10-Q 1 opy-3312016x10xq.htm 10-Q 10-Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
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)
(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  o
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    o  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
o
  
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o
  
Smaller reporting company
o
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o   No  x
The number of shares of the Company’s Class A non-voting common stock and Class B voting common stock (being the only classes of common stock of the Company) outstanding on April 29, 2016 was 13,263,532 and 99,665 shares, respectively.
 



OPPENHEIMER HOLDINGS INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q 
 
 
Page
No.
PART I
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
 
Item 1.
Item 1A.
Item 2.
Item 6.
 




PART I. FINANCIAL INFORMATION

Item 1.        Financial Statements (unaudited)

OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Expressed in thousands, except number of shares and per share amounts)
March 31, 2016
 
December 31, 2015
ASSETS
 
 
 
Cash and cash equivalents
$
62,479

 
$
63,364

Deposits with clearing organizations
56,567

 
49,490

Receivable from brokers, dealers and clearing organizations
263,363

 
360,913

Receivable from customers, net of allowance for credit losses of $2,573 ($2,545 in 2015)
791,631

 
840,355

Income tax receivable
17,261

 
10,937

Securities purchased under agreements to resell

 
206,499

Securities owned, including amounts pledged of $705,835 ($546,334 in 2015), at fair value
1,036,782

 
735,393

Notes receivable, net of accumulated amortization and allowance for uncollectibles of $58,350 and $8,722, respectively ($54,919 and $8,444, respectively, in 2015)
32,869

 
32,849

Office facilities, net of accumulated depreciation of $106,206 ($104,961 in 2015)
28,518

 
28,290

Loans held for sale
13,532

 
60,234

Mortgage servicing rights
28,024

 
28,168

Intangible assets
31,700

 
31,700

Goodwill
137,889

 
137,889

Other assets
120,249

 
105,751

Total assets
$
2,620,864

 
$
2,691,832

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Drafts payable
$
37,663

 
$
48,011

Bank call loans
148,300

 
100,200

Payable to brokers, dealers and clearing organizations
207,879

 
164,546

Payable to customers
521,557

 
594,833

Securities sold under agreements to repurchase
529,752

 
651,445

Securities sold, but not yet purchased, at fair value
270,952

 
126,493

Accrued compensation
93,835

 
150,898

Accounts payable and other liabilities
126,183

 
164,783

Senior secured notes, net of debt issuance costs of $1,011 ($1,132 in 2015)
148,989

 
148,868

Deferred tax liabilities, net of deferred tax assets of $61,346 ($63,481 in 2015)
19,408

 
16,673

Total liabilities
2,104,518

 
2,166,750

Commitments and contingencies (Note 11)

 

Stockholders’ equity
 
 
 
Share capital
 
 
 
Class A non-voting common stock, par value $0.001 per share, 50,000,000 shares authorized, 13,263,532 and 13,238,486 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
59,216

 
57,387

Class B voting common stock, par value $0.001 per share, 99,665 shares authorized,
issued and outstanding
133

 
133

 
59,349

 
57,520

Contributed capital
38,385

 
44,438

Retained earnings
411,678

 
417,001

Accumulated other comprehensive loss
(28
)
 
(901
)
Total Oppenheimer Holdings Inc. stockholders’ equity
509,384

 
518,058

Noncontrolling interest
6,962

 
7,024

Total stockholders’ equity
516,346

 
525,082

Total liabilities and stockholders’ equity
$
2,620,864

 
$
2,691,832

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

2


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
(Expressed in thousands, except number of shares and per share amounts)
2016
 
2015
REVENUE
 
 
 
Commissions
$
103,833

 
$
109,695

Advisory fees
66,026

 
70,966

Investment banking
12,383

 
27,305

Interest
13,379

 
11,035

Principal transactions, net
1,531

 
18,555

Other
21,542

 
8,005

Total revenue
218,694

 
245,561

EXPENSES
 
 
 
Compensation and related expenses
151,413

 
163,091

Communications and technology
17,781

 
17,168

Occupancy and equipment costs
14,978

 
15,778

Clearing and exchange fees
6,921

 
6,402

Interest
5,088

 
3,910

Other
30,510

 
29,361

Total expenses
226,691

 
235,710

Income (loss) before income tax provision (benefit)
(7,997
)
 
9,851

Income tax provision (benefit)
(4,088
)
 
3,730

Net income (loss)
(3,909
)
 
6,121

Less net income (loss) attributable to noncontrolling interest
(62
)
 
402

Net income (loss) attributable to Oppenheimer Holdings Inc.
$
(3,847
)
 
$
5,719

Earnings (loss) per share attributable to Oppenheimer Holdings Inc.
 
 
 
Basic
$
(0.29
)
 
$
0.42

Diluted
$
(0.29
)
 
$
0.40

Dividends declared per share
$
0.11

 
$
0.11

Weighted average shares
 
 
 
Basic
13,379,827

 
13,704,228

Diluted
13,379,827

 
14,282,270

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

3


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
(Expressed in thousands)
2016
 
2015
Net income (loss)
$
(3,909
)
 
$
6,121

Other comprehensive income (loss), net of tax (1)
 
 
 
Currency translation adjustment
873

 
(567
)
Comprehensive income (loss)
(3,036
)
 
5,554

Less net income (loss) attributable to noncontrolling interests
(62
)
 
402

Comprehensive income (loss) attributable to Oppenheimer Holdings Inc.
$
(2,974
)
 
$
5,152

 
(1)
Total other comprehensive income (loss) is attributable to Oppenheimer Holdings Inc. No other comprehensive income (loss) is attributable to noncontrolling interests.
The accompanying notes are an integral part of these condensed consolidated financial statements.

