OPPENHEIMER HOLDINGS INC 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND The condensed consolidated financial statements include the accounts of Oppenheimer Holdings Inc. and its consolidated subsidiaries (together, the "Company", "Firm", "Parent", "we", "our" or "us"). The Company's condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto which appear elsewhere in this quarterly report. Oppenheimer Holdings Inc., through its operating subsidiaries, is a leading middle market investment bank and full service broker-dealer that is engaged in a broad range of activities in the securities industry, including retail securities brokerage, institutional sales and trading, market-making, research, investment banking (both corporate and public finance), investment advisory and asset management services and trust services. Its principal subsidiaries are Oppenheimer & Co. Inc. ("Oppenheimer") and Oppenheimer Asset Management Inc. ("OAM"). As of March 31, 2024, we provided our services from 89 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, Portugal and Geneva, Switzerland. The Company provides investment advisory services through OAM and Oppenheimer Investment Management LLC ("OIM") and Oppenheimer's financial advisor directed programs. At March 31, 2024, client assets under management ("AUM") totaled $46.6 billion. AUM includes the total market value of client investments in discretionary and non-discretionary advisory programs as well as the net asset value of private placements of alternative investments offered by and held by clients of the Firm. Client assets under administration ("CAUA") as of March 31, 2024 totaled $124.9 billion. CAUA includes AUM and the other assets held 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., we conduct our secondary trading activities related to the purchase and sale of loans, primarily on a riskless principal basis. At March 31, 2024, the Company employed 2,951 employees (2,911 full-time and 40 part-time), of whom 936 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, including integrating new technology platforms to expand the suite of services offered to our clients and onboarding experienced personnel and/or small units that will improve our ability to attract institutional clients in both equities and fixed income without significantly raising our risk profile. In investment banking, we are committed to 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 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. 36 Table of Contents Impact of Change in Short-term Interest Rates At its meetings in first quarter of 2024, the Federal Reserve (the “FED”) unanimously decided to hold the target federal funds rate steady at 5.25% to 5.50% – a 23-year high and the fifth consecutive meeting with no target rate change. While the market generally expected that the FED would ease rates to some extent in 2024 given the strong performance of the U.S. economy and low unemployment levels, the FED has held them at their current, more restrictive range since the outset of the year given higher than anticipated inflationary readings and the FED’s desire for inflation to return to its 2% long-term target. The FED’s median forecast currently projects three rate decreases during 2024, though this is subject to change and the market believes that these restrictive conditions will likely continue. Potential decreases to the federal funds rate may result in reduced interest-based revenues though any future federal funds rate increases may improve these revenues. While decreases in interest rates will lower fees the Company earns from FDIC insured deposits of clients through a program offered by the Company, such decreases may be offset to a degree if the cash sweep balances increase as clients find fewer higher-yielding alternatives to deploy these balances. Future rate decreases will also reduce the rates the Company charges on margin balances which will have a negative 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. EXECUTIVE SUMMARY The Firm registered outstanding operating results for the first quarter of 2024, reflecting the solid performance of our investment banking franchise amidst an improving capital market and strong results from our Wealth Management Business responding to the impact of rising equity markets. Our overall performance was favorably impacted by improving macroeconomic conditions, highlighted by the continued rise of the equity markets with the S&P reaching record highs owing to positive economic data and expectations that the Federal Reserve will pivot to reducing rates in the second half of the year. The stock market rally propelled assets under management within our Wealth Management business to all-time highs, which drove a large increase in AUM-based advisory fee revenue when compared with the prior year period. We also saw encouraging signs of improvement in the capital raising environment, as our investment banking results were boosted by a meaningful uptick in the number of private placement and underwriting transactions in our pipeline that crystallized during the quarter. The still-high interest rate environment boded well for our fixed income division, which saw continued strength within its sales and trading revenue largely due to higher volumes and increased volatility. Higher rates also benefited several of our other interest-sensitive revenue streams, though we did see a pullback in FDIC sweep deposit balances which reduced these revenues. The Company ended the quarter on a high note with record book value per share levels resulting from positive earnings and share repurchases. Our strong balance sheet and ample capital levels have us well-positioned for growth and to continue providing value added investment services to our clients. RESULTS OF OPERATIONS The Company reported net income of $26.1 million or $2.50 basic earnings per share for the first quarter of 2024, compared with net income of $14.6 million or $1.32 per share for the first quarter of 2023. Revenue for the first quarter of 2024 was $353.1 million, an increase of 9.8% compared to revenue of $321.7 million for the first quarter of 2023. 37 Table of Contents (Expressed in thousands, except Per Share Amounts or otherwise indicated) 1Q-2024 1Q-2023 Change % Change Revenue $ 353,138 $ 321,679 $ 31,459 9.8 Compensation expense $ 221,713 $ 206,292 $ 15,421 7.5 Non-compensation expense $ 93,970 $ 96,338 $ (2,368) (2.5) Pre-tax Income $ 37,455 $ 19,049 $ 18,406 96.6 Income taxes provision $ 11,711 $ 4,585 $ 7,126 155.4 Net Income (1) $ 26,054 $ 14,617 $ 11,437 78.2 Earnings per share (basic) (1) $ 2.50 $ 1.32 $ 1.18 89.4 Earnings per share (diluted) (1) $ 2.37 $ 1.22 $ 1.15 94.3 Book Value Per Share $ 77.47 $ 72.27 $ 5.20 7.2 Tangible Book Value Per Share (2) $ 60.41 $ 56.92 $ 3.49 6.1 Class A Shares Outstanding 10,247,197 10,975,723 (728,526) (6.6) AUA ($ billions) $ 124.9 $ 108.9 $ 16.0 14.7 AUM ($ billions) $ 46.6 $ 39.3 $ 7.3 18.6 (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 first quarter of 2024 was primarily driven by a significant improvement in private placement and underwriting-related fees generated by our investment banking business, higher advisory fees attributable to a rise in billable AUM as well as continued strength in fixed income sales and trading revenue. • Assets under administration and under management were both at record levels at March 31, 2024, benefiting from market appreciation and positive net asset flows. • Compensation expenses increased from the prior year quarter largely as a result of higher base salary expense associated with opportunistic new hires and inflationary pressures on wages in addition to higher production-related expenses. • Non-compensation expenses decreased from the prior year quarter primarily due to lower legal costs partially offset by higher interest expense. • Book value and tangible book value per share reached new record highs as a result of positive earnings and share repurchases. BUSINESS SEGMENTS The table below presents information about the reported revenue and pre-tax income (loss) of the Company's reportable business segments for the three months ended March 31, 2024 and 2023: 38 Table of Contents (Expressed in thousands) For the Three Months Ended March 31, 2024 2023 % Change Revenue Private Client $ 213,033 $ 203,421 4.7 Asset Management 24,928 23,959 4.0 Capital Markets 112,083 90,282 24.1 Corporate/Other 3,094 4,017 (23.0) Total $ 353,138 $ 321,679 9.8 Pre-Tax Income (Loss) Private Client $ 68,151 $ 54,456 25.1 Asset Management 7,634 6,481 17.8 Capital Markets (6,702) (15,477) (56.7) Corporate/Other (31,628) (26,411) 19.8 Total $ 37,455 $ 19,049 96.6 Private Client Private Client reported revenue for the current quarter of $213.0 million, 4.7% higher compared with a year ago mostly due to higher advisory fees driven by appreciation in AUM and an increase in commission revenue. Pre-tax income of $68.2 million in the current quarter resulted in a pre-tax margin of 32.0%. Financial advisor headcount at the end of the current quarter was 936 compared to 959 and 931 at the end of the first quarter of 2023 and fourth quarter of 2023, respectively. ('000s unless otherwise indicated) 1Q-2024 1Q-2023 Change % Change Revenue $ 213,033 $ 203,421 $ 9,612 4.7 Retail commissions $ 52,794 $ 46,636 $ 6,158 13.2 Advisory fee revenue $ 88,876 $ 76,583 $ 12,293 16.1 Bank deposit sweep income $ 36,685 $ 48,909 $ (12,224) (25) Interest $ 20,196 $ 20,579 $ (383) (1.9) Other $ 14,482 $ 10,714 $ 3,768 35.2 Total Expenses $ 144,882 $ 148,965 $ (4,083) (2.7) Compensation $ 109,148 $ 95,074 $ 14,074 14.8 Non-compensation $ 35,734 $ 53,891 $ (18,157) (33.7) Pre-tax Income $ 68,151 $ 54,456 $ 13,695 25.1 Compensation Ratio 51.2 % 46.7 % 450 9.6 Non-compensation Ratio 16.8 % 26.5 % (970) (36.6) Pre-tax Margin 32.0 % 26.8 % 5.2 % 19.4 Asset Under Administration (billions) $ 124.9 $ 108.9 $ 16.0 14.7 Cash Sweep Balances (billions) $ 3.2 $ 4.4 $ (1.2) (27.3) • Retail commissions increased 13.2% from a year ago primarily due to higher retail trading activity • Advisory fees increased 16.1% due to higher AUM during the billing period for the current quarter when compared to the first quarter of last year and increased net new client assets • Bank deposit sweep income decreased $12.2 million from a year ago due to lower cash sweep balances • Interest revenue was relatively flat with the prior year period 39 Table of Contents • Other revenue increased from a year ago primarily due to increases in the cash surrender value of Company-owned life insurance policies, which fluctuates based on changes in the fair value of the policies' underlying investments • Compensation expenses increased 14.8% from a year ago primarily due to higher production related expenses • Non-compensation expenses decreased 33.7% from a year ago primarily due to lower legal costs Asset Management Asset Management reported revenue for the current quarter of $24.9 million, 4.0% higher when compared with the prior year period. Pre-tax income was $7.6 million, an increase of $1.2 million compared with the prior year period. ('000s unless otherwise indicated) 1Q-2024 1Q-2023 Change % Change Revenue $ 24,928 $ 23,959 $ 969 4.0 Advisory fee revenue $ 25,960 $ 23,954 $ 2,006 8.4 Other $ (1,032) $ 5 $ (1,037) * Total Expenses $ 17,294 $ 17,478 $ (184) (1.1) Compensation $ 6,424 $ 7,615 $ (1,191) (15.6) Non-compensation $ 10,870 $ 9,863 $ 1,007 10.2 Pre-tax Income $ 7,634 $ 6,481 $ 1,153 17.8 Compensation Ratio 25.8 % 31.8 % (600) (18.9) Non-compensation Ratio 43.6 % 41.2 % 240 5.8 Pre-tax Margin 30.6 % 27.1 % 3.5 % 12.9 AUM (billions) $ 46.6 $ 39.3 $ 7.3 18.6 *Percentage not meaningful • Advisory fee revenue increased 8.4% from a year ago due to increased management fees resulting from the higher net value of billable AUM during the quarter and increased net new client assets • Other revenue decreased $1.0 million from a year ago due to a decrease in the fair value of the positions held in private equity funds • AUM increased to $46.6 billion at March 31, 2024, a new record high, which is the basis for advisory fee billings for April 2024 • The increase in AUM was comprised of higher asset values of $7.1 billion on existing client holdings and a net contribution of $0.2 billion in new client assets • Compensation expenses were down 15.6% from a year ago which was due to decreases in incentive compensation • Non-compensation expenses were up 10.2% when compared to the prior year period mostly due to higher external portfolio management costs which are directly related to the increase in billable AUM 40 Table of Contents The following table provides a breakdown of the change in assets under management for the three months ended March 31, 2024: (Expressed in millions) For the Three Months Ended March 31, 2024 Fund Type Beginning Balance Contributions Redemptions/Profit Distribution Appreciation (Depreciation) Ending Balance Traditional (1) $ 38,143 $ 2,023 $ (2,098) $ 2,423 $ 40,491 Institutional Fixed Income (2) 852 100 -17 (93) 6 865 Alternative Investments: Hedge funds (3) 3,463 24 (160) 504 3,831 Private Equity Funds (4) 1,107 15 (12) (14) 1,096 Portfolio Enhancement Program (5) 305 6 (11) — 300 $ 43,870 $ 2,168 $ (2,374) $ 2,919 $ 46,583 (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. 41 Table of Contents Capital Markets Capital Markets reported revenue for the current quarter of $112.1 million, 24.1% higher when compared with the prior year period. Pre-tax loss was $6.7 million, compared with pre-tax loss of $15.5 million in the prior year period. ('000s) 1Q-2024 1Q-2023 Change % Change Revenues $ 112,083 $ 90,282 $ 21,801 24.1 Investment Banking $ 47,918 $ 36,281 $ 11,637 32.1 Advisory fees $ 31,868 $ 27,937 $ 3,931 14.1 Equities underwriting $ 13,179 $ 7,343 $ 5,836 79.5 Fixed income underwriting $ 2,447 $ 897 $ 1,550 172.8 Other $ 424 $ 104 $ 320 307.7 Sales and Trading $ 63,659 $ 53,379 $ 10,280 19.3 Equities $ 30,266 $ 31,686 $ (1,420) (4.5) Fixed Income $ 33,393 $ 21,693 $ 11,700 53.9 Other $ 506 $ 622 $ (116) (18.6) Total Expenses $ 118,785 $ 105,759 $ 13,026 12.3 Compensation $ 81,588 $ 76,796 $ 4,792 6.2 Non-compensation $ 37,197 $ 28,963 $ 8,234 28.4 Pre-tax Loss $ (6,702) $ (15,477) $ 8,775 * Compensation Ratio 72.8 % 85.1 % (1,230) (14.5) Non-compensation Ratio 33.2 % 32.1 % 110 3.4 Pre-tax Margin (6.0) % (17.1) % 11.1 % (64.9) *Percentage not meaningful • Advisory fees earned from investment banking activities increased 14.1% compared with a year ago due to higher transaction volumes, particularly in the healthcare industry • Equity underwriting fees increased 79.5% when compared with a year ago due to higher new issuance volumes • Fixed income underwriting fees were modestly higher than the prior year • Equities sales and trading revenue was relatively flat with the prior year • Fixed income sales and trading revenue increased 53.9% compared with a year ago primarily due to an increase in trading income attributable to higher volumes and market volatility • Compensation expenses increased 6.2% compared with a year ago primarily due to costs associated with opportunistic hiring and higher deferred compensation costs • Non-compensation expenses were 28.4% higher than a year ago primarily due to an increase in interest expense in financing trading 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, 2023. 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 42 Table of Contents thereto found in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Certain of those policies are considered to be particularly important to the presentation of the Company's financial results because they require management to make difficult, complex or subjective judgments, often as a result of matters that are inherently uncertain. During the three months ended March 31, 2024, 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, 2023. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2024, total assets increased by 13.1% from 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 repurchase agreements. We met our longer-term capital needs through the issuance of the 5.50% Senior Secured Notes due 2025 (see "Senior Secured Notes" below). Oppenheimer has arrangements with banks for borrowings on a fully collateralized basis. The amount of Oppenheimer's bank borrowings fluctuates in response to changes in the level of the Company's securities inventories and customer margin debt, changes in notes receivable from employees, investment in furniture, equipment and leasehold improvements, and changes in stock loan balances and financing through repurchase agreements. At March 31, 2024, the Company had bank call loans of $94.4 million compared to zero at December 31, 2023. 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 $383,296, respectively, at March 31, 2024. The liquid assets at Oppenheimer Europe Ltd. are primarily comprised of cash deposits in bank accounts. The liquid assets at Oppenheimer Investments Asia Limited are primarily comprised of investments in U.S. Treasuries and cash deposits in bank accounts. Any transfer of these liquid assets from Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited to the Company or its other subsidiaries would be limited by regulatory capital requirements. The Company permanently reinvests eligible earnings of its foreign subsidiaries and, accordingly, does not accrue any U.S. income taxes that would arise if these earnings were repatriated. The unrecognized deferred tax liability associated with the outside basis difference of its foreign subsidiaries is estimated at $3.5 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. 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 first quarter of 2023, the Company repurchased and subsequently cancelled $1.0 million of the Notes, recognizing a small extinguishment gain. As of March 31, 2024, $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. 43 Table of Contents 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 Guarantor’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 selected financial information as of March 31, 2024 and for the three months ended March 31, 2024 for the Parent and Subsidiary Guarantors. (Expressed in thousands) As of March 31, 2024 Total Assets $ 2,130,167 Due From Non-Guarantor Subsidiary 17,634 Total Liabilities 584,895 Due To Non-Guarantor Subsidiary 72,244 For the Three Months Ended March 31, 2024 Total Revenue $ 2,612 Pre-Tax Income (Loss) (201) Net Income (Loss) (79) S&P’s Corporate Family rating and 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 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 are mainly comprised of actively traded readily marketable securities. We issued $4.5 million in forgivable notes (which are inherently illiquid) to employees for the three months ended March 31, 2024 ($1.9 million for the three months ended March 31, 2023) 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. 44 Table of Contents We obtain short-term borrowings primarily through bank call loans. Bank call loans are generally payable on demand and bear interest at various rates. At March 31, 2024, the Company had $94.4 million of bank call loans (zero at December 31, 2023). The average daily bank loan outstanding for the three months ended March 31, 2024 was $57.8 million ($57.5 million for the three months ended March 31, 2023). The largest daily bank loans outstanding for the three months ended March 31, 2024 was $164.9 million ($167.3 million for the three months ended March 31, 2023). At March 31, 2024, securities loan balances totaled $298.0 million ($285.0 million at December 31, 2023 and $368.1 million at March 31, 2023). The average daily securities loan balance outstanding for the three months ended March 31, 2024 was $303.4 million ($341.4 million for the three months ended March 31, 2023). The largest daily stock loan balance for the three months ended March 31, 2024 was $335.7 million ($388.4 million for the three months ended March 31, 2023). 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. At March 31, 2024, the gross balances of reverse repurchase agreements and repurchase agreements were $578.8 million and $861.1 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the three months ended March 31, 2024 was $122.9 million and $809.3 million, respectively ($179.0 million and $283.1 million, respectively, for the three months ended March 31, 2023). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the three months ended March 31, 2024 was $578.4 million and $1.1 billion, respectively ($506.4 million and $634.9 million, respectively, for the three months ended March 31, 2023). 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 $95.2 million as of March 31, 2024. 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 $112.7 million principal outstanding, net of debt issuance costs as of March 31, 2024 under our Senior Secured Notes (due in 2025) and $177.3 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 $13.9 million for the remainder of 2024. 45 Table of Contents Funding Risk (Expressed in thousands) For the Three Months Ended March 31, 2024 2023 Cash used in operating activities $ (79,048) $ (86,123) Cash used in investing activities (258) (2,976) Cash provided by (used in) financing activities 78,132 7,033 Net decrease in cash, cash equivalents and restricted cash $ (1,174) $ (82,066) Management believes that funds from operations, combined with our capital base and available credit facilities, are sufficient for our liquidity needs for the foreseeable future. Under some circumstances, banks including those on whom we rely may back away from providing funding to the securities industry. Such a development might impact our ability to finance our day-to-day activities or increase the costs to acquire funding. We may or may not be able to pass such increased funding costs on to our clients. During periods of high volatility, we have seen increased calls for deposits of collateral to offset perceived risk between the Company's settlement liability to industry clearinghouses such as the Options Clearing Corporation (“OCC”) and National Securities Clearing Corp. (“NSCC”) as well as more stringent collateral arrangements with our bank lenders. All such requirements have been and will be met in the ordinary course with available collateral. CYBERSECURITY Cybersecurity presents significant challenges to the business community in general, including to the financial services industry. Increasingly, bad actors, both domestic and international, attempt to steal personal data and/or interrupt the normal functioning of businesses through accessing individuals' and companies' files and equipment connected to the internet. Recent incidents have reflected the increasing sophistication of intruders and their intent to steal personally identifiable information as well as funds and securities. These intruders sometimes use instructions that are seemingly from authorized parties but in fact, are from parties intent on attempting to steal. In other instances these intruders attempt to bypass normal safeguards and disrupt or steal significant amounts of information and then either release it to the Internet or hold it for ransom. Regulators are increasingly requiring companies to provide heightened levels of sophisticated defenses. The Company maintains processes and systems with an aim to preventing any such attack from disrupting its services to clients as well as to prevent any loss of data concerning its clients, their financial affairs, as well as Company privileged information. Our management is actively involved in the oversight of our cybersecurity risk management program, We have devoted significant financial and personnel resources to implement and maintain security measures to meet regulatory requirements and customer expectations. We have incorporated cybersecurity processes to assess, identify and manage risks from cybersecurity threats into our overall risk assessment process. The Company maintains a cybersecurity program that is designed to identify, protect from, detect, respond to, and recover from cybersecurity threats and risks, and protect the confidentiality, integrity, and availability of its information systems, including the information residing on such systems. The National Institute of Standards and Technology Cybersecurity Framework helps the Company inform its cybersecurity agenda and prioritize its cybersecurity activities. The Company takes a risk-based approach to cybersecurity, which begins with the identification and evaluation of cybersecurity risks or threats that could affect the Company’s operations, finances, legal or regulatory compliance, or reputation. The Company has processes in place for assessing, identifying and managing material risks from cybersecurity threats along with risk assessment procedures designed to allow such processes to remain responsive to emerging risks. Our processes include, but are not limited to, the following: • we engage third-party cybersecurity firms and tools to assist with network monitoring, endpoint protection, vulnerability assessments and penetration testing; • we engage cyber security consultants, auditors, and other third parties to assess and enhance our cybersecurity practices, such as to perform tabletop exercises and evaluate our cyber processes including an assessment of our incident response procedures. Identified risks are formally tracked until mitigated or eliminated; • we perform regular scanning of our systems to identify and resolve critical vulnerabilities; • we provide periodic training and testing, including phishing tests, to help our employees understand cybersecurity risks and their responsibility in mitigating those risks; and 46 Table of Contents • we insure against potential losses from cyber incidents by maintaining cybersecurity insurance. We have a written incident response plan that identifies the steps to be taken in response to a cybersecurity incident that includes investigation, escalation and remediation provisions. The incident response plan includes standard processes for reporting and escalating cybersecurity incidents to senior management. We have processes to evaluate third party service providers and vendors that have access to sensitive systems and Company and customer data, which may include the use of cybersecurity questionnaires and due diligence procedures such as assessments of that service provider’s cybersecurity posture. Management’s Role Management has implemented risk management structures, policies and procedures, and manages our risk exposure on a day-to-day basis. The Company has a dedicated cybersecurity organization within its technology department that focuses on current and emerging cybersecurity matters. The Company’s cybersecurity function is led by the Company’s Chief Information Officer ("CIO") and the Company’s Chief Information Security Officer ("CISO"), who reports to the Company’s CIO. The CIO and his direct reports, including the CISO, discuss action items related to risks at a standing monthly meeting. The CISO and many members of his team have multiple decades of cybersecurity related experience. Risk reporting is provided at monthly meetings of the Firm’s cross-business Cybersecurity Committee and periodic presentations to the Firm’s Risk Management Committee, at which many members of the Company’s senior management are present. The CEO meets regularly with the CIO to discuss cybersecurity threats and existing and potentially new technology systems including those related to cybersecurity. The CIO and CISO have a standing monthly meeting with the President and General Counsel to discuss potential vulnerabilities in the cyber environment. The President formerly ran the Information Technology Department at the firm and as a result has significant systems experience including experience related to cybersecurity. Board Oversight The Board of Directors, both directly and through the Audit Committee, oversees Management’s responsibility of ensuring proper functioning of our cybersecurity risk management program. In particular, the Audit Committee assists the Board in its oversight of management’s responsibility to assess, manage and mitigate cybersecurity risks. The Audit Committee receives a cybersecurity update at each regular meeting of the Board covering cybersecurity risks, cybersecurity staffing and staff development including certifications and training. These updates are given either in person by the CIO and CISO or in written presentations created by them. As of the date of this filing, the Company has not identified any cybersecurity threats that have materially affected or are reasonably anticipated to have a material effect on the Company’s business strategy, results of operations or financial condition. Although the Company has not experienced cybersecurity incidents that are individually, or in the aggregate, material, the Company has experienced cyberattacks in the past, which the Company believes have thus far been mitigated by preventative, detective, and responsive measures put in place by the Company. Given the continuing reports of cyber incidents in general, we believe that the Company will most likely continue to be a target of cybersecurity attacks by bad actors. 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”). 47 Table of Contents 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 Department of Labor ("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 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 have enabled and 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, 2023 for additional information. Oppenheimer and many of its affiliates are each subject to various regulatory capital requirements. As of March 31, 2024, 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 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 statutory disqualifications from the SEC. On February 7, 2024, Oppenheimer submitted an Offer of Settlement to the CFTC. On March 19, 2024, the CFTC issued an order pursuant to which Oppenheimer will 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, 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 48 Table of Contents markets and financial services industry, (vii) potential cybersecurity threats and attacks, (viii) legal developments affecting the litigation experience of the securities industry and the Company, (ix) changes in foreign, federal and state tax laws that could affect the popularity of products sold by the Company or impose taxes on securities transactions, (x) the adoption and implementation of the SEC’s “Regulation Best Interest” and other regulations adopted in recent years, (xi) war, terrorist acts and nuclear confrontation as well as political unrest, including events relating to the Israel-Hamas war and related unrest in the Middle East and 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 Annual Report on Form 10-K for the year ended December 31, 2023. 49 Table of Contents Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the three months ended March 31, 2024, 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, 2023. 50 Table of Contents