# Oppenheimer Holdings Inc: Form 10-Q for the period ended Sep 30, 2019

- Company: [Oppenheimer Holdings Inc](/companies/opy.md) (CIK 791963)
- Form: 10-Q
- Filed: 2019-10-25
- Accepted by EDGAR: Oct 25, 2019, 08:40 ET
- Period: 2019-09-30
- Accession: 0000791963-19-000029
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/791963/000079196319000029/opy-9302019x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/791963/000079196319000029/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-30 | $214.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-01-01 to 2019-09-30 | $664.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2019-07-01 to 2019-09-30 | $6.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-01-01 to 2019-09-30 | $39.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-07-01 to 2019-09-30 | $11.5m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-01-01 to 2019-09-30 | $37.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-07-01 to 2019-09-30 | $2.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-01-01 to 2019-09-30 | $12.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-30 | $3.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-01-01 to 2019-09-30 | $27.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-30 | $0.29 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-01-01 to 2019-09-30 | $1.99 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-07-01 to 2019-09-30 | $0.31 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-01-01 to 2019-09-30 | $2.13 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-30 | 13,832,994 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-01-01 to 2019-09-30 | 13,846,139 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-01-01 to 2019-09-30 | $22.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-01-01 to 2019-09-30 | $8.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2019-01-01 to 2019-09-30 | $4.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2019-01-01 to 2019-09-30 | $8.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-09-30 | $26.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2019-09-30 | $2.20bn | us-gaap:Assets |
| Total liabilities | at 2019-09-30 | $1.64bn | us-gaap:Liabilities |
| Long-term debt | at 2019-09-30 | $149.5m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2019-09-30 | $566.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,705 characters.

### BACKGROUND

Oppenheimer Holdings Inc. (the "Company", "we", "our" or "us") 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 September 30, 2019, we provided our services from 94 offices in 25 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 as of September 30, 2019 totaled $87.6 billion. The Company provides investment advisory services through OAM and Oppenheimer Investment Management LLC ("OIM") and Oppenheimer's financial adviser direct programs. At September 30, 2019, client assets under management ("AUM") totaled $30.2 billion. We also provide trust services and products through Oppenheimer Trust Company of Delaware and discount brokerage services through Freedom Investments, Inc. ("Freedom"). Through OPY Credit Corp., we offer syndication as well as trading of issued syndicated corporate loans. At September 30, 2019, the Company employed 2,974 employees (2,917 full-time and 57 part-time), of whom 1,043 were financial advisers.

### Outlook

We are focused on growing our private client and asset management businesses through strategic additions of experienced financial advisers in our existing branch system and employment of experienced money management personnel in our asset management business as well as deploying our capital for expansion through targeted acquisitions. In addition, we commit to the improvement of our technology capability to support client service and the expansion of our capital markets capabilities while addressing the issue of managing expenses.

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. We are committed to continuing to improve our technology capabilities to ensure compliance with industry regulations, support client service and expand our wealth management and capital markets capabilities. We recognize the importance of compliance with applicable regulatory requirements and are committed to performing rigorous and ongoing assessments of our compliance and risk management effort, investing in people and programs, and providing a platform with first class investment programs and services.

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. Our long-term intention is to pursue growth by acquisition where we can find a comfortable match in terms of corporate goals and personnel at a price that would provide our shareholders with incremental value. We review potential acquisition opportunities from time to time on the basis of fulfilling the Company's strategic goals, while evaluating and managing our existing businesses.

### Impact of Interest Rates

The Federal Reserve Bank implemented a series of increases in its benchmark short-term interest rate between December 2015 and December 2018. These increases in short-term interest rates had a significant positive impact on our overall financial performance, as we have programs offered to our clients (for the investment of short-term funds as well as margin loans) which are sensitive to changes in interest rates. Given the relationship of our interest-sensitive assets to liabilities, increases in short-term interest rates generally result in an overall increase in our net earnings. Clients’ domestic cash sweep balances have decreased over the past several quarters as clients increased their allocations to other investments, largely driven by the improvement of equity market conditions as well as other short-term fixed income investments. While the Federal Reserve increased short-term interest rates over the last few years, market deposit rates paid on client cash balances were not impacted to as great a degree, resulting in an increase in fees the Company earned from FDIC insured deposits of clients offered by the Company. Any decreases in short-term interest rates, increases in deposit rates paid to clients, and/or a significant decline in our clients’ cash balances would likely have a negative impact on our earnings. During the third quarter of 2019, the Federal Reserve decreased its benchmark short-term interest rate by 0.25% on two separate occasions. Accordingly, the Company’s earnings during the third quarter of 2019 were negatively impacted by such decreases. Given the recent concerns around the slowing global economy, there are expectations of further rate cuts which would negatively impact the Company’s earnings going forward.

