Siebert Financial Corp. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The unaudited statements consolidate Siebert Financial Corp. and its wholly owned subsidiaries; equity-method results include interests in Siebert Brandford Shank & Co. (SBS) and SBS Financial Products Company (SBSFPC).
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $4.278 million | $5.625 million | $8.544 million | $12.178 million |
| Expenses | $5.254 million | $6.017 million | $10.195 million | $11.791 million |
| Equity-investee income (loss) | $(0.377) million | $0.839 million | $(1.071) million | $0.685 million |
| Net income (loss) | $(1.353) million | $0.447 million | $(2.722) million | $1.072 million |
| Basic and diluted EPS | $(0.06) | $0.02 | $(0.12) | $0.05 |
Revenue fell 23.9% in Q2 and 29.8% for the six-month period year over year. The company reported net losses in both 2013 periods; no tax benefit was recorded because deferred tax assets were fully reserved. No operating or net margin was stated in the filing.
Financial position and cash flow
- At June 30, 2013, total assets were $30.767 million, cash and cash equivalents were $19.404 million, and restricted cash equivalents were $1.532 million. Total stockholders’ equity was $28.299 million.
- Reported liabilities consisted of $2.468 million in accounts payable and accrued liabilities; the balance sheet reports no debt. Management regarded $20.4 million, or 66% of assets, as highly liquid.
- For the first six months, operating cash flow was $0.633 million, investing cash outflow was $0.112 million, and financing cash outflow was $0.019 million. Cash increased $0.502 million to $19.404 million.
- Siebert’s regulatory net capital was approximately $17.144 million, $16.894 million above the $250,000 minimum. A subordinated lending commitment to SBS of up to $1.2 million is collateralized by $1.532 million of restricted cash and bears 4% interest.
Material changes and operating trends
- Commissions and fees declined 25.1% in Q2 and 34.8% in the first half. Management cited lower average commissions, reduced retail options activity from a significant customer, and lower commission-recapture and institutional trading commissions.
- Investment banking revenue declined 37.3% in Q2 and 13.2% in the first half, reflecting reduced participation in new equity and debt issues. Trading profits rose 14.3% in Q2 but fell 18.1% in the first half.
- SBS shifted from income of $0.701 million in the first half of 2012 to a $0.951 million loss for Siebert in the first half of 2013, reflecting fewer senior-managed and co-managed transactions. Siebert’s SBSFPC share of loss was $0.120 million, versus $0.016 million a year earlier.
- Expenses decreased 12.7% in Q2 and 13.5% in the first half. Lower compensation and communications costs were partly offset by higher professional fees, principally legal costs related to a dispute with a former employee.
- Retail trades increased to 89,382 in Q2 from 86,096, but first-half trades declined to 175,376 from 189,219. Average commission per retail trade fell to $22.35 in Q2 from $30.16 and to $24.05 for the first half from $31.03.
Outlook, risks and unusual items
- Management said market conditions improved in the first half, but Siebert’s revenue did not; it provided no numerical guidance. Results are sensitive to securities-market activity, trading volumes, interest rates, competition, and demand for brokerage and investment-banking services. Management noted that some expenses remain relatively fixed when activity declines.
- A former employee’s arbitration remains unresolved. The company considers the action without merit, but related defense costs have adversely affected results and may continue. A separate Lehman-related class action was largely settled after a $1 million payment in a prior year; potential additional liability, if any, could not be determined.
- After Detroit filed for bankruptcy in July 2013, SBSFPC unwound and assigned certain Detroit-related derivatives to a financial institution. The contracts had carrying values of $123.063 million on both the asset and liability sides of SBSFPC at June 30; SBSFPC reported no gain or loss from the transaction and no continuing rights or obligations. SBSFPC had recorded a $241,000 write-down on the contracts in Q1.
- The company extended its New York office lease through 2017, adding $1.487 million of obligations, and extended its clearing agreement through July 2017. On August 9, 2013, Chairwoman and President Muriel F. Siebert took a temporary leave; CFO Joseph M. Ramos assumed similar principal-executive-officer functions.
- Customer trading exposes Siebert to losses if customers fail to meet obligations, though no material unsettled-transaction losses were reported. SBS undistributed earnings of $6.4 million may not be immediately distributable. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Investor verification points
- Track commission revenue, average commission per retail trade, customer activity, and exposure to significant customers.
- Review SBS’s underwriting performance, its ability to distribute earnings, and the financial impact of SBSFPC’s Detroit-related contracts and derivatives activity.
- Monitor legal and arbitration developments, including any additional Lehman-related liability and ongoing defense costs.
- Assess liquidity and capital restrictions, including the SBS secured-note commitment, lease obligations, and regulatory net-capital requirements.
- Confirm the duration and circumstances of the CEO’s temporary leave and the resulting leadership arrangements.