OPPENHEIMER HOLDINGS INC 10-K

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations for the years ended December 31, 2023 and 2022. For a discussion of our results of operations and liquidity and capital resources for the year ended December 31, 2021, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. This analysis should be read in conjunction with the consolidated financial statements and related footnote disclosures contained in this report. BACKGROUND The consolidated financial statements include the accounts of Oppenheimer Holdings Inc. ("Parent") and its consolidated subsidiaries (together, the "Company", "we", "our" or "us"). The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto which appear elsewhere in this annual 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 December 31, 2023, we provided our services from 90 offices in 25 states located throughout the United States, offices in Puerto Rico, Tel Aviv, Israel, Hong Kong, China, London, England, St. Helier, Isle of Jersey, 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 December 31, 2023, client assets under management ("AUM") totaled $43.9 billion. AUM includes the total market value of client investments in discretionary and non-discretionary advisory programs and as well as the net asset value of private placement of alternative investments offered by and held by clients of the firm. Client assets under administration ("CAUA") as of December 31, 2023 totaled $118.2 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 discount brokerage services through Freedom Investments, Inc. ("Freedom"). Through OPY Credit Corp., we conduct secondary trading activities related to the purchase and sale of loans, primarily on a riskless principal basis. At December 31, 2023, the Company employed 2,942 employees (2,903 full-time and 39 part-time), of whom 931 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 markets businesses where we can employ experienced personnel and/or small units that will improve our ability to attract institutional clients in both equities and fixed income without significantly raising our risk profile. We are continuously reviewing ways in which we can increase security around our data and our platform as the risks of cybercrime increase. In investment banking, we are committed to growing our footprint by adding experienced bankers within our existing industry practices as well as new industry practices where we believe we can be successful. We continuously invest in and improve our technology platform to support client service and to remain competitive, while continuously managing expenses. The Company's long-term growth plan is to continue to expand existing offices by hiring experienced professionals as well as expand through the purchase of operating branch offices from other broker-dealers or the opening of new branch offices in attractive locations, and to continue to grow and develop the existing trading, investment banking, investment advisory and other divisions. We are committed to continuing to improve our 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. 39 Table of Contents The Company is also reviewing its full service business model to determine the opportunities available to build or acquire closely related businesses in areas where others have shown some success. Equally important is the search for viable acquisition candidates. Our long-term intention is to pursue growth by acquisition where we can find a comfortable match in terms of corporate goals and personnel at a price that would provide our shareholders with incremental value. We review potential acquisition opportunities from time to time with the aim of fulfilling the Company's strategic goals, while evaluating and managing our existing businesses. In addition, the Company may from time to time make minority private investments out of excess capital in allied or unrelated businesses with the goal of either syndicating the investment to eligible clients or retaining ownership because we believe them to be an attractive investment. Impact of Change in Short-term Interest Rates After increasing rates by 425 basis points in 2022, the Federal Reserve (the “FED”) slowed both the pace and magnitude of rate increases in 2023. To prevent overtightening in the midst of conflicting economic data and stress within the regional banking sector at the outset of the year, the FED proceeded cautiously and enacted four federal funds rate increases – 25 basis points each – between its February and July meetings. The FED paused on further tightening actions for the remainder of 2023, largely due to improved inflationary readings, resulting in the target federal funds rate remaining at 5.25% to 5.50% as of December 31, 2023. The FED’s forecast currently projects three rate decreases during 2024, though this is subject to change. Increases in the federal funds rate will be favorable to the Company’s interest-based revenues though any future federal funds rate decreases may result in reductions to these revenues. 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 an 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 which have a positive impact on our earnings. 