Siebert Financial Corp. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Siebert Financial Corp. operates a brokerage business through wholly owned subsidiaries and holds equity interests in municipal underwriting and derivatives affiliates. Results are unaudited.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $4.498 million | $7.396 million | $10.001 million | $11.709 million |
| Expenses | $5.995 million | $6.552 million | $12.407 million | $14.177 million |
| Equity-investee income (loss) | $(292,000) | $501,000 | $(1.376) million | $1.824 million |
| Net income (loss) | $(1.790) million | $782,000 | $(3.794) million | $(412,000) |
| Basic and diluted EPS | $(0.08) | $0.04 | $(0.17) | $(0.02) |
Q2 revenue fell 39.2% year over year; six-month revenue fell 14.6%. The filing does not report a headline profit margin. Commission and fee revenue was $3.539 million in Q2 and $7.484 million for the half; investment banking revenue was $406,000 and $1.578 million, respectively; trading profits were $526,000 and $903,000.
At June 30, 2011, total assets were $36.386 million, including $22.774 million cash and cash equivalents and $1.532 million restricted cash equivalents. Stockholders’ equity was $32.823 million; accounts payable and accrued liabilities were $3.563 million. No borrowings or debt balance is presented. Cash and cash equivalents increased $128,000 during the first half, versus a $2.945 million increase in the comparable 2010 period. Operating cash flow was $149,000, compared with $3.080 million; investing and financing cash outflows were $8,000 and $13,000, respectively.
The company described $23.9 million, or 66% of assets, as highly liquid. Siebert’s regulatory net capital was approximately $20.403 million, about $20.153 million above its $250,000 minimum. Customer margin debit balances were $232.0 million, versus $176.5 million a year earlier.
Material changes and management commentary
- Commissions and fees declined 46.6% in Q2 and 27.6% for the half. Comparisons were affected by $3 million of commission and fee income recognized in Q2 2010 in connection with negotiations for a three-year clearing agreement; management also cited lower retail trading activity.
- Affiliate SBS reported a $2.784 million first-half net loss, compared with $3.737 million net income in the first half of 2010. Siebert’s 49% share was a $1.4 million loss, versus $1.8 million income. Management attributed SBS’s deterioration to sharply lower municipal underwriting volumes, fiscal pressures on municipalities, concerns about state and local defaults, and expiration of the Build America Bonds program.
- First-half investment banking revenue increased 107.6% and trading profits increased 62.1%, partly offsetting weaker commissions and affiliate results. Expenses declined 12.5% for the half, including lower clearing, professional, communications, and occupancy costs.
- Management said market volatility and reduced customer participation had adversely affected revenue, and that intense brokerage competition and relatively fixed costs can pressure profitability when market activity is low. It provided no specific forward guidance.
Risks, contingencies, and unusual items
- A former employee’s arbitration remains unresolved. The company considers the claim without merit, but legal defense costs have affected results and may continue until resolution.
- Because of cumulative losses, the company recorded a full valuation allowance against its net deferred tax asset of approximately $3.567 million; it recognized no tax benefit on the first-half 2011 loss. The statements report tax expense of $12,000 for first-half 2011 and a $232,000 tax benefit for first-half 2010.
- Siebert had pledged approximately $1.532 million of restricted cash equivalents under a subordinated secured demand-note facility to SBS, which may borrow up to $1.2 million. The facility bears 4% interest and expires August 31, 2012. SBS’s undistributed earnings attributable to Siebert were approximately $6.5 million and may not be immediately distributable.
- The company may incur losses if customers or counterparties fail to meet obligations on unsettled transactions. It reported no material losses from unsettled customer transactions. Management said routine legal claims were not expected to have a material adverse effect; no material changes to the prior annual report’s risk factors were reported.
- The company repurchased 7,155 shares during the first half at an average $1.85 per share. The filing reports no material change in internal control over financial reporting and states disclosure controls were effective.
Important facts for investors to verify
- Whether retail trading and commission revenue recover, and how much of the year-over-year comparison reflects the one-time $3 million 2010 clearing-agreement item.
- Municipal underwriting volumes, SBS’s subsequent financial performance, and the availability of affiliate earnings for distribution.
- Progress and potential costs or outcome of the former employee arbitration.
- Liquidity and regulatory capital, including the restricted cash and SBS demand-note exposure, and the company’s ability to realize deferred tax assets.