Quarterly Report (10-q)

Date : 10/26/2018 @ 8:52AM
Source : Edgar (US Regulatory)
Stock : Oppenheimer Holdings Class A (DE) (OPY)
Quote : 29.87  0.0 (0.00%) @ 8:31AM

Quarterly Report (10-q)



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

 
 
FORM 10-Q
 
   
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR  
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
 
 
Commission file number 1-12043
 
 
OPPENHEIMER HOLDINGS INC.
(Exact name of registrant as specified in its charter)

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

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

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

 
 
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).    Yes   x     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
 
Emerging growth company
o
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   x
The number of shares of the Company's Class A non-voting common stock and Class B voting common stock (being the only classes of common stock of the Company) outstanding on October 26, 2018 was 13,177,931 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)
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Cash and cash equivalents
$
37,531

 
$
48,154

Deposits with clearing organizations
53,956

 
42,222

Receivable from brokers, dealers and clearing organizations
205,031

 
187,115

Receivable from customers, net of allowance for credit losses of $859 ($769 in 2017)
797,751

 
848,226

Income tax receivable
3,495

 
2,939

Securities purchased under agreements to resell, at fair value
1,502

 
658

Securities owned, including amounts pledged of $738,835 ($655,683 in 2017), at fair value
895,251

 
926,597

Notes receivable, net of accumulated amortization and allowance for uncollectibles of $24,334 and $7,126, respectively ($24,705 and $7,975, respectively, in 2017)
43,278

 
40,520

Furniture, equipment and leasehold improvements, net of accumulated depreciation of $87,165 ($82,826 in 2017)
28,842

 
27,187

Intangible assets
32,100

 
31,700

Goodwill
137,889

 
137,889

Other assets
119,659

 
145,310

Total assets
$
2,356,285

 
$
2,438,517

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Drafts payable
$
29,242

 
$
42,412

Bank call loans
3,000

 
118,300

Payable to brokers, dealers and clearing organizations
219,443

 
211,483

Payable to customers
351,750

 
385,907

Securities sold under agreements to repurchase
606,010

 
586,478

Securities sold but not yet purchased, at fair value
143,746

 
94,486

Accrued compensation
151,658

 
173,116

Accounts payable and other liabilities
95,820

 
92,495

Senior secured notes, net of debt issuance costs of $969 ($1,163 in 2017)
199,031

 
198,837

Deferred tax liabilities, net of deferred tax assets of $46,827 ($47,597 in 2017)
12,708

 
11,092

Total liabilities
1,812,408

 
1,914,606

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, 13,177,931 and 13,139,203 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
59,153

 
58,359

Class B voting common stock, par value $0.001 per share, 99,665 shares authorized, issued and outstanding as of September 30, 2018 and December 31, 2017
133

 
133

 
59,286

 
58,492

Contributed capital
40,362

 
36,546

Retained earnings
443,188

 
426,930

Accumulated other comprehensive income
702

 
1,582

Total Oppenheimer Holdings Inc. stockholders' equity
543,538

 
523,550

Non-controlling interest
339

 
361

Total stockholders' equity
543,877

 
523,911

Total liabilities and stockholders' equity
$
2,356,285

 
$
2,438,517

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

3


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(Expressed in thousands, except number of shares and per share amounts)
2018
 
2017
 
2018
 
2017
REVENUE
 
 
 
 
 
 
 
Commissions
$
79,678

 
$
77,635

 
$
245,935

 
$
248,204

Advisory fees
78,154

 
74,329

 
232,972

 
216,521

Investment banking
28,328

 
23,940

 
84,442

 
57,347

Bank deposit sweep income
30,053

 
21,146

 
84,203

 
52,992

Interest
13,403

 
12,952

 
38,686

 
36,346

Principal transactions, net
(16
)
 
5,135

 
9,110

 
15,810

Other
8,214

 
11,083

 
19,552

 
28,145

Total revenue
237,814

 
226,220

 
714,900

 
655,365

EXPENSES
 
 
 
 
 
 
 
Compensation and related expenses
152,846

 
142,090

 
457,821

 
428,625

Communications and technology
18,602

 
17,781

 
55,287

 
53,886

Occupancy and equipment costs
15,106

 
15,288

 
45,435

 
45,721

Clearing and exchange fees
5,378

 
5,622

 
17,254

 
17,392

Interest
12,915

 
6,500

 
32,787

 
18,710

Other
25,823

 
27,111

 
77,046

 
87,865

Total expenses
230,670

 
214,392

 
685,630

 
652,199

Income before income taxes from continuing operations
7,144

 
11,828

 
29,270

 
3,166

Income taxes
2,083

 
4,425

 
8,661

 
2,464

Net income from continuing operations
5,061

 
7,403

 
20,609

 
702

 
 
 
 
 
 
 
 
Discontinued operations
 
 
 
 
 
 
 
Income from discontinued operations

 
769

 

 
1,834

Income taxes

 
308

 

 
733

Net income from discontinued operations

 
461

 

 
1,101

 
 
 
 
 
 
 
 
Net income
5,061

 
7,864

 
20,609

 
1,803

Less net income (loss) attributable to non-controlling interest, net of tax
(10
)
 
75

 
(22
)
 
180

Net income attributable to Oppenheimer Holdings Inc.
$
5,071

 
$
7,789

 
$
20,631

 
$
1,623

 
 
 
 
 
 
 
 
Basic net income per share attributable to Oppenheimer Holdings Inc.
 
