JEFFERIES FINANCIAL GROUP INC. Forward-Looking Statements
This report may contain or incorporate by reference certain "forward looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our future and statements that are not historical or current facts. These forward looking statements are often preceded by the words "should," "expect," "believe," "intend," "may," "will," "would," "could" or similar expressions. Forward-looking statements may contain expectations regarding revenues, earnings, operations and other results, and may include statements of future performance, plans and objectives. Forward looking statements also include statements pertaining to our strategies for future development of our business and products. Forward looking statements represent only our belief regarding future events, many of which by their nature are inherently uncertain. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward looking statements is contained in this report and other documents we file. You should read and interpret any forward looking statement together with these documents, including the following:
•the description of our business contained in this report under the caption "Business";
•the risk factors contained in this report under the caption "Risk Factors";
•the discussion of our analysis of financial condition and results of operations contained in this report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein; •the discussion of our risk management policies, procedures and methodologies contained in this report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations-Risk Management" herein;
•the consolidated financial statements and notes to the consolidated financial statements contained in this report; and
•cautionary statements we make in our public documents, reports and announcements.
Any forward-looking statement speaks only as of the date on which that statement is made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made, except as required by applicable law. Our business, by its nature, does not produce predictable or necessarily recurring earnings. Our results in any given period can be materially affected by conditions in global financial markets, economic conditions generally and our own activities and positions. For a further discussion of the factors that may affect our future operating results, see the risk factors contained in this report under the caption "Risk Factors". Our results of operations for the years endedNovember 30, 2022 ("2022"),November 30, 2021 ("2021") andNovember 30, 2020 ("2020") are discussed below. Additionally, for a further discussion of our results of operations for the year endedNovember 30, 2021 ("2021") and our 2021 results of operations as compared with our 2020 results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report Form 10-K for the year endedNovember 30, 2021 , which was filed with theSecurities and Exchange Commission ("SEC") onJanuary 28, 2022 , and Exhibit 99.1, Part II, Item 7 of our Form 8-K, which was filed with theSEC onOctober 7, 2022 . 25
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JEFFERIES FINANCIAL GROUP INC.
Consolidated Results of Operations
Jefferies Group LLC Merger into
OnNovember 1, 2022 , we simplified our corporate structure by mergingJefferies Group LLC with and intoJefferies Financial Group Inc. This merger eliminated the requirement for two sets ofSEC filings and other duplicative processes. In connection with the merger, we have reclassified the presentation of certain line items within our Consolidated Statements of Earnings to streamline our financial statements and better align the presentation of our firm with our strategy of building our investment banking and capital markets and asset management businesses as we continue to reduce our legacy merchant banking portfolio. Prior year amounts have been revised to conform to these reclassification and presentation changes to current year reporting. Refer to Note 1, Organization and Basis of Presentation, in our consolidated financial statements included in this Annual Report on Form 10-K for further details.
Overview
The following table provides an overview of our consolidated results of operations (dollars in thousands):
% Change from
Prior Year
2022 2021 2020 2022 2021
Net revenues $ 5,978,838 $ 8,013,826 $ 5,850,521 (25.4) % 37.0 %
Non-interest expenses 4,923,276 5,759,721 4,783,438 (14.5) % 20.4 %
Earnings before income taxes 1,055,562 2,254,105 1,067,083 (53.2) % 111.2 %
Income tax expense 273,852 576,729 298,673 (52.5) % 93.1 %
Net earnings 781,710 1,677,376 768,410 (53.4) % 118.3 %
Net earnings (loss) attributable to
noncontrolling interests (2,397) 3,850 (5,271) N/M N/M
Net loss attributable to redeemable
noncontrolling interests (1,342) (826) (1,558) 62.5 % (47.0) %
Preferred stock dividends 8,281 6,949 5,634 19.2 % 23.3 %
Net earnings attributable to
Jefferies Financial Group Inc. 777,168 1,667,403 769,605 (53.4) % 116.7 %
Effective Tax Rate 25.9 % 25.6 % 28.0 %
N/M - Not Meaningful
Executive Summary
2022 Compared with 2021
Consolidated Results
•Net revenues for 2022 were
•Earnings before income taxes of
•Net earnings attributable to
Business Results
•Our investment banking net revenues were$2.90 billion for 2022, compared with a prior year record of$4.66 billion for 2021, including strong advisory revenues of$1.78 billion , compared to a prior year record of$1.87 billion . Our underwriting revenues for 2022 were$1.03 billion , down 58.7%, consistent with the significant reduction in industry-wide deal activity while our market position continued to improve. For 2022, we ranked as the seventh largest firm globally across our three core investment banking businesses - mergers and acquisitions advisory services, equity underwriting and leveraged finance underwriting. 26
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JEFFERIES FINANCIAL GROUP INC. •Our equities net revenues of$1.06 billion are 18.5% lower than 2021, as 2021 was an exceptional year and 2022 presented a more difficult trading environment with significantly reduced new issue activity, including substantially reduced Special Purpose Acquisition Companies ("SPACs") activity. This was partially offset by market share gains and ongoing momentum in our client franchise. This compares to record results in predominately all of our equities businesses and across each of our regions during 2021. •Our fixed income net revenues of$765.6 million were down 20.2% compared to 2021, primarily due to reduced client activity across most products, increased inflation and interest rate concerns, mark-to-market losses on certain mortgage inventory positions and a slowdown in securitized markets resulted in fewer trading opportunities. •Overall net revenues in our asset management business were$1.26 billion , compared with$1.09 billion in 2021, reflecting revenues from sales of certain legacy merchant banking positions partially offset by lower investment returns as compared to the prior year.
