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 June 30, 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 June 30, 2023, client assets under management ("AUM") totaled $41.2 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 June 30, 2023 totaled $113.2 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 limited 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 June 30, 2023, the Company employed 3,011 employees (2,897 full-time, 47 part-time and 67 summer interns), of whom 964 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 also reviews its full service business model to determine the opportunities available to build or acquire closely related businesses in areas where others have shown some success. Equally important is the search for viable acquisition candidates. Our long-term intention is to pursue growth by acquisition where we can find a comfortable match in terms of corporate goals and personnel at a price that would provide our shareholders with incremental value. We review potential acquisition opportunities from time to time with the aim of fulfilling the Company's strategic goals, while evaluating and managing our existing businesses. In addition, the Company may from time to time make minority 39 Table of Contents 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 Change in Short-term Interest Rates At its May 2023 meeting, the Federal Reserve ("FED") remained committed to tightening monetary policy as a means to lower inflation and, as a result, increased the Federal Funds rate by 25 basis points to a new target range of 5.00% to 5.25%. While several macroeconomic factors continued to suggest that further policy action would be necessary to cool the economy to achieve its 2% inflation target, the FED decided against enacting further rate increases for the first time in 10 meetings at its meeting in June, largely out of caution to see how the existing rate increases have impacted the broader economy and to prevent overtightening in light of the collapse of three midsized banks in the spring. However, based on a continuation of strong employment and other positive economic data throughout the quarter, it is likely that another rate increase will occur in the third quarter of 2023. The increases in the Federal funds rate are favorable to the Company's interest-based revenue. While increases in interest rates will increase fees the Company earns from FDIC-insured deposits of clients through a program offered by the Company, such increases may be offset to some extent if the cash sweep balances continue to 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. “Dutch auction” Tender Offer On May 31, 2023, the Company announced the commencement of a modified “Dutch Auction” tender offer to purchase up to $30.0 million of its Class A non-voting common stock at a price not less than $34.00 per share or more than $40.00 per share. The purpose of the tender offer, among others, was to assure that sufficient liquidity existed for our stockholders that may be required to sell Class A shares when they were removed from the Russell 2000 and 3000 indices. The Company was advised that, as a result of the fact that voting rights are exclusively associated with the Company’s Class B voting common stock, which does not publicly trade, the Company’s Class A non-voting common stock was to be removed from the Russell 2000 and Russell 3000 on June 23, 2023. The Company completed its repurchases pursuant to the tender offer on July 6, 2023, when it successfully repurchased and cancelled 437,183 shares of Class A non-voting common stock for an aggregate purchase price of $17.49 million. As a result, the Company had 10,447,392 shares outstanding on July 6, 2023 after the purchase. EXECUTIVE SUMMARY The growth in our total revenue highlighted the ability of our diversified business mix to successfully operate in a mixed but still growing economy. While our operating businesses performed quite well, the Company’s overall results were adversely impacted by the accrual of a significant legal reserve related to a previously disclosed matter. We believe that this reserve will permit us to cover anticipated costs related to the matter, even though the reserve created a net loss for the quarter. During the quarter, the markets performed better than expected, as the S&P 500 and Nasdaq continued to advance upward in large part due to investor enthusiasm for generative A.I. tech stocks. On the economic front, unemployment hovered near historic lows and strong consumer spending on travel and services continued to buoy the economy along with increases in wages. The Federal Reserve continued its 15-month tightening campaign, though at a moderated pace, owing to encouraging inflationary trends and