### EXECUTIVE SUMMARY

The Company reported net income attributable to Oppenheimer Holdings Inc. of $3.9 million or $0.31 basic net income per share for the three months ended September 30, 2019 compared with net income attributable to Oppenheimer Holdings Inc. of $5.1 million or $0.38 basic net income per share for the three months ended September 30, 2018. Income before income taxes was $6.5 million for the three months ended September 30, 2019 compared with income before income taxes of $7.2 million for the three months ended September 30, 2018. Revenue for the three months ended September 30, 2019 was $234.8 million compared with revenue of $237.8 million for the three months ended September 30, 2018, a decrease of 1.3%.

During the third quarter of 2019, the major stock indices in the U.S. increased 1.2% extending gains for the year-to-date period ending September 30, 2019 to 18.7%. Volatility returned to the equity markets during the third quarter due to the trade war between the U.S. and China, concerns around the strength of the economy, and potential impeachment proceedings. The markets set new highs in July only to retreat in August amidst increased trade tensions between the U.S. and China. Markets rallied in September around easing trade tensions and the expectations of the Federal Reserve loosening monetary policy. On September 18, 2019, the Fed cut the target range for its benchmark interest rate by 0.25%, the second such decrease during the third quarter of 2019. The 10-year Treasury yield declined 32.5 basis points to end the third quarter of 2019 at 1.68%.

The operating results for the period reflect a modest slowdown in business conditions as well as the impact of lower interest rates on earnings. The transaction-based business was lower again despite an up-tick in volatility. The firm did, however, benefit from the slight increase in share prices and increases in net client assets from the first quarter to the second quarter of 2019, which is reflected in advisory fees earned in the third quarter of 2019. The improvement in security valuations at the end of the third quarter will positively impact advisory fees for the fourth quarter, given the increase of 2.0% in assets under management. Our investment banking business was impacted by fewer lead-managed equity underwriting transactions which led to lower underwriting income compared to that of the prior year period. This was partially offset by higher M&A advisory fees during the period. The decrease in short-term interest rates resulted in lower cash sweep income during the third quarter of 2019.

### RESULTS OF OPERATIONS

The following table and discussion summarizes the changes in the major revenue and expense categories for the three and nine months ended September 30, 2019 compared with the same period in 2018:

*(Expressed in thousands)*

| Revenue | For the Three Months Ended September 30, 2019 | 2018 | % Change | For the Nine Months Ended September 30, 2019 | 2018 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commissions | $78,627 | $79,678 | (1.3) | $238,932 | $245,935 | (2.8) |
| Advisory fees | 80,887 | 78,154 | 3.5 | 235,241 | 232,972 | 1.0 |
| Investment banking | 21,798 | 28,328 | (23.1) | 81,847 | 84,442 | (3.1) |
| Bank deposit sweep income | 28,894 | 30,053 | (3.9) | 94,692 | 84,203 | 12.5 |
| Interest | 12,344 | 13,403 | (7.9) | 38,621 | 38,686 | (0.2) |
| Principal transactions, net | 7,606 | (16) | \* | 22,089 | 9,110 | 142.5 |
| Other | 4,637 | 8,214 | (43.5) | 26,076 | 19,552 | 33.4 |
| Total revenue | 234,793 | 237,814 | (1.3) | 737,498 | 714,900 | 3.2 |
| **Expenses** |  |  |  |  |  |  |
| Compensation and related expenses | 151,284 | 152,846 | (1.0) | 467,422 | 457,821 | 2.1 |
| Communications and technology | 20,872 | 18,602 | 12.2 | 61,457 | 55,287 | 11.2 |
| Occupancy and equipment costs | 16,010 | 15,106 | 6.0 | 46,856 | 45,435 | 3.1 |
| Clearing and exchange fees | 5,469 | 5,378 | 1.7 | 16,479 | 17,254 | (4.5) |
| Interest | 11,531 | 12,915 | (10.7) | 37,709 | 32,787 | 15.0 |
| Other | 23,131 | 25,813 | (10.4) | 67,636 | 77,024 | (12.2) |
| Total expenses | 228,297 | 230,660 | (1.0) | 697,559 | 685,608 | 1.7 |
| Income before income taxes | 6,496 | 7,154 | (9.2) | 39,939 | 29,292 | 36.3 |
| Income taxes | 2,547 | 2,083 | 22.3 | 12,421 | 8,661 | 43.4 |
| **Net income** | $3,949 | $5,071 | (22.1) | $27,518 | $20,631 | 33.4 |

\* Percentage not meaningful.

### Third Quarter 2019

#### Revenue

Commission revenue was $78.6 million for the three months ended September 30, 2019, a decrease of 1.3% compared with $79.7 million for the three months ended September 30, 2018.

Advisory fees were $80.9 million for the three months ended September 30, 2019, an increase of 3.5% compared with $78.2 million for the three months ended September 30, 2018 due to a higher level of AUM.

Investment banking revenue decreased 23.1% to $21.8 million for the three months ended September 30, 2019 compared with $28.3 million for the three months ended September 30, 2018 as the Company participated in fewer lead-managed transactions during the three months ended September 30, 2019.

Bank deposit sweep income was $28.9 million for the three months ended September 30, 2019, a decrease of 3.9% compared with $30.1 million for the three months ended September 30, 2018 due to lower short-term interest rates and lower client balances during the three months ended September 30, 2019.

Interest revenue was $12.3 million for the three months ended September 30, 2019, a decrease of 7.9% compared with $13.4 million for the three months ended September 30, 2018 due to lower short-term interest rates during the three months ended September 30, 2019.

Principal transactions revenue was $7.6 million for the three months ended September 30, 2019, compared with a loss of $16,000 for the three months ended September 30, 2018. The increase was due to the Company's participation in tender offers by issuers of ARS which resulted in recognized losses totaling $8.1 million during the third quarter of 2018. The recognized losses were comprised of realized losses of $4.6 million related to tendering ARS holdings at prices below par and unrealized losses of $3.5 million related to revaluing the remaining affected ARS owned and commitments to purchase at the tender offer prices.

Other revenue was $4.6 million for the three months ended September 30, 2019, a decrease of 43.5% compared to $8.2 million for the three months ended September 30, 2018 primarily due to the decrease in cash surrender value of the Company's life insurance policies and proceeds received under those insurance policies partially offset by a favorable legal settlement during the three months ended September 30, 2019.

#### Expenses

Compensation and related expenses totaled $151.3 million during the three months ended September 30, 2019, a decrease of 1.0% compared with the three months ended September 30, 2018. The decrease was due to lower deferred, incentive and share-based compensation costs partially offset by higher salaries and traders' compensation costs during the three months ended September 30, 2019. The Company recorded compensation and related expenses of $3.4 million related to its OARs plan due to the price of its Class A Stock increasing from $27.22 at the end of the second quarter of 2019 to $30.06 at the end of the third quarter of 2019. During the third quarter of 2018, the Company had compensation expenses related to its OARs plan of $4.3 million. Compensation and related expenses as a percentage of revenue was 64.4% during the three months ended September 30, 2019 compared with 64.3% during the three months ended September 30, 2018.

Non-compensation expenses were $77.0 million during the three months ended September 30, 2019, a decrease of 1.0% compared with $77.8 million during the three months ended September 30, 2018 due primarily to lower legal and regulatory costs and interest costs partially offset by higher communications and technology costs and costs associated with the Notes redemption during the three months ended September 30, 2019. The Company incurred $1.9 million in costs associated with paying the Call Premium ($1.7 million) and the write-off of debt issuance costs ($0.2 million) related to the redemption of $50 million (25%) of its Notes during the third quarter of 2019.

The effective income tax rate for the three months ended September 30, 2019 was 39.2%, 10.0% higher when compared with 29.2% for the three months ended September 30, 2018 due to losses in foreign jurisdictions without any associated tax benefits. The effective rate reflects the Company's estimate of the annual effective tax rate adjusted for certain discrete items.

### Year-to-date 2019

#### Revenue

Commission revenue was $238.9 million for the nine months ended September 30, 2019, a decrease of 2.8% compared with $245.9 million for the nine months ended September 30, 2018.

Advisory fees were $235.2 million for the nine months ended September 30, 2019, an increase of 1.0% compared with $233.0 million for the nine months ended September 30, 2018.

Investment banking revenue decreased 3.1% to $81.8 million for the nine months ended September 30, 2019 compared with $84.4 million for the nine months ended September 30, 2018 due to lower equities underwriting revenue partially offset by higher M&A fee income during the nine months ended September 30, 2019.

Bank deposit sweep income was $94.7 million for the nine months ended September 30, 2019, an increase of 12.5% compared with $84.2 million for the nine months ended September 30, 2018 due to higher short-term interest rates and lower client cash balances during the nine months ended September 30, 2019.

Interest revenue was $38.6 million for the nine months ended September 30, 2019, a decrease of 0.2% compared with $38.7 million for the nine months ended September 30, 2018.

Principal transactions revenue was $22.1 million for the nine months ended September 30, 2019, an increase of 142.5% compared with $9.1 million for the nine months ended September 30, 2018. The increase was due to the Company's participation in tender offers by issuers of ARS which resulted in recognized losses totaling $8.1 million during the third quarter of 2018. The recognized losses are comprised of realized losses of $4.6 million related to tendering ARS holdings at prices below par and unrealized losses of $3.5 million related to revaluing the remaining affected ARS owned and commitments to purchase at the tender offer prices.

Other revenue was $26.1 million for the nine months ended September 30, 2019, an increase of 33.4% compared to $19.6 million for the nine months ended September 30, 2018 due primarily to the increase in cash surrender value of the Company's life insurance policies and proceeds received under those insurance policies as well as to a favorable legal settlement during the nine months ended September 30, 2019.

#### Expenses

Compensation and related expenses (including salaries, production and incentive compensation, share-based compensation, deferred compensation, and other benefit-related items) totaled $467.4 million during the nine months ended September 30, 2019, an increase of 2.1% compared with the nine months ended September 30, 2018. The increase was due to higher salary, deferred and share-based compensation expenses, partially offset by lower production-related compensation costs during the nine months ended September 30, 2019. Compensation and related expenses as a percentage of revenue was 63.4% during the nine months ended September 30, 2019 compared with 64.0% during the nine months ended September 30, 2018.

Non-compensation expenses were $230.1 million during the nine months ended September 30, 2019, an increase of 1.0% compared with $227.8 million during the nine months ended September 30, 2018 due to higher communications and technology costs and interest costs partially offset by lower legal and regulatory costs during the nine months ended September 30, 2019.

The effective income tax rate for the nine months ended September 30, 2019 was 31.1% slightly higher when compared with 29.6% for the nine months ended September 30, 2018. The effective rate reflects the Company's estimate of the annual effective tax adjusted for uncertain discrete items.

### BUSINESS SEGMENTS

The table below presents information about the reported revenue and income (loss) before income taxes of the Company's reportable business segments for the three and nine months ended September 30, 2019 and 2018:

*(Expressed in thousands)*

| Revenue | For the Three Months Ended September 30, 2019 | 2018 | % Change | For the Nine Months Ended September 30, 2019 | 2018 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Private Client | $152,054 | $158,083 | (3.8) | $477,509 | $468,730 | 1.9 |
| Asset Management | 18,368 | 17,870 | 2.8 | 53,576 | 53,220 | 0.7 |
| Capital Markets | 64,068 | 68,130 | (6.0) | 206,848 | 197,865 | 4.5 |
| Corporate/Other | 303 | (6,269) | \* | (435) | (4,915) | 91.1 |
| Total | $234,793 | $237,814 | (1.3) | $737,498 | $714,900 | 3.2 |
| **Income (loss) before income taxes** |  |  |  |  |  |  |
| Private Client | $35,251 | $37,608 | (6.3) | $121,501 | $111,283 | 9.2 |
| Asset Management | 4,932 | 4,127 | 19.5 | 12,492 | 11,803 | 5.8 |
| Capital Markets | (6,385) | (2,076) | (207.6) | (10,833) | (8,332) | (30.0) |
| Corporate/Other | (27,302) | (32,505) | 16.0 | (83,221) | (85,462) | 2.6 |
| Total | $6,496 | $7,154 | (9.2) | $39,939 | $29,292 | 36.3 |

#### \* Percentage not meaningful

### Private Client

Private Client reported revenue of $152.1 million for the third quarter of 2019, 3.8% lower than the third quarter of 2018 due to lower commissions, bank deposit sweep income, and decreases in the cash surrender value of Company-owned life insurance partially offset by higher asset management fees during the third quarter of 2019. Income before income taxes was $35.3 million for the third quarter of 2019, a decrease of 6.3% compared with the third quarter of 2018.

- Client assets under administration were $87.6 billion at September 30, 2019, compared with $80.1 billion at December 31, 2018, an increase of 9.4%.
- Financial adviser headcount was 1,043 at the end of the third quarter of 2019, down from 1,078 at the end of the third quarter of 2018.
- Retail commissions were $46.0 million for the third quarter of 2019, a decrease of 3.4% from the third quarter of 2018.
- Advisory fee revenue on traditional and alternative managed products was $62.5 million for the third quarter of 2019, an increase of 3.3% from the third quarter of 2018 (see Asset Management below for further information). The increase in advisory fees was due to an increase in assets under management ("AUM") at June 30, 2019 as a result of the increase in the equities markets and net new assets during the second quarter of 2019.
- Bank deposit sweep income was $28.9 million for the third quarter of 2019, a decrease of 3.9% compared with $30.1 million for the third quarter of 2018 due to lower short-term interest rates and lower client cash balances during the third quarter of 2019.

### Asset Management

Asset Management reported revenue of $18.4 million for the third quarter of 2019, 2.8% higher than the third quarter of 2018 due to higher AUM at June 30, 2019, which is the basis for advisory fees earned during the third quarter of 2019, as a result of the increase in the equities markets and net new assets during the second quarter of 2019. Income before income taxes was $4.9 million for the third quarter of 2019, an increase of 19.5% compared with the third quarter of 2018 due to higher AUM at June 30, 2019.

- Advisory fee revenue on traditional and alternative managed products was $18.4 million for the third quarter of 2019, an increase of 4.5% from the third quarter of 2018 primarily due to higher AUM at June 30, 2019.
- Advisory fees are calculated based on the value of client AUM at the end of the prior quarter which totaled $30.2 billion at June 30, 2019 ($28.7 billion at June 30, 2018) and are allocated between the Private Client and Asset Management business segments.
- AUM increased 2.0% to $30.2 billion at September 30, 2019, a record high, compared with $29.6 billion at September 30, 2018, which is the basis for advisory fee billings for the fourth quarter of 2019. The increase in AUM was comprised of lower asset values of $0.4 billion on existing client holdings and a positive net contribution of assets of $1.0 billion.

The following table provides a breakdown of the change in assets under management for the three months ended September 30, 2019:

*(Expressed in millions)*

| Fund Type | For the Three Months Ended September 30, 2019 Beginning Balance Contributions | Redemptions |  | Appreciation (Depreciation) | Ending Balance |
| --- | ---: | ---: | ---: | ---: | ---: |
| Traditional (1) | $25,768 | $778 | $(496) | $(228) | $25,822 |
| Institutional Fixed Income (2) | 748 | 30 | (15) | 11 | 774 |
| Alternative Investments: |  |  |  |  |  |
| Hedge funds (3) | 3,005 | 94 | (111) | (64) | 2,924 |
| Private Equity Funds (4) | 226 | — | — | 16 | 242 |
| Portfolio Enhancement Program (5) | 446 | — | (5) | — | 441 |
|  | $30,193 | $902 | $(627) | $(265) | $30,203 |

(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 $64.1 million for the third quarter of 2019, 6.0% lower than the third quarter of 2018 primarily due to lower equities underwriting fees partially offset by higher trading income. Loss before income taxes was $6.4 million for the third quarter of 2019 compared with loss before income taxes of $2.1 million for the third quarter of 2018.

