OPPENHEIMER HOLDINGS INC. BACKGROUND
The condensed consolidated financial statements include the accounts ofOppenheimer Holdings Inc. and its consolidated subsidiaries (together, the "Company", "Firm", "we", "our" or "us"). The Company's condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto which appear elsewhere in this quarterly report.Oppenheimer Holdings Inc. , through its operating subsidiaries, is a leading middle market investment bank and full service broker-dealer that is engaged in a broad range of activities in the financial services industry, including retail securities brokerage, institutional sales and trading, investment banking (corporate and public finance), equity and fixed income research, market-making, trust services, and investment advisory and asset management services. Its principal subsidiaries areOppenheimer & Co. Inc. ("Oppenheimer") andOppenheimer Asset Management Inc. ("OAM"). As ofSeptember 30, 2020 , we provided our services from 93 offices in 25 states located throughoutthe United States , with offices inTel Aviv, Israel ,Hong Kong, China ,London, England ,St. Helier , Isle of Jersey,Frankfurt, Germany andGeneva, Switzerland . Client assets under administration ("CAUA") as ofSeptember 30, 2020 totaled$94.3 billion . The Company provides investment advisory services throughOAM and Oppenheimer Investment Management LLC ("OIM") and Oppenheimer's financial advisor direct programs. AtSeptember 30, 2020 , client assets under management ("AUM") totaled$34.5 billion . We also provide trust services and products throughOppenheimer Trust Company of Delaware and discount brokerage services throughFreedom Investments, Inc. ("Freedom"). ThroughOPY Credit Corp. , we offer syndication as well as trading of issued syndicated corporate loans. AtSeptember 30, 2020 , the Company employed 2,907 employees (2,868 full-time and 39 part-time), of whom 1,010 were financial advisors.
Outlook
We are focused on growing our private client and asset management businesses
through strategic additions of experienced financial advisors 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. We are also focused on opportunities in our capital
market businesses where we can acquire experienced personnel and/or business
units that will improve our ability to attract institutional clients in both
equities and fixed income without significantly raising our risk profile. In
investment banking we are committed to grow our footprint by adding experienced
bankers within our existing industry practices.
We continuously invest in and improve our technology platform to support client
service and to remain competitive while continuously 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, and investing in people and programs, while 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. In addition, the Company may from time to time make
minority private investments out of excess capital in allied or unrelated
businesses with the goal of syndicating the investment to eligible clients or to
retain ownership because we believe them to be an attractive investment.
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Impact of Interest Rates TheFederal Reserve Bank implemented a series of increases in its benchmark short-term interest rate betweenDecember 2015 andDecember 2018 . These increases in short-term interest rates had a significant positive impact on our overall financial performance, as we offered programs 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. While clients' domestic cash sweep balances have decreased over the past several years as clients increased their allocations to other investments, that trend reversed in the past few periods as market volatility drove client assets into our short-term cash sweep program and other "safe haven" assets. Over the past 18 months, theFederal Reserve reduced short-term interest rates resulting in a decrease in fees the Company earned fromFDIC insured deposits of clients through a program offered by the Company. Decreases in short-term interest rates, increases in deposit rates paid to clients, and/or a significant decline in our clients' cash balances have a negative impact on our earnings. TheFederal Reserve reduced its benchmark rate significantly during two separate unscheduled meetings inMarch 2020 by a total of 1.50%. Accordingly, the Company's earnings during the first three quarters of 2020 were negatively impacted by such decreases. The impact will continue to be significant for the foreseeable future as theFederal Reserve has stated that these lower rates are likely to persist for the next several years.
CORONAVIRUS DISEASE 2019 ("COVID-19 PANDEMIC")
The Company continues to monitor the effects of the COVID-19 Pandemic both on a national level as well as regionally and locally and is responding accordingly. In addition, we continue to provide frequent communications to clients, employees, and regulators. We have adopted enhanced cleaning practices and other health protocols in our offices, taken measures to significantly restrict non-essential business travel and have practices in place to mandate that employees who may have been exposed to COVID-19, or show any relevant symptoms, self-quarantine. In earlyMarch 2020 , the Company executed on its Business Continuity Plan whereby the vast majority of our employees began to work remotely with only "essential" employees reporting to our offices. We accomplished this by significantly expanding the use of technology infrastructure that facilitates remote operations. Our ability to avoid significant business disruptions is reliant on the continued ability to have the vast majority of employees work remotely. To date, there have been no significant disruptions to our business or control processes as a result of this dispersion of employees. Recent outbreaks in various states indicate that COVID-19 will continue to impact the economy and, by extension, our business, well into 2021. We currently anticipate that a large number of our employees will continue to work remotely for the indefinite future.
