# Oppenheimer Holdings Inc: Form 10-Q for the period ended Mar 31, 2020

- Company: [Oppenheimer Holdings Inc](/companies/opy.md) (CIK 791963)
- Form: 10-Q
- Filed: 2020-05-01
- Accepted by EDGAR: May 1, 2020, 08:45 ET
- Period: 2020-03-31
- Accession: 0000791963-20-000012
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/791963/000079196320000012/opy-3312020x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/791963/000079196320000012/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-01-01 to 2020-03-31 | $237.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2020-01-01 to 2020-03-31 | $10.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-01-01 to 2020-03-31 | $6.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-01-01 to 2020-03-31 | $2.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-01-01 to 2020-03-31 | $7.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-01-01 to 2020-03-31 | $0.58 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-01-01 to 2020-03-31 | $0.61 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-01-01 to 2020-03-31 | 13,456,233 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2020-01-01 to 2020-03-31 | −$241.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-01-01 to 2020-03-31 | $1.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2020-01-01 to 2020-03-31 | $1.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2020-01-01 to 2020-03-31 | $8.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-03-31 | $23.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2020-03-31 | $2.14bn | us-gaap:Assets |
| Total liabilities | at 2020-03-31 | $1.55bn | us-gaap:Liabilities |
| Long-term debt | at 2020-03-31 | $148.1m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2020-03-31 | $586.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 49,916 characters.

### BACKGROUND

The condensed consolidated financial statements include the accounts of Oppenheimer Holdings Inc. and its consolidated subsidiaries (together, the "Company", "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.

The Company engages 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, 2020, we provided our services from 93 offices in 25 states located throughout the United States, with offices in Tel Aviv, Israel, Hong Kong, China, London, England, St. Helier, Isle of Jersey, Frankfurt, Germany and Geneva, Switzerland. Client assets under administration as of March 31, 2020 totaled $79.1 billion. The Company provides investment advisory services through OAM and Oppenheimer Investment Management LLC ("OIM") and Oppenheimer's financial adviser direct programs. At March 31, 2020, client assets under management ("AUM") totaled $28.0 billion. 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 offer syndication as well as trading of issued syndicated corporate loans. At March 31, 2020, the Company employed 2,946 employees (2,902 full-time and 44 part-time), of whom 1,029 were financial advisers.

### Outlook

We are focused on growing our private client and asset management businesses through strategic additions of experienced financial advisers 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 also focused on opportunities in our capital market businesses where we can acquire experienced personnel and/or business units that will improve our ability to attract institutional clients in both equities and fixed income without significantly raising our risk profile. In investment banking we are committed to grow our footprint by adding experienced bankers within our existing industry practices.

We continuously invest in and improve our technology platform to support client service and to remain competitive while continuously managing expenses. The Company's long-term growth plan is to continue to expand existing offices by hiring experienced professionals as well as expand through the purchase of operating branch offices from other broker-dealers or the opening of new branch offices in attractive locations, and to continue to grow and develop the existing trading, investment banking, investment advisory and other divisions. We are committed to continuing to improve our technology capabilities to ensure compliance with industry regulations, support client service and expand our wealth management and capital markets capabilities. We 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, investing in people and programs, while providing a platform with first class investment programs and services.

The Company is also reviewing its full service business model to determine the opportunities available to build or acquire closely related businesses in areas where competitors 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 on the basis of fulfilling the Company's strategic goals, while evaluating and managing our existing businesses.

### Impact of Interest Rates

The Federal Reserve Bank implemented a series of increases in its benchmark short-term interest rate between December 2015 and December 2018. These increases in short-term interest rates had a significant positive impact on our overall financial performance, as we have programs offered to our clients (for the investment of short-term funds as well as margin loans) which are sensitive to changes in interest rates. Given the relationship of our interest-sensitive assets to liabilities, increases in short-term interest rates generally result in an overall increase in our net earnings. While clients’ domestic cash sweep balances had decreased over the past several years as clients increased their allocations to other investments, that trend ended in the most recent quarter as market volatility drove client assets into our short-term cash sweep program and other "safe haven" assets.

While the Federal Reserve increased short-term interest rates over the last few years, market deposit rates paid on client cash balances were not impacted to as great a degree, resulting in an increase in fees the Company earned from FDIC insured deposits of clients through a program offered by the Company. Decreases in short-term interest rates, increases in deposit rates paid to clients, and/or a significant decline in our clients’ cash balances would likely have a negative impact on our earnings. During the year ended December 31, 2019, the Federal Reserve decreased its benchmark short-term interest rate three times by 0.25% (0.75% in total). During two separate unscheduled meetings in March 2020, the Federal Reserve lowered short-term interest rates by a total of 1.50%. Accordingly, the Company’s earnings during the first quarter of 2020 were negatively impacted by such decreases. The impact will be more significant on future periods as these indicative rates flow through the system.

### CORONAVIRUS DISEASE 2019 ("COVID-19 PANDEMIC")

On January 30, 2020, the spread of the novel coronavirus was declared a Public Health Emergency of International Concern by the World Health Organization ("WHO"). Subsequently, on March 11, 2020, the WHO characterized the COVID-19 outbreak as a pandemic. The United States now has the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported cases of infected individuals. Several states, including the State of New York, where we are headquartered, have declared states of emergency. Our management is continuously monitoring the situation and providing frequent communications to both external clients and our employee partners. We have adopted enhanced cleaning practices in most of our offices, taken measures to restrict non-essential business travel and have practices in place to quarantine employees who may have been exposed to COVID-19, or show any relevant symptoms. Since early March 2020, the Company implemented a Business Continuity Plan whereby we have requested that the vast majority of our employees work remotely with only a few "essential" employees reporting to our offices. We accomplished this by significantly expanding the use of technology infrastructure that facilitates remote operations. Our ability to avoid significant business disruptions are predicated on the continued facilitation of remote operations. To date, there have been no significant disruptions to our business or control processes as a result of this dispersion of employees.

### EXECUTIVE SUMMARY

The Company reported net income of $7.8 million or $0.61 basic net income per share for the three months ended March 31, 2020 compared with net income of $11.2 million or $0.86 basic net income per share for the three months ended March 31, 2019. Income before income taxes was $10.2 million for the three months ended March 31, 2020 compared with income before income taxes of $16.1 million for the three months ended March 31, 2019. Revenue for the three months ended March 31, 2020 was $234.8 million compared with revenue of $251.8 million for the three months ended March 31, 2019, a decrease of 6.8%.

The performance of the financial markets during the first quarter of 2020 was a tale of two diametrical halves split almost equally. The quarter began with financial markets weathering the threat of war in the Middle East rallying to new highs by mid-February fueled by an easy monetary policy, 50-year record low unemployment, solid corporate earnings, and strong consumer confidence. On February 19, 2020, the S&P 500 index hit an all-time high of 3,386 while the CBOE Volatility Index ("VIX") stood at 14.38, well below its 20-year average of 19.7. Then, as a result of the realization of the seriousness of the COVID-19 Pandemic, the equity markets dramatically reversed course amidst extreme volatility and fell into “bear market territory” in record time. At its low point on March 23, 2020, the S&P 500 was down almost 34% from its all-time high as a reaction to COVID-19 Pandemic-related news and Federal and state government action taken to shut down the U.S. economy. The equities markets then rebounded from their lows during the last week in March in response to the Congressional passage of a $2 trillion economic rescue package and aggressive steps to further ease monetary policy by the Federal Reserve with the S&P 500 closing the quarter down 20%. During this period, the VIX rose sharply before hitting its peak of 82.69 on March 16, 2020 and ended the quarter at 53.54.

As the Federal government and many states began to pass regulatory mandates such as closures of non-essential businesses, "shelter-in place", school closures, and social distancing, economic conditions quickly worsened. The fall-out was widespread as financial market volatility increased, credit quality deteriorated, and liquidity concerns mounted. Unemployment quickly ramped up, amid broad declines in discretionary spending, increasing inventory levels and reduced manufacturing production due to decreased demand, and supply constraints resulting from decreased imports of essential parts from China. During the first quarter of 2020, energy stocks extended already significant declines as oil prices collapsed due to the impact of the abrupt halt to economic activity and as the price war between OPEC and Russia fueled a global oversupply of oil. In late March, oil prices hit an 18-year intraday low by dropping below $20 per barrel before ending the quarter at $20.28.

As the economic toll of the COVID-19 Pandemic began to take hold during the second half of the quarter, the bond market saw a flight to safety as the prices of bonds with credit risks, such as low investment grade and high-yield corporate bonds as well as emerging markets debt, declined significantly. Meanwhile concerns about state and local finances related to the impact of lower sales taxes and much higher expenditures in fighting the COVID-19 Pandemic resulted in dramatic selling of normally “safe” haven assets in municipal bonds. Global investors rushed to the safety of the U.S. government bond market. After beginning the year at 1.92%, the 10-Year Treasury Yield hit an intraday historic low of 0.32% in early March before ending the quarter at 0.70%.

In an effort to restore confidence, in an emergency meeting on Sunday March 16, 2020, the Federal Reserve announced it would cut its benchmark short-term interest rate by 100bps along with a $700 billion quantitative easing program. This followed a 50bps cut to short-term interest rates two weeks prior for a total 150bps decrease during the first quarter of 2020. The effective fed funds rate stood at 8bps at March 31, 2020 with a target range of 0bps to 25bps.

The operating results for the Company were solid up until mid-March when the impact of the COVID-19 Pandemic really began to take its toll on the U.S. economy. The largest impact on our results for the first quarter of 2020 was the decrease in short-term interest rates which had begun to take place in the latter part of 2019. This resulted in a decline of bank deposit sweep income of $15.1 million during the first quarter of 2020 when compared to the first quarter of 2019. We expect the impact to continue with short-term interest rates expected to remain near zero. Our investment banking area was also impacted by the COVID 19 Pandemic's effect on clients' risk appetite and the resulting cancellation of active mandates, although the area showed strong results through the first two months of the year. As a result of early strength in investment banking, results were limited to an 8% decrease. We sustained trading losses of less than $1 million during the period where the equities markets experienced extreme volatility and credit markets saw spreads widen substantially. Since the Company does not have a commercial lending business, we were fortunate to not have any losses due to credit write-downs.

Transaction-based commissions on both the retail and institutional sides were up significantly as clients repositioned their portfolios. Commission revenues ended the period up substantially at 30%. Also, our asset management fees were up 17% during the first quarter of 2020, based on values in client portfolios as of year-end.

As we enter the second quarter of 2020, the government-mandated shutdowns remain a major concern with no certainty around when the restrictions will begin to be lifted or when the economy may resume a normal pattern of growth. The longer these restrictions remain in place the more damage the economy will sustain which may result in an adverse financial impact on many U.S. businesses including the Company.

### RESULTS OF OPERATIONS

The following table and discussion summarizes the changes in the major revenue and expense categories for the three months ended March 31, 2020 compared with the same period in 2019:

*(Expressed in thousands)*

| Revenue | For the Three Months Ended March 31, 2020 | 2019 | % Change |
| --- | ---: | ---: | ---: |
| Commissions | $103,249 | $79,409 | 30.0 |
| Advisory fees | 86,164 | 73,647 | 17.0 |
| Investment banking | 25,728 | 28,043 | (8.3) |
| Bank deposit sweep income | 18,826 | 33,968 | (44.6) |
| Interest | 10,890 | 12,727 | (14.4) |
| Principal transactions, net | (868) | 11,438 | \* |
| Other | (9,219) | 12,538 | \* |
| Total revenue | 234,770 | 251,770 | (6.8) |
| **Expenses** |  |  |  |
| Compensation and related expenses | 157,676 | 160,355 | (1.7) |
| Communications and technology | 19,891 | 20,086 | (1.0) |
| Occupancy and equipment costs | 16,078 | 15,273 | 5.3 |
| Clearing and exchange fees | 5,659 | 5,332 | 6.1 |
| Interest | 6,550 | 12,986 | (49.6) |
| Other | 18,693 | 21,686 | (13.8) |
| Total expenses | 224,547 | 235,718 | (4.7) |
| Income before income taxes | 10,223 | 16,052 | (36.3) |
| Income taxes | 2,405 | 4,858 | (50.5) |
| **Net income** | $7,818 | $11,194 | (30.2) |

\* *Percentage not meaningful.*

### First Quarter 2020 compared to First Quarter 2019

### Revenue

Commission revenue was $103.2 million for the three months ended March 31, 2020, an increase of 30.0% compared with $79.4 million for the three months ended March 31, 2019 due to the significant volatility in the equities markets resulting from the sharp sell-off during the first quarter of 2020.

Advisory fees were $86.2 million for the three months ended March 31, 2020, an increase of 17.0% compared with $73.6 million for the three months ended March 31, 2019. The increase in advisory fees was due to an increase in AUM at December 31, 2019 as a result of the increase in the equities markets and net new assets during the fourth quarter of 2019.

Investment banking revenue decreased 8.3% to $25.7 million for the three months ended March 31, 2020 compared with $28.0 million for the three months ended March 31, 2019.

Bank deposit sweep income was $18.8 million for the three months ended March 31, 2020, a decrease of 44.6% compared with $34.0 million for the three months ended March 31, 2019 due to lower short-term interest rates and lower client balances during the three months ended March 31, 2020.

Interest revenue was $10.9 million for the three months ended March 31, 2020, a decrease of 14.4% compared with $12.7 million for the three months ended March 31, 2019 due to lower margin revenue as a result of lower short-term interest rates during the three months ended March 31, 2020.

Principal transactions revenue was $868,000 (loss) for the three months ended March 31, 2020, compared with $11.4 million for the three months ended March 31, 2019, due primarily to unrealized losses on securities underlying deferred compensation obligations and treasury futures contracts as well as realized losses in municipal trading.

Other revenue was $9.2 million (loss) for the three months ended March 31, 2020, compared to $12.5 million for the three months ended March 31, 2019 primarily due to the decrease in cash surrender value of the Company's life insurance policies during the three months ended March 31, 2020.

### Expenses

Compensation and related expenses totaled $157.7 million during the three months ended March 31, 2020, a decrease of 1.7% compared with the three months ended March 31, 2019. The decrease was due to lower deferred and share-based compensation costs partially offset by higher salaries and production-related compensation costs during the three months ended March 31, 2020. The Company recorded a credit to compensation and related expenses of $3.4 million related to its OARs plan due to the price of its Class A Stock decreasing from $27.48 at the end of the fourth quarter of 2019 to $19.76 at the end of the first quarter of 2020. Compensation and related expenses as a percentage of revenue was 67.2% during the three months ended March 31, 2020 compared with 63.7% during the three months ended March 31, 2019.

Non-compensation expenses were $66.9 million during the three months ended March 31, 2020, a decrease of 11.3% compared with $75.4 million during the three months ended March 31, 2019 due primarily to lower legal and regulatory costs, conference and seminar costs, and interest costs partially offset by higher occupancy and equipment costs and external portfolio management costs during in the first quarter of 2020 .

The effective income tax rate for the three months ended March 31, 2020 was 23.5%, 6.8% lower when compared with 30.3% for the three months ended March 31, 2019. The lower effective tax rate for the first quarter of 2020 was primarily due to tax windfalls related to the vesting of restricted stock awards during the first quarter of 2020 as well as a lower estimate of non-deductible items for the 2020 year.

### BUSINESS SEGMENTS

The table below presents information about the reported revenue and income (loss) before income taxes of the Company's reportable business segments for the three months ended March 31, 2020 and 2019:

*(Expressed in thousands)*

| Revenue | For the Three Months Ended March 31, 2020 | 2019 | % Change |
| --- | ---: | ---: | ---: |
| Private Client | $141,418 | $163,527 | (13.5) |
| Asset Management | 19,276 | 16,586 | 16.2 |
| Capital Markets | 75,542 | 70,961 | 6.5 |
| Corporate/Other | (1,466) | 696 | \* |
| Total | $234,770 | $251,770 | (6.8) |
| **Income (loss) before income taxes** |  |  |  |
| Private Client | $33,369 | $42,834 | (22.1) |
| Asset Management | 4,305 | 2,242 | 92.0 |
| Capital Markets | (143) | (2,647) | 94.6 |
| Corporate/Other | (27,308) | (26,377) | (3.5) |
| Total | $10,223 | $16,052 | (36.3) |

#### \* Percentage not meaningful

### Private Client

Private Client reported revenue of $141.4 million for the first quarter of 2020, 13.5% lower than the first quarter of 2019 due to lower bank deposit sweep income, and decreases in the cash surrender value of Company-owned life insurance partially offset by higher commissions and asset management fees during the first quarter of 2020. Income before income taxes was $33.4 million for the first quarter of 2020, a decrease of 22.1% compared with the first quarter of 2019.

- Client assets under administration were $79.1 billion at March 31, 2020 compared with $90.1 billion at December 31, 2019, a decrease of 12.2%.
- Financial adviser headcount was 1,029 at the end of the first quarter of 2020, down from 1,062 at the end of the first quarter of 2019.
- Retail commissions were $56.9 million for the first quarter of 2020, an increase of 20.9% from the first quarter of 2019.
- Advisory fee revenue on traditional and alternative managed products was $66.9 million for the first quarter of 2020, an increase of 17.3% from the first quarter of 2019 (see Asset Management below for further information). The increase in advisory fees was due to an increase in assets under management ("AUM") at December 31, 2019 as a result of the increase in the equities markets and net new assets during the fourth quarter of 2019.

### Asset Management

Asset Management reported revenue of $19.3 million for the first quarter of 2020, 16.2% higher than the first quarter of 2019 due to higher AUM at December 31, 2019, which is the basis for advisory fees earned during the first quarter of 2020, as a result of the increase in the equities markets and net new assets during the fourth quarter of 2019. Income before income taxes was $4.3 million for the first quarter of 2020, an increase of 92.0% compared with the first quarter of 2019 due to higher AUM at December 31, 2019.

- Advisory fee revenue on traditional and alternative managed products was $19.3 million for the first quarter of 2020, an increase of 16.2% from the first quarter of 2019 primarily due to higher AUM at December 31, 2019.
- Advisory fees are calculated based on the value of client AUM at the end of the prior quarter which totaled $32.1 billion at December 31, 2019 ($26.7 billion at December 31, 2018) and are allocated between the Private Client and Asset Management business segments.
- AUM decreased 5.1% to $28.0 billion at March 31, 2020 compared with $29.5 billion at March 31, 2019, which is the basis for advisory fee billings for the second quarter of 2020. The decrease in AUM was comprised of lower asset values of $2.8 billion on existing client holdings and a positive net contribution of assets of $1.3 billion.

The following table provides a breakdown of the change in assets under management for the three months ended March 31, 2020:

*(Expressed in millions)*

| Fund Type | For the Three Months Ended March 31, 2020 Beginning Balance Contributions | Redemptions |  | Appreciation (Depreciation) | Ending Balance |
| --- | ---: | ---: | ---: | ---: | ---: |
| Traditional (1) | $27,454 | $1,995 | $(1,410) | $(4,689) | $23,350 |
| Institutional Fixed Income (2) | 771 | 4 | (10) | (22) | 743 |
| Alternative Investments: |  |  |  |  |  |
| Hedge funds (3) | 3,190 | 104 | (223) | 97 | 3,168 |
| Private Equity Funds (4) | 284 | 23 | (7) | 9 | 309 |
| Portfolio Enhancement Program (5) | 414 | 8 | — | — | 422 |
|  | $32,113 | $2,134 | $(1,650) | $(4,605) | $27,992 |

(1) Traditional investments include third party advisory programs, Oppenheimer financial adviser

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.

### Capital Markets

Capital Markets reported revenue of $75.5 million for the first quarter of 2020, 6.5% lower than the first quarter of 2019 primarily due to higher commissions partially offset by lower trading income and investment banking revenue. Loss before income taxes was $143,000 for the first quarter of 2020 compared with loss before income taxes of $2.6 million for the first quarter of 2019.

- Institutional equities commissions increased 29.6% to $30.5 million for the first quarter of 2020 compared with the first quarter of 2019 due to the significant volatility in the equities markets resulting from the sharp sell-off during the period.
- Advisory fees earned from investment banking activities decreased 41.3% to $9.8 million for the first quarter of 2020 compared with $16.7 million for the first quarter of 2019 due to a significant slowdown in M&A activity from the economic fallout related to the COVID-19 Pandemic during the first quarter of 2020.
- Equities underwriting fees increased 10.7% to $8.3 million for the first quarter of 2020 compared with $7.5 million for the first quarter of 2019.
- Revenue from taxable fixed income increased to $22.2 million during the first quarter of 2020 from $16.5 million during the first quarter of 2019 due to higher commissions partially offset by lower trading income.
- Revenue from public finance and municipal trading decreased to $2.2 million during the first quarter of 2020 from $5.2 million during the first quarter of 2019 primarily due to lower trading income partially offset by higher gross credits from municipal trading.

### 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 consolidated financial statements and notes thereto found in its Annual Report on Form 10-K for the year ended December 31, 2019.

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 notes thereto found in its Annual Report on Form 10-K for the year ended December 31, 2019. 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, 2020, 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, 2019.

### LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2020, total assets decreased by 13.2% from December 31, 2019. 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 6.75% Senior Secured Notes due 2022 (the "Notes") (see "Refinancing" 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, 2020, the Company had $203.1 million of such borrowings outstanding compared to outstanding borrowings of $nil at December 31, 2019. 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 $4.1 million and $387,020, respectively, at March 31, 2020. 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 $3.2 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. In accordance with the Tax Cuts and Jobs Act ("TCJA"), 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.

### Refinancing

On June 23, 2017, in a private offering, we issued $200.0 million aggregate principal amount of 6.75% Senior Secured Notes due 2022 (the "Unregistered Notes") under an indenture at an issue price of 100% of the principal amount. On September 19, 2017, 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 had been registered under the Securities Act of 1933. We did not receive any proceeds in the exchange offer. Interest on the Notes is payable semi-annually on January 1st and July 1st. We used a portion of the net proceeds from the offering of the Unregistered Notes to redeem in full our 8.75% Senior Secured Notes due April 15, 2018 in the principal amount of $120.0 million, and pay all related fees and expenses related thereto. See note 11 to the condensed consolidated financial statements appearing in Item 1 for further discussion.

On March 30, 2020, S&P affirmed the Company's 'B+' Corporate Family rating and 'B+' rating on the Notes and changed its outlook to stable from positive. On August 19, 2019, Moody's Corporation upgraded the Company's Corporate Family to a ‘B1’ rating and affirmed its 'B1' rating on the Notes and changed its outlook to stable.

On August 25, 2019, the Company redeemed a total of $50.0 million (25%) aggregate principal amount of the outstanding Notes at a redemption price equal to 103.375% (“Call Premium”) of the principal amount redeemed, plus accrued and unpaid interest thereon to the redemption date. During the first quarter of 2020, the Company repurchased $1.4 million of the Notes and paid $22,807 of accrued and unpaid interest. The Company recorded a gain of $85,560 on the repurchase.

As of March 31, 2020, $148.6 million aggregate principal amount of the Notes remains outstanding. See note 11 to the condensed consolidated financial statements appearing in Item 1 for further discussion.

### 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 ARS, are mainly comprised of actively trading readily marketable securities. We advanced $4.5 million in forgivable notes (which are inherently illiquid) to employees for the three months ended March 31, 2020 ($3.7 million for the three months ended March 31, 2019) 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 March 31, 2020, the Company had $203.1 million of bank call loans ($nil at December 31, 2019). The average daily bank loan outstanding for the three months ended March 31, 2020 was $61.8 million ($15.8 million for the three months ended March 31, 2019). The largest daily bank loan outstanding for the three months ended March 31, 2020 was $324.3 million ($76.9 million for the three months ended March 31, 2019).

At March 31, 2020, securities loan balances totaled $181.7 million ($234.3 million at December 31, 2019 and $232.4 million at March 31, 2019). The average daily securities loan balance outstanding for the three months ended March 31, 2020 was $220.0 million ($219.7 million at March 31, 2019). The largest daily stock loan balance for the three months ended March 31, 2020 was $292.0 million ($209.5 million at March 31, 2019).

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.

Certain of our repurchase agreements and reverse repurchase agreements are carried at fair value as a result of the Company's fair value option election. We elected the fair value option for those repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date. We have elected the fair value option for these instruments to more accurately reflect market and economic events in our earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. At March 31, 2020, we did not have any repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date.

At March 31, 2020, the gross balances of reverse repurchase agreements and repurchase agreements were $11.8 million and $135.9 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the three months ended March 31, 2020 was $103.7 million and $468.7 million, respectively ($101.1 million and $369.0 million, respectively, for the three months ended March 31, 2019). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the three months ended March 31, 2020 was $237.0 million and $780.0 million, respectively ($228.2 million and $891.0 million, respectively, for the three months ended March 31, 2019).

At March 31, 2020, the gross leverage ratio was 3.6.

### 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 $57.0 million as of March 31, 2020.

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.