- Institutional equities commissions decreased 0.9% to $22.9 million for the third quarter of 2019 compared with the third quarter of 2018.
- Advisory fees earned from investment banking activities increased 9.4% to $10.5 million for the third quarter of 2019 compared with $9.6 million for the third quarter of 2018 due to an increase in mergers and acquisitions transactions during the third quarter of 2019.
- Equities underwriting fees decreased 50.0% to $7.4 million for the third quarter of 2019 compared with $14.8 million for the third quarter of 2018 as the Company participated in fewer lead-managed transactions during the third quarter of 2019.
- Revenue from taxable fixed income increased to $17.1 million during the third quarter of 2019 from $14.7 million during the third quarter of 2018 due to higher commissions and trading income.
- Revenue from public finance and municipal trading was virtually flat at $4.8 million during the third quarter of 2019 compared with the third quarter of 2018 as higher trading income was offset by lower commissions and syndicate income during the third quarter of 2019.

### CRITICAL ACCOUNTING POLICIES

The Company's condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Reference is also made to the Company's consolidated financial statements and notes thereto found in its Annual Report on Form 10-K for the year ended December 31, 2018.

The Company's accounting policies are essential to understanding and interpreting the financial results reported on the condensed consolidated financial statements. The significant accounting policies used in the preparation of the Company's condensed consolidated financial statements are summarized in note 2 to those statements and notes thereto found in its Annual Report on Form 10-K for the year ended December 31, 2018. 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.

During the nine months ended September 30, 2019, there were no material changes to matters discussed under the heading "Critical Accounting Polices" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

### LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2019, total assets decreased by 1.6% from December 31, 2018. 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. We finance our trading in government securities through the use of securities sold under agreements to repurchase ("repurchase agreements"). We met our 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 September 30, 2019, the Company had $nil of such borrowings outstanding compared to outstanding borrowings of $15.0 million at December 31, 2018. 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 our ability to utilize their capital for other purposes. The regulatory capital requirements for Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited were $5.0 million and $382,700, respectively, at September 30, 2019. 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 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 $3.1 million for those subsidiaries. We have 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 Tax Cuts and Jobs Act, we will continue to review our historical treatment of these earnings to determine whether our historical practice will continue or whether a change is warranted.

### Refinancing

On June 23, 2017, in a private offering, we issued $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, we completed an exchange offer in which we exchanged 99.8% of our Unregistered Notes for a like principal amount of notes with identical terms except that such new notes had been registered under the Securities Act of 1933, as amended (the "Notes"). We did not receive any proceeds in the exchange offer. Interest on the Notes is payable semi-annually on January 1st and July 1st. We used a portion of the net proceeds from the offering of the Unregistered Notes to redeem in full our 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.

On June 7, 2019, S&P affirmed the Company's 'B+' Corporate Family rating and 'B+' rating on the Notes and changed its outlook to positive. On August 19, 2019, Moody's Corporation upgraded the Company's Corporate Family to ‘B1’ rating and affirmed its 'B1' rating on the Notes and changed its outlook to stable.

On August 25, 2019, the Company redeemed a total of $50.0 million (25%) aggregate principal amount of the outstanding Notes at a redemption price equal to 103.375% (“Call Premium”) of the principal amount redeemed, plus accrued and unpaid interest thereon to the Redemption Date. See note 10 to the condensed consolidated financial statements appearing in Item 1 for further discussion.

### 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. Our receivables are, for the most part, collateralized by marketable securities. Our collateral maintenance policies and procedures are designed to limit our exposure to credit risk. Securities owned, with the exception of the ARS, are mainly comprised of actively trading readily marketable securities. We advanced $3.8 million in forgivable notes (which are inherently illiquid) to employees for the three months ended September 30, 2019 ($4.2 million for the three months ended September 30, 2018) as upfront or backend inducements to commence or continue employment as the case may be. The amount of funds allocated to such inducements will vary with hiring activity.

We satisfy our 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.

We obtain short-term borrowings primarily through bank call loans. Bank call loans are generally payable on demand and bear interest at various rates. At September 30, 2019, the Company had $nil of bank call loans ($15.0 million at December 31, 2018 and $3.0 million at September 30, 2018). The average daily bank loan outstanding for the three and nine months ended September 30, 2019 was $6.3 million and $14.6 million, respectively ($25.1 million and $68.9 million for the three and nine months ended September 30, 2018). The largest daily bank loan outstanding for both the three and nine months ended September 30, 2019 was $82.2 million and $100.9 million, respectively ($107.9 and $516.5 million for the three and nine months ended September 30, 2018, respectively).