general reservations about over-tightening in light of the earlier regional bank failures. These conditions strongly aided our Wealth Management business, where interest sensitive margin interest and sweep revenue registered large increases from the prior year and AUM began approaching levels reached prior to last year’s market decline. The lack of speculative activity resulted in continued lower transaction-based commission revenue. Capital Markets’ operating results showed modest improvement with higher M&A advisory fees, equities underwriting and sales and trading revenue offsetting lower fixed income underwriting revenue, as continued uncertainty and higher interest rates limited issuances. The Company’s balance sheet and capital position remain strong, with ample levels of liquidity. During the second quarter, the Company purchased 96,135 shares (1%) of its Class A Stock at an average price of $37.43 per share in the open market under its share repurchase program. This resulted in 10,884,575 shares of Class A Stock remaining outstanding at June 30, 2023. The Company also launched a “Dutch auction” tender offer during the quarter through which it committed to repurchase an additional 437,183 shares at a price of $40.00 per share. The repurchase of shares in conjunction with the tender offer was completed in July and after adjusting for shares repurchased under the Tender Offer, there were 10,447,392 shares of Class A Stock remaining outstanding at July 6, 2023. Both of these actions permitted us to reach record levels in book value and tangible book value per share. We remain confident in our businesses and ability to continue delivering value to our stakeholders. 40 Table of Contents RESULTS OF OPERATIONS The Company reported a net loss of $9.4 million or $(0.85) per share for the second quarter of 2023, compared with a loss of $3.9 million or $(0.32) per share for the second quarter of 2022. Revenue for the second quarter of 2023 was $306.2 million, an increase of 29.1% compared to revenue of $237.2 million for the second quarter of 2022. (Expressed in thousands, except Per Share Amounts or otherwise indicated) 2Q-2023 2Q-2022 Change % Change Revenue $ 306,189 $ 237,222 $ 68,967 29.1 Compensation expense $ 187,224 $ 177,979 $ 9,245 5.2 Non-compensation expense $ 130,664 $ 65,412 $ 65,252 99.8 Pre-Tax (Loss) $ (11,699) $ (6,169) $ (5,530) 89.6 Income Taxes (Benefit) $ (2,131) $ (1,449) $ (682) 47.1 Net (Loss) (1) $ (9,400) $ (3,874) $ (5,526) 142.6 (Loss) per share (basic) (1) $ (0.85) $ (0.32) $ (0.53) 165.6 (Loss) per share (diluted) (1) $ (0.85) $ (0.32) $ (0.53) 165.6 Book Value Per Share $ 71.77 $ 68.57 $ 3.20 4.7 Tangible Book Value Per Share (2) $ 56.29 $ 53.62 $ 2.67 5.0 Class A Shares Outstanding 10,884,575 11,270,944 (386,369) (3.4) AUA ($ billions) $ 113.2 $ 104.0 $ 9.2 8.8 AUM ($ billions) $ 41.2 $ 37.1 $ 4.1 11.1 (1) Attributable to Oppenheimer Holdings Inc. (2) Represents book value less goodwill and intangible assets divided by number of shares outstanding. Highlights • Increased revenue for the second quarter of 2023 is primarily driven by a rise in interest sensitive income, including margin interest and bank deposit sweep income. • The second quarter 2023 net loss is primarily attributable to an increase in non-compensation expenses, which was mostly driven by the accrual of a significant legal reserve associated with a previously disclosed matter. • Assets under administration and under management were both at higher levels at June 30, 2023 when compared with the same period last year, benefiting from market appreciation and positive net asset flows. • The Company repurchased 96,135 shares of Class A Stock during the second quarter of 2023 under its previously announced share repurchase program, or approximately 1% of shares outstanding at year-end. • The Company also launched a “Dutch auction” tender offer, which resulted in the repurchase and retirement of an additional 437,183 shares of Class A non-voting common stock when the transaction closed in July 2023. • Book value and tangible book value per share increased from the prior year period primarily as a result of share repurchases. 41 Table of Contents BUSINESS SEGMENTS The table below presents information about the reported revenue and pre-tax income (loss) of the Company's reportable business segments for the three and six months ended June 30, 2023 and 2022: (Expressed in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30, 2023 2022 % Change 2023 2022 % Change Revenue Private Client $ 201,245 $ 144,471 39.3 $ 404,666 $ 295,318 37.0 Asset Management 22,198 24,315 (8.7) 46,157 51,432 (10.3) Capital Markets 79,582 71,274 11.7 169,864 156,325 8.7 Corporate/Other 3,164 (2,838) * 7,181 175 4,003.4 Total $ 306,189 $ 237,222 29.1 $ 627,868 $ 503,250 24.8 Pre-Tax Income (Loss) Private Client $ 20,794 $ 38,800 (46.4) $ 75,250 $ 62,946 19.5 Asset Management 6,533 8,120 (19.5) 13,014 17,594 (26.0) Capital Markets (14,051) (17,935) (21.7) (29,528) (16,769) 76.1 Corporate/Other (24,975) (35,154) (29.0) (51,386) (55,727) (7.8) Total $ (11,699) $ (6,169) 89.6 $ 7,350 $ 8,044 (8.6) *Percentage not meaningful Private Client Private Client reported revenue for the current quarter of $201.2 million, 39.3% higher when compared with the prior year period. Pre-tax income was $20.8 million, compared with pre-tax income of $38.8 million in the prior year period. Financial advisor headcount at the end of the current quarter was 964 compared to 990 at the end of the second quarter of 2022. ('000s, except Financial advisor headcount or otherwise indicated) 2Q-2023 2Q-2022 Change % Change Revenue $ 201,245 $ 144,471 $ 56,774 39.3 Retail commissions $ 45,377 $ 45,916 $ (539) (1.2) Advisory fee revenue $ 78,811 $ 83,085 $ (4,274) (5.1) Bank deposit sweep income $ 44,060 $ 14,845 $ 29,215 197 Interest $ 22,403 $ 10,369 $ 12,034 116.1 Other $ 10,594 $ (9,744) $ 20,338 * Total Expenses $ 180,451 $ 105,671 $ 74,780 70.8 Compensation $ 99,528 $ 77,342 $ 22,186 28.7 Non-compensation $ 80,923 $ 28,329 $ 52,594 185.7 Pre-tax Income $ 20,794 $ 38,800 $ (18,006) (46.4) Compensation Ratio 49.5 % 53.5 % (400) (7.5) Non-compensation Ratio 40.2 % 19.6 % 2,060 105.1 Pre-tax Margin 10.3 % 26.9 % (16.6) % (61.7) Asset Under Administration (billions) $ 113.2 $ 104.0 $ 9.2 8.8 Cash Sweep Balances (billions) $ 3.9 $ 7.5 $ (3.6) (48.0) *Percentage not meaningful 42 Table of Contents • Retail commissions were flat compared with the prior year quarter due to continued lower retail trading activity. • Advisory fees decreased 5.1% from a year ago primarily due to lower AUM during the billing period for the current quarter when compared to the second quarter of last year. • Bank deposit sweep income increased $29.2 million or 197% from a year ago due to higher short-term interest rates partially offset by lower cash sweep balances. • Interest revenue approached record level and increased 116.1% 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 increased 28.7% from a year ago primarily due to higher share-based and deferred compensation costs. • Non-compensation expenses increased substantially (185.7%) from a year ago primarily due to additional accrual of a significant legal reserve associated with a previously disclosed matter. Asset Management Asset Management reported revenue for the current quarter of $22.2 million, 8.7% lower when compared with the prior year period. Pre-tax income was $6.5 million, a decrease of 19.5% compared with the prior year period. ('000s unless otherwise indicated) 2Q-2023 2Q-2022 Change % Change Revenue $ 22,198 $ 24,315 $ (2,117) (8.7) Advisory fee revenue $ 22,196 $ 24,311 $ (2,115) (8.7) Other $ 2 $ 4 $ (2) (50.0) Total Expenses $ 15,664 $ 16,195 $ (531) (3.3) Compensation $ 6,283 $ 6,697 $ (414) (6.2) Non-compensation $ 9,381 $ 9,498 $ (117) (1.2) Pre-tax Income $ 6,534 $ 8,120 $ (1,586) (19.5) Compensation Ratio 28.3 % 27.5 % 80 2.9 Non-compensation Ratio 42.3 % 39.1 % 320 8.2 Pre-tax Margin 29.4 % 33.4 % (4.0) % (12.0) AUM (billions) $ 41.2 $ 37.1 $ 4.1 11.1 • Advisory fees decreased 8.7% from a year ago due to reduced management fees resulting from the lower net value of billable AUM during the quarter. • AUM increased to $41.2 billion at June 30, 2023, which is the basis for advisory fee billings for July 2023. • The increase in AUM was comprised of higher asset values of $3.7 billion on existing client holdings and a net contribution of $0.4 billion in new assets. • Compensation expenses were down 6.2% from a year ago which was primarily related to decreases in incentive compensation. • Non-compensation expenses were down 1.2% when compared to the prior year period mostly due to lower external portfolio management costs which are directly related to the decrease in billable AUM, partially offset by higher communication and technology expenses. The following table provides a breakdown of the change in assets under management for the three months ended June 30, 2023: 43 Table of Contents (Expressed in millions) For the Three Months Ended June 30, 2023 Fund Type Beginning Balance Contributions Redemptions/Profit Distribution Appreciation (Depreciation) Ending Balance Traditional (1) $ 33,698 $ 1,604 $ (1,522) $ 1,663 $ 35,443 Institutional Fixed Income (2) 841 1 -17 (17) 2 827 Alternative Investments: Hedge funds (3) 3,246 45 (20) 128 3,399 Private Equity Funds (4) 1,188 11 (20) 4 1,183 Portfolio Enhancement Program (5) 332 — (9) — 323 $ 39,305 $ 1,661 $ (1,588) $ 1,797 $ 41,175 (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. (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 $79.6 million, 11.7% higher when compared with the prior year period. Pre-tax loss was $14.1 million, compared with a pre-tax loss of $17.9 million in the prior year period. ('000s) 2Q-2023 2Q-2022 Change % Change Revenues $ 79,582 $ 71,274 $ 8,308 11.7 Investment Banking $ 18,749 $ 14,699 $ 4,050 27.6 Advisory fees $ 10,945 $ 8,284 $ 2,661 32.1 Equities underwriting $ 5,478 $ 2,751 $ 2,727 99.1 Fixed income underwriting $ 1,867 $ 3,259 $ (1,392) (42.7) Other $ 459 $ 405 $ 54 13.3 Sales and Trading $ 60,216 $ 55,978 $ 4,238 7.6 Equities $ 34,453 $ 37,126 $ (2,673) (7.2) Fixed Income $ 25,763 $ 18,852 $ 6,911 36.7 Other $ 617 $ 597 $ 20 3.4 Total Expenses $ 93,633 $ 89,209 $ 4,424 5.0 Compensation $ 61,255 $ 67,172 $ (5,917) (8.8) Non-compensation $ 32,378 $ 22,037 $ 10,341 46.9 Pre-tax Loss $ (14,051) $ (17,935) $ 3,884 (21.7) Compensation Ratio 77.0 % 94.2 % (1,720) (18.3) Non-compensation Ratio 40.7 % 30.9 % 980 31.7 Pre-tax Margin (17.7) % (25.2) % 7.5 % (29.8) 44 Table of Contents • Advisory fees earned from investment banking activities increased 32.1% compared with a year ago due to an increase in M&A transactions. • Equities underwriting fees modestly increased by $2.7 million when compared with a year ago, when IPO and secondary offerings were at historically low levels industry-wide. • Fixed income underwriting fees were down 42.7% compared with a year ago primarily driven by lower deal volumes during the second quarter of 2023. • Equities sales and trading revenue decreased 7.2% compared with a year ago due to reduced volumes as a result of lower market volatility. • Fixed income sales and trading revenue increased by 36.7% compared with a year ago primarily due to an increase in trading income attributable to higher volumes. • Compensation expenses decreased 8.8% compared with a year ago primarily due to decreased incentive compensation. • Non-compensation expenses were 46.9% higher than a year ago primarily due to an increase in interest expense in financing inventories. 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 six months ended June 30, 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 June 30, 2023, total assets increased by 13.9% 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 June 30, 2023, the Company had bank call loans of $94.4 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 $5.4 million and $382,854, respectively, at June 30, 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. 45 Table of Contents 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 $3.5 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 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 June 30, 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 six months ended June 30, 2023 and the balance sheet at June 30, 2023 for the Parent and Subsidiary Guarantors. 46 Table of Contents (Expressed in thousands) As of June 30, 2023 Total Assets $ 2,044,507 Due From Non-Guarantor Subsidiary 17,554 Total Liabilities 556,574 Due To Non-Guarantor Subsidiary 20,624 For the Six Months Ended June 30, 2023 Total Revenue $ 5,258 Pre-Tax Income (Loss) (270) Net Income (Loss) (642) On June 17, 2021, S&P upgraded the Company's Corporate Family rating and rating on the Unregistered Notes from 'B+' with a stable outlook to 'BB-' with a stable outlook. On August 23, 2021, Moody’s upgraded the Company's Corporate Family rating and the rating on the Unregistered Notes from “B1” with a stable outlook to “Ba3” with a stable outlook. Liquidity For the most part, the Company's assets consist of cash and cash equivalents and assets that it can readily convert into cash. The receivable from brokers, dealers and clearing organizations represents deposits for securities borrowed transactions, margin deposits and current transactions awaiting settlement. The receivable from customers represents margin balances and amounts due on transactions awaiting settlement. Our receivables are, for the most part, collateralized by marketable securities. Our collateral maintenance policies and procedures are designed to limit our exposure to credit risk. Securities owned, with the exception of the ARS, are mainly comprised of actively trading readily marketable securities. We issued $1.5 million in forgivable notes (which are inherently illiquid) to employees for the three months ended June 30, 2023 ($5.1 million for the three months ended June 30, 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 June 30, 2023, the Company had $94.4 million of bank call loans (zero at December 31, 2022). The average daily bank loan outstanding for the three and six months ended June 30, 2023 was $77.8 million and $67.7 million, respectively ($111.5 million and $99.4 