Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto which appear elsewhere in this annual report.
The Company engages in a broad range of activities in the securities 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. Its principal subsidiaries are Oppenheimer & Co. Inc. ("Oppenheimer") and Oppenheimer Asset Management Inc. ("OAM"). As of
December 31, 2018
, the Company provided its services from
92
offices in 24 states located throughout the United States, offices in Tel Aviv, Israel, Hong Kong, China, London, England, St. Helier, Isle of Jersey, Frankfurt, Germany and Geneva, Switzerland. Client assets administered by the Company as of
December 31, 2018
totaled
$80.1 billion
. The Company provides investment advisory services through OAM and Oppenheimer Investment Management LLC ("OIM") and Oppenheimer's financial adviser direct programs. At
December 31, 2018
, client assets under management ("AUM") totaled
$26.7 billion
. The Company provides trust services and products through Oppenheimer Trust Company of Delaware. The Company provides discount brokerage services through Freedom Investments, Inc. ("Freedom"). Through OPY Credit Corp., the Company offers syndication as well as trading of issued syndicated corporate loans. At
December 31, 2018
, the Company employed
2,976
employees (
2,918
full-time and
58
part-time), of whom
1,073
were financial advisers.
Critical Accounting Policies
The Company's accounting policies are essential to understanding and interpreting the financial results reported on the consolidated financial statements. The significant accounting policies used in the preparation of the Company's consolidated financial statements are summarized in note 2 to those statements. Certain of those policies are considered to be particularly important to the presentation of the Company's financial results because they require management to make difficult, complex or subjective judgments, often as a result of matters that are inherently uncertain. The following is a discussion of these policies:
Fair Value Measurements
The accounting guidance for the fair value measurement of financial assets, which defines fair value, establishes a framework for measuring fair value, establishes a fair value measurement hierarchy, and expands fair value measurement disclosures. Fair value, as defined by the accounting guidance, is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy established by this accounting guidance prioritizes the inputs used in valuation techniques into the following three categories (highest to lowest priority):
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Level 1:
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Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
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Level 2:
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Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and
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Level 3:
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Unobservable inputs that are significant to the overall fair value measurement.
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The Company's financial instruments that are recorded at fair value generally are classified within Level 1 or Level 2 within the fair value hierarchy using quoted market prices or quotes from market makers or broker-dealers. Financial instruments classified within Level 1 are valued based on quoted market prices in active markets and consist of U.S. Treasury and Agency securities, corporate equities, and certain money market instruments. Level 2 financial instruments primarily consist of investment grade and high-yield corporate debt, convertible bonds, mortgage and asset-backed securities, and municipal obligations. Financial instruments classified as Level 2 are valued based on quoted prices for similar assets and liabilities in active markets and quoted prices for identical or similar assets and liabilities in markets that are not active. Some financial instruments are classified within Level 3 within the fair value hierarchy as observable pricing inputs are not available due to limited market activity for the asset or liability. Such financial instruments include certain distressed municipal securities, auction rate securities ("ARS") and investments in hedge funds and private equity funds where the Company, through its subsidiaries, is general partner.
Legal and Regulatory Reserves
The Company records reserves related to legal and regulatory proceedings in accounts payable and other liabilities. The determination of the amounts of these reserves requires significant judgment on the part of management. In accordance with applicable accounting guidance, the Company establishes reserves for litigation and regulatory matters where available information indicates that it is probable a liability had been incurred at the date of the consolidated financial statements and the Company can reasonably estimate the amount of that loss. When loss contingencies are not probable and cannot be reasonably estimated, the Company does not establish reserves.
When determining whether to record a reserve, management considers many factors including, but not limited to, the amount of the claim; the stage and forum of the proceeding, the sophistication of the claimant, the amount of the loss, if any, in the client's account and the possibility of wrongdoing, if any, on the part of an employee of the Company; the basis and validity of the claim; previous results in similar cases; and applicable legal precedents and case law. Each legal and regulatory proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management. Any change in the reserve amount is recorded in the results of that period. The assumptions of management in determining the estimates of reserves may be incorrect and the actual disposition of a legal or regulatory proceeding could be greater or less than the reserve amount.
Goodwill
The Company defines a reporting unit as an operating segment. The Company's goodwill resides in its Private Client Division ("PCD") reporting unit. Goodwill of a reporting unit is subject to at least an annual test for impairment to determine if the estimated fair value of a reporting unit is less than its carrying amount. Goodwill of a reporting unit is required to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Due to the volatility in the financial services sector and equity markets in general, determining whether an impairment of goodwill has occurred is increasingly difficult and requires management to exercise significant judgment. The Company's annual goodwill impairment analysis performed at
December 31, 2018
applied the same valuation methodologies with consistent inputs as that performed at
December 31, 2017
, as follows:
In estimating the fair value of the PCD reporting unit, the Company uses traditional standard valuation methods, including the market comparable approach and income approach. The market comparable approach is based on comparisons of the subject company to public companies whose stocks are actively traded ("Price Multiples") or to similar companies engaged in an actual merger or acquisition ("Precedent Transactions"). As part of this process, multiples of value relative to financial variables, such as earnings or stockholders' equity, are developed and applied to the appropriate financial variables of the subject company to indicate its value. The income approach involves estimating the present value of the subject company's future cash flows by using projections of the cash flows that the business is expected to generate, and discounting these cash flows at a given rate of return ("Discounted Cash Flow" or "DCF"). Each of these standard valuation methodologies requires the use of management estimates and assumptions.
In its Price Multiples valuation analysis, the Company uses various operating metrics of comparable companies, including revenues, after-tax earnings, EBITDA as well as price-to-book value ratios at a point in time. The Company analyzes prices paid in Precedent Transactions that are comparable to the business conducted in the PCD. The DCF analysis includes the Company's assumptions regarding discount rate, growth rates of the PCD's revenues, expenses, EBITDA, and capital expenditures, adjusted for current economic conditions and expectations. The Company weighs each of the three valuation methods equally in its overall valuation. Given the subjectivity involved in selecting which valuation method to use, the corresponding weightings, and the input variables for use in the analyses, it is possible that a different valuation model and the selection of different input variables could produce a materially different estimate of the fair value of the PCD reporting unit.
At each annual goodwill impairment testing date, the PCD reporting unit had a fair value that was substantially in excess of its carrying value. See note 18 to the consolidated financial statements appearing in Item 8 for further discussion.
Intangible Assets
Indefinite intangible assets are comprised of trademarks, trade names and an Internet domain name. These intangible assets carried at
$32.1 million
, which are not amortized, are subject to at least an annual test for impairment to determine if the estimated fair value is less than their carrying amount. The fair value of the trademarks and trade names was substantially in excess of its carrying value at
December 31, 2018
. See note 18 to the consolidated financial statements appearing in Item 8 for further discussion.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and the results of recent operations.
The Company records uncertain tax positions in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740, "Income Taxes" on the basis of a two-step process whereby it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and, for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company records interest and penalties accruing on unrecognized tax benefits in income (loss) before income taxes as interest expense and other expense, respectively, in its consolidated statement of operations.
The Company permanently reinvests eligible earnings of its foreign subsidiaries and, accordingly, does not accrue any U.S. income taxes that would arise if such earnings were repatriated.
To the extent that a company's accounting for certain income tax effects of the TCJA is incomplete but the company is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA. The Company determined that there were no material changes from the 2017 provisional estimate.
New Accounting Pronouncements
Recently issued accounting pronouncements are described in note 2 to the consolidated financial statements appearing in Item 8.
Business Environment
The securities industry is directly affected by general economic and market conditions, including fluctuations in volume and price levels of securities and changes in interest rates, inflation, political events, investor confidence, investor participation levels, legal and regulatory, accounting, tax and compliance requirements and competition, all of which have an impact on commissions, firm trading, fees from accounts under investment management as well as fees for investment banking services, and investment and interest income as well as on liquidity. Substantial fluctuations can occur in revenue and net income due to these and other factors.
The Company is focused on growing its private client and asset management businesses through strategic additions of experienced financial advisers in its existing branch system and employment of experienced money management personnel in its asset management business as well as deploying its capital for expansion through targeted acquisitions. In addition, the Company is committed to the improvement of its technology capability to support client service and the expansion of its capital markets capabilities while addressing the issue of managing its expenses.
Regulatory and Legal Environment
The Company's brokerage business is subject to regulation by, among others, the Securities and Exchange Commission (the "SEC"), the Commodities Futures Trading Commission, the National Futures Association, the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority ("FINRA") in the United States, the Financial Conduct Authority ("FCA") in the United Kingdom, the Jersey Financial Services Commission in the Isle of Jersey, the Securities and Futures Commission in Hong Kong, and various state securities regulators in the United States. In addition, Oppenheimer Israel (OPCO) Ltd. operates under the supervision of the Israel Securities Authority. Past events surrounding corporate accounting and other activities leading to investor losses caused increased regulation of public companies. Certain legislators continue to publicly advocate that the SEC has not taken adequate enforcement action against firms and individuals. Various states are imposing their own regulations that make compliance more difficult and more expensive to monitor.
In July 2010, Congress enacted extensive legislation entitled the Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") in which it mandated that the SEC and other regulators conduct comprehensive studies and issue new regulations based on their findings to control the activities of financial institutions in order to protect the financial system, the investing public and consumers from issues and failures that occurred in the 2008-9 financial crisis.
Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds (the "Volcker Rule") was published by the U.S. Federal Reserve Board as required by the Dodd-Frank Act in 2011. The Volcker Rule is not applicable to the Company. Recent changes have narrowed the application of the Volcker Rule to fewer institutions and broadened the ability of banks to service their clients through the use of their balance sheet.
In April 2016, the DOL finalized its definition of fiduciary under the Employee Retirement Income Security Act through the release of new rules and changes to interpretations of six prohibited transaction exemptions which together set a new standard for the treatment and effects of advice given to retirement investors ("DOL Fiduciary Rules"). Under this rule, investment advice given to an employee benefit plan or an individual retirement account ("IRA") would be considered fiduciary advice.
In March 2018, the U.S. 5th Circuit Court of Appeals found that the DOL did not have the jurisdiction to adopt the aforementioned rules and vacated the DOL Fiduciary Rules effective in June 2018. On April 18, 2018, the SEC announced its proposed "Regulation Best Interest," a package of rulemakings and interpretations that address customers' relationships with investment advisers and broker-dealers. Regulation Best Interest would enact an intermediate standard requiring advisers and broker-dealers to act in the clients' "best interest" at all times. The proposed rules would require substantially greater record keeping than is currently the case. The rules would be applicable to all customers of broker-dealers and investment advisers. The public comment period applicable to Regulation Best Interest expired on August 7, 2018. The SEC has indicated its intention to move forward with a final rule proposal in 2019. It is too soon to predict whether and in what form the SEC will adopt Regulation Best Interest, the effect it may have on broker-dealers and investment advisers generally, the specific effect it will have on the Company's broker-dealer and investment management businesses, and the effect it will have on the Company’s competitive position in the financial services industry.
During 2017, the Company reviewed its business and operating models in light of the DOL Fiduciary Rules and made significant structural and operational changes to the Company's broker-dealer and investment management businesses. The changes have had a negative impact on revenues derived from retirement accounts and the desirability of servicing such accounts except when they are participating in fixed fee based programs. The Company is reviewing its business and operating models in light of the 5th Circuit ruling and the proposed Regulation Best Interest and may make further structural and operational changes in light of the vacated DOL Fiduciary Rules and in anticipation of the SEC adopting a version of the proposed Regulation Best Interest.
The European Commission recently adopted several acts under the revised Markets in Financial Instruments Directive (known as "MiFID II") that prevent broker-dealers operating in the European Union ("EU") from "bundling" the cost of research together with trading commissions. These rules became effective on January 3, 2018. The ability of the Company to be compensated for equity research activities has been reduced and institutional clients are required to make payments for research through cash payments rather than transaction based commissions. MiFID II is already having an impact on the manner in which business is being conducted in the United Kingdom and in Europe with a noticeable reduction in the availability of equity research particularly in relation to smaller issuers. The long term effects of these changes on global securities markets and on competition in the EU and UK are impossible to predict.
In June 2016, in a referendum to consider the United Kingdom's continued participation in the EU, the United Kingdom voted in favor of withdrawing from the EU ("Brexit"). The British government instituted Rule 50 on March 30, 2017 thereby beginning a two-year period during which Great Britain and the EU will define their relationship effective with Great Britain's departure from the EU. Brexit has created significant uncertainty in both the United Kingdom and in the other member states around its economic impact and the operating requirements for businesses located in the United Kingdom after the effective date. The Company has a London-based business and the ability for it to passport its employees to conduct a financial services business in the EU post-Brexit is in considerable doubt. In addition, a number of its London-based employees do not hold British passports, although a number have applied for and received the right to continue to be employed in the United Kingdom. To date, there has been no discernible progress on the post-Brexit relationship between the EU and the UK. Failing the implementation of an agreed extension, the UK will leave the EU in March 2019 under a "hard" Brexit, leaving considerable uncertainty as to the ongoing relationship and a likely negative impact on all parties. Given the lack of clarity on the ultimate post-Brexit relationship between Great Britain and the EU, the Company cannot fully determine what, if any, impact Brexit may have on its operations, both inside and outside the United Kingdom. The Company has opened an office in Frankfurt, Germany in the EU for its investment banking business and it will be available in the eventuality that it is needed in order to continue to conduct a securities business in the EU post-Brexit.
The anti-money laundering ("AML") rules and requirements that were created by the passage of the USA Patriot Act in the U.S. and similar laws in other countries have created significant costs of compliance and can be expected to continue to do so. The U.S. Financial Crimes Enforcement Network ("FinCEN") has heightened its review of the activities of broker-dealers. This increased focus is likely to lead to significantly higher levels of enforcement and higher fines and penalties on broker-dealers. Regulators have expanded their views of the requirements of the USA Patriot Act, as well as their views of the enforcement of the provisions of the Bank Secrecy Act and the Foreign Corrupt Practices Act with respect to the amount of diligence and on-going monitoring required by financial institutions of both their foreign and domestic clients and their activities. As a result, the Company has significantly increased its AML staffing, made additional investments in its due diligence systems, upgraded its monitoring systems and significantly revised its AML policies and procedures. In May 2016, FinCEN's proposed rule on customer due diligence ("CDD Rule") was finalized and became effective on May 11, 2018. FINRA has recently announced the expansion of AML regulations to include the collection and analysis of other types of client activity. The CDD and associated rules are significantly more intrusive on the activities of U.S.-based clients and will have the effect of increasing the costs associated with opening new accounts and creating new business relationships.
The Trump Administration has announced its intention to ease the regulatory burden on businesses. There can be no assurance that such easing will in fact take place, that it will have a favorable impact on financial service providers such as the Company, or that it will have a positive effect on the Company's business.
Pursuant to FINRA Rule 3130, the chief executive officers ("CEOs") of member broker-dealers (including the CEO of Oppenheimer) are required to certify that their companies have processes in place to establish and test supervisory policies and procedures reasonably designed to achieve compliance with federal securities laws and regulations, including applicable regulations of self-regulatory organizations. The CEO of the Company is required to make such a certification on an annual basis and did so in March 2018.
In September 2015, FINRA released Regulatory Notice 15-33 which provides guidance on effective liquidity risk management strategies. Based on the guidelines, broker-dealers are expected to rigorously evaluate their potential liquidity needs related to both market wide stress and idiosyncratic stresses, devote sufficient resources to measuring risks applicable to their businesses and report the results of such measurement to senior management. The reporting requirement includes a review of risks that are based on historical events and stresses that could occur but have not yet been observed. Additionally, based on the guidelines, every broker-dealer must consider developing contingency plans for addressing those risks so that the firm will have sufficient liquidity to operate after the stress occurs while continuing to protect customer assets. It must also conduct stress tests and other reviews to evaluate the effectiveness of the contingency plans, have a training plan for its staff and have tested the processes on which it intends to rely if such stresses occur. The Company has enhanced its liquidity risk management practices in light of these requirements.
On January 8, 2018, FINRA released for comment Regulatory Notice 18-02 "Liquidity Reporting and Notification" which would require member firms to notify FINRA no more than 48 hours after specified events that may signal an adverse change in liquidity risk. This notice would also require members to file a new Supplemental Liquidity Schedule ("SLS") detailing the largest customer and counterparty exposures as a supplement to the FOCUS Report. On the new SLS, member firms would report information related to specified financing transactions and other sources or uses of liquidity. The information would include among other things, financing terms, collateral types and the identity of large counterparties. The comment period has ended without the publication of final rules.
Other Regulatory Matters
On January 27, 2015, the SEC approved an Offer of Settlement from Oppenheimer and issued an Order Instituting Administrative and Cease and Desist Proceedings (the "SEC Order"). Pursuant to the SEC Order, Oppenheimer was ordered to, amongst other things, retain an independent consultant to review Oppenheimer's policies and procedures relating to anti-money laundering and Section 5 of the Securities Act of 1933.
On February 19, 2015, the board of directors formed a Special Committee (later replaced by the Compliance Committee) in order to engage an independent law firm to conduct the review set forth above. On April 22, 2015, the Special Committee agreed to retain Kalorama Partners, LLP ("Kalorama") to act as the independent law firm. In July 2015, the Company created a Compliance Committee made up of independent directors to oversee the Company's compliance with applicable rules and regulations.
On December 15, 2016, the Company's agreement with Kalorama expired by its terms. In May and June 2017, Kalorama delivered to the Company reports in connection with the January 2015 SEC Order, and another report in connection with the SEC's Municipalities Continuing Disclosure Cooperation "MCDC Initiative " (collectively, the "Required Reports"). Each of the reports has been reviewed by the Company and the Compliance Committee. In June 2018, the SEC began an examination of the Company to review the Company's assertions with respect to its fulfillment of Kalorama's recommendations in the Required Reports. That examination concluded in November of 2018. On October 29, 2018, Kalorama resigned as the independent law firm. On February 1, 2019 the Company engaged Locke Lord and Exiger LLC as successor independent consultants (“Successor IC’s”) to complete the review of the implementation of the recommendations made in the Required Reports. The Company expects to work with the Successor IC’s to finalize the implementation the remaining recommendations highlighted by the SEC exam staff during the examination.
Since August 2014, Oppenheimer has been responding to information requests from the SEC regarding the supervision of one of its former financial advisers who was indicted and convicted of insider trading. Oppenheimer is continuing to cooperate with the SEC inquiry.
Since September 2016, Oppenheimer has been responding to information requests from FINRA (including FINRA's Enforcement Division) regarding the supervision of Oppenheimer’s sale of unit investment trusts from 2011 to 2015. The Company understands that the inquiry is part of a larger targeted examination or "sweep" examination involving many other brokerage firms. Oppenheimer is continuing to cooperate with the FINRA inquiry.
On February 12, 2018, the SEC Division of Enforcement ("Enforcement Division") announced the Share Class Selection Disclosure Initiative ("SCSD Initiative") pursuant to which investment advisers were encouraged to self-report possible securities laws violations relating to the failure to make certain disclosures concerning mutual fund share class selection. On June 11, 2018, Oppenheimer and OAM notified the Enforcement Division that it intended to participate in the SCSD Initiative. Oppenheimer and OAM filed the information required by the SCSD Initiative on September 19, 2018. On February 7, 2019, Oppenheimer (and its affiliate Oppenheimer Asset Management, collectively “Oppenheimer”) filed an Offer of Settlement with the SEC (the “Offer”) pursuant to which Oppenheimer offered to disgorge approximately $3.5 million (the “Disgorgement Amo
unt”) (including pre-judgment interest) of 12b-1 fees and agree to certain undertakings including the following: (i) within 30 days of the entry of an SEC Order, review and correct as necessary all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees; (ii) within 30 days of the entry of an SEC Order, evaluate whether existing clients should be moved to a lower-cost share class and move clients as necessary; (iii) within 30 days of the entry of an SEC Order, evaluate, update (if necessary), and review for the effectiveness of their implementation, Oppenheimer’s policies and procedures so that they are reasonably designed to prevent violations of the Investment Advisers Act in connection with disclosures regarding mutual fund share class selection; (iv) within 30 days of the entry of an SEC Order, notify affected investors (i.e., those former and current clients who, during the relevant period of inadequate disclosure, purchased or held 12b-1 fee paying share class mutual funds when a lower-cost share class of the same fund was available to the client) of the settlement terms of the Order in a clear and conspicuous fashion; and (v) within 40 days of the entry of an SEC Order, certify, in writing, compliance with the undertaking(s) set forth above. Oppenheimer is awaiting the entry of an SEC Order consistent with the above.
For a number of years, the Company offered auction rate securities ("ARS") to its clients. A significant portion of the market in ARS 'failed' because, in the tight credit market in and subsequent to 2008, dealers were no longer willing or able to purchase the imbalance between supply and demand for ARS. Beginning in February 2008, uncertainties in the credit markets resulted in substantially all of the ARS market experiencing failed auctions. Certain clients of the Company continue to hold ARS in their individual or corporate accounts. Issuer redemptions and tender offers, combined with purchases by the Company, have reduced client holdings by approximately 99%.
In February 2010, Oppenheimer finalized settlements with 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. 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 December 31, 2018, the Company purchased and holds (net of redemptions) approximately $40.7 million in ARS from its clients. As of December 31, 2018, the Company had no outstanding ARS purchase commitments related to the settlements with the Regulators. In addition, the Company is committed to purchase another $7.3 million from clients through 2020 under legal settlements and awards.
The Company's clients held at Oppenheimer approximately $22.4 million of ARS at December 31, 2018 exclusive of amounts that 1) were owned by Qualified Institutional Buyers ("QIBs"), 2) were transferred to the Company after February 2008, 3) were purchased by clients after February 2008, or 4) were transferred from the Company to other securities firms after February 2008. See "Off-Balance Sheet Arrangements" herein for additional details.
As part of its ongoing business, the Company records reserves for legal expenses, judgments, fines and/or awards attributable to litigation and regulatory matters. In connection therewith, the Company has maintained its legal reserves at levels it believes will resolve outstanding matters, but may increase or decrease such reserves as matters warrant. In accordance with applicable accounting guidance, the Company establishes reserves for litigation and regulatory matters when those matters present loss contingencies that are both probable and reasonably estimable. When loss contingencies are not both probable and reasonably estimable, the Company does not establish reserves. See "Legal Proceedings" in Item 3 and note 16 to the consolidated financial statements appearing in Item 8.
Other Matters
The Company operates in all state jurisdictions in the United States and is thus subject to regulation and enforcement under the laws and regulations of each of these jurisdictions. The Company has been and expects that it will continue to be subject to investigations and some or all of these may result in enforcement proceedings as a result of its business conducted in the various states. In particular, many states have become more aggressive and have imposed larger fines in connection with state registration violations than was previously the case.
Business Continuity
The Company is committed to an on-going investment in its technology and communications infrastructure including extensive business continuity planning and investment. These costs are on-going and the Company believes that current and future costs will exceed historic levels due to business and regulatory requirements. The Company maintains a data center which is housed in a different location in New York City from its headquarters. The Company continues to review the adequacy of its remote data center and anticipates that, over the next few years, it may make a determination to move the center to a more remote location than where it currently resides. There is no guarantee that in the event of a significant business disruption that the Company's business continuity plans will be successful in restoring operations in a timely manner.
Cybersecurity
For many years, the Company has sought to maintain the security of its clients' data, limit access to its data processing environment, and protect its data processing facilities. See "Risk Factors — The Company may be exposed to damage to its business or its reputation by cybersecurity incidents" in Item 1A. Recent examples of vulnerabilities by other companies and the government that have resulted in loss of client data and fraudulent activities by both domestic and foreign actors have caused the Company continually to review its security policies and procedures and to take additional actions to protect its network and its information.
Given the importance of the protection of client data, regulators have developed increased oversight of cybersecurity planning and protections that broker-dealers and other financial service providers have implemented. Such planning and protection are subject to the SEC's and FINRA's oversight and examination on a periodic or targeted basis. The Company expects that regulatory oversight will intensify, as a result of publicly announced data breaches by other organizations involving tens of millions of items of personally identifiable information. The Company continues to implement protections and adopt procedures to address the risks posed by the current information technology environment. The Company has significantly increased the resources dedicated to this effort and believes that further increases may be required in the future, in anticipation of increases in the sophistication and persistency of such attacks. There can be no guarantee that the Company's cybersecurity efforts will be successful in discovering or preventing a security breach.
Outlook
The Company recognizes the importance of compliance with applicable regulatory requirements and has committed to performing rigorous and ongoing assessments of its compliance and risk management efforts, to investing in people and programs, and to providing a platform with first class investment ideas and services. The Company is committed to continuing to improve its technology capabilities to ensure compliance with industry regulations, support client service and expand its wealth management and capital markets capabilities. The Company's long-term growth plan is to continue to expand existing offices by hiring experienced professionals as well as expand through the purchase of operating branch offices from other broker-dealers or the opening of new branch offices in attractive locations, and to continue to grow and develop the existing trading, investment banking, investment advisory and other divisions.
The Company is also reviewing its full service business model to determine the opportunities available to build or acquire closely related businesses in areas where competitors have shown some success. Equally important is the search for viable acquisition candidates. The Company's long-term intention is to pursue growth by acquisition where it can find a comfortable match in terms of corporate goals and personnel at a price that would provide the Company's stockholders with incremental value. The Company reviews potential acquisition opportunities from time to time, while evaluating and managing its existing businesses. The Company may use all or a portion of the net proceeds of its June 2017 refinancing for the acquisition of related businesses.
Results of Operations
The Company reported net income attributable to Oppenheimer Holdings Inc. of
$28.9 million
or
$2.18
basic net income per share for the year ended
December 31, 2018
compared with net income of
$22.8 million
or
$1.72
basic net income per share for the year ended
December 31, 2017
. Income before income taxes from continuing operations for the year ended
December 31, 2018
was
$44.9 million
compared with income before income taxes from continuing operations of
$19.7 million
for the year ended
December 31, 2017
. Revenue from continuing operations for the year ended
December 31, 2018
was
$958.2 million
, an increase of
4.1
% compared with revenue from continuing operations of
$920.3 million
for the year ended
December 31, 2017
.
The Company recorded an after-tax benefit of $9.0 million during the year ended December 31, 2017 primarily related to re-measuring deferred tax assets and deferred tax liabilities as a result of the enactment of the TCJA. There was no such after-tax adjustment made to the year end December 31, 2018; however, the Company did benefit from a lower marginal tax rate. Incentive fees earned during the year ended December 31, 2017 totaled $27.5 million as a result of the return on assets under management from alternative investments exceeding certain benchmark returns over a 12-month period. Incentive fees earned during the year ended December 31, 2018 totaled $0.8 million due to the volatility and significant decline in the valuation of assets held by alternative investment funds sponsored by the Company during 2018.
The following table sets forth the amount and percentage of the Company's revenue from each principal source for each of the following years ended December 31:
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Expressed in thousands)
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2018
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2017
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2016
|
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|
Amount
|
|
Percentage
|
|
Amount
|
|
Percentage
|
|
Amount
|
|
Percentage
|
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Commissions
|
$
|
329,668
|
|
|
34
|
%
|
|
$
|
336,620
|
|
|
37
|
%
|
|
$
|
377,317
|
|
|
44
|
%
|
|
Advisory fees
|
314,349
|
|
|
33
|
%
|
|
320,746
|
|
|
35
|
%
|
|
269,119
|
|
|
31
|
%
|
|
Investment banking
|
115,353
|
|
|
12
|
%
|
|
78,215
|
|
|
8
|
%
|
|
81,011
|
|
|
10
|
%
|
|
Bank deposit sweep income
|
116,052
|
|
|
12
|
%
|
|
76,839
|
|
|
8
|
%
|
|
36,316
|
|
|
4
|
%
|
|
Interest
|
52,484
|
|
|
5
|
%
|
|
48,498
|
|
|
5
|
%
|
|
47,649
|
|
|
6
|
%
|
|
Principal transactions, net
|
14,461
|
|
|
2
|
%
|
|
23,273
|
|
|
3
|
%
|
|
20,481
|
|
|
2
|
%
|
|
Other
|
15,787
|
|
|
2
|
%
|
|
36,147
|
|
|
4
|
%
|
|
25,886
|
|
|
3
|
%
|
|
Total revenue
|
$
|
958,154
|
|
|
100
|
%
|
|
$
|
920,338
|
|
|
100
|
%
|
|
$
|
857,779
|
|
|
100
|
%
|
The Company derives most of its revenue from the operations of its principal subsidiaries, Oppenheimer and OAM. Although maintained as separate entities, the operations of the Company's brokerage subsidiaries both in the U.S. and other countries are closely related because Oppenheimer acts as clearing broker in transactions initiated by these subsidiaries.
