Siebert Financial Corp. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Financial statements are unaudited. Siebert Financial Corp. provides brokerage and investment banking services and reports equity-method results from affiliates, including municipal underwriter Siebert, Brandford, Shank & Co. (SBS).
Financial results and position
- Revenue: $3.718 million, down 12.8% from $4.266 million in Q1 2013. Commissions and fees were $2.980 million; investment banking revenue was $435,000; trading profits were $289,000; interest and dividends were $14,000.
- Profitability: Net income was $28,000 versus a $1.369 million net loss a year earlier; reported diluted EPS was $0.00 versus $(0.06). Expenses were $4.416 million, down 10.6%. Before income from equity investees, the company had a $698,000 loss; $726,000 of equity income, principally from SBS, brought it to reported net income. Approximate net margin was 0.8%.
- Cash flow: Operating cash use was $1.063 million, compared with $143,000 in Q1 2013. Investing cash use was $171,000; financing cash flow was zero. Cash and cash equivalents declined $1.234 million during the quarter to $14.190 million.
- Liquidity and capital: Total assets were $27.191 million and stockholders’ equity was $25.137 million at March 31, 2014. Cash equivalents of $1.532 million were restricted as collateral for the SBS lending arrangement. Management identified $14.2 million, or 52.2% of assets, as highly liquid. Siebert’s regulatory net capital was approximately $12.506 million, $12.256 million above its $250,000 minimum.
- Debt and obligations: The balance sheet reports $2.054 million of accounts payable and accrued liabilities and no debt line item. Siebert is obligated to lend SBS up to $1.2 million on a subordinated basis; any amount lent bears 4% interest and is repayable August 31, 2015. The balance sheet includes the related $1.2 million receivable from SBS within investments in and advances to affiliates.
Changes versus Q1 2013
- Revenue fell $548,000, mainly due to lower investment banking revenue (down 40.4%) and trading profits (down 46.0%); commissions and fees were essentially flat.
- Retail trades declined to 80,782 from 81,982, and average commission per retail trade fell to $20.16 from $23.44. Retail customer margin debit balances increased to $240 million from $186 million, while accounts with positions declined to 34,871 from 40,904.
- Expenses decreased $525,000, including lower compensation, clearing, professional, advertising, communications and occupancy costs. Other general and administrative expense increased $46,000.
- Equity-investee results improved to $726,000 of income from a $694,000 loss in the prior-year quarter. SBS reported $1.481 million of net income versus a $1.229 million loss; the company recorded $726,000 of its share. SBSFPC operations were being phased out and contributed no income or loss in Q1 2014.
Outlook, risks and unusual items
- The filing provides no numerical guidance or specific forecast. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Management cites intense brokerage competition and sensitivity to market activity, securities prices and volumes, interest rates, customer demand, and trading opportunities. Lower market activity can hurt profitability because some costs are relatively fixed.
- An arbitration proceeding brought by a former employee remains unresolved. Management considers the action without merit, but defense costs have adversely affected results and may continue to do so. Management says routine claims and lawsuits are not expected to have a material adverse effect.
- Siebert bears potential loss exposure if customers fail to meet obligations on unsettled transactions; no material losses were reported for the periods discussed. The filing also identifies risks including systems failures, trading errors, customer nonpayment, competition, and regulatory capital requirements.
- SBS’s $8.1 million of undistributed earnings may not be immediately available to Siebert, including due to SBS cash availability, agreement terms, and regulatory capital requirements. SBS paid no distribution to Siebert in Q1.
- The company reported no Q1 share repurchases in the narrative. However, the issuer-purchases table is garbled or inconsistent with that statement, showing figures of 129,137 and 170,863 without clearly rendered purchase totals. The filing states disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the issuer-purchases table reflects any actual Q1 repurchases; its rendered figures do not clearly reconcile with the statement that none occurred.
- How sustainable earnings are given the small reported profit and the $726,000 contribution from equity-method investees, particularly SBS.
- Availability and timing of SBS’s undistributed earnings and repayment of the subordinated note arrangement.
- Costs, status and potential outcome of the former employee arbitration.
- Trends in commission per trade, retail account activity, margin debit balances, and investment banking and trading revenue.