10-Q 1 opy-6302016x10xq.htm 10-Q Document


 
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 June 30, 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 July 29, 2016 was 13,268,439 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)
June 30, 2016
 
December 31, 2015 (1)
ASSETS
 
 
 
Cash and cash equivalents
$
107,537

 
$
63,364

Deposits with clearing organizations
42,910

 
49,490

Receivable from brokers, dealers and clearing organizations
315,308

 
365,791

Receivable from customers, net of allowance for credit losses of $2,543 ($2,545 in 2015)
780,670

 
840,355

Income tax receivable
17,534

 
12,231

Securities purchased under agreements to resell

 
206,499

Securities owned, including amounts pledged of $657,527 ($546,334 in 2015), at fair value
951,906

 
734,831

Notes receivable, net of accumulated amortization and allowance for uncollectibles of $61,671 and $8,062, respectively ($54,919 and $8,444, respectively, in 2015)
33,012

 
32,849

Office facilities, net of accumulated depreciation of $107,810 ($104,812 in 2015)
27,880

 
28,285

Assets held for sale
21,764

 
99,881

Intangible assets
31,700

 
31,700

Goodwill
137,889

 
137,889

Other assets
107,619

 
94,839

Total assets
$
2,575,729

 
$
2,698,004

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Drafts payable
$
26,759

 
$
48,011

Bank call loans
151,900

 
100,200

Payable to brokers, dealers and clearing organizations
172,362

 
164,546

Payable to customers
596,441

 
594,833

Securities sold under agreements to repurchase
432,912

 
651,445

Securities sold, but not yet purchased, at fair value
259,032

 
126,493

Liabilities held for sale
36,490

 
74,680

Accrued compensation
108,097

 
149,092

Accounts payable and other liabilities
110,367

 
108,637

Senior secured notes, net of debt issuance costs of $890 ($1,132 in 2015)
149,110

 
148,868

Deferred tax liabilities, net of deferred tax assets of $61,198 ($63,481 in 2015)
10,147

 
6,117

Total liabilities
2,053,617

 
2,172,922

Commitments and contingencies (Note 12)

 

Stockholders' equity
 
 
 
Share capital
 
 
 
Class A non-voting common stock, par value $0.001 per share, 50,000,000 shares authorized, 13,259,715 and 13,238,486 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
59,173

 
57,387

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

 
133

 
59,306

 
57,520

Contributed capital
39,608

 
44,438

Retained earnings
415,680

 
417,001

Accumulated other comprehensive loss
(682
)
 
(901
)
Total Oppenheimer Holdings Inc. stockholders' equity
513,912

 
518,058

Noncontrolling interest
8,200

 
7,024

Total stockholders' equity
522,112

 
525,082

Total liabilities and stockholders' equity
$
2,575,729

 
$
2,698,004

(1)     Amounts have been recast to reflect discontinued operations. See Note 3 for details.

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 June 30,
 
For the Six Months Ended June 30,
(Expressed in thousands, except number of shares and per share amounts)
2016
 
2015 (1)
 
2016
 
2015 (1)
REVENUE
 
 
 
 
 
 
 
Commissions
$
92,591

 
$
103,556

 
$
196,424

 
$
213,251

Advisory fees
66,104

 
72,243

 
132,130

 
143,209

Investment banking
18,881

 
29,020

 
31,264

 
56,325

Interest
12,007

 
11,313

 
25,049

 
22,016

Principal transactions, net
7,577

 
3,541

 
14,195

 
12,038

Other
14,914

 
8,286

 
27,968

 
18,295

Total revenue
212,074

 
227,959

 
427,030

 
465,134

EXPENSES
 
 
 
 
 
 
 