4


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
(Expressed in thousands)
2016
 
2015
Share capital
 
 
 
Balance at beginning of period
$
57,520

 
$
62,397

Issuance of Class A non-voting common stock
5,463

 
2,889

Repurchase of Class A non-voting common stock for cancellation
(3,634
)
 

Balance at end of period
59,349

 
65,286

Contributed capital
 
 
 
Balance at beginning of period
44,438

 
45,118

Tax deficiency from share-based awards
(741
)
 
(321
)
Share-based expense
1,492

 
898

Vested employee share plan awards
(6,804
)
 
(4,572
)
Balance at end of period
38,385

 
41,123

Retained earnings
 
 
 
Balance at beginning of period
417,001

 
421,047

Net income (loss) attributable to Oppenheimer Holdings Inc.
(3,847
)
 
5,719

Dividends paid ($0.11 per share)
(1,476
)
 
(1,511
)
Balance at end of period
411,678

 
425,255

Accumulated other comprehensive loss
 
 
 
Balance at beginning of period
(901
)
 
(918
)
Currency translation adjustment
873

 
(567
)
Balance at end of period
(28
)
 
(1,485
)
Total Oppenheimer Holdings Inc. stockholders’ equity
509,384

 
530,179

Noncontrolling interest
 
 
 
Balance at beginning of period
7,024

 
6,088

Net income (loss) attributable to noncontrolling interest
(62
)
 
402

Balance at end of period
6,962

 
6,490

Total stockholders’ equity
$
516,346

 
$
536,669

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

5


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
(Expressed in thousands)
2016
 
2015
Cash flows from operating activities
 
 
 
Net income (loss) for the period
$
(3,909
)
 
$
6,121

Adjustments to reconcile net income (loss) to net cash used in operating activities
 
 
 
Payment of taxes due for vested share-based awards related to amounts the Company withheld on behalf of its employees to meet minimum statutory tax withholding requirements
(1,341
)
 
(1,683
)
Non-cash items included in net income:
 
 
 
Depreciation and amortization of office facilities and leasehold improvements
1,534

 
1,794

Deferred income taxes
2,735

 
6,089

Amortization of notes receivable
3,431

 
3,745

Amortization of debt issuance costs
121

 
121

Amortization of mortgage servicing rights
782

 
230

Provision for credit losses
28

 
12

Share-based compensation
1,189

 
1,495

Decrease (increase) in operating assets:
 
 
 
Cash and securities segregated for regulatory and other purposes

 
17,077

Deposits with clearing organizations
(7,077
)
 
(13,748
)
Receivable from brokers, dealers and clearing organizations
97,550

 
(23,628
)
Receivable from customers
48,696

 
(26,083
)
Income tax receivable
(6,324
)
 
(2,089
)
Securities purchased under agreements to resell
206,499

 
251,606

Securities owned
(301,389
)
 
(112,208
)
Notes receivable
(3,451
)
 
(3,808
)
Loans held for sale
46,702

 
(76,633
)
Mortgage servicing rights
(638
)
 
1,519

Other assets
(13,625
)
 
(11,820
)
Increase (decrease) in operating liabilities:
 
 
 
Drafts payable
(10,348
)
 
(758
)
Payable to brokers, dealers and clearing organizations
43,333

 
93,069

Payable to customers
(73,276
)
 
51,831

Securities sold under agreements to repurchase
(121,693
)
 
(290,051
)
Securities sold, but not yet purchased
144,459

 
92,139

Accrued compensation
(56,760
)
 
(63,063
)
Accounts payable and other liabilities
(38,600
)
 
62,141

Cash used in operating activities
(41,372
)
 
(36,583
)
Cash flows from investing activities
 
 
 
Purchase of office facilities
(1,762
)
 
(474
)
Cash used in investing activities
(1,762
)
 
(474
)
Cash flows from financing activities
 
 
 
Cash dividends paid on Class A non-voting and Class B voting common stock
(1,476
)
 
(1,511
)
Repurchase of Class A non-voting common stock for cancellation
(3,634
)
 

Tax deficiency from share-based awards
(741
)
 
(321
)
Increase in bank call loans, net
48,100

 
42,000

Cash provided by financing activities
42,249

 
40,168

Net (decrease) increase in cash and cash equivalents
(885
)
 
3,111

Cash and cash equivalents, beginning of period
63,364

 
63,807

Cash and cash equivalents, end of period
$
62,479

 
$
66,918

Schedule of non-cash financing activities
 
 
 
Employee share plan issuance
$
5,463

 
$
2,889

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
1,788

 
$
611

Cash paid during the period for income taxes, net of refunds
$
181

 
$
107

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

6


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

1.        Organization and basis of presentation
Organization
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 Company engages in a broad range of activities in the financial services industry, including retail securities brokerage, institutional sales and trading, investment banking (both corporate and public finance), research, market-making, trust services, mortgage banking and investment advisory and asset management services.
The principal subsidiaries of OPY are Oppenheimer & Co. Inc. ("Oppenheimer"), a registered broker dealer in securities and investment adviser under the Investment Advisers Act of 1940, Oppenheimer Asset Management Inc. ("OAM") and its wholly- owned subsidiary, Oppenheimer Investment Management LLC ("OIM"), both registered investment advisers under the Investment Advisers Act of 1940, Oppenheimer Trust Company of Delaware ("Oppenheimer Trust"), a limited purpose trust company that provides fiduciary services such as trust and estate administration and investment management, Oppenheimer Multifamily Housing & Healthcare Finance, Inc. ("OMHHF"), which is engaged in commercial mortgage origination and servicing, OPY Credit Corp., which offers syndication as well as trading of issued corporate loans, Oppenheimer Europe Ltd., based in the United Kingdom, with offices in the Isle of Jersey and Switzerland, which provides institutional equities and fixed income brokerage and corporate financial services and is regulated by the Financial Conduct Authority, and Oppenheimer Investments Asia Limited, based in Hong Kong, China, which provides assistance in accessing the U.S. equities markets and limited mergers and acquisitions advisory services to Asia-based companies, as well as offering fixed income brokerage services to institutional investors, and is regulated by the Securities and Futures Commission.
Oppenheimer provides its services from 82 offices in 24 states located throughout the United States and in 5 foreign jurisdictions. Oppenheimer owns Freedom Investments, Inc. ("Freedom"), a registered broker dealer in securities, which provides discount brokerage services, and Oppenheimer Israel (OPCO) Ltd., which is engaged in offering investment services in the State of Israel. Oppenheimer holds a trading permit on the New York Stock Exchange and is a member of several other regional exchanges in the United States.
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America ("U.S. GAAP") for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the "Form 10-K"). The accompanying December 31, 2015 condensed consolidated balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. Although these estimates are based on management’s knowledge of current events and actions that the Company may undertake in the future, actual results may differ materially from the estimates. The condensed consolidated results of operations for the three month period ended March 31, 2016 are not necessarily indicative of the results to be expected for any future interim or annual period.
Certain prior period amounts have been reclassified to conform to the current period presentation.
Accounting standards require the Company to present noncontrolling interests as a separate component of stockholders’ equity on the Company’s condensed consolidated balance sheet. As of March 31, 2016, the Company owned 83.68% of OMHHF and the noncontrolling interest recorded in the condensed consolidated balance sheet was $7.0 million.