The following table and discussion summarizes the changes in the major revenue and expense categories for the past two years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
|
|
2018 versus 2017
|
|
2017 versus 2016
|
|
|
Amount Change
|
|
% Change
|
|
Amount Change
|
|
% Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
Commissions
|
$
|
(6,952
|
)
|
|
(2.1
|
)
|
|
$
|
(40,697
|
)
|
|
(10.8
|
)
|
|
Advisory fees
|
(6,397
|
)
|
|
(2.0
|
)
|
|
51,627
|
|
|
19.2
|
|
|
Investment banking
|
37,138
|
|
|
47.5
|
|
|
(2,796
|
)
|
|
(3.5
|
)
|
|
Bank deposit sweep income
|
39,213
|
|
|
51.0
|
|
|
40,523
|
|
|
111.6
|
|
|
Interest
|
3,986
|
|
|
8.2
|
|
|
849
|
|
|
1.8
|
|
|
Principal transactions, net
|
(8,812
|
)
|
|
(37.9
|
)
|
|
2,792
|
|
|
13.6
|
|
|
Other
|
(20,360
|
)
|
|
(56.3
|
)
|
|
10,261
|
|
|
39.6
|
|
|
Total revenue
|
37,816
|
|
|
4.1
|
|
|
62,559
|
|
|
7.3
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Compensation and related expenses
|
5,054
|
|
|
0.8
|
|
|
17,428
|
|
|
3.0
|
|
|
Communications and technology
|
2,501
|
|
|
3.5
|
|
|
1,588
|
|
|
2.3
|
|
|
Occupancy and equipment costs
|
7
|
|
|
—
|
|
|
373
|
|
|
0.6
|
|
|
Clearing and exchange fees
|
(560
|
)
|
|
(2.4
|
)
|
|
(1,581
|
)
|
|
(6.3
|
)
|
|
Interest
|
18,042
|
|
|
63.6
|
|
|
8,917
|
|
|
45.9
|
|
|
Other
|
(12,345
|
)
|
|
(10.9
|
)
|
|
(5,794
|
)
|
|
(4.9
|
)
|
|
Total expenses
|
12,699
|
|
|
1.4
|
|
|
20,931
|
|
|
2.4
|
|
|
Income before income taxes from continuing operations
|
25,117
|
|
|
127.3
|
|
|
41,628
|
|
|
(190.2
|
)
|
|
Income taxes
|
18,111
|
|
|
(848.7
|
)
|
|
10,128
|
|
|
(82.6
|
)
|
|
Net income from continuing operations
|
7,006
|
|
|
32.0
|
|
|
31,500
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
(2,071
|
)
|
|
(100.0
|
)
|
|
(15,268
|
)
|
|
(88.1
|
)
|
|
Income taxes
|
(941
|
)
|
|
(100.0
|
)
|
|
(6,277
|
)
|
|
(87.0
|
)
|
|
Net income from discontinued operations
|
(1,130
|
)
|
|
(100.0
|
)
|
|
(8,991
|
)
|
|
(88.8
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
5,876
|
|
|
25.5
|
|
|
22,509
|
|
|
4,584.3
|
|
|
Less net income attributable to non-controlling interest, net of tax
|
(200
|
)
|
|
(108.7
|
)
|
|
(1,468
|
)
|
|
(88.9
|
)
|
|
Net income attributable to Oppenheimer Holdings Inc.
|
$
|
6,076
|
|
|
26.6
|
|
|
$
|
23,977
|
|
|
*
|
|
* Percentage not meaningful.
Fiscal
2018
compared to Fiscal
2017
Revenue
Commission revenue was
$329.7 million
for the year ended
December 31, 2018
, a decrease of
2.1%
compared with
$336.6 million
for the year ended
December 31, 2017
due to lower retail and institutional fixed income commission revenue partially offset by higher institutional equities commission revenue during the
2018
year.
Advisory fees were
$314.3 million
for the year ended
December 31, 2018
, an decrease of
2.0%
compared with
$320.7 million
for the year ended
December 31, 2017
due to higher management fee income partially offset by lower incentive fee income.
Investment banking revenue was
$115.4 million
for the year ended
December 31, 2018
, an increase of
47.5%
compared with
$78.2 million
for the year ended
December 31, 2017
due to higher equity underwriting fees as well as higher merger and acquisition advisory fees during the
2018
year.
Bank deposit sweep income was
$116.1 million
for the year ended
December 31, 2018
, an increase of
51.0%
compared with
$76.8 million
for the year ended
December 31, 2017
due to higher short-term interest rates during the
2018
year.
Interest revenue was
$52.5 million
for the year ended
December 31, 2018
, an increase of
8.2%
compared with
$48.5 million
in
2017
due primarily to an increase in interest revenue on margin extended to customers during the
2018
year.
Principal transactions revenue was
$14.5 million
for the year ended
December 31, 2018
, a decrease of
37.9%
compared with
$23.3 million
for the year ended
December 31, 2017
primarily due to recognized losses resulting from participating in tender offers of ARS during the
2018
year.
Other revenue was
$15.8 million
for the year ended
December 31, 2018
, a decrease of
56.3%
compared to
$36.1 million
for the year ended December 31,
2017
primarily due to a decrease in the cash surrender value of Company-owned life insurance during the
2018
year and a favorable arbitration award during the 2018 year.
Expenses
Compensation and related expenses totaled
$607.2 million
during the year ended
December 31, 2018
, an increase of
0.8%
compared with the year ended
December 31, 2017
. The increase was due to higher salaries, producer, and incentive compensation expenses partially offset by lower share-based and deferred compensation expenses during the year ended
December 31, 2018
. Compensation and related expenses as a percentage of revenue was
63.4%
during the year ended
December 31, 2018
compared with
65.4%
during the year ended
December 31, 2017
.
Non-compensation expenses were
$306.1 million
during the year ended
December 31, 2018
, an increase of
2.6%
compared with
$298.5 million
during the year ended
December 31, 2017
due primarily to higher interest costs, legal and regulatory costs, and communication and technology costs partially offset by lower external portfolio manager costs during the year ended
December 31, 2018
and the charge of $6.4 million associated with the settlement with the Israeli VAT Authority in the first quarter of 2017.
The effective income tax rate from continuing operations for the year ended
December 31, 2018
was
35.6%
compared with
10.8%
(benefit) for the year ended
December 31, 2017
. The effective tax rate for the year ended
December 31, 2018
benefited due to the Federal tax rate of 21% (versus 35% in prior years) as a result of the enactment of the TCJA in December 2017 offset by a detriment from the establishment of a valuation allowance for the deferred tax asset related to net operating losses of the Company's operations in Europe as well as larger non-deductible expenses related to items such as entertainment, fringe benefits, regulatory fines and penalties, and limitations around the deductibility of executive compensation under the TCJA. The effective income tax rate for the year ended
December 31, 2017
was positively impacted by the estimated impact of the TCJA which resulted in a net discrete after-tax benefit of $9.0 million.
Fiscal
2017
compared to Fiscal
2016
Revenue
Commission revenue was
$336.6 million
for the year ended December 31, 2017, a decrease of
10.8%
compared with
$377.3 million
for the year ended December 31, 2016 due to reduced transaction volumes from retail and institutional investors as well as lower financial adviser headcount during the 2017 year.
Advisory fees were
$320.7 million
for the year ended December 31, 2017, an increase of
19.2%
compared with
$269.1 million
for the year ended December 31, 2016 due to increases in advisory fees on traditional managed products and incentive fees on alternative managed products.
Investment banking revenue was
$78.2 million
for the year ended December 31, 2017, a decrease of
3.5%
compared with
$81.0 million
for the year ended December 31, 2016 due to lower fees from mergers and acquisition activity and debt capital market transactions partially offset by higher fees from equities underwriting transactions during the 2017 year.
Bank deposit sweep income was
$76.8 million
for the year ended December 31, 2017, an increase of
111.6%
compared with
$36.3 million
for the year ended December 31, 2016 due to higher short-term interest rates during the 2017 year.
Interest revenue was
$48.5 million
for the year ended December 31, 2017, an increase of
1.8%
compared with
$47.6 million
in 2016.
Principal transactions revenue was
$23.3 million
for the year ended December 31, 2017, an increase of
13.6%
compared with
$20.5 million
for the year ended December 31, 2016 due primarily to increases in the valuation of firm investments during the 2017 year.
Other revenue was
$36.1 million
for the year ended December 31, 2017, an increase of
39.6%
compared to
$25.9 million
for the year ended December 31, 2016 due to positive changes in the cash surrender value of Company-owned life insurance and a favorable arbitration award during the during the 2017 year.
Expenses
Compensation and related expenses (including salaries, production and incentive compensation, share-based compensation, deferred compensation, and other benefit-related items) totaled
$602.1 million
during the year ended December 31, 2017, an increase of
3.0%
compared with the year ended December 31, 2016. The increase was due to higher producer, incentive, share-based, and deferred compensation expenses partially offset by lower salary and healthcare expenses during the year ended December 31, 2017. Compensation and related expenses as a percentage of revenue was
65.4%
during the year ended December 31, 2017 compared with
68.2%
during the year ended December 31, 2016.
Non-compensation expenses were
$298.5 million
during the year ended December 31, 2017, an increase of
1.2%
compared with
$295.0 million
during the year ended December 31, 2016 due primarily to higher interest costs and the charge of $6.4 million associated with the settlement with the Israeli VAT Authority in the first quarter of 2017 partially offset by lower legal and regulatory costs during the year ended December 31, 2017.
The effective income tax rate from continuing operations for the year ended December 31, 2017 was
10.8%
(benefit) compared with
56.0%
(benefit) for the year ended December 31, 2016. The effective income tax rate for the year ended December 31, 2017 was positively impacted by the estimated impact of the TCJA which resulted in a net discrete after-tax benefit of $9.0 million in the fourth quarter of 2017. The effective income tax rate for the year ended December 31, 2016 was positively impacted by income tax provision to tax return true-ups and higher nontaxable benefits received with respect to Company-owned life insurance partially offset by the valuation allowance established on deferred tax assets related to net operating losses of a foreign subsidiary.
The table below presents information about the reported revenue and income (loss) before income taxes from continuing operations of the Company's reportable business segments for the years ended December 31,
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
% Change
|
|
Revenue
|
|
|
|
|
|
|
Private Client
|
$
|
617,871
|
|
|
$
|
592,753
|
|
|
4.2
|
|
|
Asset Management
|
71,696
|
|
|
89,896
|
|
|
(20.2
|
)
|
|
Capital Markets
|
272,719
|
|
|
231,632
|
|
|
17.7
|
|
|
Corporate/Other
|
(4,132
|
)
|
|
6,057
|
|
|
(168.2
|
)
|
|
|
958,154
|
|
|
920,338
|
|
|
4.1
|
|
|
Income (Loss) before income taxes
|
|
|
|
|
|
|
Private Client
|
149,097
|
|
|
128,840
|
|
|
15.7
|
|
|
Asset Management
|
18,590
|
|
|
26,685
|
|
|
(30.3
|
)
|
|
Capital Markets
|
(13,416
|
)
|
|
(39,978
|
)
|
|
(66.4
|
)
|
|
Corporate/Other
|
(109,418
|
)
|
|
(95,811
|
)
|
|
14.2
|
|
|
|
$
|
44,853
|
|
|
$
|
19,736
|
|
|
127.3
|
|
Private Client
Private Client reported revenue of
$617.9 million
for the year ended December 31,
2018
,
4.2%
higher than the year ended December 31,
2017
due to higher management fees, bank deposit sweep income and margin revenue partially offset by decreases in incentive fees, commissions and the cash surrender value of the Company-owned life insurance during the year ended December 31,
2018
. Income before income taxes was
$149.1 million
for the year ended December 31,
2018
, an increase of
15.7%
compared with the year ended December 31,
2017
due to the foregoing partially offset by higher legal and regulatory costs during the year ended December 31,
2018
.
|
|
|
|
•
|
Retail commissions were $196.7 million for the year ended December 31, 2018, a decrease of 3.2% from the year ended December 31, 2017.
|
|
|
|
|
•
|
Advisory fee revenue on traditional and alternative managed products was $243.5 million for the year ended December 31, 2018, an increase of 4.8% compared with the year ended December 31, 2017. The increase in advisory fees was due to the increase in management fees partially offset by a decrease in incentive fees earned from alternative investments.
|
|
|
|
|
•
|
Bank deposit sweep income was $116.1 million for the year ended December 31, 2018, an increase of 51.0% compared with $76.8 million for the year ended December 31, 2017 due to higher short-term interest rates during the year ended December 31, 2018.
|
Asset Management
Asset Management reported revenue of
$71.7 million
for the year ended December 31,
2018
,
20.2%
lower than the year ended December 31,
2017
due to lower incentive fees and a change in the method of reporting alternative investment management fees earned through an investment adviser that was adopted during the first quarter of 2018. The decrease for the year ended December 31, 2018 was partially offset by higher management fees from traditional products. Income before income taxes was
$18.6 million
for the year ended December 31,
2018
, a decrease of
30.3%
compared with the year ended December 31,
2017
.
|
|
|
|
•
|
Advisory fee revenue on traditional and alternative managed products was $70.8 million for the year ended December 31, 2018, a decrease of 19.9% compared with the year ended December 31, 2017 primarily due to lower incentive fees and the change in the method of reporting management fees from alternative investments referred to above partially offset by higher management fees earned from traditional products during the year ended December 31, 2018.
|
|
|
|
|
•
|
AUM decreased 5.6% to
$26.7 billion
at December 31, 2018 compared with
$28.3 billion
at December 31, 2017, which is the basis for advisory fee billings for the first quarter of 2019. The decrease in AUM was comprised of asset depreciation of
$2.2 billion
and a positive net contribution of assets of $0.6 billion.
|
The following table provides a breakdown of the change in assets under management for the year ended December 31,
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
Beginning
Balance
|
|
|
|
|
|
Appreciation
(Depreciation)
|
|
Ending
Balance
|
|
Fund Type
|
|
|
Contributions
|
|
Redemptions
|
|
|
|
Traditional
(1)
|
|
$
|
24,290
|
|
|
$
|
4,738
|
|
|
$
|
(4,107
|
)
|
|
$
|
(2,026
|
)
|
|
$
|
22,895
|
|
|
Institutional Fixed Income
(2)
|
|
695
|
|
|
47
|
|
|
(45
|
)
|
|
3
|
|
|
700
|
|
|
Alternative Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge funds
(3)
|
|
2,590
|
|
|
350
|
|
|
(291
|
)
|
|
(233
|
)
|
|
2,416
|
|
|
Private Equity Funds
(4)
|
|
185
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
220
|
|
|
Portfolio Enhancement Program
(5)
|
|
521
|
|
|
6
|
|
|
(28
|
)
|
|
(1
|
)
|
|
498
|
|
|
|
|
$
|
28,281
|
|
|
$
|
5,141
|
|
|
$
|
(4,471
|
)
|
|
$
|
(2,222
|
)
|
|
$
|
26,729
|
|
|
|
|
|
(1)
|
Traditional investments include third party advisory programs, Oppenheimer financial adviser managed and advisory programs, and Oppenheimer Asset Management taxable and tax-exempt portfolio management strategies.
|
|
|
|
|
(2)
|
Institutional fixed income provides solutions to institutional investors including: Taft-Hartley Funds, Public Pension Funds, Corporate Pension Funds, and Foundations and Endowments.
|
|
|
|
|
(3)
|
Hedge funds represent single manager hedge fund strategies in areas including hedged equity, technology and financial services, and multi-manager and multi-strategy fund of funds.
|
|
|
|
|
(4)
|
Private equity funds represent private equity fund of funds including portfolios focused on natural resources and related assets.
|
|
|
|
|
(5)
|
The portfolio enhancement program sells uncovered, far out-of-money puts and calls on the S&P 500 Index. The program is market neutral and uncorrelated to the index. Valuation is based on collateral requirements for a series of contracts representing the investment strategy.
|
Capital Markets
Capital Markets reported revenue of
$272.7 million
for the year ended December 31,
2018
,
17.7%
higher than the year ended December 31,
2017
due to higher fees from mergers and acquisitions activity and equities underwriting transactions partially offset by lower debt capital market transactions during the year ended
December 31, 2018
. Loss before income taxes was
$13.4 million
for the year ended December 31,
2018
compared with a loss before income taxes of
$40.0 million
for the year ended December 31,
2017
. Results for this segment continue to be impacted by elevated compensation costs as the Company continues to re-position its business.
|
|
|
|
•
|
Institutional equities commissions increased 1.2% to $96.2 million for the year ended December 31, 2018 compared with the year ended December 31, 2017 due to higher client participation in the equities markets during the year ended December 31, 2018.
|
|
|
|
|
•
|
Advisory fees earned from investment banking activities increased 45.2% to $42.8 million for the year ended December 31, 2018 compared with the year ended December 31, 2017 due to an increase in mergers and acquisitions activity during the year ended December 31, 2018.
|
|
|
|
|
•
|
Equities underwriting fees increased 106.1% to $50.4 million for the year ended December 31, 2018 compared with the year ended December 31, 2017 due to increased capital raising activity during the year ended December 31, 2018.
|
|
|
|
|
•
|
Revenue from Global Fixed Income increased 1.2% to $74.5 million for the year ended December 31, 2018 compared with the year ended December 31, 2017 due to higher trading profits in government trading offset by lower institutional commissions and trading profits in municipal bonds during the year ended December 31, 2018.
|
Liquidity and Capital Resources
At
December 31, 2018
, total assets decreased by
8.1%
from
December 31, 2017
. The Company satisfies its need for short-term financing from internally generated funds and collateralized and uncollateralized borrowings, consisting primarily of bank call loans, stock loans, and uncommitted lines of credit. The Company finances its trading in government securities through the use of securities sold under agreements to repurchase ("repurchase agreements"). The Company has met its longer-term capital needs through the issuance of the 6.75% Senior Secured Notes due 2022 (the "Notes") (see "Refinancing" below). Oppenheimer has arrangements with banks for borrowings on a fully-collateralized basis. The amount of Oppenheimer's bank borrowings fluctuates in response to changes in the level of the Company's securities inventories and customer margin debt, changes in notes receivable from employees, investment in furniture, equipment and leasehold improvements, and changes in stock loan balances and financing through repurchase agreements. At
December 31, 2018
, the Company had
$15.0 million
of such borrowings outstanding compared to outstanding borrowings of
$118.3 million
at
December 31, 2017
. The Company also has some availability of short-term bank financing on an unsecured basis.
The Company's overseas subsidiaries, Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited, are subject to local regulatory capital requirements that restrict the Company's ability to utilize their capital for other purposes. The regulatory capital requirements for Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited were $4.3 million and
$383,000
, respectively, at
December 31, 2018
. In December 2017, Oppenheimer Europe Ltd. received approval from the FCA for a variation of permission to remove the limitation of "matched principal business" from the firm's scope of permitted businesses and become a "Full-Scope Prudential Sourcebook for Investment Firms (IFPRU) €730K" firm, effective in January 2018. In December 2017, the Company contributed additional capital of $7.0 million to Oppenheimer Europe Ltd. in order to facilitate this new permissioning. See note 17 to the consolidated financial statements appearing in Item 8 for further details. The liquid assets at Oppenheimer Europe Ltd. are primarily comprised of cash deposits in bank accounts. The liquid assets at Oppenheimer Investments Asia Limited are primarily comprised of investments in U.S. Treasuries and cash deposits in bank accounts. Any restrictions on transfer of these liquid assets from Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited to the Company or its other subsidiaries would be limited by the regulatory capital requirements.
The Company permanently reinvests eligible earnings of its foreign subsidiaries and, accordingly, does not accrue any U.S. income taxes that would arise if these earnings were repatriated. The unrecognized deferred tax liability associated with the outside basis difference of its foreign subsidiaries is estimated at $2.9 million for those subsidiaries. The Company has continued to reinvest permanently the excess earnings of Oppenheimer Israel (OPCO) Ltd. in its own business and in the businesses in Europe and Asia to support business initiatives in those regions. With the passage of the TCJA, the Company will continue to review its historical treatment of these earnings to determine whether its historical practice will continue or whether a change is warranted.
In February 2010, Oppenheimer finalized settlements with the Regulators concluding investigations and administrative proceedings concerning Oppenheimer's marketing and sale of ARS. Pursuant to those settlements and legal settlements and awards, the Company has purchased and will, subject to the terms and conditions of the settlements, continue to purchase ARS on a periodic basis. See "Off-Balance Sheet Arrangements" herein.
Additional fines, penalties and settlements of regulatory matters could have an adverse effect on the Company's liquidity depending on the size and composition of any such settlement.
Refinancing
On June 23, 2017, the Parent issued in a private offering $200.0 million aggregate principal amount of 6.75% Senior Secured Notes due 2022 (the "Unregistered Notes") under an indenture at an issue price of 100% of the principal amount. On September 19, 2017, the Parent completed an exchange offer in which the Parent exchanged 99.8% of its Unregistered Notes for a like principal amount of notes with identical terms except that such new notes have been registered under the Securities Act of 1933, as amended (the "Notes"). The Parent did not receive any proceeds in the exchange offer. The interest on the Notes is payable semi-annually on January 1st and July 1st, beginning January 1, 2018. The Parent used a portion of the net proceeds from the offering of the Unregistered Notes to redeem in full its 8.75% Senior Secured Notes due April 15, 2018 in the principal amount of $120.0 million, and pay all related fees and expenses related thereto. See note 11 to the consolidated financial statements appearing in Item 8 for further discussion.
On December 13, 2018, Moody's Corporation affirmed the Company's 'B2' Corporate Family rating and 'B1' rating on the Notes and affirmed its stable outlook. On August 24, 2018, S&P affirmed the Company's 'B+' Corporate Family rating and 'B+' rating on the Notes and affirmed its stable outlook.
Liquidity
For the most part, the Company's assets consist of cash and cash equivalents and assets that it can readily convert into cash. The receivable from brokers, dealers and clearing organizations represents deposits for securities borrowed transactions, margin deposits or current transactions awaiting settlement. The receivable from customers represents margin balances and amounts due on transactions awaiting settlement. The Company's receivables are, for the most part, collateralized by marketable securities. The Company's collateral maintenance policies and procedures are designed to limit the Company's exposure to credit risk. Securities owned, with the exception of the ARS, are mainly comprised of actively trading, readily marketable securities. The Company advanced $18.5 million in forgivable notes (which are inherently illiquid) to employees for the year ended
December 31, 2018
($23.2 million for the year ended
December 31, 2017
) as upfront or backend inducements to continue employment. The amount of funds allocated to such inducements will vary with hiring activity.
The Company satisfies its need for short-term liquidity from internally generated funds, collateralized and uncollateralized bank borrowings, stock loans and repurchase agreements and warehouse facilities. Bank borrowings are, in most cases, collateralized by firm and customer securities.
The Company obtains short-term borrowings primarily through bank call loans. Bank call loans are generally payable on demand and bear interest at various rates. At
December 31, 2018
, bank call loans were
$15.0 million
(
$118.3 million
at
December 31, 2017
). The average daily bank loan outstanding for the year ended
December 31, 2018
was
$53.3 million
(
$123.9 million
for the year ended
December 31, 2017
). The largest daily bank loan outstanding for the year ended
December 31, 2018
was $516.5 million ($247.6 million for the year ended
December 31, 2017
). The average weighted interest rate on bank call loans applicable on
December 31, 2018
was
3.43%
.
At
December 31, 2018
, securities loan balances totaled
$146.8 million
(
$180.3 million
at
December 31, 2017
). The average daily securities loan balance for the year ended
December 31, 2018
was $209.8 million ($179.4 million for the year ended
December 31, 2017
). The largest daily stock loan balance for the year ended
December 31, 2018
was $274.6 million ($279.5 million for the year ended
December 31, 2017
).
The Company finances its government trading operations through the use of securities purchased under agreements to resell ("reverse repurchase agreements") and repurchase agreements. Except as described below, repurchase and reverse repurchase agreements, principally involving government and agency securities, are carried at amounts at which securities subsequently will be resold or reacquired as specified in the respective agreements and include accrued interest. Repurchase and reverse repurchase agreements are presented on a net-by-counterparty basis, when the repurchase and reverse repurchase agreements are executed with the same counterparty, have the same explicit settlement date, are executed in accordance with a master netting arrangement, the securities underlying the repurchase and reverse repurchase agreements exist in "book entry" form and certain other requirements are met.
Certain of the Company's repurchase agreements and reverse repurchase agreements are carried at fair value as a result of the Company's fair value option election. The Company elected the fair value option for those repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date. The Company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. At
December 31, 2018
, the Company did not have any repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date.
At
December 31, 2018
, the gross balances of reverse repurchase agreements and repurchase agreements were
$82.4 million
and
$566.4 million
, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the year ended
December 31, 2018
was $142.4 million and $729.0 million, respectively ($267.1 million and $708.5 million, respectively, for the year ended
December 31, 2017
). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the year ended
December 31, 2018
was $394.8 million and $1.1 billion, respectively ($661.4 million and $1.0 billion, respectively, for the year ended
December 31, 2017
).
During the year 2018, the Company obtained additional liquidity on its ARS owned of $66.1 million through ARS issuer redemptions and tender offers, net of additional client buybacks.
At
December 31, 2018
, the gross leverage ratio was
4.1
Liquidity Management
The Company manages its need for liquidity on a daily basis to ensure compliance with regulatory requirements. The Company's liquidity needs may be affected by market conditions, increased inventory positions, business expansion and other unanticipated occurrences. In the event that existing financial resources do not satisfy the Company's needs, the Company may have to seek additional external financing. The availability of such additional external financing may depend on market factors outside the Company's control.
The Company regularly reviews its sources of liquidity and financing and conducts internal stress analysis to determine the impact on the Company of events that could remove sources of liquidity or financing and to plan actions the Company could take in the case of such an eventuality. The Company's reviews have resulted in plans that the Company believes would result in a reduction of assets through liquidation that would significantly reduce the Company's need for external financing.
Funding Risk
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
Cash provided by (used in) operating activities
|
$
|
168,570
|
|
|
$
|
(16,136
|
)
|
|
Cash used in investing activities
|
(8,191
|
)
|
|
(3,867
|
)
|
|
Cash (used in) provided by financing activities
|
(117,858
|
)
|
|
3,244
|
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
42,521
|
|
|
$
|
(16,759
|
)
|
Management believes that funds from operations, combined with the Company's capital base and available credit facilities, are sufficient for the Company's liquidity needs in the foreseeable future. Changes in capital requirements under international standards that will impact the costs and relative returns on loans may cause banks including those with whom the Company relies to back away from providing funding to the securities industry. Such a development might impact the Company's ability to finance its day-to-day activities or increase the costs to acquire funding. The Company may or may not be able to pass such increased funding costs on to its clients. See "Factors Affecting 'Forward-Looking Statements'" herein.
Other Matters
On November 23, 2018, the Company paid a cash dividend of $0.11 per share of Class A and Class B Stock totaling approximately $1.5 million from available cash on hand.
On February 28, 2019, the Company paid a cash dividend of $0.11 per share of Class A and Class B Stock totaling approximately $1.4 million from available cash on hand.
The book value of the Company's Class A and Class B Stock was
$41.81
at
December 31, 2018
compared to
$39.55
at
December 31, 2017
, based on total outstanding shares of
13,041,474
and
13,238,868
, respectively.
The diluted weighted average number of shares of Class A and Class B Stock outstanding for the year ended
December 31, 2018
was
14,061,369
compared to
13,673,361
outstanding on
December 31, 2017
.