2023 Israel-Hamas War On October 7, 2023, Hamas initiated an unprovoked invasion of Israel from the Gaza Strip, resulting in thousands of casualties. Israel formally declared war on Hamas in response to the attack and initiated several military operations in an effort to clear militants from the area. The war has triggered a humanitarian crisis, with hundreds of thousands displaced from their homes and many without food, water or electricity. There remains a risk that the conflict could expand into a wider regional war, which could have an adverse impact on the worldwide economy, financial markets and thus on our business. At this time, the conflict has not yet had a material impact on our business operations in Israel or elsewhere. “Dutch Auction” Tender Offer On July 6, 2023, the Company completed its “Dutch Auction” tender offer. A total of 437,183 shares of the Company's Class A Stock, par value $0.001 per share were properly tendered at a purchase price of $40.00 per share for an aggregate cost of approximately $17.49 million. The purpose of the tender offer, among others, was to assure that sufficient liquidity existed for our stockholders that might have been required to sell shares of Class A Stock when they were removed from the Russell 2000 and 3000 indices at the end of June 2023. EXECUTIVE SUMMARY The Company generated profitable results for the full year 2023 despite mixed macroeconomic conditions and significantly higher legal and regulatory costs. The costs of a particular legal matter (which we now believe is mostly behind us from a financial point of view) and, the impact of a non-recurring accrual related to an SEC industry-wide focus on ‘off-channel communications’ was approximately $70 million for the year. But for these, the Company would have produced a stronger return despite the ongoing drought in Investment Banking activity. The year began with markets anticipating either a mild recession or a "soft landing" with nominal growth and high but declining inflation driven by a FED committed to interest rate increases. The economic outlook gradually improved as inflation receded, unemployment held steady and the FED signaled potential rate cuts in 2024. The financial markets improved along with the economic outlook, as what began as a narrow rally focused on generative A.I. stocks eventually broadened into an “everything rally” by the year’s end, with most major indices ending the year at or near their all-time highs in spite of continued geopolitical tensions in Ukraine and Gaza. Throughout these evolving market conditions, our diversified businesses registered a year-over-year increase in total revenues. Higher short-term interest rates propelled record high full-year bank deposit sweep and margin interest income in our Wealth Management business as well as large increases in fixed income sales and trading revenues in our Capital Markets segment. 40 Table of Contents The rising markets and addition of new client assets also drove improvements in the valuation of client assets under management throughout the year, though asset-based advisory fees did not fully recover to 2022 levels. Investment banking revenues continue to be adversely impacted by reduced corporate transactions and a moribund IPO environment. The Company ended the year with a strong balance sheet and record high book value per share levels. Additionally, the Class A share count is significantly reduced from the prior year due to share repurchases during the year. RESULTS OF OPERATIONS The following table and discussion summarizes the changes in the major revenue and expense categories for the past three years: (Expressed in thousands ) For the Years Ended December 31, For the Years Ended December 31, 2023 2022 % Change 2022 2021 % Change REVENUE Commissions $ 349,248 $ 370,382 (5.7) $ 370,382 $ 401,607 (7.8) Advisory fees 415,679 425,615 (2.3) 425,615 451,197 (5.7) Investment banking 117,665 127,529 (7.7) 127,529 435,870 (70.7) Bank deposit sweep income 172,807 104,558 65.3 104,558 15,557 572.1 Interest 104,550 60,713 72.2 60,713 36,482 66.4 Principal transactions, net 65,347 21,031 210.7 21,031 23,984 (12.3) Other 23,529 1,113 2,014.0 1,113 29,338 (96.2) Total revenue 1,248,825 1,110,941 12.4 1,110,941 1,394,035 (20.3) EXPENSES Compensation and related expenses 782,396 740,827 5.6 740,827 886,840 (16.5) Communications and technology 91,321 85,474 6.8 85,474 80,520 6.2 Occupancy and equipment costs 66,002 59,897 10.2 59,897 60,069 (0.3) Clearing and exchange fees 24,928 25,566 (2.5) 25,566 22,306 14.6 Interest 68,599 23,846 187.7 23,846 9,855 142.0 Other 168,809 129,777 30.1 129,777 109,804 18.2 Total expenses 1,202,055 1,065,387 12.8 1,065,387 1,169,394 (8.9) Pre-tax income 46,770 45,554 2.7 45,554 224,641 (79.7) Income tax provision 16,498 13,444 22.7 13,444 65,677 (79.5) Net Income $ 30,272 $ 32,110 (5.7) $ 32,110 $ 158,964 (79.8) Net income (loss) attributable to non-controlling interest, net of tax 93 (241) * (241) — * Net income attributable to Oppenheimer Holdings Inc. $ 30,179 $ 32,351 (6.7) $ 32,351 $ 158,964 (79.6) *Percentage not meaningful Fiscal 2023 compared to Fiscal 2022 Revenue • Commission revenue was $349.2 million for the year ended December 31, 2023, a decrease of 5.7% compared with $370.4 million for the year ended December 31, 2022 due to decreased client activity in listed securities, OTC products and options, partially offset by higher commission income on annuities. • Advisory fees were $415.7 million for the year ended December 31, 2023, a decrease of 2.3% compared with $425.6 million for the year ended December 31, 2022 due to lower management fees from advisory programs attributable to reduced billable AUM levels and lower incentive fees from alternative investments during the year. 41 Table of Contents • Investment banking revenue was $117.7 million for the year ended December 31, 2023, a decrease of 7.7% compared with $127.5 million for the year ended December 31, 2022 driven by an industry-wide slowdown in M&A transactions and lower levels of fixed income capital issuances, partially offset by higher equity underwriting fees. • Bank deposit sweep income was $172.8 million for the year ended December 31, 2023, an increase of 65.3% compared with $104.6 million for the year ended December 31, 2022 due to higher short-term interest rates, partially offset by lower cash sweep balances. • Interest revenue was $104.6 million for the year ended December 31, 2023, an increase of 72.2% compared with $60.7 million for the year ended December 31, 2022 due to higher short-term interest rates, which drove record full year margin interest income. • Principal transactions revenue was $65.3 million for the year ended December 31, 2023, an increase of 210.7% compared with $21.0 million for the year ended December 31, 2022 primarily due to