What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-28 · 129 added, 111 removed, 355 unchanged (40% of the section changed)

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The consolidated financial statements include the accounts of Oppenheimer Holdings Inc.

and its consolidated subsidiaries (together, the "Company", "Firm", "we", "our" or "us").

and its consolidated subsidiaries (together, the "Company", "Parent", "we", "our" or "us").

The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

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Helier, Isle of Jersey, Munich, Germany and Geneva, Switzerland.

Client assets under administration ("CAUA") as of December 31, 2021 totaled $122.1 billion.

The Company provides investment advisory services through OAM and Oppenheimer Investment Management LLC ("OIM") and Oppenheimer's financial advisor directed programs.

At December 31, 2022, client assets under management LLC ("AUM") totaled $36.8 billion.

AUM includes the total market value of client investments in discretionary and non-discretionary advisory programs and as well as the net asset value of private placement of alternative investments offered by and held by clients of the firm.

Client assets under administration ("CAUA") as of December 31, 2022 totaled $105.0 billion.

CAUA includes AUM and the other assets for which the firm provides services.

We also provide trust services and products through Oppenheimer Trust Company of Delaware and discount brokerage services through Freedom Investments, Inc.

Through OPY Credit Corp., we offer syndication as well as trading of issued syndicated corporate loans.

Through OPY Credit Corp., from time to time we may offer syndication as well as trading of issued syndicated corporate loans.

At December 31, 2022, the Company employed 2,912 employees (2,868 full-time and 44 part-time), of whom 968 were financial advisors.

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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.

In investment banking we are committed to grow our footprint by adding experienced bankers within our existing industry practices as well as in new industry areas in which we believe we can be successful.

We continuously invest in and improve our technology platform to support client service and to remain competitive while carefully managing expenses.

We are also focused on opportunities in our capital markets 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 technology capabilities to ensure compliance with industry regulations, support client service and expand our wealth management and capital markets capabilities.

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.

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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.

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.

Impact of Interest Rates

The Federal Reserve has reduced short-term interest rates, largely due to the impact of the COVID-19 Pandemic and its out-sized negative impact on the economy, resulting in a decrease in fees the Company earned from FDIC-insured deposits of clients through a program offered by the Company.

Decreases in short-term interest rates, increases in deposits rates paid to clients, and/or a significant decline in our clients' cash balances have a negative impact on our earnings.

The Federal Reserve reduced its benchmark rate significantly during two separate unscheduled meetings in March 2020.

Low interest rates have continued to negatively impact our earnings in an otherwise favorable environment.

The Federal Reserve has commenced tapering its purchase of U.S.

Treasuries and mortgage-backed securities which is scheduled to be completed by March 2022 with no further planned purchases thereafter.

Recently the Federal Reserve announced its intention to begin increasing the discount rate in increments beginning in March 2022 with the markets believing that there may be up to five such increases during 2022.

The increase in interest rates if and when they take place will be favorable to the Company’s interest-based revenues.

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.

CORONAVIRUS DISEASE 2019 ("COVID-19 PANDEMIC")

The Federal Reserve ("FED") increased the federal funds rate by 425 basis point during 2022, with the majority of that increase occurring during the second half of the year.

While we have seen indications in the fourth quarter that inflation has peaked and is beginning to slowly abate, it remains at elevated levels.

As a result, it is likely that the FED will continue to increase the federal funds rate when it meets in early 2023, though at a slower pace, and in fact did so on February 1, 2023, with a 25 basis point increase.

In addition, the FED has continued 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.

However, the FED's current policies, which are intended to reduce inflation, 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, though such increases may be offset if the cash sweep balances decrease.

These rate increases will also increase the rates the Company charges on margin balances and have a positive impact on our earnings.

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 and other 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 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 buybacks by the Company occurring after December 31, 2022 may be subject to the 1% excise tax.

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.

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.

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.

Since the direct impact of the virus has been substantially reduced, 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.

Throughout 2022, most of our employees worked under a hybrid arrangement that recognizes the benefits of collaboration and hands-on training associated with in-person engagement, along with the importance of flexibility associated with a work from home/remote option.

At the same time, employees from our home office and branch locations continue to work remotely.

There can be no assurance at this time that these improvements will continue and we continue to closely monitor the situation.

EXECUTIVE SUMMARY

The record results for the full year 2021 demonstrate the strength of our franchise and the countercyclical and balanced nature of our businesses.

The record results in our Capital Markets business helped offset the significantly lower incentive fees from alternative investments and bank deposit sweep income in Wealth Management.

Despite this, the Wealth Management business had record management fees and steady commission revenue contributing to very solid results during the year.

The performance of the Investment Banking division helped propel the Capital Markets business to record revenue and earnings for the year on very strong equity underwriting and M&A advisory fees.

The operating results of Capital Markets were also positively impacted by the establishment of a deferred compensation plan in December 2021.

The Company's operating results were the best in its history.

Operating results, however, were negatively impacted by an increase in legal and regulatory costs during the fourth quarter reversing a trend of decreases in those costs over the past several years.

Concerns impacting market sentiment continue to persist around inflation, higher oil prices, and the Federal Reserve's tapering of bond buying.

However, the prospects of moderately higher interest rates, a strong economy, and low unemployment, should provide a constructive backdrop for investors.

While our comparative operating results for the quarter were significantly impacted by the outsized impact of incentive fees in the fourth quarter of 2020, the overall business performed exceptionally well with record contributions from our Investment Bank and strong results across the board from our other businesses.

The results for the full year 2022 are significantly reduced from the prior year’s record levels, largely reflecting the impact of challenging macroeconomic conditions as well as an adverse arbitration decision in 2022.

Concerns around whether inflation, rising interest rates and other geopolitical tensions could induce a recession weighed negatively on market sentiment during the year.

This resulted in significant declines in transaction volumes and in the valuations of the equity and fixed income markets, which drove a meaningful reduction in both our transaction based revenues and advisory fee revenues.

The volatile markets also led to a cooling of equity IPOs, secondary offerings and M&A transaction activity, which negatively impacted our capital markets income.

Nevertheless, in spite of these headwinds, we were able to deliver profitable results for the year owing to the diversity and countercyclical nature of our revenue streams.

In particular, bank deposit sweep income and interest income on margin loans increased significantly throughout the year, as both received a benefit from the short-term interest rate increases enacted by the FED.

Importantly, while we experienced higher legal expenses during the year, we remain focused on managing our controllable costs and maintaining discipline on our overall expense levels.

The Company continues to maintain a strong balance sheet with a significant excess in regulatory capital.

During the year, the Company took advantage of the lower level of its share price to purchase 1,684,287 shares (15%) of its Class A Stock at an average price of $36.00 per share in the open market under its share repurchase program.

This resulted in 10,868,556 shares of Class A Stock remaining outstanding at December 31, 2022.

We remain confident in the strength of our brand, the resiliency of our businesses and our ability to continue to provide essential investment services to our clients.

RESULTS OF OPERATIONS

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Net Income $ 32,110 $ 158,964 (79.8) $ 158,964 $ 122,986 29.3

Net income (loss) attributable to noncontrolling interest, net of tax (241) — * — — *

Net income attributable to Oppenheimer Holdings Inc.

$ 32,351 $ 158,964 (79.6) $ 158,964 $ 122,986 29.3

*Percentage not meaningful

Fiscal 2022 compared to Fiscal 2021

• Commission revenue was $370.4 million for the year ended December 31, 2022, a decrease of 7.8% compared with $401.6 million for the year ended December 31, 2021 due to decreased client activity in mutual funds, listed securities, OTC products and annuities, partially offset by higher commission income on municipal bonds.

• Advisory fees were $425.6 million for the year ended December 31, 2022, a decrease of 5.7% compared with $451.2 million for the year ended December 31, 2021 due to the reduced valuations of assets under management.

• Investment banking revenue was $127.5 million for the year ended December 31, 2022, a decrease of 70.7% compared with $435.9 million for the year ended December 31, 2021 driven by an industry-wide decrease in M&A transactions, and significantly lower levels of capital issuances in the equity markets, particularly in the healthcare and technology sectors.

• Bank deposit sweep income was $104.6 million for the year ended December 31, 2022, an increase of 572.1% compared with $15.6 million for the year ended December 31, 2021 due to significantly higher short-term interest rates.

• Interest revenue was $60.7 million for the year ended December 31, 2022, an increase of 66.4% compared with $36.5 million in 2021 due to higher average margin balances and higher short-term interest rates.

• Principal transactions revenue was $21.0 million for the year ended December 31, 2022, a decrease of 12.3% compared with $24.0 million for the year ended December 31, 2021 driven by lower income from investment grade, high yield, Emerging Markets, and municipal bonds partially offset by higher income from U.S.

government securities.

• Other revenue was $1.1 million for the year ended December 31, 2022, a decrease of 96.2% compared to $29.3 million for the year ended December 31, 2021 primarily due to a decrease in the cash surrender value of Company-owned life insurance during 2022, which fluctuates based on changes in fair value of the policies' underlying investments.

• Compensation and related expenses totaled $740.8 million during the year ended December 31, 2022, a decrease of 16.5% compared with the year ended December 31, 2021 due to decreased incentive compensation costs.

Compensation and related expenses as a percentage of revenue was 66.7% for the year ended December 31, 2022 compared with 63.6% for the year ended December 31, 2021.

• Non-compensation expenses were $324.6 million during the year ended December 31, 2022, an increase of 14.9% compared with $282.6 million during the year ended December 31, 2021 due to higher legal costs recorded during third quarter of 2022 which related to an adverse arbitration decision.

• The effective income tax rate for the year ended December 31, 2022 was 29.5% compared with 29.2% for the year ended December 31, 2021.

Fiscal 2021 compared to Fiscal 2020

• Commission revenue was $401.6 million for the year ended December 31, 2021, an increase of 1.6% compared with $395.1 million for the year ended December 31, 2020 due to increased client activity in mutual funds, options, annuities, and mortgage backed securities partially offset by lower commission income on municipal bonds.

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• Interest revenue was $36.5 million for the year ended December 31, 2021, an increase of 9.0% compared with $33.5 million in 2020 due to higher average margin balances partially offset by lower short-term interest rates.

high yield, emerging markets, and municipal bonds partially offset by higher income from corporate and convertible bonds.

• Principal transactions revenue was $24.0 million for the year ended December 31, 2021, a decrease of 14.0% compared with $27.9 million for the year ended December 31, 2020 driven by lower income from investment grade, high yield, Emerging Markets, and municipal bonds partially offset by higher income from corporate and convertible bonds.

• Other revenue was $29.3 million for the year ended December 31, 2021, a decrease of 1.7% compared to $29.8 million for the year ended December 31, 2020 primarily due to a decrease in the cash surrender value of Company-owned life insurance during 2021.

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• Non-compensation expenses were $282.6 million during the year ended December 31, 2021, an increase of 9.2% compared with $258.7 million during the year ended December 31, 2020 due to increased legal, underwriting, travel and entertainment, and conference costs partially offset by reduced interest costs during the year ended December 31, 2021.

• The effective income tax rate for the year ended December 31, 2021 was 29.2% compared with 27.2% for the year ended December 31, 2020.

The higher tax rate in 2021 was primarily due to an increase in apportionment factors in state and local jurisdictions with higher statutory tax rates.

Fiscal 2020 compared to Fiscal 2019

• Commission revenue was $395.1 million for the year ended December 31, 2020, an increase of 23.4% compared with $320.1 million for the year ended December 31, 2019 as a result of increased volatility and client participation in active equities-related markets.

• Advisory fees were $455.3 million for the year ended December 31, 2020, an increase of 28.7% compared with $353.7 million for the year ended December 31, 2019 due to higher management fees and incentive fees from alternative investments.

• Investment banking revenue was $222.3 million for the year ended December 31, 2020, an increase of 76.1%compared with $126.2 million for the year ended December 31, 2019 due to significantly higher underwriting revenues from equities transactions and increased M&A activity later in the 2020.

• Bank deposit sweep income was $34.8 million for the year ended December 31, 2020, a decrease of 70.3% compared with $117.4 million for the year ended December 31, 2019 due to lower short-term interest rates partially offset by higher average cash sweep balances.

• Interest revenue was $33.5 million for the year ended December 31, 2020, a decrease of 34.0% compared with $50.7 million in 2019 due to lower short-term interest rates partially offset by higher average margin balances.

• Principal transactions revenue was $27.9 million for the year ended December 31, 2020, a decrease of 7.4% compared with $30.1 million for the year ended December 31, 2019 as a result of lower client involvement in markets during the early months of the COVID Pandemic.

• Other revenue was $29.8 million for the year ended December 31, 2020, a decrease of 15.1% compared to $35.1 million for the year ended December 31, 2019 primarily due to a decrease in the cash surrender value of Company-owned life insurance during 2020.

• Compensation and related expenses totaled $771.0 million during the year ended December 31, 2020, an increase of 17.2% compared with the year ended December 31, 2019.

The increase was due to increased production and incentive compensation tied to increases in revenue during the year ended December 31, 2020.

Compensation and related expenses as a percentage of revenue was 64.3% for the year ended December 31, 2020 compared with 63.6% for the year ended December 31, 2019.

• Non-compensation expenses were $258.7 million during the year ended December 31, 2020, a decrease of 14.0% compared with $300.8 million during the year ended December 31, 2019 due to decreased interest costs, lower legal and regulatory costs and reduced costs associated with business travel and entertainment and conferences during the year ended December 31, 2020.

• The effective income tax rate for the year ended December 31, 2020 was 27.2% compared with 29.3% for the year ended December 31, 2019.

The lower effective tax rate for 2020 was primarily due to lower state and local income taxes, valuation allowance on foreign operations and other non-deductible expenses over higher pre-tax income in 2020 compared to 2019.

BUSINESS SEGMENTS

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Private Client

Private Client reported revenue of $665.1 million for the year ended December 31, 2021, 3.6% higher compared with a year ago.

Pre-tax income of $101.1 million in the year ended December 31, 2021 resulted in a pre-tax profit margin of 15.2%.

Financial advisor headcount declined amid retirements to 996 at the end of 2021 compared to 1,002 at the end of 2020, although the productivity of our financial advisors increased significantly reflecting higher individual production levels.

Private Client reported revenue of $675.7 million for the year ended December 31, 2022, 1.6% higher compared with the prior year.

Pre-tax income was $142.3 million, an increase of 40.6% from the prior year.

Financial advisor headcount declined amid retirements to 968 at the end of 2022 compared to 996 at the end of 2021.

(Expressed in thousands, except financial advisor headcount or otherwise indicated)

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Pre-Tax Margin 21.1 % 15.2 % 38.8

CAUA (billions) $ 122.1 $ 104.8 16.5

AUA (billions) $ 105.0 $ 122.1 (14.0)

Cash Sweep Balances (billions) $ 5.5 $ 7.9 (30.4)

Financial Advisor Headcount 968 996 (2.8)

• Retail commissions were $217.7 million for the year ended December 31, 2021, an increase of 4.0% from a year ago due to increased client activity in mutual funds, options, annuities, and mortgage backed securities partially offset by lower commission income on municipal bonds.

• Advisory fees increased 6.0% due to increases in management fees from advisory programs partially offset by significantly lower incentive fees from alternative investments.

Incentive fees allocated to this segment were $0.6 million for the 2021 year versus $61.7 million for the prior year.

• Bank deposit sweep income decreased 55.3% from 2020 due to lower short-term interest rates partially offset by higher average cash sweep balances.

• Interest revenue increased 16.5% from a year ago due to higher average margin balances partially offset by lower short-term interest rates.

• Other revenue increased 22.1% primarily due to increases in the cash surrender value of Company-owned life insurance policies.

• Compensation expenses increased 8.5% from 2020 primarily due to increased production and share-based compensation costs.

• Non-compensation expenses increased 9.1% from 2020 primarily due to higher legal costs.

• Retail commissions decreased 12.5% from the prior year primarily due to decreased client activity in mutual funds, listed securities, OTC products and annuities, partially offset by higher commission income on municipal bonds.

• Advisory fees decreased 5.9% due to the reduced valuations of assets under management.

• Bank deposit sweep income increased $89.0 million or 572.1% from the prior year due to significant increases in short-term interest rates.

• Interest revenue increased 77.1% from the prior year due to higher average margin balances and higher short-term interest rates.

• Other revenue declined 95.7% compared with the prior year primarily due to decreases in the cash surrender value of Company-owned life insurance policies which fluctuates based on changes in fair value of the policies' underlying investments.

• Compensation expenses decreased 15.5% from the prior year primarily due to decreased production, share-based and incentive compensation costs, partially offset by the inflationary impact on salaries.

• Non-compensation expenses increased 33.2% from the prior year primarily due to higher legal costs recorded during third quarter of 2022 which related to an adverse arbitration decision.

Asset Management

Asset Management reported revenue of $104.6 million for the year ended December 31, 2021, 19.7% higher compared with a year ago.

Pre-tax income was $35.9 million, an increase of 49.9% compared with a year ago.

Asset Management reported revenue of $99.2 million for the year ended December 31, 2022, 5.1% lower compared with the prior year.

Pre-tax income was $35.8 million, a decrease of 0.3% compared with the prior year.

(Expressed in thousands, unless otherwise indicated)

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AUM (billions) $ 36.8 $ 46.2 (20.3)

• Advisory fee revenue on traditional and alternative managed products was $104.6 million for the year ended December 31, 2021, a decrease of 18.5% due to significantly lower incentive fees from alternative investments partially offset by higher management fees from advisory programs.

Incentive fees allocated to this segment were $1.8 million for the 2021 year versus $49.4 million in 2020.

• AUM hit a record level of $46.2 billion at December 31, 2021, which is the basis for advisory fee billings for the first quarter of 2022.

The increase in AUM was comprised of higher asset values of $6.4 billion on existing client holdings and a net contribution of assets of $1.0 billion.

• Compensation expenses increased 10.7% when compared to the prior year driven primarily by higher incentive compensation costs.

• Non-compensation expenses were up 22.1% when compared to the prior year primarily due to higher external portfolio management costs which are directly related to the increase in AUM.

• Advisory fee revenue on traditional and alternative managed products decreased 5.1% from the prior year primarily due to lower management fees from advisory programs, partially offset by higher incentive fees from alternative investments during the year.

• AUM were at reduced levels of $36.8 billion at December 31, 2022, which is the basis for advisory fee billings for January 2023.

The decrease in AUM from December 31, 2021 to December 31, 2022 was comprised of lower asset values of $7.6 billion on existing client holdings and a net distribution of assets of $1.8 billion.

• Compensation expenses were down 12.8% when compared to the prior year driven primarily by lower incentive compensation costs.

• Non-compensation expenses were down 4.1% when compared to the prior year primarily due to lower external portfolio management costs which are directly related to the decrease in AUM, partially offset by an increase in total communications and technology expenses.

The following table provides a breakdown of the change in assets under management for the year ended December 31, 2022:

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Capital Markets

Capital Markets reported revenue of $625.7 million for 2021, 46.6% higher compared with a year ago.

Pre-Tax income was $204.1 million compared with a pre-tax income of $83.4 million a year ago.

Capital Markets reported revenue of $337.8 million for the year ended December 31, 2022, 46.0% lower compared with the prior year.

Pre-tax loss was $25.7 million compared with a pre-tax income of $204.1 million for the prior year.

(Expressed in thousands )

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Non-compensation 102,543 102,764 (0.2)

Pre-Tax Income $ 204,090 $ 83,442 144.6

Pre-Tax Income (Loss) $ (25,696) $ 204,090 *

Compensation Ratio 77.3 % 51.0 % 51.6

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Pre-Tax Margin (7.6) % 32.6 % *

• Advisory fees earned from investment banking activities increased 141.8% to $194.8 million for the year ended December 31, 2021 compared with $80.5 million for the year ended December 31, 2020 driven by increased M&A activity and fees associated with a significant number of capital raising transactions (PIPES) in the healthcare and technology sectors completed during 2021.

• Equities underwriting fees increased 80.8% to $186.7 million for the year ended December 31, 2021 compared with $103.3 million for the year ended December 31, 2020 due to significantly higher levels of capital issuances in the equity markets particularly in the healthcare and technology sectors.

• Fixed income underwriting fees increased 32.4% to $27.0 million for the year ended December 31, 2021 compared with $20.1 million for the year ended December 31, 2020 primarily driven by public finance issuances during 2021.

• Equities sales and trading increased to $138.4 million for the year ended December 31, 2021, 5.9% higher compared to $130.7 million for the year ended December 31, 2020 due to higher income from institutional agency and convertible bonds.

• Fixed income sales and trading decreased 13.7% driven by lower income from investment grade, high yield, emerging markets, and municipal bonds partially offset by higher income from corporate and convertible bonds.

• Compensation expenses increased 26.7% primarily due to increased incentive compensation costs during the year tied to significant increases in revenue.

• Non-compensation expenses were 12.2% higher compared with the prior year due to increased legal, underwriting, travel and entertainment, and conference costs partially offset by reduced interest costs.

* Percentage not meaningful

• Advisory fees earned from investment banking activities decreased 56.6% compared with the prior year driven by an industry-wide decrease in M&A transactions.

• Equities underwriting fees decreased 86.8% compared with the prior year due to significantly lower levels of capital issuances in the equity markets, particularly in the healthcare and technology sectors.

• Fixed income underwriting fees were down 67.0% compared with the prior year primarily driven by fewer public finance debt issuances during the year.

• Equities sales and trading increased 1.9% compared with the prior year.

• Fixed income sales and trading increased 2.1% compared with the prior year driven by higher trading income from U.S.

government securities.

• Compensation expenses decreased 18.2% compared with the prior year primarily due to decreased incentive compensation costs.

• Non-compensation expenses were 0.2% lower compared with the prior year.

CRITICAL ACCOUNTING ESTIMATES

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Financial instruments are classified as Level 3 if observable pricing inputs are not available due to limited market activity for the asset or liability.

The valuation of financial instruments are classified in Level 3 of the fair value hierarchy consists of valuation techniques that incorporate one or more significant unobservable input, and therefore requires the greatest amount of management judgment.

The valuation of financial instruments are classified in Level 3 of the fair value hierarchy and consists of valuation techniques that incorporate one or more significant unobservable inputs, and therefore requires the greatest amount of management judgment.

As of December 31, 2022, the Company had $31.8 million in financial instruments, comprised of auction rate securities, classified within Level 3 of the fair value hierarchy.

See note 7 to the consolidated financial statements appearing in Item 8 for further information on the fair value definition, Level 1, Level 2 and Level 3 and related valuation technique.

See note 7 to the consolidated financial statements appearing in Item 8 for further information on the fair value definition, Level 1, Level 2 and Level 3 and related valuation techniques.

I mpact if actual results differ from assumptions – We established an independent valuation process to evaluate and approve the valuation of our financial instruments.

For financial instruments that classified in Level 3, we review the appropriateness of the unobservable inputs to ensure consistency with how a market participant would arrive at the unobservable input.

Although an independent review process is in place, the fair value of the Level 3 financial instrument could be significantly different due to the sensitivity of some unobservable inputs (for example, interest rates) and it could also have a material adverse effect on our consolidated financial statements.

For financial instruments that are classified in Level 3, we review the appropriateness of the unobservable inputs to ensure consistency with how a market participant would arrive at the unobservable input.

Although an independent review process is in place, the fair value of the Level 3 financial instrument could be significantly different due to the sensitivity of some unobservable inputs (for example, interest rates) and any such difference could also have a material adverse effect on our consolidated financial statements.

Legal and Regulatory Reserves

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Assumption and judgement - The determination of the levels of these reserves requires significant judgment on the part of management.

In accordance with applicable accounting guidance, we established reserves for litigation and regulatory matters where available information indicates that it is probable a liability had been incurred at the date of the consolidated financial

statements and we can reasonably estimate the amount of that loss.

When loss contingencies are not probable or cannot be reasonably estimated, we do not establish reserves.

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and applicable legal precedents and case law.

Each legal and regulatory proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management.

Each legal and regulatory proceeding is reviewed with counsel in each accounting period and the reserve is

adjusted as deemed appropriate by management.

Any change in the reserve amount is recorded in the results of that period.

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We estimate when certain items will affect taxable income in the various jurisdictions in the future.

We are also required to evaluate and measure all uncertain tax positions taken or expected to be taken on tax returns and to record liabilities for the amount of such positions that may not be sustained, may only be partially sustained, upon examination by the relevant taxing authorities.

We are also required to evaluate and measure all uncertain tax positions taken or expected to be taken on tax returns and to record liabilities for the amount of such positions that may not be sustained, or may only be partially sustained, upon examination by the relevant taxing authorities.

See note 15 to the consolidated financial statements appearing in Item 8 for further details.

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New Accounting Pronouncements

Recently issued accounting pronouncements are described in note 2 to the consolidated financial statements appearing in Item 8.

The potential impact of recently issued accounting pronouncements are described in note 2 to the consolidated financial statements appearing in Item 8.

LIQUIDITY AND CAPITAL RESOURCES

Total assets increased by 12.1% from December 31, 2020 to December 31, 2021.

Total assets decreased by 10.8% from December 31, 2021 to December 31, 2022.

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.

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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, changes in stock loan balances and financing through repurchase agreements.

At December 31, 2021, the Company had $69.5 million of such borrowings outstanding compared to outstanding borrowings of $82.0 million at December 31, 2020.

At December 31, 2022, the Company had no such borrowings outstanding compared to outstanding borrowings of $69.5 million at December 31, 2021.

The Company also has some availability of short-term bank financing on an unsecured basis.

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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 been assessing the impact that the current new presidential administration’s tax proposals will have on its operations and cash flows.

Senior Secured Notes

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We did not receive any proceeds in the exchange offer.

During the fourth quarter of 2022, the Company repurchased and subsequently cancelled $10.95 million of the 5.50% Senior Secured Notes, recognizing a small extinguishment gain.

As of December 31, 2022, $114.05 million aggregate principal amount of the Notes remain outstanding.

See note 12 to the consolidated financial statements appearing in Item 1 for further discussion.

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Bank call loans are generally payable on demand and bear interest at various rates.

At December 31, 2021, bank call loans were $69.5 million ($82.0 million at December 31, 2020).

At December 31, 2022, bank call loans were zero ($69.5 million at December 31, 2021).

The average daily bank loan outstanding for the year ended December 31, 2022 was $79.4 million ($76.4 million for the year ended December 31, 2021).

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Our primary long-term cash requirements include $113.4 million principal outstanding as of December 31, 2022 under our Senior Secured Notes (due in 2025) and $182.6 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 $48.6 million for the upcoming year.

The total cash requirement for interest expense related to the Notes and operating lease obligations is estimated to be approximately $17.6 million for the 2023 year.

(Expressed in thousands)

For the Years Ended December 31,

Cash provided by/(used in) operating activities $ 227,786 $ (54,059)

Cash provided by operating activities $ 64,492 $ 227,786

Cash used in investing activities (14,137) (6,267)

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We may or may not be able to pass such increased funding costs on to our clients.

During the recent period of high volatility, we have seen increased calls for deposits of collateral to offset perceived risk between the Company's settlement liability to industry utilities such as the Options Clearing Corporation (“OCC”) and National Securities Clearing Corp.

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 utilities such as the Options Clearing Corporation (“OCC”) and National Securities Clearing Corp.

(“NSCC”) as well as more stringent collateral arrangements with our bank lenders.

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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”).

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.

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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.

Similar to the proposal the DOL released in June of 2020 the PTE 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 PTE 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.

Court of Appeals for the Fifth Circuit later vacated in June 2018), the PTE 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 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 above the actions taken to comply with the Reg BI Rules in order to ensure full compliance with the PTE.

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 beyond the actions taken to comply with the Reg BI Rules in order to ensure full compliance with the PTE.

Regulatory Environment

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Other Regulatory Matters

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.

See Item 3 “Legal Proceedings” for further information.

On November 18, 2022, the Company received an information request from the SEC requesting information relating to the use of text messaging and similar forms of electronic communications by employees of the Company and whether those communications were properly retained by the Company as part of its records preservation requirements relating to the broker-dealer or investment adviser business activities of the Company.

The Company has responded to the information request and continues to cooperate with the SEC inquiry.

FACTORS AFFECTING "FORWARD-LOOKING STATEMENTS"

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These risks and uncertainties, many of which are beyond the Company’s control, include, but are not limited to:

(i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory requirements that could affect the cost and method of doing business, (v) general economic conditions, both domestic and international, (vi) competition from existing financial institutions, new entrants and other participants in the securities markets and financial services industry, (vii) potential cybersecurity threats, (viii) legal developments affecting the litigation experience of the securities industry and the Company, (ix) changes in foreign, federal and state tax laws that could affect the popularity of products sold by the Company or impose taxes on securities transactions, (x) the adoption and implementation of the SEC’s “Regulation Best Interest” and other regulations adopted in recent years, (xi) war, terrorist acts and nuclear confrontation as well as political unrest, (xii) the Company’s ability to achieve its business plan, (xiii) the effects of the economy on the Company’s ability to find and maintain financing options and liquidity, (xiv) credit, operational, legal and regulatory risks, (xv) risks related to foreign operations, including those in the United Kingdom which may be affected by Britain’s 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;

(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 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis