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Oppenheimer Holdings 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
OPY-3.31.2015-10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 1-12043
 
OPPENHEIMER HOLDINGS INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
98-0080034
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
85 Broad Street
New York, New York 10004
(Address of principal executive offices) (Zip Code)
(212) 668-8000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One): 
Large accelerated filer
o
  
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o
  
Smaller reporting company
o
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o   No  x
The number of shares of the Company’s Class A non-voting common stock and Class B voting common stock (being the only classes of common stock of the Company) outstanding on April 30, 2015 was 13,650,149 and 99,680 shares, respectively.
 



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




PART I. FINANCIAL INFORMATION

Item 1.        Financial Statements (unaudited)

OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Expressed in thousands, except number of shares and per share amounts)
March 31, 2015
 
December 31, 2014
ASSETS
 
 
 
Cash and cash equivalents
$
66,918

 
$
63,807

Cash segregated for regulatory and other purposes
1,517

 
18,594

Deposits with clearing organizations
50,258

 
36,510

Receivable from brokers, dealers and clearing organizations
338,103

 
314,475

Receivable from customers, net of allowance for credit losses of $2,439 ($2,427 in 2014)
890,260

 
864,189

Income tax receivable
6,329

 
4,240

Securities purchased under agreements to resell

 
251,606

Securities owned, including amounts pledged of $501,643 ($518,123 in 2014), at fair value
955,363

 
843,155

Notes receivable, net of accumulated amortization and allowance for uncollectibles of $35,596 and $9,062, respectively ($42,211 and $8,606, respectively, in 2014)
34,995

 
34,932

Office facilities, net of accumulated depreciation of $105,809 ($103,547 in 2014)
28,269

 
29,589

Loans held for sale, at fair value
95,876

 
19,243

Mortgage servicing rights
28,391

 
30,140

Intangible assets
31,700

 
31,700

Goodwill
137,889

 
137,889

Other assets
118,518

 
107,386

Total assets
$
2,784,386

 
$
2,787,455

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Drafts payable
$
34,615

 
$
35,373

Bank call loans
101,400

 
59,400

Payable to brokers, dealers and clearing organizations
350,230

 
257,161

Payable to customers
704,087

 
652,256

Securities sold under agreements to repurchase
397,389

 
687,440

Securities sold, but not yet purchased, at fair value
184,649

 
92,510

Accrued compensation
102,668

 
165,134

Accounts payable and other liabilities
203,493

 
141,352

Senior secured notes
150,000

 
150,000

Deferred tax liabilities, net of deferred tax assets of $62,254 ($68,622 in 2014)
19,186

 
13,097

Total liabilities
2,247,717

 
2,253,723

Contingencies (Note 11)

 

Stockholders’ equity
 
 
 
Share capital
 
 
 
Class A non-voting common stock, par value $0.001 per share, 50,000,000 shares authorized, 13,634,831 and 13,530,688 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively
65,153

 
62,264

Class B voting common stock, par value $0.001 per share, 99,680 shares authorized,
issued and outstanding
133

 
133

 
65,286

 
62,397

Contributed capital
41,123

 
45,118

Retained earnings
425,255

 
421,047

Accumulated other comprehensive loss
(1,485
)
 
(918
)
Total Oppenheimer Holdings Inc. stockholders’ equity
530,179

 
527,644

Noncontrolling interest
6,490

 
6,088

Total stockholders’ equity
536,669

 
533,732

Total liabilities and stockholders’ equity
$
2,784,386

 
$
2,787,455

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

2


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
(Expressed in thousands, except number of shares and per share amounts)
2015
 
2014
REVENUE
 
 
 
Commissions
$
109,695

 
$
122,138

Advisory fees
70,966

 
68,205

Investment banking
27,305

 
33,524

Interest
11,035

 
12,390

Principal transactions, net
18,555

 
8,817

Other
8,005

 
10,094

Total revenue
245,561

 
255,168

EXPENSES
 
 
 
Compensation and related expenses
163,091

 
171,950

Communications and technology
17,168

 
16,734

Occupancy and equipment costs
15,778

 
15,397

Clearing and exchange fees
6,402

 
5,892

Interest
3,910

 
5,164

Other
29,361

 
34,922

Total expenses
235,710

 
250,059

Income before income tax provision
9,851

 
5,109

Income tax provision
3,730

 
1,689

Net income for the period
6,121

 
3,420

Less net income attributable to noncontrolling interest
402

 
196

Net income attributable to Oppenheimer Holdings Inc.
$
5,719

 
$
3,224

Earnings per share attributable to Oppenheimer Holdings Inc.
 
 
 
Basic
$
0.42

 
$
0.24

Diluted
$
0.40

 
$
0.23

Dividends declared per share
$
0.11

 
$
0.11

Weighted average shares
 
 
 
Basic
13,704,228

 
13,536,805

Diluted
14,282,270

 
14,114,957

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

3


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
(Expressed in thousands)
2015
 
2014
Net income for the period
$
6,121

 
$
3,420

Other comprehensive loss, net of tax (1)
 
 
 
Currency translation adjustment
(567
)
 
(87
)
Comprehensive income for the period
5,554

 
3,333

Less net income attributable to noncontrolling interests
402

 
196

Comprehensive income attributable to Oppenheimer Holdings Inc.
$
5,152

 
$
3,137

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

4


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
(Expressed in thousands)
2015
 
2014
Share capital
 
 
 
Balance at beginning of period
$
62,397

 
$
60,198

Issuance of Class A non-voting common stock
2,889

 
1,918

Balance at end of period
65,286

 
62,116

Contributed capital
 
 
 
Balance at beginning of period
45,118

 
42,407

Tax benefit (deficiency) from share-based awards
(321
)
 
1,242

Share-based expense
898

 
1,600

Vested employee share plan awards
(4,572
)
 
(3,896
)
Balance at end of period
41,123

 
41,353

Retained earnings
 
 
 
Balance at beginning of period
421,047

 
418,204

Net income for the period attributable to Oppenheimer Holdings Inc.
5,719

 
3,224

Dividends paid ($0.11 per share)
(1,511
)
 
(1,486
)
Balance at end of period
425,255

 
419,942

Accumulated other comprehensive income
 
 
 
Balance at beginning of period
(918
)
 
1,709

Currency translation adjustment
(567
)
 
(87
)
Balance at end of period
(1,485
)
 
1,622

Total Oppenheimer Holdings Inc. stockholders’ equity
530,179

 
525,033

Noncontrolling interest
 
 
 
Balance at beginning of period
6,088

 
5,353

Net income attributable to noncontrolling interest
402

 
196

Balance at end of period
6,490

 
5,549

Total stockholders’ equity
$
536,669

 
$
530,582

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

5


OPPENHEIMER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
(Expressed in thousands)
2015
 
2014
Cash flows from operating activities
 
 
 
Net income for the period
$
6,121

 
$
3,420

Adjustments to reconcile net income to net cash used in operating activities
 
 
 
Payment of taxes due for vested share-based awards related to amounts the
Company withheld on behalf of its employees to meet minimum statutory tax
withholding requirements
(1,683
)
 
(2,074
)
Non-cash items included in net income:
 
 
 
Depreciation and amortization of office facilities and leasehold improvements
1,794

 
1,941

Deferred income taxes
6,089

 
5,450

Amortization of notes receivable
3,745

 
4,491

Amortization of debt issuance costs
121

 
160

Amortization of mortgage servicing rights
230

 
656

Provision for credit losses
12

 
18

Share-based compensation
1,495

 
3,834

Decrease (increase) in operating assets:
 
 
 
Cash segregated for regulatory and other purposes
17,077

 
42

Deposits with clearing organizations
(13,748
)
 
(7,756
)
Receivable from brokers, dealers and clearing organizations
(23,628
)
 
34,510

Receivable from customers
(26,083
)
 
(85,799
)
Income tax receivable
(2,089
)
 
(4,223
)
Securities purchased under agreements to resell
251,606

 
(65,723
)
Securities owned
(112,208
)
 
(79,928
)
Notes receivable
(3,808
)
 
(2,572
)
Loans held for sale
(76,633
)
 
66,551

Mortgage servicing rights
1,519

 
(1,003
)
Other assets
(11,820
)
 
34,299

Increase (decrease) in operating liabilities:
 
 
 
Drafts payable
(758
)
 
(6,892
)
Payable to brokers, dealers and clearing organizations
93,069

 
152,189

Payable to customers
51,831

 
3,000

Securities sold under agreements to repurchase
(290,051
)
 
(51,764
)
Securities sold, but not yet purchased
92,139

 
67,139

Accrued compensation
(63,063
)
 
(75,841
)
Accounts payable and other liabilities
62,141

 
(46,721
)
Cash used in operating activities
(36,583
)
 
(52,596
)
Cash flows from investing activities
 
 
 
Purchase of office facilities
(474
)
 
(1,397
)
Cash used in investing activities
(474
)
 
(1,397
)
Cash flows from financing activities
 
 
 
Cash dividends paid on Class A non-voting and Class B voting common stock
(1,511
)
 
(1,486
)
Issuance of Class A non-voting common stock

 
185

Tax benefit (deficiency) from share-based awards
(321
)
 
1,242

Increase in bank call loans, net
42,000

 
78,800

Cash provided by financing activities
40,168

 
78,741

Net increase in cash and cash equivalents
3,111

 
24,748

Cash and cash equivalents, beginning of period
63,807

 
98,294

Cash and cash equivalents, end of period
$
66,918

 
$
123,042

Schedule of non-cash financing activities
 
 
 
Employee share plan issuance
$
2,889

 
$
1,733

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
611

 
$
788

Cash paid during the period for income taxes, net of refunds
$
107

 
$
131

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

6


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

1.        Organization and basis of presentation
Organization
Oppenheimer Holdings Inc. ("OPY") is incorporated under the laws of the State of Delaware. The condensed consolidated financial statements include the accounts of OPY and its subsidiaries (together, the "Company"). The Company engages in a broad range of activities in the financial services industry, including retail securities brokerage, institutional sales and trading, investment banking (both corporate and public finance), research, market-making, trust services, mortgage banking and investment advisory and asset management services.
The principal subsidiaries of OPY are Oppenheimer & Co. Inc. ("Oppenheimer"), a registered broker dealer in securities and investment adviser under the Investment Advisers Act of 1940, Oppenheimer Asset Management Inc. ("OAM") and its wholly owned subsidiary, Oppenheimer Investment Management Inc. ("OIM"), both registered investment advisers under the Investment Advisers Act of 1940, Oppenheimer Trust Company of Delaware ("Oppenheimer Trust"), a limited purpose trust company that provides fiduciary services such as trust and estate administration and investment management, Oppenheimer Multifamily Housing & Healthcare Finance, Inc. ("OMHHF"), which is engaged in commercial mortgage origination and servicing, OPY Credit Corp., which offers syndication as well as trading of issued corporate loans, Oppenheimer Europe Ltd., based in the United Kingdom, with offices in the Isle of Jersey and Switzerland, which provides institutional equities and fixed income brokerage and corporate financial services and is regulated by the Financial Conduct Authority, and Oppenheimer Investments Asia Limited, based in Hong Kong, China, which provides assistance in accessing the U.S. equities markets and limited mergers and acquisitions advisory services to Asia-based companies, as well as offering fixed income brokerage services to institutional investors, and is regulated by the Securities and Futures Commission.
Oppenheimer provides its services from 93 offices in 24 states located throughout the United States and in 6 foreign jurisdictions. Oppenheimer owns Freedom Investments, Inc. ("Freedom"), a registered broker dealer in securities, which provides discount brokerage services, and Oppenheimer Israel (OPCO) Ltd., which is engaged in offering investment services in the State of Israel. Freedom has been approved to operate as a representative office in Beijing, China. Oppenheimer holds a trading permit on the New York Stock Exchange and is a member of several other regional exchanges in the United States.
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America ("U.S. GAAP") for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the "Form 10-K"). The accompanying December 31, 2014 condensed consolidated balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. Although these estimates are based on management’s knowledge of current events and actions that the Company may undertake in the future, actual results may differ materially from the estimates. The condensed consolidated results of operations for the three month period ended March 31, 2015 are not necessarily indicative of the results to be expected for any future interim or annual period.
Certain prior period amounts have been reclassified to conform to the current period presentation.
Accounting standards require the Company to present noncontrolling interests as a separate component of stockholders’ equity on the Company’s condensed consolidated balance sheet. As of March 31, 2015, the Company owned 83.68% of OMHHF and the noncontrolling interest recorded in the condensed consolidated balance sheet was $6.5 million.