### Funding Risk

*(Expressed in thousands)*

|  | For the Three Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Cash (used in) provided by operating activities | $(241,023) | $15,327 |
| Cash used in investing activities | (1,326) | (3,448) |
| Cash provided by (used in) financing activities | 186,339 | (19,481) |
| Net decrease in cash and cash equivalents | $(56,010) | $(7,602) |

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. Changes in capital requirements under international standards that will impact the costs and relative returns on loans may cause banks including those with whom we rely to 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 the recent period of high volatility, we have seen increased calls for deposits collateral by 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.

### OFF-BALANCE SHEET ARRANGEMENTS

Information concerning our off-balance sheet arrangements is included in note 8 to the condensed consolidated financial statements appearing in Item 1. Such information is hereby incorporated by reference. Also, see "Risk Factors — The Company may continue to be significantly affected by the failure of the Auction Rate Securities Market" in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 as well as Part II, Item 1A "Risk Factors" elsewhere herein for additional details.

### CONTRACTUAL OBLIGATIONS

The following table sets forth the Company's contractual obligations as of March 31, 2020:

*(Expressed in thousands)*

|  | Total | Less than 1 Year 1-3 Years | 3-5 Years |  | More than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating Lease Obligations (1)(2) | $282,036 | $41,945 | $72,275 | $58,414 | $109,402 |
| Committed Capital (3) | 1,399 | 1,399 | — | — | — |
| Senior Secured Notes (4)(5) | 173,673 | 10,028 | 163,645 | — | — |
| ARS Purchase Commitments (3) | 6,074 | 5,667 | 407 |  |  |
| Total | $463,182 | $59,039 | $236,327 | $58,414 | $109,402 |

(1) See note 4 to the condensed consolidated financial statements for additional information.

(2) Includes interest liability of $73.1 million.

(3) See note 13 to the condensed consolidated financial statements for additional information.

(4) See note 11 to the condensed consolidated financial statements for additional information.

(5) Includes interest payable of $25.1 million through maturity.

### CYBERSECURITY

For many years, we have sought to maintain the security of our clients' data, limit access to our data processing environment, and protect our data processing facilities. See "Risk Factors — The Company may be exposed to damage to its business or its reputation by cybersecurity incidents" as further described in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Recent examples of vulnerabilities by other companies and the government that have resulted in loss of client data and fraudulent activities by both domestic and foreign actors have caused us to continuously review our security policies and procedures and to take additional actions to protect our network and our information.

Given the importance of the protection of client data, regulators have developed increased oversight of cybersecurity planning and protections that broker-dealers and other financial service providers have implemented. Such planning and protection are subject to the SEC's and FINRA's oversight and examination on a periodic or targeted basis. We expect that regulatory oversight will intensify, as a result of publicly announced data breaches by other organizations involving tens of millions of items of personally identifiable information. We continue to implement protections and adopt procedures to address the risks posed by the current information technology environment. The Company has significantly increased the resources dedicated to this effort and believes that further increases may be required in the future, in anticipation of increases in the sophistication and persistency of such attacks. As more of our employees have begun working remotely, we have increased our surveillance practices and adapted more stringent programs to protect client data as well as to protect our infrastructure. There can be no guarantee that our cybersecurity efforts will be successful in discovering or preventing a security breach.

### REGULATORY MATTERS AND DEVELOPMENTS

### Regulation Best Interest (U.S.)

On April 18, 2018, the SEC announced its proposed "Regulation Best Interest," a package of rulemakings and interpretations that address customers' relationships with investment advisers and broker-dealers.

On June 5, 2019, the SEC adopted a final version of this rulemaking package that included the adoption of Regulation Best Interest (“Reg BI”) as Rule 15l-1 under the Securities Exchange Act of 1934. Reg BI imposes a new 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 such client 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. The effective date for compliance with Reg BI is June 30, 2020. In addition to passing Reg BI the SEC also adopted rules (i) requiring broker-dealers and investment advisers to provide a written relationship summary to each client, and (ii) clarifying certain interpretations under the Investment Advisers Act of 1940 including but not limited to when a broker-dealer's activity is considered “solely incidental” to its broker-dealer business and is, therefore, not considered investment advisory activity (collectively, the “Reg BI Rules”).

It is too early to predict what all the effects of the Reg BI Rules will have on the Company. However, it appears likely that there will be a need for enhanced documentation for recommendations of securities transactions to broker-dealer retail clients as well as the curtailment of certain practices and limitations on certain kinds of transactions previously carried on in the normal course of business. The new rules and processes related thereto will possibly limit revenue and most likely involve increased costs, including, but not limited to, compliance costs associated with new or enhanced technology as well as increased litigation costs.

