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 March 31, 2023, we provided our services from 92 offices in 25 states located throughout the United States and offices in Puerto Rico, Tel Aviv, Israel, Hong Kong, China, London, England, St. Helier, Isle of Jersey, Munich, Germany, Portugal and Geneva, Switzerland. The Company provides investment advisory services through OAM and Oppenheimer Investment Management LLC ("OIM") and Oppenheimer's financial advisor directed programs. At March 31, 2023, client assets under management ("AUM") totaled $39.3 billion. AUM includes the total market value of client investments in discretionary and non-discretionary advisory programs as well as the net asset value of private placements of alternative investments offered by and held by clients of the firm. Client assets under administration ("CAUA") as of March 31, 2023 totaled $108.9 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. ("Freedom"). Through OPY Credit Corp., from time to time we may offer syndication as well as trading of issued syndicated corporate loans. At March 31, 2023, the Company employed 2,916 employees (2,876 full-time and 40 part-time), of whom 959 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 37 Table of Contents 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 During the first quarter of 2023, the Federal Reserve ("FED") remained committed to tightening monetary policy as a means of combating inflation. While modest decreases in key inflationary measures such as the Consumer Price Index demonstrated that the rate increases implemented throughout 2022 were beginning to have their intended impact, unexpectedly strong job growth and consumer spending data led the FED to conclude that further short-term rate increases were necessary. As a result, the FED increased the Federal funds rate by 50 basis point to a target range of 4.75% to 5.00% during the three months ended March 31, 2023. However, the smaller nature (25 basis point) of both first quarter 2023 rate increases balances the FED’s intention not to ‘over-tighten,’ while also acknowledging that a contraction in bank lending in light of the Silicon Valley Bank and Signature Bank failures will likely help ease inflation. As a result of the banking failures, the FED has signaled that it will proceed with both prudence and patience in determining whether additional rate increases are warranted when it meets in May 2023. The unexpected failure of two commercial banks (Silicon Valley Bank and Signature Bank) during the quarter, resulted from the rapid increase in interest rates during 2022 and the consequential impact on the value of fixed income investments by these banks and many others. The increases in rates, which are intended to reduce inflation, are also likely to reduce economic activity possibly leading to a recession in the coming months. These factors have already reduced customer confidence and are likely to continue to reduce discretionary spending, increase volatility in financial markets, and reduce revenues the Company derives from commissions and possibly from fees based on the value of client assets managed by the Company should equity prices decline. The increases in the Federal funds rate are favorable to the Company's interest-based revenue. 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 to some extent if the cash sweep balances decrease as clients seek higher-yielding investments. 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 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 initially was to significantly increase the price of hydrocarbons and the cost 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 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. However, that impact has largely abated and the equity markets have performed quite well in early 2023 as they continue to try to discern the likely direction of the world economy as it is impacted by these crosscurrents. 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. To date, there have been no significant disruptions to our business or control processes as a result of COVID. 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. The aftermath of the pandemic has continued to produce lower office attendance than pre-pandemic and had an ongoing impact on attitudes surrounding work-life balance. Some employees from our home office and branch locations continue to work remotely at least part of each week but the efforts continue to encourage office attendance. There can be no assurance at this time that improvements in attendance will continue and we continue to closely monitor the long term impact and to adjust our office footprints as real estate leases expire. EXECUTIVE SUMMARY The profitable results for the quarter reflect our ability to continue supporting and advising our clients and prudently managing our business