Compensation and related expenses
141,721

 
153,805

 
290,216

 
314,629

Communications and technology
17,638

 
16,307

 
35,318

 
33,379

Occupancy and equipment costs
14,984

 
15,911

 
29,887

 
31,612

Clearing and exchange fees
6,199

 
6,231

 
13,120

 
12,633

Interest
4,972

 
4,105

 
9,839

 
7,875

Other
31,806

 
32,701

 
61,236

 
60,293

Total expenses
217,320

 
229,060

 
439,616

 
460,421

Income (loss) before income taxes from continuing operations
(5,246
)
 
(1,101
)
 
(12,586
)
 
4,713

Income taxes
(2,627
)
 
400

 
(6,439
)
 
2,555

Net income (loss) from continuing operations
(2,619
)
 
(1,501
)
 
(6,147
)
 
2,158

 
 
 
 
 
 
 
 
Discontinued operations
 
 
 
 
 
 
 
Income from discontinued operations
15,366

 
3,731

 
14,709

 
7,768

Income taxes
6,036

 
1,585

 
5,760

 
3,160

Net income from discontinued operations
9,330


2,146


8,949


4,608

 
 
 
 
 
 
 
 
Net income
6,711

 
645

 
2,802

 
6,766

Less net income attributable to noncontrolling interest, net of tax
1,523

 
350

 
1,461

 
752

Net income attributable to Oppenheimer Holdings Inc.
$
5,188

 
$
295

 
$
1,341

 
$
6,014

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Oppenheimer Holdings Inc.
 
 
 
 
 
 
 
Continuing operations
$
(0.20
)
 
$
(0.11
)
 
$
(0.46
)
 
$
0.16

Discontinued operations
0.59

 
0.13

 
0.56

 
0.28

Net earnings per share attributable to Oppenheimer Holdings Inc.
$
0.39

 
$
0.02

 
$
0.10

 
$
0.44

Diluted earnings (loss) per share attributable to Oppenheimer Holdings Inc.
 
 
 
 
 
 
 
Continuing operations
$
(0.20
)
 
$
(0.11
)
 
$
(0.46
)
 
$
0.15

Discontinued operations
0.59

 
0.13

 
0.56

 
0.27

Net earnings per share attributable to Oppenheimer Holdings Inc.
$
0.39

 
$
0.02

 
$
0.10

 
$
0.42

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.11

 
$
0.11

 
$
0.22

 
$
0.22

Weighted average number of common shares outstanding
 
 
 
 
 
 
 
Basic
13,367,248

 
13,745,957

 
13,373,537

 
13,725,208

Diluted
13,367,248

 
13,745,957

 
13,373,537

 
14,342,474

(1)    Amounts have been recast to reflect discontinued operations. See Note 3 for details.

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

3



OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
(Expressed in thousands)
2016
 
2015
 
2016
 
2015
Net income
$
6,711

 
$
645

 
$
2,802

 
$
6,766

Other comprehensive income (loss), net of tax (1)
 
 
 
 
 
 
 
Currency translation adjustment
(654
)
 
1,317

 
219

 
750

Comprehensive income
6,057

 
1,962

 
3,021

 
7,516

Less net income attributable to noncontrolling interests
1,523

 
350

 
1,461

 
752

Comprehensive income attributable to Oppenheimer Holdings Inc.
$
4,534

 
$
1,612

 
$
1,560

 
$
6,764

 
(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 SIX MONTHS ENDED JUNE 30,
(Expressed in thousands)
2016
 
2015
Share capital
 
 
 
Balance at beginning of period
$
57,520

 
$
62,397

Issuance of Class A non-voting common stock
5,584

 
3,139

Repurchase of Class A non-voting common stock for cancellation
(3,798
)
 

Balance at end of period
59,306

 
65,536

Contributed capital
 
 
 
Balance at beginning of period
44,438

 
45,118

Tax deficiency from share-based awards
(747
)
 
(270
)
Share-based expense
2,842

 
2,362

Vested employee share plan awards
(6,925
)
 
(4,822
)
Balance at end of period
39,608

 
42,388

Retained earnings
 
 
 