Off-Balance Sheet Arrangements
In February 2010, Oppenheimer finalized settlements with 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
December 31, 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
December 31, 2018
, the Company purchased and holds (net of redemptions) approximately
$40.7 million
in ARS from its clients. In addition, the Company is committed to purchase another
$7.3 million
in ARS from clients through 2020 under legal settlements and awards.
The Company's purchases of ARS from its clients holding ARS eligible for repurchase will, subject to the terms and conditions of the settlements with the Regulators, continue on a periodic basis. Pursuant to these terms and conditions, the Company is required to conduct a financial review every six months, until the Company has extended Purchase Offers to all Eligible Investors (as defined), to determine whether it has funds available, after giving effect to the financial and regulatory capital constraints applicable to the Company, to extend additional Purchase Offers. The financial review is based on the Company's operating results, regulatory net capital, liquidity, and other ARS purchase commitments outstanding under legal settlements and awards (described below). There are no predetermined quantitative thresholds or formulas used for determining the final agreed upon amount for the Purchase Offers. Upon completion of the financial review, the Company first meets with its primary regulator, FINRA, and then with representatives of the NYAG and other regulators to present the results of the review and to finalize the amount of the next Purchase Offer. Various offer scenarios are discussed in terms of which Eligible Investors should receive a Purchase Offer. The primary criteria to date in terms of determining which Eligible Investors should receive a Purchase Offer has been the amount of household account equity each Eligible Investor had with the Company in February 2008. Once various Purchase Offer scenarios have been discussed, the regulators, not the Company, make the final determination of which Purchase Offer scenario to implement. The terms of the settlements provide that the amount of ARS to be purchased during any period shall not risk placing the Company in violation of regulatory requirements.
Outside of the settlements with the Regulators, the Company has also reached various legal settlements with clients and received unfavorable legal awards requiring it to purchase ARS. The terms and conditions including the ARS amounts committed to be purchased under legal settlements are based on the specific facts and circumstances of each legal proceeding. In most instances, the purchase commitments are in increments and extend over a period of time. At
December 31, 2018
, no ARS purchase commitments related to legal settlements extended past 2020. To the extent the Company receives an unfavorable award, the Company usually must purchase the ARS provided for by the award within 30 days of the rendering of the award.
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. At
December 31, 2018
, the amount of ARS held by the Company that was below investment grade was $75,000 and the amount of ARS that was unrated was $nil.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
Auction Rate Securities Owned and Committed to Purchase at December 31, 2018
|
|
|
|
|
Valuation
Adjustment
|
|
|
|
Product
|
Principal
|
|
|
Fair Value
|
|
Auction Rate Securities ("ARS") Owned
(1)
|
$
|
40,650
|
|
|
$
|
2,698
|
|
|
$
|
37,952
|
|
|
ARS Commitments to Purchase Pursuant to:
(2)(3)
|
|
|
|
|
|
|
Settlements with the Regulators
(4)
|
—
|
|
|
—
|
|
|
—
|
|
|
Legal Settlements and Awards
(5)
|
7,305
|
|
|
1,096
|
|
|
6,209
|
|
|
Total
|
$
|
47,955
|
|
|
$
|
3,794
|
|
|
$
|
44,161
|
|
|
|
|
|
(1)
|
Principal amount represents the par value of the ARS and is included in securities owned on the consolidated balance sheet at
December 31, 2018
. The valuation adjustment amount is included as a reduction to securities owned on the consolidated balance sheet at
December 31, 2018
.
|
|
|
|
|
(2)
|
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 is included in accounts payable and other liabilities on the consolidated balance sheet at
December 31, 2018
.
|
|
|
|
|
(3)
|
Specific ARS to be purchased under ARS Purchase Commitments are unknown until the beneficial owner selects the individual ARS to be purchased.
|
|
|
|
|
(4)
|
Commitments to purchase under settlements with the Regulators at at December 31, 2018. Eligible Investors for future buybacks under the settlements with Regulators held approximately
$7.5 million
of ARS as of December 31, 2018.
|
|
|
|
|
(5)
|
Commitments to purchase under various legal settlements and awards with clients through 2020.
|
Per the above table, the Company has recorded a valuation adjustment on its ARS owned and ARS purchase commitments of
$3.8 million
as of
December 31, 2018
. The valuation adjustment is comprised of
$2.7 million
which represents the difference between the principal value and the fair value of the ARS the Company owned as of
December 31, 2018
and
$1.1 million
which represents the difference between the principal value and the fair value of the ARS the Company is committed to purchase under legal settlements and awards. As of
December 31, 2018
, the Company had no outstanding ARS purchase commitments related to the settlements with the Regulators. Eligible Investors for future buybacks under the settlements with the Regulators held approximately
$7.5 million
of ARS as of
December 31, 2018
. Since the Company was not committed to purchase this amount as of
December 31, 2018
, there were no valuation adjustments booked to recognize the difference between the principal value and the fair value for this remaining amount.
Additional information concerning the Company's off-balance sheet arrangements is included in note 6 to the consolidated financial statements appearing in Item 8. Such information is hereby incorporated by reference. Also, see "Risk Factors — The Company may continue to be significantly affected by the failure of the Auction Rate Securities Market" in Item 1A as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations — Business Environment — Other Regulatory Matters" in Item 7 for additional details.
Contractual Obligations
The following table sets forth the Company's contractual obligations as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1
Year
|
|
|
|
|
|
More than 5
Years
|
|
|
Total
|
|
|
1-3 Years
|
|
3-5 Years
|
|
|
Operating Lease Obligations
(1)
|
$
|
280,609
|
|
|
$
|
39,684
|
|
|
$
|
69,709
|
|
|
$
|
56,960
|
|
|
$
|
114,256
|
|
|
Committed Capital
(1)
|
1,399
|
|
|
1,399
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Senior Secured Notes
(2)(3)
|
247,288
|
|
|
13,500
|
|
|
27,000
|
|
|
206,788
|
|
|
—
|
|
|
ARS Purchase Commitments
(1)
|
7,305
|
|
|
—
|
|
|
7,305
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
536,601
|
|
|
$
|
54,583
|
|
|
$
|
104,014
|
|
|
$
|
263,748
|
|
|
$
|
114,256
|
|
|
|
|
|
(1)
|
See note 16 to the consolidated financial statements appearing in Item 8 for additional information.
|
|
|
|
|
(2)
|
See note 11 to the consolidated financial statements appearing in Item 8 for additional information.
|
|
|
|
|
(3)
|
Includes interest payable of $47.3 million through maturity.
|
Inflation
Because the assets of the Company's brokerage subsidiaries are highly liquid, and because securities inventories are carried at current market values, the impact of inflation generally is reflected in the financial statements. However, the rate of inflation affects the Company's costs relating to employee compensation, rent, communications and certain other operating costs, and such costs may not be recoverable in the level of commissions or fees charged. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets, it may adversely affect the Company's financial position and results of operations.
Factors Affecting "Forward-Looking Statements"
From time to time, the Company may publish "Forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues, earnings, liabilities or expenses, business prospects, projected ventures, new products, anticipated market performance, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to remain within the terms of the safe harbor, the Company cautions readers that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risks and uncertainties, many of which are beyond the Company's control, include, but are not limited to: (i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory requirements that could affect the cost and method of doing business and reduce returns, (v) fluctuations in currency rates, (vi) general economic conditions, both domestic and international (vii) changes in the rate of inflation and the related impact on the securities markets, (viii) competition from existing financial institutions, new entrants and other participants in the securities markets and financial services industry, (ix) legal developments affecting the litigation experience of the securities industry and the Company, including developments arising from the failure of the Auction Rate Securities markets, the trading of low-priced securities, stepped up enforcement efforts by the SEC, FinCEN, FINRA and other regulators and the results of pending litigation and regulatory proceedings involving the Company, (x) changes in foreign, federal and state tax laws that could affect the popularity of products sold by the Company or impose taxes on securities transactions, (xi) the adoption and implementation of the SEC's proposed "Regulation Best Interest" and other regulations in recent years, (xii) the effectiveness of the Company's efforts to reduce costs and manage compensation expense, (xiii) war, international police actions, terrorist acts and nuclear confrontation as well as political unrest and regime changes, health epidemics and economic crises in foreign countries, (xiv) the Company's ability to achieve its business plan, (xv) corporate governance issues, (xvi) the consolidation of the banking and financial services industry, (xvii) the effects of the economy on the Company's ability to find and maintain financing options and liquidity, (xviii) credit, operational, legal and regulatory risks, (xix) risks related to foreign operations, including those in the United Kingdom which may be affected by Britain's June 23, 2016 referendum to exit the EU beginning in March 2019 ("Brexit"), (xx) risks related to the downgrade of U.S. long-term sovereign debt obligations and the sovereign debt of European nations, (xxi) potential cybersecurity threats, (xxii) the effect of technological innovation on the financial services industry and business, (xxiii) risks related to the changes by S&P Global Ratings ("S&P") or Moody's Investor Service, Inc. ("Moody's") of its rating on the Company and on the Company's long-term debt, (xxiv) risks related to elections results, Congressional gridlock, government shutdowns and investigations, changes in or uncertainty surrounding regulations and threats of default by the federal government, (xxv) risks relate to trade wars, and (xxvi) risks related to changes in capital requirements under international standards that may cause banks to back away from providing funding to the securities industry. There can be no assurance that the Company has correctly or completely identified and assessed all of the factors affecting the Company's business. The Company does not undertake any obligation to publicly update or revise any forward-looking statements. See "Risk Factors" in Item 1A.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Oppenheimer Holdings Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of the Company's principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
As of
December 31, 2018
, management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on this assessment, management has concluded that the Company's internal control over financial reporting as of
December 31, 2018
was effective.
The Company's internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets and provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's financial statements.
The Company's internal control over financial reporting as of
December 31, 2018
has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report included herein, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of
December 31, 2018
.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Oppenheimer Holdings Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Oppenheimer Holdings Inc. and subsidiaries (the "Company") as of
December 31, 2018
, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018
, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended
December 31, 2018
of the Company and our report dated March 1, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
New York, NY
March 1, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Oppenheimer Holdings Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Oppenheimer Holdings Inc. and subsidiaries (the "Company") as of
December 31, 2018
and 2017, the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended
December 31, 2018
, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018
and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018
, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of
December 31, 2018
, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
New York, NY
March 1, 2019
We have served as the Company's auditor since 2013.
OPPENHEIMER HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands, except number of shares and per share amounts)
|
2018
|
|
2017
|
|
ASSETS
|
|
|
|
|
Cash and cash equivalents
|
$
|
90,675
|
|
|
$
|
48,154
|
|
|
Deposits with clearing organizations
|
67,678
|
|
|
42,222
|
|
|
Receivable from brokers, dealers and clearing organizations
|
166,493
|
|
|
187,115
|
|
|
Receivable from customers, net of allowance for credit losses of $886 ($769 in 2017)
|
720,777
|
|
|
848,226
|
|
|
Income tax receivable
|
1,014
|
|
|
2,939
|
|
|
Securities purchased under agreements to resell
|
290
|
|
|
658
|
|
|
Securities owned, including amounts pledged of $517,951 ($655,683 in 2017), at fair value
|
837,584
|
|
|
926,597
|
|
|
Notes receivable, net of accumulated amortization and allowance for uncollectibles of $25,109 and $6,800, respectively ($24,705 and $7,975, respectively, in 2017)
|
44,058
|
|
|
40,520
|
|
|
Furniture, equipment and leasehold improvements, net of accumulated depreciation of $89,182 ($82,826 in 2017)
|
28,988
|
|
|
27,187
|
|
|
Intangible assets
|
32,100
|
|
|
31,700
|
|
|
Goodwill
|
137,889
|
|
|
137,889
|
|
|
Other assets
|
112,768
|
|
|
145,310
|
|
|
Total assets
|
$
|
2,240,314
|
|
|
$
|
2,438,517
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Liabilities
|
|
|
|
|
Drafts payable
|
$
|
16,348
|
|
|
$
|
42,412
|
|
|
Bank call loans
|
15,000
|
|
|
118,300
|
|
|
Payable to brokers, dealers and clearing organizations
|
289,207
|
|
|
211,483
|
|
|
Payable to customers
|
336,616
|
|
|
385,907
|
|
|
Securities sold under agreements to repurchase
|
484,218
|
|
|
586,478
|
|
|
Securities sold but not yet purchased, at fair value
|
85,446
|
|
|
94,486
|
|
|
Accrued compensation
|
167,348
|
|
|
173,116
|
|
|
Accounts payable and other liabilities
|
87,630
|
|
|
92,495
|
|
|
Senior secured notes, net of debt issuance costs of $904 ($1,163 in 2017)
|
199,096
|
|
|
198,837
|
|
|
Deferred tax liabilities, net of deferred tax assets of $41,722 ($46,247 in 2017)
|
14,083
|
|
|
11,092
|
|
|
Total liabilities
|
1,694,992
|
|
|
1,914,606
|
|
|
Commitments and contingencies (note 16)
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
Share capital
|
|
|
|
|
Class A non-voting common stock, par value $0.001 per share, 50,000,000 shares authorized, 12,941,809 and 13,139,203 shares issued and outstanding as of December 31, 2018 and 2017, respectively
|
53,259
|
|
|
58,359
|
|
|
Class B voting common stock, par value $0.001 per share, 99,665 shares authorized, issued and outstanding
|
133
|
|
|
133
|
|
|
|
53,392
|
|
|
58,492
|
|
|
Contributed capital
|
41,776
|
|
|
36,546
|
|
|
Retained earnings
|
449,989
|
|
|
426,930
|
|
|
Accumulated other comprehensive income
|
165
|
|
|
1,582
|
|
|
Total Oppenheimer Holdings Inc. stockholders' equity
|
545,322
|
|
|
523,550
|
|
|
Non-controlling interest
|
—
|
|
|
361
|
|
|
Total stockholders' equity
|
545,322
|
|
|
523,911
|
|
|
Total liabilities and stockholders' equity
|
$
|
2,240,314
|
|
|
$
|
2,438,517
|
|
The accompanying notes are an integral part of these consolidated financial statements.
OPPENHEIMER HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands, except number of shares and per share amounts)
|
2018
|
|
2017
|
|
2016
|
|
REVENUE
|
|
|
|
|
|
|
Commissions
|
$
|
329,668
|
|
|
$
|
336,620
|
|
|
$
|
377,317
|
|
|
Advisory fees
|
314,349
|
|
|
320,746
|
|
|
269,119
|
|
|
Investment banking
|
115,353
|
|
|
78,215
|
|
|
81,011
|
|
|
Bank deposit sweep income
|
116,052
|
|
|
76,839
|
|
|
36,316
|
|
|
Interest
|
52,484
|
|
|
48,498
|
|
|
47,649
|
|
|
Principal transactions, net
|
14,461
|
|
|
23,273
|
|
|
20,481
|
|
|
Other
|
15,787
|
|
|
36,147
|
|
|
25,886
|
|
|
Total revenue
|
958,154
|
|
|
920,338
|
|
|
857,779
|
|
|
EXPENSES
|
|
|
|
|
|
|
Compensation and related expenses
|
607,192
|
|
|
602,138
|
|
|
584,710
|
|
|
Communications and technology
|
74,479
|
|
|
71,978
|
|
|
70,390
|
|
|
Occupancy and equipment costs
|
61,171
|
|
|
61,164
|
|
|
60,791
|
|
|
Clearing and exchange fees
|
22,985
|
|
|
23,545
|
|
|
25,126
|
|
|
Interest
|
46,396
|
|
|
28,354
|
|
|
19,437
|
|
|
Other
|
101,078
|
|
|
113,423
|
|
|
119,217
|
|
|
Total expenses
|
913,301
|
|
|
900,602
|
|
|
879,671
|
|
|
Income (Loss) before income taxes from continuing operations
|
44,853
|
|
|
19,736
|
|
|
(21,892
|
)
|
|
Income taxes expenses (benefits)
|
15,977
|
|
|
(2,134
|
)
|
|
(12,262
|
)
|
|
Net income (loss) from continuing operations
|
28,876
|
|
|
21,870
|
|
|
(9,630
|
)
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
Income from discontinued operations
|
—
|
|
|
2,071
|
|
|
17,339
|
|
|
Income taxes expenses (benefits)
|
—
|
|
|
941
|
|
|
7,218
|
|
|
Net income from discontinued operations
|
—
|
|
|
1,130
|
|
|
10,121
|
|
|
|
|
|
|
|
|
|
Net income
|
28,876
|
|
|
23,000
|
|
|
491
|
|
|
Less net income (loss) attributable to non-controlling interest, net of tax
|
(16
|
)
|
|
184
|
|
|
1,652
|
|
|
Net income (loss) attributable to Oppenheimer Holdings Inc.
|
$
|
28,892
|
|
|
$
|
22,816
|
|
|
$
|
(1,161
|
)
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share attributable to Oppenheimer Holdings Inc.
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.18
|
|
|
$
|
1.65
|
|
|
$
|
(0.72
|
)
|
|
Discontinued operations
|
—
|
|
|
0.07
|
|
|
0.63
|
|
|
Net income (loss) per share
|
$
|
2.18
|
|
|
$
|
1.72
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share attributable to Oppenheimer Holdings Inc.
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.05
|
|
|
$
|
1.60
|
|
|
$
|
(0.72
|
)
|
|
Discontinued operations
|
—
|
|
|
0.07
|
|
|
0.63
|
|
|
Net income (loss) per share
|
$
|
2.05
|
|
|
$
|
1.67
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
|
|
|
|
Basic
|
13,248,876
|
|
|
13,246,423
|
|
|
13,368,768
|
|
|
Diluted
|
14,061,369
|
|
|
13,673,361
|
|
|
13,368,768
|
|
The accompanying notes are an integral part of these consolidated financial statements.
OPPENHEIMER HOLDINGS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Net income
|
$
|
28,876
|
|
|
$
|
23,000
|
|
|
$
|
491
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
Currency translation adjustment
|
(1,417
|
)
|
|
2,263
|
|
|
220
|
|
|
Comprehensive income
|
27,459
|
|
|
25,263
|
|
|
711
|
|
|
Net income (loss) attributable to non-controlling interest, net of tax
|
(16
|
)
|
|
184
|
|
|
1,652
|
|
|
Comprehensive income (loss) attributable to Oppenheimer Holdings Inc.
|
$
|
27,475
|
|
|
$
|
25,079
|
|
|
$
|
(941
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
OPPENHEIMER HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Share capital
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
58,492
|
|
|
$
|
59,361
|
|
|
$
|
57,520
|
|
|
Issuance of Class A non-voting common stock
|
794
|
|
|
6,595
|
|
|
5,776
|
|
|
Repurchase of Class A non-voting common stock for cancellation
|
(5,894
|
)
|
|
(7,464
|
)
|
|
(3,935
|
)
|
|
Balance at end of year
|
53,392
|
|
|
58,492
|
|
|
59,361
|
|
|
Contributed capital
|
|
|
|
|
|
|
Balance at beginning of year
|
36,546
|
|
|
41,765
|
|
|
44,438
|
|
|
Tax deficiency from share-based awards
|
—
|
|
|
—
|
|
|
(740
|
)
|
|
Share-based expense
|
6,061
|
|
|
5,583
|
|
|
5,184
|
|
|
Vested employee share plan awards
|
(831
|
)
|
|
(11,227
|
)
|
|
(7,117
|
)
|
|
Cumulative-effect adjustment from adoption of new accounting update of employee share-based accounting
|
—
|
|
|
425
|
|
|
—
|
|
|
Balance at end of year
|
41,776
|
|
|
36,546
|
|
|
41,765
|
|
|
Retained earnings
|
|
|
|
|
|
|
Balance at beginning of year
|
426,930
|
|
|
410,258
|
|
|
417,001
|
|
|
Net income (loss) attributable to Oppenheimer Holdings Inc.
|
28,892
|
|
|
22,816
|
|
|
(1,161
|
)
|
|
Dividends paid ($0.44 per share)
|
(5,833
|
)
|
|
(5,836
|
)
|
|
(5,887
|
)
|
|
Dividends received from non-controlling interest
|
—
|
|
|
6
|
|
|
305
|
|
|
Cumulative-effect adjustment from adoption of new accounting update of employee share-based accounting
|
—
|
|
|
(314
|
)
|
|
—
|
|
|
Balance at end of year
|
449,989
|
|
|
426,930
|
|
|
410,258
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
Balance at beginning of year
|
1,582
|
|
|
(681
|
)
|
|
(901
|
)
|
|
Currency translation adjustment
|
(1,417
|
)
|
|
2,263
|
|
|
220
|
|
|
Balance at end of year
|
165
|
|
|
1,582
|
|
|
(681
|
)
|
|
Total Oppenheimer Holdings Inc. stockholders' equity
|
545,322
|
|
|
523,550
|
|
|
510,703
|
|
|
Non-controlling interest
|
|
|
|
|
|
|
Balance at beginning of year
|
361
|
|
|
2,631
|
|
|
7,024
|
|
|
Net income attributable to non-controlling interest, net of tax
|
(16
|
)
|
|
184
|
|
|
1,652
|
|
|
Dividends paid to non-controlling interest
|
(345
|
)
|
|
(2,448
|
)
|
|
(5,740
|
)
|
|
Dividends paid to parent
|
—
|
|
|
(6
|
)
|
|
(305
|
)
|
|
Balance at end of year
|
—
|
|
|
361
|
|
|
2,631
|
|
|
Total stockholders' equity
|
$
|
545,322
|
|
|
$
|
523,911
|
|
|
$
|
513,334
|
|
The accompanying notes are an integral part of these consolidated financial statements.
OPPENHEIMER HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
28,876
|
|
|
$
|
23,000
|
|
|
$
|
491
|
|
|
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
|
6,871
|
|
|
5,657
|
|
|
6,788
|
|
|
Deferred income taxes
|
2,773
|
|
|
(2,045
|
)
|
|
(2,941
|
)
|
|
Amortization of notes receivable
|
12,540
|
|
|
11,791
|
|
|
12,960
|
|
|
Amortization of debt issuance costs
|
259
|
|
|
353
|
|
|
484
|
|
|
Write-off of debt issuance costs
|
—
|
|
|
430
|
|
|
—
|
|
|
Amortization of mortgage servicing rights
|
—
|
|
|
—
|
|
|
1,286
|
|
|
Provision for (reversal of) credit losses
|
117
|
|
|
(25
|
)
|
|
(1,751
|
)
|
|
Share-based compensation
|
6,710
|
|
|
12,573
|
|
|
6,203
|
|
|
Tax deficiency from share-based awards
|
—
|
|
|
—
|
|
|
(740
|
)
|
|
Gain on sale of assets
|
—
|
|
|
—
|
|
|
(16,475
|
)
|
|
Decrease (increase) in operating assets:
|
|
|
|
|
|
|
Deposits with clearing organizations
|
(25,456
|
)
|
|
(4,037
|
)
|
|
11,305
|
|
|
Receivable from brokers, dealers and clearing organizations
|
20,622
|
|
|
27,819
|
|
|
145,882
|
|
|
Receivable from customers
|
127,332
|
|
|
(815
|
)
|
|
(5,280
|
)
|
|
Income tax receivable
|
1,925
|
|
|
2,877
|
|
|
5,104
|
|
|
Securities purchased under agreements to resell
|
368
|
|
|
23,348
|
|
|
182,493
|
|
|
Securities owned
|
89,013
|
|
|
(219,489
|
)
|
|
24,725
|
|
|
Notes receivable
|
(16,078
|
)
|
|
(22,212
|
)
|
|
(10,210
|
)
|
|
Loans held for sale
|
—
|
|
|
—
|
|
|
60,234
|
|
|
Mortgage servicing rights
|
—
|
|
|
—
|
|
|
(1,300
|
)
|
|
Other assets
|
30,272
|
|
|
(37,130
|
)
|
|
2,368
|
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
Drafts payable
|
(26,064
|
)
|
|
3,184
|
|
|
(8,783
|
)
|
|
Payable to brokers, dealers and clearing organizations
|
77,724
|
|
|
(9,906
|
)
|
|
56,843
|
|
|
Payable to customers
|
(49,291
|
)
|
|
(64,039
|
)
|
|
(144,887
|
)
|
|
Securities sold under agreements to repurchase
|
(102,260
|
)
|
|
208,394
|
|
|
(273,361
|
)
|
|
Securities sold but not yet purchased
|
(9,040
|
)
|
|
9,436
|
|
|
(41,443
|
)
|
|
Accrued compensation
|
(6,418
|
)
|
|
21,184
|
|
|
(6,864
|
)
|
|
Accounts payable and other liabilities
|
(2,225
|
)
|
|
(6,484
|
)
|
|
(69,996
|
)
|
|
Cash provided by (used in) operating activities
|
168,570
|
|
|
(16,136
|
)
|
|
(66,865
|
)
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Purchase of furniture, equipment and leasehold improvements
|
(8,672
|
)
|
|
(5,611
|
)
|
|
(5,731
|
)
|
|
Purchase of intangible assets
|
(400
|
)
|
|
—
|
|
|
—
|
|
|
Proceeds from sale of assets
|
—
|
|
|
—
|
|
|
45,448
|
|
|
Proceeds from the settlement of Company-owned life insurance
|
881
|
|
|
1,744
|
|
|
—
|
|
|
Cash (used in) provided by investing activities
|
(8,191
|
)
|
|
(3,867
|
)
|
|
39,717
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Cash dividends paid on Class A non-voting and Class B voting common stock
|
(5,833
|
)
|
|
(5,836
|
)
|
|
(5,887
|
)
|
|
Cash dividends paid to non-controlling interest
|
(372
|
)
|
|
(2,448
|
)
|
|
(5,740
|
)
|
|
Issuance of Class A non-voting common stock
|
70
|
|
|
26
|
|
|
—
|
|
|
Repurchase of Class A non-voting common stock for cancellation
|
(5,894
|
)
|
|
(7,464
|
)
|
|
(3,935
|
)
|
|
Payments for employee taxes withheld related to vested share-based awards
|
(2,529
|
)
|
|
(2,237
|
)
|
|
(1,341
|
)
|
|
Issuance of senior secured notes
|
—
|
|
|
200,000
|
|
|
—
|
|
|
Redemption of senior secured notes
|
—
|
|
|
(150,000
|
)
|
|
—
|
|
|
Debt issuance costs
|
—
|
|
|
(1,297
|
)
|
|
—
|
|
|
(Decrease) increase in bank call loans, net
|
(103,300
|
)
|
|
(27,500
|
)
|
|
45,600
|
|
|
Cash (used in) provided by financing activities
|
(117,858
|
)
|
|
3,244
|
|
|
28,697
|
|
|
Net increase (decrease) in cash and cash equivalents
|
42,521
|
|
|
(16,759
|
)
|
|
1,549
|
|
|
Cash and cash equivalents, beginning of year
|
48,154
|
|
|
64,913
|
|
|
63,364
|
|
|
Cash and cash equivalents, end of year
|
$
|
90,675
|
|
|
$
|
48,154
|
|
|
$
|
64,913
|
|
|
Schedule of non-cash financing activities
|
|
|
|
|
|
|
Employee share plan issuance
|
$
|
724
|
|
|
$
|
6,569
|
|
|
$
|
5,776
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
Cash paid during the year for interest
|
$
|
53,559
|
|
|
$
|
23,899
|
|
|
$
|
19,705
|
|
|
Cash paid (received) during the year for income taxes, net
|
$
|
11,520
|
|
|
$
|
(2,378
|
)
|
|
$
|
(5,009
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
1. Organization
Oppenheimer Holdings Inc. ("OPY" or the "Parent") is incorporated under the laws of the State of Delaware. The 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
92
retail branch offices in the United States and has institutional businesses located in London, Tel Aviv, and Hong Kong. The principal subsidiaries of OPY are Oppenheimer & Co. Inc. ("Oppenheimer"), a registered broker-dealer in securities and investment adviser under the Investment Advisers Act of 1940; Oppenheimer Asset Management Inc. ("OAM") and its wholly-owned subsidiary, Oppenheimer Investment Management LLC, both registered investment advisers under the Investment Advisers Act of 1940; Oppenheimer Trust Company of Delaware ("Oppenheimer Trust"), a limited purpose trust company that provides fiduciary services such as trust and estate administration and investment management; OPY Credit Corp., which offers syndication as well as trading of issued corporate loans; Oppenheimer Europe Ltd., based in the United Kingdom, with offices in the Isle of Jersey, Germany and Switzerland, which provides institutional equities and fixed income brokerage and corporate finance and is regulated by the Financial Conduct Authority; 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.
