Siebert Financial Corp. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Siebert provides retail brokerage, advisory, insurance, technology and prime brokerage services. Results are sensitive to market activity, interest rates and customer trading. The company reports one operating segment.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $11.7 million | $16.8 million | $22.0 million | $35.7 million |
| Expenses | $12.3 million | $14.9 million | $24.1 million | $30.8 million |
| Pre-tax income (loss) | ($0.5 million) | $1.9 million | ($1.9 million) | $4.9 million |
| Net income (loss) available to common stockholders | $0.7 million | $1.4 million | ($0.3 million) | $3.7 million |
| Basic and diluted earnings (loss) per share | $0.02 | $0.05 | ($0.01) | $0.12 |
- Q2 revenue fell about 30%; six-month revenue fell about 38%. Lower commissions, principal trading and market making more than offset growth in stock borrow/loan revenue.
- Stock borrow/loan revenue rose to $4.1 million in Q2 and $7.7 million for six months, attributed to business growth and expanded securities-lending and locate relationships.
- Q2 net income included a $1.0 million income-tax benefit despite a pre-tax loss; the six-month tax benefit was $1.3 million. The company cited reversal of an uncertain tax position after the limitations period expired. This significantly affected reported net results.
- Operating cash flow was negative $3.3 million for the six months, versus positive $24.2 million in 2021. Cash and cash equivalents were $4.1 million. An additional $321.7 million of cash and securities was segregated for regulatory purposes and should not be treated as unrestricted liquidity.
- Total assets were $1.15 billion and total liabilities $1.10 billion at June 30, 2022, down from $1.40 billion and $1.35 billion, respectively, at year-end, mainly reflecting lower securities-borrowed balances and customer receivables/payables.
- Debt included a $4.4 million mortgage, $3.2 million East West Bank line-of-credit balance and $3.25 million of related-party notes. The company reported compliance with debt covenants and had $5.0 million remaining under the East West Bank line, plus a $25 million overnight borrowing facility with no balance outstanding.
Changes, outlook and risks
- Management attributed weaker commissions and interest-related fees partly to the loss of institutional customers after GSCO terminated RISE’s clearing arrangement. It said JonesTrading-related income would not offset the lost business.
- Higher Treasury yields generated a $2.8 million unrealized loss on the U.S. government securities portfolio for the six months. Management intends to hold the securities to maturity, no later than August 2024, and expects the loss to be temporary; further yield increases could cause additional unrealized losses.
- Siebert’s direct ownership of RISE fell from 76% to approximately 44% after membership-interest transactions, including an exchange of $2.88 million in related-party notes for a 24% interest. Siebert continues to consolidate RISE as a variable-interest entity and says it may have to fund RISE disproportionately to its ownership.
- Management was reviewing RISE’s strategic plan; the relaunched, woman-owned prime brokerage business is new and untested, and success in attracting customers and revenue is uncertain. No quantitative company-wide earnings or revenue guidance was provided.
- The company entered an at-the-market sales agreement allowing up to $9.6 million of stock sales; no shares had been sold under it by June 30. It also invested approximately $120 million in Treasury securities during the first half.
- Risks include market downturns and reduced trading activity, changing interest rates and funding costs, regulatory capital and liquidity requirements, counterparty and systems risks, and the limited public float. A FINRA investigation concerning pre-acquisition StockCross unit investment trust transactions could result in sanctions or restitution; management could not assess the likely outcome or amount. The filing records no related contingent liability for the NFS clearing contract’s early-termination fees, which could be substantial.
Key facts for investors to verify
- Whether the decline in institutional business is stabilizing and whether stock borrow/loan growth can offset pressure in other revenue streams.
- RISE’s operating plan, funding needs, and whether Siebert remains its primary beneficiary and must continue consolidating it.
- The impact of interest-rate movements on Treasury fair values, customer balances, interest income and borrowing costs.
- Unrestricted liquidity, debt maturities and the status of the East West Bank credit-line extension discussions described by management.
- Any developments in the FINRA investigation, NFS contract exposure, related-party arrangements, or use of the $9.6 million ATM program.