        —          881,514   

Income tax receivable

     15,094         31,100        (684     (31,530     13,980   

Securities purchased under agreements to resell

     —           —          —          —          —     

Securities owned, including amounts pledged of $391,900, at fair value

     —           2,574        845,755        —          848,329   

Subordinated loan receivable

     —           112,558        —          (112,558     —     

Notes receivable, net

     —           —           45,030        —          45,030   

Office facilities, net

     —           17,626        13,312        —          30,938   

Deferred tax assets, net

     —           309        36,595        (35,124     1,780   

Intangible assets, net

     —           —          31,700        —          31,700   

Goodwill

     —           —          137,889        —          137,889   

Other

     3,332         25,276        157,926        —          186,534   

Investment in subsidiaries

     514,028         875,266        (182,562     (1,206,732     —     

Intercompany receivables

     177,650         (70,560     (41,213     (65,877     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $  710,144       $  1,025,543      $ 2,345,301      $ (1,451,821   $ 2,629,167   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

           

Liabilities

           

Drafts payable

   $ —         $ —        $ 44,927      $ —        $ 44,927   

Bank call loans

     —           —          204,000        —          204,000   

Payable to brokers and clearing organizations

     —           —          215,612        —          215,612   

Payable to customers

     —           —          607,034        —          607,034   

Securities sold under agreements to repurchase

     —           —          544,136        —          544,136   

Securities sold, but not yet purchased, at fair value

     —           —          63,046        —          63,046   

Accrued compensation

     —           —          97,887        —          97,887   

Accounts payable and other liabilities

     8,287         60,255        80,567        (492     148,617   

Income tax payable

     2,440         22,189        5,296        (29,925     —     

Senior secured notes

     195,000         —          —          —          195,000   

Subordinated indebtedness

     —           —          112,558        (112,558     —     

Deferred tax liabilities, net

     —           —          36,728        (36,728     —     

Excess of fair value of acquired assets over cost

     —           —          —          —          —     

Intercompany payables

     —           65,875        —          (65,875     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     205,727         148,319        2,011,791        (245,578     2,120,259   

Stockholders’ equity

           

Stockholders’ equity attributable to Oppenheimer Holdings Inc.

     504,417         877,224        329,019        (1,206,243     504,417   

Noncontrolling interest

     —           —          4,491        —          4,491   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     504,417         877,224        333,510        (1,206,243     508,908   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 710,144       $ 1,025,543      $ 2,345,301      $ (1,451,821   $ 2,629,167   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2012

 

(expressed in thousands of dollars)

   Parent     Guarantor
subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

          

Cash and cash equivalents

   $ 35      $ 40,658      $ 94,673      $ —        $ 135,366   

Cash and securities segregated for regulatory and other purposes

     —          —          33,000        —          33,000   

Deposits with clearing organizations

     —          —          25,954        —          25,954   

Receivable from brokers and clearing organizations

     —          —          479,699        —          479,699   

Receivable from customers, net of allowance for credit losses of $2,256

     —          —          817,941        —          817,941   

Income tax receivable

     13,207        30,568        (450     (42,874     451   

Securities purchased under agreements to resell

     —          —          —          —          —     

Securities owned, including amounts pledged of $569,995, at fair value

     —          2,459        757,283        —          759,742   

Subordinated loan receivable

     —          112,558        —           (112,558     —     

Notes receivable, net

     —          —           47,324        —          47,324   

Office facilities, net

     —          15,547        12,785        —          28,332   

Deferred tax assets, net

     (143     309        52,350        (36,176     16,340   

Intangible assets, net

     —          —          31,700        —          31,700   

Goodwill

     —          —          137,889        —          137,889   

Other

     3,418        1,437        159,427        —          164,282   

Investment in subsidiaries

     506,679        880,609        (195,045     (1,192,243     —     

Intercompany receivables

     178,743        (114,449     (27,686     (36,608     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $  701,939      $ 969,696      $ 2,426,844      $  (1,420,459   $ 2,678,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

          

Liabilities

          

