Siebert Financial Corp. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Siebert is a financial services company focused on brokerage and asset management, with insurance, advisory, technology and prime brokerage operations. The filing reports one operating segment.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $12.575 million | $10.753 million | $39.995 million | $31.709 million |
| Total expenses | $12.480 million | $9.131 million | $37.900 million | $26.770 million |
| Income before taxes | $95,000 | $1.622 million | $2.095 million | $4.939 million |
| Net income | $581,000 | $1.273 million | $2.056 million | $3.574 million |
| Basic and diluted EPS | $0.02 | $0.04 | $0.07 | $0.12 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $36.352 million | $(7.064) million |
Revenue increased about 17% in Q3 and 26% for the nine-month period, while net income fell about 54% and 42%, respectively. Net margin was approximately 4.6% in Q3 2020 versus 11.8% in Q3 2019, and 5.1% for the first nine months versus 11.3% in 2019.
- Revenue mix: Q3 commissions and fees rose to $4.679 million from $2.273 million; stock borrow/loan revenue increased to $1.267 million from $349,000. These gains were partly offset by margin interest, marketing and distribution fees falling to $2.311 million from $3.912 million. For nine months, commissions and fees were $15.149 million and stock borrow/loan revenue was $2.482 million; margin interest, marketing and distribution fees declined to $7.730 million.
- Costs and taxes: Q3 expenses rose 37%, led by employee compensation, technology and clearing costs. The quarter included a $486,000 income tax benefit despite only $95,000 of pretax income. The nine-month tax provision was $39,000. Management attributed the unusually low tax expense to anticipated amended federal returns and recognition of additional deferred tax assets.
- Cash flow: Nine-month operating cash flow was $36.352 million, substantially affected by movements in securities borrowed and loaned and customer balances. Cash and cash equivalents were $4.536 million; cash plus securities segregated for regulatory purposes totaled $268.516 million. Segregated funds are not equivalent to unrestricted corporate cash.
- Balance sheet and debt: At September 30, total assets were $673.452 million, total liabilities $637.134 million, and stockholders’ equity $36.318 million. The asset and liability totals include large customer and securities-related balances. Debt included $4.904 million drawn under East West Bank financing and $6 million of related-party notes ($3 million due December 2020 and $3 million due November 2021). Lease liabilities were $3.181 million.
- Regulatory capital: MSCO reported $27.9 million of net capital, $25.6 million above its $2.3 million requirement. Its customer reserve account held $264.0 million, $16.6 million above the requirement at quarter-end. WP reported $3.7 million net capital, $3.5 million above its minimum.
Material changes and business developments
- StockCross was merged into MSCO effective January 1, 2020, following acquisition of its remaining shares for 3,298,774 Siebert shares. Because the entities were under common control, results are presented on a combined basis for all periods. The acquisition expanded the customer and securities balances and added retail accounts and revenue streams.
- WP, acquired in December 2019, contributed to 2020 results; therefore, the 2020-versus-2019 comparison also reflects WP’s inclusion in 2020. Management noted StockCross-related revenue from market making, stock loan and interest income, among other sources.
- A proposed $7.3 million sale of WP was terminated effective July 24, 2020.
- Assets increased $135.385 million and liabilities increased $132.202 million from December 31, 2019, primarily due to securities borrowed and loaned and customer balances.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic reduced revenue and income, particularly through lower interest rates and market volatility. Lower rates pressured margin interest and interest income. Branches had reopened by the filing date, and remote work had not materially disrupted operations. The ultimate effect remained uncertain.
- Management response: The company reduced senior employee salaries, made workforce reductions, reduced or waived director fees, and was negotiating vendor costs. It expected office transitions to begin producing cost savings in the second quarter of 2021. No quantitative earnings guidance was provided.
- Liquidity and borrowing: Management believed operating cash flows, available cash, related-party borrowing capacity and access to capital markets could fund requirements for the next 12 months. The East West Bank facility permits up to $10 million of term loans; $4.9 million had been drawn. The facility is secured and subject to financial covenants, which the company reported meeting at quarter-end and filing date.
- Tax matters: The company recorded a $1.041 million uncertain tax position related to anticipated 2017–2019 amended returns; management expected a refund of approximately $248,000 by Q1 2021. The filing notes that anticipated refunds exceed the amount meeting the recognition threshold.
- Other commitments and risks: A Beverly Hills office lease of approximately $1.5 million is scheduled to commence in March 2021. Customer margin lending, unsettled trades, securities lending and counterparty exposure may result in losses if customers or counterparties fail to perform. Ordinary-course legal matters were described as not expected to have a significant financial effect; self-insurance estimates may differ from ultimate claims.
- Subsequent event: On November 10, 2020, the company issued 150,000 restricted shares each to two new employees, for approximately $400,000 per recipient.
Important facts for investors to verify
- How much of reported operating cash flow reflects recurring earnings versus changes in customer and securities financing balances.
- The unrestricted liquidity available after excluding regulatory-segregated cash, and the company’s ability to meet the December 2020 related-party note maturity.
- Whether the anticipated tax refunds are received, and how the $1.041 million uncertain tax position is resolved.
- The sustainability of commission and stock-loan growth relative to lower margin-interest income, and the effect of WP’s inclusion on comparisons.
- Compliance with East West Bank covenants and broker-dealer capital and customer-reserve requirements as balances and market conditions change.