higher fixed income trading volumes. • Other revenue was $23.5 million for the year ended December 31, 2023, a significant increase compared to $1.1 million for the year ended December 31, 2022 primarily due to increases in the cash surrender value of Company-owned life insurance during 2023, which fluctuates based on changes in fair value of the policies' underlying investments. Expenses • Compensation and related expenses totaled $782.4 million during the year ended December 31, 2023, an increase of 5.6% compared with the year ended December 31, 2022 primarily due to higher base salary and deferred compensation costs. Compensation and related expenses as a percentage of revenue was 62.7% for the year ended December 31, 2023 compared with 66.7% for the year ended December 31, 2022. • Non-compensation expenses were $419.7 million during the year ended December 31, 2023, an increase of 29.3% compared with $324.6 million during the year ended December 31, 2022 due to the impact of significant legal costs and an accrual for a regulatory settlement. • The effective income tax rate for the year ended December 31, 2023 was 35.3% compared with 29.5% for the year ended December 31, 2022 primarily due to the impact of a non-deductible regulatory settlement totaling $13.0 million. Fiscal 2022 compared to Fiscal 2021 Revenue • Commission revenue was $370.4 million for the year ended December 31, 2022, a decrease of 7.8% compared with $401.6 million for the year ended December 31, 2021 due to decreased client activity in mutual funds, listed securities, OTC products and annuities, partially offset by higher commission income on municipal bonds. • Advisory fees were $425.6 million for the year ended December 31, 2022, a decrease of 5.7% compared with $451.2 million for the year ended December 31, 2021 due to the reduced valuations of assets under management. • Investment banking revenue was $127.5 million for the year ended December 31, 2022, a decrease of 70.7% compared with $435.9 million for the year ended December 31, 2021 driven by an industry-wide decrease in M&A transactions, and significantly lower levels of capital issuances in the equity markets, particularly in the healthcare and technology sectors. • Bank deposit sweep income was $104.6 million for the year ended December 31, 2022, an increase of 572.1% compared with $15.6 million for the year ended December 31, 2021 due to significantly higher short-term interest rates. • Interest revenue was $60.7 million for the year ended December 31, 2022, an increase of 66.4% compared with $36.5 million in 2021 due to higher average margin balances and higher short-term interest rates. 42 Table of Contents • Principal transactions revenue was $21.0 million for the year ended December 31, 2022, a decrease of 12.3% compared with $24.0 million for the year ended December 31, 2021 driven by lower income from investment grade, high yield, Emerging Markets, and municipal bonds partially offset by higher income from U.S. government securities. • Other revenue was $1.1 million for the year ended December 31, 2022, a decrease of 96.2% compared to $29.3 million for the year ended December 31, 2021 primarily due to a decrease in the cash surrender value of Company-owned life insurance during 2022, which fluctuates based on changes in fair value of the policies' underlying investments. Expenses • Compensation and related expenses totaled $740.8 million during the year ended December 31, 2022, a decrease of 16.5% compared with the year ended December 31, 2021 due to decreased incentive compensation costs. Compensation and related expenses as a percentage of revenue was 66.7% for the year ended December 31, 2022 compared with 63.6% for the year ended December 31, 2021. • Non-compensation expenses were $324.6 million during the year ended December 31, 2022, an increase of 14.9% compared with $282.6 million during the year ended December 31, 2021 due to higher legal costs recorded during third quarter of 2022 which related to an adverse arbitration decision. • The effective income tax rate for the year ended December 31, 2022 was 29.5% compared with 29.2% for the year ended December 31, 2021. 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 and years ended December 31, 2023 and 2022: (Expressed in thousands) For the Three Months Ended December 31, For the Years Ended December 31, 2023 2022 % Change 2023 2022 % Change Revenue Private Client $ 203,834 $ 201,748 1.0 $ 801,754 $ 675,680 18.7 Asset Management 21,446 22,940 (6.5) 88,433 99,242 (10.9) Capital Markets 81,457 90,549 (10.0) 345,897 337,821 2.4 Corporate/Other 1,552 (1,657) * 12,741 (1,802) * Total 308,289 313,580 (1.7) 1,248,825 1,110,941 12.4 Pre-Tax Income (Loss) Private Client 53,945 49,331 9.4 194,444 142,250 36.7 Asset Management 6,125 9,837 (37.7) 24,091 35,753 (32.6) Capital Markets (18,179) (11,328) 60.5 (62,961) (25,696) 145.0 Corporate/Other (24,059) (17,568) 36.9 (108,804) (106,753) 1.9 Total $ 17,832 $ 30,272 (41.1) $ 46,770 $ 45,554 2.7 * Percentage not meaningful Private Client Private Client reported revenue of $801.8 million for the year ended December 31, 2023, 18.7% higher compared with the prior year. Pre-tax income was $194.4 million, an increase of 36.7% from the prior year. 43 Table of Contents (Expressed in thousands, except financial advisor headcount or otherwise indicated) For the Years Ended December 31, 2023 2022 % Change Revenue $ 801,754 $ 675,680 18.7 Commissions 186,496 190,614 (2.2) Advisory fees 319,191 326,240 (2.2) Bank deposit sweep income 172,807 104,558 65.3 Interest 85,105 51,866 64.1 Other 38,155 2,402 1,488.5 Total Expenses $ 607,310 $ 533,430 13.8 Compensation 399,185 377,671 5.7 Non-compensation 208,125 155,759 33.6 Pre-Tax Income $ 194,444 $ 142,250 36.7 Compensation Ratio 49.8 % 55.9 % (10.9) Non-compensation Ratio 26.0 % 23.1 % 12.6 Pre-Tax Margin 24.3 % 21.1 % 15.2 AUA (billions) $ 118.2 $ 105.0 12.6 Cash Sweep Balances (billions) $ 3.4 $ 5.5 (38.2) Financial Advisor Headcount 931 968 (3.8) • Retail