 
 
 
 
 
 
Continuing operations
$
0.38

 
$
0.56

 
$
1.56

 
$
0.05

Discontinued operations

 
0.03

 

 
0.07

Net income per share
$
0.38

 
$
0.59

 
$
1.56

 
$
0.12

 
 
 
 
 
 
 
 
Diluted net income per share attributable to Oppenheimer Holdings Inc.
 
 
 
 
 
 
 
Continuing operations
$
0.36

 
$
0.54

 
$
1.47

 
$
0.05

Discontinued operations

 
0.03

 

 
0.07

Net income per share
$
0.36

 
$
0.57

 
$
1.47

 
$
0.12

 
 
 
 
 
 
 
 
Weighted average shares
 
 
 
 
 
 
 
Basic
13,269,024

 
13,213,139

 
13,252,596

 
13,290,399

Diluted
14,140,263

 
13,763,516

 
14,043,326

 
13,790,136

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

4


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(Expressed in thousands)
2018
 
2017
 
2018
 
2017
Net income
$
5,061

 
$
7,864

 
$
20,609

 
$
1,803

Other comprehensive income (loss), net of tax (1)
 
 
 
 
 
 
 
Currency translation adjustment
99

 
(251
)
 
(880
)
 
1,953

Comprehensive income
5,160

 
7,613

 
19,729

 
3,756

Net income (loss) attributable to non-controlling interest, net of tax
(10
)
 
75

 
(22
)
 
180

Comprehensive income attributable to Oppenheimer Holdings Inc.
$
5,170

 
$
7,538

 
$
19,751

 
$
3,576

 
(1)
No other comprehensive income (loss) is attributable to non-controlling interests.
The accompanying notes are an integral part of these condensed consolidated financial statements.

5


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Expressed in thousands)
2018
 
2017
Share capital
 
 
 
Balance at beginning of period
$
58,492

 
$
59,361

Issuance of Class A non-voting common stock
794

 
4,225

Repurchase of Class A non-voting common stock for cancellation

 
(7,464
)
Balance at end of period
59,286

 
56,122

Contributed capital
 
 
 
Balance at beginning of period
36,546

 
41,765

Share-based expense
4,647

 
4,112

Vested employee share plan awards
(831
)
 
(6,457
)
Cumulative-effect adjustment from adoption of new accounting update of employee share-based accounting

 
425

Balance at end of period
40,362

 
39,845

Retained earnings
 
 
 
Balance at beginning of period
426,930

 
410,258

Net income attributable to Oppenheimer Holdings Inc.
20,631

 
1,623

Dividends paid ($0.33 per share)
(4,373
)
 
(4,394
)
Dividends received from non-controlling interest

 
6

Cumulative-effect adjustment from adoption of new accounting update of employee share-based accounting

 
(314
)
Balance at end of period
443,188

 
407,179

Accumulated other comprehensive income (loss)
 
 
 
Balance at beginning of period
1,582

 
(681
)
Currency translation adjustment
(880
)
 
1,953

Balance at end of period
702

 
1,272

Total Oppenheimer Holdings Inc. stockholders' equity
543,538

 
504,418

Non-controlling interest
 
 
 
Balance at beginning of period
361

 
2,631

Net income (loss) attributable to non-controlling interest, net of tax
(22
)
 
180

Dividends paid to non-controlling interest

 
(2,448
)
Dividends paid to parent

 
(6
)
Balance at end of period
339

 
357

Total stockholders' equity
$
543,877

 
$
504,775

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

6


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Expressed in thousands)
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
20,609

 
$
1,803

Adjustments to reconcile net income to net cash used in operating activities
 
 
 
Non-cash items included in net income:
 
 
 
Depreciation and amortization of furniture, equipment and leasehold improvements
4,999

 
4,185

Deferred income taxes
1,616

 
4,240

Amortization of notes receivable
9,480

 
8,658

Amortization of debt issuance costs
194

 
287

Write-off of debt issuance costs

 
430

Provision for (reversal of) credit losses
90

 
(12
)
Share-based compensation
11,088

 
3,517

Decrease (increase) in operating assets:
 
 
 
Deposits with clearing organizations
(11,734
)
 
(6,016
)
Receivable from brokers, dealers and clearing organizations
(17,916
)
 
(33,957
)
Receivable from customers
50,385

 
71,796

Income tax receivable
(556
)
 
755

Securities purchased under agreements to resell
(844
)
 
24,006

Securities owned
31,346

 
(330,355
)
Notes receivable
(12,238
)
 
(16,800
)
Other assets
24,487

 
(9,585
)
Increase (decrease) in operating liabilities:
 
 
 
