Penson Worldwide Q1 net income slips

The Company also said that the second quarter is on track to be significantly stronger than the first, and reaffirmed its 2009 financial goals.

Penson reported net revenues of $66.8 million, net income of $1.7 million and diluted earnings per common share of $0.07 for the first quarter ended March 31, 2009, in line with its expected range of $0.06 to $0.09 per share. Penson had previously said that the first quarter would be its weakest of 2009 and lower than a year ago due to several factors, including reduced trading volumes in January and February, sharply lower interest rates, and a $0.04 per share expense net of tax for consultant work and for severance associated with a reduction in staff.

On a sequential quarter basis, net interest income from customer interest earning average balances increased 14%, to $11.7 million, as these balances grew 4% to $4.45 billion and the net spread widened by 17 basis points, to 1.02%. The expansion in spread was the result of a recovery in stock lending balances and of the Company's previously announced insured bank deposit investment program. Penson moved approximately $900 million of customer segregated funds into higher yielding FDIC insured bank accounts during the quarter, resulting in an average balance of $500 million of these assets invested in such deposits for the period.

Comment

"We saw two markets during the first quarter," said Philip A. Pendergraft, Chief Executive Officer. "In January and the first half of February, trading volumes were weak across the board, particularly in futures. Volumes rebounded sharply in the second half of the quarter, with particular strength in options. We cleared more than 25 million option contracts in March, a record, and reached approximately 8% market share in this asset class."

Mr. Pendergraft said that based on recent market trends and Penson's expense control initiatives, the second quarter is on track to be significantly stronger than the first. "The improved volumes we saw in March are carrying through in April, benefiting both non-interest revenues and interest earning balances. We also expect to realize a full quarter of higher yields from the redeployment of segregated assets. Expenses will benefit from the recent cost reductions and the absence of one time severance and consulting expenses."

As a result, Mr. Pendergraft said, the Company also remains on track with its 2009 goals of a 3-5% increase in net revenues and approximately $45 million in pre-tax profit.

Analysis of First Quarter 2009 Results

(All comparisons are to the corresponding year-ago period unless otherwise indicated)

Non-interest revenues increased 2%, to $52.3 million, with a 17% increase in "other" revenue and an 18% increase in technology more than offsetting a 4% decline in clearing and commission fees. "Other" grew as a result of the expansion of Penson's execution services business, and technology reflected the recognition of $1 million in licensing revenue from a previously announced contract. Non-interest revenues declined 6% from the volatile fourth quarter of 2008 due to lower trading volumes in the first half of the March 2009 quarter.

Net interest revenue declined 24%, to $14.5 million. The contribution from correspondent customer interest earning asset-based balances declined 21%, to $13.1 million. This was primarily due to the 92% decrease in the average federal funds rate, partially offset by a 7% increase in balances and by moving assets into higher yielding insured bank accounts. The contribution from conduit stock loans declined 44%, to $1.4 million. This was primarily due to a 54% decrease in balances, which reflects the past year's general reduction in short positions, partially offset by a 21% increase in spread, due to the higher value of shares available for lending.

Expenses increased 12%, to $64.0 million. This included approximately $750 thousand in employee compensation and benefits related to one-time severance and another $750 thousand related to non-recurring consulting costs. Floor brokerage, exchange and clearance fees were 14% of non-interest revenues versus 7%, as the year ago quarter included receipt of industry rebates from 2007, whereas most of these rebates are now included in the year in which they are earned.

New Business

Penson had 300 revenue generating correspondents in the March 2009 quarter, up 6% from 284 in the year ago quarter. Securities clearing operations in the US, Canada and UK had 258 correspondents, compared to 246 in the year ago quarter. Penson GHCO futures operations had 42 introducing brokerage firms in the first quarter, compared to 38 in the year ago quarter.

Not reflected in the above numbers is a "pipeline" of 24 new correspondents that are expected to begin contributing to revenue in the second and third quarters of 2009.

View the figures here: