OPPENHEIMER HOLDINGS INC 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND The condensed consolidated financial statements include the accounts of Oppenheimer 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 in the 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 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 March 31, 2022, we provided our services from 93 offices in 24 states located throughout the United States and offices in Tel Aviv, Israel, Hong Kong, China, London, England, St. Helier, Isle of Jersey, Munich, Germany and Geneva, Switzerland. Client assets under administration ("CAUA") as of March 31, 2022 totaled $117.2 billion. The Company provides investment advisory services through OAM and Oppenheimer Investment Management LLC ("OIM") and Oppenheimer's financial advisor directed programs. At March 31, 2022, client assets under management ("AUM") totaled $42.7 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 March 31, 2022, the Company employed 2,896 employees (2,853 full-time and 43 part-time), of whom 993 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 increasingly creating and investing in private market opportunities on our own behalf and on behalf of qualified clients. We are also focused on opportunities in our capital market businesses where we can employ individual experienced personnel and/or small units that will improve our ability to attract institutional clients in both equities and fixed income without significantly raising our risk profile. We are continuously reviewing ways in which we can increase security around our data and our platform as the risks of cybercrime increase. In investment banking we are committed to grow our footprint by adding experienced bankers within our existing industry practices as well as new industry exposure where we believe we can be successful. 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 others 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 either syndicating the investment to eligible clients or retaining ownership because we believe them to be an attractive investment. 38 Table of Contents Impact of Interest Rates The Federal Reserve ("FED") has announced its intention to increase the Federal Funds Rate over future periods and began this process by increasing the FED Funds Rate by 25bps in March 2022. As a result of the risk of continued inflation, it is likely that interest rates across the spectrum will increase significantly from the record low levels of recent years. In addition, the FED has announced that it will reduce its balance sheet as it allows maturing bonds to runoff without re-investing the proceeds. The increase in interest rates, if and when they take place will be favorable to the Company’s interest-based revenues. These changes in policy are intended to reduce inflation and are likely to also reduce economic activity possibly leading to a recession. However increases in interest rates will increase fees the Company earns from FDIC-insured deposits of clients through a program offered by the Company. These rate increases will also increase the rates the Company charges on margin balances and have a positive impact on our earnings. However, such increases while bringing down inflationary pressures may also prove detrimental to economic expansion and thereby to financial markets in general. The impact of rate increases seems likely to increase volatility in financial markets, decrease the value of fixed income investments and impact equity share prices. Ukraine War In February 2022, without provocation, Russia invaded Ukraine. Over ensuing weeks, the war has lasted longer than previously thought, and it seems likely will last for a more extended period of time than previously thought as the Ukrainians continue to be more successful than initially expected at turning back Russian forces and as NATO countries supply the Ukrainians with armaments and supplies. The European Union and the United States have imposed broad-based sanctions and impounded financial assets of Russia, its companies and various notable Russian individuals. The impact of the sanctions has been to increase the price of hydrocarbons and the costs of various agricultural products produced by both Russia and Ukraine and disrupted supplies to further increase inflationary pressures in Europe as well as the rest of the world. It has also had the indirect effect of lowering consumer confidence and consumer spending, all of which could have an adverse impact on financial markets and thus on our business. 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 regarding the impact of COVID-19 on our business. 