Non-interest Expenses
•Non-interest expenses for 2022 decreased$836.4 million , or 14.5%, to$4.92 billion , compared with$5.76 billion for 2021. The decrease is due to lower compensation and benefits expense, consistent with the decline in net revenues. Our pre-tax operating margin decreased to 17.7% in 2022 from 28.1% in 2021. •Compensation and benefits expense for 2022 was$2.59 billion , a decrease of$965.7 million , or 27.2%, from 2021. Compensation and benefits expense as a percentage of Net revenues was 43.3% for 2022, compared with 44.4% for 2021. Refer to Note 13, Compensation Plans, included in this Annual Report on Form 10-K, for further details
•Non-interest expenses were also impacted by increases in Floor brokerage and clearing expenses, technology and communications expenses and business and development expenses, partially offset by a decline in underwriting expenses.
Headcount
•AtNovember 30, 2022 , we had 5,381 employees globally, a decrease of 175 employees from our headcount of 5,556 atNovember 30, 2021 . Our headcount decreased by 561 as a result of the sale of our wholly-owned subsidiary, Idaho Timber, offset by growth in our investment banking headcount, as well as additions in technology and other corporate services staff to support our growth and other strategic priorities.
2021 Compared with 2020
Consolidated Results
•Net revenues for 2021 were$8.01 billion , compared with prior year net revenues of$5.85 billion for 2020, an increase of$2.16 billion , or 37.0%, reflecting then record net revenues in investment banking, equities and asset management and solid results in fixed income.
•Earnings before income taxes of
•Net earnings attributable to
Business Results
•Our investment banking net revenues of$4.66 billion for 2021 were an increase of 81.9% from the prior year, reflecting record advisory revenues of$1.87 billion , an increase of 77.8%, or$820.1 million , compared to 2020, while our record underwriting revenues for 2021 were$2.49 billion , up$1.04 billion , or 72.1%. The increase in net revenues is reflective of an increase in both the number and aggregate value of transactions completed by our investment banking franchise.
•Our equities net revenues increased 15.2% compared to the prior year, reflecting record results that were driven by strong client activity and trading performance as a result of meaningful growth across all of our products and regions.
•Our fixed income net revenues were down 28.5% compared to the prior year, which was an all-time record. Net revenues for 2021 are reflective of strong trading results under more normalized trading conditions and reflect continued strength in certain of our credit-focused businesses and strong client demand though this is in comparison to outsize trading volumes and extremely active markets and high levels of volatility driving results in the prior year. •Our asset management net revenues of$1.09 billion for 2021, were higher than the$814.6 million recorded in the prior year, driven by a substantial increase in asset management fees and revenues. 27
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JEFFERIES FINANCIAL GROUP INC.
Expenses
•Non-interest expenses for 2021 increased $976.3 million , or 20.9%, to $5.76
billion , compared with $4.78 billion for 2020. This 20.4% increase, is largely
due to higher compensation and benefits expense, as well as higher
transaction-related costs.
•Compensation and benefits expense for 2021 was $3.55 billion , an increase of
$610.7 million , or 20.7%, from 2020. The increase is primarily a result of the
significant increase in our net revenues.