in all types of markets. Due to a combination of macroeconomic factors and turmoil within the 38 Table of Contents regional banking industry, the equity and fixed income markets were volatile during the first quarter of the year. Convinced that Federal Reserve ("FED") tightening would soon end, the equity markets rallied to start the year. However, unexpected bank failures created large uninsured bank deposit withdrawals at certain regional banks that led to the fear of a broader bank contagion. Early action by the regulators to provide liquidity to banks seems to have dramatically slowed the move of funds into money market funds and short-term government securities. While the Company did not have any direct exposures to the failed institutions, the events caused a reaction in equity and fixed income markets, impacted portfolio turnover and our transaction-based revenues. Rising interest rates and fear of a recession significantly limited issuers' access to capital, resulting in markedly lower investment banking revenues associated with new equity issuances and secondary offerings. Strong M&A advisory fees and trading revenues offset some of the weakness seen in the IPO market. Our Wealth Management business continues to perform well, as its revenue mix has benefited from the rising interest rate environment. Income from our FDIC-insured bank deposit program and interest income on margin loans approached record quarterly levels as a result of the FED’s 50 basis point rate increase during the quarter. These revenue increases were partially offset by lower valuations in client portfolios, which drove decreased fee income. Despite the volatility and market stress seen in the first quarter, the Company continues to maintain a strong balance sheet with capital near its historic highs and ample levels of liquidity. During the first quarter, the Company took advantage of the lower level of its share price to purchase 95,055 shares (approximately 1%) of its Class A non-voting common stock at an average price of $38.79 per share in the open market under its share repurchase program. This resulted in 10,975,723 shares of Class A non-voting common stock remaining outstanding at March 31, 2023. We remain confident in the resiliency of our platform and our ability to provide essential investment services to our clients. RESULTS OF OPERATIONS The Company reported net income of $14.6 million or $1.32 basic earnings per share for the first quarter of 2023, compared with net income of $9.3 million or $0.75 basic earnings per share for the first quarter of 2022. Revenue for the first quarter of 2023 was $321.7 million, an increase of 20.9% compared to revenue of $266.0 million for the first quarter of 2022. (Expressed in thousands, except Per Share Amounts or otherwise indicated) 1Q-2023 1Q-2022 Change % Change Revenue $ 321,679 $ 266,028 $ 55,651 20.9 Compensation expense $ 206,292 $ 186,031 $ 20,261 10.9 Non-compensation expense $ 96,338 $ 65,784 $ 30,554 46.4 Pre-Tax Income $ 19,049 $ 14,213 $ 4,836 34.0 Income Taxes Provision $ 4,585 $ 4,435 $ 150 3.4 Net Income (1) $ 14,617 $ 9,292 $ 5,325 57.3 Earnings per share (basic) (1) $ 1.32 $ 0.75 $ 0.57 76.0 Earnings per share (diluted) (1) $ 1.22 $ 0.69 $ 0.53 76.8 Book Value Per Share $ 72.27 $ 66.45 $ 5.82 8.8 Tangible Book Value Per Share (2) $ 56.92 $ 52.58 $ 4.34 8.3 Class A Shares Outstanding 10,975,723 12,156,174 (1,180,451) (9.7) AUA ($ billions) $ 108.9 $ 117.2 $ (8.3) (7.1) AUM ($ billions) $ 39.3 $ 42.7 $ (3.4) (8.0) (1) Attributable to Oppenheimer Holdings Inc. (2) Represents book value less goodwill and intangible assets divided by number of shares outstanding. 39 Table of Contents Highlights • Gross revenue, net income, and earnings per share for the first quarter of 2023 primarily reflected increases in our interest sensitive revenues, growth in M&A advisory fees and stronger sales and trading revenues partially offset by lower activity levels and valuations in client portfolios. • Assets under administration and under management were both at reduced levels at March 31, 2023 when compared with the same period last year. • Non-compensation expenses increased from the prior year quarter largely due to higher interest expense and legal costs. • Near record revenues in the Private Client segment are largely attributed to higher bank deposit sweep income and margin interest revenue, which benefited from higher short-term interest rates. • The Company repurchased 95,055 shares of Class A non-voting common stock during the first quarter of 2023 under its previously announced share repurchase program, or approximately 1% of shares outstanding at year-end 2022. • Book value and tangible book value per share increased from the prior year period largely as a result of share repurchases and positive earnings. BUSINESS SEGMENTS The table below presents information