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", "Parent", "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 September 30, 2022, we provided our services from 91 offices in 25 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 September 30, 2022 totaled $100.3 billion. The Company provides investment advisory services through OAM and Oppenheimer Investment Management LLC ("OIM") and Oppenheimer's financial advisor directed programs. At September 30, 2022, client assets under management ("AUM") totaled $35.3 billion. We also provide trust services and products through Oppenheimer Trust Company of Delaware and discount brokerage services through Freedom Investments, Inc. ("Freedom"). Through OPY Credit Corp., we offer syndication as well as trading of issued syndicated corporate loans. At September 30, 2022, the Company employed 2,938 employees (2,889 full-time and 49 part-time), of whom 985 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 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 growing our footprint by adding experienced bankers within our existing industry practices as well as new industry practices 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 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 with the aim 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. 40 Table of Contents Impact of Interest Rates The Federal Reserve ("FED") increased the federal funds rate by 300 basiss point during the first nine months of 2022, with half of that increase occurring during the three months ended September 30, 2022. Since inflation remains at elevated levels, it is likely that the federal funds rate will continue to increase in the coming months from the low levels of recent years. In addition, the FED has begun to reduce its balance sheet as it allows maturing bonds to runoff without re-investing the proceeds. The increases in the federal funds rate will be favorable to the Company’s interest-based revenues. These changes in policy by the FED are intended to reduce inflation and are also likely to reduce economic activity possibly leading to a recession. Such increases, while bringing down inflationary pressures may also prove detrimental to economic activity 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 negatively impact equity share prices while reducing revenues the Company derives from commissions and from fees based on the value of client assets managed by the Company. 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. Ukraine War In February 2022, without provocation, Russia invaded Ukraine. The war has lasted longer than previously anticipated, and it seems likely it will last for an extended period of time 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. In addition, the disruption of supplies for those products has further increased inflationary pressures in Europe as well as the rest of the world and in addition has led to significant cutbacks in economic activity due to anticipated shortages of natural gas in the coming winter period due to actions taken by Russia and OPEC. It has also had the indirect effect of lowering consumer confidence and consumer spending in Europe, all of which could have an adverse impact on financial markets in Europe as well as the U.S. and, thus on our business. Inflation Reduction Act of 2022 On August 16, 2022, President Biden signed H.R. 5376, commonly referred to as the Inflation Reduction Act (the "IRA"), into law, which includes an excise tax on stock buybacks, a new alternative minimum tax and significant tax incentives for energy and climate initiatives, among other provisions. Effective for repurchases occurring after December 31, 2022, the IRA imposes a nondeductible 1% excise tax on the net value of certain stock that is repurchased during the tax year. The value of stock repurchases subject to the tax is reduced by the value of any stock issued during the tax year. Additionally, effective for tax years beginning after December 31, 2022, the IRA imposes a 15% corporate alternative minimum tax on companies with adjusted financial statement income exceeding $1 billion over a three-year period. While we are currently assessing the impact of the IRA’s provisions, we do not expect it to have a material impact on the Company’s financial statements although future buybacks by the Company occurring after December 31, 2022 may be subject to the 1% excise tax. 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 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 support our employees that continue to work remotely. To date, there have been no significant disruptions to our business or control processes as a result of this dispersion of employees. While the direct impact of the virus has been substantially reduced, many employees from our home office and branch locations continue to work remotely. In recent months, 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. 41 Table of Contents An increased numbers of employees have returned to offices in recent weeks and months but we continue to maintain flexible work arrangements for our employees in keeping with the change in expectations and work habits that have developed during the past several years. EXECUTIVE SUMMARY The results for the quarter were significantly impacted by an adverse arbitration decision, but we were able to deliver profitable results reflecting the diversity and general health of our business. Volatile market conditions and emerging economic headwinds reduced valuations in both equity and fixed income markets. The high rate of inflation resulted in the Federal Reserve raising interest rates at the fastest speed in over 40 years with multiple 75 basis point increases during the quarter. Our Wealth Management business saw a benefit from the higher interest rate environment, as income from our FDIC-insured bank deposit program and interest income on margin loans were markedly greater than the prior year although this was offset to some extent by lower activity levels and lower valuations in client portfolios which drive fee income. The macroeconomic environment drove all major equity indices into bear market territory during the third quarter. The declining valuations negatively impacted our advisory fee revenues. The volatile markets also led to a marked slowdown in equity IPOs and secondary offerings and a significant decline in capital markets income. Investment banking advisory fees, while lower than the record Q3 results recorded in 2021, picked up considerably from the second quarter. The Company maintains a strong balance sheet with near record regulatory capital despite the volatile market environment and the impact of an adverse arbitration decision. The Company took advantage of the lower level of its share price to purchase 413,052 shares (3%) of its Class A non-voting common stock at an average price of $33.86 per share in the open market under its share repurchase program resulting in 10,874,990 Class A non-voting common shares outstanding at September 30, 2022. We remain confident in the resiliency of our business and our ability to continue to provide essential investment services to our clients. RESULTS OF OPERATIONS The Company reported net income of $4.5 million or $0.40 basic earnings per share for the third quarter of 2022, compared with net income of $26.3 million or $2.07 basic earnings per share for the third quarter of 2021. Revenue for the third quarter of 2022 was $294.1 million, a decrease of 6.7% compared to revenue of $315.3 million for the third quarter of 2021. (Expressed in thousands, except Per Share Amounts or otherwise indicated) 3Q-2022 3Q-2021 Change % Change Revenue $ 294,111 $ 315,342 $ (21,231) (6.7) Compensation expense $ 179,134 $ 206,312 $ (27,178) (13.2) Non-compensation expense $ 107,739 $ 71,636 $ 36,103 50.4 Pre-Tax Income $ 7,238 $ 37,394 $ (30,156) (80.6) Income Taxes Provision $ 2,573 $ 11,144 $ (8,571) (76.9) Net Income (1) $ 4,520 $ 26,250 $ (21,730) (82.8) Earnings per share (basic) (1) $ 0.40 $ 2.07 $ (1.67) (80.7) Earnings per share (diluted) (1) $ 0.37 $ 1.92 $ (1.55) (80.7) Book Value Per Share $ 70.23 $ 61.43 $ 8.80 14.3 Tangible Book Value Per Share (2) $ 54.74 $ 47.95 $ 6.79 14.2 Class A Shares Outstanding 10,874,990 12,515,734 (1,640,744) (13.1) AUA ($ billions) $ 100.3 $ 117.8 $ (17.5) (14.9) AUM ($ billions) $ 35.3 $ 43.6 $ (8.3) (19.0) (1) Attributable to Oppenheimer Holdings Inc. (2) Represents book value less goodwill and intangible assets divided by number of shares outstanding. 42 Table of Contents Highlights • Gross revenue, net income, and earnings per share for the third quarter of 2022 reflected the positive impact of the rising rate environment on our interest-sensitive revenues offset by lower activity levels and valuations in client portfolios and fewer underwriting and M&A transactions. • Client assets under administration and under management were both at reduced levels at September 30, 2022, down from the second quarter of 2022 as well as the same period last year. • Increased revenues in the Private Client segment are largely attributed to bank deposit sweep income, which exceeded the related revenue recorded during all of 2021 due to higher short-term interest rates. • Non-compensation expenses increased from the prior year quarter, reflecting the impact of an adverse arbitration decision in September 2022, which has since been appealed. • The Company repurchased 413,052 shares of Class A non-voting common stock during the third quarter of 2022 under its previously announced buy-back plan or 3% of shares outstanding at year-end 2021, bringing the total shares purchased under the plan during the first 9 months of 2022 to 1,675,595. • Book value and tangible book value per share reached record levels at September 30, 2022 largely as a result of share buy-backs. 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 ended September 30, 2022 and 2021: (Expressed in thousands) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2022 2021 % Change 2022 2021 % Change Revenue Private Client $ 178,614 $ 160,864 11.0 $ 473,932 $ 491,750 (3.6) Asset Management 24,870 26,894 (7.5) 76,302 76,668 (0.5) Capital Markets 90,947 128,585 (29.3) 247,272 460,129 (46.3) Corporate/Other (320) (1,001) (68.0) (145) 370 * Total $ 294,111 $ 315,342 (6.7) $ 797,361 $ 1,028,917 (22.5) Pre-Tax Income (Loss) Private Client $ 29,973 $ 37,426 (19.9) $ 92,919 $ 83,362 11.5 Asset Management 8,322 9,412 (11.6) 25,916 25,603 1.2 Capital Markets 2,401 17,888 (86.6) (14,368) 107,252 * Corporate/Other (33,458) (27,332) 22.4 (89,185) (83,528) 6.8 Total $ 7,238 $ 37,394 (80.6) $ 15,282 $ 132,689 (88.5) *Percentage not meaningful 43 Table of Contents Private Client Private Client reported revenue for the current quarter of $178.6 million, 11.0% higher when compared with the previous year. Pre-tax income was $30.0 million, a decrease of 19.9% compared with the prior year quarter. Financial advisor headcount at the end of the current quarter was 985 compared to 1,003 at the end of the third quarter of 2021. ('000s, except Financial advisor headcount or otherwise indicated) 3Q-2022 3Q-2021 Change % Change Revenue $ 178,614 $ 160,864 $ 17,750 11.0 Retail commissions $ 46,893 $ 51,348 $ (4,455) (8.7) Advisory fee revenue $ 78,055 $ 89,849 $ (11,794) (13.1) Bank deposit sweep income $ 35,769 $ 3,909 $ 31,860 815 Interest $ 14,471 $ 7,624 $ 6,847 89.8 Other $ 3,426 $ 8,134 $ (4,708) (57.9) Total Expenses $ 148,641 $ 123,438 $ 25,203 20.4 Compensation $ 87,555 $ 97,522 $ (9,967) (10.2) Non-compensation $ 61,086 $ 25,916 $ 35,170 135.7 Pre-tax Income $ 29,973 $ 37,426 $ (7,453) (19.9) Compensation Ratio 49.0 % 60.6 % (1,160) (19.1) Non-compensation Ratio 34.2 % 16.1 % 1,810 112.4 Pre-tax Margin 16.8 % 23.3 % (6.5) % (27.9) Asset Under Administration (billions) $ 100.3 $ 117.8 $ (17.5) (14.9) Cash Sweep Balances (billions) $ 6.5 $ 7.7 $ (1.2) 26.0 • Retail commissions decreased 8.7% from a year ago due to a decrease in client activity compared to the significantly elevated levels from a year ago. • Advisory fees decreased 13.1% from a year ago primarily due to the impact of lower equity and fixed income valuations on assets under administration. • Bank deposit sweep income increased $31.9 million (815%) from a year ago due to higher short-term interest rates. • Interest revenue increased 89.8% from a year ago due to higher short-term interest rates and higher average margin balances. • Other revenue decreased from a year ago primarily due to decreases in the cash surrender value of Company-owned life insurance policies. • Compensation expenses decreased 10.2% from a year ago primarily due to decreased production, and decreased share-based and deferred compensation costs. • Non-compensation expenses increased $35.2 million from a year ago primarily due to the impact of an adverse arbitration decision. 44 Table of Contents Asset Management Asset Management reported revenue for the current quarter of $24.9 million, 7.5% lower when compared with the prior year. Pre-tax income was $8.3 million, a decrease of 11.6% compared with the prior year period. ('000s unless otherwise indicated) 3Q-2022 3Q-2021 Change % Change Revenue $ 24,870 $ 26,894 $ (2,024) (7.5) Advisory fee revenue $ 24,865 $ 26,890 $ (2,025) (7.5) Other $ 5 $ 4 $ 1 25.0 Total Expenses $ 16,548 $ 17,482 $ (934) (5.3) Compensation $ 6,702 $ 6,120 $ 582 9.5 Non-compensation $ 9,846 $ 11,362 $ (1,516) (13.3) Pre-tax Income $ 8,322 $ 9,412 $ (1,090) (11.6) Compensation Ratio 26.9 % 22.8 % 410 18.0 Non-compensation Ratio 39.6 % 42.2 % (260) (6.2) Pre-tax Margin 33.5 % 35.0 % (1.5) % (4.3) AUM (billions) $ 35.3 $ 43.6 $ (8.3) (19.0) • Advisory fee revenue decreased 7.5% from a year ago due to the lower net value of assets under management, partially offset by incentive fees earned during the third quarter of 2022. • AUM were at reduced l evels of $35.3 billion at September 30, 2022, which is the basis for advisory fee billings for October 2022. • The decrease in AUM was comprised of lower asset values of $7.6 billion on existing client holdings and a net distribution of assets of $0.7 billion. • Compensation expenses were up 9.5% from a year ago primarily due to increases in fixed and discretionary compensation. • Non-compensation expenses were down 13.3% when compared to the prior year period due to lower portfolio manager expenses in line with the decrease in AUM. 45 Table of Contents The following table provides a breakdown of the change in assets under management for the three months ended September 30, 2022: (Expressed in millions) For the Three Months Ended September 30, 2022 Beginning Balance Appreciation (Depreciation) Ending Balance Fund Type Contributions Redemptions/Profit Distribution Traditional (1) $ 31,219 $ 1,458 $ (1,477) $ (1,287) $ 29,913 Institutional Fixed Income (2) 795 13 (20) (18) 770 Alternative Investments: Hedge funds (3) 3,249 25 (131) (111) 3,032 Private Equity Funds (4) 1,441 22 (33) (237) 1,193 Portfolio Enhancement Program (5) 366 1 (8) — 359 $ 37,070 $ 1,519 $ (1,669) $ (1,653) $ 35,267 (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, out-of-money puts and calls on the S&P 500 Index. The program is intended to be market neutral and uncorrelated to the index. Valuation is based on collateral requirements for a series of contracts representing the investment strategy. 46 Table of Contents Capital Markets Capital Markets reported revenue for the current quarter of $90.9 million, 29.3% lower when compared with the prior year period. Pre-tax income was $2.4 million compared with pre-tax income of $17.9 million in the prior year period. ('000s) 3Q-2022 3Q-2021 Change % Change Revenues $ 90,947 $ 128,585 $ (37,638) (29.3) Investment Banking $ 36,951 $ 82,012 $ (45,061) (54.9) Advisory fees $ 29,270 $ 51,815 $ (22,545) (43.5) Equities underwriting $ 5,061 $ 26,348 $ (21,287) (80.8) Fixed income underwriting $ 2,111 $ 3,140 $ (1,029) (32.8) Other $ 509 $ 709 $ (200) (28.2) Sales and Trading $ 53,093 $ 46,262 $ 6,831 14.8 Equities $ 34,877 $ 30,861 $ 4,016 13.0 Fixed Income $ 18,216 $ 15,401 $ 2,815 18.3 Other $ 903 $ 311 $ 592 190.4 Total Expenses $ 88,546 $ 110,697 $ (22,151) (20.0) Compensation $ 60,415 $ 81,690 $ (21,275) (26.0) Non-compensation $ 28,131 $ 29,007 $ (876) (3.0) Pre-tax Income $ 2,401 $ 17,888 $ (15,487) (86.6) Compensation Ratio 66.4 % 63.5 % 290 4.6 Non-compensation Ratio 30.9 % 22.6 % 830 36.7 Pre-tax Margin 2.6 % 13.9 % (11.3) % (81.3) • Advisory fees earned from investment banking activities decreased 43.5% compared with a year ago due to an industry-wide decrease in deal volumes. • Equity underwriting fees decreased 80.8% compared with a year ago due to a significant decrease in equity IPOs and secondary offerings, including SPAC issuances. • Fixed income underwriting fees were down 32.8% compared with a year ago primarily driven by a decrease in issuances of public finance and emerging market debt during the third quarter of 2022. • Equities sales and trading revenue increased 13.0% compared with a year ago due to a marked increase in volatility resulting in increased volumes in the equities market compared to the levels in the prior year period. • Fixed income sales and trading revenue increased by 18.3% compared with a year ago primarily due to an increase in trading income attributable to higher trading volumes. • Compensation expenses decreased 26.0% compared with a year ago primarily due to decreased incentive compensation. • Non-compensation expenses were 3.0% lower than a year ago due to a decrease in underwriting expenses, partially offset by an increase in business travel and entertainment expenses. 47 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 September 30, 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 September 30, 2022, total assets decreased by 6.2% 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 September 30, 2022, the Company had bank call loans of $53.6 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 $5.2 million and $382,163, respectively, at September 30, 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 $3.4 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. 48 Table of Contents 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 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 Subsidiary 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 Subsidiary 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 Subsidiary Guarantor will be automatically and unconditionally released and discharged upon the sale, exchange or transfer of the capital stock of a Subsidiary Guarantor and the Subsidiary 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 Subsidiary Guarantor being dissolved or liquidated; a Subsidiary 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 nine months ended September 30, 2022 and the balance sheet at September 30, 2022 for the Parent and Subsidiary Guarantors. (Expressed in thousands) As of September 30, 2022 Total Assets $ 2,000,542 Due From Non-Guarantor Subsidiary 12,930 Total Liabilities 546,858 Due To Non-Guarantor Subsidiary 2,237 For the Nine Months Ended September 30, 2022 Total Revenue $ 7,481 Pre-Tax Income (Loss) (563) Net Income (Loss) (501) 49 Table of Contents 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. 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 $1.9 million in forgivable notes (which are inherently illiquid) to employees for the three months ended September 30, 2022 ($6.2 million for the three months ended September 30, 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 September 30, 2022, the Company had $53.6 million of bank call loans ($69.5 million at December 31, 2021). The average daily bank loan outstanding for the three and nine months ended September 30, 2022 was $67.1 million and $88.50 million, respectively ($76.0 million and $80.1 million for the three and nine months ended September 30, 2021). The largest daily bank loans outstanding for the three and nine months ended September 30, 2022 was $176.5 million and $226.6 million ($227.7 million for both of the three and nine months ended September 30, 2021). At September 30, 2022, securities loan balances totaled $307.4 million ($244.2 million at December 31, 2021 and $286.2 million at September 30, 2021). The average daily securities loan balance outstanding for the three and nine months ended September 30, 2022 was $300.9 million and $291.6 million, respectively ($296.9 million and $280.3 million for the three and nine months ended September 30, 2021). The largest daily stock loan balance for the three and nine months ended September 30, 2022 was $339.2 million and $350.1 million, respectively ($320.6 million for both of the three and nine months ended September 30, 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 September 30, 2022, we did not have any repurchase agreements and reverse repurchase agreements that did not settle overnight or have an open settlement date. 50 Table of Contents At September 30, 2022, the gross balances of reverse repurchase agreements and repurchase agreements were $195.1 million and $479.2 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the three months ended September 30, 2022 was $250.2 million and $360.1 million, respectively ($134.9 million and $289.9 million, respectively, for the three months ended September 30, 2021). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the three months ended September 30, 2022 was $526.7 million and $668.3 million, respectively ($423.9 million and $441.1 million, respectively, for the three months ended September 30, 2021). 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 $71.6 million as of September 30, 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 $124.3 million principal outstanding as of September 30, 2022 under our Senior Secured Notes (due in 2025) and $189.3 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 $4.9 million for the 2022 year. Funding Risk (Expressed in thousands) For the Nine Months Ended September 30, 2022 2021 Cash (used in)/provided by operating activities $ (83,104) $ 135,188 Cash used in investing activities (10,436) (5,512) Cash used in financing activities (83,126) (24,281) Net (decrease)/increase in cash, cash equivalents and restricted cash $ (176,666) $ 105,395 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. 51 Table of Contents 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 of 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 has resulted in increased attacks on the 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. 52 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 required on June 30, 2020. In addition to adopting Reg BI, the SEC 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 rules and processes required under Reg BI limit revenue and involve increased costs, including, but not limited to, compliance costs associated with 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 of 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. In 2021, the SEC adopted reforms under the Investment Advisers Act of 1940 to modernize rules that govern investment adviser advertisements and payments to solicitors. The amendments create a single rule (“Marketing Rule”) that replaced the previous regulatory guidance. Registered investment advisers like Oppenheimer (OPCO) and Oppenheimer Asset Management (OAM) and their employees need to comply with the new rule beginning on November 4, 2022. The SEC Marketing Rule is designed to regulate adviser’s marketing communications to their prospects and clients. The Rule prohibits misleading advertisements and creates specific requirements for the presentation of performance data to clients and prospects. The Rule defines an advertisement as any direct or indirect communication between an FA and a client or prospect regarding advisory services such as OPCO and OAM’s advisory programs or investments in private funds such as many of the hedge funds offered on the OAM hedge fund platform. The Company has updated its policies and implemented certain processes in order to comply with the Marketing Rule. 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 September 30, 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. 53 Table of Contents 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. On June 30, 2022, the Company received a "Wells Notice" from the SEC requesting that Oppenheimer make a written submission to the SEC to explain why Oppenheimer should not be charged with violations of Section 15c2-12 of the Exchange Act and Rule 15c2-12 thereunder as well as Municipal Securities Rulemaking Board Rules G-17 and G-27 in relation to its sales of municipal notes pursuant to an exemption from continuing disclosure contained in Rule 15c2-12. On September 13, 2022, the SEC filed a complaint against Oppenheimer in the United States District Court for the Southern District of New York (the "Court") alleging that Oppenheimer violated Section 15B(c)(1) of the Exchange Act and Rule 15c2-12 thereunder as well as Municipal Securities Rulemaking Board Rules G-17 and G-27 for not having fully complied with the exemption from the continuing disclosure obligations under Rule 15c2-12. The SEC asked the Court to enter an order enjoining Oppenheimer from violating the above referenced rules and requiring it to disgorge approximately $1.9 million plus interest. The Company believes such claim to be without merit and intends to vigorously defend itself against any such claim. 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 events 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”) and economic uncertainty in the UK, EU and elsewhere, (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 (xix) 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. 54 Table of Contents Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the nine months ended September 30, 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. 55 Table of Contents