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 early March 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. Given the recent surge in COVID-19 cases related to the Omicron variant, many employees from our home office and branch locations are working remotely while employees from select groups are working from office locations given the nature of their responsibilities. We anticipate employees returning to offices once the risks associated with the Omicron variant subside while maintaining flexible work arrangements. In recent weeks, we have seen increased attendance at the workplace as local regulations have been loosened, hospital visits reduced and a larger portion of the population vaccinated. There can be no assurance at this time that these improvements will continue and we continue to closely monitor the situation. EXECUTIVE SUMMARY The results for the quarter reflect the significant downturn in equity capital market issuance, which had an out-sized impact on the Company during the period. Markets reflected the continuing impact of COVID on the economy, the changed interest rate environment and the impact on consumer confidence of the invasion of Ukraine by Russia early in the quarter. The emerging high inflationary environment at the highest levels in 40 years, due to continued supply chain issues and higher inflation expectations are propelling consumer prices higher and draining energy from the equity markets. By quarter’s end, interest rates reached the highest levels since 2018. While the Company’s pipeline of potential future banking business remains strong, the closing of the window for IPO’s and secondary offerings, and the closing down of the SPAC market dramatically reduced capital market revenues for the first quarter of 2022 compared to the record number of offerings during the first quarter of 2021. 39 Table of Contents Wealth Management continued to deliver solid results driven by near record AUM and net investor flows. The continued steady performance of our Wealth Management business offset some of the impact of disappointing revenue, but, nevertheless, the Firm's reported results were significantly reduced from 2021. Concerns around inflation, higher oil prices, the FED's announced intention of raising short-term rates and the commencement of the run-off of the FED’s balance sheet all weighed on equity markets during the period. These concerns drove up the yield on the 10-Year Treasury to 2.52% at period end. We remain confident in the resiliency of our platform and our ability to provide essential investment services to our clients. RESULTS OF OPERATIONS The Company reported net income of $9.3 million or $0.75 basic earnings per share for the first quarter of 2022, a decrease of 76.0%, compared with net income of $38.7 million or $3.07 basic earnings per share for the first quarter of 2021. Revenue for the first quarter of 2022 was $266.0 million, a decrease of 28.7% compared to revenue of $373.3 million for the first quarter of 2021. (Expressed in thousands, except Per Share Amounts or otherwise indicated) 1Q-2022 1Q-2021 Change % Change Revenue $ 266,028 $ 373,282 $ (107,254) (28.7) Compensation expense $ 186,031 $ 255,601 $ (69,570) (27.2) Non-compensation expense $ 65,784 $ 65,554 $ 230 0.4 Pre-Tax Income $ 14,213 $ 52,127 $ (37,914) (72.7) Income Taxes $ 4,435 $ 13,469 $ (9,034) (67.1) Net Income (1) $ 9,292 $ 38,658 $ (29,366) (76.0) Earnings per share (basic) (1) $ 0.75 $ 3.07 $ (2.32) (75.6) Earnings per share (diluted) (1) $ 0.69 $ 2.91 $ (2.22) (76.3) Book Value Per Share $ 66.45 $ 56.74 $ 9.71 17.1 Tangible Book Value Per Share (2) $ 52.58 $ 43.34 $ 9.24 21.3 CAUA ($ billions) $ 117.2 $ 111.4 $ 5.8 5.2 AUM ($ billions) $ 42.7 $ 40.2 $ 2.5 6.2 (1) Attributable to Oppenheimer Holdings Inc. (2) Represents book value less goodwill and intangible assets divided by number of shares outstanding. Highlights • Client assets under administration and under management were both at near record levels at March 31, 2022 and up from the same period in 2021. • Advisory fees increased from the same period last year due to near record high assets under management. • Book value and tangible book value per share reached record levels at March 31, 2022. • Reduced first quarter 2022 gross revenue, net income, and earnings per share reflected a significant decline in industry-wide activity, and lower net revenues in underwriting, trading and M&A fees. • Significantly reduced revenue and earnings in the Capital Markets segment for the first quarter of 2022 were driven by reduced capital markets activity. • The Company repurchased 377,313 shares of Class A non-voting common stock during the first quarter of 2022 under its previously announced buy-back plan or 3% of shares outstanding at year-end. 40 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 months ended March 31, 2022 and 2021: (Expressed in thousands) For the Three Months Ended March 31, 2022 2021 % Change Revenue Private Client $ 150,847 $ 164,023 (8.0) Asset Management 27,117 24,230 11.9 Capital Markets 85,051 183,599 (53.7) Corporate/Other 3,013 1,430 110.7 Total $ 266,028 $ 373,282 (28.7) Pre-Tax Income (Loss) Private Client $ 24,146 $ 24,263 (0.5) Asset Management 9,474 7,553 25.4 Capital Markets 1,166 49,991 (97.7) Corporate/Other (20,573) (29,680) (30.7) Total $ 14,213 $ 52,127 (72.7) Private Client Private Client reported revenue for the current quarter of $150.8 million, 8.0% lower than the prior year period due to lower commissions and decreases in the cash surrender value of Company-owned life insurance policies partially offset by an increase in bank deposit sweep income from higher interest rates. Pre-tax income of $24.1 million in the current quarter resulted in a pre-tax profit margin of 16.0%. Financial advisor headcount at the end of the current quarter was 993 compared to 1,000 at the end of the first quarter of 2021. The productivity of our financial advisors increased, reflecting higher individual