•Non-compensation expenses for 2021 increased $365.6 million , or 19.9%, to $2.20
billion , compared with $1.84 billion for 2020. The increase in non-compensation
expenses was largely due to higher Floor brokerage and clearing fees related to
increased trading volumes and a significant increase in volume of investment
banking transactions driving higher Underwriting costs. Technology and
communication expenses, Professional services expenses and Business development
expenses were also higher for 2021 reflecting our growth and costs associated
with our increased recruiting efforts.
•Other expenses also increased for 2021 primarily due to an increase in bad debt
expense mostly related to a specific default in our prime brokerage business and
$64.0 million in costs related to the early redemption of senior notes.
Headcount
•AtNovember 30, 2021 , we had 5,556 employees globally, an increase of 611 employees from our headcount of 4,945 atNovember 30, 2020 . Our headcount increased across all regions primarily as a result the growth of our investment banking business, as well as due to additions in technology and other corporate services staff to support our increased regulatory requirements and overall growth. 28
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JEFFERIES FINANCIAL GROUP INC.
Revenues by Source
Historically, our results of operations have been presented by summarized income
statement line items by business segments comprised as follows: Investment
Banking and Capital Markets, Asset Management, Merchant Banking, Corporate and
Parent Company Interest, including consolidation adjustments. During the year
ended November 30, 2022 and in connection with the merger of Jefferies Group LLC
with and into Jefferies Financial Group Inc. , we transferred significantly all
of our legacy merchant banking investments to our Asset Management reportable
segment. Certain publicly traded equity investments that are related to
investment banking relationships were transferred from our Merchant Banking
reportable segment to our Investment Banking and Capital Markets reportable
segment. In addition, there were certain investments that were held within the
Investment Banking and Capital Markets reportable segment, which have been
transferred to the Asset Management reportable segment. These investments are
now managed by the respective segment managers and we have revised our
reportable business segment presentation accordingly. Prior period amounts have
been revised to conform to the current segment reporting.
We now present our results as two reportable business segments as follows:
Investment Banking and Capital Markets and Asset Management. Additionally,
corporate activities are now fully allocated to each of these reportable
business segments. We believe that this reorganization of our segments better
aligns the manner in which we manage our business activities and is in keeping
with our fundamental long-term strategy of continuing to build out our
investment banking effort, enhancing our capital markets businesses and further
developing our Leucadia Asset Management alternative asset management platform
as we continue to divest of significant portions of our legacy merchant banking
portfolio.
The remainder of our "Consolidated Results of Operations" is presented on a
detailed product and expense basis. Our "Revenues by Source" is reported along
the following business lines: investment banking, equities, fixed income and
asset management. Additionally, the results of the asset management business
include a new subcategory "merchant banking."
The following is a description of the changes that have been made:
•Revenues from certain publicly traded equity securities that were historically presented within our Merchant Banking segment and are related to investment banking relationships are now presented within Other investment banking revenues. Other investment banking also includes revenues from our share of net earnings from ourJefferies Finance joint venture, our share of net earnings from our Berkadia commercial real estate joint venture, revenues from our lending and servicing of automobile loans as well as any revenues from securities and loans received or acquired in connection with our investment banking activities that have also been previously presented within Other investment banking in prior financial statement filings. •Within Asset Management, investment return represents revenue related to our capital invested in asset management funds that are managed by us or our affiliated asset managers. Historically, revenues from principal investments in private equity and hedge funds managed by third-parties that are not part of ourLeucadia Asset Management platform and revenues from other investment positions were also reported within investment return and have now been disaggregated and are presented as part of the new merchant banking subcategory. •Revenues from legacy merchant banking investments, including results from our real estate development, oil and gas and other manufacturing activities are now presented in the new Asset Management subcategory, "merchant banking." Foreign currency transaction gains or losses, fair value debt valuation adjustments on derivative contracts, gains and losses on investments held in deferred compensation or certain other immaterial corporate income items are not considered by management in assessing the financial performance of our operating businesses and are, therefore, not reported as part of our business segment results. The changes to the manner in which we describe and disclose the performance of our business activities has no effect on our historical consolidated results of operation. Previously reported results are presented on a comparable basis in the tables below. 29
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JEFFERIES FINANCIAL GROUP INC.
The following provides a summary of "Net Revenues by Source" (dollars in
thousands):
% Change from
2022 2021 2020 Prior Year
% of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues 2022 2021
Advisory $ 1,778,003 29.7 % $ 1,873,204 23.4 % $ 1,053,500 18.0 % (5.1) % 77.8 %
Equity underwriting 538,946 9.0 1,557,364 19.4 902,016 15.4 (65.4) % 72.7
Debt underwriting 490,873 8.2 935,131 11.7 545,978 9.3 (47.5) % 71.3
Total underwriting 1,029,819 17.2 2,492,495 31.1 1,447,994 24.7 (58.7) % 72.1
Other investment banking 92,170 1.6 291,423 3.6 58,286 1.1 (68.4) % 400.0
Total Investment Banking 2,899,992 48.5 4,657,122 58.1 2,559,780 43.8 (37.7) % 81.9
Equities 1,060,582 17.7 1,301,530 16.2 1,128,910 19.3 (18.5) % 15.3
Fixed income 765,576 12.8 959,122 12.0 1,340,792 22.9 (20.2) % (28.5)
Total Capital Markets 1,826,158 30.5 2,260,652 28.2 2,469,702 42.2 (19.2) % (8.5)
Total Investment Banking
and Capital Markets (1) 4,726,150 79.0 6,917,774 86.3 5,029,482 86.0 (31.7) % 37.5
Asset management fees and
revenues 89,127 1.5 120,733 1.5 26,540 0.5 (26.2) % 354.9
Investment return (2) 156,594 2.6 260,316 3.2 256,090 4.4 (39.8) 1.7
Merchant banking (1) 1,053,031 17.6 756,482 9.5 580,411 9.9 39.2 30.3
Allocated net interest (2) (41,059) (0.7) (44,907) (0.6) (48,484) (0.8) (8.6) % (7.4)
Total Asset Management 1,257,693 21.0 1,092,624 13.6 814,557 14.0 15.1 % 34.1
Other (5,005) - 3,428 0.1 6,482 - N/M (47.1)
Net Revenues $ 5,978,838 100.0 % $ 8,013,826 100.0 % $ 5,850,521 100.0 % (25.4) % 37.0 %
N/M - Not Meaningful
(1)Net revenues presented for our Investment Banking and Capital Markets
businesses and the merchant banking activities within our Asset Management
business include allocations of interest income and interest expense as we
assess the profitability of these businesses inclusive of the net interest
revenue or expense associated with the respective activities, including the net
interest cost of allocated long-term debt, which is a function of the mix of
each business's associated assets and liabilities and the related funding costs.
(2)Allocated net interest represents an allocation to Asset Management of our
long-term debt interest expense, net of interest income on our Cash and cash
equivalents and other sources of liquidity. Allocated net interest has been
disaggregated to increase transparency and to make clearer actual Investment
return. We believe that aggregating Investment return and Allocated net interest
would obscure the Investment return by including an amount that is unique to our
credit spreads, debt maturity profile, capital structure, liquidity risks and
allocation methods.
Investment Banking Revenues
Investment banking is composed of revenues from:
•advisory services with respect to mergers/acquisitions, restructurings/recapitalizations and private capital advisory transactions;
•underwriting services, which include underwriting and placement services related to corporate debt, municipal bonds, mortgage-backed and asset-backed securities and equity and equity-linked securities and loan syndication;
•our 50% share of net earnings from our corporate lending joint venture,
•our 45% share of net earnings from our commercial real estate finance joint venture, Berkadia;
•the revenues of Foursight, our wholly-owned subsidiary engaged in the lending and servicing of automobile loans; and
•securities and loans received or acquired in connection with our investment banking activities.
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JEFFERIES FINANCIAL GROUP INC.
The following table sets forth our investment banking revenues (dollars in
thousands):
% Change from
Prior Year
2022 2021 2020 2022 2021
Advisory $ 1,778,003 $ 1,873,204 $ 1,053,500 (5.1) % 77.8 %
Equity underwriting 538,946 1,557,364 902,016 (65.4) % 72.7 %
Debt underwriting 490,873 935,131 545,978 (47.5) % 71.3 %
Total underwriting 1,029,819 2,492,495 1,447,994 (58.7) % 72.1 %
Other investment banking 92,170 291,423 58,286 (68.4) % 400.0 %
Total investment banking $ 2,899,992 $ 4,657,122 $ 2,559,780 (37.7) % 81.9 %
The following table sets forth our investment banking activities (dollars in
billions):
Deals Completed Aggregate Value
2022 2021 2020 2022 2021 2020
Advisory transactions 364 315 228 $ 336.7 $ 380.4 $ 217.5
Public and private equity and
convertible offerings 166 426 286 37.8 145.6 103.5
Public and private debt financings 653 812 639 250.6 390.9 255.8
2022 Compared with 2021
•Investment banking revenues for 2022 were $2.90 billion , compared with an
annual record $4.66 billion for 2021, reflecting near record advisory revenues,
offset by much lower revenues in debt and equity underwriting.
