Penson Worldwide Inc., the parent of the second-biggest securities clearing firm, reported a net loss of $7.4 million in its second quarter, equivalent to a loss of 29 cents per share. The company, which last month purchased the Ridge Clearing & Outsourcing Solutions Inc. business, had a gain of $6.1 million in the year-earlier second quarter.
The Dallas-based firm attributed much of the loss to acquisition-related expenses of $7.6 million pretax that cost investors 26 cents a share, weak client trading and persistently low interest rates.
“The likelihood of near-term rate increases appears to have been forestalled, and while trading volumes were good in May, they were weak in June and in July to date,” Penson CEO Philip A. Pendergraft said in a prepared statement. “In response, we are intensifying efforts to properly adjust our cost structure.”
As part of its Ridge acquisition, which sandwiches Penson between Bank of New York's industry-leading Pershing and Fidelity Investment's National Financial
among the top three clearing firms, the company outsourced data and other services to Broadridge Financial Solutions Inc., the former parent of Ridge.
Penson absorbed $3.3 million in severance costs relating to the outsourcing agreement and other projects, another $2.8 million in banking and legal fees for the Ridge acquisition and $1.5 million in legal expenses relating to convicted broker Jamie Solow and to its inability to collect a Finra-ordered settlement from Empire Financial Group, the parent of embattled Jesup & Lamont, Inc., which ceased conducting transactions earlier this month.
An arbitration panel last month ordered Empire, a former unit of Jesup & Lamont Inc. that went out of business in 2008, to pay the award to Penson Financial, which acted as Empire's clearing firm.
"Our former correspondent made serious but false claims, and we won it completely, including legal fees," Mr. Pendergraft said on a conference call with analysts. "Unfortunately, Empire's parent's legal filings appear to show we will not be able to collect that award and will thus not collect the fees."
Empire had alleged that Penson conspired to put it out of business, extorted money from the firm and withheld commissions.The Financial Industry Regulatory Authority Inc. arbitration panel dismissed all of Empire's claims.
Penson said it moved more aggressively than originally planned to reduce overhead “in line with the current low interest rate environment and market activity.” The cuts are expected to result in annual savings of about $2 million starting in this year's second half, and will “push annual savings from the (outsourcing) agreement to the high end of the previously announced $7-10 million range,” it stated.
Excluding the one-time expenses, Penson said results in the three months ending June 30 were hurt by lower-than-expected trading volumes that affected the entire securities industry in June as well as reduced spreads that dented its securities lending business. It also reported “higher-than-anticipated client ‘on-boarding' expenses in its Australian operation and about $1 million of interest payments on long-term debt raised two months in advance of the Ridge acquisition to help absorb the business.
Penson said it acquired 95 correspondent clearing contracts in the Ridge deal, slightly below the 100 it had forecast.
The company ended the quarter with 385 revenue-generating correspondents, up from 297 three months earlier. The additions of the Ridge correspondents were supplemented by two new Penson futures clients and offset in part by the loss of nine Penson securities clearing clients. Penson said it has a “pipeline” of 24 correspondents who are signed but not yet contributing to revenues.
Though the Federal Reserve has indicated no immediate plans to raise interest rates, Penson estimated that its net interest revenue will increase by $1.1 million per quarter for every 25 basis-point increase in the federal funds rate.
In another future-looking spin, Penson said the new Ridge correspondents should generate more than $50 million in net revenues annually beginning this quarter and at least $14 million in earnings before interest, taxes, depreciation and amortization. It also plans to absorb the clearing business of online broker TradeKing this quarter, which it said will be one of its top ten correspondent firms.
Dan Jamieson contributed to this story
