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SIEB > SEC Filings for SIEB > Form 10-Q on 21-Nov-2012All Recent SEC Filings

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Form 10-Q for SIEBERT FINANCIAL CORP


21-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2011, and the unaudited consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report.

Business Environment

Our working capital is invested primarily in money market funds, so that liquidity has not been materially affected. The recent financial crisis did have the effect of reducing participation in the securities market by our retail and institutional customers, which had an adverse effect on our revenues. However the stock market has improved in the nine months ended September 30, 2012 consequently so have our revenues. Our affiliate, Siebert, Brandford, Shank & Co., L.L.C. ("SBS") had income for the current nine month period of approximately $1.8 million as a result of industry volumes increasing in the current period this year as compared to a loss of $800,000 for the same period last year due to municipalities struggling with the fiscal crisis, concerns about defaults at the state and local level and the expiration of the Build America Bonds program in 2011. This increase in SBS's income resulted in income to the Company of $888,000 for the current nine month period. Our expenses include the costs of an arbitration proceeding commenced by a former employee following the termination of his employment, which remains unresolved. The Company believes that the action is without merit, but the costs of defense, which are included as professional expenses, have adversely affected the Company's results of operations and may continue to affect the results of operations until the action is completed. Competition in the brokerage industry remains intense.

The following table sets forth certain metrics as of September 30, 2012 and 2011 and for the three and nine months ended September 30, 2012 and 2011, respectively, which we use in evaluating our business.

                                          For the Three Months        For the Nine Months
                                          ended September 30,         ended September 30,
     Retail Customer Activity:               2012         2011           2012         2011


Total retail trades:                         71,177      115,696        260,396      331,927
Average commission per retail trade:    $     20.65    $   20.15    $     28.19    $   20.86

                                          As of September 30,

Retail customer balances:                    2012         2011

Retail customer net worth (in
billions):                              $       6.7    $     6.0
Retail customer money market fund
value (in billions):                    $       1.0    $     1.0
Retail customer margin debit
balances (in million):                  $     202.6    $   247.4
Retail customer accounts with
positions:                                   42,185       45,471


Description:

Total retail trades represent retail trades that generate commissions.

Average commission per retail trade represents the average commission generated for all types of retail customer trades.

Retail customer net worth represents the total value of securities and cash in the retail customer accounts before deducting margin debits.

Retail customer money market fund value represents all retail customers accounts invested in money market funds.

Retail customer margin debits balances represent credit extended to our customers to finance their purchases against current positions.

Retail customer accounts with positions represent retail customers with cash and/or securities in their accounts.

Like other securities firms, we are directly affected by general economic and market conditions including fluctuations in volume and prices of securities, changes and prospects for changes in interest rates and demand for brokerage and investment banking services, all of which can affect our relative profitability. In periods of reduced market activity, profitability is likely to be adversely affected because certain expenses, including salaries and related costs, portions of communications costs and occupancy expenses, remain relatively fixed. Earnings, or loss, for any period should not be considered representative of any other period.

Recent Developments

On January 23, 2008, the Board of Directors of the Company authorized a buy back of up to 300,000 shares of common stock. During the nine months ended September 30, 2012, the Company purchased 7,277 shares at an average price of $1.67.

Critical Accounting Policies

We generally follow accounting policies standard in the brokerage industry and believe that our policies appropriately reflect our financial position and results of operations. Our management makes significant "estimates" that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities included in the financial statements. The estimates relate primarily to revenue and expense items in the normal course of business as to which we receive no confirmations, invoices, or other documentation at the time the books are closed for a period. We use our best judgment, based on our knowledge of these revenue transactions and expenses incurred, to estimate the amounts of such revenue and expense. We are not aware of any material differences between the estimates used in closing our books for the last five years and the actual amounts of revenue and expenses incurred when we subsequently receive the actual confirmations, invoices or other documentation. Estimates are also used in determining the useful lives of intangible assets, and the fair market value of intangible assets and securities. Our management believes that its estimates are reasonable.


Results of Operations

We believe that our business reflects the current difficult business environment for discount and online and institutional brokers. We had net loss of $912,000 for the three months ended September 30, 2012 and net income of $160,000 for the nine months ended September 30, 2012.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Total revenues for the three months ended September 30, 2012 were $4.1 million, a decrease of $1.8 million or 30.5% from the same period in 2011.

Commission and fee income for the three months ended September 30, 2012 was $2.6 million, a decrease of $1.0 million or 28.1% from the same period in 2011 due to a decrease in retail trading volume and a decrease in fees from margin debits due to a decrease in average customer margin debit balances. Our institutional trading commissions and commission recapture decreased as well.