Balance at beginning of period
417,001

 
421,047

Net income attributable to Oppenheimer Holdings Inc.
1,341

 
6,014

Dividends paid ($0.22 per share)
(2,947
)
 
(3,023
)
Preferred dividends received
285

 

Balance at end of period
415,680

 
424,038

Accumulated other comprehensive loss
 
 
 
Balance at beginning of period
(901
)
 
(918
)
Currency translation adjustment
219

 
750

Balance at end of period
(682
)
 
(168
)
Total Oppenheimer Holdings Inc. stockholders' equity
513,912

 
531,794

Noncontrolling interest
 
 
 
Balance at beginning of period
7,024

 
6,088

Net income attributable to noncontrolling interest
1,461

 
752

Preferred dividends paid
(285
)
 

Balance at end of period
8,200

 
6,840

Total stockholders' equity
$
522,112

 
$
538,634

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 SIX MONTHS ENDED JUNE 30,
(Expressed in thousands)
2016
 
2015
Cash flows from operating activities
 
 
 
Net income for the period
$
2,802

 
$
6,766

Adjustments to reconcile net income 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
2,981

 
3,564

Deferred income taxes
(5,725
)
 
5,085

Amortization of notes receivable
6,752

 
6,831

Amortization of debt issuance costs
242

 
242

Amortization of mortgage servicing rights
1,224

 
495

Provision for credit losses
(2
)
 
64

Share-based compensation
2,595

 
4,462

Gain on sale of assets
(14,916
)
 

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

 
17,739

Deposits with clearing organizations
6,580

 
(15,115
)
Receivable from brokers, dealers and clearing organizations
57,593

 
(42,695
)
Receivable from customers
59,687

 
(41,262
)
Income tax receivable
10,213

 
(47
)
Securities purchased under agreements to resell
206,499

 
147,305

Securities owned
(217,075
)
 
(161,995
)
Notes receivable
(6,915
)
 
(6,985
)
Loans held for sale
58,491

 
(57,108
)
Mortgage servicing rights
(1,036
)
 
425

Other assets
(19,022
)
 
(4,377
)
Increase (decrease) in operating liabilities:
 
 
 
Drafts payable
(21,252
)
 
(31,319
)
Payable to brokers, dealers and clearing organizations
7,816

 
(19,154
)
Payable to customers
1,608

 
1,985

Securities sold under agreements to repurchase
(218,533
)
 
(63,588
)
Securities sold, but not yet purchased
132,539

 
128,157

Accrued compensation
(42,521
)
 
(45,254
)
Accounts payable and other liabilities
(49,999
)
 
41,074

Cash used in operating activities
(40,715
)
 
(126,388
)
Cash flows from investing activities
 
 
 
Purchase of office facilities
(2,572
)
 
(1,913
)
Proceeds from sale of assets
43,252

 

Cash provided by (used in) investing activities
40,680

 
(1,913
)
Cash flows from financing activities
 
 
 
Cash dividends paid on Class A non-voting and Class B voting common stock
(2,947
)
 
(3,023
)
Repurchase of Class A non-voting common stock for cancellation
(3,798
)
 

Tax deficiency from share-based awards
(747
)
 
(270
)
Increase in bank call loans, net
51,700

 
118,100

Cash provided by financing activities
44,208

 
114,807

Net increase (decrease) in cash and cash equivalents
44,173

 
(13,494
)
Cash and cash equivalents, beginning of period
63,364

 
63,807

Cash and cash equivalents, end of period
$
107,537

 
$
50,313

Schedule of non-cash financing activities
 
 
 
Employee share plan issuance
$
5,584

 
$
3,139

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
10,270

 
$
8,343

Cash (received) paid during the period for income taxes, net of refunds
$
(4,420
)
 
$
863

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, 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, 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 Multifamily Housing & Healthcare Finance, Inc. ("OMHHF") was formerly engaged in Federal Housing Administration ("FHA")-insured commercial mortgage origination and servicing and is in the process of selling its remaining operating assets and discontinuing its business.
Oppenheimer provides its services from 94 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 six month period ended June 30, 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 June 30, 2016, the Company owned 83.68% of OMHHF and the noncontrolling interest recorded in the condensed consolidated balance sheet was $8.2 million.