•Our 2022 advisory revenues were $1.78 billion , down $95.2 million , or 5.1%,
from 2021's record year. Activity in the mergers and acquisitions markets
remained strong and the market share of our completed transactions continued to
increase.
•Our underwriting revenues for 2022 were $1.03 billion , a decrease of $1.46
billion , or 58.7%, from 2021, reflecting lower net revenues in both equity and
debt underwriting of $539 million and $491 million , respectively. The decline in
our debt and equity underwriting net revenues was consistent with the
substantial reduction in industry-wide deal activity. The prior year results
reflect an exceptionally active period in which clients took advantage of the
strong equity environment to raise equity capital and the low rate environment
to access the debt capital markets, with high levels of activity in the
leveraged loan new issuance markets and record levels of high yield bond
refinancing activity.
•Other investment banking revenues were $92.2 million for 2022, compared with
$291.4 million for 2021. Other investment banking revenues during 2022 include
$124.4 million from our share of Berkadia net earnings as compared with
$130.6 million in 2021, primarily due to a shift in sales to a lower margin
product mix as well as higher borrowing costs, partially offset by increased
income from higher interest rates and increased servicing revenues. This was
offset by our share of the net loss of our Jefferies Finance joint venture in
2022, reflecting reduced market activity and higher reserves recorded on its
loan portfolio and outstanding commitments due to company-specific developments
and difficult conditions in the leveraged finance market compared with our share
of JFIN's net earnings in 2021. Revenues from Foursight were relatively
consistent in 2022 as compared to 2021 as declines in revenue from originations
and sales were offset by increases in servicing fee revenues. Other investment
banking revenues for 2022 were also impacted by net unrealized losses on various
investments, including publicly traded equity securities related to investment
banking relationships, as compared to net unrealized gains in 2021.
•Our three-month forward investment banking backlog as of November 30, 2022 is
consistent with the levels as of August 31, 2022 , but execution remains
dependent on market conditions. As an indicator of net revenues in a given
future period, backlog snapshots are subject to limitations. The time frame for
the realization of revenues from these expected transactions varies and is
influenced by factors we do not control. Transactions not included in the
estimate may occur, and expected transactions may also be modified or cancelled.
2021 Compared with 2020
•Total Investment banking revenues for 2021 were a record of
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JEFFERIES FINANCIAL GROUP INC. •Our 2021 advisory revenues were a record$1.87 billion , up$820.1 million , or 77.8%, from 2020, primarily due to a significant increase in the number and values of transactions, and including a significant contribution from Special Purpose Acquisition Companies ("SPACs") advisory transactions in 2021. •Our underwriting revenues for 2021 were a record$2.49 billion , an increase of$1.04 billion , or 72.1%, from 2020, with record net revenues in equity underwriting of$1.56 billion and record net revenues of$935.1 million in debt underwriting, as clients took advantage of the strong equity environment and the low interest rate environment. Our equity underwriting results also include increased revenues from SPAC offerings, as well as strong revenues from at-the-money offerings. •Other investment banking revenues were$291.4 million for 2021, compared with$58.3 million for 2020. Other investment banking revenues include our share of the net earnings (loss) of theJefferies Finance joint venture. In 2021,Jefferies Finance achieved record underwriting volumes on the back of the strength of the leveraged loan market and an active private-equity backed mergers and acquisitions environment. The results in 2021 were partially offset by a$56.0 million one-time charge incurred byJefferies Finance related to refinancing outstanding debt. Results ofJefferies Finance in 2020 were impacted by unrealized losses related to the write-down of commitments and loans held-for-sale, primarily due to the impact of the COVID-19 pandemic on the markets and the economy. Additionally, results for 2021 include higher net revenues of from our share of earnings from Berkadia. The higher net revenues for 2021 are due to significant increases in debt and investment sales volumes. The net revenues for 2020 were impacted by the impairment of mortgage servicing rights as a result of lower interest rates, higher loan loss provisions and a decline in loan originations due to the impact of COVID-19. The prior year results were also impacted by unrealized write-downs of private equity investments received or acquired in connection with our investment banking activities.