EXECUTIVE SUMMARY
The Company continued to produce strong operating results despite the challenges in the current environment. The capital markets business outperformed with a record quarter for revenue while the wealth management business continued to produce solid operating returns based on increased commission activity and higher fee income from assets under management despite the headwinds from ultra-low short-term interest rates. Investment banking had its best quarter ever as the Firm increased its market share during a robust period for both equities and debt issuances in theU.S. capital markets. Our continued investment in and commitment to the capital markets business positioned us extremely well to participate in an environment with a significant demand for capital raising. M&A activity also picked up during the period with several notable transaction advisory and placement fees. Equities sales and trading activity continued to be a bright spot as volatility remained elevated during the period. Our investment in public finance continues to reap returns as we secured appointments in larger and more prominent transactions. Despite a sell-off late in the quarter, the broader equities markets were up 8.5% during the period contributing to record assets under management atSeptember 30, 2020 , which will drive our advisory fee revenue for the fourth quarter of 2020. In addition, the Firm was able to take advantage of the current low interest rate environment by refinancing our outstanding long-term debt with a lower coupon rate and a net pay down of$25 million which will save$3.3 million in interest costs on an annual basis. 49
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RESULTS OF OPERATIONS The Company reported net income of$15.6 million or$1.25 basic earnings per share for the three months endedSeptember 30, 2020 compared with net income of$3.9 million or$0.31 basic earnings per share for the three months endedSeptember 30, 2019 . Pre-tax income was$21.7 million for the three months endedSeptember 30, 2020 compared with pre-tax income of$6.5 million for the three months endedSeptember 30, 2019 . Revenue for the three months endedSeptember 30, 2020 was$276.3 million compared with revenue of$234.8 million for the three months endedSeptember 30, 2019 , an increase of 17.7%. (Expressed in thousands, except Per Share Amounts or otherwise indicated) 3Q-2020 3Q-2019 Change % Change Revenue$ 276,259 $ 234,793 $ 41,466 17.7 Compensation expense$ 189,654 $ 151,284 $ 38,370 25.4 Non-compensation expense$ 64,887 $ 77,013 $ (12,126) (15.7) Pre-Tax Income$ 21,718 $ 6,496 $ 15,222 234.3 Income Taxes$ 6,079 $ 2,547 $ 3,532 138.7 Net Income$ 15,639 $ 3,949 $ 11,690 296.0 Earnings per share (basic)$ 1.25 $ 0.31 $ 0.94 303.2 Earnings per share (diluted)$ 1.19 $ 0.29 $ 0.90 310.3 Book Value Per Share$ 49.20 $ 44.27 $ 4.93 11.1 Tangible Book Value Per Share$ 35.61 $ 30.99 $ 4.62 14.9 CAUA ($ billions)$ 94.3 $ 87.6 $ 6.7 7.6 AUM ($ billions)$ 34.5 $ 30.2 $ 4.3 14.2 Highlights •Revenue increased 17.7% due to robust underwriting revenue, large M&A fees, increased institutional equities sales and trading activity, higher retail participation, and higher advisory fees. •Compensation expense increased 25.4% due to higher production, incentive, and deferred compensation costs partially offset by lower share-based compensation costs. •Non-compensation expenses were 15.7% lower primarily due to lower interest, travel and entertainment, and conference costs partially offset by charges related to the refinancing of the Firm's long-term debt. •Book value and tangible book value per share reached record levels atSeptember 30, 2020 . •Private Client pre-tax profit margin was 18.3% reflecting strong underlying business fundamentals. •Client assets under administration and under management were both at record levels atSeptember 30, 2020 . •The Investment Banking division had its best ever revenue quarter helping to drive a record revenue quarter for the Capital Markets segment. •The Firm refinanced its outstanding long-term debt during the period which resulted in a one-time charge of$2.8 million . Going forward, the Firm will save$3.3 million in interest costs on an annual basis. 50
-------------------------------------------------------------------------------- Table of Contents BUSINESS SEGMENTS The table below presents information about the reported revenue and pre-tax income (loss) of the Company's reportable business segments for the three and nine months endedSeptember 30, 2020 and 2019: (Expressed in thousands) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 % Change 2020 2019 % Change Revenue Private Client$ 141,097 $ 152,054 (7.2)$ 424,340 $ 477,509 (11.1) Asset Management 20,632 18,368 12.3 57,423 53,576 7.2 Capital Markets 114,289 64,068 78.4 295,101 206,848 42.7 Corporate/Other 241 303 (20.5) (1,105) (435) 154.0 Total$ 276,259 $ 234,793 17.7$ 775,759 $ 737,498 5.2 Pre-Tax Income (Loss) Private Client$ 25,764 $ 35,251 (26.9)$ 83,482 $ 121,501 (31.3) Asset Management 6,426 4,932 30.3 14,714 12,492 17.8 Capital Markets 19,369 (6,385) * 41,548 (10,833) * Corporate/Other (29,841) (27,302) (9.3) (84,539) (83,221) 1.6 Total$ 21,718 $ 6,496 234.3$ 55,205 $ 39,939 38.2