Investment banking revenues for the three months ended September 30, 2012 were $875,000, a decrease of $862,000 or 49.6% from the same period in 2011 due to our participation in fewer new issues in the equity and debt capital markets.

Trading profits were $585,000 for the three months ended September 30, 2012, an increase of $82,000 or 16.3% from the same period in 2011 due to an overall increase in trading volume primarily in the debt markets.

Interest and dividends for the three months ended September 30, 2012 were $18,000, an increase of $8,000 or 80.0% from the same period in 2011 primarily due to higher yields.

Total expenses for the three months ended September 30, 2012 were $5.1 million, a decrease of $2.3 million or 31.0% from the same period in 2011.

Employee compensation and benefit costs for the three months ended September 30, 2012 were $2.3 million, a decrease of $583,000 or 20.0% from the same period in 2011. This decrease was primarily due to decreases in commissions paid based on production, a reduction in registered repsresentatives as a result of the closing of our Naples and Surfside branches in Florida in the fourth quarter of 2011 and a decrease in health insurance costs.

Clearing and floor brokerage costs for the three months ended September 30, 2012 were $508,000, a decrease of $237,000 or 31.8% from the same period in 2011 primarily due to the decrease in volume of trade executions for retail customers and a decrease in execution charges for institutional debt and equity customers.

Professional fees for the three months ended September 30, 2012 were $1.1 million, a decrease of $114,000 or 9.6% from the same period in 2011 primarily due to a decrease in legal fees relating to a dispute with a former employee offset by an increase in consulting fees relating to our Information Technology department.

Advertising and promotion expenses for the three months ended September 30, 2012 were $104,000, a decrease of $8,000 or 7.1% from the same period in 2011 due to a decrease in local media and print advertising.

Communications expense for the three months ended September 30, 2012 was $317,000, a decrease of $220,000 or 41.0% from the same period in 2011 due to a reduction in registered representatives and the closing of our


Surfside and Naples branches in Florida during the fourth quarter of 2011, as well as the elimination of costs associated with the discontinuance of our website developed and maintained by a software vendor as of June 30, 2012.

Occupancy costs for the three months ended September 30, 2012 were $224,000, a decrease of $55,000 or 19.7% from the same period in 2011 due to the closing of our Surfside and Naples branches in Florida during the fourth quarter of 2011.

Other general and administrative expenses for the three months ended September 30, 2012 were $561,000, a decrease of $81,000 or 12.6% from the same period in 2011 due to a decrease in depreciation, travel and entertainment and registration fees.

Income from Siebert's equity investment in SBS, an entity in which Siebert holds a 49% equity interest, for the three months ended September 30, 2012 was $186,000, a decrease of $787,000 or 80.9% from the same period in 2011 due to SBS participating in fewer senior managed or co-managed transactions. Income from our equity investment in SBSFPC for the three months ended September 30, 2012 was $58,000 an increase of $56,000 from the same period in 2011 was due to mark to market gains in positions. Income from equity investees is considered to be integral to our operations and material to the results of operations.

The tax provision for the three months ended September 30, 2012 and 2011 was $107,000 and $1,000, respectively, representing various minimum state taxes based on capital, and with respect to the three months ended September 30, 2012, a state tax assessment of $34,000 relating to years 2007, 2008 and 2009 based on a tax examination. No tax benefit related to the pre-tax loss incurred during the three months ended September 30, 2012 and 2011 has been recognized due to the recording of a full valuation allowance to offset deferred tax assets arising from such losses.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Total revenues for the nine months ended September 30, 2012 were $16.3 million, an increase of $393,000 or 2.5% from the same period in 2011.

Commission and fee income for the nine months ended September 30, 2012 was $11.6 million, an increase of $541,000 or 4.9% from the same period in 2011 primarily due to an increase in average commissions charged per trade as a result of an increase in retail options trading by one customer, which accounted for approximately 21% of total commissions and fees, as well as an increase in our institutional trading commissions and our commission recapture operations.

Investment banking revenues for the nine months ended September 30, 2012 were $2.6 million, a decrease of $733,000 or 22.1% from the same period in 2011 due to our participation in fewer issues in the equity and debt capital markets.


Trading profits for the nine months ended September 30, 2012 were $2.0 million, an increase of $573,000 or 40.8% from the same period in 2011 due to an overall increase in customer trading volume in the debt markets.

Interest and dividends for the nine months ended September 30, 2012 were $58,000, an increase of $12,000 or 26.1% from the same period in 2011 primarily due to higher yields.

Total expenses for the nine months ended September 30, 2012 were $16.9 million, a decrease of $3.0 million or 15.0% from the same period in 2011.