7


2.        New accounting pronouncements
Recently Adopted
In April 2014, the FASB issued ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." Under this ASU, a discontinued operation is defined as a disposal of a component or group of components that is disposed of and represents a strategic shift that has or will have a major effect on an entity’s operation. The ASU also modified related disclosure requirements. The ASU became effective for the annual reporting period in the fiscal year that begins after December 15, 2014. The adoption of this accounting guidance did not have a material impact on the Company’s condensed consolidated financial statements.
In November 2014, the FASB issued ASU No. 2014-17 "Business Combination - Pushdown Accounting." The ASU gives the acquired entity the option of applying pushdown accounting in its stand-alone financial statements upon a change-in-control event. The ASU became effective upon issuance. The adoption of this accounting guidance did not have a material impact on the Company’s condensed consolidated financial statements.
Recently Issued
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Additionally, the ASU expands the disclosure requirements for revenue recognition. The ASU was originally to be effective for the annual reporting period in the fiscal year that begins after December 15, 2017 and early adoption is not permitted. However, on April 1, 2015, the FASB decided to defer for one year the effective date and also to permit entities to early adopt the ASU. The Company is currently evaluating the impact, if any, that the ASU will have on its condensed consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-11, "Transfers and Servicing – Repurchase-to-Maturity Transactions, Repurchase Financing, and Disclosures," which makes amendments to the guidance in Accounting Standards Codification 860 on accounting for certain repurchase agreements. The ASU is effective for the annual reporting period in the fiscal year that begins after December 15, 2015 and early adoption is not permitted. The Company is currently evaluating the impact, if any, that the ASU will have on its condensed consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation." The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based award as performance conditions that affect vesting. The ASU is effective for the annual reporting period in the fiscal year that begins after December 15, 2015 and early adoption is permitted. The Company will not early adopt this ASU. The Company is currently evaluating the impact, if any, that the ASU will have on its condensed consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, "Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern," which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The ASU requires management of an entity to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements and also provide disclosures if there is "substantial doubt about the entity's ability to continue as a going concern." The ASU is effective for the annual reporting period in the fiscal year that begins after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the impact on its disclosure.
In January 2015, the FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items," to simplify income statement classification by removing the concept of extraordinary items. Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of an unusual nature and occurs infrequently. This separate, net-of-tax presentation (and corresponding earnings per share impact) will no longer be allowed. However, the existing requirement to separately present items that are of an unusual nature or occur infrequently on a pre-tax basis within income from continuing operations has been retained. The ASU is effective for the annual reporting period in the fiscal year that begins after December 15, 2015. Early adoption is permitted, but only as of the beginning of the fiscal year of adoption. Upon adoption, a reporting entity may elect prospective or retrospective application. If adopted prospectively, both the nature and amount of any subsequent adjustments to previously reported extraordinary items must be disclosed. The Company will not early adopt this ASU. The Company is currently evaluating the impact, if any, that the ASU will have on its condensed consolidated financial statements.

8


In February 2015, the FASB issued ASU No. 2015-02, "Consolidation - Amendments to the Consolidation Analysis," to eliminate the deferral of the application of the revised consolidation rules and make changes to both the variable interest model and the voting model. Under this ASU, a general partner will not consolidate a partnership or similar entity under the voting model. The ASU is effective for the annual reporting period in the fiscal year that begins after December 15, 2015 and early adoption is permitted. The Company is currently evaluating the impact, if any, that the ASU will have on its condensed consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. The ASU is effective for the annual reporting period in the fiscal year that begins after December 15, 2015 and early adoption is permitted. The Company is currently evaluating the impact, if any, that the ASU will have on its condensed consolidated financial statements.
3.        Earnings per share
Basic earnings per share is computed by dividing net income attributable to Oppenheimer Holdings Inc. by the weighted average number of shares of Class A non-voting common stock ("Class A Stock") and Class B voting common stock ("Class B Stock") outstanding. Diluted earnings per share includes the weighted average number of shares of Class A Stock and Class B Stock outstanding and restricted stock awards of Class A Stock using the treasury stock method.
Earnings per share have been calculated as follows:
(Expressed in thousands, except number of shares and per share amounts)
 
 
 
 
For the Three Months Ended March 31,
 
2015
 
2014
Basic weighted average number of shares outstanding
13,704,228

 
13,536,805

Net dilutive effect of share-based awards, treasury method (1)
578,042

 
578,152

Diluted weighted average number of shares outstanding
14,282,270

 
14,114,957

Net income for the period
$
6,121

 
$
3,420

Net income attributable to noncontrolling interest, net of tax
402

 
196

Net income attributable to Oppenheimer Holdings Inc.
$
5,719

 
$
3,224

Basic earnings per share
$
0.42

 
$
0.24

Diluted earnings per share
$
0.40

 
$
0.23

 
(1)
For the three months ended March 31, 2015, the diluted earnings per share computation does not include the anti-dilutive effect of 46,076 shares of Class A Stock granted under share-based compensation arrangements (55,309 shares of Class A Stock granted under share-based compensation arrangements for the three months ended March 31, 2014).

9


4.        Receivable from and payable to brokers, dealers and clearing organizations
(Expressed in thousands)
 
 
 
 
As of
 
March 31, 2015
 
December 31, 2014
Receivable from brokers, dealers and clearing organizations consist of:
 
 
 
Securities borrowed
$
266,563

 
$
242,172

Receivable from brokers
25,663

 
38,149

Securities failed to deliver
19,248

 
11,055

Clearing organizations
23,857

 
21,106

Other
2,772

 
1,993

Total
$
338,103

 
$
314,475

Payable to brokers, dealers and clearing organizations consist of:
 
 
 
Securities loaned
$
165,005

 
$
137,892

Payable to brokers
7,347

 
4,559

Securities failed to receive
18,557

 
23,573

Other
159,321

 
91,137

Total
$
350,230

 
$
257,161

5.        Fair value measurements
Securities owned and securities sold but not yet purchased, investments and derivative contracts are carried at fair value with changes in fair value recognized in earnings each period. The Company’s other financial instruments are generally short-term in nature or have variable interest rates and as such their carrying values approximate fair value.
Securities Owned and Securities Sold, But Not Yet Purchased at Fair Value
(Expressed in thousands)
 
 
 
 
 
 
 
 
As of March 31, 2015
 
As of December 31, 2014
 
Owned
 
Sold
 
Owned
 
Sold
U.S. Government, agency and sovereign obligations
$
662,364

 
$
131,588

 
$
570,607

 
$
30,615

Corporate debt and other obligations
14,813

 
4,533

 
19,795

 
2,646

Mortgage and other asset-backed securities
3,982

 
1

 
6,689

 
255

Municipal obligations
83,942

 
51

 
60,833

 
51

Convertible bonds
41,054

 
11,453

 
49,813

 
11,369

Corporate equities
49,760

 
37,023

 
42,751

 
47,574

Money markets
391

 

 
1,245

 

Auction rate securities
99,057

 

 
91,422

 

Total
$
955,363

 
$
184,649

 
$
843,155

 
$
92,510

Securities owned and securities sold, but not yet purchased, consist of trading and investment securities at fair values. Included in securities owned at March 31, 2015 are corporate equities with estimated fair values of approximately $14.8 million ($15.7 million at December 31, 2014), which are related to deferred compensation liabilities to certain employees included in accrued compensation on the condensed consolidated balance sheet.