Equities Net Revenues
Equities is composed of net revenues from:
•services provided to our clients from which we earn commissions or spread revenue by executing, settling and clearing transactions for clients;
•advisory services offered to clients;
•financing, securities lending and other prime brokerage services offered to clients, including capital introductions and outsourced trading; and
•wealth management services.
2022 Compared with 2021
•Total equities net revenues were$1.06 billion for 2022, a decrease of 18.5%, compared with an exceptional$1.30 billion in 2021. The results for 2022 were impacted by a more difficult trading environment than 2021 with significantly reduced new issue activity, including reduced SPAC activity. This was partially offset by market share gains and ongoing momentum in our client franchise with strong client activity on market volatility. This compares to record results in predominately all of our equities businesses and across each of our regions during 2021. •Results in our global cash equities business were lower across regions driven by lower trading revenues versus record results globally and across each region on strong market volumes in 2021. The prior year also benefited from trading opportunities related to SPACs. Our global convertibles business also had lower revenues, primarily driven by weaker primary equity markets and widening credit spreads compared to a strong new issue market in 2021. In addition, our equity derivatives business results declined as a difficult and challenging trading environment put pressure on trading activity during 2022. •The lower results were offset by record 2022 results in our electronic trading and prime services businesses, reflecting increased client trading volumes driving strong commission revenues and by continued growth and momentum in our outsourced trading business. 2021 Compared with 2020 •Total equities net revenues were a record$1.30 billion for 2021, an increase of 15.3% over the previous year record of$1.13 billion in 2020. Overall, our record results were driven by strong client activity and trading performance across all regions. 32
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JEFFERIES FINANCIAL GROUP INC. •Our global cash equities business had record results driven by significant client activity and strong trading revenue, including trading gains from SPAC-related activity, and our electronic trading platform continued to expand and achieve record results. Our derivatives business achieved record results, driven by strong client activity and trading revenues. Our prime services franchise had record results driven by higher balances and increased client activity, as well as higher financing revenues in our securities finance business. Our results were slightly offset by lower revenues in our global convertibles businesses primarily driven by lower trading volumes and volatility.
Fixed Income Net Revenues
Fixed income is composed of net revenues from:
•executing transactions for clients and making markets in securitized products, investment grade, high-yield, distressed, emerging markets, municipal and sovereign securities and bank loans, as well as foreign exchange execution on behalf of clients;
•interest rate derivatives and credit derivatives; and
•financing services offered to clients.
2022 Compared with 2021
•Our fixed income net revenues of$765.6 million for 2022 were down 20.2% compared to 2021, primarily due to reduced client activity across most products, mark-to-market losses on certain mortgage inventory positions and a slowdown in securitized markets resulting in fewer trading opportunities. The prior year results were reflective of particularly strong client activity and robust trading activity.
•Results in certain
•We achieved higher revenues in emerging markets and our electronic execution businesses as increased volatility due to geopolitical concerns drove an increase in trading volumes. This was offset by lower results across most of our other credit businesses as a result of a decline in trading opportunities as compared to the prior year comparable period that reflected robust revenues across regions and products.
2021 Compared with 2020
•Fixed income net revenues totaled$959.1 million for 2021, a decrease of 28.5% compared with record net revenues of$1.34 billion for 2020, driven by reduced global trading volumes across several products. While 2021 revenues decreased from 2020, our fixed income franchise produced solid overall trading results across most of our businesses, reflecting continued strength in certain of our credit-focused businesses and strong client demand in structuring and financing credit products and for trading securitized products. The results in 2020 significantly benefited from strong trading volumes due to extremely active markets and high levels of volatility. •Net revenues for 2021 were higher in our securitized markets groups and distressed trading business, as compared with the prior year. In addition, 2021 results benefited from trading gains in our municipal securities business compared to 2020 when markets experienced a significant sell-off due to the impact of COVID-19. Our revenues also benefited from ongoing investments across our European credit franchise. •Our 2021 results also include lower revenues in ourU.S. and international rates businesses due to a decline in trading opportunities, as a result of lower volatility, as the prior year benefited from significant client activity and wider bid-offer spreads. Lower results across our investment grade corporates and emerging markets businesses, as well as our high yield and loan trading businesses, were driven by reduced client activity and lower levels of volatility in 2021. 33
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JEFFERIES FINANCIAL GROUP INC.
Asset Management
We operate a diversified alternative asset management platform offering
institutional clients an innovative range of investment strategies directly and
through our affiliated asset managers. We provide certain of our affiliated
asset managers access to our fully integrated global operational infrastructure
and support. This may include strategy and product development, daily operations
and finance-related activities, compliance, legal and human resources support,
as well as marketing and business development.
