Siebert Financial Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; financial statements are unaudited. Comparisons are with the corresponding 2020 periods, except balance-sheet comparisons, which are with December 31, 2020. Siebert is a single-segment financial services company with brokerage, advisory, insurance, technology-development, and prime brokerage activities.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $16.793 million | $12.619 million | $35.717 million | $27.420 million |
| Income before taxes | $1.913 million | $0.489 million | $4.923 million | $2.000 million |
| Net income | $1.429 million | $0.499 million | $3.704 million | $1.475 million |
| Diluted EPS | $0.05 | $0.02 | $0.12 | $0.05 |
| Operating cash flow | Not provided by quarter | $24.167 million | $30.544 million |
Q2 revenue rose approximately 33% year over year and net income nearly tripled. First-half revenue increased approximately 30% and net income approximately 151%. Net margin was approximately 8.5% in Q2 2021 versus 4.0% in Q2 2020, and 10.4% for the first half versus 5.4%. These margins are calculated from reported revenue and net income.
Q2 revenue gains included principal transactions ($4.107 million, up $1.526 million), market making ($1.758 million, up $1.143 million), and stock borrow/loan ($2.240 million, up $1.469 million). Commissions and fees declined $0.562 million to $4.325 million, mainly due to lower institutional business. For the first half, commissions increased, while interest, marketing and distribution fees declined $0.577 million, mainly due to lower 12b-1 fees.
Total expenses were $14.880 million in Q2, up from $12.130 million; employee compensation rose to $8.745 million, primarily reflecting higher commission payouts associated with revenue growth. For the first half, expenses were $30.794 million versus $25.420 million. The filing does not present a separate operating-income or operating-margin measure.
Financial position, cash flow, and capital
- At June 30, 2021, total assets were $1.117 billion and total liabilities were $1.074 billion; stockholders’ equity was $43.071 million. Assets and liabilities declined by $256.069 million and $261.154 million, respectively, from year-end, primarily as securities borrowed and securities loaned fell.
- Cash and cash equivalents were $2.332 million, down from $3.632 million at year-end. Cash and securities segregated for regulatory purposes were $348.689 million and should not be treated as unrestricted corporate cash. Current assets exceeded current liabilities by $23.412 million; customer and securities-financing balances make this measure distinct from ordinary corporate working capital.
- First-half operating cash flow was $24.167 million, compared with $30.544 million. Management says cash generation was strong; the cash-flow statement shows large movements in securities borrowed and securities loaned as major drivers. Investing activities used $1.204 million, including $850,000 cash paid for the OpenHand investment; financing activities used $498,000 for debt repayments.
- Reported debt included $4.157 million outstanding under the East West Bank term loan and $5.2 million of related-party notes payable to principal stockholder Gloria E. Gebbia. The bank facility permits an additional $5 million draw; the company also had a $15 million undrawn overnight line with BMO Harris Bank. The $5.2 million related-party notes had 2021 maturities, including a note renewed to September 30, 2021.
- MSCO reported $31.6 million of net capital, approximately $29.5 million above its $2.1 million requirement. Its regulatory reserve held $348.7 million, $16 million above the requirement at June 30, before subsequent adjustments. Management reported compliance with East West Bank covenants.
Material changes, outlook, and risks
- Management attributed stronger trading-related revenue to favorable market conditions, increased trading activity, and growth in securities lending and locate relationships. It reported that the Securities Finance Group achieved its highest quarterly revenue to date, exceeding $2.2 million.
- The company acquired a 5% interest in OpenHand for $2.231 million, paid with $850,000 cash and 329,654 Siebert shares. It will be OpenHand’s exclusive broker-dealer for account services and has an option to acquire another 7.5% for approximately $4.5 million, exercisable within 18 months after platform launch. The option was assigned no value in the statements.
- Management said it expects operating cash flows, cash, borrowing capacity, and access to capital to meet operating, investing, and financing needs for the next 12 months. It provided no specific revenue or earnings guidance. Management noted that low interest rates may continue to pressure interest-related revenue during 2021; results also depend on market activity, which can fluctuate.
- COVID-19 had not materially affected liquidity or business operations as of the filing, but its ultimate effects remained uncertain. The business is exposed to market, interest-rate, liquidity, credit, counterparty, systems, cybersecurity, regulatory, and competition risks. Customer margin loans were approximately $1.1 billion; margin shortfalls or counterparties’ failure to perform could create losses.
- Two regulatory matters concerning pre-acquisition StockCross activity were agreed in July 2021: a $250,000 FINRA fine and independent-consultant undertaking, and a California order involving $100,000 administrative costs and an offer to rescind approximately $315,000 of commissions to six customers. The company accrued the $350,000 fines/costs in Q2 and said the matters were not expected to materially affect results or financial position.
- Other notable items: a $1.105 million uncertain tax position was recorded at both reporting dates; the company had no outstanding BMO overnight borrowing at June 30. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether recent gains in principal transactions, market making, and stock borrow/loan are sustainable if market conditions and trading activity weaken.
- How OpenHand’s platform launch, commercial performance, strategic relationship, and potential additional investment develop; the option’s exercise period runs from platform launch.
- Repayment or renewal of the related-party notes, remaining bank-loan obligations, covenant compliance, and the availability of borrowing facilities.
- The ultimate cost and completion of the FINRA and California regulatory matters, including the customer commission-rescission offers and independent review.
- How much of reported cash and operating cash flow is available for corporate use after regulatory segregation and changes in securities-financing balances.