2. Summary of significant accounting policies and estimates
Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Intercompany transactions and balances have been eliminated in the preparation of the consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.
In presenting the consolidated financial statements, management makes estimates regarding valuations of financial instruments, loans and allowances for credit losses, the outcome of legal and regulatory matters, goodwill and other intangible assets, share-based compensation plans and income taxes. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could be materially different from these estimates. A discussion of certain critical accounting policies in which estimates are a significant component of the amounts reported on the consolidated financial statements follows.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Financial Instruments and Fair Value
Financial Instruments
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.
Fair Value Measurements
Accounting guidance for the fair value measurement of financial assets, which defines fair value, establishes a framework for measuring fair value, establishes a fair value measurement hierarchy, and expands fair value measurement disclosures. Fair value, as defined by the accounting guidance, is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy established by this accounting guidance prioritizes the inputs used in valuation techniques into the following three categories (highest to lowest priority):
|
|
|
|
Level 1:
|
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
|
|
|
|
|
Level 2:
|
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and
|
|
|
|
|
Level 3:
|
Unobservable inputs that are significant to the overall fair value measurement.
|
The Company's financial instruments that are recorded at fair value generally are classified within Level 1 or Level 2 within the fair value hierarchy using quoted market prices or quotes from market makers or broker-dealers. Financial instruments classified within Level 1 are valued based on quoted market prices in active markets and consist of U.S. Treasury and Agency securities, corporate equities, and certain money market instruments. Level 2 financial instruments primarily consist of investment grade and high-yield corporate debt, convertible bonds, mortgage and asset-backed securities, and municipal obligations. Financial instruments classified as Level 2 are valued based on quoted prices for similar assets and liabilities in active markets and quoted prices for identical or similar assets and liabilities in markets that are not active. Some financial instruments are classified within Level 3 within the fair value hierarchy as observable pricing inputs are not available due to limited market activity for the asset or liability. Such financial instruments include certain distressed municipal securities, auction rate securities ("ARS") and investments in hedge funds and private equity funds where the Company, through its subsidiaries, is general partner.
Fair Value Option
The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The Company may make a fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.
Consolidation
The Company consolidates all subsidiaries in which it has a controlling financial interest, as well as any variable interest entities ("VIEs") where the Company is deemed to be the primary beneficiary, when it has the power to make the decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb significant losses or the right to receive benefits that could potentially be significant to the VIE. The Company reviews factors, including the rights of the equity holders at risk and obligations of equity holders to absorb losses or receive expected residual returns, to determine if the entity is a VIE. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly or indirectly by the Company. Under Accounting Standards Update ("ASU") 2015-02, a general partner will not consolidate a partnership or similar entity under the voting interest model. See note 8 for further details.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Financing Receivables
The Company's financing receivables include customer margin loans, securities purchased under agreements to resell ("reverse repurchase agreements"), and securities borrowed transactions. The Company uses financing receivables to extend margin loans to customers, meet trade settlement requirements, and facilitate its matched-book arrangements and inventory requirements.
The Company's financing receivables are secured by collateral received from clients and counterparties. In many cases, the Company is permitted to sell or re-pledge securities held as collateral. These securities may be used to collateralize repurchase agreements, to enter into securities lending agreements, to cover short positions or fulfill the obligation of securities fails to deliver. The Company monitors the market value of the collateral received on a daily basis and may require clients and counterparties to deposit additional collateral or return collateral pledged, when appropriate.
Customer receivables, primarily consisting of customer margin loans collateralized by customer-owned securities, are stated net of allowance for credit losses. The Company reviews large customer accounts that do not comply with the Company's margin requirements on a case-by-case basis to determine the likelihood of collection and records an allowance for credit loss following that process. For small customer accounts that do not comply with the Company's margin requirements, the allowance for credit loss is generally recorded as the amount of unsecured or partially secured receivables.
The Company also makes loans to financial advisers as part of its hiring process. These loans are recorded as notes receivable on its consolidated balance sheet. Allowances are established on these loans if the financial adviser is no longer associated with the Company and the loan has not been promptly repaid.
Legal and Regulatory Reserves
The Company records reserves related to legal and regulatory proceedings in accounts payable and other liabilities. The determination of the amounts of these reserves requires significant judgment on the part of management. In accordance with applicable accounting guidance, the Company establishes reserves for litigation and regulatory matters where available information indicates that it is probable a liability had been incurred and the Company can reasonably estimate the amount of that loss. When loss contingencies are not probable or cannot be reasonably estimated, the Company does not establish reserves.
When determining whether to record a reserve, management considers many factors including, but not limited to, the amount of the claim; the stage and forum of the proceeding, the sophistication of the claimant, the amount of the loss, if any, in the client's account and the possibility of wrongdoing, if any, on the part of an employee of the Company; the basis and validity of the claim; previous results in similar cases; and applicable legal precedents and case law. Each legal and regulatory proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management. Any change in the reserve amount is recorded in the results of that period. The assumptions of management in determining the estimates of reserves may be incorrect and the actual disposition of a legal or regulatory proceeding could be greater or less than the reserve amount.
Goodwill
The Company defines a reporting unit as an operating segment. The Company's goodwill resides in its Private Client Division ("PCD") reporting unit. Goodwill of a reporting unit is subject to at least an annual test for impairment to determine if the estimated fair value of a reporting unit is less than its carrying amount. Goodwill of a reporting unit is required to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Due to the volatility in the financial services sector and equity markets in general, determining whether an impairment of goodwill has occurred is increasingly difficult and requires management to exercise significant judgment. The Company's annual goodwill impairment analysis performed as of
December 31, 2018
applied the same valuation methodologies with consistent inputs as that performed as of
December 31, 2017
, as follows:
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
In estimating the fair value of the PCD reporting unit, the Company uses traditional standard valuation methods, including the market comparable approach and income approach. The market comparable approach is based on comparisons of the subject company to public companies whose stocks are actively traded ("Price Multiples") or to similar companies engaged in an actual merger or acquisition ("Precedent Transactions"). As part of this process, multiples of value relative to financial variables, such as earnings or stockholders' equity, are developed and applied to the appropriate financial variables of the subject company to indicate its value. The income approach involves estimating the present value of the subject company's future cash flows by using projections of the cash flows that the business is expected to generate, and discounting these cash flows at a given rate of return ("Discounted Cash Flow" or "DCF"). Each of these standard valuation methodologies requires the use of management estimates and assumptions.
In its Price Multiples valuation analysis, the Company uses various operating metrics of comparable companies, including revenues, after-tax earnings, and EBITDA as well as price-to-book value ratios at a point in time. The Company analyzes prices paid in Precedent Transactions that are comparable to the business conducted in the PCD. The DCF analysis includes the
Company's assumptions regarding discount rate, growth rates of the PCD's revenues, expenses, EBITDA, and capital expenditures, adjusted for current economic conditions and expectations. The Company weighs each of the three valuation methods equally in its overall valuation. Given the subjectivity involved in selecting which valuation method to use, the corresponding weightings, and the input variables for use in the analyses, it is possible that a different valuation model and the selection of different input variables could produce a materially different estimate of the fair value of the PCD reporting unit.
Intangible Assets
Indefinite intangible assets are comprised of trademarks, trade names and an Internet domain name. These intangible assets carried at
$32.1 million
, which are not amortized, are subject to at least an annual test for impairment to determine if the estimated fair value is less than their carrying amount. The fair value of the trademarks and trade names was substantially in excess of its carrying value as of
December 31, 2018
.
Share-Based Compensation Plans
As part of the compensation to employees and directors, the Company uses stock-based compensation, consisting of restricted stock, stock options and stock appreciation rights. In accordance with ASC Topic 718, "Compensation - Stock Compensation," the Company classifies the stock options and restricted stock awards as equity awards, which requires the compensation cost to be recognized in the consolidated statement of operations over the requisite service period of the award at grant date fair value and adjust for actual forfeitures. The fair value of restricted stock awards is determined based on the grant date closing price of the Company's Class A non-voting common stock ("Class A Stock") adjusted for the present value of the dividend to be received upon vesting. The fair value of stock options is determined using the Black-Scholes model. Key assumptions used to estimate the fair value include the expected term and the expected volatility of the Company's Class A Stock over the term of the award, the risk-free interest rate over the expected term, and the Company's expected annual dividend yield. The Company classifies stock appreciation rights ("OARs") as liability awards, which requires the fair value to be remeasured at each reporting period until the award vests. The fair value of OARs is also determined using the Black-Scholes model at the end of each reporting period. The compensation cost is adjusted each reporting period for changes in fair value prorated for the portion of the requisite service period rendered.
Revenue Recognition
Brokerage
Customers' securities and commodities transactions are reported on a settlement date basis, which is generally
two
business days after trade date for securities transactions and
one
day for commodities transactions. Related commission income and expense is recorded on a trade date basis.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Principal Transactions
Transactions in proprietary securities and related revenue and expenses are recorded on a trade date basis. Securities owned and securities sold but not yet purchased are reported at fair value generally based upon quoted prices. Realized and unrealized changes in fair value are recognized in principal transactions, net in the period in which the change occurs.
Investment Banking Fees
Advisory fees from mergers, acquisitions and restructuring transactions are recorded when services for the transactions are completed and income is reasonably determinable, generally as set forth under the terms of the engagement. Retainer fees and engagement fees are recognized ratably over the service period.
Underwriting fees are recorded when 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 the related expenses are presented gross on the consolidated statement of operations.
Interest
Interest revenue represents interest earned on margin debit balances, securities borrowed transactions, reverse repurchase agreements, fixed income securities, firm investments, and cash and cash equivalents. Interest revenue is recognized in the period earned based upon average or daily asset balances, contractual cash flows, and interest rates.
Asset Management
Asset management fees are generally recognized over the period the related service is provided based on the account value at the valuation date per the respective asset management agreements. In certain circumstances, OAM is entitled to receive performance (or incentive) fees when the return on assets under management ("AUM") exceeds certain benchmark returns or other performance targets. Performance fees are generally based on investment performance over a 12-month 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. Asset management fees and performance fees are included in advisory fees in the consolidated statement of operations. Assets under management are not included as assets of the Company.
Bank Deposit Sweep Income
Bank deposit sweep income consists of revenues earned from the Advantage 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. The Company earns the fee paid on these deposits after administrative fees are paid to the administrator of the program. The fee earned in the period is recorded in bank deposit sweep income and the portion of interest credited to clients is recorded in interest expense in the consolidated statement of operations.
Balance Sheet
Cash and Cash Equivalents
The Company defines cash equivalents as highly liquid investments with original maturities of less than
90
days that are not held for sale in the ordinary course of business.
Receivables from / Payables to Brokers, Dealers and Clearing Organizations
Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced or received. Securities borrowed transactions require the Company to deposit cash or other collateral with the lender. The Company receives cash or collateral in an amount generally in excess of the market value of securities loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis and may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Securities failed to deliver and receive represent the contract value of securities which have not been delivered or received, respectively, by settlement date.
Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase
Reverse repurchase agreements and securities sold under agreements to repurchase ("repurchase agreements") are treated as collateralized financing transactions and are recorded at their contractual amounts plus accrued interest. The resulting interest income and expense for these arrangements are included in interest income and interest expense in the consolidated statement of operations. Additionally, the Company elected the fair value option for repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date. The Company can present the reverse repurchase and repurchase transactions on a net-by-counterparty basis when the specific offsetting requirements are satisfied.
Notes Receivable
Notes receivable represent recruiting and retention payments generally in the form of upfront loans to financial advisers and key revenue producers as part of the Company's overall growth strategy. These notes generally amortize over a service period of
3
to
9
years from the initial date of the note or based on productivity levels of employees. All such notes are contingent on
the employees' continued employment with the Company. The unforgiven portion of the notes becomes due on demand in the event the employee departs during the service period. Amortization of notes receivable is included in the consolidated statement of operations in compensation and related expenses.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation of furniture, fixtures, and equipment is provided on a straight-line basis generally over
3
-
7
years. Leasehold improvements are amortized on a straight-line basis over the shorter of the life of the improvement or the remaining term of the lease. Leases with escalating rents are expensed on a straight-line basis over the life of the lease. Landlord incentives are recorded as deferred rent and amortized, as reductions to lease expense, on a straight-line basis over the life of the applicable lease. Deferred rent is included in accounts payable and other liabilities on the consolidated balance sheet.
Drafts Payable
Drafts payable represent amounts drawn by the Company against a bank.
Bank Call Loans
Bank call loans are generally payable on demand and bear interest at various rates, such loans were collateralized by firm and/or customer securities.
Foreign Currency Translations
Foreign currency balances have been translated into U.S. dollars as follows: monetary assets and liabilities at exchange rates prevailing at period end; revenue and expenses at average rates for the period; and non-monetary assets and stockholders' equity at historical rates. The functional currency of the overseas operations is the local currency in each location except for Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited which have the U.S. dollar as their functional currency.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
The Company recognizes deferred tax assets to the extent it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and the results of recent operations.
The Company records uncertain tax positions in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740, "Income Taxes" on the basis of a two-step process whereby it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company records interest and penalties accruing on unrecognized tax benefits in income before income taxes as interest expense and other expense, respectively, in its consolidated statement of operations.
The Company permanently reinvests eligible earnings of its foreign subsidiaries and, accordingly, does not accrue any U.S. income taxes that would arise if such earnings were repatriated.
On December 22, 2017, the Federal government enacted Public Law 115-97, commonly referred to as the Tax Cuts and Jobs Act ("TCJA"). The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. Federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) a new provision designed to tax global intangible low-taxed income ("GILTI"), which allows for the possibility of using foreign tax credits ("FTCs") and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (5) limitations on the use of FTCs to reduce the U.S. income tax liability; (6) eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized; (7) creating the base erosion anti-abuse tax, a new minimum tax; (8) limitations on the deductibility of certain executive compensation; (9) creating a new limitation on deductible interest expense; (10) eliminating the deductibility of entertainment expenses; and (11) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”) which provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “TCJA”). SAB 118 provides a measurement period, not to exceed 12 months from the date of enactment to complete, the accounting associated with the TCJA. Under SAB 118, for matters for which the accounting related to the TCJA had not yet been completed, the Company recognized provisional amounts to the extent that they were reasonably estimable. The Company has completed its accounting of the impact of the TJCA in the current period and there were no significant changes to the provisional amounts previously recorded in accordance with SAB 118. See note 14, Income taxes.
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 evaluated the impact of adopting this ASU which will have a significant impact on its 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 consolidated balance sheet upon adoption of this ASU. As of
December 31, 2018
, the Company estimates that it will record right-of-use assets between $170.0 million to $215.0 million and lease liabilities within the same range on the consolidated balance sheet upon the adoption of this standard, which predominately relates 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.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
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 the Company's 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 the Company's 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 the Company's 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.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
3. Discontinued operations
OMHHF historically was 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 satisfied FHA criteria. During 2016, the Company sold substantially all of the assets of OMHHF and ceased it operations.
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 consolidated statements of operations. The following is a summary of revenue and expenses of OMHHF for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
REVENUE
|
|
|
|
|
|
|
Interest
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
943
|
|
|
Principal transactions, net
|
—
|
|
|
—
|
|
|
(9,022
|
)
|
|
Gain on sale of assets
|
—
|
|
|
—
|
|
|
16,475
|
|
|
Other
(1)
|
—
|
|
|
2,165
|
|
|
16,917
|
|
|
Total revenue
|
—
|
|
|
2,173
|
|
|
25,313
|
|
|
EXPENSES
|
|
|
|
|
|
|
Compensation and related expenses
|
—
|
|
|
18
|
|
|
4,311
|
|
|
Communications and technology
|
—
|
|
|
27
|
|
|
221
|
|
|
Occupancy and equipment costs
|
—
|
|
|
—
|
|
|
415
|
|
|
Interest
|
—
|
|
|
12
|
|
|
408
|
|
|
Other
|
—
|
|
|
45
|
|
|
2,619
|
|
|
Total expenses
|
—
|
|
|
102
|
|
|
7,974
|
|
|
Income before income taxes
|
$
|
—
|
|
|
$
|
2,071
|
|
|
$
|
17,339
|
|
|
Income attributable to non-controlling interest before income taxes
|
$
|
—
|
|
|
$
|
338
|
|
|
$
|
2,830
|
|
|
|
|
|
(1)
|
Other revenue for the year ended December 31, 2017 was primarily due to an earn-out from the sale of OMHHF's pipeline business in 2016.
|
The following is a summary of cash flows of OMHHF for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cash provided by (used in) operating activities
|
$
|
—
|
|
|
$
|
5,721
|
|
|
$
|
(14,097
|
)
|
|
Cash provided by investing activities
|
—
|
|
|
—
|
|
|
45,448
|
|
|
Cash used in financing activities
(1) (2)
|
(372
|
)
|
|
(20,035
|
)
|
|
(35,421
|
)
|
|
Net decrease in cash and cash equivalents
|
$
|
(372
|
)
|
|
$
|
(14,314
|
)
|
|
$
|
(4,070
|
)
|
|
|
|
|
(1)
|
Includes cash dividends paid to OMHHF's parent (E.A. Viner International Co.) and non-controlling interest of $
nil
and
$345,000
, respectively, for the year ended
December 31, 2018
(
$12.6 million
and
$2.4 million
, respectively, for the year ended
December 31, 2017
).
|
|
|
|
|
(2)
|
Includes
$5.0 million
paid to OMHHF's parent due to redemption of the parent's outstanding preferred stock for the year ended December 31, 2017.
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
4. 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 consolidated financial statements for the year ended
December 31, 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.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Advisory Fees
The Company earns management and performance (or incentive) fees in connection with the advisory and asset management services it provides to various types of funds and investment vehicles through its subsidiaries. Management fees are generally based on the account value at the valuation date per the respective asset management agreements and are recognized over time as the customer receives the benefits of the services evenly throughout the term of the contract. Performance fees are recognized when the return on client AUM exceeds a specified benchmark return or other performance targets over a 12-month measurement period. Performance fees are considered variable as they are subject to fluctuation and/or are contingent on a future event over the measurement period and are not subject to adjustment once the measurement period ends. Such fees are computed as of the fund's year-end when the measurement period ends and generally are recorded as earned in the fourth quarter of the Company's fiscal year. Both management and performance fees are generally received within 90 days.
Investment Banking
The Company earns underwriting revenues by providing capital raising solutions for corporate clients through initial public offerings, follow-on offerings, equity-linked offerings, private investments in public entities, and private placements. Underwriting revenues are recognized at a point in time on trade date, as the client obtains the control and benefit of the capital markets offering at that point. These fees are generally received within 90 days after the transactions are completed. Transaction-related expenses, primarily consisting of legal, travel and other costs directly associated with the transaction, are deferred and recognized in the same period as the related investment banking transaction revenue. Underwriting revenues and related expenses are presented gross on the consolidated statement of operations.
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.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
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 year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
For the Year Ended December 31, 2018
|
|
|
Reportable Segments
|
|
|
Private Client
|
|
Asset Management
|
|
Capital Markets
|
|
Corporate/Other
|
|
Total
|
|
Revenues from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
Commissions from sales and trading
|
$
|
154,167
|
|
|
$
|
—
|
|
|
$
|
131,955
|
|
|
$
|
89
|
|
|
$
|
286,211
|
|
|
Mutual fund income
|
42,514
|
|
|
908
|
|
|
13
|
|
|
22
|
|
|
43,457
|
|
|
Advisory fees
|
243,474
|
|
|
70,775
|
|
|
67
|
|
|
33
|
|
|
314,349
|
|
|
Investment banking - capital markets
|
13,284
|
|
|
—
|
|
|
56,474
|
|
|
—
|
|
|
69,758
|
|
|
Investment banking - advisory
|
—
|
|
|
—
|
|
|
45,595
|
|
|
—
|
|
|
45,595
|
|
|
Bank deposit sweep income
|
116,052
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
116,052
|
|
|
Other
|
14,745
|
|
|
13
|
|
|
1,054
|
|
|
352
|
|
|
16,164
|
|
|
Total revenues from contracts with customers
|
584,236
|
|
|
71,696
|
|
|
235,158
|
|
|
496
|
|
|
891,586
|
|
|
Other sources of revenue:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
37,581
|
|
|
—
|
|
|
13,739
|
|
|
1,164
|
|
|
52,484
|
|
|
Principal transactions, net
|
(1,125
|
)
|
|
—
|
|
|
23,378
|
|
|
(7,792
|
)
|
|
14,461
|
|
|
Other
|
(2,821
|
)
|
|
—
|
|
|
444
|
|
|
2,000
|
|
|
(377
|
)
|
|
Total other sources of revenue
|
33,635
|
|
|
—
|
|
|
37,561
|
|
|
(4,628
|
)
|
|
66,568
|
|
|
Total revenue
|
$
|
617,871
|
|
|
$
|
71,696
|
|
|
$
|
272,719
|
|
|
$
|
(4,132
|
)
|
|
$
|
958,154
|
|
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
$21.0 million
at
December 31, 2018
and January 1, 2018, respectively. The Company had no significant impairments related to these receivables during the year ended
December 31, 2018
.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
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 consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
Ending Balance
at December 31, 2018
|
|
Opening Balance
at January 1, 2018
|
|
Contract assets (receivables):
|
|
|
|
|
Commission
(1)
|
$
|
3,738
|
|
|
$
|
2,007
|
|
|
Mutual fund income
(2)
|
7,241
|
|
|
7,779
|
|
|
Advisory fees
(3)
|
1,214
|
|
|
1,460
|
|
|
Bank deposit sweep income
(4)
|
4,622
|
|
|
3,459
|
|
|
Investment banking fees
(5)
|
3,996
|
|
|
3,926
|
|
|
Other
|
2,869
|
|
|
2,398
|
|
|
Total contract assets
|
$
|
23,680
|
|
|
$
|
21,029
|
|
|
Deferred revenue (payables):
|
|
|
|
|
Investment banking fees
(6)
|
$
|
318
|
|
|
$
|
—
|
|
|
Total deferred revenue
|
$
|
318
|
|
|
$
|
—
|
|
|
|
|
|
(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.
|
|
|
|
|
(6)
|
Retainer fees and fees earned from certain advisory transactions where the performance obligations have not yet been satisfied.
|
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
December 31, 2018
, the contract costs were
$1.6 million
. There were no significant charges recognized in relation to these costs for year ended
December 31, 2018
.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
5. Receivable from and payable to brokers, dealers and clearing organizations
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
|
Receivable from brokers, dealers and clearing organizations consists of:
|
|
|
|
|
Securities borrowed
|
$
|
108,144
|
|
|
$
|
132,368
|
|
|
Receivable from brokers
|
20,140
|
|
|
19,298
|
|
|
Securities failed to deliver
|
7,021
|
|
|
9,442
|
|
|
Clearing organizations
|
28,777
|
|
|
24,361
|
|
|
Other
|
2,411
|
|
|
1,646
|
|
|
Total
|
$
|
166,493
|
|
|
$
|
187,115
|
|
|
Payable to brokers, dealers and clearing organizations consists of:
|
|
|
|
|
Securities loaned
|
$
|
146,815
|
|
|
$
|
180,270
|
|
|
Payable to brokers
|
158
|
|
|
1,567
|
|
|
Securities failed to receive
|
27,799
|
|
|
17,559
|
|
|
Other
|
114,435
|
|
|
12,087
|
|
|
Total
|
$
|
289,207
|
|
|
$
|
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.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
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
December 31, 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
December 31, 2018
, the Company purchased and holds (net of redemptions) approximately
$40.7 million
in ARS from its clients. In addition, the Company is committed to purchase another
$7.3 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.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
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.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
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 December 31, 2018
|
|
Product
|
|
Principal
|
|
Valuation
Adjustment
|
|
Fair
Value
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Range
|
|
Weighted
Average
|
|
Auction Rate Securities Owned
(1)
|
|
Auction Rate Preferred Securities
|
|
$
|
21,350
|
|
|
$
|
1
|
|
|
$
|
21,349
|
|
|
Discounted Cash Flow
|
|
Discount Rate
(2)
|
|
2.86% to 3.89%
|
|
3.88%
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
Duration
|
|
1 Year
|
|
1 Year
|
|
|
|
|
|
|
|
|
|
|
|
Current Yield
(3)
|
|
2.69% to 4.05%
|
|
4.03%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Discounted Cash Flow
|
|
Discount Rate
(5)
|
|
4.35%
|
|
4.35%
|
|
|
|
|
|
|
|
|
|
|
|
Duration
|
|
2 years
|
|
2 years
|
|
|
|
|
|
|
|
|
|
|
|
Current Yield
(3)
|
|
5.51%
|
|
5.51%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Loan Auction Rate Securities
|
|
275
|
|
|
—
|
|
|
275
|
|
|
Discounted Cash Flow
|
|
Discount Rate
(6)
|
|
3.68%
|
|
3.68%
|
|
|
|
|
|
|
|
|
|
|
|
Duration
|
|
4.0 Years
|
|
4.0 Years
|
|
|
|
|
|
|
|
|
|
|
|
Current Yield
(3)
|
|
3.64%
|
|
3.64%
|
|
|
|
$
|
40,650
|
|
|
$
|
2,698
|
|
|
$
|
37,952
|
|
|
|
|
|
|
|
|
|
|
Auction Rate Securities Commitments to Purchase
(7)
|
|
|
|
|
|
|
|
|
|
Auction Rate Preferred Securities
|
|
7,305
|
|
|
1,096
|
|
|
6,209
|
|
|
Tender Offer
(4)
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,305
|
|
|
$
|
1,096
|
|
|
$
|
6,209
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,955
|
|
|
$
|
3,794
|
|
|
$
|
44,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Principal amount represents the par value of the ARS and is included in securities owned on the consolidated balance sheet as of
December 31, 2018
. The valuation adjustment amount is included as a reduction to securities owned on the consolidated balance sheet as of
December 31, 2018
.
|
|
|
|
|
(2)
|
Derived by applying a multiple to a spread between
110%
to
150%
to the U.S. Treasury rate of
2.60%
.
|
|
|
|
|
(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
175%
to the U.S. Treasury rate of
2.49%
.
|
|
|
|
|
(6)
|
Derived by applying the sum of the spread of
1.20%
to the U.S. Treasury rate of
2.48%
.
|
|
|
|
|
(7)
|
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 consolidated balance sheet as of
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
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 impa
ct of a
25
basis point increase in the discount rate at
December 31, 2018
would result in a decrease in the fair value of
$22,000
(does not consider a corresponding reduction in duration as discussed above).