Drafts payable

   $ —        $ —        $ 56,586      $ —        $ 56,586   

Bank call loans

     —          —          128,300        —          128,300   

Payable to brokers and clearing organizations

     —          —          204,218        —          204,218   

Payable to customers

     —          —          692,378        —          692,378   

Securities sold under agreements to repurchase

     —          —          392,391        —          392,391   

Securities sold, but not yet purchased, at fair value

     —          —          173,450        —          173,450   

Accrued compensation

     —          —          150,434        —          150,434   

Accounts payable and other liabilities

     3,759        43,350        133,646        (493     180,262   

Income tax payable

     2,440        22,189        18,687        (43,316     —     

Senior secured notes

     195,000        —          —          —          195,000   

Subordinated indebtedness

     —          —          112,558        (112,558     —     

Deferred tax liabilities, net

     —          (943     36,677        (35,734     —     

Excess of fair value of acquired assets over cost

     —          —          —          —          —     

Intercompany payables

     —          36,605        —          (36,605     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     201,199        101,201        2,099,325        (228,706     2,173,019   

Stockholders’ equity

          

Stockholders’ equity attributable to Oppenheimer Holdings Inc.

     500,740        868,495        323,258        (1,191,753     500,740   

Noncontrolling interest

     —          —          4,261        —          4,261   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     500,740        868,495        327,519        (1,191,753     505,001   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 701,939      $ 969,696      $ 2,426,844      $ (1,420,459   $ 2,678,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

40


Table of Contents

OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

 

(expressed in thousands of dollars)

   Parent     Guarantor
subsidiaries
     Non-guarantor
Subsidiaries
     Eliminations     Consolidated  

REVENUES

            

Commissions

   $ —        $ —         $ 119,580       $ —        $ 119,580   

Principal transactions, net

     —          73         15,644         —          15,717   

Interest

     5        2,788         12,296         (2,718     12,371   

Investment banking

     —          —           18,448         —          18,448   

Advisory fees

     —          —           57,360         (640     56,720   

Other

     —          42         16,310         (42     16,310   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     5        2,903         239,638         (3,400     239,146   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

EXPENSES

            

Compensation and related expenses

     441        —           158,768         —          159,209   

Clearing and exchange fees

     —          —           6,042         —          6,042   

Communications and technology

     23        —           15,841         —          15,864   

Occupancy and equipment costs

     —          —           17,607         (42     17,565   

Interest

     4,375        —           5,205         (2,718     6,862   

Other

     437        3         27,091         (640     26,891   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     5,276        3         230,554         (3,400     232,433   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     (5,271     2,900         9,084         —          6,713   

Income tax provision (benefit)

     (2,032     679         4,173         —          2,820   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss) for the period

     (3,239     2,221         4,911         —          3,893   

Less net income attributable to non- controlling interest, net of tax

     —          —           230         —          230   

Equity in subsidiaries

     6,902        —           —           (6,902     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss) attributable to Oppenheimer Holdings Inc.

   $ 3,663      $  2,221       $ 4,681       $  (6,902   $ 3,663   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ —        $ —         $ 451       $ —        $ 451   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

41


Table of Contents

OPPENHEIMER HOLDINGS INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2012

 

(expressed in thousands of dollars)

   Parent     Guarantor
subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

REVENUES

          

Commissions

   $ —        $ —        $ 125,634      $ —        $ 125,634   

Principal transactions, net

     —          488        12,067        —          12,555   

Interest

     —          3,097        12,996        (2,700     13,393   

Investment banking

     —          —          20,087        —          20,087   

Advisory fees

     —          —          50,714        (637     50,077   

Other

     —          —          16,468        —           16,468   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —          3,585        237,966        (3,337     238,214   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

          

Compensation and related expenses

     128        —          158,523        —          158,651   

Clearing and exchange fees

     —          —          6,031        —          6,031   

Communications and technology

     —          —          16,138        —          16,138   

Occupancy and equipment costs

     —          (42     24,386        —          24,344   

Interest

     4,374        66        7,052        (2,700     8,792   

Other

     343        18        31,023        (637     30,747   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     4,845        42        243,153        (3,337     244,703   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (4,845     3,543        (5,187     —          (6,489

Income tax provision (benefit)

     (1,832     1,233        (2,007     —          (2,606
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) for the period

     (3,013