commissions decreased slightly from the prior year due to lower overall client activity, though transaction volumes improved later in the year. • Advisory fees decreased 2.2% from the prior year due to lower billable AUM during the year. • Bank deposit sweep income for the full year was a record high and increased $68.2 million or 65.3% from the prior year due to higher short-term interest rates, partially offset by lower cash sweep balances. • Interest revenue increased 64.1% from the prior year due to record full year margin interest income attributable to higher short-term interest rates. • Other revenue increased significantly compared with the prior year 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 5.7% from the prior year primarily due to higher deferred compensation costs. • Non-compensation expenses increased 33.6% from the prior year primarily due to the impact of significant legal costs. Asset Management Asset Management reported revenue of $88.4 million for the year ended December 31, 2023, 10.9% lower compared with the prior year. Pre-tax income was $24.1 million, a decrease of 32.6% compared with the prior year. 44 Table of Contents 45 Table of Contents (Expressed in thousands, unless otherwise indicated) For the Years Ended December 31, 2023 2022 % Change Revenue $ 88,433 $ 99,242 (10.9) Advisory fee revenue 96,259 99,224 (3.0) Other (7,826) 18 * Total Expenses $ 64,342 $ 63,489 1.3 Compensation 24,846 24,261 2.4 Non-compensation 39,496 39,228 0.7 Pre-Tax Income $ 24,091 $ 35,753 (32.6) Compensation Ratio 28.1 % 24.4 % 15.2 Non-compensation Ratio 44.7 % 39.5 % 13.2 Pre-Tax Margin 27.2 % 36.0 % (24.4) AUM (billions) $ 43.9 $ 36.8 19.3 * Percentage not meaningful • Advisory fee revenue decreased 3.0% from the prior year primarily due to lower management fees from advisory programs attributable to reduced billable AUM levels and lower incentive fees from alternative investments during the year. • Other revenue decreased $7.8 million from a year ago primarily due to a decrease in the fair value of positions held in private equity investments. • AUM were $43.9 billion at December 31, 2023, which is the basis for advisory fee billings for January 2024. • The increase in AUM from December 31, 2022 to December 31, 2023 was comprised of higher asset values of $6.0 billion on existing client holdings and a net contribution of assets of $1.1 billion. • Compensation expenses and non-compensation expenses were relatively flat when compared to the prior year. The following table provides a breakdown of the change in assets under management for the year ended December 31, 2023: (Expressed in millions) For the Year Ended December 31, 2023 Beginning Balance Appreciation (Depreciation) Ending Balance Fund Type Contributions Redemptions Traditional (1) $ 31,413 $ 7,610 $ (6,356) $ 5,476 $ 38,143 Institutional Fixed Income (2) 836 17 (70) 70 853 Alternative Investments: Hedge funds (3) 3,041 120 (315) 617 3,463 Private Equity Funds (4) 1,152 190 (83) (153) 1,106 Portfolio Enhancement Program (5) 352 6 (53) — 305 $ 36,794 $ 7,943 $ (6,877) $ 6,010 $ 43,870 (1) Traditional investments include third party advisory programs, Oppenheimer financial advisor managed and advisory programs, and Oppenheimer Asset Management taxable and tax-exempt portfolio management strategies. (2) Institutional fixed income provides solutions to institutional investors including: Taft-Hartley Funds, Public Pension Funds, Corporate Pension Funds, and Foundations and Endowments. (3) Hedge funds represent single manager hedge fund strategies in areas including hedged equity, technology and financial services, and multi-manager and multi-strategy fund of funds. (4) Private equity funds represent private equity fund of funds including portfolios focused on natural resources and related assets. (5) The portfolio enhancement program sells uncovered, far out-of-money puts and calls on the S&P 500 Index. The program is market neutral and uncorrelated to the index. Valuation is based on collateral requirements for a series of contracts representing the investment strategy. 46 Table of Contents Capital Markets Capital Markets reported revenue of $345.9 million for the year ended December 31, 2023, 2.4% higher compared with the prior year. Pre-tax loss was $63.0 million compared with a pre-tax loss of $25.7 million for the prior year. (Expressed in thousands ) For the Years Ended December 31, 2023 2022 % Change Revenue $ 345,897 $ 337,821 2.4 Investment Banking $ 111,734 $ 117,101 (4.6) Advisory fees 69,623 84,569 (17.7) Equities underwriting 33,904 24,583 37.9 Fixed income underwriting 6,594 8,898 (25.9) Other 1,613 (949) * Sales and Trading $ 231,867 $ 217,712 6.5 Equities 128,216 141,013 (9.1) Fixed income 103,651 76,699 35.1 Other $ 2,296 $ 3,008 (23.7) Total Expenses $ 408,858 $ 363,517 12.5 Compensation 269,330 260,974 3.2 Non-compensation 139,528 102,543 36.1 Pre-Tax Loss $ (62,961) $ (25,696) 145.0 Compensation Ratio 77.9 % 77.3 % 0.8 Non-compensation Ratio 40.3 % 30.4 % 32.6 Pre-Tax Margin (18.2) % (7.6) % 139.5 * Percentage not meaningful • Advisory fees earned from investment banking activities decreased 17.7% compared with the prior year driven by an industry-wide slowdown in M&A transactions. • Equities underwriting fees increased 37.9% compared with the prior year due to higher new issuance volumes and deal sizes, primarily during the third quarter. • Fixed income underwriting fees were down 25.9% compared with the prior year primarily driven by less overall new issuance activity. • Equities sales and trading decreased 9.1% compared with the prior year due to reduced volumes as a result of lower market volatility. • Fixed income sales and trading increased 35.1% compared with the prior year driven by higher trading income attributable to higher volumes. • Compensation expenses were slightly higher than the prior year due to opportunistic hires and inflationary pressures on wages as well as higher deferred compensation costs. • Non-compensation expenses were 