Drafts payable
(13,170
)
 
(12,748
)
Payable to brokers, dealers and clearing organizations
7,960

 
26,090

Payable to customers
(34,157
)
 
(53,431
)
Securities sold under agreements to repurchase
19,532

 
20,566

Securities sold but not yet purchased
49,260

 
281,531

Accrued compensation
(27,899
)
 
(14,238
)
Accounts payable and other liabilities
5,747

 
(5,108
)
Cash provided by (used in) operating activities
118,279

 
(34,386
)
Cash flows from investing activities
 
 
 
Purchase of furniture, equipment and leasehold improvements
(6,654
)
 
(3,506
)
Purchase of intangible assets
(400
)
 

Proceeds from the settlement of Company-owned life insurance
284

 
1,194

Cash used in investing activities
(6,770
)
 
(2,312
)
Cash flows from financing activities
 
 
 
Cash dividends paid on Class A non-voting and Class B voting common stock
(4,373
)
 
(4,394
)
Cash dividends paid to non-controlling interest

 
(2,448
)
Issuance of Class A non-voting common stock
70

 

Repurchase of Class A non-voting common stock for cancellation

 
(7,464
)
Payments for employee taxes withheld related to vested share-based awards
(2,529
)
 
(2,232
)
Issuance of senior secured notes

 
200,000

Redemption of senior secured notes

 
(150,000
)
Debt issuance costs

 
(1,183
)
Decrease in bank call loans, net
(115,300
)
 
(15,700
)
Cash (used in) provided by financing activities
(122,132
)
 
16,579

Net decrease in cash and cash equivalents
(10,623
)
 
(20,119
)
Cash and cash equivalents, beginning of period
48,154

 
64,913

Cash and cash equivalents, end of period
$
37,531

 
$
44,794

Schedule of non-cash financing activities
 
 
 
Employee share plan issuance
$
724

 
$
4,225

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
36,500

 
$
17,711

Cash paid during the period for income taxes, net
$
7,757

 
$
2,354

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

7


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


1.    Organization and basis of presentation
Organization
Oppenheimer Holdings Inc. ("OPY" or the "Parent") is incorporated under the laws of the State of Delaware. The condensed consolidated financial statements include the accounts of OPY and its consolidated subsidiaries (together, the "Company"). The Company engages in a broad range of activities in the financial services industry, including retail securities brokerage, institutional sales and trading, market-making, research, investment banking (both corporate and public finance), investment advisory and asset management services and trust services.
The Company has 91 retail branch offices in the United States and has institutional businesses located in London, Tel Aviv, and Hong Kong. The principal subsidiaries of OPY are Oppenheimer & Co. Inc. ("Oppenheimer"), a registered broker-dealer in securities and investment adviser under the Investment Advisers Act of 1940; Oppenheimer Asset Management Inc. ("OAM") and its wholly-owned subsidiary, Oppenheimer Investment Management LLC, both registered investment advisers under the Investment Advisers Act of 1940; Oppenheimer Trust Company of Delaware ("Oppenheimer Trust"), a limited purpose trust company that provides fiduciary services such as trust and estate administration and investment management; OPY Credit Corp., which offers syndication as well as trading of issued corporate loans; Oppenheimer Europe Ltd., based in the United Kingdom, with offices in the Isle of Jersey and Switzerland, which provides institutional equities and fixed income brokerage and corporate finance and is regulated by the Financial Conduct Authority; Oppenheimer Investments Asia Limited, based in Hong Kong, China, which provides fixed income and equities brokerage services to institutional investors and is regulated by the Securities and Futures Commission; and Oppenheimer Multifamily Housing & Healthcare Finance, Inc. ("OMHHF") which was formerly engaged in Federal Housing Administration ("FHA")-insured commercial mortgage origination and servicing. During 2016, the Company sold substantially all of the assets of OMHHF and ceased its operations.
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, 2017 (the "Form 10-K"). The accompanying December 31, 2017 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 nine month period ended September 30, 2018 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 non-controlling interests as a separate component of stockholders' equity on the Company's condensed consolidated balance sheet. As of September 30, 2018 , the Company owned 83.68% of OMHHF and the non-controlling interest recorded on the condensed consolidated balance sheet was $339,000 .


8


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

2.    New accounting pronouncements
Recently Issued
In February 2016, the FASB issued ASU 2016-02, "Leases." The ASU requires the recognition of a right-of use asset and lease liability on the balance sheet by lessees for those leases classified as operating leases under previous guidance. The ASU is effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of adopting this ASU which it expects will have a significant impact on its condensed consolidated financial statements. Since the Company has operating leases in over 100 locations, equipment leases and embedded leases, the Company expects to recognize a significant right-of use asset and lease liability on its condensed consolidated balance sheet upon adoption of this ASU. As of September 30, 2018, the Company estimates that it will record right-of-use assets between $170.0 million to $190.0 million and lease liabilities within the same range on the condensed consolidated balance sheet upon the adoption of this standard, which predominately relate to real estate leases. The Company has elected the modified retrospective method and will include any cumulative-effect adjustment as of the date of adoption.
In June 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 fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact, if any, that the ASU will have on the Company; the adoption of the ASU is not currently expected to have a material impact on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other, Simplifying the Test for Goodwill Impairment," which simplifies the subsequent measurement of goodwill. The Company is no longer required to perform its Step 2 goodwill impairment test; instead, the Company should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The ASU is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company will not early adopt this ASU. The Company is currently evaluating the impact, if any, of the ASU on the Company; the adoption of the ASU is not currently expected to have a material impact on its condensed consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities," which amends the hedge accounting recognition and presentation requirements. The ASU improves the transparency and understandability of information conveyed to financial statement users by better aligning companies' hedging relationships to their existing risk management strategies, simplifies the application of hedge accounting and increases transparency regarding the scope and results of the hedging program. The ASU is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company will not early adopt this ASU. The Company is currently evaluating the impact, if any, of the ASU on the Company; the adoption of the ASU is not currently expected to have a material impact on its condensed consolidated financial statements.
 
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement - Disclosure Framework - Changes to the Disclosure Requirements for the Fair Value Measurement," which modifies the disclosure requirements related to fair value measurement. The ASU is effective for fiscal years and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company will not early adopt this ASU. The Company is currently evaluating the impact, if any, of the ASU on the Company's disclosure.


9


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

3.    Revenues from contracts with customers

In the first quarter of 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers." The Company has elected the modified retrospective method which did not result in a cumulative-effect adjustment at the date of adoption. The implementation of this new standard had no material impact on the Company's condensed consolidated financial statements for the three and nine months ended September 30, 2018 .
Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by transferring the promised goods or services to customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring the Company's progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for those promised goods or services (i.e., the "transaction price"). In determining the transaction price, the Company considers multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, the Company considers the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of the Company's influence, such as market volatility or the judgment and actions of third parties.
The Company earns revenue from contracts with customers and other sources (principal transactions, interest and other). The following provides detailed information on the recognition of the Company's revenue from contracts with customers:
Commissions
Commissions from Sales and Trading — The Company earns commission revenue by executing, settling and clearing transactions with clients primarily in exchange-traded and over-the-counter corporate equity and debt securities, money market instruments and exchange-traded options and futures contracts. A substantial portion of Company's revenue is derived from commissions from private clients through accounts with transaction-based pricing. Trade execution and clearing services, when provided together, represent a single performance obligation as the services are not separately identifiable in the context of the contract. Commission revenue associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, is recognized at a point in time on trade date when the performance obligation is satisfied. Commission revenue is generally paid on settlement date, which is generally two business days after trade date for equity securities and corporate bond transactions and one day for government securities and commodities transactions. The Company records a receivable on the trade date and receives a payment on settlement date.
Mutual Fund Income — The Company earns mutual fund income for sales and distribution of mutual fund shares. Many mutual fund companies pay distribution fees to intermediaries, such as broker-dealers, for selling their shares. The fees are operational expenses of the mutual fund and are included in its expense ratio. The Company recognizes mutual fund income at a point in time on trade date when the performance obligation is satisfied which is when the mutual fund interest is sold to the investor. Mutual fund income is generally received within 90 days.

10


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

Advisory Fees
The Company earns management and performance (or incentive) fees in connection with the advisory and asset management services it provides to various types of funds and investment vehicles through its subsidiaries. Management fees are generally based on the account value at the valuation date per the respective asset management agreements and are recognized over time as the customer receives the benefits of the services evenly throughout the term of the contract. Performance fees are recognized when the return on client assets under management ("AUM") exceeds a specified benchmark return or other performance targets over a 12-month measurement period. Performance fees are considered variable as they are subject to fluctuation and/or are contingent on a future event over the measurement period and are not subject to adjustment once the measurement period ends. Such fees are computed as of the fund's year-end when the measurement period ends and generally are recorded as earned in the fourth quarter of the Company's fiscal year. Both management and performance fees are generally received within 90 days.
Investment Banking
The Company earns underwriting revenues by providing capital raising solutions for corporate clients through initial public offerings, follow-on offerings, equity-linked offerings, private investments in public entities, and private placements. Underwriting revenues are recognized at a point in time on trade date, as the client obtains the control and benefit of the capital markets offering at that point. These fees are generally received within 90 days after the transactions are completed. Transaction-related expenses, primarily consisting of legal, travel and other costs directly associated with the transaction, are deferred and recognized in the same period as the related investment banking transaction revenue. Underwriting revenues and related expenses are presented gross on the condensed consolidated statement of income.
Revenue from financial advisory services includes fees generated in connection with mergers, acquisitions and restructuring transactions and such revenue and fees are primarily recorded at a point in time when services for the transactions are completed and income is reasonably determinable, generally as set forth under the terms of the engagement. Payment for advisory services is generally due upon a completion of the transaction or milestone. Retainer fees and fees earned from certain advisory services are recognized ratably over the service period as the customer receives the benefit of the services throughout the term of the contracts, and such fees are collected based on the terms of the contracts.
Bank Deposit Sweep Income
Bank deposit sweep income consists of revenue earned from the FDIC-insured bank deposit program. Under this program, client funds are swept into deposit accounts at participating banks and are eligible for FDIC deposit insurance up to FDIC standard maximum deposit insurance amounts. Fees are earned over time and are generally received within 30 days.


11


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

Disaggregation of Revenue
The following presents the Company's revenue from contracts with customers disaggregated by major business activity and other sources of revenue for the three and nine months ended September 30, 2018 :
(Expressed in thousands)
For the Three Months Ended September 30, 2018
 
Reportable Segments
 
Private Client
 
Asset Management
 
Capital Markets
 
Corporate/Other
 
Total
Revenues from contracts with customers:
 
 
 
 
 
 
 
 
 
Commissions from sales and trading
$
36,553

 
$

 
$
31,807

 
$
10

 
$
68,370

Mutual fund income
11,059

 
240

 
4

 
5

 
11,308

Advisory fees
60,516

 
17,627

 
3

 
8

 
78,154

Investment banking - capital markets
2,733

 

 
15,806

 

 
18,539

Investment banking - advisory

 

 
9,789

 

 
9,789

Bank deposit sweep income
30,053

 

 

 

 
30,053

Other
3,654

 
3

 
318

 
40

 
4,015

Total revenues from contracts with customers
144,568

 
17,870

 
57,727

 
63

 
220,228

Other sources of revenue:
 
 
 
 
 
 
 
 
 
Interest
9,469

 

 
3,678

 
256

 
13,403

Principal transactions, net
675

 

 
6,423

 
(7,114
)
 
(16
)
Other
3,371

 

 
302

 
526

 
4,199

Total other sources of revenue
13,515

 

 
10,403

 
(6,332
)
 
17,586

Total revenue
$
158,083

 
$
17,870

 
$
68,130

 
$
(6,269
)
 
$
237,814


(Expressed in thousands)
For the Nine Months Ended September 30, 2018
 
Reportable Segments
 
Private Client
 
Asset Management
 
Capital Markets
 
Corporate/Other
 
Total
Revenues from contracts with customers:
 
 
 
 
 
 
 
 
 
Commissions from sales and trading
$
115,924

 
$

 
$
96,826

 
$
87

 
$
212,837

Mutual fund income
32,327

 
745

 
11

 
15

 
33,098

Advisory fees
180,426

 
52,465

 
57

 
24

 
232,972

Investment banking - capital markets
10,572

 

 
46,398

 

 
56,970

Investment banking - advisory

 

 
27,472

 

 
27,472

Bank deposit sweep income
84,203

 

 

 

 
84,203

Other
11,359

 
9

 
750

 
(6
)
 
12,112

Total revenues from contracts with customers
434,811

 
53,219

 
171,514

 
120

 
659,664

Other sources of revenue:
 
 
 
 
 
 
 
 
 
Interest
27,820

 
1

 
10,146

 
719

 
38,686

Principal transactions, net
807

 

 
15,804

 
(7,501
)
 
9,110

Other
5,292

 

 
401

 
1,747

 
7,440

Total other sources of revenue
33,919

 
1

 
26,351

 
(5,035
)
 
55,236

Total revenue
$
468,730

 
$
53,220

 
$
197,865

 
$
(4,915
)
 
$
714,900





12


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

Contract Balances
The timing of the Company's revenue recognition may differ from the timing of payment by its customers. The Company records receivables when revenue is recognized prior to payment and it has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied.
The Company had receivables related to revenue from contracts with customers of $23.7 million and $18.6 million at September 30, 2018 and January 1, 2018, respectively. The Company had no significant impairments related to these receivables during the three and nine months ended September 30, 2018 .
Deferred revenue relates to IRA fees received annually in advance on customer's IRA accounts managed by the Company and the retainer fees and fees earned from certain advisory transactions where the performance obligations have not yet been satisfied. Total deferred revenue was $1.2 million and $ nil at September 30, 2018 and January 1, 2018, respectively.
The following presents the Company's contract assets and deferred revenue balances from contracts with customers, which are included in other assets and other liabilities, respectively, on the condensed consolidated balance sheet:
(Expressed in thousands)
 
 
 
 
Ending Balance
at September 30, 2018
 
Opening Balance
at January 1, 2018
Contract assets (receivables):
 
 
 
Commission (1)
$
2,867

 
$
2,007

Mutual fund income (2)
7,364

 
7,779

Advisory fees (3)
681

 
1,460

Bank deposit sweep income (4)
3,849

 
3,459

Investment banking fees (5)
5,601

 
3,926

  Other
3,290

 

  Total contract assets
$
23,652

 
$
18,631

Deferred revenue (payables):
 
 
 
Investment banking fees
$
407

 
$

IRA fees
762

 

Total deferred revenue
$
1,169

 
$

(1)
Commission recorded on trade date but not yet settled.
(2)
Mutual fund income earned but not yet received.
(3)
Management and performance fees earned but not yet received.
(4)
Fees earned from FDIC-insured bank deposit program but not yet received.
(5)
Underwriting revenue and advisory fee earned but not yet received.