10


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 and, accordingly, are categorized in Level 1 of the fair value hierarchy.
U.S. Agency Obligations
U.S. agency securities consist of agency issued debt securities and mortgage pass-through securities. Non-callable agency issued debt securities are generally valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. The fair value of mortgage pass-through securities are model driven with respect to spreads of the comparable To-be-announced ("TBA") security. Actively traded non-callable agency-issued debt securities are categorized in Level 1 of the fair value hierarchy. Callable agency-issued debt securities and mortgage pass-through securities are generally categorized in Level 2 of the fair value hierarchy.
Sovereign Obligations
The fair value of sovereign obligations is determined based on quoted market prices when available or a valuation model that generally utilizes interest rate yield curves and credit spreads as inputs. Sovereign obligations are categorized in Level 1 or 2 of the fair value hierarchy.
Corporate Debt and Other Obligations
The fair value of corporate bonds is estimated using recent transactions, broker quotations and bond spread information. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy.
Mortgage and Other Asset-Backed Securities
The Company holds non-agency securities collateralized by home equity and various other types of collateral which are valued based on external pricing and spread data provided by independent pricing services and are generally categorized in Level 2 of the fair value hierarchy. When specific external pricing is not observable, the valuation is based on yields and spreads for comparable bonds and, consequently, the positions are categorized in Level 3 of the fair value hierarchy.
Municipal Obligations
The fair value of municipal obligations is estimated using recently executed transactions, broker quotations, and bond spread information. These obligations are generally categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.
Convertible Bonds
The fair value of convertible bonds is estimated using recently executed transactions and dollar-neutral price quotations, where observable. When observable price quotations are not available, fair value is determined based on cash flow models using yield curves and bond spreads as key inputs. Convertible bonds are generally categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.
Corporate Equities
Equity securities and options are generally valued based on quoted prices from the exchange or market where traded and categorized as Level 1 of the fair value hierarchy. To the extent quoted prices are not available, fair values are generally derived using bid/ask spreads, and these securities are generally categorized in Level 2 of the fair value hierarchy.
Loans Held for Sale
The Company elected the fair value option for loans held for sale and determines the fair value using both a discounted cash flow model (see key assumptions used in determining mortgage servicing rights below) and quoted observable prices from market participants. Therefore, the Company categorizes these loans held for sale in Level 2 of the fair value hierarchy.

11


Interest Rate Lock Commitments
OMHHF records an interest rate lock commitment upon the commitment to originate a loan with a borrower. This commitment, which can be an asset or a liability, is recognized at fair value, which reflects the fair value of the contractual loan origination related fees and sale premiums, net of co-broker fees, and the estimated fair value of the expected net future cash flows associated with the servicing of the loan. The interest rate lock commitments are valued using a discounted cash flow model developed based on U.S. Treasury rate changes and other observable market data. The fair value is determined after considering the potential impact of collateralization, and the Company categorizes these commitments within Level 3 of the fair value hierarchy.
To-Be-Announced ("TBA") sale contracts
TBA sale contracts of permanent loans originated or purchased at OMHHF are based on observable market prices of recently executed purchases of similar loans which are then used to derive a market implied spread, which in turn is used as the primary input in estimating the fair value of loans at the measurement date. TBA sale contracts of construction loans originated or purchased at OMHHF are based on observable market prices of recently executed purchases. TBA sale contracts are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions.
Mortgage Servicing Rights ("MSRs")
The Company’s MSRs are measured at fair value on a nonrecurring basis. The MSRs are initially measured at fair value on the loan securitization date and subsequently measured on the amortized cost basis subject to quarterly impairment testing. MSRs do not trade in active open markets with readily observable pricing. Therefore the Company uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model calculates the present value of estimated future net servicing income using inputs such as contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the model to reflect observable and unobservable market conditions and assumptions that a market participant would consider in valuing an MSR asset. MSRs are carried at the lower of amortized cost or estimated fair value.
The following key assumptions were used in determining the initial fair value of MSRs:
Discount Rate – The discount rate used for originated permanent and construction loans averaged approximately 12%.
Estimated Life – The estimated life of the MSRs is derived using a continuous prepayment ("CPR") assumption which estimates projected prepayments of the loan portfolio by considering factors such as note rates, lockouts, and prepayment penalties at the loan level. The CPR rates used are 0% until such time that a loan's prepayment penalty rate hits 4% of the unpaid principal balance of the loan with the vast majority of CPR speeds ranging from 10% to 15% thereafter, with an average of 12%.
Servicing Costs – The estimated future cost to service the loans on an annual basis per loan averages approximately $1,250 for a permanent loan, with a considerably higher cost to service during the construction phase.
The Company does not anticipate any credit losses on the commercial mortgages it services since all of the mortgages are insured for and guaranteed against credit losses by the Federal Housing Administration ("FHA") and the Government National Mortgage Association ("GNMA") and are thus guaranteed by the U.S. government.
Auction Rate Securities ("ARS")
In February 2010, Oppenheimer finalized settlements with each of the New York Attorney General’s office ("NYAG") and the Massachusetts Securities Division ("MSD" and, together with the NYAG, the "Regulators") concluding investigations and administrative proceedings by the Regulators concerning Oppenheimer’s marketing and sale of ARS. Pursuant to the settlements with the Regulators, Oppenheimer agreed to extend offers to repurchase ARS from certain of its clients subject to certain terms and conditions more fully described below. In addition to the settlements with the Regulators, Oppenheimer has also reached settlements of and received adverse awards in legal proceedings with various clients where the Company is obligated to purchase ARS. Pursuant to completed Purchase Offers (as defined) under the settlements with the Regulators and client related legal settlements and awards to purchase ARS, as of March 31, 2015, the Company purchased and holds (net of redemptions) approximately $105.3 million in ARS from its clients. In addition, the Company is committed to purchase another $14.2 million in ARS from clients through 2017 under legal settlements and awards.