36.1% higher compared with the prior year mainly due to an increase in interest expense in financing trading inventories. CRITICAL ACCOUNTING ESTIMATES The Company's accounting estimates are essential to understanding and interpreting the financial results reported on the consolidated financial statements. The significant accounting policies used in the preparation of the Company's consolidated financial statements are summarized in note 2 to those statements. Certain of those policies are considered to be particularly 47 Table of Contents 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. The following is a discussion of these estimates: Fair Value Measurements Critical estimates - The accounting guidance for the fair value measurement (ASC 820) of financial assets defines fair value, establishes a framework for measuring fair value, establishes a fair value measurement hierarchy, and expands fair value measurement disclosures. Fair value, as defined by the accounting guidance, is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When market observable inputs are not available, our judgment is applied to reflect those judgments that a market participant would use in valuing the same asset or liability. Assumption and judgement - The fair value hierarchy established by ASC 820 prioritizes the inputs used in valuation techniques into the following three categories (highest to lowest priority): • Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets; • Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and • Unobservable inputs that are significant to the overall fair value measurement. The availability of observable inputs can vary for different products. We use prices and inputs that are current as of the measurement date even in periods of market disruption or illiquidity. Financial instruments are classified as Level 3 if observable pricing inputs are not available due to limited market activity for the asset or liability. The valuation of financial instruments are classified in Level 3 of the fair value hierarchy and consists of valuation techniques that incorporate one or more significant unobservable inputs, and therefore requires the greatest amount of management judgment. As of December 31, 2023, the Company had $2.7 million in financial instruments, comprised of auction rate securities, classified within Level 3 of the fair value hierarchy. See note 8 to the consolidated financial statements appearing in Item 8 for further information on the fair value definition, Level 1, Level 2 and Level 3 and related valuation techniques. Impact if actual results differ from assumptions – We established an independent valuation process to evaluate and approve the valuation of our financial instruments. For financial instruments that are classified in Level 3, we review the appropriateness of the unobservable inputs to ensure consistency with how a market participant would arrive at the unobservable input. Although an independent review process is in place, the fair value of the Level 3 financial instrument could be significantly different due to the sensitivity of some unobservable inputs (for example, interest rates) and any such difference could also have a material adverse effect on our consolidated financial statements. Legal and Regulatory Reserves Critical estimates – In the normal course of business, the Company has been named as defendant or co-defendant in various legal actions, including arbitrations, class actions and other litigation, creating substantial exposure and periodic expenses. Management is required to assess the probability of loss and estimate the amount of such loss when preparing its consolidated financial statements. Assumption and judgement - The determination of the levels of these reserves requires significant judgment on the part of management. In accordance with applicable accounting guidance, we established reserves for litigation and regulatory matters where available information indicates that it is probable a liability had been incurred at the date of the consolidated financial statements and we can reasonably estimate the amount of that loss. When loss contingencies are not probable or cannot be reasonably estimated, we do not establish reserves. When determining whether to record a reserve, management considers many factors including, but not limited to, the amount of the claim; the stage and forum of the proceeding, the sophistication of the claimant, the amount of the loss, if any, in the client's account and the possibility of wrongdoing, if any, on the part of an employee of the Company; the basis and validity of the claim; previous results in similar cases; and applicable legal precedents and case law. Each legal and regulatory proceeding is reviewed with counsel in each accounting period and the reserve is adjusted as deemed appropriate by management. Any change in the reserve amount is recorded in the results of that period. See note 18 to the consolidated financial statements appearing in Item 8 for further details. Impact if actual results differ from assumptions – Due to the inherent uncertainties of the legal and regulatory proceedings, our judgement may be materially different from the actual outcome. The assumptions we used to determine the estimates of reserves may be incorrect and the actual disposition of a legal or regulatory proceeding could be greater or less than the reserve amount. 48 Table of Contents Income Taxes Critical estimates – We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate. We are also subject to the tax laws of our international subsidiaries and branches. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. We record uncertain tax positions in accordance with ASC 740, "Income Taxes", on the basis of a two-step process whereby we determined whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and, for those tax positions that meet the more-likely-than-not recognition threshold, we will recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Assumption and judgement - We recognize deferred tax assets to the extent we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and the results of recent operations. In establishing a provision for income tax expense, we must make judgements and interpretations about the application of these inherently complex tax laws. We estimate when certain items will affect taxable income in the various jurisdictions in the future. We are also required to evaluate and measure all uncertain tax positions taken or expected to be taken on tax returns and to record liabilities for the amount of such positions that may not be sustained, or may only be partially sustained, upon examination by the relevant taxing authorities. See note 16 to the consolidated financial statements appearing in Item 8 for further details. Impact if actual results differ from assumptions – Although we believe that our estimates and judgements are reasonable, actual results may differ from these estimates. Some or all of these judgements are subject to review by the relevant taxing authorities. If one or more of the taxing authorities were to successfully challenge our right to realize some or all of the tax benefit we recorded, and we were not able to realize this benefit, our effective income tax rate in a given financial statement period could be materially affected and it could also have a material adverse effect on our consolidated financial statements. New Accounting Pronouncements The following Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board ("FASB") has not yet been adopted by the Company: ASU 2023-07 – Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures In November 2023, the FASB issued this ASU to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The revised guidance will require disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), the title and position of the CODM and how the CODM uses the reported measures of segment profit or loss in assessing segment performance, among other requirements. While this ASU will have no impact on the Company’s financial position or results of operations, the Company is currently evaluating the impact of this ASU on its segment disclosures. LIQUIDITY AND CAPITAL RESOURCES Total assets increased by 5.9% from December 31, 2022 to December 31, 2023. 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 agreements to repurchase ("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, changes in stock loan balances and financing through repurchase agreements. At December 31, 2023 and December 31, 2022, the Company had no such borrowings outstanding. 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 $384,120, 49 Table of Contents respectively, at December 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 restrictions on 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 $3.5 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 except that such new notes have been registered under the Securities Act of 1933, as amended (the "Notes"). We did not receive any proceeds in the exchange offer. During the fourth quarter of 2022, the Company repurchased and subsequently cancelled $10.95 million of the Notes, recognizing a small extinguishment gain. As of December 31, 2022, $114.05 million aggregate principal amount of the Notes remain outstanding. During the first quarter of 2023, the Company repurchased and cancelled $1.0 million aggregate principal amount of its Notes in the open market. As of December 31, 2023, the Company repurchased and cancelled $1.0 million aggregate principal amount of its Notes in the open market. As of December 31, 2023, $113.05 million aggregate principal amount of the Notes remain outstanding. See note 13 to the consolidated financial statements appearing in Item 1 for further discussion. The Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by E.A. Viner International Co. and Viner Finance Inc. (together, the "Guarantors"), unless released as described below. Each of the Guarantors is 100% owned by the Parent. The indenture for the Notes contains covenants with restrictions which are discussed in note 13. The guarantees are senior secured obligations of each Guarantor. The guarantees rank: • effectively senior in right of payment to all unsecured and unsubordinated obligations of such Guarantor, to the extent of the value of the collateral owned by such Guarantor (and, to the extent of any unsecured remainder after payment of the value of the collateral, rank equally in right of payment with such unsecured and unsubordinated indebtedness of such Guarantor); and • senior in right of payment to any subordinated debt of such Guarantor (The Notes are 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 obligation under the guarantee. There are no externally imposed restrictions on transfers of assets between the Company and its subsidiaries. Each Guarantor will be automatically and unconditionally released and discharged upon: the sale, exchange or transfer of the capital stock of a Guarantor and the Guarantor ceasing to be a direct or indirect subsidiary of the Parent if such sale does not constitute an asset sale under the Indenture for the Notes or does not constitute an asset sale effected in compliance with the asset sale and merger covenants of the Indenture for the Notes; a Guarantor being dissolved or liquidated; a Guarantor being designated unrestricted in compliance with the applicable provisions of the Notes; or the exercise by the Parent of its legal defeasance option or covenant defeasance option or the discharge of the Parent's obligations under the Indenture for the Notes in accordance with the terms of such Indenture. 