about the reported revenue and pre-tax income (loss) of the Company's reportable business segments for the three months ended March 31, 2023 and 2022: (Expressed in thousands) For the Three Months Ended March 31, 2023 2022 % Change Revenue Private Client $ 203,421 $ 150,847 34.9 Asset Management 23,959 27,117 (11.6) Capital Markets 90,282 85,051 6.2 Corporate/Other 4,017 3,013 33.3 Total $ 321,679 $ 266,028 20.9 Pre-Tax Income (Loss) Private Client $ 54,456 $ 24,146 125.5 Asset Management 6,481 9,474 (31.6) Capital Markets (15,477) 1,166 * Corporate/Other (26,411) (20,573) 28.4 Total $ 19,049 $ 14,213 34.0 *Percentage not meaningful 40 Table of Contents Private Client Private Client reported revenue for the current quarter of $203.4 million, 34.9% higher compared with a year ago mostly due to an increase in bank deposit sweep income and margin interest income driven by higher short-term interest rates. Pre-tax income of $54.5 million in the current quarter resulted in a pre-tax profit margin of 26.8%. Financial advisor headcount at the end of the current quarter was 959 compared to 993 at the end of the first quarter of 2022. ('000s, except Financial advisor headcount or otherwise indicated) 1Q-2023 1Q-2022 Change % Change Revenue $ 203,421 $ 150,847 $ 52,574 34.9 Retail commissions $ 46,636 $ 51,677 $ (5,041) (9.8) Advisory fee revenue $ 76,583 $ 88,527 $ (11,944) (13.5) Bank deposit sweep income $ 48,909 $ 4,354 $ 44,555 1,023 Interest $ 20,579 $ 8,147 $ 12,432 152.6 Other $ 10,714 $ (1,858) $ 12,572 * Total Expenses $ 148,965 $ 126,701 $ 22,264 17.6 Compensation $ 95,074 $ 99,855 $ (4,781) (4.8) Non-compensation $ 53,891 $ 26,846 $ 27,045 100.7 Pre-tax Income $ 54,456 $ 24,146 $ 30,310 125.5 Compensation Ratio 46.7 % 66.2 % (1,950) (29.5) Non-compensation Ratio 26.5 % 17.8 % 870 48.9 Pre-tax Margin 26.8 % 16.0 % 10.8 % 67.5 Asset Under Administration (billions) $ 108.9 $ 117.2 $ (8.3) (7.1) Cash Sweep Balances (billions) $ 4.4 $ 8.1 $ (3.7) (45.7) *Percentage not meaningful • Retail commissions decreased 9.8% from a year ago primarily due to lower client activity in volatile markets. • Advisory fees decreased 13.5% due to lower valuations of assets under management. • Bank deposit sweep income increased $44.6 million from a year ago due to higher short-term interest rates. • Interest revenue approached a record high and increased 152.6% from a year ago due to higher short-term interest rates. • Other revenue increased primarily due to increases 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 4.8% from a year ago primarily due to decreased production. • Non-compensation expenses increased 100.7% from a year ago primarily due to higher interest expense and legal costs. Asset Management Asset Management reported revenue for the current quarter of $24.0 million, 11.6% lower compared with a year ago. Pre-tax income was $6.5 million, a decrease of 31.6% compared with the prior year period. 41 Table of Contents ('000s unless otherwise indicated) 1Q-2023 1Q-2022 Change % Change Revenue $ 23,959 $ 27,117 $ (3,158) (11.6) Advisory fee revenue $ 23,954 $ 27,113 $ (3,159) (11.7) Other $ 5 $ 4 $ 1 25.0 Total Expenses $ 17,478 $ 17,643 $ (165) (0.9) Compensation $ 7,615 $ 7,086 $ 529 7.5 Non-compensation $ 9,863 $ 10,557 $ (694) (6.6) Pre-tax Income $ 6,481 $ 9,474 $ (2,993) (31.6) Compensation Ratio 31.8 % 26.1 % 570 21.8 Non-compensation Ratio 41.2 % 38.9 % 230 5.9 Pre-tax Margin 27.1 % 34.9 % (7.8) % (22.3) AUM (billions) $ 39.3 $ 42.7 $ (3.4) (8.0) • Advisory fee revenue decreased 11.7% due to reduced management fees resulting from the lower net value of assets under management. • AUM were at reduced l evels of $39.3 billion at March 31, 2023, which is the basis for advisory fee billings for April 2023. • The decrease in AUM was comprised of lower asset values of $3.1 billion on existing client holdings and a net distribution of assets of $0.3 billion. • Compensation expenses were up 7.5% from a year ago which was primarily related to increases in incentive compensation. • Non-compensation expenses were down 6.6% when compared to the prior year period mostly due to lower external portfolio management costs which is directly related to the decrease in AUM, partially offset by higher travel-related expenses. The following table provides a breakdown of the change in assets under management for the three months ended March 31, 2023: (Expressed in millions) For the Three Months Ended March 31, 2023 Fund Type Beginning Balance Contributions Redemptions/Profit Distribution Appreciation (Depreciation) Ending Balance Traditional (1) $ 31,413 $ 2,418 $ (1,619) $ 1,485 $ 33,697 Institutional Fixed Income (2) 835 3 (17) 20 841 Alternative Investments: Hedge funds (3) 3,041 25 (131) 311 3,246 Private Equity Funds (4) 1,152 72 (4) (32) 1,188 Portfolio Enhancement Program (5) 352 — (20) — 332 $ 36,793 $ 2,518 $ (1,791) $ 1,784 $ 39,304 (1) Traditional investments include first 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. 42 Table of Contents (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. Capital Markets Capital Markets reported revenue for the current quarter of $90.3 million, 6.2% higher when compared with the prior year period. Pre-tax loss was $15.5 million compared with pre-tax income of $1.2 million a year ago. ('000s) 1Q-2023 1Q-2022 Change % Change Revenues $ 90,282 $ 85,051 $ 5,231 6.2 Investment Banking $ 36,281 $ 32,975 $ 3,306 10.0 Advisory fees $ 27,937 $ 21,905 $ 6,032 27.5 Equities underwriting $ 7,343 $ 11,236 $ (3,893) (34.6) Fixed income underwriting $ 897 $ 1,987 $ (1,090) (54.9) Other $ 104 $ (2,153) $ 2,257 * Sales and Trading $ 53,379 $ 51,603 $ 1,776 3.4 Equities $ 31,686 $ 35,928 $ (4,242) (11.8) Fixed Income $ 21,693 $ 15,675 $ 6,018 38.4 Other $ 622 $ 473 $ 149 31.5 Total Expenses $ 105,759 $ 83,885 $ 21,874 26.1 Compensation $ 76,796 $ 60,223 $ 16,573 27.5 Non-compensation $ 28,963 $ 23,662 $ 5,301 22.4 Pre-tax Income (Loss) $ (15,477) $ 1,166 $ (16,643) * Compensation Ratio 85.1 % 70.8 % 1,430 20.2 Non-compensation Ratio 32.1 % 27.8 % 430 15.5 Pre-tax Margin (17.1) % 1.4 % (18.5) % * *Percentage not meaningful • Advisory fees earned from investment banking activities increased 27.5% compared with a year ago due to an increase in M&A transactions. • Equity underwriting fees decreased 34.6% compared with a year ago due to a continued market slowdown in equity IPOs and secondary offerings, including SPAC issuances. • Fixed income underwriting fees were down 54.9% compared with a year ago primarily driven by lower deal volumes during the first quarter of 2023. • Equities sales and trading revenue decreased 11.8% compared with a year ago due to reduced volumes in the equities market compared to the levels in the prior year period. • Fixed income sales and trading revenues increased 38.4% compared with a year ago primarily due to both an increase in trading income attributable to wider spreads and also increased activity due to high volatility during the period. • Compensation expenses increased 27.5% compared with a year ago primarily due to opportunistic hiring and increased incentive compensation. • Non-compensation expenses were 22.4% higher than a year ago primarily due to an increase in interest expense in financing inventories. 43 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, 2022. 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, 2022. Certain of those policies are considered to be particularly important to the presentation of the Company's financial results because they require management to make difficult, complex or subjective judgments, often as a result of matters that are inherently uncertain. During the three months ended March 31, 2023, 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, 2022. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2023, total assets increased by 7.6% from 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. We finance our trading in government securities through the use of securities sold under repurchase agreements. We met our longer-term capital needs through the issuance of the 5.50% Senior Secured Notes due 2025 (see "Senior Secured Notes" below). Oppenheimer has arrangements with banks for borrowings on a fully collateralized basis. The amount of Oppenheimer's bank borrowings fluctuates in response to changes in the level of the Company's securities inventories and customer margin debt, changes in notes receivable from employees, investment in furniture, equipment and leasehold improvements, and changes in stock loan balances and financing through repurchase agreements. At March 31, 2023, the Company had bank call loans of $19.3 million compared to zero at December 31, 2022. 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 $5.1 million and $382,172, respectively, at March 31, 2023. 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 $3.6 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. 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 44 Table of Contents 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 . During the fourth quarter of 2022, the Company repurchased and subsequently cancelled $10.95 million of the Notes, recognizing a small extinguishment gain. As of December 31, 2022, $114.05 million aggregate principal amount of the Notes remains outstanding. During the first quarter of 2023, the Company repurchased and subsequently cancelled $1.0 million of the Notes, recognizing a small extinguishment gain. As of March 31, 2023, $113.05 million aggregate principal amount of the Notes remains outstanding. 