7


2.        New accounting pronouncements
Recently Adopted
In April 2014, the FASB issued ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." Under this ASU, a discontinued operation is defined as a disposal of a component or group of components that is disposed of and represents a strategic shift that has or will have a major effect on an entity's operation. The ASU also modified related disclosure requirements. The ASU became effective for the annual reporting period in the fiscal year that began after December 15, 2014. The adoption of this accounting guidance did not have a material impact on the Company's condensed consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-11, "Transfers and Servicing – Repurchase-to-Maturity Transactions, Repurchase Financing, and Disclosures," which makes amendments to the guidance in Accounting Standards Codification 860 on accounting for certain repurchase agreements. The ASU became effective for the annual reporting period in the fiscal year that began after December 15, 2015, except for the disclosures related to transactions accounted for as secured borrowings, which became effective for the period that began on or after March 15, 2015. The adoption of this accounting guidance did not have a material impact on the Company's condensed consolidated financial statements. See Note 6, Collateralized transactions, below.
In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation." The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based award as performance conditions that affect vesting. The ASU became effective for the annual reporting period in the fiscal year that began after December 15, 2015. The adoption of the ASU did not have a material impact on the Company's condensed consolidated financial statements.
In November 2014, the FASB issued ASU No. 2014-17, "Business Combination - Pushdown Accounting." The ASU gives the acquired entity the option of applying pushdown accounting in its stand-alone financial statements upon a change-in-control event. The ASU became effective upon issuance. The adoption of this accounting guidance did not have a material impact on the Company's condensed consolidated financial statements.
In January 2015, the FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items," to simplify income statement classification by removing the concept of extraordinary items. Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of an unusual nature and occurs infrequently. This separate, net-of-tax presentation (and corresponding earnings per share impact) will no longer be allowed. However, the existing requirement to separately present items that are of an unusual nature or occur infrequently on a pre-tax basis within income from continuing operations has been retained. The ASU became effective for the annual reporting period in the fiscal year that began after December 15, 2015. The adoption of the ASU did not have a material impact on the Company's condensed consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, "Consolidation - Amendments to the Consolidation Analysis," to eliminate the deferral of the application of the revised consolidation rules and make changes to both the variable interest model and the voting model. Under this ASU, a general partner will not consolidate a partnership or similar entity under the voting model. The ASU became effective for the annual reporting period in the fiscal year that began after December 15, 2015. The adoption of the ASU impacted the disclosure of VIEs but did not have a material impact on the Company's condensed consolidated financial statements. See Note 7, Variable interest entities, below.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. The ASU became effective for the annual reporting period in the fiscal year that began after December 15, 2015. The adoption of the ASU did not have a material impact on the Company's condensed consolidated financial statements.
In May 2015, the FASB issued ASU No. 2015-07, “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” which removes the requirement to categorize within the fair value hierarchy all investments measured using the net asset value per share practical expedient and related disclosures. The ASU became effective for the annual reporting periods in the fiscal year that began after December 15, 2015. The adoption of the ASU impacted the fair value disclosures but did not have a material impact on the Company's condensed consolidated financial statements. See Note 5, Fair value measurements, below.

8


Recently Issued
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Additionally, the ASU expands the disclosure requirements for revenue recognition. The ASU was originally effective for the annual reporting period in the fiscal year that begins after December 15, 2016. In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers: Deferral of the Effective Date." which defers the effective date of the standard to the annual reporting period in the fiscal year that begins after December 15, 2017 and early adoption is permitted as of the original effective date. The Company is currently evaluating the impact, if any, that the ASU will have on its condensed consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, "Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern," which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The ASU requires management of an entity to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements and also provide disclosures if there is "substantial doubt about the entity's ability to continue as a going concern." The ASU is effective for the annual reporting period in the fiscal year that begins after December 15, 2016 and early adoption is permitted. The Company will not early adopt this ASU. The Company is currently evaluating the impact on its disclosure.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,”   which revises an entity's accounting related to the classification and measurement of investments in equity securities, changes the presentation of certain fair value changes relating to instrument specific credit risk for financial liabilities and amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for fiscal years beginning after December 15, 2017. The adoption of the ASU will not have a material impact on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases." The ASU requires most leases to be reflected on the balance sheet. The ASU is effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of the ASU. The adoption of the new lessee model is expected to have material impact on the Company's condensed consolidated financial statements.
In March, 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and minimum statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for fiscal year beginning after December 15, 2016 and early adoption is permitted. The Company will not early adopt this ASU. The Company is currently evaluating the impact, if any, that the ASU will have on its condensed consolidated financial statements.


9


3.        Earnings per share
Basic earnings per share is computed by dividing net income attributable to Oppenheimer Holdings Inc. by the weighted average number of shares of Class A Stock and Class B Stock outstanding. Diluted earnings per share includes the weighted average number of shares of Class A Stock and Class B Stock outstanding and options to purchase Class A Stock and unvested restricted stock awards of Class A Stock using the treasury stock method.
Earnings per share have been calculated as follows:
(Expressed in thousands, except number of shares and per share amounts)
 
 
 
 
For the Three Months Ended March 31,
 
2016
 
2015
Basic weighted average number of shares outstanding
13,379,827

 
13,704,228

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

 
578,042

Diluted weighted average number of shares outstanding
13,379,827

 
14,282,270

Net income (loss)
$
(3,909
)
 
$
6,121

Net income (loss) attributable to noncontrolling interest, net of tax
(62
)
 
402

Net income (loss) attributable to Oppenheimer Holdings Inc.
$
(3,847
)
 
$
5,719

Basic earnings (loss) per share
$
(0.29
)
 
$
0.42

Diluted earnings (loss) per share
$
(0.29
)
 
$
0.40

 
(1)
For the three months ended March 31, 2016, the diluted earnings per share computation does not include the anti-dilutive effect of 1,295,972 shares of Class A Stock granted under share-based compensation arrangements (46,076 for the three months ended March 31, 2015).
4.        Receivable from and payable to brokers, dealers and clearing organizations
(Expressed in thousands)
 