12


The ARS positions that the Company owns and are committed to purchase primarily represent auction rate preferred securities issued by closed-end funds and, to a lesser extent, municipal auction rate securities which are municipal bonds wrapped by municipal bond insurance and student loan auction rate securities which are asset-backed securities backed by student loans.
Interest rates on ARS typically reset through periodic auctions. Due to the auction mechanism and generally liquid markets, ARS have historically been categorized as Level 1 of the fair value hierarchy. Beginning in February 2008, uncertainties in the credit markets resulted in substantially all of the ARS market experiencing failed auctions. Once the auctions failed, the ARS could no longer be valued using observable prices set in the auctions. The Company has used less observable determinants of the fair value of ARS, including the strength in the underlying credits, announced issuer redemptions, completed issuer redemptions, and announcements from issuers regarding their intentions with respect to their outstanding ARS. The Company has also developed an internal methodology to discount for the lack of liquidity and non-performance risk of the failed auctions. Due to liquidity problems associated with the ARS market, ARS that lack liquidity are setting their interest rates according to a maximum rate formula. For example, an auction rate preferred security maximum rate may be set at 200% of a short-term index such as LIBOR or U.S. Treasury yield. For fair value purposes, the Company has determined that the maximum spread would be an adequate risk premium to account for illiquidity in the market. Accordingly, the Company applies a spread to the short-term index for each asset class to derive the discount rate. The Company uses short-term U.S. Treasury yields as its benchmark short-term index. The risk of non-performance is typically reflected in the prices of ARS positions where the fair value is derived from recent trades in the secondary market. Accordingly, the Company adds 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 ARS purchase commitment, or derivative liability, arises from both the settlements with the Regulators and legal settlements and awards. The ARS purchase commitment represents the difference between the principal value and the fair value of the ARS the Company is committed to purchase. The Company utilizes the same valuation methodology for the ARS purchase commitment as it does for the ARS it owns. Additionally, the present value of the future principal value of ARS purchase commitments under legal settlements and awards is used in the discounted valuation model to reflect the time value of money over the period of time that the commitments are outstanding. The amount of the ARS purchase commitment only becomes determinable once the Company has met with its primary regulator and the NYAG and agreed upon a buyback amount, commenced the ARS buyback offer to clients, and received notice from its clients which ARS they are tendering. As a result, it is not possible to observe the current yields actually paid on the ARS until all of these events have happened which is typically very close to the time that the Company actually purchases the ARS. For ARS purchase commitments pursuant to legal settlements and awards, the criteria for purchasing ARS from clients is based on the nature of the settlement or award which will stipulate a time period and amount for each repurchase. The Company will not know which ARS will be tendered by the client until the stipulated time for repurchase is reached. Therefore, the Company uses the current yields of ARS owned in its discounted valuation model to determine a fair value of ARS purchase commitments. The Company also uses these current yields by asset class (i.e., auction rate preferred securities, municipal auction rate securities, and student loan auction rate securities) in its discounted valuation model to determine the fair value of ARS purchase commitments. In addition, the Company uses the discount rate and duration of ARS owned, by asset class, as a proxy for the duration of ARS purchase commitments.

13


Additional information regarding the valuation technique and inputs for Level 3 financial instruments used is as follows: 
(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quantitative Information about Level 3 Fair Value Measurements at March 31, 2015
Product
 
Principal
 
Valuation
Adjustment
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted
Average
Auction Rate Securities Owned (1)
 
 
 
 
 
 
 
 
Auction Rate Preferred Securities
 
$
83,700

 
$
3,783

 
$
79,917

 
Discounted Cash Flow
 
Discount Rate (2)
 
1.24% to 1.69%
 
1.45%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.0 years
 
4.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.10% to 0.48%
 
0.28%
Municipal Auction Rate Securities
 
11,575

 
972

 
10,603

 
Discounted Cash Flow
 
Discount Rate (4)
 
2.18%
 
2.18%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.5 years
 
4.5 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.21%
 
0.21%
 
 
5,975

 
538

 
5,437

 
Secondary Market Trading Activity
 
Observable trades in inactive market for in portfolio securities
 
91.00% of par
 
91.00% of par
Student Loan Auction Rate Securities
 
375

 
47

 
328

 
Discounted Cash Flow
 
Discount Rate (5)
 
2.91%
 
2.91%
 
 
 
 
 
 
 
 
 
 
Duration
 
7.0 years
 
7.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.79%
 
0.79%
Other (7)
 
3,625

 
853

 
2,772

 
Secondary Market Trading Activity
 
Observable trades in inactive market for in portfolio securities
 
76.46% of par
 
76.46% of par
 
 
$
105,250

 
$
6,193

 
$
99,057

 
 
 
 
 
 
 
 
Auction Rate Securities Commitments to Purchase (6)
 
 
 
 
 
 
 
 
Auction Rate Preferred Securities
 
$
10,116

 
$
449

 
$
9,667

 
Discounted Cash Flow
 
Discount Rate (2)
 
1.24% to 1.69%
 
1.45%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.0 years
 
4.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.10% to 0.48%
 
0.28%
Municipal Auction Rate Securities
 
4,116

 
346

 
3,770

 
Discounted Cash Flow
 
Discount Rate (4)
 
2.18%
 
2.18%
 
 
 
 
 
 
 
 
 
 
Duration
 
4.5 years
 
4.5 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.21%
 
0.21%
Student Loan Auction Rate Securities
 
18

 
2

 
16

 
Discounted Cash Flow
 
Discount Rate (5)
 
2.91%
 
2.91%
 
 
 
 
 
 
 
 
 
 
Duration
 
7.0 years
 
7.0 years
 
 
 
 
 
 
 
 
 
 
Current Yield (3)
 
0.79%
 
0.79%
 
 
$
14,250

 
$
797

 
$
13,453

 
 
 
 
 
 
 
 
Total
 
$
119,500

 
$
6,990

 
$
112,510

 
 
 
 
 
 
 
 
 
(1)
Principal amount represents the par value of the ARS and is included in securities owned in the condensed consolidated balance sheet at March 31, 2015. The valuation adjustment amount is included as a reduction to securities owned in the condensed consolidated balance sheet as well as principal transactions revenue in the statement of income at March 31, 2015.
(2)Derived by applying a multiple to the spread between 110% to 150% to the U.S. Treasury rate of 1.13%.
(3)Based on current auctions in comparable securities that have not failed.
(4)Derived by applying a multiple to the spread of 175% to the U.S. Treasury rate of 1.25%.
(5)Derived by applying the sum of the spread of 1.20% to the U.S. Treasury rate of 1.71%.

