Jefferies Cites New Wall Street Earnings Drag: Charity

Since the financial crisis, investors and reporters reading Wall Street earnings have grown used to adjustments that take into account so-called onetime legal settlements, regulatory penalties, asset writedowns and a quarterly exercise in backing out accounting gains and losses from an investment bank's debt costs.

In reporting record full-year revenue and a near 50% fourth quarter profitability surge on Tuesday morning, Jefferies (JEF) added a new twist to Wall Street's earnings bungle: charity.

On Tuesday, Jefferies had to adjust for charity, and specifically, donations made to help a battered East Coast recover from a Hurricane Sandy, a late-October storm that destroyed thousands of homes and left millions without power.

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On the second line of Jefferies earnings release, the investment bank pegs its quarterly net income at $72 million, but highlights the number would have been $81 million had it not been for donations made in the wake of Hurricane Sandy and unnamed costs associated with its acquisition by financial holding company Leucadia National (LUK). Earnings per share, excluding Sandy-related donations and M&A expense was 35 cent a share, and 31 cents a share on a GAAP-basis.In a supplement to earnings, Jefferies states it paid $4.1 million in Hurricane Sandy donations. A financial supplement notes, adjusted revenue and EPS figures "[reflect] amortization of intangible assets recognized in connection with the acquisitions of Hoare Govett and the Bache entities, donations to Hurricane Sandy relief of $4.1 million and transaction costs (primarily professional fees) associated with the announced merger with Leucadia National Corporation of $4.2 million."Jefferies is the first of a host of publicly traded investment banks to report fourth quarter earnings that could include a new type of earnings adjustment -- prospective Hurricane Sandy related aid.Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan (JPM), Bank of America Merrill Lynch (BAC) and Citigroup (C) all report fourth quarter earnings in the New Year, but have publicly disclosed multi-million dollar commitments to Hurricane Sandy relief.Even with the visible Sandy-related adjustments, it was a banner quarter and year for Jefferies. Overall, fourth quarter earnings increased 48% and revenue rose nearly 39%. Meanwhile full-year revenue $3 billion was a record for the firm, even if overall profits fell slightly for the year to $282 million. The bank's fourth quarter earning surge was a result of strong trading gains and flat investment banking advisory and underwriting revenue. Fixed Income net revenues of $1.2 billion were a 66% increase from 2011 levels, while $1.13 billion in investment banking revenue represented no year-over-year change.Jefferies shares rose over 3% in Tuesday trading to $18.80, adding to 30%-plus year-to-date gains.

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Jefferies November merger highlighted some of the concerns overshadowing the investment banking industry, in the wake of the crisis.

Notably, the company's acquisition by a more financially stable Leucadia National begged the question of whether the full-service independent investment banking business model could be sustained, given stricter requirements around capital and harsher assessments from ratings agencies.

In the wake of Jefferies mid-November merger with Leucadia National, KBW analysts called the deal "defensive," and ratings agency Moody's took a wait and see approach on any prospective upgrades. [Interestingly, KBW, a competitor investment bank was subsequently bought by Stifel Financial (SF) for a moderate premium later in November]

In the merger Leucadia National - already a 28.6% shareholder in Jefferies - offered 0.81 of its shares for each outstanding Jefferies share in a stock deal that was valued at roughly $3.6 billion when announced on Nov. 12. In announcing the deal, Jefferies highlighted the importance of finding a strategic, capital rich partner. A press release announcing the deal keyed in on capital and the $9 billion in shareholder equity that the combined companies will now have. A key part of the deal was the assumption that the ongoing profitability of Jefferies will create the earnings to utilize a large net operating loss held on Leucadia's balance sheet, converting it into capital that could bolster future trading and banking business.According to Leucadia's third quarter filings with the Securities and Exchange Commission, it would need to generate $4.4 billion in pre-tax income to fully realize the deferred tax asset created its NOL's. Leucadia's financial statements go on to say that its NOL carryforwards will be available until 2029.After the deal is merger is completed - which is expected in early 2012 - Jefferies chief executive Richard Handler will become CEO of the combined companies and Jefferies will be Leucadia's largest business among a span of operations that give it the moniker of being a mini Berkshire Hathaway (BRK.A). To CEO Handler's credit, Jefferies partnership with Leucadia deal culminates a remarkable turnaround for the investment bank from where it stood at this time last year. In the wake of late Oct. 2011 collapse of brokerage MF Global as the debt crisis in Europe escalated, some investors and independent rating agencies were all but ready to write Jefferies off.For more on Jefferies, see why the investment bank and its CEO may turn to a mini Berkshire Hathaway or a bizarre Warren Buffett.For more on Wall Street and Hurricane Sandy relief work, see why a Barclays saleswoman traded by day and volunteered Hoboken aid by night.

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