 
 
 
As of
 
March 31, 2016
 
December 31, 2015
Receivable from brokers, dealers and clearing organizations consist of:
 
 
 
Securities borrowed
$
190,963

 
$
224,672

Receivable from brokers
36,059

 
49,458

Securities failed to deliver
10,914

 
7,799

Clearing organizations
22,957

 
25,030

Other
2,470

 
53,954

Total
$
263,363

 
$
360,913

Payable to brokers, dealers and clearing organizations consist of:
 
 
 
Securities loaned
$
143,157

 
$
130,658

Payable to brokers
10,232

 
3,316

Securities failed to receive
24,781

 
21,513

Other
29,709

 
9,059

Total
$
207,879

 
$
164,546


10


5.        Fair value measurements
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.
Securities Owned and Securities Sold, But Not Yet Purchased at Fair Value
(Expressed in thousands)
 
 
 
 
 
 
 
 
As of March 31, 2016
 
As of December 31, 2015
 
Owned
 
Sold
 
Owned
 
Sold
U.S. Government, agency and sovereign obligations
$
749,323

 
$
204,003

 
$
509,614

 
$
77,485

Corporate debt and other obligations
22,823

 
11,166

 
16,138

 
1,652

Mortgage and other asset-backed securities
4,151

 
27

 
3,504

 
27

Municipal obligations
80,220

 

 
30,132

 

Convertible bonds
50,984

 
15,988

 
54,693

 
5,951

Corporate equities
44,964

 
39,768

 
34,475

 
41,378

Money markets
132

 

 
35

 

Auction rate securities
84,185

 

 
86,802

 

Total
$
1,036,782

 
$
270,952

 
$
735,393

 
$
126,493

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, 2016 are corporate equities with estimated fair values of approximately $13.5 million ($14.0 million at December 31, 2015), which are related to deferred compensation liabilities to certain employees included in accrued compensation on the condensed consolidated balance sheet.
Valuation Techniques
A description of the valuation techniques applied and inputs used in measuring the fair value of the Company’s financial instruments is as follows:
U.S. Government Obligations
U.S. Treasury securities are valued using quoted market prices obtained from active market makers and inter-dealer brokers.
U.S. Agency Obligations
U.S. agency securities consist of agency issued debt securities and mortgage pass-through securities. Non-callable agency issued debt securities are generally valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. The fair value of mortgage pass-through securities are model driven with respect to spreads of the comparable To-be-announced ("TBA") security.
Sovereign Obligations
The fair value of sovereign obligations is determined based on quoted market prices when available or a valuation model that generally utilizes interest rate yield curves and credit spreads as inputs.
Corporate Debt and Other Obligations
The fair value of corporate bonds is estimated using recent transactions, broker quotations and bond spread information.
Mortgage and Other Asset-Backed Securities
The Company 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. When specific external pricing is not observable, the valuation is based on yields and spreads for comparable bonds.
Municipal Obligations
The fair value of municipal obligations is estimated using recently executed transactions, broker quotations, and bond spread information.

11


Convertible Bonds
The fair value of convertible bonds is estimated using recently executed transactions and dollar-neutral price quotations, where observable. When observable price quotations are not available, fair value is determined based on cash flow models using yield curves and bond spreads as key inputs.
Corporate Equities
Equity securities and options are generally valued based on quoted prices from the exchange or market where traded. To the extent quoted prices are not available, fair values are generally derived using bid/ask spreads.
Loans Held for Sale
The Company elected the fair value option for loans held for sale and determines the fair value using both a discounted cash flow model (see key assumptions used in determining mortgage servicing rights below) and quoted observable prices from market participants.
Interest Rate Lock Commitments
OMHHF records an interest rate lock commitment upon the commitment to originate a loan with a borrower. This commitment, which can be an asset or liability, is recognized at fair value, which reflects the fair value of the contractual loan origination related fees and sale premiums, net of co-broker fees, and the estimated fair value of the expected net future cash flows associated with the servicing of the loan. The interest rate lock commitments are valued using a discounted cash flow model developed based on U.S. Treasury rate changes and other observable market data. The fair value is determined after considering the potential impact of collateralization.
To-Be-Announced ("TBA") sale contracts
TBA sale contracts of permanent loans originated or purchased at OMHHF are based on observable market prices of recently executed purchases of similar loans which are then used to derive a market implied spread, which in turn is used as the primary input in estimating the fair value of loans at the measurement date. TBA sale contracts of construction loans originated or purchased at OMHHF are based on observable market prices of recently executed purchases.
Mortgage Servicing Rights ("MSRs")
The Company’s MSRs are measured at fair value on a nonrecurring basis. The MSRs are initially measured at fair value on the loan securitization date and subsequently measured on the amortized cost basis subject to quarterly impairment testing. MSRs do not trade in active open markets with readily observable pricing. Therefore the Company uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model calculates the present value of estimated future net servicing income using inputs such as contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the model to reflect observable and unobservable market conditions and assumptions that a market participant would consider in valuing a MSR asset. MSRs are carried at the lower of amortized cost or estimated fair value.
The following key assumptions were used in determining the initial fair value of MSRs:
Discount Rate – The discount rate used for originated permanent and construction loans averaged approximately 12%.
Estimated Life – The estimated life of the MSRs is derived using a continuous prepayment rate ("CPR") assumption which estimates projected prepayments of the loan portfolio by considering factors such as note rates, lockouts, and prepayment penalties at the loan level. The CPR rates used are 0% until such time that a loan's prepayment penalty rate hits 4% of the unpaid principal balance of the loan with the vast majority of CPR speeds ranging from 10% to 15% thereafter, with an average of 12%.
Servicing Costs – The estimated future cost to service the loans on an annual basis per loan averages approximately $1,250 for a permanent loan, with a considerably higher cost to service during the construction phase.
The Company does not anticipate any credit losses on the commercial mortgages it services since all of the mortgages are insured for and guaranteed against credit losses by the Federal Housing Administration ("FHA") and the Government National Mortgage Association ("GNMA") and are thus guaranteed by the U.S. government.