14


(6)
Principal amount represents the present value of the ARS par value that the Company is committed to purchase at a future date. This principal amount is presented as an off-balance sheet item. The valuation adjustment amount is included in accounts payable and other liabilities on the condensed consolidated balance sheet at March 31, 2015.
(7)
Represents ARS issued by a credit default obligation structure that the Company has purchased and is committed to purchase as a result of a legal settlement.
The fair value of ARS and ARS purchase commitments is particularly sensitive to movements in interest rates. Increases in short-term interest rates would increase the discount rate input used in the ARS valuation and thus reduce the fair value of the ARS (increase the valuation adjustment). Conversely, decreases in short-term interest rates would decrease the discount rate and thus increase the fair value of ARS (decrease the valuation adjustment). However, an increase (decrease) in the discount rate input would be partially mitigated by an increase (decrease) in the current yield earned on the underlying ARS asset increasing the cash flows and thus the fair value. Furthermore, movements in short term interest rates would likely impact the ARS duration (i.e., sensitivity of the price to a change in interest rates), which would also have a mitigating effect on interest rate movements. For example, as interest rates increase, issuers of ARS have an incentive to redeem outstanding securities as servicing the interest payments gets prohibitively expensive which would lower the duration assumption thereby increasing the ARS fair value. Alternatively, ARS issuers are less likely to redeem ARS in a lower interest rate environment as it is a relatively inexpensive source of financing which would increase the duration assumption thereby decreasing the ARS fair value. For example, see the following sensitivities:
The impact of a 25 basis point increase in the discount rate at March 31, 2015 would result in a decrease in the fair value of $1.0 million (does not consider a corresponding reduction in duration as discussed above).

The impact of a 50 basis point increase in the discount rate at March 31, 2015 would result in a decrease in the fair value of $2.1 million (does not consider a corresponding reduction in duration as discussed above).
These sensitivities are hypothetical and are based on scenarios where they are "stressed" and should be used with caution. These estimates do not include all of the interplay among assumptions and are estimated as a portfolio rather than as individual assets.
Due to the less observable nature of these inputs, the Company categorizes ARS in Level 3 of the fair value hierarchy. As of March 31, 2015, the Company had a valuation adjustment (unrealized loss) of $6.2 million for ARS owned which is included as a reduction to securities owned on the consolidated balance sheet. As of March 31, 2015, the Company also had a valuation adjustment of $797,000 on ARS purchase commitments from settlements with the Regulators and legal settlements and awards which is included in other liabilities on the condensed consolidated balance sheet. The total valuation adjustment was $7.0 million as of March 31, 2015. The valuation adjustment represents the difference between the principal value and the fair value of the ARS owned and ARS purchase commitments.
Investments
In its role as general partner in certain hedge funds and private equity funds, the Company, through its subsidiaries, holds direct investments in such funds. The Company uses the net asset value of the underlying fund as a basis for estimating the fair value of its investment. Due to the illiquid nature of these investments and difficulties in obtaining observable inputs, these investments are included in Level 3 of the fair value hierarchy.

15


The following table provides information about the Company’s investments in Company-sponsored funds at March 31, 2015:
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value
 
Unfunded
Commitments
 
Redemption Frequency
 
Redemption
Notice Period
Hedge funds (1)
$
2,092

 
$

 
Quarterly - Annually
 
30 - 120 Days
Private equity funds (2)
6,373

 
1,251

 
N/A
 
N/A
 
$
8,465

 
$
1,251

 
 
 
 
(1)
Includes investments in hedge funds and hedge fund of funds that pursue long/short, event-driven, and activist strategies. Each hedge fund has various restrictions regarding redemption; no investment is locked-up for a period greater than one year.
(2)
Includes private equity funds and private equity fund of funds with a focus on diversified portfolios, real estate and global natural resources. Due to the illiquid nature of these funds, investors are not permitted to make withdrawals without consent of the general partner. The lock-up period of the private equity funds can extend to 10 years.
Valuation Process
The Finance & Accounting ("F&A") group is responsible for the Company’s fair value policies, processes and procedures. F&A is independent from the business units and trading desks and is headed by the Company’s Chief Financial Officer ("CFO"), who has final authority over the valuation of the Company’s financial instruments. The Finance Control Group ("FCG") within F&A is responsible for daily profit and loss reporting, front-end trading system position reconciliations, monthly profit and loss reporting, and independent price verification procedures.
For financial instruments categorized in Levels 1 and 2 of the fair value hierarchy, the FCG performs a monthly independent price verification to determine the reasonableness of the prices provided by the Company’s independent pricing vendor. The FCG uses its third-party pricing vendor, executed transactions, and broker-dealer quotes for validating the fair values of financial instruments.
For financial instruments categorized in Level 3 of the fair value hierarchy measured on a recurring basis, primarily for ARS, a group comprised of the CFO, the Controller, and a financial analyst are responsible for the ARS valuation model and resulting fair valuations. Procedures performed include aggregating all ARS owned by type from firm inventory accounts and ARS purchase commitments from regulatory and legal settlements and awards provided by the Legal Department. Observable and unobservable inputs are aggregated from various sources and entered into the ARS valuation model. For unobservable inputs, the group reviews the appropriateness of the inputs to ensure consistency with how a market participant would arrive at the unobservable input. For example, for the duration assumption, the group would consider recent policy statements regarding short-term interest rates by the Federal Reserve and recent ARS issuer redemptions and announcements for future redemptions. The model output is reviewed for reasonableness and consistency. Where available, comparisons are performed between ARS owned or committed to purchase to ARS that are trading in the secondary market.
For financial instruments categorized in Level 3 of the fair value hierarchy measured on a non-recurring basis, primarily for MSRs, the OMHHF Valuation Committee, which is comprised of the OMHHF President & Chief Executive Officer, OMHHF CFO, OMHHF Chief Operating Officer, and OMHHF Asset Manager, is responsible for the MSR model and resulting fair valuations. The OMHHF Valuation Committee performs its review of the model and assumptions and its impairment analysis on a quarterly basis. On an annual basis, the Company utilizes an external valuation consultant to validate that the internal MSR model is functioning appropriately. The OMHHF Valuation Committee compares assumptions used for unobservable inputs, such as for discount rates, estimated life, and costs of servicing, to that used by the external valuation consultant for reasonableness. The model output and resulting valuation multiples are reviewed for reasonableness and consistency. Where available, comparisons are performed to recent MSR sales in the secondary market. The Company’s management reviews the results of both the quarterly reviews and annual impairment analysis.