Asset management revenues include the following:
•management and performance fees from funds and accounts managed by us;
•revenue from affiliated asset managers where we are entitled to portions of their revenues and/or profits, as well as earnings on our ownership interests in our affiliated asset managers;
•investment income from our capital invested in and managed by us and our affiliated asset managers; and
•revenues from investments held in our legacy merchant banking portfolio, including consolidated operations from real estate development activities, oil and gas activities and timber manufacturing (until the sale of Idaho Timber during the third quarter of 2022).
Asset management fees and revenues are impacted by the level of assets under
management and the performance return of those assets, for the most part on an
absolute basis, and, in certain cases, relative to a benchmark or hurdle. These
components can be affected by financial markets, profits and losses in the
applicable investment portfolios and client capital activity. Further, asset
management fees vary with the nature of investment management services. The
terms under which clients may terminate our investment management authority, and
the requisite notice period for such termination, varies depending on the nature
of the investment vehicle and the liquidity of the portfolio assets. In some
instances, performance fees and similar revenues are recognized once a year,
when they become fixed and determinable and are not probable of being
significantly reversed, typically in December. As a result, a significant
portion of our performance fees and similar revenues generated from investment
returns in a calendar year are recognized in our following fiscal year.
The following summarizes the results of our Asset Management businesses (dollars
in thousands):
% Change from
Prior Year
2022 2021 2020 2022 2021
Asset management fees:
Equities $ 7,198 $ 6,927 $ 6,158 3.9 % 12.5 %
Multi-asset 16,327 7,909 8,544 106.4 % (7.4) %
Total asset management fees 23,525 14,836 14,702 58.6 % 0.9 %
Revenue from strategic affiliates (1) 65,602 105,897 11,838 (38.1) % 794.6 %
Total asset management fees and revenues 89,127 120,733 26,540 (26.2) % 354.9 %
Investment return 156,594 260,316 256,090 (39.8) % 1.7 %
Merchant banking 1,053,031 756,482 580,411 39.2 % 30.3 %
Allocated net interest (41,059) (44,907) (48,484) (8.6) % (7.4) %
Total Asset Management $ 1,257,693 $ 1,092,624 $ 814,557 15.1 % 34.1 %
(1) These amounts include our share of fees received by affiliated asset management companies with which we have revenue and/or profit share arrangements.
2022 Compared with 2021
•Asset management net revenues for 2022 were$1.26 billion , higher than the$1.09 billion for 2021, reflecting increased revenues on certain legacy merchant banking positions as well as sales of certain positions, partially offset by lower investment returns as compared to the prior year. Asset management fees and revenues in 2022 of$89.1 million , as compared with$120.7 million in 2021, were primarily due to modestly higher asset management fees on funds managed by us and a decline in the performance and similar fees and revenues earned through our strategic affiliates. 34
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JEFFERIES FINANCIAL GROUP INC. •Asset management investment return was$156.6 million for 2022, a decline from investment return of$260.3 million for 2021. During 2022, we sold our interests in Oak Hill and recognized revenues of$175.1 million . The gain on sale from our interests in Oak Hill was offset by mark-to-market losses from capital invested by us in certain asset management funds. •Revenues from merchant banking assets managed within our Asset Management business were$1.05 billion for 2022 as compared to revenues of$756.5 million for 2021. During 2022, we recognized revenues from the sale of Idaho Timber and the sale of a completed multi-family real estate project. Merchant banking activity revenues were also higher in 2022 on higher oil and gas revenues given the increase in underlying commodity prices. The increase in revenues for the year endedNovember 30, 2022 as compared to the year endedNovember 30, 2021 was partially offset by unrealized losses on capital invested by us in various public and private companies that are now managed as part of our asset management strategy.
2021 Compared with 2020
•Asset management net revenues for 2021 were$1.09 billion , higher than the$814.6 million for 2020, driven by a substantial increase in asset management fees and revenues. Asset management fees and revenues in 2021 of$120.7 million , as compared with$26.5 million in the prior year, were driven by significant increases in management, performance and similar fees and revenues from our strategic affiliates. •Revenues from merchant banking assets managed within our Asset Management business were$756.5 million for 2022 as compared to revenues of$580.4 million in 2021. During 2021, revenues from Idaho Timber increased given the high demand for wood and an increase in average selling prices. Additionally, we recognized increased revenues in 2021 from the sale of real estate properties as compared to recognizing impairment losses in 2020 due to the softening of certain real estate markets. The increase in revenues for the year endedNovember 30, 2021 as compared to the year endedNovember 30, 2020 was partially offset by unrealized losses on capital invested by us in various public and private companies that are now managed as part of our asset management strategy.