* Percentage not meaningful
Private Client Private Client reported revenue of$141.1 million for the third quarter of 2020, 7.2% lower than the third quarter of 2019 primarily due to the impact of lower interest rates. Pre-tax income of$25.8 million in the current quarter resulted in a pre-tax margin of 18.3%. Financial advisor headcount declined to 1,010 at the end of the current quarter compared to 1,043 in the prior quarter, although productivity of our financial advisors increased reflecting higher individual production levels. ('000s, except Financial advisor headcount or otherwise indicated) 3Q-2020 3Q-2019 Change % Change Revenue$ 141,097 $ 152,054 $ (10,957) (7.2) Retail commissions$ 48,839 $ 46,044 $ 2,795 6.1 Advisory fee revenue$ 67,949 $ 62,510 $ 5,439 8.7 Bank deposit sweep income$ 4,618 $ 28,894 $ (24,276) (84.0) Interest$ 5,940 $ 8,653 $ (2,713) (31.4) Other$ 13,751 $ 5,953 $ 7,798 131.0 Total Expenses$ 115,333 $ 116,803 $ (1,470) (1.3) Compensation$ 89,562 $ 85,246 $ 4,316 5.1 Non-compensation$ 25,771 $ 31,557 $ (5,786) (18.3)
7.6
Cash Sweep Balances (billions) $ 6.6 $ 4.8 $ 1.8 26.0
Financial Advisor Headcount 1,010 1,043 (33) (3.2)
•Retail commissions were $48.8 million for the third quarter of 2020, an
increase of 6.1% from a year ago as a result of increased volatility and client
participation.
•Advisory fees increased 8.7% due to higher assets under management at June 30,
2020 compared with June 30, 2019 .
•Bank deposit sweep income decreased $24.3 million or 84.0% from a year ago due
to lower short-term interest rates partially offset by higher average cash sweep
balances.
51-------------------------------------------------------------------------------- Table of Contents •Interest revenue declined 31.4% from a year ago due to lower short-term interest rates partially offset by higher average margin balances. •Other revenue increased 131.0% primarily due to increases in the cash surrender value of Company-owned life insurance policies. •Compensation expenses increased 5.1% primarily due to increased production and deferred compensation costs partially offset by lower share-based compensation. •Non-compensation expenses decreased 18.3% primarily due to lower interest costs associated with the bank deposit sweep program. Asset Management Asset Management reported revenue of$20.6 million for the third quarter of 2020, 12.3% higher than the third quarter of 2019. Pre-tax income was$6.4 million for the third quarter of 2020, an increase of 30.3% compared with the third quarter of 2019. ('000s unless otherwise indicated) 3Q-2020 3Q-2019 Change % Change Revenue$ 20,632 $ 18,368 $ 2,264 12.3 Advisory fee revenue$ 20,632 $ 18,368 $ 2,264 12.3 Total Expenses$ 14,206 $ 13,436 $ 770 5.7 Compensation$ 5,997 $ 5,441 $ 556 10.2 Non-compensation$ 8,209 $ 7,995 $ 214 2.7 AUM (billions)$ 34.5 $ 30.2 $ 4.3 14.2 •Advisory fee revenue on traditional and alternative managed products was$20.6 million for the third quarter of 2020, an increase of 12.3% due to higher AUM atJune 30, 2020 compared withJune 30, 2019 and positive net asset flows. •Advisory fees are calculated based on the value of client AUM at the end of the prior quarter which totaled$32.7 billion atJune 30, 2020 ($32.1 billion atDecember 31, 2019 ) and are allocated between the Private Client and Asset Management business segments. •AUM hit a record level of$34.5 billion atSeptember 30, 2020 , which is the basis for advisory fee billings for the fourth quarter of 2020. The increase in AUM was comprised of higher asset values of$3.7 billion on existing client holdings and a net contribution of assets of$0.6 billion . •Compensation expenses were up 10.2% which was primarily related to increases in incentive compensation. •Non-compensation expenses were up 2.7% when compared to the prior year period. 52
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The following table provides a breakdown of the change in assets under
management for the three months ended
For
the Three Months Ended
Beginning Appreciation Ending
Fund Type Balance Contributions Redemptions (Depreciation) Balance
Traditional (1) $ 26,910 $
1,461
755 24 (10) 15 784
Alternative Investments:
Hedge funds (3) 4,202 186 (73) 347 4,662
Private Equity Funds (4) 361 31 (8) 54 438
Portfolio Enhancement Program (5) 428 - (15) - 413
$ 32,656 $ 1,702 $ (1,908) $ 2,061 $ 34,511
(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 $114.3 million for the third quarter of
2020, 78.4% higher than the third quarter of 2019. Pre-tax income was $19.4
million for the third quarter of 2020 compared with pre-tax loss of $6.4 million
for the third quarter of 2019.