50 Table of Contents The following tables present the selected financial information for the twelve months ended December 31, 2023 for the Parent and Subsidiary Guarantors. (Expressed in thousands) As of December 31, 2023 Total Assets $ 2,087,888 Due From Non-Guarantor Subsidiary 15,908 Total Liabilities 574,368 Due To Non-guarantor Subsidiary 55,799 For the Year Ended December 31, 2023 Total Revenue $ 10,472 Pre-Tax Loss 114 Net Income 1,520 S&P’s Corporate Family rating and the rating on the Notes is a 'BB-' with a stable outlook. Moody’s Corporate Family rating and the rating on the Notes is a “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 or 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 auction rate securities, are mainly comprised of actively trading, readily marketable securities. We advanced $21.5 million in forgivable notes (which are inherently illiquid) to employees for the year ended December 31, 2023 ($19.8 million for the year ended December 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 and warehouse facilities. 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 December 31, 2023, bank call loans were zero (zero at December 31, 2022). The average daily bank loan outstanding for the year ended December 31, 2023 was $49.4 million ($79.4 million for the year ended December 31, 2022). The largest daily bank loan outstanding for the year ended December 31, 2023 was $167.3 million ($226.6 million for the year ended December 31, 2022). At December 31, 2023, securities loan balances totaled $285.0 million ($320.8 million at December 31, 2022). The average daily securities loan balance for the year ended December 31, 2023 was $327.0 million ($297.6 million for the year ended December 31, 2022). The largest daily stock loan balance for the year ended December 31, 2023 was $391.5 million ($350.1 million for the year ended December 31, 2022). We finance our government trading operations through the use of securities purchased under agreements to resell ("reverse repurchase agreements") and repurchase agreements. Except as described below, repurchase and reverse repurchase agreements, principally 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. 51 Table of Contents At December 31, 2023, the gross balances of reverse repurchase agreements and repurchase agreements were $8.9 million and $643.4 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the year ended December 31, 2023 was $107.6 million and $547.1 million, respectively ($172.4 million and $356.6 million, respectively, for the year ended December 31, 2022). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the year ended December 31, 2023 was $506.4 million and $806.9 million, respectively ($663.9 million and $668.3 million, respectively, for the year ended December 31, 2022). In connection with both its trading and brokerage activities, Oppenheimer borrows securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date and lends securities to other brokers and dealers for similar purposes. Oppenheimer earns interest on its cash collateral provided and pays interest on the cash collateral received less a rebate earned for lending securities. Liquidity Management We manage our need for liquidity on a daily basis 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 $86.5 million as of December 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. Our reviews have resulted in plans that we believe would result in a reduction of assets through liquidation that would significantly reduce the Company's need for external financing. Our primary long-term cash requirements include $113.1 million principal outstanding as of December 31, 2023 under our Notes (due in 2025) and $183.3 million of operating lease obligations. The total cash requirement for interest expense related to the Notes and operating lease obligations is estimated to be approximately $18.7 million for the 2024 year. Funding Risk (Expressed in thousands) For the Years Ended December 31, 2023 2022 Cash provided by/(used in) operating activities $ (18,810) $ 64,492 Cash used in investing activities (15,561) (14,137) Cash used in financing activities (74,761) (253,912) Net decrease in cash and cash equivalents and restricted cash $ (109,132) $ (203,557) Management believes that funds from operations, combined with our capital base and available credit facilities, are sufficient for our liquidity needs in 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 utilities such as the Options Clearing Corporation (“OCC”) and National Securities Clearing Corp. (“NSCC”) as well as more stringent collateral arrangements with our bank lenders. All such requirements have been met in the ordinary course with available collateral. 52 Table of Contents REGULATORY MATTERS AND DEVELOPMENTS Regulation Best Interest (U.S.) On June 5, 2019, the SEC adopted Regulation Best Interest (“Reg BI”) as Rule 15l-1 under the Exchange Act. Reg BI imposes a federal standard of conduct on registered broker-dealers and their associated persons when dealing with retail clients and requires that a broker-dealer and its representatives act in the best interest of clients and not place its own interests ahead of the customer’s interests. Reg BI does not define the term “best interest” but instead sets forth four distinct obligations, disclosure, care, conflict of interest and compliance that a broker-dealer must satisfy in each transaction. Compliance with Reg BI became effective 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 Advisers Act including but not limited to when a broker-dealer's activity is considered “solely incidental” to its broker-dealer business and is, therefore, not considered investment advisory activity (collectively, the “Reg BI Rules”). Reg BI requires enhanced documentation for recommendations of securities transactions to broker-dealer retail clients as well as the cessation of certain practices and limitations on certain kinds of transactions previously conducted in the normal course of business. The new rules and processes related thereto may limit revenue and have increased, and most likely will continue to increase costs, including, but not limited to, compliance costs associated with new or enhanced technology as well as increased litigation costs. The Company made significant structural, technological and operational changes to our business