As a result of the business disruptions caused by the COVID 19 Pandemic, industry representatives sought an extension of the Reg BI compliance date of June 30, 2020. To date the SEC has given no indication that it plans to extend such date.

The Company has reviewed its business practices and operating models in light of the Reg BI Rules and continues to make structural and operational changes to our business in anticipation of the June 30, 2020 compliance effective date of the Reg BI Rules.

### 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 March 31, 2020, all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. See note 14 of the Notes to Condensed Consolidated Financial Statements in Item 1 for further information on regulatory capital requirements.

### 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, (vi) competition from existing financial institutions, new entrants and other participants in the securities markets and financial services industry, (vii) potential cybersecurity threats, (viii) legal developments affecting the litigation experience of the securities industry and the Company, (ix) changes in foreign, federal and state tax laws that could affect the popularity of products sold by the Company or impose taxes on securities transactions, (x) the adoption and implementation of the SEC’s proposed “Regulation Best Interest” and other regulations adopted in recent years, (xi) war, terrorist acts and nuclear confrontation as well as political unrest, (xii) the Company’s ability to achieve its business plan, (xiii) the effects of the economy on the Company’s ability to find and maintain financing options and liquidity, (xiv) credit, operational, legal and regulatory risks, (xv) risks related to foreign operations, including those in the United Kingdom which may be affected by Britain’s January 2020 exit from the EU(“Brexit”), (xvi) the effect of technological innovation on the financial services industry and securities business, (xvii) risks related to election results, Congressional gridlock, government shutdowns and investigations, trade wars, changes in or uncertainty surrounding regulation and threats of default by the Federal government, and (xviii) risks related to changes in capital requirements under international standards that may cause banks to back away from providing funding to the securities industry, and (xviv) risks related to the severity and duration of the COVID-19 pandemic; the pandemic’s impact on the U.S. and global economies; and Federal, state and local governmental responses to the 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, 2019 as well as "Risk Factors" in Part II, Item 1A below.

## Market risk

As filed, 207 characters.

During the three months ended March 31, 2020, 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, 2019.

## Controls and procedures

As filed, 3,044 characters.

The Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a–15(e) of the Securities Exchange Act of 1934 . Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report.

Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company's disclosure controls and procedures or its internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision–making can be faulty and that break-downs can occur because of a simple error or omission. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based, in part, upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost–effective control system, misstatements due to error or fraud may occur and not be detected.

The Company confirms that its management, including its Chief Executive Officer and its Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in its reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

### Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

## Risk factors

As filed, 3,048 characters.

**In addition to the risk factors identified in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company has identified the following as an additional risk factor. The effects of the outbreak of the novel coronavirus (COVID-19) have negatively affected the global economy, the United States economy and the global financial markets, and may disrupt our operations and our clients' operations, which could have an adverse effect on our business, financial condition and results of operations.**

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The United States now has the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported cases of infected individuals. Several states, including New York, where we are headquartered, have declared states of emergency. Similar impacts have been experienced in every country in which we do business. Impacts to our business could be widespread and global, and material impacts may be possible, including the

following:

- Employees contracting COVID-19
- Reductions in our operating effectiveness as our employees work from home or disaster-recovery locations
- Unavailability of key personnel necessary to conduct our business activities
- Unprecedented volatility in global financial markets
- Reductions in revenue across our operating businesses
- Delay in planned entry into, or expansion of, investments or projects in China and surrounding areas
- Closure of our offices or the offices of our clients
- De-globalization

We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be deemed to be adequate or appropriate, nor can we predict the level of disruption which will occur to our employees' ability to provide customer support and service. The ongoing COVID-19 Pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for our own securities. The further spread of the COVID-19 outbreak may materially disrupt banking and other financial activity generally and in the areas in which we operate. This would likely result in a decline in demand for our products and services, which would negatively impact our liquidity position and our growth strategy. Any one or more of these developments could have a material adverse effect on our and our consolidated subsidiaries' business, operations, consolidated financial condition, and consolidated results of

operations.

Filed May 1, 2020.
Source: SEC EDGAR, the filing index for accession 0000791963-20-000012. Last ingested by Listed: Nov 9, 2026, 19:54 ET. No prices; not investment advice.