million for the three and six months ended June 30, 2022). The largest daily bank loans outstanding for the three and six months ended June 30, 2023 was $153.3 million and $167.3 million, respectively ($226.6 million for both the three and six months ended June 30, 2022). At June 30, 2023, securities loan balances totaled $336.5 0 million ($320.8 million at December 31, 2022 and $281.4 million at June 30, 2022). The average daily securities loan balance outstanding for the three and six months ended June 30, 2023 was $362.9 million and $352.1 million, respectively ($269.6 million and $286.9 for the three and six months ended June 30, 2022). The largest daily stock loan balance for both of the three and six months ended June 30, 2023 were $391.5 million ($302.9 million and $350.1 million for the three and six months ended June 30, 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. 47 Table of Contents 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 June 30, 2023, we did not have any repurchase agreements and reverse repurchase agreements that did not settle overnight or have an open settlement date. At June 30, 2023, the gross balances of reverse repurchase agreements and repurchase agreements were $40.1 million and $685.4 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the three months ended June 30, 2023 was $146.8 million and $501.8 million, respectively ($146.9 million and $291.8 million, respectively, for the three months ended June 30, 2022). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the three months ended June 30, 2023 was $392.1 million and $782.1 million, respectively ($435.7 million and $540.1 million, respectively, for the three months ended June 30, 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, 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 $83.5 million as of June 30, 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. Regulators are increasingly focused on Liquidity Management and we anticipate both new rules regarding the management of our day-to-day liquidity as well as increased regulatory scrutiny of the compliance with any such rules. 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 June 30, 2023 under our Senior Secured Notes (due in 2025) and $196.9 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 $9.8 million for the remainder of 2023. Funding Risk (Expressed in thousands) For the Six Months Ended June 30, 2023 2022 Cash used in operating activities $ (150,811) $ (231,371) Cash used in investing activities (9,179) (1,116) Cash provided by financing activities 76,971 55,444 Net decrease in cash, cash equivalents and restricted cash $ (83,019) $ (177,043) 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. 48 Table of Contents 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 those of the Company. Given the importance of the protection of client data, regulators have developed increased oversight of cybersecurity planning and protections that broker-dealers and other financial service providers have implemented. Such planning and protection are subject to the SEC's and FINRA's oversight and examination on a periodic or targeted basis. We expect that regulatory oversight will intensify, as a result of publicly announced data breaches by other organizations involving tens of millions of items of personally identifiable information. We continue to implement protections and adopt procedures to address the risks posed by the current information technology environment. The Company has significantly increased the resources dedicated to this effort and believes that further increases may be required in the future, in anticipation of increases in the sophistication and persistency of such attacks. There can be no guarantee that our cybersecurity efforts will be successful in discovering or preventing a security breach. 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 risks. 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 for 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 49 Table of Contents 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 June 30, 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. 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. Subsequently, the Company received a similar information request from the Commodity Futures Trading Commission (“CFTC”). The Company has submitted multiple responses to the information request and continues to cooperate with the SEC and CFTC inquiries. 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 50 Table of Contents 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. 51 Table of Contents Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the six months ended June 30, 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. 52 Table of Contents