practices to comply with the requirements of the Reg BI Rules and it is likely that additional changes may be necessary to continue to comply as more experience with the Reg BI Rules is gained. Regulators have commenced reviews of the industry’s compliance with the requirements of Reg BI, including that of the Company. See “Business – Regulation – Fiduciary Standard – Rulemaking by the U.S. Department of Labor and SEC” in Part I, Item 1. On December 18, 2020, the DOL published its final prohibited transaction exemption (“PTE”) addressing investment advice fiduciaries to ERISA plans and IRAs. Similar to the proposal the DOL released in June of 2020 the PTE takes a principles-based (rather than a prescriptive) approach to resolving conflicts that arise under ERISA when an investment advice fiduciary, its affiliate or a related party is paid certain types of compensation (such as commissions, trailing fees or revenue-sharing) or engages in certain principal transactions. The PTE should provide a new and more flexible approach to ERISA compliance for certain types of transactions, which financial institutions may choose to utilize in place of other existing exemptions. Like the proposal (but in contrast to the precursor rule the DOL finalized in April 2016 that the U.S. Court of Appeals for the Fifth Circuit later vacated in June 2018), the PTE does not materially change the scope of fiduciary activities under ERISA, with the exception of including certain rollover-related advice as fiduciary advice. The effective date for compliance with the PTE was February 1, 2022. The Company believes many of the steps taken by the Company to achieve compliance with the Reg BI Rules will enable the Company to comply with the PTE. The Company implemented certain additional processes beyond the actions taken to comply with the Reg BI Rules in order to ensure full compliance with the PTE. Regulatory Environment 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” herein for additional information. Oppenheimer and many of its affiliates are each subject to various regulatory capital requirements. As of December 31, 2023, all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. See “Business – Regulatory - Regulatory Capital Requirements” in Part I, Item 1 and note 19 of the Notes to Consolidated Financial Statements in Item 8 for further information on regulatory capital requirements. Other Regulatory Matters On November 18, 2022, Oppenheimer received an information request from the SEC requesting information related to the use of text messaging and similar forms of electronic communications by employees of Oppenheimer and whether those communications were properly retained by Oppenheimer as part of its records preservation requirements relating to the broker-dealer business activities of Oppenheimer. Subsequently, Oppenheimer received a similar information request from the Commodity Futures Trading Commission (“CFTC”). On January 4, 2024, Oppenheimer submitted an Offer of Settlement to the SEC. On February 9, 2024, the SEC issued an order (the “Order”) pursuant to which Oppenheimer will pay a fine in an amount of $12 million and agree to certain undertakings. In addition to the Order Oppenheimer received a waiver of certain 53 Table of Contents statutory disqualifications from the SEC. On February 7, 2024, Oppenheimer submitted an Offer of Settlement to the CFTC pursuant to which Oppenheimer offered to pay a fine of $1 million and agree to certain undertakings. 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, liquidity and cash flows, business prospects, strategic objectives, projected ventures, new products, anticipated market performance, and similar matters. Words such as “believes,” “expects,” “anticipates,” “estimates,” “will,” “may,” “could,” “should” and “would” are intended to identify forward-looking statements. Forward-looking statements are not guarantees and involve risks, uncertainties and assumptions. 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, (vi) competition from existing financial institutions, new entrants and other participants in the securities markets and financial services industry, (vii) cybersecurity threats, (viii) legal developments affecting the litigation experience of the securities industry and the Company, (ix) changes in foreign, federal and state tax laws that could affect the popularity of products sold by the Company or impose taxes on securities transactions, including the Inflation Reduction Act. (x) the adoption and implementation of the SEC’s “Regulation Best Interest” and other regulations adopted in recent years, (xi) war, terrorist acts and nuclear confrontation as well as political unrest, including events relating to Russia’s invasion of Ukraine and Western sanctions and the Israel-Hamas war and related unrest in the Middle East, (xii) the Company’s ability to achieve its business plan, (xiii) the effects of the economy on the Company’s ability to find and maintain financing options and liquidity, (xiv) credit, operational, legal and regulatory risks, (xv) risks related to foreign operations, including those in the United Kingdom which may be affected by Britain’s January 2020 exit from the EU(“Brexit”) and economic uncertainty in the UK, EU, and elsewhere, (xvi) the effect of technological innovation on the financial services industry and securities business, (xvii) risks related to election results, Congressional gridlock, political and social unrest, government shutdowns and investigations, trade wars, changes in or uncertainty surrounding regulation, and the potential for default by the U.S. government on the nation's debt, (xviii) risks related to changes in capital requirements under international standards that may cause banks to back away from providing funding to the securities industry, and (xix) risks related to the severity and duration of the COVID-19 Pandemic; the COVID-19 Pandemic’s impact on the U.S. and global economies; 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.