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 three months ended March 31, 2023 and the balance sheet at March 31, 2023 for the Parent and Subsidiary Guarantors. (Expressed in thousands) As of March 31, 2023 Total Assets $ 2,057,254 Due From Non-Guarantor Subsidiary 15,454 Total Liabilities 546,772 Due To Non-Guarantor Subsidiary 11,628 For the Three Months Ended March 31, 2023 Total Revenue $ 2,661 Pre-Tax Income (Loss) 55 Net Income (Loss) (176) 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. 45 Table of Contents Liquidity For the most part, the Company's assets consist of cash and cash equivalents and assets that it can readily convert into cash. The receivable from brokers, dealers and clearing organizations represents deposits for securities borrowed transactions, margin deposits and current transactions awaiting settlement. The receivable from customers represents margin balances and amounts due on transactions awaiting settlement. Our receivables are, for the most part, collateralized by marketable securities. Our collateral maintenance policies and procedures are designed to limit our exposure to credit risk. Securities owned, with the exception of the ARS, are mainly comprised of actively trading readily marketable securities. We issued $10.8 million in forgivable notes (which are inherently illiquid) to employees for the three months ended March 31, 2023 ($7.7 million for the three months ended March 31, 2022) as upfront or backend inducements to commence or continue employment as the case may be. The amount of funds allocated to such inducements will vary with hiring activity. We satisfy our need for short-term liquidity from internally generated funds, collateralized and uncollateralized bank borrowings, stock loans and repurchase agreements. Bank borrowings are, in most cases, collateralized by Firm and customer securities. We obtain short-term borrowings primarily through bank call loans. Bank call loans are generally payable on demand and bear interest at various rates. At March 31, 2023, the Company had $19.3 million of bank call loans (zero at December 31, 2022). The average daily bank loan outstanding for the three months ended March 31, 2023 was $57.5 million ($87.1 million for the three months ended March 31, 2022). The largest daily bank loans outstanding for the three months ended March 31, 2023 was $167.3 million ($190.2 million for the three months ended March 31, 2022). At March 31, 2023, securities loan balances totaled $368.1 million ($320.8 million at December 31, 2022 and $300.3 million at March 31, 2022). The average daily securities loan balance outstanding for the three months ended March 31, 2023 was $341.4 million ($304.1 million for the three months ended March 31, 2022). The largest daily stock loan balance for the three months ended March 31, 2023 was $388.4 million ($350.1 million for both of the three months ended March 31, 2022). We finance our government trading operations through the use of securities purchased under reverse repurchase agreements and repurchase agreements. Except as described below, repurchase and reverse repurchase agreements, primarily involving government and agency securities, are carried at amounts at which securities subsequently will be resold or reacquired as specified in the respective agreements and include accrued interest. Repurchase and reverse repurchase agreements are presented on a net-by-counterparty basis, when the repurchase and reverse repurchase agreements are executed with the same counterparty, have the same explicit settlement date, are executed in accordance with a master netting arrangement, the securities underlying the repurchase and reverse repurchase agreements exist in "book entry" form and certain other requirements are met. Certain of our repurchase agreements and reverse repurchase agreements are carried at fair value as a result of the Company's fair value option election. We elected the fair value option for those repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date. We have elected the fair value option for these instruments to more accurately reflect market and economic events in our earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. At March 31, 2023, we did not have any repurchase agreements and reverse repurchase agreements that did not settle overnight or have an open settlement date. At March 31, 2023, the gross balances of reverse repurchase agreements and repurchase agreements were $30.1 million and $310.5 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the three months ended March 31, 2023 was $179.0 million and $283.1 million, respectively ($132.4 million and $443.5 million, respectively, for the three months ended March 31, 2022). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the three months ended March 31, 2023 was $506.4 million and $634.9 million, respectively ($462.5 million and $644.1 million, respectively, for the three months ended March 31, 2022). 