Contract Costs
The Company incurs incremental transaction-related costs to obtain and/or fulfill contracts associated with investment banking and advisory engagements where the revenue is recognized at a point in time and the costs are determined to be recoverable. As of September 30, 2018 , the contract costs were $1.5 million . There were no significant charges recognized in relation to these costs for the nine months ended September 30, 2018 .




13


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

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 non-voting common stock ("Class A Stock") and Class B voting common stock ("Class B Stock") outstanding. Diluted earnings per share includes the weighted average number of shares of Class A Stock and Class B Stock outstanding and options to purchase Class A Stock and unvested restricted stock awards of Class A Stock using the treasury stock method.
Earnings per share have been calculated as follows:
(Expressed in thousands, except number of shares and per share amounts)
 
 
 
 
 
 
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Basic weighted average number of shares outstanding
13,269,024

 
13,213,139

 
13,252,596

 
13,290,399

Net dilutive effect of share-based awards, treasury method (1)
871,239

 
550,377

 
790,730

 
499,737

Diluted weighted average number of shares outstanding
14,140,263

 
13,763,516

 
14,043,326

 
13,790,136

 
 
 
 
 
 
 
 
Net income from continuing operations
$
5,061

 
$
7,403

 
$
20,609

 
$
702

Net income from discontinued operations

 
461

 

 
1,101

Net income
5,061

 
7,864

 
20,609

 
1,803

Less net income (loss) attributable to non-controlling interest, net of tax
(10
)
 
75

 
(22
)
 
180

Net income attributable to Oppenheimer Holdings Inc.
$
5,071

 
$
7,789

 
$
20,631

 
$
1,623

 
 
 
 
 
 
 
 
Basic net income per share attributable to Oppenheimer Holdings Inc.
 
 
 
 
 
 
 
Continuing operations
$
0.38

 
$
0.56

 
$
1.56

 
$
0.05

Discontinued operations (2)

 
0.03

 

 
0.07

Net income per share
$
0.38

 
$
0.59

 
$
1.56

 
$
0.12

 
 
 
 
 
 
 
 
Diluted net income per share attributable to Oppenheimer Holdings Inc.
 
 
 
 
 
 
 
Continuing operations
$
0.36

 
$
0.54

 
$
1.47

 
$
0.05

Discontinued operations (2)

 
0.03

 

 
0.07

Net income per share
$
0.36

 
$
0.57

 
$
1.47

 
$
0.12

 
(1)
For both the three and nine months ended September 30, 2018 , the diluted net income per share computation does not include the anti-dilutive effect of 4,050 shares of Class A Stock granted under share-based compensation arrangements ( 15,450 shares for both the three and nine months ended September 30, 2017 ).
(2)
Represents net income from discontinued operations less net income attributable to non-controlling interest, net of tax divided by weighted average number of shares outstanding.


14


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

5.    Receivable from and payable to brokers, dealers and clearing organizations
(Expressed in thousands)
 
 
 
 
As of
 
September 30, 2018
 
December 31, 2017
Receivable from brokers, dealers and clearing organizations consists of:
 
 
 
Securities borrowed
$
114,795

 
$
132,368

Receivable from brokers
31,396

 
19,298

Securities failed to deliver
23,390

 
9,442

Clearing organizations
29,026

 
24,361

Other
6,424

 
1,646

Total
$
205,031

 
$
187,115

Payable to brokers, dealers and clearing organizations consists of:
 
 
 
Securities loaned
$
197,332

 
$
180,270

Payable to brokers
2,004

 
1,567

Securities failed to receive
18,102

 
17,559

Other
2,005

 
12,087

Total
$
219,443

 
$
211,483

 

6.    Fair value measurements
Securities owned, securities sold but not yet purchased, investments and derivative contracts are carried at fair value with changes in fair value recognized in earnings each period.
Valuation Techniques
A description of the valuation techniques applied and inputs used in measuring the fair value of the Company's financial instruments is as follows:
U.S. Government Obligations
U.S. Treasury securities are valued using quoted market prices obtained from active market makers and inter-dealer brokers.
U.S. Agency Obligations
U.S. agency securities consist of agency issued debt securities and mortgage pass-through securities. Non-callable agency issued debt securities are generally valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. The fair value of mortgage pass-through securities are model driven with respect to spreads of the comparable to-be-announced ("TBA") security.
Sovereign Obligations
The fair value of sovereign obligations is determined based on quoted market prices when available or a valuation model that generally utilizes interest rate yield curves and credit spreads as inputs.
Corporate Debt and Other Obligations
The fair value of corporate bonds is estimated using recent transactions, broker quotations and bond spread information.

