Siebert Financial Corp. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Siebert is a discount brokerage and investment banking firm; results also include its equity-method interests in two affiliates. Interim financial statements are unaudited.
Financial performance and position
- Revenue: $4.266 million, down 34.9% from $6.553 million. Commissions and fees fell 42.1% to $2.985 million; investment banking revenue rose 43.4% to $730,000; trading profits fell 38.0% to $535,000; interest and dividends were $16,000.
- Profitability: Net loss was $1.369 million, versus net income of $625,000; diluted loss per share was $0.06, versus earnings per share of $0.03. Expenses declined 14.4% to $4.941 million, but exceeded revenue. Loss from equity investees increased to $694,000 from $154,000.
- Cash flow: Operating cash use was $143,000, compared with $416,000 in Q1 2012. Investing activities used $109,000 and financing activities used $16,000. Cash and cash equivalents ended the quarter at $18.634 million, down $268,000 during the quarter.
- Liquidity and capital: Total assets were $31.779 million, including $18.634 million of cash and $1.532 million of restricted cash; management described approximately $20 million, or 63.5% of assets, as highly liquid. Siebert’s regulatory net capital was approximately $16.751 million, versus a $250,000 minimum.
- Debt and liabilities: The balance sheet reports $2.124 million of accounts payable and accrued liabilities and no separate conventional debt balance. Siebert has an obligation to lend SBS up to $1.2 million on a subordinated basis; the arrangement is collateralized by $1.532 million of restricted cash and expires August 31, 2014.
- Equity: Stockholders’ equity was $29.655 million, down from $31.040 million at year-end 2012, primarily reflecting the quarterly loss and treasury-share purchases.
Changes and management commentary
- Retail trades fell to 84,878 from 103,123, and average commission per retail trade declined to $22.64 from $31.75. Retail margin debit balances were $186 million, versus $237 million; customer accounts with positions declined to 40,904 from 44,003.
- Management attributed weaker commissions to lower retail activity and margin-debit fees, as well as reduced institutional commissions and commission-recapture activity. Lower debt-market riskless-principal volume and the loss of a debt sales-trader also reduced trading profits.
- Investment banking improved due to participation in more equity and debt new issues. Expense reductions in compensation, clearing, communications, advertising, and general and administrative costs partly offset revenue declines.
- Affiliate losses weighed materially on results: SBS reported a $1.229 million loss, of which Siebert’s share was $602,000; SBS Financial Products Company reported a $275,000 loss, of which Siebert’s share was $92,000. SBS had $7.8 million of Siebert’s share of undistributed earnings, which may not be immediately available for distribution.
Outlook, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management cautions that results are sensitive to market activity, trading volumes and prices, interest rates, demand for brokerage and investment banking services, and intense competition; reduced activity can hurt profitability because some expenses are relatively fixed. Management also cites customer nonpayment, trading errors, technology failures, and regulatory capital requirements as risks.
- Professional fees included costs of an unresolved arbitration brought by a former employee. Management considers the action without merit, but defense costs may continue.
- Siebert previously paid $1 million to settle claims related to Lehman Brothers offerings; additional liability remains possible, and the company cannot determine the potential amount, if any.
- Routine legal matters were described as not expected to have a material adverse effect. Management reported no material change to the risk factors in the 2012 Form 10-K and stated disclosure controls were effective.
- No tax benefit was recognized on the 2013 loss because deferred tax assets were fully offset by a valuation allowance. The filing says results for this quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether retail trading, commission levels, and margin debits stabilize or continue to decline.
- The performance and cash needs of SBS and SBS Financial Products Company, and the timing and availability of any affiliate distributions.
- The duration and cost of the former employee arbitration and any potential additional Lehman-related liability.
- Whether highly liquid resources and regulatory net capital remain adequate, including the status of restricted cash and the SBS lending arrangement.
- The filing reports 9,906 shares repurchased in Q1 2013 at an average $1.56 per share, with 173,223 shares remaining under the authorized program at quarter-end.