production levels. ('000s, except Financial advisor headcount or otherwise indicated) 1Q-2022 1Q-2021 Change % Change Revenue $ 150,847 $ 164,023 $ (13,176) (8.0) Retail commissions $ 51,677 $ 57,596 $ (5,919) (10.3) Advisory fee revenue $ 88,527 $ 80,254 $ 8,273 10.3 Bank deposit sweep income $ 4,354 $ 4,008 $ 346 8.6 Interest $ 8,147 $ 6,476 $ 1,671 25.8 Other $ (1,858) $ 15,689 $ (17,547) * Total Expenses $ 126,701 $ 139,760 $ (13,059) (9.3) Compensation $ 99,855 $ 111,395 $ (11,540) (10.4) Non-compensation $ 26,846 $ 28,365 $ (1,519) (5.4) Pre-tax Income $ 24,146 $ 24,263 $ (117) (0.5) Compensation Ratio 66.2 % 67.9 % (170) (2.5) Non-compensation Ratio 17.8 % 17.3 % 50 2.9 Pre-tax Margin 16.0 % 14.8 % 120 8.1 Client Asset Under Administration (billions) $ 117.2 $ 111.4 $ 5.8 5.2 Cash Sweep Balances (billions) $ 8.1 $ 7.4 $ 0.7 26.0 Financial Advisor Headcount 993 1,000 (7) (0.7) *Percentage not meaningful 41 Table of Contents • Retail commissions decreased 10.3% from a year ago due to a decrease in client activity compared to the significantly elevated levels of a year ago. • Advisory fees increased 10.3% due to higher assets under management. • Bank deposit sweep income increased $0.3 million or 8.6% from a year ago due to higher balances and higher short-term interest rates. • Interest revenue increased 25.8% from a year ago due to higher short-term interest rates and higher average margin balances. • Other revenue decreased primarily due to decreases in the cash surrender value of Company-owned life insurance policies during the current period compared to increases in the value of those policies in the prior year period. • Compensation expenses decreased 10.4% from a year ago primarily due to decreased production, share-based and deferred compensation costs. • Non-compensation expenses decreased 5.4% from a year ago primarily due to a decrease in the allowance for credit losses partially offset by higher interest and travel expenses. Asset Management Asset Management reported revenue for the current quarter of $27.1 million, 11.9% higher compared with a year ago. Pre-tax income was $9.5 million, an increase of 25.4% compared with the prior year period. ('000s unless otherwise indicated) 1Q-2022 1Q-2021 Change % Change Revenue $ 27,117 $ 24,230 $ 2,887 11.9 Advisory fee revenue $ 27,113 $ 24,227 $ 2,886 11.9 Other $ 4 $ 3 $ 1 100.0 Total Expenses $ 17,643 $ 16,677 $ 966 5.8 Compensation $ 7,086 $ 7,259 $ (173) (2.4) Non-compensation $ 10,557 $ 9,418 $ 1,139 12.1 Pre-tax Income $ 9,474 $ 7,553 $ 1,921 25.4 Compensation Ratio 26.1 % 30.0 % (390) (13.0) Non-compensation Ratio 38.9 % 38.9 % — — Pre-tax Margin 34.9 % 31.2 % 370 11.9 AUM (billions) $ 42.7 $ 40.2 $ 2.5 6.2 • Advisory fee revenue increased 11.9% due to higher assets under management during the first quarter of 2022 compared with the first quarter of 2021 and positive net asset flows. • The Firm changed its advisory fee billings from quarterly in advance to monthly in advance starting on April 1, 2022. • AUM was near a record l evel of $42.7 billion at March 31, 2022 , which is the basis for advisory fee billings for April 2022. • The increase in AUM was comprised of higher asset values of $1.9 billion on existing client holdings and a net contribution of assets of $0.6 billion. • Compensation expenses were down 2.4% from a year ago which was primarily due to decreases in incentive compensation. • Non-compensation expenses were up 12.1% when compared to the prior year period due to a higher communication and technology expenses and portfolio manager expense. 42 Table of Contents The following table provides a breakdown of the change in assets under management for the three months ended March 31, 2022: (Expressed in millions) For the Three Months Ended March 31, 2022 Beginning Balance Appreciation (Depreciation) Ending Balance Fund Type Contributions Redemptions/Profit Distribution Traditional (1) $ 37,833 $ 1,515 $ (1,488) $ (1,869) $ 35,991 Institutional Fixed Income (2) 868 18 (11) (36) 839 Alternative Investments: Hedge funds (3) 4,678 61 (121) (775) 3,843 Private Equity Funds (4) 1,575 105 (8) (9) 1,663 Portfolio Enhancement Program (5) 380 — (15) — 365 $ 45,334 $ 1,699 $ (1,643) $ (2,689) $ 42,701 (1) Traditional investments include third party advisory programs, Oppenheimer financial adviser managed 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. 43 Table of Contents Capital Markets Capital Markets reported revenue for the current quarter of $85.1 million, 53.7% lower when compared with the prior year period. Pre-Tax income was $1.2 million, a decreased of 97.7% compared with pre-tax income of $50.0 million a year ago. ('000s) 1Q-2022 1Q-2021 Change % Change Revenues $ 85,051 $ 183,599 $ (98,548) (53.7) Investment Banking $ 32,975 $ 116,836 $ (83,861) (71.8) Advisory fees $ 21,905 $ 35,922 $ (14,017) (39.0) Equities underwriting $ 11,236 $ 74,582 $ (63,346) (84.9) Fixed income underwriting $ 1,987 $ 5,487 $ (3,500) (63.8) Other $ (2,153) $ 845 $ (2,998) * Sales and Trading $ 51,603 $ 66,063 $ (14,460) (21.9) Equities $ 35,928 $ 43,556 $ (7,628) (17.5) Fixed Income $ 15,675 $ 22,507 $ (6,832) (30.4) Other $ 473 $ 700 $ (227) (32.4) Total Expenses $ 83,885 $ 133,608 $ (49,723) (37.2) Compensation $ 60,223 $ 111,930 $ (51,707) (46.2) Non-compensation $ 23,662 $ 21,678 $ 1,984 9.2 Pre-tax Income $ 1,166 $ 49,991 $ (48,825) (97.7) Compensation Ratio 70.8 % 61.0 % 980 16.1 Non-compensation Ratio 27.8 % 11.8 % 1,600 135.6 Pre-tax Margin 1.4 % 27.2 % (2,580) (94.9) *Percentage not meaningful • Advisory fees earned from investment banking activities decreased 39.0% compared with a year ago. The high advisory fees from the prior year period were driven by large completed M&A transactions in healthcare, technology, and consumer products. • Equity underwriting fees decreased 84.9% compared with a year ago due to a significant decrease in equity underwriting activity in the healthcare and technology sectors, particularly for companies utilizing the SPAC framework to access the public markets. • Fixed income underwriting fees were down 63.8% compared with a year ago primarily driven by a decrease in public finance issuances during the 2022 period. • Equities sales and trading revenue decreased 17.5% compared with a year ago due to a marked decline in volumes in the equities market compared to the elevated levels in the prior year period. • Fixed Income sales and trading revenue declined significantly by 30.4% compared with a year ago driven by lower trading volumes in the fixed income and municipal market. • Compensation expenses decreased 46.2% compared with a year ago primarily due to decreased incentive compensation. • Non-compensation expenses were 9.2% higher than a year ago due to increased interest costs and increased costs associated with business travel and entertainment and conferences. 44 Table of Contents 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 condensed consolidated financial statements and notes thereto found in its Annual Report on Form 10-K for the year ended December 31, 2021. 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 ended December 31, 2021. 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 ended March 31, 2022, 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, 2021. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2022, total assets increased by 0.8% from December 31, 2021. 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 repurchase agreements. We met our longer-term capital needs through the issuance of the 5.50% Senior Secured Notes due 2025 (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. At March 31, 2022, the Company had bank call loans of $78.2 million compared to $69.5 million at December 31, 2021. 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 $4.8 million and $383,007, respectively, at March 31, 2022. The liquid assets at Oppenheimer Europe Ltd. are primarily comprised of cash deposits in bank accounts. The liquid assets at Oppenheimer Investments Asia Limited are primarily comprised of investments in U.S. Treasuries and cash deposits in bank accounts. Any 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 $3.8 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. 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. The Company has begun assessing the impact that the new administration’s proposed increased corporate tax proposals will have on its operations, cash flows and financial condition. Senior Secured Notes On September 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 on April 1st and October 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 45 Table of Contents Secured Notes due July 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. On November 23, 2020, 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 (the "Notes"), except that such new notes have been registered under the Securities Act. We did not receive any proceeds in the exchange offer. See note 11 to the condensed consolidated financial statements appearing in Item 1 for further discussion . The Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by E.A. Viner International Co. and Viner Finance Inc. (together, the "Subsidiary Guarantors"), unless released as described below. Each of the Subsidiary Guarantors is 100% owned by the Parent. The indenture for the Notes contains covenants with restrictions which are discussed in note 11. The guarantees are senior secured obligations of each Subsidiary Guarantor. The guarantees rank: • effectively senior in right of payment to all unsecured and unsubordinated obligations of such guarantor, to the extent of the value of the collateral owned by such guarantor (and, to the extent of any unsecured remainder after payment of the value of the collateral, rank equally in right of payment with such unsecured and unsubordinated indebtedness of such guarantor); • senior in right of payment to any subordinated debt of such guarantor; and • secured on a first-priority basis by the collateral, subject to certain exceptions and permitted liens, and it is intended that pari passu lien indebtedness, if any, will be secured on an equal and ratable basis. Each subsidiary guarantee is limited so that it does not constitute a fraudulent conveyance under applicable law, which may reduce the subsidiary’s obligations under the guarantee. There are no externally imposed restrictions on transfers of assets between the Company and its subsidiaries. Each Guarantor will be automatically and unconditionally released and discharged upon the sale, exchange or transfer of the capital stock of a Guarantor and the Guarantor ceasing to