15


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

Mortgage and Other Asset-Backed Securities
The Company values non-agency securities collateralized by home equity and various other types of collateral based on external pricing and spread data provided by independent pricing services. When specific external pricing is not observable, the valuation is based on yields and spreads for comparable bonds.
Municipal Obligations
The fair value of municipal obligations is estimated using recently executed transactions, broker quotations, and bond spread information.
Convertible Bonds
The fair value of convertible bonds is estimated using recently executed transactions and dollar-neutral price quotations, where observable. When observable price quotations are not available, fair value is determined based on cash flow models using yield curves and bond spreads as key inputs.
Corporate Equities
Equity securities and options are generally valued based on quoted prices from the exchange or market where traded. To the extent quoted prices are not available, fair values are generally derived using bid/ask spreads.
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 September 30, 2018 , the Company had no 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 September 30, 2018 , the Company purchased and holds (net of redemptions) approximately $40.8 million in ARS from its clients. In addition, the Company is committed to purchase another $7.2 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 that are municipal bonds wrapped by municipal bond insurance and student loan auction rate securities that 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 classified 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.

16


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

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.

17


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

Additional information regarding the valuation technique and inputs for ARS used is as follows:
(Expressed in thousands)
Quantitative Information about ARS Level 3 Fair Value Measurements as of September 30, 2018
Product
 
Principal
 
Valuation
Adjustment
 
Fair
Value
 
Valuation
Technique
 
Unobservable
Input
 
Range
 
Weighted
Average
Auction Rate Securities Owned (1)
Auction Rate Preferred Securities
 
$
21,500

 
$
406

 
$
21,094

 
Discounted Cash Flow
 
Discount Rate  (2)
 
3.14% to 4.28%
 
4.26%
 
 
 
 
 
 
 
 
 
 
Duration
 
2.5 Years
 
2.5 Years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
2.38% to 3.46%
 
3.45%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auction Rate Preferred Securities
 
18,950

 
2,697

 
16,253

 
Tender Offer (4)
 
N/A
 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal Auction Rate Securities
 
75

 

 
75

 
Par
 
N/A
 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Student Loan Auction Rate Securities
 
275

 
14

 
261

 
Discounted Cash Flow
 
Discount Rate (5)
 
4.17%
 
4.17%
 
 
 
 
 
 
 
 
 
 
Duration
 
5.5 Years
 
5.5 Years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
3.09%
 
3.09%
 
 
$
40,800

 
$
3,117

 
$
37,683

 
 
 
 
 
 
 
 
Auction Rate Securities Commitments to Purchase (6)
 
 
 
 
 
 
 
 
Auction Rate Preferred Securities
 
$
49

 
$
1

 
$
48

 
Discounted Cash Flow
 
Discount Rate (2)
 
3.14% to 4.28%
 
4.26%
 
 
 
 
 
 
 
 
 
 
Duration
 
2.5 Years
 
2.5 Years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
2.38% to 3.46%
 
3.45%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auction Rate Preferred Securities
 
7,184

 
1,078

 
6,106

 
Tender Offer (4)
 
N/A
 
N/A
 
N/A
 
 
$
7,233

 
$
1,079

 
$
6,154

 
 
 
 
 
 
 
 
Total
 
$
48,033

 
$
4,196

 
$
43,837

 
 
 
 
 
 
 
 
 
(1)
Principal amount represents the par value of the ARS and is included in securities owned on the condensed consolidated balance sheet as of September 30, 2018 . The valuation adjustment amount is included as a reduction to securities owned on the condensed consolidated balance sheet as of September 30, 2018 .
(2)
Derived by applying a multiple to a spread between 110% to 150% to the U.S. Treasury rate of 2.85% .
(3)
Based on current yields for ARS positions owned.
(4)
Residual ARS amounts owned and ARS commitments to purchase that were subject to tender offers were priced at the tender offer price. Included in Level 2 of the fair value hierarchy.
(5)
Derived by applying the sum of the spread of 1.20% to the U.S. Treasury rate of 2.97% .
(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 amount is included in accounts payable and other liabilities on the condensed consolidated balance sheet as of September 30, 2018 .

18


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

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 September 30, 2018 would result in a decrease in the fair value of $126,000 (does not consider a corresponding reduction in duration as discussed above).
The impact of a 50 basis point increase in the discount rate at September 30, 2018 would result in a decrease in the fair value of $251,000 (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, ARS are primarily categorized in Level 3 of the fair value hierarchy. As of September 30, 2018 , the Company had a valuation adjustment (unrealized loss) of $3.1 million for ARS owned which is included as a reduction to securities owned on the condensed consolidated balance sheet. As of September 30, 2018 , the Company also had a valuation adjustment of $1.1 million on ARS purchase commitments from legal settlements and awards which is included in accounts payable and other liabilities on the condensed consolidated balance sheet. The total valuation adjustment was $4.2 million as of September 30, 2018 . The valuation adjustment represents the difference between the principal value and the fair value of the ARS owned and ARS purchase commitments.
During the three months ended September 30, 2018 , the Company participated in tender offers by issuers of ARS which resulted in recognized losses totaling $8.1 million . The recognized losses are comprised of realized losses of $4.6 million related to tendering ARS holdings at prices below par and unrealized losses of $3.5 million related to revaluing the remaining affected ARS owned and commitments to purchase at the tender offer prices.