7



2.        New accounting pronouncements
Recently Adopted
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 interim and annual reporting periods 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 interim and annual reporting periods 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 8, 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 interim and annual reporting periods 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 interim and 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 6, Fair value measurements, below.
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 provides amendments that defer the effective date of ASU 2014-09 by one year. In 2016, the FASB additionally issued ASU No. 2016-08-Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU No. 2016-10, "Identifying Performance Obligations and Licensing,"; and ASU 2016-12 Revenue from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients. The amendments in these updates are effective either retrospectively to each prior reporting period presented, or as a cumulative-effect adjustment as of the date of adoption, during interim and annual periods beginning after December 15, 2017, with early adoption permitted beginning after December 15, 2016. The Company is currently assessing the impact of the adoption of this update on its financial condition, results of operations and cash flows, or disclosures thereto.
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.

8



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 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 of the ASU and the adoption of the ASU will not have a material impact on its condensed consolidated financial statements.

In June 16, 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments", which amends the FASB's guidance on the impairment of financial Instruments. The ASU adds to U.S. GAAP an impairment model ("current expected credit loss model"). Under this new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The ASU is effective for the fiscal year beginning after December 15, 2019. The Company is currently evaluating the impact, if any, that the ASU will have on its condensed consolidated financial statements.

3.        Discontinued operations
OMHHF historically has been engaged in the business of originating and servicing FHA-insured multifamily and healthcare facility loans and securitizing these loans into GNMA mortgage backed securities. OMHHF offered mortgage services to developers of commercial properties including apartments, elderly housing and nursing homes that satisfy FHA criteria. OMHHF maintained a mortgage servicing portfolio for which it provided a full array of services, including the collection of mortgage payments from mortgagors which were 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% noncontrolling interest belongs to one related party who is the President and Chief Executive Officer of OMHHF.

On June 2, 2016, OMHHF entered into a definitive agreement to sell OMHHF's entire portfolio of permanent mortgage loans (consisting of over 480 permanent loans insured by the U.S. Department of Housing and Urban Development), including the associated mortgage servicing rights, to Walker & Dunlop, LLC. On June 20, 2016, OMHHF completed the transaction for cash consideration of approximately $45.0 million. An amount equal to $1.4 million was withheld from the purchase price until such time as one loan in the mortgage loan portfolio becomes current or is modified. The Company recorded a net gain of $14.9 million related to this transaction included in discontinued operations on the condensed consolidated statement of operations. During the second quarter of 2016, the Company also sold its business pipeline of mortgage loans for approximately $1.5 million.

The Company determined that the sale of the assets of OMHHF met the criteria to be classified within discontinued operations, and the results of OMHHF are reported as discontinued operations in the condensed consolidated statements of operations. Prior-period amounts have been recast for discontinued operations.

9



The following is a summary of the assets and liabilities of OMHHF as of June 30, 2016 and December 31, 2015:
(Expressed in thousands)
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
ASSETS
 
 
 
 
Securities owned
 
$
562

 
$
562

Loans held for sale
 
1,743

 
60,234

Mortgage servicing rights
 
1,993

 
28,168

Other assets
 
17,466

 
10,917

Total assets
 
$
21,764


$
99,881

LIABILITIES
 
 
 
 
Accounts payable and other liabilities
 
$
35,689

 
$
64,124

Deferred tax liability
 
801

 
10,556

Total liabilities
 
$
36,490


$
74,680


The following is a summary of revenue and expenses of OMHHF for the three and six months ended June 30, 2016 and 2015:
(Expressed in thousands)
 
 
 