|
|
|
|
|
•
|
The impact of a
50
basis point increase in the discount rate at
December 31, 2018
would result in a decrease in the fair value of
$76,000
(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
December 31, 2018
, the Company had a valuation adjustment (unrealized loss) of
$2.7 million
for ARS owned which is included as a reduction to securities owned on the consolidated balance sheet. As of
December 31, 2018
, the Company also had a valuation adjustment of
$1.1 million
on ARS purc
hase commitments from legal settlements and awards which is included in accounts payable and other liabilities on the consolidated balance sheet. The total valuation adjus
tment was
$3.8 million
as of
December 31, 2018
. The valuation adjustment represents the difference between the principal value and the fair value of the ARS owned and ARS purchase commitments.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
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
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Unfunded
Commitments
|
|
Redemption
Frequency
|
|
Redemption
Notice Period
|
|
Hedge funds
(1)
|
$
|
1,596
|
|
|
$
|
—
|
|
|
Quarterly - Annually
|
|
30 - 120 Days
|
|
Private equity funds
(2)
|
4,908
|
|
|
1,399
|
|
|
N/A
|
|
N/A
|
|
|
$
|
6,504
|
|
|
$
|
1,399
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Assets and Liabilities Measured at Fair Value
The Company's assets and liabilities, recorded at fair value on a recurring basis as of
December 31, 2018
and
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
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
10,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,500
|
|
|
Deposits with clearing organizations
|
34,599
|
|
|
—
|
|
|
—
|
|
|
34,599
|
|
|
Securities owned:
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
657,208
|
|
|
—
|
|
|
—
|
|
|
657,208
|
|
|
U.S. Agency securities
|
812
|
|
|
6,494
|
|
|
—
|
|
|
7,306
|
|
|
Sovereign obligations
|
—
|
|
|
214
|
|
|
—
|
|
|
214
|
|
|
Corporate debt and other obligations
|
—
|
|
|
20,665
|
|
|
—
|
|
|
20,665
|
|
|
Mortgage and other asset-backed securities
|
—
|
|
|
2,486
|
|
|
—
|
|
|
2,486
|
|
|
Municipal obligations
|
—
|
|
|
52,261
|
|
|
—
|
|
|
52,261
|
|
|
Convertible bonds
|
—
|
|
|
31,270
|
|
|
—
|
|
|
31,270
|
|
|
Corporate equities
|
28,215
|
|
|
—
|
|
|
—
|
|
|
28,215
|
|
|
Money markets
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
Auction rate securities
|
—
|
|
|
16,253
|
|
|
21,699
|
|
|
37,952
|
|
|
Securities owned, at fair value
|
686,242
|
|
|
129,643
|
|
|
21,699
|
|
|
837,584
|
|
|
Investments
(1)
|
—
|
|
|
—
|
|
|
101
|
|
|
101
|
|
|
Derivative contracts:
|
|
|
|
|
|
|
|
|
TBAs
|
—
|
|
|
4,873
|
|
|
—
|
|
|
4,873
|
|
|
Total
|
$
|
731,341
|
|
|
$
|
134,516
|
|
|
$
|
21,800
|
|
|
$
|
887,657
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased:
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
53,646
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
53,646
|
|
|
U.S. Agency securities
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
Sovereign obligations
|
—
|
|
|
78
|
|
|
—
|
|
|
78
|
|
|
Corporate debt and other obligations
|
—
|
|
|
7,236
|
|
|
—
|
|
|
7,236
|
|
|
Convertible bonds
|
—
|
|
|
9,709
|
|
|
—
|
|
|
9,709
|
|
|
Corporate equities
|
14,774
|
|
|
—
|
|
|
—
|
|
|
14,774
|
|
|
Securities sold but not yet purchased, at fair value
|
68,420
|
|
|
17,026
|
|
|
—
|
|
|
85,446
|
|
|
Derivative contracts:
|
|
|
|
|
|
|
|
|
Futures
|
807
|
|
|
—
|
|
|
—
|
|
|
807
|
|
|
Foreign exchange forward contracts
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
TBAs
|
—
|
|
|
4,873
|
|
|
—
|
|
|
4,873
|
|
|
ARS purchase commitments
|
—
|
|
|
1,096
|
|
|
—
|
|
|
1,096
|
|
|
Derivative contracts, total
|
811
|
|
|
5,969
|
|
|
—
|
|
|
6,780
|
|
|
Total
|
$
|
69,231
|
|
|
$
|
22,995
|
|
|
$
|
—
|
|
|
$
|
92,226
|
|
(1)
Included in other assets on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
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 consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
Level 3 Assets and Liabilities
|
|
|
For the Year Ended December 31, 2018
|
|
|
Beginning
Balance
|
|
Total Realized
and Unrealized
Gains
(Losses)
(3)(4)
|
|
Purchases
and Issuances
|
|
Sales and Settlements
|
|
Transfers
In / Out
|
|
Ending
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
$
|
35
|
|
|
$
|
14
|
|
|
$
|
76
|
|
|
$
|
(125
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Auction rate securities
(1) (5)
|
87,398
|
|
|
1,351
|
|
|
6,300
|
|
|
(35,675
|
)
|
|
(37,675
|
)
|
|
21,699
|
|
|
Investments
|
169
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
(60
|
)
|
|
101
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
ARS purchase commitments
(2) (5)
|
8
|
|
|
(1,088
|
)
|
|
—
|
|
|
—
|
|
|
1,096
|
|
|
—
|
|
|
|
|
|
(1)
|
Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
|
|
|
|
|
(2)
|
Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
|
|
|
|
|
(3)
|
Included in principal transactions in the consolidated statement of operations, except for gains (losses) from investments which are included in other income in the consolidated statement of operations.
|
|
|
|
|
(4)
|
Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
|
|
|
|
|
(5)
|
Represents transfers from Level 3 to Level 2 of the fair value hierarchy. Transfers were due to tender offers by issuers of ARS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
Level 3 Assets and Liabilities
|
|
|
For the Year Ended December 31, 2017
|
|
|
Beginning
Balance
|
|
Total Realized
and Unrealized
Gains (Losses)
(3)(4)
|
|
Purchases
and Issuances
|
|
Sales and Settlements
|
|
Transfers
In / Out
|
|
Ending
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
$
|
44
|
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35
|
|
|
Auction rate securities
(1)
|
84,926
|
|
|
1,177
|
|
|
27,225
|
|
|
(1,475
|
)
|
|
(24,455
|
)
|
|
87,398
|
|
|
Investments
|
158
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
169
|
|
|
ARS purchase commitments
(2)
|
849
|
|
|
(849
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
ARS purchase commitments
(2)
|
645
|
|
|
637
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
|
|
|
(1)
|
Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
|
|
|
|
|
(2)
|
Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
|
|
|
|
|
(3)
|
Included in principal transactions in the consolidated statement of operations, except for gains (losses) from investments which are included in other income in the consolidated statement of operations.
|
|
|
|
|
(4)
|
Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Financial Instruments Not Measured at Fair Value
The table below presents the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value on the consolidated balance sheets. The table below excludes non-financial assets and liabilities (e.g., furniture, equipment and leasehold improvements and accrued compensation).
The carrying value of financial instruments not measured at fair value categorized in the fair value hierarchy as Level 1 or Level 2 (e.g., cash and receivables from customers) approximates fair value because of the relatively short term nature of the underlying assets. The fair value of the Company's senior secured notes, categorized in Level 2 of the fair value hierarchy, is based on quoted prices from the market in which the notes trade.
Assets and liabilities not measured at fair value as of
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
Fair Value Measurement: Assets
|
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash
|
$
|
80,175
|
|
|
$
|
80,175
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
80,175
|
|
|
Deposits with clearing organization
|
33,079
|
|
|
33,079
|
|
|
—
|
|
|
—
|
|
|
33,079
|
|
|
Receivable from brokers, dealers and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
Securities borrowed
|
108,144
|
|
|
—
|
|
|
108,144
|
|
|
—
|
|
|
108,144
|
|
|
Receivables from brokers
|
20,140
|
|
|
—
|
|
|
20,140
|
|
|
—
|
|
|
20,140
|
|
|
Securities failed to deliver
|
7,021
|
|
|
—
|
|
|
7,021
|
|
|
—
|
|
|
7,021
|
|
|
Clearing organizations
|
28,777
|
|
|
—
|
|
|
28,777
|
|
|
—
|
|
|
28,777
|
|
|
Other
|
2,411
|
|
|
—
|
|
|
2,411
|
|
|
—
|
|
|
2,411
|
|
|
|
166,493
|
|
|
—
|
|
|
166,493
|
|
|
—
|
|
|
166,493
|
|
|
Receivable from customers
|
720,777
|
|
|
—
|
|
|
720,777
|
|
|
—
|
|
|
720,777
|
|
|
Securities purchased under agreements to resell
|
290
|
|
|
|
|
|
290
|
|
|
—
|
|
|
290
|
|
|
Notes receivable, net
|
44,058
|
|
|
|
|
|
44,058
|
|
|
—
|
|
|
44,058
|
|
|
Investments
(1)
|
59,765
|
|
|
—
|
|
|
59,765
|
|
|
—
|
|
|
59,765
|
|
|
|
|
|
(1)
|
Included in other assets on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
Fair Value Measurement: Liabilities
|
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Drafts payable
|
$
|
16,348
|
|
|
$
|
16,348
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,348
|
|
|
Bank call loans
|
15,000
|
|
|
—
|
|
|
15,000
|
|
|
—
|
|
|
15,000
|
|
|
Payables to brokers, dealers and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
Securities loaned
|
146,815
|
|
|
—
|
|
|
146,815
|
|
|
—
|
|
|
146,815
|
|
|
Payable to brokers
|
158
|
|
|
—
|
|
|
158
|
|
|
—
|
|
|
158
|
|
|
Securities failed to receive
|
27,799
|
|
|
—
|
|
|
27,799
|
|
|
—
|
|
|
27,799
|
|
|
Other
|
113,628
|
|
|
—
|
|
|
113,628
|
|
|
—
|
|
|
113,628
|
|
|
|
288,400
|
|
|
—
|
|
|
288,400
|
|
|
—
|
|
|
288,400
|
|
|
Payables to customers
|
336,616
|
|
|
—
|
|
|
336,616
|
|
|
—
|
|
|
336,616
|
|
|
Securities sold under agreements to repurchase
|
484,218
|
|
|
—
|
|
|
484,218
|
|
|
—
|
|
|
484,218
|
|
|
Senior secured notes
|
200,000
|
|
|
—
|
|
|
199,722
|
|
|
—
|
|
|
199,722
|
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Assets and liabilities not measured at fair value as of
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
Fair Value Measurement: Assets
|
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash
|
$
|
37,664
|
|
|
$
|
37,664
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37,664
|
|
|
Deposits with clearing organization
|
7,929
|
|
|
7,929
|
|
|
—
|
|
|
—
|
|
|
7,929
|
|
|
Receivable from brokers, dealers and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
Securities borrowed
|
132,368
|
|
|
—
|
|
|
132,368
|
|
|
—
|
|
|
132,368
|
|
|
Receivables from brokers
|
19,298
|
|
|
—
|
|
|
19,298
|
|
|
—
|
|
|
19,298
|
|
|
Securities failed to deliver
|
9,442
|
|
|
—
|
|
|
9,442
|
|
|
—
|
|
|
9,442
|
|
|
Clearing organizations
|
24,361
|
|
|
—
|
|
|
24,361
|
|
|
—
|
|
|
24,361
|
|
|
Other
|
930
|
|
|
—
|
|
|
930
|
|
|
—
|
|
|
930
|
|
|
|
186,399
|
|
|
—
|
|
|
186,399
|
|
|
—
|
|
|
186,399
|
|
|
Receivable from customers
|
848,226
|
|
|
—
|
|
|
848,226
|
|
|
—
|
|
|
848,226
|
|
|
Securities purchased under agreements to resell
|
658
|
|
|
—
|
|
|
658
|
|
|
—
|
|
|
658
|
|
|
Notes receivable, net
|
40,520
|
|
|
—
|
|
|
40,520
|
|
|
|
|
40,520
|
|
|
Investments
(1)
|
65,404
|
|
|
—
|
|
|
65,404
|
|
|
—
|
|
|
65,404
|
|
|
|
|
|
(1)
|
Included in other assets on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
Fair Value Measurement: Liabilities
|
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Drafts payable
|
$
|
42,212
|
|
|
$
|
42,212
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,212
|
|
|
Bank call loans
|
118,300
|
|
|
—
|
|
|
118,300
|
|
|
—
|
|
|
118,300
|
|
|
Payables to brokers, dealers and clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
Securities loaned
|
180,270
|
|
|
—
|
|
|
180,270
|
|
|
—
|
|
|
180,270
|
|
|
Payable to brokers
|
1,567
|
|
|
—
|
|
|
1,567
|
|
|
—
|
|
|
1,567
|
|
|
Securities failed to receive
|
17,559
|
|
|
—
|
|
|
17,559
|
|
|
—
|
|
|
17,559
|
|
|
Other
|
10,707
|
|
|
—
|
|
|
10,707
|
|
|
—
|
|
|
10,707
|
|
|
|
210,103
|
|
|
—
|
|
|
210,103
|
|
|
—
|
|
|
210,103
|
|
|
Payables to customers
|
385,907
|
|
|
—
|
|
|
385,907
|
|
|
—
|
|
|
385,907
|
|
|
Securities sold under agreements to repurchase
|
586,478
|
|
|
—
|
|
|
586,478
|
|
|
—
|
|
|
586,478
|
|
|
Senior secured notes
|
200,000
|
|
|
—
|
|
|
206,380
|
|
|
—
|
|
|
206,380
|
|
Fair Value Option
The Company elected the fair value option for securities sold under agreements to repurchase ("repurchase agreements") and securities purchased under agreements to resell ("reverse repurchase agreements") that do not settle overnight or have an open settlement date. The Company has elected the fair value option for these instruments to reflect more accurately market and economic events in its earnings and to mitigate a potential mismatch in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. As of
December 31, 2018
, the Company did not have any repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Derivative Instruments and Hedging Activities
The Company transacts, on a limited basis, in exchange traded and over-the-counter derivatives for both asset and liability management as well as for trading and investment purposes. Risks managed using derivative instruments include interest rate risk and, to a lesser extent, foreign exchange risk. All derivative instruments are measured at fair value and are recognized as either assets or liabilities on the consolidated balance sheet.
Foreign exchange hedges
From time to time, the Company also utilizes forward and options contracts to hedge the foreign currency risk associated with compensation obligations to Oppenheimer Israel (OPCO) Ltd. employees denominated in New Israeli Shekel ("NIS"). Such hedges have not been designated as accounting hedges. Unrealized gains and losses on foreign exchange forward contracts are recorded in other assets on the consolidated balance sheet and other income in the consolidated statement of operations.
Derivatives used for trading and investment purposes
Futures contracts represent commitments to purchase or sell securities or other commodities at a future date and at a specified price. Market risk exists with respect to these instruments. Notional or contractual amounts are used to express the volume of these transactions and do not represent the amounts potentially subject to market risk. The Company uses futures contracts, including U.S. Treasury notes, Federal Funds, General Collateral futures and Eurodollar contracts primarily as an economic hedge of interest rate risk associated with government trading activities. Unrealized gains and losses on futures contracts are recorded on the consolidated balance sheet in payable to brokers, dealers and clearing organizations and in the consolidated statement of operations as principal transactions revenue, net.
To-be-announced securities
The Company also transacts in pass-through mortgage-backed securities eligible to be sold in the TBA market as economic hedges against mortgage-backed securities that it owns or has sold but not yet purchased. TBAs provide for the forward or delayed delivery of the underlying instrument with settlement up to
180
days. The contractual or notional amounts related to these financial instruments reflect the volume of activity and do not reflect the amounts at risk. Net unrealized gains and losses on TBAs are recorded on the consolidated balance sheet in receivable from brokers, dealers and clearing organizations or payable to brokers, dealers and clearing organizations and in the consolidated statement of operations as principal transactions revenue, net.
The notional amounts and fair values of the Company's derivatives as of
December 31, 2018
and
2017
by product were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments as of December 31, 2018
|
|
|
Description
|
|
Notional
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
(1)
|
|
|
|
|
|
|
Other contracts
|
TBAs
|
|
$
|
729,500
|
|
|
$
|
4,873
|
|
|
|
|
|
$
|
729,500
|
|
|
$
|
4,873
|
|
|
Liabilities:
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
(1)
|
|
|
|
|
|
|
Commodity contracts
|
Futures
|
|
$
|
4,580,800
|
|
|
$
|
807
|
|
|
Other contracts
|
Foreign exchange forward contracts
|
|
200
|
|
|
4
|
|
|
|
TBAs
|
|
729,500
|
|
|
4,873
|
|
|
|
ARS purchase commitments
|
|
7,305
|
|
|
1,096
|
|
|
|
|
|
$
|
5,317,805
|
|
|
$
|
6,780
|
|
|
|
|
|
(1)
|
See "Derivative Instruments and Hedging Activities" above for a description of derivative financial instruments. Such derivate instruments are not subject to master netting agreements, thus the related amounts are not offset.
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments as of December 31, 2017
|
|
|
Description
|
|
Notional
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
(1)
|
|
|
|
|
|
|
Other contracts
|
TBAs
|
|
$
|
26,000
|
|
|
$
|
22
|
|
|
|
Other TBAs
(2)
|
|
39,576
|
|
|
694
|
|
|
|
|
|
$
|
65,576
|
|
|
$
|
716
|
|
|
Liabilities:
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
(1)
|
|
|
|
|
|
|
Commodity contracts
|
Futures
|
|
$
|
5,844,000
|
|
|
$
|
766
|
|
|
Other contracts
|
TBAs
|
|
26,000
|
|
|
22
|
|
|
|
Other TBAs
(2)
|
|
39,576
|
|
|
592
|
|
|
|
ARS purchase commitments
|
|
10,992
|
|
|
8
|
|
|
|
|
|
$
|
5,920,568
|
|
|
$
|
1,388
|
|
|
|
|
|
(1)
|
See "Derivative Instruments and Hedging Activities" above for a description of derivative financial instruments. Such derivate instruments are not subject to master netting agreements, thus the related amounts are not offset.
|
|
|
|
|
(2)
|
Represents TBA purchase and sale contracts related to the legacy OMHHF business.
|
The following table presents the location and fair value amounts of the Company's derivative instruments and their effect in the consolidated statements of operations for the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments in the Statement of Operations
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
Recognized in Income on Derivatives
(pre-tax)
|
|
Types
|
Description
|
|
Location
|
|
Net Gain (Loss)
|
|
Commodity contracts
|
Futures
|
|
Principal transactions revenue
|
|
$
|
592
|
|
|
Other contracts
|
Foreign exchange forward contracts
|
|
Other revenue
|
|
(7
|
)
|
|
|
TBAs
|
|
Principal transactions revenue
|
|
371
|
|
|
|
ARS purchase commitments
|
|
Principal transactions revenue
|
|
(1,088
|
)
|
|
|
|
|
|
|
$
|
(132
|
)
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments in the Statement of Operations
|
|
|
For the Year Ended December 31, 2017
|
|
|
|
|
Recognized in Income on Derivatives
(pre-tax)
|
|
Types
|
Description
|
|
Location
|
|
Net Gain (Loss)
|
|
Commodity contracts
|
Futures
|
|
Principal transactions revenue
|
|
$
|
987
|
|
|
Other contracts
|
Foreign exchange forward contracts
|
|
Other revenue
|
|
12
|
|
|
|
TBAs
|
|
Principal transactions revenue
|
|
(167
|
)
|
|
|
Other TBAs
|
|
Other revenue
|
|
(338
|
)
|
|
|
ARS purchase commitments
|
|
Principal transactions revenue
|
|
(212
|
)
|
|
|
|
|
|
|
$
|
282
|
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
7. Collateralized transactions
The Company enters into collateralized borrowing and lending transactions in order to meet customers' needs and earn interest rate spreads, obtain securities for settlement and finance trading inventory positions. Under these transactions, the Company either receives or provides collateral, including U.S. Government and Agency, asset-backed, corporate debt, equity, and non-U.S. Government and Agency securities.
The Company obtains short-term borrowings primarily through bank call loans. Bank call loans are generally payable on demand and bear interest at various rates. As of
December 31, 2018
, bank call loans were
$15.0 million
(
$118.3 million
as of
December 31, 2017
). As of
December 31, 2018
, such loans were collateralized by firm and/or customer securities with market values of approximately
$18.6 million
and
$1.6 million
, respectively, with commercial banks.
As of
December 31, 2018
, the Company had approximately
$1.0 billion
of customer securities under customer margin loans that are available to be pledged, of which the Company has re-pledged approximately
$112.6 million
under securities loan agreements.
As of
December 31, 2018
, the Company had pledged
$460.2 million
of customer securities directly with the Options Clearing Corporation to secure obligations and margin requirements under option contracts written by customers.
As of
December 31, 2018
, the Company had
no
outstanding letters of credit.
The Company enters into reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers' needs and to finance the Company's inventory positions. Except as described below, repurchase and reverse repurchase agreements, principally involving U.S. Government and Agency securities, are carried at amounts at which the securities subsequently will be resold or reacquired as specified in the respective agreements and include accrued interest. Repurchase agreements and reverse repurchase agreements are presented on a net-by-counterparty basis, when the repurchase agreements and reverse repurchase agreements are executed with the same counterparty, have the same explicit settlement date, are executed in accordance with a master netting arrangement, the securities underlying the repurchase agreements and reverse repurchase agreements exist in "book entry" form and certain other requirements are met.
The following table presents a disaggregation of the gross obligation by the class of collateral pledged and the remaining contractual maturity of the repurchase agreements and securities loaned transactions as of
December 31, 2018
:
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
Overnight and Open
|
|
Repurchase agreements:
|
|
|
U.S. Government and Agency securities
|
$
|
566,357
|
|
|
Securities loaned:
|
|
|
Equity securities
|
146,815
|
|
|
Gross amount of recognized liabilities for repurchase agreements and securities loaned
|
$
|
713,172
|
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
The following tables present the gross amounts and the offsetting amounts of reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
on the Balance Sheet
|
|
|
|
|
Gross
Amounts of
Recognized
Assets
|
|
Gross
Amounts
Offset on the
Balance Sheet
|
|
Net Amounts
of Assets
Presented on
the Balance
Sheet
|
|
Financial
Instruments
|
|
Cash
Collateral
Received
|
|
Net Amount
|
|
Reverse repurchase agreements
|
$
|
82,429
|
|
|
$
|
(82,139
|
)
|
|
$
|
290
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
290
|
|
|
Securities borrowed
(1)
|
108,144
|
|
|
—
|
|
|
108,144
|
|
|
(105,960
|
)
|
|
—
|
|
|
2,184
|
|
|
Total
|
$
|
190,573
|
|
|
$
|
(82,139
|
)
|
|
$
|
108,434
|
|
|
$
|
(105,960
|
)
|
|
$
|
—
|
|
|
$
|
2,474
|
|
|
|
|
|
(1)
|
Included in receivable from brokers, dealers and clearing organizations on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
on the Balance Sheet
|
|
|
|
|
Gross
Amounts of
Recognized
Liabilities
|
|
Gross
Amounts
Offset on the Balance Sheet
|
|
Net Amounts
of Liabilities
Presented on
the Balance
Sheet
|
|
Financial
Instruments
|
|
Cash
Collateral
Pledged
|
|
Net Amount
|
|
Repurchase agreements
|
$
|
566,357
|
|
|
$
|
(82,139
|
)
|
|
$
|
484,218
|
|
|
$
|
(480,322
|
)
|
|
$
|
—
|
|
|
$
|
3,896
|
|
|
Securities loaned
(2)
|
146,815
|
|
|
—
|
|
|
146,815
|
|
|
(139,232
|
)
|
|
—
|
|
|
7,583
|
|
|
Total
|
$
|
713,172
|
|
|
$
|
(82,139
|
)
|
|
$
|
631,033
|
|
|
$
|
(619,554
|
)
|
|
$
|
—
|
|
|
$
|
11,479
|
|
|
|
|
|
(2)
|
Included in payable to brokers, dealers and clearing organizations on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
on the Balance Sheet
|
|
|
|
|
Gross
Amounts of
Recognized
Assets
|
|
Gross
Amounts
Offset on the Balance Sheet
|
|
Net Amounts
of Assets
Presented on
the Balance
Sheet
|
|
Financial
Instruments
|
|
Cash
Collateral
Received
|
|
Net Amount
|
|
Reverse repurchase agreements
|
$
|
200,712
|
|
|
$
|
(200,054
|
)
|
|
$
|
658
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
658
|
|
|
Securities borrowed
(1)
|
132,368
|
|
|
—
|
|
|
132,368
|
|
|
(128,575
|
)
|
|
—
|
|
|
3,793
|
|
|
Total
|
$
|
333,080
|
|
|
$
|
(200,054
|
)
|
|
$
|
133,026
|
|
|
$
|
(128,575
|
)
|
|
$
|
—
|
|
|
$
|
4,451
|
|
|
|
|
|
(1)
|
Included in receivable from brokers, dealers and clearing organizations on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
on the Balance Sheet
|
|
|
|
|
Gross
Amounts of
Recognized
Liabilities
|
|
Gross
Amounts
Offset on the Balance Sheet
|
|
Net Amounts
of Liabilities
Presented on
the Balance
Sheet
|
|
Financial
Instruments
|
|
Cash
Collateral
Pledged
|
|
Net Amount
|
|
Repurchase agreements
|
$
|
786,532
|
|
|
$
|
(200,054
|
)
|
|
$
|
586,478
|
|
|
$
|
(585,289
|
)
|
|
$
|
—
|
|
|
$
|
1,189
|
|
|
Securities loaned
(2)
|
180,270
|
|
|
—
|
|
|
180,270
|
|
|
(170,176
|
)
|
|
—
|
|
|
10,094
|
|
|
Total
|
$
|
966,802
|
|
|
$
|
(200,054
|
)
|
|
$
|
766,748
|
|
|
$
|
(755,465
|
)
|
|
$
|
—
|
|
|
$
|
11,283
|
|
|
|
|
|
(2)
|
Included in payable to brokers, dealers and clearing organizations on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
The Company elected the fair value option for those repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date. As of
December 31, 2018
, the Company did not have any repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date.
The Company receives collateral in connection with securities borrowed and reverse repurchase agreement transactions and customer margin loans. Under many agreements, the Company is permitted to sell or re-pledge the securities received (e.g., use the securities to enter into securities lending transactions, or deliver to counterparties to cover short positions). As of
December 31, 2018
, the fair value of securities received as collateral under securities borrowed transactions and reverse repurchase agreements was
$104.9 million
(
$127.2 million
as of
December 31, 2017
) and
$83.0 million
(
$221.6 million
as of
December 31, 2017
), respectively, of which the Company has sold and re-pledged approximately
$27.6 million
(
$30.9 million
as of
December 31, 2017
) under securities loaned transactions and
$83.0 million
under repurchase agreements (
$221.6 million
as of
December 31, 2017
).
The Company pledges certain of its securities owned for securities lending and repurchase agreements and to collateralize bank call loan transactions. The carrying value of pledged securities owned that can be sold or re-pledged by the counterparty was
$518.0 million
, as presented on the face of the consolidated balance sheet as of
December 31, 2018
(
$655.7 million
as of
December 31, 2017
). The carrying value of securities owned by the Company that have been loaned or pledged to counterparties where those counterparties do not have the right to sell or re-pledge the collateral was
$20.2 million
as of
December 31, 2018
(
$97.2 million
as of
December 31, 2017
).
The Company manages credit exposure arising from repurchase and reverse repurchase agreements by, in appropriate circumstances, entering into master netting agreements and collateral arrangements with counterparties that provide the Company, in the event of a customer default, the right to liquidate securities and the right to offset a counterparty's rights and obligations. The Company manages market risk of repurchase agreements and securities loaned by monitoring the market value of collateral held and the market value of securities receivable from others. It is the Company's policy to request and obtain additional collateral when exposure to loss exists. In the event the counterparty is unable to meet its contractual obligation to return the securities, the Company may be exposed to off-balance sheet risk of acquiring securities at prevailing market prices.
Credit Concentrations
Credit concentrations may arise from trading, investing, underwriting and financing activities and may be impacted by changes in economic, industry or political factors. In the normal course of business, the Company may be exposed to credit risk in the event customers, counterparties including other brokers and dealers, issuers, banks, depositories or clearing organizations are unable to fulfill their contractual obligations. The Company seeks to mitigate these risks by actively monitoring exposures and obtaining collateral as deemed appropriate. Included in receivable from brokers, dealers and clearing organizations as of
December 31, 2018
are receivables from
five
major U.S. broker-dealers totaling approximately
$86.2 million
.
The Company is obligated to settle transactions with brokers and other financial institutions even if its clients fail to meet their obligations to the Company. Clients are required to complete their transactions on the settlement date, generally
one
to
two
business days after the trade date. If clients do not fulfill their contractual obligations, the Company may incur losses. The Company has clearing/participating arrangements with the National Securities Clearing Corporation, the Fixed Income Clearing Corporation ("FICC"), R.J. O'Brien & Associates (commodities transactions), Mortgage-Backed Securities Division (a division of FICC) and others. With respect to its business in reverse repurchase and repurchase agreements, substantially all open contracts as of
December 31, 2018
are with the FICC
.