12


Auction Rate Securities ("ARS")
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 ARS. Pursuant to the settlements with the Regulators, Oppenheimer agreed to extend offers to repurchase ARS from certain of its clients subject to certain terms and conditions more fully described below. As of March 31, 2016, the Company did not have any outstanding ARS purchase commitments related to the settlements with the Regulators. In addition to the settlements with the Regulators, Oppenheimer has also reached settlements of and received adverse awards in legal proceedings with various clients where the Company is obligated to purchase ARS. Pursuant to completed Purchase Offers (as defined) under the settlements with the Regulators and client related legal settlements and awards to purchase ARS, as of March 31, 2016, the Company purchased and holds (net of redemptions) approximately $87.1 million in ARS from its clients. In addition, the Company is committed to purchase another $32.5 million in ARS from clients through 2020 under legal settlements and awards.
The ARS positions that the Company owns and is committed to purchase 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.
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. Due to liquidity problems associated with the ARS market, ARS that lack liquidity are setting their interest rates according to a maximum rate formula. For example, an auction rate preferred security maximum rate may be set at 200% of a short-term index such as LIBOR or U.S. Treasury yield. For fair value purposes, the Company has determined that the maximum spread would be an adequate risk premium to account for illiquidity in the market. Accordingly, the Company applies a spread to the short-term index for each asset class to derive the discount rate. The Company uses short-term U.S. Treasury yields as its benchmark short-term index. The risk of non-performance is typically reflected in the prices of ARS positions where the fair value is derived from recent trades in the secondary market.
The ARS purchase commitment, or derivative asset or liability, arises from both the settlements with the Regulators and legal settlements and awards. The ARS purchase commitment represents the difference between the principal value and the fair value of the ARS the Company is committed to purchase. The Company utilizes the same valuation methodology for the ARS purchase commitment as it does for the ARS it owns. Additionally, the present value of the future principal value of ARS purchase commitments under legal settlements and awards is used in the discounted valuation model to reflect the time value of money over the period of time that the commitments are outstanding. The amount of the ARS purchase commitment only becomes determinable once the Company has met with its primary regulator and the NYAG and agreed upon a buyback amount, commenced the ARS buyback offer to clients, and received notice from its clients which ARS they are tendering. As a result, it is not possible to observe the current yields actually paid on the ARS until all of these events have happened which is typically very close to the time that the Company actually purchases the ARS. For ARS purchase commitments pursuant to legal settlements and awards, the criteria for purchasing ARS from clients is based on the nature of the settlement or award which will stipulate a time period and amount for each repurchase. The Company will not know which ARS will be tendered by the client until the stipulated time for repurchase is reached. Therefore, the Company uses the current yields of ARS owned in its discounted valuation model to determine a fair value of ARS purchase commitments. The Company also uses these current yields by asset class (i.e., auction rate preferred securities, municipal auction rate securities, and student loan auction rate securities) in its discounted valuation model to determine the fair value of ARS purchase commitments. In addition, the Company uses the discount rate and duration of ARS owned, by asset class, as a proxy for the duration of ARS purchase commitments.

13


Additional information regarding the valuation technique and inputs for ARS used is as follows: 
(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quantitative Information about Level 3 Fair Value Measurements at March 31, 2016
Product
 
Principal
 
Valuation
Adjustment
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted
Average
Auction Rate Securities ("ARS") Owned (1)
 
 
 
 
 
 
 
 
Auction Rate Preferred Securities
 
$
83,175

 
$
2,406

 
$
80,769

 
Discounted Cash Flow
 
Discount Rate (2)
 
1.15% to 1.56%
 
1.36%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.0 years
 
4.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.47% to 0.75%
 
0.61%
Municipal Auction Rate Securities
 
25

 
1

 
24

 
Discounted Cash Flow
 
Discount Rate (4)
 
1.98%
 
1.98%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.5 years
 
4.5 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
1.15%
 
1.15%
Student Loan Auction Rate Securities
 
300

 
25

 
275

 
Discounted Cash Flow
 
Discount Rate (5)
 
2.75%
 
2.75%
 
 
 
 
 
 
 
 
 
 
Duration
 
7.0 years
 
7.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
1.44%
 
1.44%
Other (7)
 
3,625

 
508

 
3,117

 
Secondary Market Trading Activity
 
Observable trades in inactive market for in portfolio securities
 
85.99% of par
 
85.99% of par
 
 
$
87,125

 
$
2,940

 
$
84,185

 
 
 
 
 
 
 
 
Auction Rate Securities Commitments to Purchase (6)
 
 
 
 
 
 
 
 
Auction Rate Preferred Securities
 
$
11,237

 
$
(1,540
)
 
$
12,777

 
Discounted Cash Flow
 
Discount Rate (2)
 
1.15% to 1.56%
 
1.36%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.0 years
 
4.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.47% to 0.75%
 
0.61%
 
 
21,312

 
559

 
20,753

 
Discounted Cash Flow
 
Discount Rate (2)
 
1.15% to 1.56%
 
1.36%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.0 years
 
4.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.47% to 0.75%
 
0.61%
 
 
$
32,549

 
$
(981
)
 
$
33,530

 
 
 
 
 
 
 
 
Total
 
$
119,674

 
$
1,959

 
$
117,715

 
 
 
 
 
 
 
 
 
(1)
Principal amount represents the par value of the ARS and is included in securities owned in the condensed consolidated balance sheet at March 31, 2016. The valuation adjustment amount is included as a reduction to securities owned in the condensed consolidated balance sheet at March 31, 2016.
(2)
Derived by applying a multiple to the spread between 110% to 150% to the U.S. Treasury rate of 1.04%.
(3)
Based on current yields for ARS positions owned.
(4)
Derived by applying a multiple to the spread of 175% to the U.S. Treasury rate of 1.13%.
(5)
Derived by applying the sum of the spread of 1.20% to the U.S. Treasury rate of 1.55%.
(6)
Principal amount represents the present value of the ARS par value that the Company is committed to purchase at a future date. This principal amount is presented as an off-balance sheet item. The valuation adjustment amounts, unrealized gains and losses, are included in other assets and accounts payable and other liabilities, respectively, on the condensed consolidated balance sheet at March 31, 2016.
(7)
Represents ARS issued by a credit default obligation structure that the Company has purchased and is committed to purchase as a result of a legal settlement.