 
 
 
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
REVENUE
 
 
 
 
 
 
 
Interest
$
472

 
$
717

 
$
809

 
$
1,049

Principal transactions, net
(1,541
)
 
(1,831
)
 
(6,628
)
 
8,226

Gain on sale of assets
14,916

 

 
14,916

 

Other
4,070

 
12,082

 
12,558

 
10,079

Total revenue
17,917


10,968


21,655


19,354

EXPENSES
 
 
 
 
 
 
 
Compensation and related expenses
735

 
4,409

 
3,652

 
6,676

Communications and technology
59

 
100

 
161

 
196

Occupancy and equipment costs
286

 
74

 
362

 
150

Interest
159

 
399

 
380

 
540

Other
1,312

 
2,255

 
2,391

 
4,024

Total expenses
2,551


7,237


6,946


11,586

Income before income taxes
$
15,366

 
$
3,731

 
$
14,709

 
$
7,768

Income attributable to noncontrolling interest before income taxes
$
2,508

 
$
609

 
$
2,401

 
$
1,268

The following is a summary of cash flows of OMHHF for the three and six months ended June 30, 2016 and 2015:
(Expressed in thousands)
 
 
 
 
For the Six Months Ended June 30,
 
2016
 
2015
Cash provided by operating activities
$
5,624

 
$
1,960

Cash provided by investing activities
43,252

 

Cash used in financing activities
(124
)
 
(124
)
Net increase in cash and cash equivalents
$
48,752

 
$
1,836


10



Intraperiod tax allocation rules require the Company to allocate the provision for income taxes between continuing operations and other categories of earnings, such as discontinued operations. In periods in which the Company has a year-to-date loss before income taxes from continuing operations and income before income taxes in other categories of earnings, such as discontinued operations, the Company must allocate the tax provision to the other categories of earnings, and then record a related tax benefit in continuing operations. During the three and six months ended June 30, 2016, the Company recognized net income from discontinued operations, and, as a result, recorded income tax expense of $6.0 million and $5.8 million, respectively, which is included in net income from discontinued operations in the consolidated statement of operations and statement of comprehensive income. Accordingly, the Company recognized a related income tax benefit of $2.6 million and $6.4 million from continuing operations in the consolidated statement of operations and statement of comprehensive income for the three and six months ended June 30, 2016, respectively.

4.        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 June 30,
 
For the Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss) from continuing operations
$
(2,619
)
 
$
(1,501
)
 
$
(6,147
)
 
$
2,158

Net income from discontinued operations
9,330

 
2,146

 
8,949

 
4,608

Net income
6,711


645


2,802


6,766

Less net income attributable to noncontrolling interest, net of tax
1,523

 
350

 
1,461

 
752

Net income attributable to Oppenheimer Holdings Inc.
$
5,188


$
295


$
1,341


$
6,014

 
 
 
 
 
 
 
 
Basic weighted average number of shares outstanding
13,367,248

 
13,745,957

 
13,373,537

 
13,725,208

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

 

 

 
617,266

Diluted weighted average number of shares outstanding
13,367,248

 
13,745,957

 
13,373,537

 
14,342,474

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Oppenheimer Holdings Inc.
 
 
 
 
 
 
 
Continuing operations
$
(0.20
)
 
$
(0.11
)
 
$
(0.46
)
 
$
0.16

Discontinued operations
0.59

 
0.13

 
0.56

 
0.28

Net earnings per share attributable to Oppenheimer Holdings Inc.
$
0.39


$
0.02


$
0.10


$
0.44

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to Oppenheimer Holdings Inc.
 
 
 
 
 
 
 
Continuing operations
$
(0.20
)
 
$
(0.11
)
 
$
(0.46
)
 
$
0.15

Discontinued operations
0.59

 
0.13

 
0.56

 
0.27

Net earnings per share attributable to Oppenheimer Holdings Inc.
$
0.39


$
0.02


$
0.10


$
0.42

 
(1)
For both the three and six months ended June 30, 2016, the diluted earnings per share computation does not include the anti-dilutive effect of 1,271,124 shares of Class A Stock granted under share-based compensation arrangements (1,312,760 and 40,309, respectively, for the three and six months ended June 30, 2015).