At September 30, 2019, securities loan balances totaled $209.3 million ($146.8 million at December 31, 2018 and $197.3 million at September 30, 2018). The average daily securities loan balance for the three and nine months ended September 30, 2019 was $244.5 million and $239.1 million, respectively ($216.2 million and $210.8 million for the three and nine months ended September 30, 2018, respectively). The largest daily stock loan balance for both the three and nine months ended September 30, 2019 was $266.5 million and $285.5 million ($250.5 and $274.6 million for the three and nine months ended September 30, 2018, respectively).

We finance our 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 our repurchase agreements and reverse repurchase agreements are carried at fair value as a result of the Company's fair value option election. We elected the fair value option for those repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date. We have elected the fair value option for these instruments to more accurately reflect market and economic events in our 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 September 30, 2019, we did not have any repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date.

At September 30, 2019, the gross balances of reverse repurchase agreements and repurchase agreements were $91.5 million and $345.2 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the three months ended September 30, 2019 was $137.4 million and $527.6 million, respectively ($168.0 million and $754.5 million, respectively, for the three months ended September 30, 2018). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the three months ended September 30, 2019 was $326.3 million and $770.5 million, respectively ($394.8 million and $1.1 billion, respectively, for the three months ended September 30, 2018).

At September 30, 2019, the gross leverage ratio was 3.9.

### Liquidity Management

We manage our need for liquidity on a daily basis to ensure compliance with regulatory requirements. Our 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 our liquidity needs, we may have to seek additional external financing. The availability of such additional external financing may depend on market factors outside our control.

We have Company-owned life insurance policies which are utilized to fund certain non-qualified deferred compensation plans. Certain policies which could provide additional liquidity if needed had a cash surrender value of $65.5 million as of September 30, 2019.

We regularly review our sources of liquidity and financing and conduct 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. Our reviews have resulted in plans that we believe 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 Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Cash provided by operating activities | $22,897 | $11,311 |
| Cash used in investing activities | (6,952) | (4,347) |
| Cash used in financing activities | (80,427) | (16,157) |
| Net decrease in cash and cash equivalents | $(64,482) | $(9,193) |

Management believes that funds from operations, combined with our capital base and available credit facilities, are sufficient for our 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 upon whom we rely to back away from providing funding to the securities industry. Such a development might impact our ability to finance our day-to-day activities or increase the costs to acquire funding. We may or may not be able to pass such increased funding costs on to our clients.

### OFF-BALANCE SHEET ARRANGEMENTS

Information concerning our off-balance sheet arrangements is included in note 7 to the condensed consolidated financial statements appearing in Item 1. 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 Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2018 as well as "Regulatory and Legal Environment — Other Regulatory Matters" herein for additional details.

### CONTRACTUAL OBLIGATIONS

The following table sets forth the Company's contractual obligations as of September 30, 2019:

*(Expressed in thousands)*

|  | Total | Less than 1 Year 1-3 Years | 3-5 Years |  | More than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating Lease Obligations (1)(2) | $289,590 | $42,843 | $72,481 | $59,916 | $114,350 |
| Committed Capital | 1,399 | 1,399 | — | — | — |
| Senior Secured Notes (3)(4) | 180,403 | 10,125 | 170,278 | — | — |
| ARS Purchase Commitments (5) | 7,010 | 5,802 | 1,208 | — | — |
| Total | $478,402 | $60,169 | $243,967 | $59,916 | $114,350 |

(1) See note 3 to the condensed consolidated financial statements appearing in Item 1 for additional information.

(2) Includes interest liability of $80.8 million.

(3) See note 10 to the condensed consolidated financial statements appearing in Item 1 for additional information.

(4) Includes interest payable of $30.4 million through maturity.

(5) See note 12 to the condensed consolidated financial statements appearing in Item 1 for additional information.

### CYBERSECURITY

For many years, we have sought to maintain the security of our clients' data, limit access to our data processing environment, and protect our data processing facilities. See "Risk Factors — The Company may be exposed to damage to its business or its reputation by cybersecurity incidents" as further described in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2018. 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 us to continuously review our security policies and procedures and to take additional actions to protect our network and our 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. We expect 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. We continue 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 our cybersecurity efforts will be successful in discovering or preventing a security breach.