In addition, the Company clears its non-U.S. international equities business carried on by Oppenheimer Europe Ltd. through Global Prime Partners, Ltd. The clearing organizations have the right to charge the Company for losses that result from a client's failure to fulfill its contractual obligations. Accordingly, the Company has credit exposures with these clearing brokers. The clearing brokers can re-hypothecate the securities held on behalf of the Company. As the right to charge the Company has no maximum amount and applies to all trades executed through the clearing brokers, the Company believes there is no maximum amount assignable to this right. As of
December 31, 2018
, the Company had recorded no liabilities with regard to this right. The Company's policy is to monitor the credit standing of the clearing brokers and banks with which it conducts business.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
8. Variable interest entities
The Company's policy is to consolidate all subsidiaries in which it has a controlling financial interest, as well as any VIEs where the Company is deemed to be the primary beneficiary, when it has the power to make the decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb significant losses or the right to receive benefits that could potentially be significant to the VIE.
For funds that the Company has concluded are not VIEs, the Company then evaluates whether the fund is a partnership or similar entity. If the fund is a partnership or similar entity, the Company evaluates the fund under the partnership consolidation guidance. Pursuant to that guidance, the Company consolidates funds in which it is the general partner, unless presumption of control by the Company can be overcome. This presumption is overcome only when unrelated investors in the fund have the substantive ability to liquidate the fund or otherwise remove the Company as the general partner without cause, based on a simple majority vote of unaffiliated investors, or have other substantive participating rights. If the presumption of control can be overcome, the Company accounts for its interest in the fund pursuant to the equity method of accounting.
The Company serves as general partner of hedge funds and private equity funds that were established for the purpose of providing investment alternatives to both its institutional and qualified retail clients. The Company holds variable interests in these funds as a result of its right to receive management and incentive fees. The Company's investment in and additional capital commitments to these hedge funds and private equity funds are also considered variable interests. The Company's additional capital commitments are subject to call at a later date and are limited to the amount committed.
The Company assesses whether it is the primary beneficiary of the hedge funds and private equity funds in which it holds a variable interest in the form of general and limited partner interests. In each instance, the Company has determined that it is not the primary beneficiary and therefore need not consolidate the hedge funds or private equity funds. The subsidiaries' general and limited partnership interests, additional capital commitments, and management fees receivable represent its maximum exposure to loss. The subsidiaries' general partnership and limited partnership interests and management fees receivable are included in other assets on the consolidated balance sheet.
The following tables set forth the total VIE assets, the carrying value of the subsidiaries' variable interests, and the Company's maximum exposure to loss in Company-sponsored non-consolidated VIEs in which the Company holds variable interests and other non-consolidated VIEs in which the Company holds variable interests as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
Total
VIE Assets
(1)
|
|
Carrying Value of the
Company's Variable Interest
|
|
Capital
Commitments
|
|
Maximum
Exposure
to Loss in
Non-consolidated
VIEs
|
|
|
Assets
(2)
|
|
Liabilities
|
|
|
Hedge funds
|
$
|
291,200
|
|
|
$
|
337
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
337
|
|
|
Private equity funds
|
7,454
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
Total
|
$
|
298,654
|
|
|
$
|
345
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
345
|
|
|
|
|
|
(1)
|
Represents the total assets of the VIEs and does not represent the Company's interests in the VIEs.
|
|
|
|
|
(2)
|
Represents the Company's interests in the VIEs and is included in other assets on the consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
Total
VIE Assets
(1)
|
|
Carrying Value of the
Company's Variable Interest
|
|
Capital
Commitments
|
|
Maximum
Exposure
to Loss in
Non-consolidated
VIEs
|
|
|
Assets
(2)
|
|
Liabilities
|
|
|
Hedge funds
|
$
|
328,172
|
|
|
$
|
713
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
713
|
|
|
Private equity funds
|
15,668
|
|
|
12
|
|
|
—
|
|
|
2
|
|
|
14
|
|
|
Total
|
$
|
343,840
|
|
|
$
|
725
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
727
|
|
|
|
|
|
(1)
|
Represents the total assets of the VIEs and does not represent the Company's interests in the VIEs.
|
|
|
|
|
(2)
|
Represents the Company's interests in the VIEs and is included in other assets on the consolidated balance sheet.
|
9. Furniture, equipment and leasehold improvements
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
Furniture, fixtures and equipment
|
$
|
57,482
|
|
|
$
|
53,260
|
|
|
Leasehold improvements
|
60,688
|
|
|
56,753
|
|
|
Total
|
118,170
|
|
|
110,013
|
|
|
Less accumulated depreciation
|
(89,182
|
)
|
|
(82,826
|
)
|
|
Total
|
$
|
28,988
|
|
|
$
|
27,187
|
|
Depreciation and amortization expense, included in occupancy and equipment costs in the consolidated statements of operations, was
$6.9 million
,
$5.7 million
and
$6.8 million
in the years ended
December 31, 2018
,
2017
and
2016
, respectively.
10. Bank call loans
Bank call loans, primarily payable on demand, bear interest at various rates but not exceeding the broker call rate, which was
4.25%
at
December 31, 2018
(
3.25%
at
December 31, 2017
). Details of the bank call loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands, except percentages)
|
|
|
|
|
|
2018
|
|
2017
|
|
Year-end balance
|
$
|
15,000
|
|
|
$
|
118,300
|
|
|
Weighted interest rate (at end of year)
|
3.43
|
%
|
|
2.25
|
%
|
|
Maximum balance (at any month-end)
|
161,800
|
|
|
230,400
|
|
|
Average amount outstanding (during the year)
|
53,271
|
|
|
123,918
|
|
|
Average interest rate (during the year)
|
2.66
|
%
|
|
2.08
|
%
|
Interest expense for the year ended
December 31, 2018
on bank call loans was
$1.4 million
(
$2.6 million
in
2017
and
$1.7 million
in
2016
).
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
11. Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
Issued
|
|
Maturity Date
|
|
December 31, 2018
|
|
December 31, 2017
|
|
6.75% Senior Secured Notes
|
|
7/1/2022
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
|
Unamortized Debt Issuance Cost
|
|
|
|
(904
|
)
|
|
(1,163
|
)
|
|
|
|
|
|
$
|
199,096
|
|
|
$
|
198,837
|
|
6.75% Senior Secured Notes
On
June 23, 2017
, the Parent issued in a private offering
$200.0 million
aggregate principal amount of
6.75%
Senior Secured Notes due 2022 (the "Unregistered Notes") under an indenture at an issue price of
100%
of the principal amount. On September 19, 2017, the Parent completed an exchange offer in which the Parent exchanged
99.8%
of its Unregistered Notes for a like principal amount of notes with identical terms except that such new notes have been registered under the Securities Act of 1933, as amended (the "Notes"). The Parent did not receive any proceeds in the exchange offer. Interest on the Notes is payable
semi-annually
on January 1st and July 1st, beginning January 1, 2018. On June 23, 2017, the Parent used a portion of the net proceeds from the offering of the Unregistered Notes to redeem in full its
8.75%
Senior Secured Notes due April 15, 2018 (the "Old Notes") in the principal amount of
$120.0 million
, and pay all fees and expenses related thereto. The cost to issue the Notes was
$4.3 million
, of which
$3.0 million
was paid to its subsidiary, Oppenheimer, who served as the initial purchaser of the offering, and was eliminated in consolidation. The Company capitalized the remaining
$1.3 million
and will amortize it over the term of the Notes.
The indenture governing the Notes contains covenants that place restrictions on the incurrence of indebtedness, the payment of dividends, the repurchase of equity, the sale of assets, mergers and acquisitions and the granting of liens. Pursuant to the indenture governing the Notes, the Parent is restricted from paying any dividend or making any payment or distribution on account of its equity interests unless, among other things, (i) the dividend, payment or distribution (together with all other such dividends, payments or distributions made since July 1, 2017) is less than an amount calculated based in part on the Consolidated Adjusted Net Income (as defined in the indenture governing the Notes) of the Parent and its restricted and regulated subsidiaries since July 1, 2017, or (ii) the dividend, payment or distribution fits within one or more exceptions, including:
|
|
|
|
•
|
it is less than
$20 million
in any fiscal year; or
|
|
|
|
|
•
|
when combined with all other Restricted Payments (as defined in the indenture governing the Notes) that rely upon this exception, it does not exceed
$10 million
.
|
The Notes provide for events of default including, among other things, nonpayment, breach of covenants and bankruptcy. The Parent's obligations under the Notes are guaranteed by certain of the Parent's subsidiaries and are secured by a first-priority security interest in substantially all of the assets of the Parent and the subsidiary's guarantors. These guarantees and the collateral may be shared, on a pari passu basis, under certain circumstances, with debt incurred. As of
December 31, 2018
, the Parent was in compliance with all of its covenants.
Interest expense for the year ended
December 31, 2018
and 2017 on the Notes was
$13.5 million
and
$7.0 million
, respectively. Interest paid on the Notes for the year ended December 31, 2018 was
$13.8 million
($
nil
in 2017).
8.75% Senior Secured Notes
On April 12, 2011, the Parent issued in a private offering
$200.0 million
in aggregate principal amount of Old Notes at an issue price of
100%
of the principal amount. Interest on the Old Notes was payable
semi-annually
on April 15th and October 15th. On April 15, 2014, the Parent retired early
$50.0 million
of the Old Notes.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
The indenture for the Old Notes contained covenants, with which the Company was in compliance during 2017.
On April 15, 2017, the Parent used the net proceeds from the asset sales of OMHHF to finance the redemption of
$30.0 million
aggregate principal amount of the Old Notes at a redemption price equal to
100%
of the principal, plus accrued and unpaid interest.
On June 23, 2017, the Parent used a portion of the net proceeds from the offering of the Notes to redeem in full its Old Notes in the principal amount of
$120.0 million
and to satisfy and discharge all of its obligations under the indenture governing the Old Notes (the "
8.75%
Notes Indenture").
In connection with the satisfaction and discharge of the
8.75%
Notes Indenture, all of the obligations of the Parent and the subsidiary guarantors (other than certain customary provisions of the
8.75%
Notes Indenture, including those relating to the compensation and indemnification of the trustee that expressly survive pursuant to the terms of the
8.75%
Notes Indenture) were discharged and the guarantees of the subsidiary guarantors and the liens on the collateral securing the Old Notes were released on June 23, 2017.
Interest expense for the year ended December 31, 2017 on the Old Notes was
$6.7 million
(
$13.1 million
in
2016
). Interest paid on the Old Notes for the year ended December 31, 2017 was
$9.4 million
(
$13.1 million
in 2016).
12. Share capital
The Company's authorized share capital consists of (a)
50,000,000
shares of Preferred Stock, par value
$0.001
per share; (b)
50,000,000
shares of Class A Stock, par value
$0.001
per share; and (c)
99,665
shares of Class B Stock, par value
$0.001
per share.
No
Preferred Stock has been issued.
99,665
shares of Class B Stock have been issued and are outstanding.
The Class A Stock and the Class B Stock are equal in all respects except that the Class A Stock is non-voting.
The following table reflects changes in the number of shares of Class A Stock outstanding for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Class A Stock outstanding, beginning of year
|
13,139,203
|
|
|
13,261,095
|
|
|
Issued pursuant to share-based compensation plans (note 15)
|
38,728
|
|
|
328,458
|
|
|
Repurchased and canceled pursuant to the stock buy-back
|
(236,122
|
)
|
|
(450,350
|
)
|
|
Class A Stock outstanding, end of year
|
12,941,809
|
|
|
13,139,203
|
|
Stock buy-back
On May 5, 2017, the Company announced that its board of directors approved a share repurchase program that authorizes the Company to purchase up to
650,000
shares of the Company's Class A Stock, representing approximately
5%
of its
13,178,571
then issued and outstanding shares of Class A Stock. This authorization supplemented the
40,734
shares that remained authorized and available under the Company's previous share repurchase program covering up to
665,000
shares of the Company's Class A Stock, which was announced on September 15, 2015, for a total of
690,734
shares authorized and available for repurchase. As of January 1, 2018, 508,906 shares were available to be purchased under this program.
During the year ended
December 31, 2018
, the Company purchased and canceled an aggregate of
236,122
shares of Class A Stock for a total consideration of
$5.9 million
(
$24.96
per share). As of
December 31, 2018
,
272,784
shares remained available to be purchased under this program.
Any such share repurchases will be made by the Company from time to time in the open market at the prevailing open market price using cash on hand, in compliance with the applicable rules and regulations of the New York Stock Exchange and federal and state securities laws and the terms of the Company's senior secured debt. The Company will cancel all of the shares repurchased.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
The Company expects to continue the share repurchase program indefinitely. The Company will base the timing and amounts of any purchases on market conditions and other factors including price, regulatory requirements and capital availability. The share repurchase program does not obligate the Company to repurchase any dollar amount or number of shares of Class A Stock. Depending on market conditions and other factors, the Company may commence or suspend repurchases from time to time without notice.
Dividends
The Company paid cash dividends of
$0.44
per share to holders of Class A and Class B Stock in
2018
,
2017
and
2016
.
13. 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 the 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 Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Basic weighted average number of shares outstanding
|
13,248,876
|
|
|
13,246,423
|
|
|
13,368,768
|
|
|
Net dilutive effect of share-based awards, treasury method
(1)
|
812,493
|
|
|
426,938
|
|
|
—
|
|
|
Diluted weighted average number of shares outstanding
|
14,061,369
|
|
|
13,673,361
|
|
|
13,368,768
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
$
|
28,876
|
|
|
$
|
21,870
|
|
|
$
|
(9,630
|
)
|
|
Net income from discontinued operations
|
—
|
|
|
1,130
|
|
|
10,121
|
|
|
Net income
|
28,876
|
|
|
23,000
|
|
|
491
|
|
|
Net income (loss) attributable to non-controlling interest, net of tax
|
(16
|
)
|
|
184
|
|
|
1,652
|
|
|
Net income (loss) attributable to Oppenheimer Holdings Inc.
|
$
|
28,892
|
|
|
$
|
22,816
|
|
|
$
|
(1,161
|
)
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share attributable to Oppenheimer Holdings Inc.
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.18
|
|
|
$
|
1.65
|
|
|
$
|
(0.72
|
)
|
|
Discontinued operations
(2)
|
—
|
|
|
0.07
|
|
|
0.63
|
|
|
Net income (loss) per share
|
$
|
2.18
|
|
|
$
|
1.72
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share attributable to Oppenheimer Holdings Inc.
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.05
|
|
|
$
|
1.60
|
|
|
$
|
(0.72
|
)
|
|
Discontinued operations
(2)
|
—
|
|
|
0.07
|
|
|
0.63
|
|
|
Net income (loss) per share
|
$
|
2.05
|
|
|
$
|
1.67
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
(1)
|
For the year ended
December 31, 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 (
10,592
and
1,237,134
shares for the years ended December 31,
2017
and
2016
, respectively).
|
|
|
|
|
(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.
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
14. Income taxes
Income taxes from continuing operations shown in the consolidated statements of operations are reconciled to amounts of tax that would have been payable (recoverable) from the application of the federal tax rate to pre-tax profit, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
Amount
|
|
Percentage
|
|
Amount
|
|
Percentage
|
|
Amount
|
|
Percentage
|
|
U.S. federal statutory income tax rate
|
$
|
9,419
|
|
|
21.0
|
%
|
|
$
|
6,907
|
|
|
35.0
|
%
|
|
$
|
(7,662
|
)
|
|
35.0
|
%
|
|
U.S. state and local income taxes, net of U.S. federal income tax benefits
|
3,144
|
|
|
7.0
|
%
|
|
1,430
|
|
|
7.2
|
%
|
|
(1,075
|
)
|
|
4.9
|
%
|
|
Unrecognized tax benefit
|
—
|
|
|
—
|
%
|
|
(9
|
)
|
|
—
|
%
|
|
(603
|
)
|
|
2.8
|
%
|
|
Valuation allowance
|
1,833
|
|
|
4.1
|
%
|
|
89
|
|
|
0.5
|
%
|
|
1,208
|
|
|
-5.5
|
%
|
|
Non-taxable income
|
(637
|
)
|
|
-1.4
|
%
|
|
(1,055
|
)
|
|
-5.3
|
%
|
|
(1,267
|
)
|
|
5.8
|
%
|
|
Provision to return adjustments
|
(326
|
)
|
|
-0.7
|
%
|
|
(1,277
|
)
|
|
-6.5
|
%
|
|
(4,167
|
)
|
|
19.0
|
%
|
|
Impact of the TCJA
|
—
|
|
|
—
|
%
|
|
(9,013
|
)
|
|
-45.7
|
%
|
|
—
|
|
|
—
|
%
|
|
Change in state and foreign tax rates
|
267
|
|
|
0.6
|
%
|
|
(353
|
)
|
|
-1.8
|
%
|
|
264
|
|
|
-1.2
|
%
|
|
Foreign tax rate differentials
|
112
|
|
|
0.2
|
%
|
|
974
|
|
|
4.9
|
%
|
|
143
|
|
|
-0.7
|
%
|
|
Excess tax benefits from share-based awards
|
(81
|
)
|
|
-0.2
|
%
|
|
(493
|
)
|
|
-2.5
|
%
|
|
—
|
|
|
—
|
%
|
|
Other non-deductible expenses
|
2,246
|
|
|
5.0
|
%
|
|
666
|
|
|
3.4
|
%
|
|
897
|
|
|
-4.1
|
%
|
|
Total income taxes
|
$
|
15,977
|
|
|
35.6
|
%
|
|
$
|
(2,134
|
)
|
|
-10.8
|
%
|
|
$
|
(12,262
|
)
|
|
56.0
|
%
|
Income taxes from continuing operations included in the consolidated statements of operations represent the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
U.S. federal tax (benefit)
|
$
|
10,355
|
|
|
$
|
506
|
|
|
$
|
(15,433
|
)
|
|
State and local tax (benefit)
|
2,618
|
|
|
(1,326
|
)
|
|
(4,631
|
)
|
|
Non-U.S. operations
|
231
|
|
|
144
|
|
|
46
|
|
|
Total Current
|
13,204
|
|
|
(676
|
)
|
|
(20,018
|
)
|
|
Deferred:
|
|
|
|
|
|
|
U.S. federal tax (benefit)
|
395
|
|
|
(1,215
|
)
|
|
5,856
|
|
|
State and local tax
|
1,438
|
|
|
1,725
|
|
|
617
|
|
|
Non-U.S. operations
|
940
|
|
|
(1,968
|
)
|
|
1,283
|
|
|
Total Deferred
|
2,773
|
|
|
(1,458
|
)
|
|
7,756
|
|
|
Total
|
$
|
15,977
|
|
|
$
|
(2,134
|
)
|
|
$
|
(12,262
|
)
|
Loss before income taxes from continuing operations with respect to Non-U.S. operations was
$4.0 million
,
$8.5 million
and
$965,000
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
The effective income tax rate from continuing operations for the year ended
December 31, 2018
was
35.6%
compared with
10.8%
(benefit) for the year ended December 31,
2017
. The effective tax rate for the year ended December 31, 2018 benefited due to the Federal tax rate of 21% (versus 35% in prior years) as a result of the enactment of the TCJA in December 2017 offset by a detriment from the establishment of a valuation allowance for the deferred tax asset related to net operating losses of the Company's operations in Europe as well as larger non-deductible expenses related to items such as entertainment, fringe benefits, regulatory fines and penalties, and limitations around the deductibility of executive compensation under the TCJA. The effective income tax rate for the year ended December 31, 2017 was positively impacted by the estimated impact of the TCJA which resulted in a net discrete after-tax benefit of
$9.0 million
. The net discrete after-tax benefit was comprised of a benefit of
$29.0 million
related to the re-measurement of deferred tax liabilities offset by a detriment of
$19.6 million
related to the re-measurement of deferred tax assets as well as a detriment of
$0.4 million
related to miscellaneous nondeductible items.
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when such differences are expected to reverse. Significant components of the Company's deferred tax assets and liabilities from continuing operations as of
December 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
Deferred compensation
|
$
|
18,909
|
|
|
$
|
19,105
|
|
|
Deferred rent and lease incentives
|
9,597
|
|
|
10,303
|
|
|
Net operating losses and credits
|
7,071
|
|
|
10,535
|
|
|
Receivable reserves
|
2,350
|
|
|
2,663
|
|
|
Accrued expenses
|
2,863
|
|
|
1,104
|
|
|
Auction rate securities reserves
|
1,007
|
|
|
540
|
|
|
Involuntary conversion
|
1,692
|
|
|
1,670
|
|
|
Depreciation
|
370
|
|
|
500
|
|
|
Other
|
1,067
|
|
|
1,177
|
|
|
Total deferred tax assets
|
44,926
|
|
|
47,597
|
|
|
Valuation allowance
|
3,204
|
|
|
1,350
|
|
|
Deferred tax assets after valuation allowance
|
41,722
|
|
|
46,247
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Goodwill
|
41,049
|
|
|
40,534
|
|
|
Partnership investments
|
8,227
|
|
|
9,184
|
|
|
Company-owned life insurance
|
6,277
|
|
|
7,426
|
|
|
Other
|
252
|
|
|
195
|
|
|
Total deferred tax liabilities
|
55,805
|
|
|
57,339
|
|
|
Deferred tax liabilities, net
|
$
|
(14,083
|
)
|
|
$
|
(11,092
|
)
|
The Company has deferred tax assets at
December 31, 2018
of
$2.5 million
arising from net operating losses incurred by Oppenheimer Israel (OPCO) Ltd. The Company believes that realization of the deferred tax assets is more likely than not based on expectations of future taxable income in Israel. These net operating losses carry forward indefinitely and are not subject to expiration, provided that these subsidiaries and their underlying businesses continue operating normally (as is anticipated). During the year ended December 31, 2018, the Company recorded a valuation allowance of
$1.8
million against the deferred tax asset related to the net operating losses incurred by Oppenheimer Europe Ltd.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Goodwill arising from the acquisitions of Josephthal Group Inc. and the Oppenheimer Divisions is being amortized for tax purposes on a straight-line basis over
15
years. The difference between book and tax is recorded as a deferred tax liability. As of December 31, 2017, the
15
year amortization period ended.
The Company or one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various states and foreign jurisdictions. The Company has closed tax years through 2014 in the U.S. federal jurisdiction.
The Company is under examination in various states in which the Company has significant business operations. The Company has closed tax years through 2010 for New York State and is currently under exam for the
2011
to
2014
tax years. The Company also has closed tax years through 2008 with New York City and is currently under exam for the
2009
to
2012
tax years. With the exception of New York State and City, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2015.
The Company has unrecognized tax benefits of
$1.1 million
,
$1.1 million
and
$1.1 million
as of
December 31, 2018
,
2017
and
2016
, respectively, from continuing operations (as shown on the table below). Included in the balance of unrecognized tax benefits as of
December 31, 2018
and
2017
are
$853,000
and
$853,000
of tax benefits for either year that, if recognized, would affect the effective tax rate.
During the year ended
December 31, 2018
, the Company did not record any changes in unrecognized tax benefit. The Company does not believe any unrecognized tax benefit will significantly increase or decrease within twelve months. A reconciliation of the beginning and ending amount of unrecognized tax benefit follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Balance at beginning of year
|
$
|
1,079
|
|
|
$
|
1,088
|
|
|
$
|
2,490
|
|
|
Additions for tax positions of prior years
|
—
|
|
|
—
|
|
|
98
|
|
|
Lapse in statute of limitations
|
—
|
|
|
(9
|
)
|
|
(652
|
)
|
|
Settlements with taxing authorities
|
—
|
|
|
—
|
|
|
(848
|
)
|
|
Balance at end of year
|
$
|
1,079
|
|
|
$
|
1,079
|
|
|
$
|
1,088
|
|
In its consolidated statements of operations, the Company records interest and penalties accruing on unrecognized tax benefits in income (loss) before income taxes as interest expense and other expense, respectively. For the year ended
December 31, 2018
, the Company recorded tax-related interest expense of
$113,000
in its consolidated statement of operations. For the year ended December 31,
2017
, the Company recorded tax-related interest expense of
$231,000
in its consolidated statement of operations. As of
December 31, 2018
and
2017
, the Company had an income tax-related interest payable of
$345,000
and
$232,000
, respectively, on its consolidated balance sheets.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
15. Employee compensation plans
The Company maintains various employee compensation plans for the benefits of its employees.
Two
types of employee compensation are granted under share-based compensation and cash-based compensation plans.
Share-based Compensation
Oppenheimer Holdings Inc. 2014 Incentive Plan
On February 26, 2014, the Company adopted the Oppenheimer Holdings Inc. 2014 Incentive Plan (the "OIP"). Pursuant to the OIP, the Compensation Committee of the Board of Directors of the Company (the "Committee") is permitted to grant
options to purchase Class A Stock ("stock options"), Class A Stock awards and restricted Class A Stock (collectively "restricted stock awards") to or for the benefit of employees and non-employee directors of the Company and its subsidiaries as part of their compensation. Stock o
ptions are generally granted for
five
-year term and generally vest at the rate of
25%
of the amount granted on the second anniversary of the grant,
25%
on the third anniversary of the grant,
25%
on the fourth anniversary of the grant and
25%
six months
before expiration. Restricted stock awards are generally awarded for a
three
or
five
year term and fully vest at the end of the term.
Oppenheimer Holdings Inc. Stock Appreciation Right Plan
Under the Oppenheimer Holdings Inc. Stock Appreciation Right Plan, the Company awards stock appreciation rights ("OARs") to certain employees as part of their compensation package based on a formula reflecting gross production and length of service. These awards are granted once per year in January with respect to the prior year's production. The OARs vest
five
years from grant date and settle in cash at vesting.
Restricted stock
- The Company has granted restricted stock awards pursuant to the OIP. The following table summarizes the status of the Company's non-vested restricted Class A Stock awards under the OIP for the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Class
A Shares
Subject to
Restricted Stock Awards
|
|
Weighted
Average Fair
Value
|
|
Remaining
Contractual
Life
|
|
Nonvested at beginning of year
|
1,067,296
|
|
|
$
|
16.34
|
|
|
2.2 Years
|
|
|
Granted
|
333,959
|
|
|
25.96
|
|
|
3.0 Years
|
|
|
Vested
|
(39,465
|
)
|
|
19.54
|
|
|
—
|
|
|
Forfeited
|
(72,566
|
)
|
|
16.54
|
|
|
—
|
|
|
Nonvested at end of year
|
1,289,224
|
|
|
$
|
18.72
|
|
|
1.8 Years
|
|
As of
December 31, 2018
, all outstanding restricted Class A Stock awards were non-vested. The aggregate intrinsic value of restricted Class A Stock awards outstanding as of
December 31, 2018
was
$32.9 million
. During the year ended
December 31, 2018
, the Company included
$6.0 million
(
$5.6 million
in
2017
and
$5.2 million
in
2016
) of compensation expense in its consolidated statement of operations relating to restricted Class A Stock awards.
As of
December 31, 2018
, there was
$11.2 million
of total unrecognized compensation cost related to unvested restricted Class A Stock awards. The cost is expected to be recognized over a weighted average period of
1.8
years.
As of
December 31, 2018
, the number of shares of Class A Stock available under the share-based compensation plans, but not yet awarded, was
811,937
.
On January 31, 2019, the Company awarded a total of
359,208
restricted shares of Class A Stock to current employees pursuant to the OIP. Of these restricted shares,
153,818
shares will cliff vest in
three
years and
205,390
shares will cliff vest in
five
years. These awards will be expensed over the applicable
three
or
five
year vesting period.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Stock options
- The Company has granted stock options pursuant to the OIP. There were
15,573
and
14,499
options outstanding as of
December 31, 2018
and
2017
, respectively.
In the year ended
December 31, 2018
, the Company included
$26,500
(
$25,700
in
2017
and
$19,900
in
2016
) of compensation expense in its consolidated statement of operations relating to the expensing of stock options.
On January 31, 2019, the Company awarded a total of
3,578
options to purchase Class A Stock to current employees pursuant to the OIP. These options will be expensed over
4.5
years (the vesting period).