14


The fair value of ARS and ARS purchase commitments 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 effect 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. For example, see the following sensitivities:
The impact of a 25 basis point increase in the discount rate at March 31, 2016 would result in a decrease in the fair value of $1.1 million (does not consider a corresponding reduction in duration as discussed above).

The impact of a 50 basis point increase in the discount rate at March 31, 2016 would result in a decrease in the fair value of $2.2 million (does not consider a corresponding reduction in duration as discussed above).
These sensitivities are hypothetical and are based on scenarios where they are "stressed" and should be used with caution. These estimates do not include all of the interplay among assumptions and are estimated as a portfolio rather than as individual assets.
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, 2016, the Company had a valuation adjustment (unrealized loss) of $2.9 million for ARS owned which is included as a reduction to securities owned on the condensed consolidated balance sheet. As of March 31, 2016, the Company also had a net valuation adjustment (unrealized gain) of $981,000 on ARS purchase commitments from settlements with the Regulators and legal settlements and awards, comprised of unrealized gains of $1.5 million and unrealized losses of $559,000, which are included in other assets and accounts payable and other liabilities, respectively, on the condensed consolidated balance sheet. The total valuation adjustment was $2.0 million as of March 31, 2016. The valuation adjustment represents the difference between the principal value and the fair value of the ARS owned and ARS purchase commitments.
Investments
In its role as general partner in certain hedge funds and private equity funds, the Company, through its subsidiaries, holds direct investments in such funds. The Company uses the net asset value of the underlying fund as a basis for estimating the fair value of its investment.
The following table provides information about the Company’s investments in Company-sponsored funds at March 31, 2016:
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value
 
Unfunded
Commitments
 
Redemption Frequency
 
Redemption
Notice Period
Hedge funds (1)
$
2,396

 
$

 
Quarterly - Annually
 
30 - 120 Days
Private equity funds (2)
4,866

 
1,251

 
N/A
 
N/A
 
$
7,262

 
$
1,251

 
 
 
 
(1)
Includes investments in hedge funds and hedge fund of funds that pursue long/short, event-driven, and activist strategies. Each hedge fund has various restrictions regarding redemption; no investment is locked-up for a period greater than one year.
(2)
Includes private equity funds and private equity fund of funds with a focus on diversified portfolios, real estate and global natural resources. Due to the illiquid nature of these funds, investors are not permitted to make withdrawals without the consent of the general partner. The lock-up period of the private equity funds can extend to 10 years.

15


Valuation Process
The Finance & Accounting ("F&A") group is responsible for the Company’s fair value policies, processes and procedures. F&A is independent from the business units and trading desks and is headed by the Company’s Chief Financial Officer ("CFO"), who has final authority over the valuation of the Company’s financial instruments. The Finance Control Group ("FCG") within F&A is responsible for daily profit and loss reporting, front-end trading system position reconciliations, monthly profit and loss reporting, and independent price verification procedures.
For financial instruments categorized in Levels 1 and 2 of the fair value hierarchy, the FCG performs a monthly independent price verification to determine the reasonableness of the prices provided by the Company’s independent pricing vendor. The FCG uses its third-party pricing vendor, executed transactions, and broker-dealer quotes for validating the fair values of financial instruments.
For financial instruments categorized in Level 3 of the fair value hierarchy measured on a recurring basis, primarily for ARS, a group comprised of the CFO, the Controller, and an Operations Director are responsible for the ARS valuation model and resulting fair valuations. Procedures performed include aggregating all ARS owned by type from firm inventory accounts and ARS purchase commitments from regulatory and legal settlements and awards provided by the Legal Department. Observable and unobservable inputs are aggregated from various sources and entered into the ARS valuation model. For unobservable inputs, the group reviews the appropriateness of the inputs to ensure consistency with how a market participant would arrive at the unobservable input. For example, for the duration assumption, the group would consider recent policy statements regarding short-term interest rates by the Federal Reserve and recent ARS issuer redemptions and announcements for future redemptions. The model output is reviewed for reasonableness and consistency. Where available, comparisons are performed between ARS owned or committed to purchase to ARS that are trading in the secondary market.
For financial instruments categorized in Level 3 of the fair value hierarchy measured on a non-recurring basis, primarily for MSRs, the OMHHF Valuation Committee, which is comprised of the OMHHF President & Chief Executive Officer, OMHHF CFO, OMHHF Chief Operating Officer, and OMHHF Asset Manager, is responsible for the MSR model and resulting fair valuations. The OMHHF Valuation Committee performs its review of the model and assumptions and its impairment analysis on a quarterly basis. On an annual basis, the Company utilizes an external valuation consultant to validate that the internal MSR model is functioning appropriately. The OMHHF Valuation Committee compares assumptions used for unobservable inputs, such as for discount rates, estimated life, and costs of servicing, to that used by the external valuation consultant for reasonableness. The model output and resulting valuation multiples are reviewed for reasonableness and consistency. Where available, comparisons are performed to recent MSR sales in the secondary market. The Company’s management reviews the results of both the quarterly reviews and annual impairment analysis.

16


Assets and Liabilities Measured at Fair Value
The Company’s assets and liabilities, recorded at fair value on a recurring basis as of March 31, 2016 and December 31, 2015, 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, 2016
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value Measurements at March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
13,449

 
$

 
$

 
$
13,449

Deposits with clearing organizations
29,981

 

 

 
29,981

Securities owned:
 
 
 
 
 
 

U.S. Treasury securities
715,404

 

 

 
715,404

U.S. Agency securities
1,000

 
29,545

 

 
30,545

Sovereign obligations

 
3,374

 

 
3,374

Corporate debt and other obligations

 
22,823

 

 
22,823

Mortgage and other asset-backed securities

 
4,151

 

 
4,151

Municipal obligations

 
80,135

 
85

 
80,220

Convertible bonds

 
50,984

 

 
50,984

Corporate equities
44,964

 

 

 
44,964

Money markets
132

 

 

 
132

Auction rate securities

 

 
84,185

 
84,185

Securities owned, at fair value
761,500

 
191,012

 
84,270

 
1,036,782

Investments (1)

 

 
161

 
161

Loans held for sale

 
13,532

 

 
13,532

Derivative contracts:
 
 
 
 
 
 
 
TBAs

 
811

 

 
811

Interest rate lock commitments

 