be a direct or indirect subsidiary of the Parent if such sale does not constitute an asset sale under the indenture for the Notes or does not constitute an asset sale effected in compliance with the asset sale and merger covenants of the indenture for the Notes; a Guarantor being dissolved or liquidated; a Guarantor being designated unrestricted in compliance with the applicable provisions of the Notes; or the exercise by the Parent of its legal defeasance option or covenant defeasance option or the discharge of the Parent's obligations under the indenture for the Notes in accordance with the terms of such indenture. The following tables present the results of operations for the three months ended March 31, 2022 and the balance sheet at March 31, 2022 for the Parent and Guarantors. (Expressed in thousands) As of March 31, 2022 Total Assets $ 2,013,404 Due From Non-Guarantor Subsidiary 15,085 Total Liabilities 508,997 Due To Non-guarantor Subsidiary 1,210 For the Three Months Ended March 31, 2022 Total Revenue $ 2,473 Pre-Tax Income (Loss) (217) Net Income (Loss) (129) On June 17, 2021, S&P upgraded the Company's Corporate Family rating and rating on the Unregistered Notes from 'B+' with a stable outlook to 'BB-' with a stable outlook. On August 23, 2021, Moody’s upgraded the Company's Corporate Family rating and the rating on the Unregistered Notes from “B1” with a stable outlook to “Ba3” with a stable outlook. 46 Table of Contents 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 and 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 issued $7.7 million in forgivable notes (which are inherently illiquid) to employees for the three months ended March 31, 2022 ($6.4 million for the three months ended March 31, 2021) 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. 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 March 31, 2022, the Company had $78.2 million of bank call loans ($69.5 million at December 31, 2021). The average daily bank loan outstanding for the three months ended March 31, 2022 was $87.1 million ($50.3 million for the three months ended March 31, 2021). The largest daily bank loans outstanding for the three months ended March 31, 2022 were both $190.2 million, ($128.8 million for the three months ended March 31, 2021). At March 31, 2022, securities loan balances totaled $300.3 million ($244.2 million at December 31, 2021 and $257.3 million at March 31, 2021). The average daily securities loan balance outstanding for the three months ended March 31, 2022 was $304.1 million, ($262.4 million for the three months ended March 31, 2021). The largest daily stock loan balance for the three months ended March 31, 2022 was $350.1 million ($285.7 million for the three months ended March 31, 2021). We finance our government trading operations through the use of securities purchased under reverse repurchase agreements and repurchase agreements. Except as described below, repurchase and reverse repurchase agreements, primarily 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 March 31, 2022, we did not have any repurchase agreements and reverse repurchase agreements that did not settle overnight or have an open settlement date. At March 31, 2022, the gross balances of reverse repurchase agreements and repurchase agreements were $44.2 million and $525.3 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the three months ended March 31, 2022 was $132.4 million and $443.5 million, respectively ($156.9 million and $395.9 million, respectively, for the three months ended March 31, 2021). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the three months ended March 31, 2022 was $462.5 million and $644.1 million, respectively ($424.2 million and $621.8 million, respectively, for the three months ended March 31, 2021). 47 Table of Contents Liquidity Management We manage our liquidity 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 $88.9 million as of March 31, 2022. 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. Our primary long-term cash requirements include $124.1 million principal outstanding as of March 31, 2022 under our Senior Secured Notes (due in 2025) and $194.1 million of operating lease obligations. The total cash requirement for interest expense related to the Notes and operating lease obligations is estimated to be approximately $37.7 million for the 2022 year. Funding Risk (Expressed in thousands) For the Three Months Ended March 31, 2022 2021 Cash (used in)/provided by operating activities $ (152,146) $ 7,268 Cash used in investing activities (2,490) (999) Cash used in financing activities (11,654) (13,148) Net decrease in cash, cash equivalents and restricted cash $ (166,290) $ (6,879) Management believes that funds from operations, combined with our capital base and available credit facilities, are sufficient for our liquidity needs for 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 periods of high volatility, we have seen increased calls for deposits of collateral to offset perceived risk between the Company's settlement liability to industry clearinghouses such as the Options Clearing Corporation (“OCC”) and National Securities Clearing Corp. (“NSCC”) as well as more stringent collateral arrangements with our bank lenders. All such requirements have been and will be met in the ordinary course with available collateral. 