16


Assets and Liabilities Measured at Fair Value
The Company’s assets and liabilities, recorded at fair value on a recurring basis as of March 31, 2015 and December 31, 2014, have been categorized based upon the above fair value hierarchy as follows:
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2015
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value Measurements at March 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
28,075

 
$

 
$

 
$
28,075

Deposits with clearing organizations
28,194

 

 

 
28,194

Securities owned:
 
 
 
 
 
 

U.S. Treasury securities
641,665

 

 

 
641,665

U.S. Agency securities
2,919

 
17,008

 

 
19,927

Sovereign obligations

 
772

 

 
772

Corporate debt and other obligations

 
14,813

 

 
14,813

Mortgage and other asset-backed securities

 
3,982

 

 
3,982

Municipal obligations

 
83,838

 
104

 
83,942

Convertible bonds

 
41,054

 

 
41,054

Corporate equities
49,760

 

 

 
49,760

Money markets
391

 

 

 
391

Auction rate securities

 

 
99,057

 
99,057

Securities owned, at fair value
694,735

 
161,467

 
99,161

 
955,363

Investments (1)

 
52,488

 
9,149

 
61,637

Loans held for sale

 
95,876

 

 
95,876

Derivative contracts:
 
 
 
 
 
 
 
TBAs

 
5,358

 

 
5,358

Interest rate lock commitments

 

 
11,424

 
11,424

Derivative contracts, total

 
5,358

 
11,424

 
16,782

Total
$
751,004

 
$
315,189

 
$
119,734

 
$
1,185,927

Liabilities
 
 
 
 
 
 
 
Securities sold, but not yet purchased:
 
 
 
 
 
 
 
U.S. Treasury securities
$
128,927

 
$

 
$

 
$
128,927

U.S. Agency securities

 
22

 

 
22

Sovereign obligations

 
2,639

 

 
2,639

Corporate debt and other obligations

 
4,533

 

 
4,533

Mortgage and other asset-backed securities

 
1

 

 
1

Municipal obligations

 
51

 

 
51

Convertible bonds

 
11,453

 

 
11,453

Corporate equities
37,023

 

 

 
37,023

Securities sold, but not yet purchased at fair value
165,950

 
18,699

 

 
184,649

Derivative contracts:
 
 
 
 
 
 
 
Futures
482

 

 

 
482

Foreign currency forward contracts
3

 

 

 
3

TBAs

 
199

 

 
199

Interest rate lock commitments

 

 
544

 
544

ARS purchase commitments

 

 
797

 
797

Derivative contracts, total
485

 
199

 
1,341

 
2,025

Total
$
166,435

 
$
18,898

 
$
1,341

 
$
186,674

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

17


Assets and liabilities measured at fair value on a recurring basis as of December 31, 2014
(Expressed in thousands)
 
 
 
 
 
 
 
 
Fair Value Measurements at December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Cash equivalents
$
31,175

 
$

 
$

 
$
31,175

Deposits with clearing organizations
24,188

 

 

 
24,188

Securities owned:
 
 
 
 
 
 
 
U.S. Treasury securities
540,223

 

 

 
540,223

U.S. Agency securities

 
26,261

 

 
26,261

Sovereign obligations

 
4,123

 

 
4,123

Corporate debt and other obligations

 
19,795

 

 
19,795

Mortgage and other asset-backed securities

 
6,689

 

 
6,689

Municipal obligations

 
60,669

 
164

 
60,833

Convertible bonds

 
49,813

 

 
49,813

Corporate equities
42,751

 

 

 
42,751

Money markets
1,245

 

 

 
1,245

Auction rate securities

 

 
91,422

 
91,422

Securities owned, at fair value
584,219

 
167,350

 
91,586

 
843,155

Investments (1)

 
51,246

 
9,508

 
60,754

Loans held for sale

 
19,243

 

 
19,243

Securities purchased under agreements to resell (2)

 
250,000

 

 
250,000

Derivative contracts:
 
 
 
 
 
 
 
TBAs

 
4,535

 

 
4,535

Interest rate lock commitments

 

 
7,576

 
7,576

Derivative contracts, total

 
4,535

 
7,576

 
12,111

Total
$
639,582

 
$
492,374

 
$
108,670

 
$
1,240,626

Liabilities
 
 
 
 
 
 
 
Securities sold, but not yet purchased:
 
 
 
 
 
 
 
U.S. Treasury securities
$
30,581

 
$

 
$

 
$
30,581

U.S. Agency securities

 
34

 

 
34

Corporate debt and other obligations

 
2,646

 

 
2,646

Mortgage and other asset-backed securities

 
255

 

 
255

Municipal obligations

 
51

 

 
51

Convertible bonds

 
11,369

 

 
11,369

Corporate equities
47,574

 

 

 
47,574

Securities sold, but not yet purchased at fair value
78,155

 
14,355

 

 
92,510

Derivative contracts:
 
 
 
 
 
 
 
Futures
353

 

 

 
353

Foreign currency forward contracts
10

 

 

 
10

TBAs

 
1,018

 

 
1,018

Interest rate lock commitments

 

 
1,222

 
1,222

ARS purchase commitments

 

 
902

 
902

Derivative contracts, total
363

 
1,018

 
2,124

 
3,505

Total
$
78,518

 
$
15,373

 
$
2,124

 
$
96,015

(1)
Included in other assets on the condensed consolidated balance sheet.
(2)
Included in securities purchased under agreements to resell where the Company has elected fair value option treatment.