('000s) 3Q-2020 3Q-2019 Change % Change
Revenues $ 114,289 $ 64,068 $ 50,221 78.4
Investment Banking $ 62,283 $ 19,239 $ 43,044 223.7
Advisory fees $ 30,706 $ 10,467 $ 20,239 193.4
Equities underwriting $ 27,969 $ 7,356 $ 20,613 280.2
Fixed income underwriting $ 3,608 $ 1,416 $ 2,192 154.8
Sales and Trading $ 51,286 $ 44,356 $ 6,930 15.6
Equities $ 40,264 $ 31,189 $ 9,075 29.1
Fixed Income $ 11,022 $ 13,167 $ (2,145) (16.3)
Other $ 720 $ 473 $ 247 52.2
Total Expenses $ 94,920 $ 70,453 $ 24,467 34.7
Compensation $ 71,328 $ 41,913 $ 29,415 70.2
Non-compensation $ 23,592 $ 28,540 $ (4,948) (17.3)
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•Advisory fees earned from investment banking activities increased 193.4% to$30.7 million for the third quarter of 2020 compared with$10.5 million for the third quarter of 2019 driven by increased M&A activity and fees associated with a significant number of capital raising transactions completed during the period. •Equities underwriting fees increased 280.2% to$28.0 million for the third quarter of 2020 compared with$7.4 million for the third quarter of 2019 due to higher levels of capital issuances in the equity markets. •Fixed income underwriting fees increased 154.8% to$3.6 million for the third quarter of 2020 compared with$1.4 million for the third quarter of 2019 primarily driven by public finance issuances during the period. •Fixed income sales and trading decreased 16.3% driven by lower client participation during the period. •Equities sales and trading increased to$40.3 million for the third quarter of 2020, 29.1% higher compared to$31.2 million during the third quarter of 2019 due to continued elevated volatility in the equities markets. •Compensation expenses increased 70.2% primarily due to increased production and incentive compensation tied to increases in revenue. •Non-compensation expenses were 17.3% lower due to decreased interest costs and reduced costs associated with business travel and entertainment and conferences. CRITICAL ACCOUNTING POLICIES The Company's condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . Reference is also made to the Company's condensed consolidated financial statements and notes thereto found in its Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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 the notes thereto found in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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 three months endedSeptember 30, 2020 , 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 endedDecember 31, 2019 . LIQUIDITY AND CAPITAL RESOURCES AtSeptember 30, 2020 , total assets increased by 5.8% fromDecember 31, 2019 . 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 5.50% Senior Secured Notes due 2025 (the "Notes") (see "Senior Secured Notes" 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. AtSeptember 30, 2020 , the Company had$156.9 million of such borrowings outstanding compared to outstanding borrowings of $nil atDecember 31, 2019 . The Company also has some availability of short-term bank financing on an unsecured basis. The Company's overseas subsidiaries,Oppenheimer Europe Ltd. andOppenheimer 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 forOppenheimer Europe Ltd. andOppenheimer Investments Asia Limited were$4.9 million and$387,089 , respectively, atSeptember 30, 2020 . The liquid assets atOppenheimer Europe Ltd. are primarily comprised of cash deposits in bank accounts. 54
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The liquid assets atOppenheimer Investments Asia Limited are primarily comprised of investments inU.S. Treasuries and cash deposits in bank accounts. Any restrictions on transfer of these liquid assets fromOppenheimer Europe Ltd. andOppenheimer 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 anyU.