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 — Cybersecurity – Security breaches of our technology systems, or those of our clients or other third-party vendors we rely on, could subject us to significant liability and harm our reputation" as further described in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2021. 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. The commencement of hostilities between Ukraine and Russia have resulted in increased attacks on the 48 Table of Contents infrastructure of data processing facilities around the world and heightened awareness of potential vulnerabilities including those of the Company. 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. 49 Table of Contents REGULATORY MATTERS AND DEVELOPMENTS Regulation Best Interest (U.S.) On June 5, 2019, the SEC adopted Regulation Best Interest (“Reg BI”) as Rule 15l-1 under the Exchange Act. Reg BI imposes a 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 clients 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 on June 30, 2020. In addition to adopting 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 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”). Reg BI requires enhanced documentation for recommendations of securities transactions to broker-dealer retail clients as well as the cessation of certain practices and 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 made significant structural, technological and operational changes to our business practices to comply with the requirements of the Reg BI Rules and it is likely that additional changes may be necessary to continue to comply as more experience with the Reg BI Rules is gained. Regulators have commenced in-depth reviews of the industry’s compliance with the requirements of Reg BI, including that of the Company. On December 18, 2020, the DOL published its final prohibited transaction exemption (“PTE”) addressing investment advice fiduciaries to ERISA plans and IRAs. Similar to the proposal the DOL released in June of 2020, the final exemption takes a principles-based (rather than a prescriptive) approach to resolving conflicts that arise under ERISA when an investment advice fiduciary, its affiliate or a related party is paid certain types of compensation (such as commissions, trailing fees or revenue- sharing) or engages in certain principal transactions. The final exemption should provide a new and more flexible approach to ERISA compliance for certain types of transactions, which financial institutions may choose to utilize in place of other existing exemptions. Like the proposal (but in contrast to the precursor rule the DOL finalized in April 2016 that the U.S. Court of Appeals for the Fifth Circuit later vacated in June 2018), the final exemption does not materially change the scope of fiduciary activities under ERISA, with the exception of including certain rollover-related advice as fiduciary advice. The effective date for compliance with the PTE was February 1, 2022. The Company believes many of the steps taken by the Company to achieve compliance with the Reg BI Rules will enable the Company to comply with the PTE. The Company implemented certain additional processes to accompany the actions taken to comply with the Reg BI Rules in order to ensure full compliance with the PTE. 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 ended December 31, 2021 for additional information. Oppenheimer and many of its affiliates are each subject to various regulatory capital requirements. As of March 31, 2022, all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. See note 15 to the condensed consolidated financial statements in Item 1 for further information on regulatory capital requirements. Other Regulatory Matters Since August 2021, Oppenheimer has been responding to information requests from the SEC’s Division of Enforcement relating to a former Oppenheimer financial advisor and his relationship with registered investment adviser, Southport Capital and its affiliates. 50 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, including inflation and changes in consumer confidence and spending, (vi) competition from existing financial institutions, new entrants and other participants in the securities markets and financial services industry, (vii) potential cybersecurity threats and attacks, (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 “Regulation Best Interest” and other regulations adopted in recent years, (xi) war, terrorist acts and nuclear confrontation as well as political unrest, including event relating to Russia's invasion of Ukraine and related Western sanctions, (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 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 the potential for default by the U.S. government on the nation's debt, (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 COVID-19 Pandemic’s impact on the U.S. and global economies including supply chain disruptions ; and Federal, state and local governmental responses to the COVID-19 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 ended December 31, 2021. 51 Table of Contents Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the three months ended March 31, 2022, 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, 2021.