Employee compensation and benefit costs for the nine months ended September 30, 2012 were $7.5 million, a decrease of $305,000 or 3.9% from the same period in 2011. This decrease was primarily due to decreases in commissions paid based on production, a reduction in registered repsresentatives as a result of the closing of our Naples and Surfside branches in Florida in the fourth quarter of 2011 and a decrease in health insurance costs.

Clearing and floor brokerage costs for the nine months ended September 30, 2012 were $2.1 million, a decrease of $217,000 or 9.2% from the same period in 2011, due to lower retail trading as well as execution charges for institutional debt and equity customers.

Professional fees for the nine months ended September 30, 2012 were $2.7 million, a decrease of $1.3 million or 33.0% from the same period in 2011 primarily due to a a decrease in legal fees relating to a dispute with a former employee offset by increases in consulting fees relating to our Information Technology department and our commission recapture operations.

Advertising and promotion expenses for the nine months ended September 30, 2012 were $331,000, an increase of $26,000 or 8.5% from the same period in 2011 primarily due to an increase in online advertising.

Communications expense for the nine months ended September 30, 2012 was $1.3 million, a decrease of $318,000 or 19.6% from the same period in 2011 due to a decrease in Bloomberg devices due to fewer employees in the Institutional Trading department and the result of the closing of our Surfside and Naples branches in Florida during the fourth quarter of 2011, as well as the elimination of costs associated with the discontinuance of our website developed and maintained by a software vendor as of June 30, 2012.

Occupancy costs for the nine months ended September 30, 2012 were $701,000, a decrease of $121,000 or 14.7% from the same period in 2011 due to the closing of our Surfside and Naples branches in Florida during the fourth quarter of 2011.

Write off of software development costs of $433,000 was due to the Company's discontinuation of its relationship with a software vendor on June 30, 2012, which had developed and maintained our website. As a result, the Company wrote off its remaining unamortized carrying value of development costs of $433,000. Effective July 1, 2012, such services are provided by our clearing broker.

Other general and administrative expenses for the nine months ended September 30, 2012 were $1.8 million, a decrease of $150,000 or 7.7% from the same period in 2011 due to a decrease in depreciation, training, subscriptions, computer updates and data storage costs.


Income from Siebert's equity investment in SBS, an entity in which Siebert holds a 49% equity interest, for the nine months ended September 30, 2012 was $888,000, compared to a loss of $392,000 from the same period in 2011 due to SBS participating in more senior managed or co-managed transactions. Income from our equity investment in SBSFPC for the nine months ended September 30, 2012 was $42,000 as compared to a loss of $10,000 from the same period in 2011 due to the mark to market of positions. We consider income and loss from equity investees to be integral to our operations and material to the results of operations.

The tax provision for the nine months ended September 30, 2012 and 2011 was $162,000 and $13,000, respectively, representing various minimum state taxes based on capital, and with respect to the nine months ended September 30, 2012 included a state tax assessment of $34,000 relating to 2007, 2008 and 2009 based on a tax examination. There is no provision for income taxes for the nine months ended September 30, 2012 because the company incurred a loss for income tax purposes during such period attributable to a deductable temporary difference related to litigation arising during 2011, the benefit of which was fully reserved the beginning of the year. No tax benefit related to the pre-tax loss incurred during the nine months ended September 30, 2011 has been recognized due to the recording of a full valuation allowance to offset deferred tax assets arising from such losses.

Liquidity and Capital Resources

Our assets are highly liquid, consisting generally of cash in money market funds. Our total assets at September 30, 2012 were $35.1 million. As of that date, we regarded $22.3 million, or 64%, of total assets as highly liquid.

Siebert is subject to the net capital requirements of the SEC, the Financial Industry Regulatory Authority (FINRA) and other regulatory authorities. At September 30, 2012, Siebert's regulatory net capital was $17.6 million, $17.4 million in excess of its minimum capital requirement of $250,000.

On January 22, 2008, the Board of Directors of the Company authorized a buy back of up to 300,000 shares of common stock. During the nine months ended September 30, 2012, 7,277 shares were purchased at an average price of $1.67 per share.

Siebert has entered into a Secured Demand Note Collateral Agreement with SBS under which Siebert is obligated to lend to SBS up to $1.2 million on a subordinated basis collateralized by cash equivalents of approximately $1.5 million as of September 30, 2012. Amounts pledged by Siebert under the facility are reflected on our balance sheet as "cash equivalents - restricted". SBS pays Siebert interest on this amount at the rate of 4% per annum. The facility expires on August 31, 2014, at which time SBS is obligated to repay to Siebert any amounts borrowed by SBS thereunder.

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