 
14,024

 
14,024

ARS purchase commitments

 

 
1,540

 
1,540

Derivative contracts, total

 
811

 
15,564

 
16,375

Total
$
804,930

 
$
205,355

 
$
99,995

 
$
1,110,280

Liabilities
 
 
 
 
 
 
 
Securities sold, but not yet purchased:
 
 
 
 
 
 
 
U.S. Treasury securities
$
202,838

 
$

 
$

 
$
202,838

U.S. Agency securities

 
13

 

 
13

Sovereign obligations

 
1,152

 

 
1,152

Corporate debt and other obligations

 
11,166

 

 
11,166

Mortgage and other asset-backed securities

 
27

 

 
27

Convertible bonds

 
15,988

 

 
15,988

Corporate equities
39,768

 

 

 
39,768

Securities sold, but not yet purchased, at fair value
242,606

 
28,346

 

 
270,952

Derivative contracts:
 
 
 
 
 
 
 
Futures
709

 

 

 
709

Foreign currency forward contracts
17

 

 

 
17

TBAs

 
11,816

 

 
11,816

ARS purchase commitments

 

 
559

 
559

Derivative contracts, total
726

 
11,816

 
559

 
13,101

Total
$
243,332

 
$
40,162

 
$
559

 
$
284,053

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

17


Assets and liabilities measured at fair value on a recurring basis as of December 31, 2015
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value Measurements at December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
13,000

 
$

 
$

 
$
13,000

Deposits with clearing organizations
31,456

 

 

 
31,456

Securities owned:
 
 
 
 
 
 
 
U.S. Treasury securities
436,533

 

 

 
436,533

U.S. Agency securities
25,240

 
46,176

 

 
71,416

Sovereign obligations

 
1,665

 

 
1,665

Corporate debt and other obligations

 
16,138

 

 
16,138

Mortgage and other asset-backed securities

 
3,504

 

 
3,504

Municipal obligations

 
30,051

 
81

 
30,132

Convertible bonds

 
54,693

 

 
54,693

Corporate equities
34,475

 

 

 
34,475

Money markets
35

 

 

 
35

Auction rate securities

 

 
86,802

 
86,802

Securities owned, at fair value
496,283

 
152,227

 
86,883

 
735,393

Investments (1)

 

 
157

 
157

Loans held for sale

 
60,234

 

 
60,234

Securities purchased under agreements to resell (2)

 
206,499

 

 
206,499

Derivative contracts:
 
 
 
 
 
 
 
TBAs

 
6,448

 

 
6,448

Interest rate lock commitments

 

 
9,161

 
9,161

Derivative contracts, total

 
6,448

 
9,161

 
15,609

Total
$
540,739

 
$
425,408

 
$
96,201

 
$
1,062,348

Liabilities
 
 
 
 
 
 
 
Securities sold, but not yet purchased:
 
 
 
 
 
 
 
U.S. Treasury securities
$
75,653

 
$

 
$

 
$
75,653

U.S. Agency securities

 
15

 

 
15

Sovereign obligations

 
1,817

 

 
1,817

Corporate debt and other obligations

 
1,652

 

 
1,652

Mortgage and other asset-backed securities

 
27

 

 
27

Convertible bonds

 
5,951

 

 
5,951

Corporate equities
41,378

 

 

 
41,378

Securities sold, but not yet purchased, at fair value
117,031

 
9,462

 

 
126,493

Derivative contracts:
 
 
 
 
 
 
 
Futures
249

 

 

 
249

Foreign currency forward contracts
2

 

 

 
2

TBAs

 
11,619

 

 
11,619

Interest rate lock commitments

 

 
923

 
923

ARS purchase commitments

 

 
1,369

 
1,369

Derivative contracts, total
251

 
11,619

 
2,292

 
14,162

Total
$
117,282

 
$
21,081

 
$
2,292

 
$
140,655

(1)
Included in other assets on the condensed consolidated balance sheet.
(2)
Included in securities purchased under agreements to resell where the Company has elected fair value option treatment.
There were no transfers between any of the levels in the three months ended March 31, 2016.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

18


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, 2016 and 2015:
(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities
 
For the Three Months Ended March 31, 2016
 
 
 
Total Realized
 
 
 
 
 
 
 
 
 
 
 
and Unrealized
 
 
 
 
 
 
 
 
 
Beginning
 
Gains
 
Purchases
 
Sales and
 
Transfers
 
Ending
 
Balance
 
(Losses) (4)(5)
 
and Issuances 
 
Settlements
 
In (Out)
 
Balance
Assets
 
 
 
 
 
 
 
 
 
 
 
Municipals
$
81

 
$
4

 
$

 
$

 
$

 
$
85

Auction rate securities (1)(6)(7)
86,802

 
2,233

 
11,450

 
(16,300
)
 

 
84,185

Interest rate lock commitments (2)
9,161

 
4,863

 

 


 

 
14,024

Investments
157

 
4

 


 


 

 
161

ARS purchase commitments (3)

 
1,540

 

 

 

 
1,540

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments (2)
923

 
923

 

 

 

 

ARS purchase commitments (3)
1,369

 
810

 

 

 

 
559

 
(1)
Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
(2)
Interest rate lock commitment assets and liabilities are recorded upon the commitment to originate a loan with a borrower and sell the loan to an investor. The commitment assets and liabilities are recognized at fair value, which reflects the fair value of the contractual loan origination related fees and sale premiums, net of co-broker fees, and the estimated fair value of the expected net future cash flows associated with the servicing of the loan.
(3)
Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(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.
(6)
Purchases and issuances in connection with ARS purchase commitments represent instances in which the Company purchased ARS securities from clients during the period pursuant to regulatory and legal settlements and awards that satisfy the outstanding commitment to purchase obligation. This also includes instances where the ARS issuer has redeemed ARS where the Company had an outstanding purchase commitment prior to the Company purchasing those ARS.
(7)
Sales and settlements for the ARS purchase commitments represent additional purchase commitments made during the period for regulatory and legal ARS settlements and awards.

19


(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities
 
For the Three Months Ended March 31, 2015
 
 
 
Total Realized
 
 
 
 
 
 
 
 
 
 
 
and Unrealized
 
 
 
 
 
 
 
 
 
Beginning
 
Gains
 
Purchases
 
Sales and
 
Transfers
 
Ending
 
Balance
 
(Losses) (4)(5)
 
and Issuances 
 
Settlements
 
In (Out)
 
Balance
Assets
 
 
 
 
 
 
 
 
 
 
 
Municipals
$
164

 
$
(60
)
 
$

 
$

 
$

 
$
104

Auction rate securities (1)(6)(7)
91,422

 
935

 
8,225

 
(1,525
)
 

 
99,057

Interest rate lock commitments (2)
7,576

 
3,848

 

 

 

 
11,424

Investments
193

 
(9
)
 

 

 

 
184

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments (2)
1,222

 
678

 

 

 

 
544

ARS purchase commitments (3)
902

 
105

 

 

 

 
797

(1)
Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
(2)
Interest rate lock commitment assets and liabilities are recorded upon the commitment to originate a loan with a borrower and sell the loan to an investor. The commitment assets and liabilities are recognized at fair value, which reflects the fair value of the contractual loan origination related fees and sale premiums, net of co-broker fees, and the estimated fair value of the expected net future cash flows associated with the servicing of the loan.
(3)
Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(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.
(6)
Purchases and issuances in connection with ARS purchase commitments represent instances in which the Company purchased ARS securities from clients during the period pursuant to regulatory and legal settlements and awards that satisfy the outstanding commitment to purchase obligation. This also includes instances where the ARS issuer has redeemed ARS where the Company had an outstanding purchase commitment prior to the Company purchasing those ARS.
(7)
Sales and settlements for the ARS purchase commitments represent additional purchase commitments made during the period for regulatory and legal ARS settlements and awards.
Financial Instruments Not Measured at Fair Value
The tables below present 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 sheets. The tables below exclude non-financial assets and liabilities (e.g., office facilities 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 or settlement. The fair value of the Company’s 8.75% Senior Secured Notes, categorized in Level 2 of the fair value hierarchy, is based on quoted prices from the market in which the Notes trade.
The fair value of MSRs is based on observable and unobservable inputs and thus categorized as Level 3 in the fair value hierarchy. See valuation techniques above for key assumptions used.

20


Assets and liabilities not measured at fair value as of March 31, 2016 
(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement: Assets
 
As of March 31, 2016
 
As of March 31, 2016
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
49,030

 
$
49,030

 
$
49,030

 
$

 
$

 
$
49,030

Deposits with clearing organization
26,586

 
26,586

 
26,586

 

 

 
26,586

Receivable from brokers, dealers and clearing organizations:
 
 
 
 
 
 
 
 
 
 
 
Securities borrowed
190,963

 
190,963

 

 
190,963

 

 
190,963

Receivables from brokers
36,059

 
36,059

 

 
36,059

 

 
36,059

Securities failed to deliver
10,914

 
10,914

 

 
10,914

 

 
10,914

Clearing organizations
22,957

 
22,957

 

 
22,957

 

 
22,957

Other
2,470

 
2,470

 

 
2,470

 

 
2,470

 
263,363

 
263,363

 

 
263,363

 

 
263,363

Receivable from customers
791,631

 
791,631

 

 
791,631

 

 
791,631

Mortgage servicing rights
28,024

 
41,777

 

 

 
41,777

 
41,777

Investments (1)
53,482

 
53,482

 

 
53,482

 

 
53,482

 
(1)
Included in other assets on the condensed consolidated balance sheet.
(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement: Liabilities
 
As of March 31, 2016
 
As of March 31, 2016
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Drafts payable
$
37,663

 
$
37,663

 
$
37,663

 
$

 
$

 
$
37,663

Bank call loans
148,300

 
148,300

 

 
148,300

 

 
148,300

Payables to brokers, dealers and clearing organizations:
 
 
 
 
 
 
 
 
 
 
 
Securities loaned
143,157

 
143,157

 

 
143,157

 

 
143,157

Payable to brokers
10,232

 
10,232

 

 
10,232

 

 
10,232

Securities failed to receive
24,781

 
24,781

 

 
24,781

 

 
24,781

Other
29,709

 
29,709

 

 
29,709

 

 
29,709

 
207,879

 
207,879

 

 
207,879

 

 
207,879

Payables to customers
521,557

 
521,557

 

 
521,557

 

 
521,557

Securities sold under agreements to repurchase
529,752

 
529,752

 

 
529,752

 

 
529,752

Warehouse payable
11,845

 
11,845

 

 
11,845

 

 
11,845

Senior secured notes
150,000

 
152,195

 

 
152,195

 

 
152,195


21


Assets and liabilities not measured at fair value as of December 31, 2015 
(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement: Assets
 
As of December 31, 2015
 
As of December 31, 2015
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
50,364

 
$
50,364

 
$
50,364

 
$

 
$

 
$
50,364

Deposits with clearing organization
18,034

 
18,034

 
18,034

 

 

 
18,034

Receivable from brokers, dealers and clearing organizations:
 
 
 
 
 
 
 
 
 
 
 
Securities borrowed
224,672

 
224,672

 

 
224,672

 

 
224,672

Receivables from brokers
49,458

 
49,458

 

 
49,458

 

 
49,458

Securities failed to deliver
7,799

 
7,799

 

 
7,799

 

 
7,799

Clearing organizations
25,030

 
25,030

 

 
25,030

 

 
25,030

Other
53,954

 
53,954

 

 
53,954

 

 
53,954

 
360,913

 
360,913

 

 
360,913

 

 
360,913

Receivable from customers
840,355

 
840,355

 

 
840,355

 

 
840,355

Mortgage servicing rights
28,168

 
41,838

 

 

 
41,838

 
41,838

Investments (1)
53,286

 
53,286

 

 
53,286

 

 
53,286

(1)
Included in other assets on the condensed consolidated balance sheet.
(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement: Liabilities
 
As of December 31, 2015
 
As of December 31, 2015
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Drafts payable
$
48,011

 
$
48,011

 
$
48,011

 
$

 
$

 
$
48,011

Bank call loans
100,200

 
100,200

 

 
100,200

 

 
100,200

Payables to brokers, dealers and clearing organizations:
 
 
 
 
 
 
 
 
 
 
 
Securities loaned
130,658

 
130,658

 

 
130,658

 

 
130,658

Payable to brokers
3,316

 
3,316

 

 
3,316

 

 
3,316

Securities failed to receive
21,513