18


There were no transfers between Level 1 and Level 2 financial assets and liabilities in the three months ended March 31, 2015.
The following tables present changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2015 and 2014:
(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities
 
For the Three Months Ended March 31, 2015
 
 
 
Total Realized
 
 
 
 
 
 
 
 
 
 
 
and Unrealized
 
 
 
 
 
 
 
 
 
Beginning
 
Gains
 
Purchases
 
Sales and
 
Transfers
 
Ending
 
Balance
 
(Losses) (5)(6)
 
and Issuances 
 
Settlements
 
In (Out)
 
Balance
Assets
 
 
 
 
 
 
 
 
 
 
 
Municipals
$
164

 
$
(60
)
 
$

 
$

 
$

 
$
104

Auction rate securities (1)(7)(8)
91,422

 
935

 
8,225

 
(1,525
)
 

 
99,057

Interest rate lock commitments (2)
7,576

 
3,848

 

 


 

 
11,424

Investments (3)
9,508

 
(231
)
 
198

 
(215
)
 
(111
)
 
9,149

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments (2)
1,222

 
678

 

 

 

 
544

ARS purchase commitments (4)
902

 
105

 

 

 

 
797

 
(1)
Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
(2)
Interest rate lock commitment assets and liabilities are recorded upon the commitment to originate a loan with a borrower and sell the loan to an investor. The commitment assets and liabilities are recognized at fair value, which reflects the fair value of the contractual loan origination related fees and sale premiums, net of co-broker fees, and the estimated fair value of the expected net future cash flows associated with the servicing of the loan.
(3)
Primarily represents general partner ownership and limited partner interests in hedge funds and private equity funds sponsored by the Company.
(4)
Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(5)
Included in principal transactions on the condensed consolidated statement of income, except for investments which are included in other income on the condensed consolidated statement of income.
(6)
Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
(7)
Purchases and issuances in connection with ARS purchase commitments represent instances in which the Company purchased ARS securities from clients during the period pursuant to regulatory and legal settlements and awards that satisfy the outstanding commitment to purchase obligation. This also includes instances where the ARS issuer has redeemed ARS where the Company had an outstanding purchase commitment prior to the Company purchasing those ARS.
(8)
Sales and settlements for the ARS purchase commitments represent additional purchase commitments made during the period for regulatory and legal ARS settlements and awards.

19


(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities
 
For the Three Months Ended March 31, 2014
 
 
 
Total Realized
 
 
 
 
 
 
 
 
 
 
 
and Unrealized
 
 
 
 
 
 
 
 
 
Beginning
 
Gains
 
Purchases
 
Sales and
 
Transfers
 
Ending
 
Balance
 
(Losses) (5)(6)
 
and Issuances 
 
Settlements
 
In (Out)
 
Balance
Assets
 
 
 
 
 
 
 
 
 
 
 
Municipals
$
236

 
$
(166
)
 
$

 
$

 
$

 
$
70

Auction rate securities (1)(7)(8)
85,124

 
1

 
3,200

 
(3,300
)
 

 
85,025

Interest rate lock commitments (2)
2,375

 
663

 

 

 

 
3,038

Investments (3)
5,946

 
(169
)
 
4,052

 
(503
)
 
(620
)
 
8,706

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments (2)
3,653

 
(749
)
 

 

 

 
4,402

ARS purchase commitments (4)
2,600

 
395

 

 

 

 
2,205

(1)
Represents auction rate preferred securities, municipal auction rate securities and student loan auction rate securities that failed in the auction rate market.
(2)
Interest rate lock commitment assets and liabilities are recorded upon the commitment to originate a loan with a borrower and sell the loan to an investor. The commitment assets and liabilities are recognized at fair value, which reflects the fair value of the contractual loan origination related fees and sale premiums, net of co-broker fees, and the estimated fair value of the expected net future cash flows associated with the servicing of the loan.
(3)
Primarily represents general partner ownership and limited partner interests in hedge funds and private equity funds sponsored by the Company.
(4)
Represents the difference in principal and fair value for auction rate securities purchase commitments outstanding at the end of the period.
(5)
Included in principal transactions on the condensed consolidated statement of income, except for investments which are included in other income on the condensed consolidated statement of income.
(6)
Unrealized gains (losses) are attributable to assets or liabilities that are still held at the reporting date.
(7)
Purchases and issuances in connection with ARS purchase commitments represent instances in which the Company purchased ARS securities from clients during the period pursuant to regulatory and legal settlements and awards that satisfy the outstanding commitment to purchase obligation. This also includes instances where the ARS issuer has redeemed ARS where the Company had an outstanding purchase commitment prior to the Company purchasing those ARS.
(8)
Sales and settlements for the ARS purchase commitments represent additional purchase commitments made during the period for regulatory and legal ARS settlements and awards.
Financial Instruments Not Measured at Fair Value
The tables below present the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value in the condensed consolidated balance sheets. The tables below exclude non-financial assets and liabilities (e.g., office facilities and accrued compensation).
The carrying value of financial instruments not measured at fair value categorized in the fair value hierarchy as Level 1 or Level 2 (e.g., cash and receivables from customers) approximates fair value because of the relatively short period of time between their origination and expected maturity. The fair value of the Company’s 8.75% Senior Secured Notes, categorized in Level 2 of the fair value hierarchy, is based on quoted prices from the market in which the Notes trade.
The fair value of MSRs is based on observable and unobservable inputs and thus categorized as Level 3 in the fair value hierarchy. See valuation techniques above for key assumptions used.

20


Assets and liabilities not measured at fair value on a recurring basis as of March 31, 2015 
(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement: Assets
 
As of March 31, 2015
 
As of March 31, 2015
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
38,843

 
$
38,843

 
$
38,843

 
$

 
$

 
$
38,843

Cash segregated for regulatory and other purposes
1,517

 
1,517

 
1,517

 

 

 
1,517

Deposits with clearing organization
22,064

 
22,064

 
22,064

 

 

 
22,064

Receivable from brokers, dealers and clearing organizations:
 
 
 
 
 
 
 
 
 
 
 
Securities borrowed
266,563

 
266,563

 

 
266,563

 

 
266,563

Receivables from brokers
25,663

 
25,663

 

 
25,663

 

 
25,663

Securities failed to deliver
19,248

 
19,248

 

 
19,248

 

 
19,248

Clearing organizations
23,857

 
23,857

 

 
23,857

 

 
23,857

Other
2,772

 
2,772

 

 
2,772

 

 
2,772

 
338,103

 
338,103

 

 
338,103

 

 
338,103

Receivable from customers
890,260

 
890,260

 

 
890,260

 

 
890,260

Mortgage servicing rights
28,391

 
40,772

 

 

 
40,772

 
40,772

 
(Expressed in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement: Liabilities
 
As of March 31, 2015
 
As of March 31, 2015
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Drafts payable
$
34,615

 
$
34,615

 
$
34,615

 
$

 
$

 
$
34,615

Bank call loans
101,400

 
101,400

 

 
101,400