OARs
- The Company has awarded OARs pursuant to the Oppenheimer Holdings Inc. Stock Appreciation Right Plan. The following table summarizes the status of the Company's outstanding OARs awards as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Number of
OARs
Outstanding
|
|
Strike Price
|
|
Remaining
Contractual
Life
|
|
Fair Value as of December 31, 2018
|
|
January 14, 2014
|
|
378,460
|
|
|
$
|
23.48
|
|
|
13 Days
|
|
$
|
2.11
|
|
|
January 9, 2015
|
|
428,920
|
|
|
21.94
|
|
|
1 Year
|
|
4.87
|
|
|
January 6, 2016
|
|
425,900
|
|
|
15.89
|
|
|
2 Years
|
|
9.90
|
|
|
January 6, 2017
|
|
409,660
|
|
|
18.90
|
|
|
3 Years
|
|
8.32
|
|
|
January 5, 2018
|
|
482,720
|
|
|
27.05
|
|
|
4 Years
|
|
5.96
|
|
|
|
|
2,125,660
|
|
|
|
|
|
|
|
|
Total weighted average values
|
|
|
|
$
|
21.58
|
|
|
2.1 Years
|
|
$
|
6.30
|
|
The fair value as of
December 31, 2018
for each of the OARs was estimated using the Black-Scholes model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
January 14, 2014
|
|
January 9, 2015
|
|
January 6, 2016
|
|
January 6, 2017
|
|
January 5, 2018
|
|
Expected term
(1)
|
|
13 Days
|
|
|
1 Year
|
|
|
2 Years
|
|
|
3 Years
|
|
|
4 Years
|
|
|
Expected volatility factor
(2)
|
|
28.2
|
%
|
|
27.6
|
%
|
|
26.7
|
%
|
|
29.0
|
%
|
|
33.0
|
%
|
|
Risk-free interest rate
(3)
|
|
1.2
|
%
|
|
2.6
|
%
|
|
2.5
|
%
|
|
2.5
|
%
|
|
2.5
|
%
|
|
Actual dividends
(4)
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
|
|
|
(1)
|
The expected term was determined based on the remaining life of the actual awards.
|
|
|
|
|
(2)
|
The volatility factor was measured using the weighted average of historical daily price changes of the Company's Class A Stock over a historical period commensurate to the expected term of the awards.
|
|
|
|
|
(3)
|
The risk-free interest rate was based on periods equal to the expected term of the awards based on the U.S. Treasury yield curve in effect at
December 31, 2018
.
|
|
|
|
|
(4)
|
Actual dividends were used to compute the expected annual dividend yield.
|
As of
December 31, 2018
,
2,125,660
of outstanding OARs were unvested and
nil
were vested. As of
December 31, 2018
, the aggregate intrinsic value of OARs outstanding was
$9.2 million
. In the year ended
December 31, 2018
, the Company included
$650,000
(
$6.9 million
in
2017
and
$1.0 million
in
2016
) in compensation expense in its consolidated statement of operations relating to OARs awards. The liability related to the OARs was
$6.9 million
as of
December 31, 2018
.
As of
December 31, 2018
, there was
$6.5 million
of total unrecognized compensation cost related to unvested OARs. The cost is expected to be recognized over a weighted average period of
2.1
years.
On January 11, 2019,
560,156
OARs were awarded to Oppenheimer employees related to fiscal
2018
performance. These OARs will be expensed over
5
years (the vesting period).
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
Cash-based Compensation Plan
Defined Contribution Plan
The Company, through its subsidiaries, maintains a defined contribution plan covering substantially all full-time U.S. employees. The Oppenheimer & Co. Inc. 401(k) Plan provides that Oppenheimer may make discretionary contributions. Eligible Oppenheimer employees could make voluntary contributions which could not exceed
$18,500
,
18,000
and
18,000
per annum in
2018
,
2017
and
2016
, respectively. The Company made contributions to the 401(k) Plan of
$1.8 million
,
$1.5 million
and
$1.3 million
in
2018
,
2017
and
2016
, respectively.
Deferred Compensation Plans
The Company maintains an Executive Deferred Compensation Plan ("EDCP") and a Deferred Incentive Plan ("DIP") in order to offer certain qualified high-performing financial advisers a bonus based upon a formula reflecting years of service, production, net commissions and a valuation of their clients' assets. The bonus amounts resulted in deferrals in fiscal
2018
of
$9.4 million
(
$8.2 million
in
2017
and
$7.7 million
in
2016
). These deferrals normally vest after
five
years. The liability is being recognized on a straight-line basis over the vesting period. The EDCP also includes voluntary deferrals by senior executives that are not subject to vesting. The Company maintains a Company-owned life insurance policy, which is designed to offset approximately
60%
of the EDCP liability. The EDCP liability is being tracked against the value of a benchmark investment portfolio held for this purpose. As of
December 31, 2018
, the Company's liability with respect to the EDCP and DIP totaled
$46.5 million
and is included in accrued compensation on the consolidated balance sheet as of
December 31, 2018
.
In addition, the Company is maintaining a deferred compensation plan on behalf of certain employees who were formerly employed by CIBC World Markets. The liability is being tracked against the value of an investment portfolio held by the Company for this purpose and, therefore, the liability fluctuates with the fair value of the underlying portfolio. As of
December 31, 2018
, the Company's liability with respect to this plan totaled
$15.6 million
.
The total amount expensed in
2018
for the Company's deferred compensation plans was
$6.1 million
(
$17.1 million
in
2017
and
$11.8 million
in
2016
).
16. Commitments and contingencies
Commitments
The Company and its subsidiaries have operating leases for office space, equipment and furniture and fixtures expiring at various dates through
2034
. Future minimum rental commitments under such office and equipment leases as of
December 31, 2018
are as follows:
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
2019
|
$
|
39,684
|
|
|
2020
|
36,851
|
|
|
2021
|
32,858
|
|
|
2022
|
29,604
|
|
|
2023
|
27,356
|
|
|
2024 and thereafter
|
114,256
|
|
|
|
$
|
280,609
|
|
The above table includes operating leases which have been signed by the Company's subsidiary, Viner Finance Inc., in which the Company is responsible for rent charges associated with its occupancy.
Certain of the leases contain provisions for rent increases based on changes in costs incurred by the lessor.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
The Company's rent expense for the year ended
December 31, 2018
was
$44.7 million
(
$45.6 million
in
2017
and
$44.4 million
in
2016
).
As of
December 31, 2018
, the Company had capital commitments of
$1.4 million
with respect to unfunded obligations in private equity funds sponsored by the Company.
As of
December 31, 2018
, the Company had no collateralized or uncollateralized letters of credit outstanding.
Contingencies
Many aspects of the Company's business involve substantial risks of liability. In the normal course of business, the Company has been named as defendant or co-defendant in various legal actions, including arbitrations, class actions and other litigation, creating substantial exposure and periodic expenses. Certain of the actual or threatened legal matters include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. These proceedings arise primarily from securities brokerage, asset management and investment banking activities. The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company's business, which may result in expenses, adverse judgments, settlements, fines, penalties, injunctions or other relief. The investigations include inquiries from the Securities and Exchange Commission (the "SEC"), the Financial Industry Regulatory Authority ("FINRA") and various state regulators.
The Company accrues for estimated loss contingencies related to legal and regulatory matters when available information indicates that it is probable a liability had been incurred and the Company can reasonably estimate the amount of that loss. In many proceedings, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. In addition, even where a loss is possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is often not possible to reasonably estimate the size of the possible loss or range of loss or possible additional losses or range of additional losses.
For certain legal and regulatory proceedings, the Company cannot reasonably estimate such losses, particularly for proceedings that are in their early stages of development or where plaintiffs seek substantial, indeterminate or special damages. Counsel may be required to review, analyze and resolve numerous issues, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before the Company can reasonably estimate a loss or range of loss or additional loss for the proceeding. Even after lengthy review and analysis, the Company, in many legal and regulatory proceedings, may not be able to reasonably estimate possible losses or range of loss.
For certain other legal and regulatory proceedings, the Company can estimate possible losses, or range of loss in excess of amounts accrued, but does not believe, based on current knowledge and after consultation with counsel, that such losses individually, or in the aggregate, will have a material adverse effect on the Company's consolidated financial statements as a whole.
For legal and regulatory proceedings where there is at least a reasonable possibility that a loss or an additional loss may be incurred, the Company estimates a range of aggregate loss in excess of amounts accrued of
$0
to
$30.0 million
. This estimated aggregate range is based upon currently available information for those legal proceedings in which the Company is involved, where the Company can make an estimate for such losses. For certain cases, the Company does not believe that it can make an estimate. The foregoing aggregate estimate is based on various factors, including the varying stages of the proceedings (including the fact that many are currently in preliminary stages), the numerous yet-unresolved issues in many of the proceedings and the attendant uncertainty of the various potential outcomes of such proceedings. Accordingly, the Company's estimate will change from time to time, and actual losses may be more than the current estimate.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
In February 2010, Oppenheimer finalized settlements with 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
December 31, 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
December 31, 2018
, the Company purchased and holds (net of redemptions) approximately
$40.7 million
in ARS from its clients. In addition, the Company is committed to purchase another
$7.3 million
in ARS from clients through 2020 under legal settlements and awards.
The Company's purchases of ARS from its clients holding ARS eligible for repurchase will, subject to the terms and conditions of the settlements with the Regulators, continue on a periodic basis. Pursuant to these terms and conditions, the Company is required to conduct a financial review every
six
months, until the Company has extended Purchase Offers to all Eligible Investors (as defined), to determine whether it has funds available, after giving effect to the financial and regulatory capital constraints applicable to the Company, to extend additional Purchase Offers. There are no predetermined quantitative thresholds or formulas used for determining the final agreed upon amount for the Purchase Offers. Upon completion of the financial review, the Company first meets with its primary regulator, FINRA, and then with representatives of the NYAG and other regulators to present the results of the review and to finalize the amount of the next Purchase Offer and discuss offer scenarios in terms of which Eligible Investors should receive a Purchase Offer. Once various Purchase Offer scenarios have been discussed, the regulators, not the Company, make the final determination of which Purchase Offer scenario to implement. The terms of the settlements provide that the amount of ARS to be purchased during any period shall not risk placing the Company in violation of regulatory requirements.
Eligible Investors for future buybacks continued to hold approximately
$7.5 million
of ARS principal value as of
December 31, 2018
. It is reasonably possible that some ARS Purchase Offers will need to be extended to Eligible Investors holding ARS prior to redemptions (or tender offers) by issuers of the full amount that remains outstanding. The potential additional losses that may result from entering into ARS purchase commitments with Eligible Investors for future buybacks represent the estimated difference between the principal value and the fair value. It is possible that the Company could sustain a loss of all or substantially all of the principal value of ARS still held by Eligible Investors but such an outcome is highly unlikely. The amount of potential additional losses resulting from entering into these commitments cannot be reasonably estimated due to the uncertainties surrounding the amounts and timing of future buybacks that result from the six-month financial review and the amounts, scope, and timing of future issuer redemptions and tender offers of ARS held by Eligible Investors. The range of potential additional losses related to valuation adjustments is between
$0
and the amount of the estimated differential between the principal value and the fair value of ARS held by Eligible Investors for future buybacks that were not yet purchased or committed to be purchased by the Company at any point in time. The range of potential additional losses described here is not included in the estimated range of aggregate loss in excess of amounts accrued for legal and regulatory proceedings described above.
Outside of the settlements with the Regulators, the Company has also reached various legal settlements with clients. As of
December 31, 2018
, there were no ARS purchase commitments related to legal settlements extending past 2020.
Since August 2014, Oppenheimer has been responding to information requests from the SEC regarding the supervision of one of its former financial advisers who was indicted by the United States Attorney's Office for the District of New Jersey in March 2014 on allegations of insider trading. Oppenheimer is continuing to cooperate with the SEC inquiry.
Since September 2016, Oppenheimer has been responding to information requests from FINRA (including from FINRA's Enforcement Department) regarding the supervision of Oppenheimer's sale of unit investment trusts from 2011 to 2015. The inquiry is part of a larger targeted examination or "sweep" examination involving many other brokerage firms. Oppenheimer is continuing to cooperate with the FINRA inquiry.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
On February 12, 2018, the SEC Division of Enforcement ("Enforcement Division") announced the Share Class Selection Disclosure Initiative ("SCSD Initiative") pursuant to which investment advisers were encouraged to self-report possible securities laws violations relating to the failure to make certain disclosures concerning mutual fund share class selection. On June 11, 2018, Oppenheimer and OAM notified the Enforcement Division that it intended to participate in the SCSD Initiative. Oppenheimer and OAM filed the information required by the SCSD Initiative on September 19, 2018. On February 7, 2019, Oppenheimer (and its affiliate Oppenheimer Asset Management, collectively “Oppenheimer”) filed an Offer of Settlement with the SEC (the “Offer”) pursuant to which Oppenheimer offered to disgorge approximately
$3.5 million
(the “Disgorgement Amount”) (including pre-judgment interest) of 12b-1 fees and agree to certain undertakings including the following: (i) within 30 days of the entry of an SEC Order, review and correct as necessary all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees; (ii) within 30 days of the entry of an SEC Order, evaluate whether existing clients should be moved to a lower-cost share class and move clients as necessary; (iii) within 30 days of the entry of an SEC Order, evaluate, update (if necessary), and review for the effectiveness of their implementation, Oppenheimer’s policies and procedures so that they are reasonably designed to prevent violations of the Investment Advisers Act in connection with disclosures regarding mutual fund share class selection; (iv) within 30 days of the entry of an SEC Order, notify affected investors (i.e., those former and current clients who, during the relevant period of inadequate disclosure, purchased or held 12b-1 fee paying share class mutual funds when a lower-cost share class of the same fund was available to the client) of the settlement terms of the Order in a clear and conspicuous fashion; and (v) within 40 days of the entry of an SEC Order, certify, in writing, compliance with the undertaking(s) set forth above. Oppenheimer is awaiting the entry of an SEC Order consistent with the above.
|
|
|
|
17.
|
Regulatory requirements
|
The Company's U.S. broker dealer subsidiaries, Oppenheimer and Freedom, are subject to the uniform net capital requirements of the SEC under Rule 15c3-1 (the "Rule") promulgated under the Securities Exchange Act of 1934. Oppenheimer computes its net capital requirements under the alternative method provided for in the Rule which requires that Oppenheimer maintain net capital equal to
two
percent of aggregate customer-related debit items, as defined in SEC Rule 15c3-3. As of
December 31, 2018
, the net capital of Oppenheimer as calculated under the Rule was
$194.5 million
or
20.86%
of Oppenheimer's aggregate debit items. This was
$175.8 million
in excess of the minimum required net capital at that date. Freedom computes its net capital requirement under the basic method provided for in the Rule, which requires that Freedom maintain net capital equal to the greater of
$100,000
or 6-2/3% of aggregate indebtedness, as defined. As of
December 31, 2018
, Freedom had net capital of
$5.3 million
, which was
$5.2 million
in excess of the
$100,000
required to be maintained at that date.
As of
December 31, 2018
, the capital required and held under the Capital Requirements Directive ("CRD IV") for Oppenheimer Europe Ltd. was as follows:
|
|
|
|
•
|
Common Equity Tier 1 ratio
13.37%
(required
4.5%
);
|
|
|
|
|
•
|
Tier 1 Capital ratio
13.37%
(required
6.0%
); and
|
|
|
|
|
•
|
Total Capital ratio
13.65%
(required
8.0%
).
|
In December 2017, Oppenheimer Europe Ltd. received approval from the Financial Conduct Authority ("FCA") for a variation of permission to remove the limitation of "matched principal business" from the firm's scope of permitted businesses and become a "Full-Scope Prudential Sourcebook for Investment Firms (IFPRU) €730K" firm which was effective January 2018. In addition to the capital requirement under CRV IV above, Oppenheimer Europe Ltd. is required to maintain a minimum capital of EUR
730,000
. As of December 31, 2018, Oppenheimer Europe Ltd. is in compliance with its regulatory requirements.
As of
December 31, 2018
, the regulatory capital of Oppenheimer Investments Asia Limited was
$1.5 million
, which was
$1.1 million
in excess of the
$383,000
required to be maintained on that date. Oppenheimer Investments Asia Limited computes its regulatory capital pursuant to the requirements of the Securities and Futures Commission of Hong Kong.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
18. Goodwill and intangibles
Goodwill
The Company's goodwill of
$137.9 million
resides in its PCD reporting unit. The Company performed its annual test for goodwill impairment as of
December 31, 2018
and
2017
, which did not result in any impairment charges for either period. At each annual goodwill impairment testing date, the PCD reporting unit had a fair value that was substantially in excess of its carrying value.
Intangible Assets
Indefinite intangible assets are comprised of trademarks, trade names and an Internet domain name. These intangible assets carried at
$32.1 million
, which are not amortized, are subject to at least an annual test for impairment to determine if the estimated fair value is less than their carrying amount. Trademarks and trade names recorded as of
December 31, 2018
and
2017
have been tested for impairment and it has been determined that
no
impairment has occurred. At each annual intangible assets impairment testing date, the trademarks and trade names had a fair value that was substantially in excess of its carrying value.
19. Segment information
The Company has determined its reportable segments based on the Company's method of internal reporting, which disaggregates its retail business by branch and its proprietary and investment banking businesses by product. The Company evaluates the performance of its segments and allocates resources to them based upon profitability.
The Company's reportable segments are:
Private Client
— includes commissions and a proportionate amount of fee income earned on assets under management ("AUM"), net interest earnings on client margin loans and cash balances, fees from money market funds, custodian fees, net contributions from stock loan activities and financing activities, and direct expenses associated with this segment;
Asset Management
— includes a proportionate amount of fee income earned on AUM from investment management services of Oppenheimer Asset Management Inc. Oppenheimer's asset management divisions employ various programs to manage client assets either in individual accounts or in funds, and includes direct expenses associated with this segment; and
Capital Markets
— includes investment banking, institutional equities sales, trading, and research, taxable fixed income sales, trading, and research, public finance and municipal trading, as well as the Company's operations in the United Kingdom, Hong Kong and Israel, and direct expenses associated with this segment.
The Company does not allocate costs associated with certain infrastructure support groups that are centrally managed for its reportable segments. These areas include, but are not limited to, legal, compliance, operations, accounting, and internal audit. Costs associated with these groups are separately reported in a Corporate/Other category and primarily include compensation and benefits.
The Commercial Mortgage Banking segment was discontinued during the second quarter of 2016. See note 3 for further details.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
The table below presents information about the reported revenue and income (loss) before income taxes from continuing operations of the Company for the years ended
December 31, 2018
,
2017
and
2016
. Asset information by reportable segment is not reported, since the Company does not produce such information for internal use by the chief operating decision maker.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
Private client
(1)
|
$
|
617,871
|
|
|
$
|
592,753
|
|
|
$
|
504,192
|
|
|
Asset management
(1)
|
71,696
|
|
|
89,896
|
|
|
92,852
|
|
|
Capital markets
|
272,719
|
|
|
231,632
|
|
|
254,933
|
|
|
Corporate/Other
|
(4,132
|
)
|
|
6,057
|
|
|
5,802
|
|
|
Total
|
$
|
958,154
|
|
|
$
|
920,338
|
|
|
$
|
857,779
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
Private client
(1)
|
$
|
149,097
|
|
|
$
|
128,840
|
|
|
$
|
66,072
|
|
|
Asset management
(1)
|
18,590
|
|
|
26,685
|
|
|
31,412
|
|
|
Capital markets
|
(13,416
|
)
|
|
(39,978
|
)
|
|
(17,713
|
)
|
|
Corporate/Other
|
(109,418
|
)
|
|
(95,811
|
)
|
|
(101,663
|
)
|
|
Total
|
$
|
44,853
|
|
|
$
|
19,736
|
|
|
$
|
(21,892
|
)
|
|
|
|
|
(1)
|
Clients investing in the OAM advisory program are charged fees based on the value of AUM. Advisory fees were allocated
22.5%
to the Asset Management and
77.5%
to the Private Client segments. Starting January 1, 2017, the Company determined it was appropriate to change the allocation to
10.0%
to the Asset Management and
90.0%
to the Private Client segments due to changes in the mix of the business over time and costs associated with it.
|
Revenue, classified by the major geographic areas in which it was earned for the years ended
December 31, 2018
,
2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Americas
|
$
|
925,127
|
|
|
$
|
880,602
|
|
|
$
|
815,231
|
|
|
Europe/Middle East
|
29,292
|
|
|
36,364
|
|
|
39,048
|
|
|
Asia
|
3,735
|
|
|
3,372
|
|
|
3,500
|
|
|
Total
|
$
|
958,154
|
|
|
$
|
920,338
|
|
|
$
|
857,779
|
|
20. Subsequent events
On
February 1, 2019
, the Company announced a quarterly dividend in the amount of
$0.11
per share, payable on
February 28, 2019
to holders of Class A Stock and Class B Stock of record on
February 15, 2019
.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
21. Quarterly information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
Fiscal Quarters
|
|
|
|
For the Year Ended December 31, 2018
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
Year
|
|
Revenue
|
|
$
|
243,254
|
|
|
$
|
237,814
|
|
|
$
|
242,556
|
|
|
$
|
234,530
|
|
|
$
|
958,154
|
|
|
Expenses
|
|
227,671
|
|
|
230,670
|
|
|
230,055
|
|
|
224,905
|
|
|
913,301
|
|
|
Income before income taxes from continuing operations
|
|
15,583
|
|
|
7,144
|
|
|
12,501
|
|
|
9,625
|
|
|
44,853
|
|
|
Income taxes
|
|
7,316
|
|
|
2,083
|
|
|
3,662
|
|
|
2,916
|
|
|
15,977
|
|
|
Net income from continuing operations
|
|
8,267
|
|
|
5,061
|
|
|
8,839
|
|
|
6,709
|
|
|
28,876
|
|
|
Net income from discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income
|
|
8,267
|
|
|
5,061
|
|
|
8,839
|
|
|
6,709
|
|
|
28,876
|
|
|
Less net income (loss) attributable to non-controlling interest, net of tax
|
|
6
|
|
|
(10
|
)
|
|
(16
|
)
|
|
4
|
|
|
(16
|
)
|
|
Net income attributable to Oppenheimer Holdings Inc.
|
|
$
|
8,261
|
|
|
$
|
5,071
|
|
|
$
|
8,855
|
|
|
$
|
6,705
|
|
|
$
|
28,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share attributable to Oppenheimer Holdings Inc.
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.62
|
|
|
$
|
0.38
|
|
|
$
|
0.67
|
|
|
$
|
0.51
|
|
|
$
|
2.18
|
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income per share
|
|
$
|
0.62
|
|
|
$
|
0.38
|
|
|
$
|
0.67
|
|
|
$
|
0.51
|
|
|
$
|
2.18
|
|
|
Diluted net income per share attributable to Oppenheimer Holdings Inc.
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.59
|
|
|
$
|
0.36
|
|
|
$
|
0.63
|
|
|
$
|
0.48
|
|
|
$
|
2.05
|
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net income per share
|
|
$
|
0.59
|
|
|
$
|
0.36
|
|
|
$
|
0.63
|
|
|
$
|
0.48
|
|
|
$
|
2.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.44
|
|
|
Market price of Class A Stock
(1)
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
33.76
|
|
|
$
|
34.15
|
|
|
$
|
29.80
|
|
|
$
|
29.00
|
|
|
$
|
34.15
|
|
|
Low
|
|
$
|
23.52
|
|
|
$
|
27.40
|
|
|
$
|
24.60
|
|
|
$
|
25.25
|
|
|
$
|
23.52
|
|
|
|
|
|
(1)
|
The price quotations above were obtained from the New York Stock Exchange website.
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
Fiscal Quarters
|
|
|
|
For the Year Ended December 31, 2017
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
Year
|
|
Revenue
|
|
$
|
264,973
|
|
|
$
|
226,220
|
|
|
$
|
215,884
|
|
|
$
|
213,261
|
|
|
$
|
920,338
|
|
|
Expenses
|
|
248,403
|
|
|
214,392
|
|
|
217,521
|
|
|
220,286
|
|
|
900,602
|
|
|
Income (Loss) before income taxes from continuing operations
|
|
16,570
|
|
|
11,828
|
|
|
(1,637
|
)
|
|
(7,025
|
)
|
|
19,736
|
|
|
Income taxes
|
|
(4,598
|
)
|
|
4,425
|
|
|
(274
|
)
|
|
(1,687
|
)
|
|
(2,134
|
)
|
|
Net income (loss) from continuing operations
|
|
21,168
|
|
|
7,403
|
|
|
(1,363
|
)
|
|
(5,338
|
)
|
|
21,870
|
|
|
Net income (loss) from discontinued operations
|
|
29
|
|
|
461
|
|
|
53
|
|
|
587
|
|
|
1,130
|
|
|
Net income (loss)
|
|
21,197
|
|
|
7,864
|
|
|
(1,310
|
)
|
|
(4,751
|
)
|
|
23,000
|
|
|
Less net income attributable to non-controlling interest, net of tax
|
|
4
|
|
|
75
|
|
|
9
|
|
|
96
|
|
|
184
|
|
|
Net income (loss) attributable to Oppenheimer Holdings Inc.
|
|
$
|
21,193
|
|
|
$
|
7,789
|
|
|
$
|
(1,319
|
)
|
|
$
|
(4,847
|
)
|
|
$
|
22,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share attributable to Oppenheimer Holdings Inc.
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.61
|
|
|
$
|
0.56
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
1.65
|
|
|
Discontinued operations
|
|
—
|
|
|
0.03
|
|
|
—
|
|
|
0.04
|
|
|
0.07
|
|
|
Net income (loss) per share
|
|
$
|
1.61
|
|
|
$
|
0.59
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
1.72
|
|
|
Diluted net income (loss) per share attributable to Oppenheimer Holdings Inc.
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.54
|
|
|
$
|
0.54
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
1.60
|
|
|
Discontinued operations
|
|
—
|
|
|
0.03
|
|
|
—
|
|
|
0.04
|
|
|
0.07
|
|
|
Net income (loss) per share
|
|
$
|
1.54
|
|
|
$
|
0.57
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.44
|
|
|
Market price of Class A Stock
(1)
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
29.00
|
|
|
$
|
17.70
|
|
|
$
|
18.25
|
|
|
$
|
19.60
|
|
|
$
|
29.00
|
|
|
Low
|
|
$
|
17.35
|
|
|
$
|
15.40
|
|
|
$
|
15.10
|
|
|
$
|
15.90
|
|
|
$
|
15.10
|
|
|
|
|
|
(1)
|
The price quotations above were obtained from the New York Stock Exchange website.
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
22. Condensed consolidating financial information
On June 23, 2017, the Parent issued in a private offering
$200.0 million
aggregate principal amount of the Notes. The Company used a portion of the net proceeds from the offering of the Unregistered Notes to redeem in full its Old Notes. See note 11 for further details.
The Notes are jointly and severally and fully and unconditionally guaranteed on a senior basis by E.A. Viner International Co. and Viner Finance Inc. (together, the "Guarantors"), unless released as described below. Each of the Guarantors is
100%
owned by the Parent. The indenture for the Notes contains covenants with restrictions which are discussed in note 10. The following condensed consolidating financial information presents the financial position, results of operations and cash flows of the Parent, the Guarantor subsidiaries, the Non-Guarantor subsidiaries and elimination entries necessary to consolidate the Company.
Each Guarantor will be automatically and unconditionally released and discharged upon: the sale, exchange or transfer of the capital stock of a Guarantor and the Guarantor ceasing to be a direct or indirect subsidiary of the Parent if such sale does not constitute an asset sale under the indenture for the Notes or does not constitute an asset sale effected in compliance with the asset sale and merger covenants of the indenture for the Notes; a Guarantor being dissolved or liquidated; a Guarantor being designated unrestricted in compliance with the applicable provisions of the Notes; or the exercise by the Parent of its legal defeasance option or covenant defeasance option or the discharge of the Parent's obligations under the indenture for the Notes in accordance with the terms of such indenture.