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, 46 Table of Contents 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 $79.1 million as of March 31, 2023. 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. Recent bank failures did not result in reducing the availability of funding or any disruption in the Company’s business. Should such disruption occur in the future we have 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 $112.5 million principal outstanding as of March 31, 2023 under our Senior Secured Notes (due in 2025) and $193.4 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 $14.2 million for the remainder of 2023. Funding Risk (Expressed in thousands) For the Three Months Ended March 31, 2023 2022 Cash used in operating activities $ (86,123) $ (152,146) Cash used in investing activities (2,976) (2,490) Cash provided by/(used in) financing activities 7,033 (11,654) Net decrease in cash, cash equivalents and restricted cash $ (82,066) $ (166,290) Management believes that funds from operations, combined with our capital base and available credit facilities, are sufficient for our liquidity needs for the foreseeable future. Under some circumstances, banks including those on whom we rely may back away from providing funding to the securities industry. Such a development might impact our ability to finance our day-to-day activities or increase the costs to acquire funding. We may or may not be able to pass such increased funding costs on to our clients. During periods of high volatility, we have seen increased calls for deposits of collateral to offset perceived risk between the Company's settlement liability to industry clearinghouses such as the Options Clearing Corporation (“OCC”) and National Securities Clearing Corp. (“NSCC”) as well as more stringent collateral arrangements with our bank lenders. All such requirements have been and will be met in the ordinary course with available collateral. CYBERSECURITY For many years, we have sought to maintain the security of our clients' data, limit access to our data processing environment, and protect our data processing facilities. See "Risk Factors — Cybersecurity – Security breaches of our technology systems, or those of our clients or other first-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, 2022. 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 the compliance of 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 47 Table of Contents tens of millions of items of personally identifiable information. We continue to implement protections and adopt procedures to address the risks posed by the current information technology environment. The Company has significantly increased the resources dedicated to this effort and believes that further increases may be required in the future, in anticipation of increases in the sophistication and persistency of such attacks. There can be no guarantee that our cybersecurity efforts will be successful in discovering or preventing a security breach. REGULATORY MATTERS AND DEVELOPMENTS Regulation Best Interest (U.S.) On 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. 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, 2022 for additional information. Oppenheimer and many of its affiliates are each subject to various regulatory capital requirements. As of March 31, 2023, all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. See note 15 to the condensed consolidated financial statements in Item 1 for further information on regulatory capital requirements. Other Regulatory Matters Since August 2021, Oppenheimer has been responding to information requests from the SEC’s Division of Enforcement relating to a former Oppenheimer financial advisor and his relationship with registered investment adviser, Southport Capital and its affiliates. 48 Table of Contents 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. 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 submitted multiple responses to the information request and continues to cooperate with the SEC inquiry. The SEC has under consideration a number of rules that are believed will change the operation of the equity markets and may disrupt and/or remove liquidity from the markets as well as significant rule proposals relating to cybersecurity, climate change and investment advisory custodial practices. The Company continues to monitor these developments and cannot currently determine what, if any, impact they may have on its business. 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, recession, 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, bank failures, 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 and Annual Report on Form 10-K for the year ended December 31, 2022. 49 Table of Contents Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the three months ended March 31, 2023, 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, 2022. 50 Table of Contents