11



5.        Receivable from and payable to brokers, dealers and clearing organizations
(Expressed in thousands)
 
 
 
 
As of
 
June 30, 2016
 
December 31, 2015
Receivable from brokers, dealers and clearing organizations consist of:
 
 
 
Securities borrowed
$
216,419

 
$
224,672

Receivable from brokers
42,763

 
49,458

Securities failed to deliver
17,541

 
7,799

Clearing organizations
24,669

 
25,030

Other
13,916

 
58,832

Total
$
315,308

 
$
365,791

Payable to brokers, dealers and clearing organizations consist of:
 
 
 
Securities loaned
$
125,548

 
$
130,658

Payable to brokers
1,068

 
3,316

Securities failed to receive
23,491

 
21,513

Other
22,255

 
9,059

Total
$
172,362

 
$
164,546

6.        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 June 30, 2016
 
As of December 31, 2015
 
Owned (1)
 
Sold
 
Owned (1)
 
Sold
U.S. treasury, agency and sovereign obligations
$
616,831

 
$
179,562

 
$
509,614

 
$
77,485

Corporate debt and other obligations
40,311

 
23,811

 
16,138

 
1,652

Mortgage and other asset-backed securities
3,875

 
27

 
3,504

 
27

Municipal obligations
106,661

 

 
30,132

 

Convertible bonds
56,582

 
12,505

 
54,693

 
5,951

Corporate equities
38,612

 
43,127

 
34,475

 
41,378

Money markets
495

 

 
35

 

Auction rate securities
89,101

 

 
86,802

 

Total
$
952,468

 
$
259,032

 
$
735,393

 
$
126,493

(1)    $562,000 is included in assets held for sale on the condensed consolidated balance sheet. See Note 3 for details.
Securities owned and securities sold, but not yet purchased, consist of trading and investment securities at fair values. Included in securities owned at June 30, 2016 are corporate equities with estimated fair values of approximately $13.7 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.

12



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 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.
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.

13



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.
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 June 30, 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 June 30, 2016, the Company purchased and holds (net of redemptions) approximately $90.7 million in ARS from its clients. In addition, the Company is committed to purchase another $26.9 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.

14



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.

15



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 June 30, 2016
Product
 
Principal
 
Valuation
Adjustment
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted
Average
Auction Rate Securities ("ARS") Owned (1)
 
 
 
 
 
 
 
 
Auction Rate Preferred Securities
 
$
86,750

 
$
1,156

 
$
85,594

 
Discounted Cash Flow
 
Discount Rate (2)
 
0.94% to 1.29%
 
1.11%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.0 years
 
4.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.77%
 
0.77%
Municipal Auction Rate Securities
 
25

 

 
25

 
Discounted Cash Flow
 
Discount Rate (4)
 
1.64%
 
1.64%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.5 years
 
4.5 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
1.19%
 
1.19%
Student Loan Auction Rate Securities
 
300

 
21

 
279

 
Discounted Cash Flow
 
Discount Rate (5)
 
2.49%
 
2.49%
 
 
 
 
 
 
 
 
 
 
Duration
 
7.0 years
 
7.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
1.43%
 
1.43%
Other (7)
 
3,625

 
422

 
3,203

 
Secondary Market Trading Activity
 
Observable trades in inactive market for in portfolio securities
 
88.36% of par
 
88.36% of par
 
 
$
90,700

 
$
1,599

 
$
89,101

 
 
 
 
 
 
 
 
Auction Rate Securities Commitments to Purchase (6)
 
 
 
 
 
 
 
 
Auction Rate Preferred Securities
 
$
6,372

 
$
(911
)
 