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF
DECEMBER 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
Parent
|
|
Guarantor
subsidiaries
|
|
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
53,526
|
|
|
$
|
3,826
|
|
|
$
|
33,323
|
|
|
$
|
—
|
|
|
$
|
90,675
|
|
|
Deposits with clearing organizations
|
—
|
|
|
—
|
|
|
67,678
|
|
|
—
|
|
|
67,678
|
|
|
Receivable from brokers, dealers and clearing organizations
|
—
|
|
|
—
|
|
|
166,493
|
|
|
—
|
|
|
166,493
|
|
|
Receivable from customers, net of allowance for credit losses of $886
|
—
|
|
|
—
|
|
|
720,777
|
|
|
—
|
|
|
720,777
|
|
|
Income tax receivable
|
45,733
|
|
|
23,491
|
|
|
(702
|
)
|
|
(67,508
|
)
|
|
1,014
|
|
|
Securities purchased under agreements to resell
|
—
|
|
|
—
|
|
|
290
|
|
|
—
|
|
|
290
|
|
|
Securities owned, including amounts pledged of $517,951, at fair value
|
—
|
|
|
1,358
|
|
|
836,226
|
|
|
—
|
|
|
837,584
|
|
|
Notes receivable, net of accumulated amortization and allowance for uncollectibles of $25,109 and $6,800, respectively
|
—
|
|
|
—
|
|
|
44,058
|
|
|
—
|
|
|
44,058
|
|
|
Furniture, equipment and leasehold improvements, net of accumulated depreciation of $89,182
|
—
|
|
|
20,722
|
|
|
8,266
|
|
|
—
|
|
|
28,988
|
|
|
Subordinated loan receivable
|
—
|
|
|
112,558
|
|
|
—
|
|
|
(112,558
|
)
|
|
—
|
|
|
Intangible assets
|
—
|
|
|
400
|
|
|
31,700
|
|
|
—
|
|
|
32,100
|
|
|
Goodwill
|
—
|
|
|
—
|
|
|
137,889
|
|
|
|
|
|
137,889
|
|
|
Other assets
|
135
|
|
|
2,581
|
|
|
110,052
|
|
|
—
|
|
|
112,768
|
|
|
Deferred tax assets
|
1
|
|
|
455
|
|
|
18,494
|
|
|
(18,950
|
)
|
|
—
|
|
|
Investment in subsidiaries
|
661,837
|
|
|
546,704
|
|
|
—
|
|
|
(1,208,541
|
)
|
|
—
|
|
|
Intercompany receivables
|
(14,211
|
)
|
|
46,840
|
|
|
(6,299
|
)
|
|
(26,330
|
)
|
|
—
|
|
|
Total assets
|
$
|
747,021
|
|
|
$
|
758,935
|
|
|
$
|
2,168,245
|
|
|
$
|
(1,433,887
|
)
|
|
$
|
2,240,314
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Drafts payable
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,348
|
|
|
$
|
—
|
|
|
$
|
16,348
|
|
|
Bank call loans
|
—
|
|
|
—
|
|
|
15,000
|
|
|
—
|
|
|
15,000
|
|
|
Payable to brokers, dealers and clearing organizations
|
—
|
|
|
—
|
|
|
289,207
|
|
|
—
|
|
|
289,207
|
|
|
Payable to customers
|
—
|
|
|
—
|
|
|
336,616
|
|
|
—
|
|
|
336,616
|
|
|
Securities sold under agreements to repurchase
|
—
|
|
|
—
|
|
|
484,218
|
|
|
—
|
|
|
484,218
|
|
|
Securities sold but not yet purchased, at fair value
|
—
|
|
|
—
|
|
|
85,446
|
|
|
—
|
|
|
85,446
|
|
|
Accrued compensation
|
—
|
|
|
—
|
|
|
167,348
|
|
|
—
|
|
|
167,348
|
|
|
Accounts payable and other liabilities
|
163
|
|
|
31,653
|
|
|
55,823
|
|
|
(9
|
)
|
|
87,630
|
|
|
Income tax payable
|
2,440
|
|
|
22,189
|
|
|
42,878
|
|
|
(67,507
|
)
|
|
—
|
|
|
Senior secured notes, net of debt issuance cost of $904
|
199,096
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
199,096
|
|
|
Subordinated indebtedness
|
—
|
|
|
—
|
|
|
112,558
|
|
|
(112,558
|
)
|
|
—
|
|
|
Deferred tax liabilities
|
—
|
|
|
—
|
|
|
33,029
|
|
|
(18,946
|
)
|
|
14,083
|
|
|
Intercompany payables
|
—
|
|
|
26,334
|
|
|
—
|
|
|
(26,334
|
)
|
|
—
|
|
|
Total liabilities
|
201,699
|
|
|
80,176
|
|
|
1,638,471
|
|
|
(225,354
|
)
|
|
1,694,992
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity attributable to Oppenheimer Holdings Inc.
|
545,322
|
|
|
678,759
|
|
|
529,774
|
|
|
(1,208,533
|
)
|
|
545,322
|
|
|
Total stockholders' equity
|
545,322
|
|
|
678,759
|
|
|
529,774
|
|
|
(1,208,533
|
)
|
|
545,322
|
|
|
Total liabilities and stockholders' equity
|
$
|
747,021
|
|
|
$
|
758,935
|
|
|
$
|
2,168,245
|
|
|
$
|
(1,433,887
|
)
|
|
$
|
2,240,314
|
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF
DECEMBER 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
Parent
|
|
Guarantor
subsidiaries
|
|
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
7,442
|
|
|
$
|
3,716
|
|
|
$
|
36,996
|
|
|
$
|
—
|
|
|
$
|
48,154
|
|
|
Deposits with clearing organizations
|
—
|
|
|
—
|
|
|
42,222
|
|
|
—
|
|
|
42,222
|
|
|
Receivable from brokers, dealers and clearing organizations
|
—
|
|
|
—
|
|
|
187,115
|
|
|
—
|
|
|
187,115
|
|
|
Receivable from customers, net of allowance for credit losses of $769
|
—
|
|
|
—
|
|
|
848,226
|
|
|
—
|
|
|
848,226
|
|
|
Income tax receivable
|
45,998
|
|
|
26,025
|
|
|
—
|
|
|
(69,084
|
)
|
|
2,939
|
|
|
Securities purchased under agreements to resell
|
—
|
|
|
—
|
|
|
658
|
|
|
—
|
|
|
658
|
|
|
Securities owned, including amounts pledged of $655,683 at fair value
|
—
|
|
|
1,386
|
|
|
925,211
|
|
|
—
|
|
|
926,597
|
|
|
Notes receivable, net of accumulated amortization and allowance for uncollectibles of $24,705 and $7,975, respectively
|
—
|
|
|
—
|
|
|
40,520
|
|
|
—
|
|
|
40,520
|
|
|
Furniture, equipment and leasehold improvements, net of accumulated depreciation of $82,826
|
—
|
|
|
20,221
|
|
|
6,966
|
|
|
—
|
|
|
27,187
|
|
|
Subordinated loan receivable
|
—
|
|
|
112,558
|
|
|
—
|
|
|
(112,558
|
)
|
|
—
|
|
|
Intangible assets
|
—
|
|
|
—
|
|
|
31,700
|
|
|
—
|
|
|
31,700
|
|
|
Goodwill
|
—
|
|
|
—
|
|
|
137,889
|
|
|
—
|
|
|
137,889
|
|
|
Other assets
|
133
|
|
|
2,573
|
|
|
142,604
|
|
|
—
|
|
|
145,310
|
|
|
Deferred tax assets
|
3,502
|
|
|
—
|
|
|
18,463
|
|
|
(21,965
|
)
|
|
—
|
|
|
Investment in subsidiaries
|
622,824
|
|
|
507,747
|
|
|
—
|
|
|
(1,130,571
|
)
|
|
—
|
|
|
Intercompany receivables
|
52,149
|
|
|
83,437
|
|
|
—
|
|
|
(135,586
|
)
|
|
—
|
|
|
Total assets
|
$
|
732,048
|
|
|
$
|
757,663
|
|
|
$
|
2,418,570
|
|
|
$
|
(1,469,764
|
)
|
|
$
|
2,438,517
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Drafts payable
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,412
|
|
|
$
|
—
|
|
|
$
|
42,412
|
|
|
Bank call loans
|
—
|
|
|
—
|
|
|
118,300
|
|
|
—
|
|
|
118,300
|
|
|
Payable to brokers, dealers and clearing organizations
|
—
|
|
|
—
|
|
|
211,483
|
|
|
—
|
|
|
211,483
|
|
|
Payable to customers
|
—
|
|
|
—
|
|
|
385,907
|
|
|
—
|
|
|
385,907
|
|
|
Securities sold under agreements to repurchase
|
—
|
|
|
—
|
|
|
586,478
|
|
|
—
|
|
|
586,478
|
|
|
Securities sold but not yet purchased, at fair value
|
—
|
|
|
—
|
|
|
94,486
|
|
|
—
|
|
|
94,486
|
|
|
Accrued compensation
|
—
|
|
|
—
|
|
|
173,116
|
|
|
—
|
|
|
173,116
|
|
|
Accounts payable and other liabilities
|
7,221
|
|
|
33,994
|
|
|
51,280
|
|
|
—
|
|
|
92,495
|
|
|
Income tax payable
|
2,440
|
|
|
22,189
|
|
|
44,455
|
|
|
(69,084
|
)
|
|
—
|
|
|
Senior secured notes, net of debt issuance costs of $1,163
|
198,837
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
198,837
|
|
|
Subordinated indebtedness
|
—
|
|
|
—
|
|
|
112,558
|
|
|
(112,558
|
)
|
|
—
|
|
|
Deferred tax liabilities
|
—
|
|
|
17
|
|
|
33,040
|
|
|
(21,965
|
)
|
|
11,092
|
|
|
Intercompany payables
|
—
|
|
|
62,163
|
|
|
73,423
|
|
|
(135,586
|
)
|
|
—
|
|
|
Total liabilities
|
208,498
|
|
|
118,363
|
|
|
1,926,938
|
|
|
(339,193
|
)
|
|
1,914,606
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity attributable to Oppenheimer Holdings Inc.
|
523,550
|
|
|
639,300
|
|
|
491,271
|
|
|
(1,130,571
|
)
|
|
523,550
|
|
|
Non-controlling interest
|
—
|
|
|
—
|
|
|
361
|
|
|
—
|
|
|
361
|
|
|
Total stockholders' equity
|
523,550
|
|
|
639,300
|
|
|
491,632
|
|
|
(1,130,571
|
)
|
|
523,911
|
|
|
Total liabilities and stockholders' equity
|
$
|
732,048
|
|
|
$
|
757,663
|
|
|
$
|
2,418,570
|
|
|
$
|
(1,469,764
|
)
|
|
$
|
2,438,517
|
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
Parent
|
|
Guarantor
subsidiaries
|
|
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
329,668
|
|
|
$
|
—
|
|
|
$
|
329,668
|
|
|
Advisory fees
|
—
|
|
|
1,938
|
|
|
316,829
|
|
|
(4,418
|
)
|
|
314,349
|
|
|
Investment banking
|
—
|
|
|
—
|
|
|
115,353
|
|
|
—
|
|
|
115,353
|
|
|
Bank deposit sweep income
|
—
|
|
|
—
|
|
|
116,052
|
|
|
—
|
|
|
116,052
|
|
|
Interest
|
66
|
|
|
8,247
|
|
|
52,481
|
|
|
(8,310
|
)
|
|
52,484
|
|
|
Principal transactions, net
|
—
|
|
|
—
|
|
|
14,515
|
|
|
(54
|
)
|
|
14,461
|
|
|
Other
|
—
|
|
|
443
|
|
|
15,782
|
|
|
(438
|
)
|
|
15,787
|
|
|
Total revenue
|
66
|
|
|
10,628
|
|
|
960,680
|
|
|
(13,220
|
)
|
|
958,154
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Compensation and related expenses
|
1,548
|
|
|
—
|
|
|
605,644
|
|
|
—
|
|
|
607,192
|
|
|
Communications and technology
|
163
|
|
|
—
|
|
|
74,316
|
|
|
—
|
|
|
74,479
|
|
|
Occupancy and equipment costs
|
—
|
|
|
—
|
|
|
61,610
|
|
|
(439
|
)
|
|
61,171
|
|
|
Clearing and exchange fees
|
—
|
|
|
—
|
|
|
22,985
|
|
|
—
|
|
|
22,985
|
|
|
Interest
|
13,500
|
|
|
—
|
|
|
41,205
|
|
|
(8,309
|
)
|
|
46,396
|
|
|
Other
|
1,208
|
|
|
4,059
|
|
|
100,229
|
|
|
(4,418
|
)
|
|
101,078
|
|
|
Total expenses
|
16,419
|
|
|
4,059
|
|
|
905,989
|
|
|
(13,166
|
)
|
|
913,301
|
|
|
Income (loss) before income taxes
|
(16,353
|
)
|
|
6,569
|
|
|
54,691
|
|
|
—
|
|
|
44,853
|
|
|
Income taxes expenses (benefits)
|
(4,371
|
)
|
|
2,052
|
|
|
18,296
|
|
|
—
|
|
|
15,977
|
|
|
Net income (loss) from continuing operations
|
(11,982
|
)
|
|
4,517
|
|
|
36,395
|
|
|
—
|
|
|
28,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
40,874
|
|
|
36,411
|
|
|
—
|
|
|
(77,285
|
)
|
|
—
|
|
|
Net income
|
28,892
|
|
|
40,928
|
|
|
36,395
|
|
|
(77,285
|
)
|
|
28,876
|
|
|
Less net income attributable to non-controlling interest, net of tax
|
—
|
|
|
—
|
|
|
(16
|
)
|
|
—
|
|
|
(16
|
)
|
|
Net income attributable to Oppenheimer Holdings Inc.
|
28,892
|
|
|
40,928
|
|
|
36,411
|
|
|
(77,285
|
)
|
|
28,892
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
(1,417
|
)
|
|
—
|
|
|
(1,417
|
)
|
|
Total comprehensive income
|
$
|
28,892
|
|
|
$
|
40,928
|
|
|
$
|
34,994
|
|
|
$
|
(77,285
|
)
|
|
$
|
27,475
|
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
Parent
|
|
Guarantor
subsidiaries
|
|
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
336,620
|
|
|
$
|
—
|
|
|
$
|
336,620
|
|
|
Advisory fees
|
—
|
|
|
1,752
|
|
|
323,114
|
|
|
(4,120
|
)
|
|
320,746
|
|
|
Investment banking
|
—
|
|
|
—
|
|
|
81,215
|
|
|
(3,000
|
)
|
|
78,215
|
|
|
Bank deposit sweep income
|
—
|
|
|
—
|
|
|
76,839
|
|
|
—
|
|
|
76,839
|
|
|
Interest
|
—
|
|
|
9,589
|
|
|
48,548
|
|
|
(9,639
|
)
|
|
48,498
|
|
|
Principal transactions, net
|
—
|
|
|
17
|
|
|
23,256
|
|
|
—
|
|
|
23,273
|
|
|
Other
|
22
|
|
|
361
|
|
|
36,123
|
|
|
(359
|
)
|
|
36,147
|
|
|
Total revenue
|
22
|
|
|
11,719
|
|
|
925,715
|
|
|
(17,118
|
)
|
|
920,338
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Compensation and related expenses
|
1,237
|
|
|
—
|
|
|
600,901
|
|
|
—
|
|
|
602,138
|
|
|
Communications and technology
|
160
|
|
|
—
|
|
|
71,818
|
|
|
—
|
|
|
71,978
|
|
|
Occupancy and equipment costs
|
—
|
|
|
—
|
|
|
61,523
|
|
|
(359
|
)
|
|
61,164
|
|
|
Clearing and exchange fees
|
—
|
|
|
—
|
|
|
23,545
|
|
|
—
|
|
|
23,545
|
|
|
Interest
|
13,740
|
|
|
—
|
|
|
24,253
|
|
|
(9,639
|
)
|
|
28,354
|
|
|
Other
|
4,969
|
|
|
1,382
|
|
|
114,192
|
|
|
(7,120
|
)
|
|
113,423
|
|
|
Total expenses
|
20,106
|
|
|
1,382
|
|
|
896,232
|
|
|
(17,118
|
)
|
|
900,602
|
|
|
Income (loss) before income taxes
|
(20,084
|
)
|
|
10,337
|
|
|
29,483
|
|
|
—
|
|
|
19,736
|
|
|
Income taxes expenses (benefits)
|
(7,110
|
)
|
|
(12,655
|
)
|
|
17,631
|
|
|
—
|
|
|
(2,134
|
)
|
|
Net income (loss) from continuing operations
|
(12,974
|
)
|
|
22,992
|
|
|
11,852
|
|
|
—
|
|
|
21,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
—
|
|
|
—
|
|
|
2,071
|
|
|
—
|
|
|
2,071
|
|
|
Income taxes
|
—
|
|
|
—
|
|
|
941
|
|
|
—
|
|
|
941
|
|
|
Net income from discontinued operations
|
—
|
|
|
—
|
|
|
1,130
|
|
|
—
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
35,790
|
|
|
12,798
|
|
|
—
|
|
|
(48,588
|
)
|
|
—
|
|
|
Net income
|
22,816
|
|
|
35,790
|
|
|
12,982
|
|
|
(48,588
|
)
|
|
23,000
|
|
|
Less net income attributable to non-controlling interest, net of tax
|
—
|
|
|
—
|
|
|
184
|
|
|
—
|
|
|
184
|
|
|
Net income attributable to Oppenheimer Holdings Inc.
|
22,816
|
|
|
35,790
|
|
|
12,798
|
|
|
(48,588
|
)
|
|
22,816
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
2,263
|
|
|
—
|
|
|
2,263
|
|
|
Total comprehensive income
|
$
|
22,816
|
|
|
$
|
35,790
|
|
|
$
|
15,061
|
|
|
$
|
(48,588
|
)
|
|
$
|
25,079
|
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
Parent
|
|
Guarantor
subsidiaries
|
|
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
377,317
|
|
|
$
|
—
|
|
|
$
|
377,317
|
|
|
Advisory fees
|
—
|
|
|
1,571
|
|
|
271,763
|
|
|
(4,215
|
)
|
|
269,119
|
|
|
Investment banking
|
—
|
|
|
—
|
|
|
81,011
|
|
|
—
|
|
|
81,011
|
|
|
Bank deposit sweep income
|
—
|
|
|
—
|
|
|
36,316
|
|
|
—
|
|
|
36,316
|
|
|
Interest
|
—
|
|
|
10,242
|
|
|
47,804
|
|
|
(10,397
|
)
|
|
47,649
|
|
|
Principal transactions, net
|
—
|
|
|
16
|
|
|
20,465
|
|
|
—
|
|
|
20,481
|
|
|
Other
|
—
|
|
|
326
|
|
|
25,885
|
|
|
(325
|
)
|
|
25,886
|
|
|
Total revenue
|
—
|
|
|
12,155
|
|
|
860,561
|
|
|
(14,937
|
)
|
|
857,779
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Compensation and related expenses
|
1,241
|
|
|
—
|
|
|
583,469
|
|
|
—
|
|
|
584,710
|
|
|
Communications and technology
|
124
|
|
|
—
|
|
|
70,266
|
|
|
—
|
|
|
70,390
|
|
|
Occupancy and equipment costs
|
—
|
|
|
—
|
|
|
61,116
|
|
|
(325
|
)
|
|
60,791
|
|
|
Clearing and exchange fees
|
—
|
|
|
—
|
|
|
25,126
|
|
|
—
|
|
|
25,126
|
|
|
Interest
|
13,125
|
|
|
—
|
|
|
16,709
|
|
|
(10,397
|
)
|
|
19,437
|
|
|
Other
|
1,887
|
|
|
1,284
|
|
|
120,261
|
|
|
(4,215
|
)
|
|
119,217
|
|
|
Total expenses
|
16,377
|
|
|
1,284
|
|
|
876,947
|
|
|
(14,937
|
)
|
|
879,671
|
|
|
Income (loss) before income taxes
|
(16,377
|
)
|
|
10,871
|
|
|
(16,386
|
)
|
|
—
|
|
|
(21,892
|
)
|
|
Income taxes expenses (benefits)
|
(8,296
|
)
|
|
3,325
|
|
|
(7,291
|
)
|
|
—
|
|
|
(12,262
|
)
|
|
Net income (loss) from continuing operations
|
(8,081
|
)
|
|
7,546
|
|
|
(9,095
|
)
|
|
—
|
|
|
(9,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
—
|
|
|
—
|
|
|
17,339
|
|
|
—
|
|
|
17,339
|
|
|
Income taxes
|
—
|
|
|
—
|
|
|
7,218
|
|
|
—
|
|
|
7,218
|
|
|
Net income from discontinued operations
|
—
|
|
|
—
|
|
|
10,121
|
|
|
—
|
|
|
10,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
6,920
|
|
|
(626
|
)
|
|
—
|
|
|
(6,294
|
)
|
|
—
|
|
|
Net income (loss)
|
(1,161
|
)
|
|
6,920
|
|
|
1,026
|
|
|
(6,294
|
)
|
|
491
|
|
|
Less net income attributable to non-controlling interest, net of tax
|
—
|
|
|
—
|
|
|
1,652
|
|
|
—
|
|
|
1,652
|
|
|
Net income (loss) attributable to Oppenheimer Holdings Inc.
|
(1,161
|
)
|
|
6,920
|
|
|
(626
|
)
|
|
(6,294
|
)
|
|
(1,161
|
)
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
220
|
|
|
—
|
|
|
220
|
|
|
Total comprehensive income (loss)
|
$
|
(1,161
|
)
|
|
$
|
6,920
|
|
|
$
|
(406
|
)
|
|
$
|
(6,294
|
)
|
|
$
|
(941
|
)
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED
DECEMBER 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
Parent
|
|
Guarantor
subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
$
|
60,270
|
|
|
$
|
510
|
|
|
$
|
107,790
|
|
|
|
|
|
$
|
168,570
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase of furniture, equipment and leasehold improvements
|
—
|
|
|
—
|
|
|
(8,672
|
)
|
|
—
|
|
|
(8,672
|
)
|
|
Purchase of intangible assets
|
—
|
|
|
(400
|
)
|
|
—
|
|
|
—
|
|
|
(400
|
)
|
|
Proceeds from the settlement of Company-owned life insurance
|
|
|
|
|
881
|
|
|
|
|
881
|
|
|
Cash used in investing activities
|
—
|
|
|
(400
|
)
|
|
(7,791
|
)
|
|
—
|
|
|
(8,191
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid on Class A non-voting and Class B voting common stock
|
(5,833
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,833
|
)
|
|
Cash dividends paid to non-controlling interest
|
—
|
|
|
—
|
|
|
(372
|
)
|
|
—
|
|
|
(372
|
)
|
|
Issuance of Class A non-voting common stock
|
70
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
70
|
|
|
Repurchase of Class A non-voting common stock for cancellation
|
(5,894
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,894
|
)
|
|
Payments of employee taxes withheld related to vested share-based awards
|
(2,529
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,529
|
)
|
|
Decrease in bank call loans, net
|
—
|
|
|
—
|
|
|
(103,300
|
)
|
|
—
|
|
|
(103,300
|
)
|
|
Cash used in financing activities
|
(14,186
|
)
|
|
—
|
|
|
(103,672
|
)
|
|
—
|
|
|
(117,858
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
46,084
|
|
|
110
|
|
|
(3,673
|
)
|
|
—
|
|
|
42,521
|
|
|
Cash and cash equivalents, beginning of the year
|
7,442
|
|
|
3,716
|
|
|
36,996
|
|
|
—
|
|
|
48,154
|
|
|
Cash and cash equivalents, end of the year
|
$
|
53,526
|
|
|
$
|
3,826
|
|
|
$
|
33,323
|
|
|
$
|
—
|
|
|
$
|
90,675
|
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED
DECEMBER 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
Parent
|
|
Guarantor
subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
$
|
(25,979
|
)
|
|
$
|
(6,568
|
)
|
|
$
|
16,411
|
|
|
$
|
—
|
|
|
$
|
(16,136
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase of furniture, equipment and leasehold improvements
|
—
|
|
|
—
|
|
|
(5,611
|
)
|
|
—
|
|
|
(5,611
|
)
|
|
Proceeds from the settlement of Company-owned life insurance
|
—
|
|
|
—
|
|
|
1,744
|
|
|
—
|
|
|
1,744
|
|
|
Cash used in investing activities
|
—
|
|
|
—
|
|
|
(3,867
|
)
|
|
—
|
|
|
(3,867
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid on Class A non-voting and Class B voting common stock
|
(5,836
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,836
|
)
|
|
Cash dividends paid to non-controlling interest
|
—
|
|
|
—
|
|
|
(2,448
|
)
|
|
—
|
|
|
(2,448
|
)
|
|
Issuance of Class A non-voting common stock
|
26
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
Repurchase of Class A non-voting common stock for cancellation
|
(7,464
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,464
|
)
|
|
Payments of employee taxes withheld related to vested share-based awards
|
(2,237
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,237
|
)
|
|
Issuance of senior secured notes
|
200,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
200,000
|
|
|
Redemption of senior secured notes
|
(150,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(150,000
|
)
|
|
Debt issuance costs
|
(1,297
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,297
|
)
|
|
Decrease in bank call loans, net
|
—
|
|
|
—
|
|
|
(27,500
|
)
|
|
—
|
|
|
(27,500
|
)
|
|
Cash provided by (used in) financing activities
|
33,192
|
|
|
—
|
|
|
(29,948
|
)
|
|
—
|
|
|
3,244
|
|
|
Net increase (decrease) in cash and cash equivalents
|
7,213
|
|
|
(6,568
|
)
|
|
(17,404
|
)
|
|
—
|
|
|
(16,759
|
)
|
|
Cash and cash equivalents, beginning of the year
|
229
|
|
|
10,284
|
|
|
54,400
|
|
|
—
|
|
|
64,913
|
|
|
Cash and cash equivalents, end of the year
|
$
|
7,442
|
|
|
$
|
3,716
|
|
|
$
|
36,996
|
|
|
$
|
—
|
|
|
$
|
48,154
|
|
|
|
|
|
|
|
|
|
|
OPPENHEIMER HOLDINGS INC.
Notes to Consolidated Financial Statements
|
OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED
DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed in thousands)
|
Parent
|
|
Guarantor
subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
$
|
10,485
|
|
|
$
|
7,698
|
|
|
$
|
(85,048
|
)
|
|
$
|
—
|
|
|
$
|
(66,865
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase of furniture, equipment and leasehold improvements
|
—
|
|
|
—
|
|
|
(5,731
|
)
|
|
—
|
|
|
(5,731
|
)
|
|
Proceeds from sale of assets
|
—
|
|
|
—
|
|
|
45,448
|
|
|
—
|
|
|
45,448
|
|
|
Cash provided by investing activities
|
—
|
|
|
—
|
|
|
39,717
|
|
|
—
|
|
|
39,717
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid on Class A non-voting and Class B voting common stock
|
(5,887
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,887
|
)
|
|
Cash dividends paid to non-controlling interest
|
—
|
|
|
—
|
|
|
(5,740
|
)
|
|
—
|
|
|
(5,740
|
)
|
|
Repurchase of Class A non-voting common stock for cancellation
|
(3,935
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,935
|
)
|
|
Payments of employee taxes withheld related to vested share-based awards
|
(1,341
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,341
|
)
|
|
Increase in bank call loans, net
|
—
|
|
|
—
|
|
|
45,600
|
|
|
—
|
|
|
45,600
|
|
|
Cash provided by (used in) financing activities
|
(11,163
|
)
|
|
—
|
|
|
39,860
|
|
|
—
|
|
|
28,697
|
|
|
Net increase (decrease) in cash and cash equivalents
|
(678
|
)
|
|
7,698
|
|
|
(5,471
|
)
|
|
—
|
|
|
1,549
|
|
|
Cash and cash equivalents, beginning of the year
|
907
|
|
|
2,586
|
|
|
59,871
|
|
|
—
|
|
|
63,364
|
|
|
Cash and cash equivalents, end of the year
|
$
|
229
|
|
|
$
|
10,284
|
|
|
$
|
54,400
|
|
|
$
|
—
|
|
|
$
|
64,913
|
|