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$3.3 million for those subsidiaries. We have continued to reinvest permanently the excess earnings ofOppenheimer Israel (OPCO) Ltd. in its own business and in the businesses inEurope andAsia to support business initiatives in those regions. In accordance with the Tax Cuts and Jobs Act ("TCJA"), 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. Senior Secured Notes OnSeptember 22, 2020 , in a private offering, we issued$125.0 million aggregate principal amount of 5.50% Senior Secured Notes due 2025 (the "Unregistered Notes") under an Indenture at an issue price of 100% of the principal amount. Interest on the Unregistered Notes is payable semi-annually onApril 1st andOctober 1st . We used the net proceeds from the offering of the Unregistered Notes, along with cash on hand, to redeem in full our 6.75% Senior Secured Notes dueJuly 1, 2022 in the principal amount of$150.0 million (the Company held$1.4 million in treasury for a net outstanding amount of$148.6 million ), and pay all related fees and expenses related thereto. OnOctober 9, 2020 , we filed registration statements to commence an exchange offer in which we plan to exchange 100% of our Unregistered Notes for a like principal amount of notes with identical terms except that such new notes will be registered under the Securities Act (the "Notes"). We will not receive any proceeds in the exchange offer. See note 11 to the condensed consolidated financial statements appearing in Item 1 for further discussion. OnSeptember 14, 2020 , S&P affirmed the Company's 'B+' Corporate Family rating and 'B+' rating on the Unregistered Notes and affirmed its stable outlook. OnSeptember 21, 2020 , Moody's Corporation affirmed the Company's Corporate Family 'B1' rating and affirmed its 'B1' rating on the Unregistered Notes and its stable outlook. Liquidity For the most part, the Company's assets consist of cash and cash equivalents and assets that it can readily convert into cash. The receivable from brokers, dealers and clearing organizations represents deposits for securities borrowed transactions, margin deposits or current transactions awaiting settlement. The receivable from customers represents margin balances and amounts due on transactions awaiting settlement. 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 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 endedSeptember 30, 2020 ($3.8 million for the three months endedSeptember 30, 2019 ) 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 and retention requirements. 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. AtSeptember 30, 2020 , the Company had$156.9 million of bank call loans ($nil atDecember 31, 2019 ). The average daily bank loan outstanding for the three and nine months endedSeptember 30, 2020 was$97.5 million and$73.4 million respectively, ($6.3 million and$14.6 million for the three and nine months endedSeptember 30, 2019 ). The largest daily bank loan outstanding for the three and nine months endedSeptember 30, 2020 was$235.1 million and$324.3 million , respectively ($82.2 million and$100.9 million for the three and nine months endedSeptember 30, 2019 ). AtSeptember 30, 2020 , securities loan balances totaled$292.0 million ($234.3 million atDecember 31, 2019 and$209.3 million atSeptember 30, 2019 ). The average daily securities loan balance outstanding for the three and nine months endedSeptember 30, 2020 was$281.8 million and$241.3 million , respectively ($244.5 million and$239.1 million for the three and nine months endedSeptember 30, 2019 ). The largest daily stock loan balance for both the three and nine months endedSeptember 30, 2020 was$316.9 million ($266.5 million and$285.5 million for the three and nine months endedSeptember 30, 2019 ). 55
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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, 2020 , 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, 2020 , the gross balances of reverse repurchase agreements and
repurchase agreements were $191.5 million and $444.3 million , respectively. The
average daily balance of reverse repurchase agreements and repurchase agreements
on a gross basis for the three months ended September 30, 2020 was $185.4
million and $393.1 million , respectively ($137.4 million and $527.6 million ,
respectively, for the three months ended September 30, 2019 ). The largest amount
of reverse repurchase agreements and repurchase agreements outstanding on a
gross basis during the three months ended September 30, 2020 was $521.9 million
and $803.0 million , respectively ($326.3 million and $770.5 million ,
respectively, for the three months ended September 30, 2019 ).
At September 30, 2020 , the gross leverage ratio was 4.2.
Liquidity Management
We manage our liquidity on a daily basis to meet our current obligations and
upcoming liquidity needs as well as 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 $72.5 million as of
September 30, 2020 .