19


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

Investments
In its role as general partner in certain hedge funds and private equity funds, the Company, through its subsidiaries, holds direct investments in such funds. The Company uses the net asset value of the underlying fund as a basis for estimating the fair value of its investment.
The following table provides information about the Company's investments in Company-sponsored funds as of September 30, 2018 :
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value
 
Unfunded
Commitments
 
Redemption
Frequency
 
Redemption
Notice Period
Hedge funds (1)
$
1,631

 
$

 
Annually
 
30 - 120 Days
Private equity funds (2)
4,974

 
1,400

 
N/A
 
N/A
 
$
6,605

 
$
1,400

 
 
 
 
(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.
Valuation Process
The Company's 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 with ARS that are trading in the secondary market.

20


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

Assets and Liabilities Measured at Fair Value
The Company's assets and liabilities, recorded at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 , 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 September 30, 2018
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value Measurements as of September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
10,500

 
$

 
$

 
$
10,500

Deposits with clearing organizations
31,291

 

 

 
31,291

Securities owned:
 
 
 
 
 
 
 
U.S. Treasury securities
701,261

 

 

 
701,261

U.S. Agency securities
14,688

 
7,425

 

 
22,113

Sovereign obligations

 
2,964

 

 
2,964

Corporate debt and other obligations

 
14,400

 

 
14,400

Mortgage and other asset-backed securities

 
2,777

 

 
2,777

Municipal obligations

 
45,427

 

 
45,427

Convertible bonds

 
34,013

 

 
34,013

Corporate equities
34,613

 

 

 
34,613

Auction rate securities

 
16,253

 
21,430

 
37,683

Securities owned, at fair value
750,562

 
123,259

 
21,430

 
895,251

Investments (1)

 

 
104

 
104

Derivative contracts:
 
 
 
 
 
 
 
TBAs

 
12,309

 

 
12,309

Total
$
792,353

 
$
135,568

 
$
21,534

 
$
949,455

Liabilities
 
 
 
 
 
 
 
Securities sold but not yet purchased:
 
 
 
 
 
 
 
U.S. Treasury securities
$
107,031

 
$

 
$

 
$
107,031

U.S. Agency securities

 
2

 

 
2

Corporate debt and other obligations

 
4,061

 

 
4,061

Mortgage and other asset-backed securities

 
2,349

 

 
2,349

Convertible bonds

 
7,356

 

 
7,356

Corporate equities
22,947

 

 

 
22,947

Securities sold but not yet purchased, at fair value
129,978

 
13,768

 

 
143,746

Derivative contracts:
 
 
 
 
 
 
 
Futures
709

 

 

 
709

Foreign exchange forward contracts
2

 

 

 
2

TBAs

 
12,258

 

 
12,258

ARS purchase commitments

 
1,078

 
1

 
1,079

Derivative contracts, total
711

 
13,336

 
1

 
14,048

Total
$
130,689

 
$
27,104

 
$
1

 
$
157,794

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



21


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

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2017
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value Measurements as of December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
10,490

 
$

 
$

 
$
10,490

Deposits with clearing organizations
34,293

 

 

 
34,293

Securities owned:
 
 
 
 
 
 
 
U.S. Treasury securities
640,337

 

 

 
640,337

U.S. Agency securities
3,011

 
6,894

 

 
9,905

Sovereign obligations

 
608

 

 
608

Corporate debt and other obligations

 
12,538

 

 
12,538

Mortgage and other asset-backed securities

 
4,037

 

 
4,037

Municipal obligations

 
89,618

 
35

 
89,653

Convertible bonds

 
23,216

 

 
23,216

Corporate equities
34,067

 

 

 
34,067

Money markets
383

 

 

 
383

Auction rate securities

 
24,455

 
87,398

 
111,853

Securities owned, at fair value
677,798

 
161,366

 
87,433

 
926,597

Investments (1)

 

 
169

 
169

Derivative contracts:


 


 


 


TBAs

 
716

 

 
716

Total
$
722,581

 
$
162,082

 
$
87,602

 
$
972,265

Liabilities
 
 
 
 
 
 
 
Securities sold but not yet purchased:
 
 
 
 
 
 
 
U.S. Treasury securities
$
53,425

 
$

 
$

 
$
53,425

U.S. Agency securities

 
13

 

 
13

Sovereign obligations

 
1,179

 

 
1,179

Corporate debt and other obligations

 
4,357

 

 
4,357

Mortgage and other asset-backed securities

 
10

 

 
10

Convertible bonds

 
10,109

 

 
10,109

Corporate equities
25,393

 

 

 
25,393

Securities sold but not yet purchased, at fair value
78,818

 
15,668

 

 
94,486

Derivative contracts:
 
 
 
 
 
 
 
Futures
766

 

 

 
766

TBAs

 
614

 

 
614

ARS purchase commitments

 

 
8

 
8

Derivative contracts, total
766

 
614

 
8

 
1,388

Total
$
79,584

 
$
16,282

 
$
8

 
$
95,874

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







22


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

The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended September 30, 2018 and 2017 :