### REGULATORY MATTERS AND DEVELOPMENTS

### Regulation Best Interest (U.S.)

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.

On June 5, 2019, the SEC adopted a final version of this rulemaking package that included the adoption of Regulation Best Interest (“Reg BI”) as Rule 15l-1 under the Securities Exchange Act of 1934. Reg BI imposes a new federal standard of conduct on registered broker-dealers and their associated persons when dealing with retail clients and requires that a broker-dealer and its representatives act in the best interest of such client and not place its own interests ahead of the customer’s interests. Reg BI does not define the term “best interest” but instead sets forth four distinct obligations, disclosure, care, conflict of interest and compliance that a broker-dealer must satisfy in each transaction. The effective date for compliance with Reg BI is June 30, 2020. In addition to passing Reg BI the SEC also adopted rules (i) requiring broker-dealers and investment advisers to provide a written relationship summary to each client, and (ii) clarifying certain interpretations under the Advisers Act including but not limited to when a broker-dealer's activity is considered “solely incidental” to its broker-dealer business and is, therefore, not considered investment advisory activity (collectively, the “Reg BI Rules”).

It is too early to predict what all the effects of the Reg BI Rules will have on the Company. However, it appears likely that there will be a need for enhanced documentation for recommendations of securities transactions to broker-dealer retail clients as well as the curtailment of certain practices and limitations on certain kinds of transactions previously carried on in the normal course of business. The new rules and processes related thereto will possibly limit revenue and most likely involve increased costs, including, but not limited to, compliance costs associated with new or enhanced technology as well as increased litigation costs.

We are reviewing our business and operating models in light of the Reg BI Rules and may make structural and operational changes to our business in anticipation of the June 30, 2020 compliance effective date of the Reg BI Rules.

### Regulatory Environment

See the discussion of the regulatory environment in which we operate and the impact on our operations of certain rules and regulations in Item 1 “Business - Regulation” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory and Legal Environment” of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Oppenheimer and many of its affiliates are each subject to various regulatory capital requirements. As of September 30, 2019, all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. See note 13 of the Notes to Condensed Consolidated Financial Statements in Item 1 for further information on regulatory capital requirements.

### Regulatory Matters

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 involving other brokerage firms as well. Oppenheimer is continuing to cooperate with the FINRA inquiry.

### FACTORS AFFECTING "FORWARD-LOOKING STATEMENTS"

From time to time, the Company may publish or make oral statements that constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 which provides a safe harbor for 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 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, (v) general economic conditions, both domestic and international, (vi) competition from existing financial institutions, new entrants and other participants in the securities markets and financial services industry, (vii) potential cybersecurity threats, (viii) legal developments affecting the litigation experience of the securities industry and the Company, (ix) 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, (x) the adoption and implementation of the SEC’s proposed “Regulation Best Interest” and other regulations adopted in recent years, (xi) war, terrorist acts and nuclear confrontation as well as political unrest, (xii) the Company’s ability to achieve its business plan, (xiii) the effects of the economy on the Company’s ability to find and maintain financing options and liquidity, (xiv) credit, operational, legal and regulatory risks, (xv) 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 in 2019 (“Brexit”), (xvi) the effect of technological innovation on the financial services industry and securities business, (xvii) risks related to election results, Congressional gridlock, government shutdowns and investigations, trade wars, changes in or uncertainty surrounding regulation and threats of default by the Federal government, and (xviii) 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 Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

## Market risk

As filed, 210 characters.

During the nine months ended September 30, 2019, there were no material changes to the information contained in Part II, Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

## Controls and procedures

As filed, 2,989 characters.

The Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a–15(e) of the Exchange Act. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report.

Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company's disclosure controls and procedures or its internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision–making can be faulty and that break-downs can occur because of a simple error or omission. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based, in part, upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost–effective control system, misstatements due to error or fraud may occur and not be detected.

The Company confirms that its management, including its Chief Executive Officer and its Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in its reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

### Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the nine months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

## Risk factors

As filed, 209 characters.

During the nine months ended September 30, 2019, there were no material changes to the information contained in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Filed Oct 25, 2019.
Source: SEC EDGAR, the filing index for accession 0000791963-19-000029. Last ingested by Listed: Nov 9, 2026, 19:54 ET. No prices; not investment advice.