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 sources of 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,
2020 2019
Cash (used in)/provided by operating activities $ (148,383) $ 22,897
Cash used in investing activities (3,708) (6,952)
Cash provided by/(used in) financing activities 104,621 (80,427)
Net decrease in cash and cash equivalents $ (47,470) $ (64,482)
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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. Under some circumstances, banks including those on whom we rely may 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. During the recent period of high volatility, we have seen increased calls for deposits of collateral to offset perceived risk between the Company's settlement liability to industry utilities such as theOptions Clearing Corporation ("OCC") andNational Securities Clearing Corp. ("NSCC") as well as more stringent collateral arrangements with our bank lenders. All such requirements have been met in the ordinary course with available collateral. OFF-BALANCE SHEET ARRANGEMENTS Information concerning our off-balance sheet arrangements is included in note 8 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 theAuction Rate Securities Market " in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 as well as Part II, Item 1A "Risk Factors" elsewhere herein for additional details. CONTRACTUAL OBLIGATIONS The following table sets forth the Company's contractual obligations as ofSeptember 30, 2020 : (Expressed in thousands) Less than 1 More than 5 Total Year 1-3 Years 3-5 Years Years Operating Lease Obligations (1)(2)$ 268,852 $ 40,892 $ 72,479 $ 55,951 $ 99,530 Committed Capital (3) 1,238 1,238 - - - Senior Secured Notes (4)(5) 159,547 7,047 13,750 138,750 - ARS Purchase Commitments (3) 1,291 1,291 - - - Total$ 430,928 $ 50,468 $ 86,229 $ 194,701 $ 99,530 (1)See note 4 to the condensed consolidated financial statements for additional information. (2)Includes interest liability of$67.0 million . (3)See note 13 to the condensed consolidated financial statements for additional information. (4)See note 11 to the condensed consolidated financial statements for additional information. (5)Includes interest payable of$34.5 million through maturity.
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 endedDecember 31, 2019 . 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 theSEC's andFINRA'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. As more of our employees have begun working remotely, we have increased our surveillance practices and adapted more stringent programs to protect client data as well as to protect our infrastructure. There can be no guarantee that our cybersecurity efforts will be successful in discovering or preventing a security breach. 57
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REGULATORY MATTERS AND DEVELOPMENTS
Regulation Best Interest (U.S. ) OnApril 18, 2018 , theSEC announced its proposed "Regulation Best Interest," a package of rulemakings and interpretations that address customers' relationships with investment advisers and broker-dealers. OnJune 5, 2019 , theSEC adopted a final version of this rulemaking package that included the adoption of Regulation Best Interest ("Reg BI") as Rule 15l-1 under the Exchange Act. 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. Compliance with Reg BI became effective onJune 30, 2020 . In addition to adopting Reg BI theSEC 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 Investment Advisers Act of 1940 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, there is a need for enhanced documentation for recommendations of securities transactions to broker-dealer retail clients as well as the cessation of certain practices as well as limitations on certain kinds of transactions previously conducted in the normal course of business. The new rules and processes related thereto may limit revenue and most likely will involve increased costs, including, but not limited to, compliance costs associated with new or enhanced technology as well as increased litigation costs. The Company has reviewed its business practices and operating models in light of the Reg BI Rules and has made significant structural, technological and operational changes to our business leading up to the effective date ofJune 30, 2020 for compliance with the Reg BI Rules. As a result, the Company conducted significant training of all its employees with respect to the requirements of Reg BI and made each of the required mailings (both electronic and conventional) prior to the effective date. The Company believes that the changes made to its business processes will result in compliance with these new requirements. As business is conducted under the Reg BI Rules, it is likely that additional changes may be necessary. 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" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional information. Oppenheimer and many of its affiliates are each subject to various regulatory capital requirements. As ofSeptember 30, 2020 , all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. See note 14 to the condensed consolidated financial statements in Item 1 for further information on regulatory capital requirements. 58
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Table of Contents 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 theSEC's "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 theUnited Kingdom which may be affected byBritain's January 2020 exit from the EU("Brexit"), (xvi) the effect of technological innovation on the financial services industry and securities business, (xvii) risks related to election results, Congressional gridlock, political and social unrest, government shutdowns and investigations, trade wars, changes in or uncertainty surrounding regulation and threats of default by the Federal government, (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, and (xviv) risks related to the severity and duration of the COVID-19 Pandemic; the pandemic's impact on theU.S. and global economies; and Federal, state and local governmental responses to the pandemic. There can be no assurance that the Company has correctly or completely identified and assessed all of the factors affecting the Company's business. See "Risk Factors" in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 as well as "Risk Factors" in Part II, Item 1A below.
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