$
7,283

 
Discounted Cash Flow
 
Discount Rate (2)
 
0.94% to 1.29%
 
1.11%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.0 years
 
4.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.77%
 
0.77%
Auction Rate Preferred Securities
 
20,495

 
142

 
20,353

 
Discounted Cash Flow
 
Discount Rate (2)
 
0.94% to 1.29%
 
1.11%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.0 years
 
4.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.77%
 
0.77%
 
 
$
26,867

 
$
(769
)
 
$
27,636

 
 
 
 
 
 
 
 
Total
 
$
117,567

 
$
830

 
$
116,737

 
 
 
 
 
 
 
 
 
(1)
Principal amount represents the par value of the ARS and is included in securities owned in the condensed consolidated balance sheet at June 30, 2016. The valuation adjustment amount is included as a reduction to securities owned in the condensed consolidated balance sheet at June 30, 2016.
(2)
Derived by applying a multiple to the spread between 110% to 150% to the U.S. Treasury rate of 0.86%.
(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 0.94%.
(5)
Derived by applying the sum of the spread of 1.20% to the U.S. Treasury rate of 1.29%.
(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 June 30, 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.

16



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 June 30, 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 June 30, 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 June 30, 2016, the Company had a valuation adjustment (unrealized loss) of $1.6 million for ARS owned which is included as a reduction to securities owned on the condensed consolidated balance sheet. As of June 30, 2016, the Company also had a net valuation adjustment (unrealized gain) of $769,000 on ARS purchase commitments from settlements with the Regulators and legal settlements and awards, comprised of unrealized gains of $911,000 and unrealized losses of $142,000, which are included in other assets and accounts payable and other liabilities, respectively, on the condensed consolidated balance sheet. The total valuation adjustment was $830,000 as of June 30, 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 June 30, 2016:
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value
 
Unfunded
Commitments
 
Redemption Frequency
 
Redemption
Notice Period
Hedge funds (1)
$
2,614

 
$

 
Quarterly - Annually
 
30 - 120 Days
Private equity funds (2)
4,629

 
1,251

 
N/A
 
N/A
 
$
7,243

 
$
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.

17



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, and OMHHF Chief Operating Officer, 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.

18



Assets and Liabilities Measured at Fair Value
The Company's assets and liabilities, recorded at fair value on a recurring basis as of June 30, 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 June 30, 2016
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value Measurements at June 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
22,156

 
$

 
$

 
$
22,156

Deposits with clearing organizations
22,975

 

 

 
22,975

Securities owned:
 
 
 
 
 
 

U.S. Treasury securities (1)
593,897

 

 

 
593,897

U.S. Agency securities
4,515

 
18,387

 

 
22,902

Sovereign obligations

 
32

 

 
32

Corporate debt and other obligations

 
40,311

 

 
40,311

Mortgage and other asset-backed securities

 
3,875

 

 
3,875

Municipal obligations

 
106,636

 
25

 
106,661

Convertible bonds

 
56,582

 

 
56,582

Corporate equities
38,612

 

 

 
38,612

Money markets
495

 

 

 
495

Auction rate securities

 

 
89,101

 
89,101

Securities owned, at fair value
637,519

 
225,823

 
89,126

 
952,468

Investments (2)

 

 
158

 
158

Loans held for sale (3)

 
1,743

 

 
1,743

Derivative contracts:
 
 
 
 
 
 
 
TBAs

 
1,296

 

 
1,296

Interest rate lock commitments

 

 
13,453

 
13,453

ARS purchase commitments

 

 
911

 
911

Derivative contracts, total

 
1,296

 
14,364

 
15,660

Total
$
682,650

 
$
228,862

 
$
103,648

 
$
1,015,160

Liabilities
 
 
 
 
 
 
 
Securities sold, but not yet purchased:
 
 
 
 
 
 
 
U.S. Treasury securities
179,554

 
$

 
$

 
$
179,554

U.S. Agency securities

 
8

 

 
8

Corporate debt and other obligations

 
23,811

 

 
23,811

Mortgage and other asset-backed securities

 
27

 

 
27

Convertible bonds

 
12,505

 

 
12,505

Corporate equities
43,127

 

 

 
43,127

Securities sold, but not yet purchased, at fair value
222,681

 
36,351

 

 
259,032

Derivative contracts:
 
 
 
 
 
 
 
Futures
950

 

 

 
950

Foreign currency forward contracts
6

 

 

 
6

TBAs

 
12,507

 

 
12,507

ARS purchase commitments

 

 
142

 
142

Derivative contracts, total
956

 
12,507

 
142

 
13,605

Total
$
223,637

 
$
48,858

 
$
142

 
$
272,637

(1)
$562,000 is included in assets held for sale on the condensed consolidated balance sheet. See Note 3 for details.
(2)
Included in other assets on the condensed consolidated balance sheet.
(3)
Included in assets held for sale on the condensed consolidated balance sheet. See Note 3 for details.

19



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 (1)
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 (2)

 

 
157

 
157

Loans held for sale (3)

 
60,234

 

 
60,234

Securities purchased under agreements to resell (4)

 
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)
$562,000 is included in assets held for sale on the condensed consolidated balance sheet. See Note 3 for details.
(2)
Included in other assets on the condensed consolidated balance sheet.
(3)
Included in assets held for sale on the condensed consolidated balance sheet. See Note 3 for details.
(4)
Included in securities purchased under agreements to resell where the Company has elected fair value option treatment.


20



There were no transfers between any of the levels in the three and six months ended June 30, 2016.

The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended June 30, 2016 and 2015:

(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities
 
For the Three Months Ended June 30, 2016
 
 
 
Total Realized
 
 
 
 
 
 
 
 
 
 
 
and Unrealized
 
 
 
 
 
 
 
 
 
Beginning
 
Gains
 
Purchases
 
Sales and
 
Transfers
 
Ending
 
Balance
 
(Losses) (4)(5)
 
and Issuances 
 
Settlements
 
In (Out)
 
Balance
Assets
 
 
 
 
 
 
 
 
 
 
 
Municipals
$
85

 
$
2

 
$

 
$
(62
)
 
$

 
$
25

Auction rate securities (1)(6)(7)
84,185

 
1,341

 
5,000

 
(1,425
)
 

 
89,101

Interest rate lock commitments (2)
14,024

 
(571
)
 

 

 

 
13,453

Investments
161

 
(3
)
 

 

 

 
158

ARS purchase commitments (3)
1,540

 
(629
)
 

 

 

 
911

Liabilities
 
 
 
 
 
 
 
 
 
 
 
ARS purchase commitments (3)
559

 
417

 

 

 

 
142

(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.


21



(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities
 
For the Three Months Ended June 30, 2015
 
 
 
Total Realized
 
 
 
 
 
 
 
 
 
 
 
and Unrealized
 
 
 
 
 
 
 
 
 
Beginning
 
Gains
 
Purchases
 
Sales and
 
Transfers
 
Ending
 
Balance
 
(Losses) (4)(5)
 
and Issuances 
 
Settlements
 
In (Out)
 
Balance
Assets
 
 
 
 
 
 
 
 
 
 
 
Municipals
$
104

 
$
(22
)
 
$

 
$
(20
)
 
$

 
$
62

Auction rate securities (1)(6)(7)
99,057

 
(998
)
 
2,500

 
(175
)
 

 
100,384

Interest rate lock commitments (2)
11,424

 
(6,364
)
 

 

 

 
5,060

Investments
184

 
31

 

 

 

 
215

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments (2)
544

 
(139
)
 

 

 

 
683

ARS purchase commitments (3)
797

 
(237
)
 

 

 

 
1,034

(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)
Purchas