Assets under Management
We and our affiliated asset managers have aggregate net asset values or net asset value equivalent assets under management of approximately$29.0 billion and$23.5 billion atNovember 30, 2022 and 2021, respectively. Net asset values or net asset value equivalent assets under management are composed of the fair value of the net assets of a fund or the net capital invested in a separately managed account. These include the following: •Net asset values of investments made by us in funds or separately managed accounts were$2.6 billion and$2.6 billion atNovember 30, 2022 and 2021, respectively. We invest in certain strategies using our own capital, often before opening a strategy to outside capital. The net asset values include our capital of$1.5 billion and$1.6 billion atNovember 30, 2022 and 2021, respectively, plus amounts financed of$0.9 billion and$1.0 billion atNovember 30, 2022 and 2021, respectively. Revenues related to the investments made by us are presented in Investment return within the results of our asset management businesses. •The assets under management by affiliated asset managers with whom we have profit or revenue sharing arrangements were$25.2 billion and$20.1 billion atNovember 30, 2022 and 2021, respectively. In some instances, due to the timing of payments and crystallization of underlying profits or revenue, the revenue related to these relationships will generally be realized and recognized once per year at the calendar year-end (during our first fiscal quarter). Revenues from our share of fees received by affiliated asset managers are presented in Revenue from strategic affiliates within the results of our asset management businesses. •Third-party investments actively managed by our wholly-owned managers were$1.2 billion and$0.8 billion atNovember 30, 2022 and 2021, respectively. We earn asset management fees as a result of the third-party investments, which are presented in Asset management fees and revenues within the results of our asset management businesses. 35
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JEFFERIES FINANCIAL GROUP INC.
The tables below include only third-party assets under management by us, excluding those of our affiliated asset managers.
Period end assets under management by predominant asset class were as follows
(in millions):
November 30,
2022 2021
Assets under management:
Equities $ 274 $ 349
Multi-asset 974 482
Total $ 1,248 $ 831 Change in assets under management were as follows (in millions):
Year Ended November 30,
2022 2021
Assets under management:
Balance, beginning of period $ 831 $ 774
Net cash flow in (out) 434 21
Net market appreciation (depreciation) (17) 36
Balance, end of period $ 1,248 $ 831
The net cash flow in during 2022 is primarily due to new subscriptions and
investments from third-parties. The net cash flow in 2021 is primarily due to
new subscriptions and investments from third-parties and net market
appreciation, partially offset by redemptions from and liquidations of certain
funds.
Our definition of assets under management is not based on any definition
contained in any of our investment management agreements and differs from the
manner in which "Regulatory Assets Under Management" is reported to the SEC on
Form ADV.
Asset Management Investments
Our asset management business makes seed and additional strategic investments
directly in alternative asset management separately managed accounts and
co-mingled funds where we act as the asset manager or in affiliated asset
managers where we have strategic relationships and participate in the revenues
or profits of the affiliated manager. The following table represents our
investments by type of asset manager (in thousands):
November 30,
2022 2021
Jefferies Financial Group Inc. ; as manager:
Fund investments (1) $ 182,792 $ 221,359
Separately managed accounts (2) 129,430 251,665
Total $ 312,222 $ 473,024
Strategic affiliates; as asset manager:
Fund investments $ 1,022,029 $ 831,508
Separately managed accounts (2) 214,387 368,377
Investments in asset managers 52,357 222,661
Total $ 1,288,773 $ 1,422,546
Total asset management investments $ 1,600,995 $ 1,895,570
(1) Due to the level or nature of an investment in a fund, we may consolidate that fund; and accordingly, the assets and liabilities of the fund are included in the representative line items in our consolidated financial statements. AtNovember 30, 2022 and 2021,$9.7 million and$76.5 million , respectively, represents net investments in funds that have been consolidated in our financial statements. (2) Where we have investments in a separately managed account, the assets and liabilities of such account are presented in our consolidated financial statements within each respective line item. 36
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JEFFERIES FINANCIAL GROUP INC.
Other
Other revenues include foreign currency transaction gains or losses, fair value
debt valuation adjustments on derivative contracts, gains and losses on
investments held in deferred compensation or certain other immaterial corporate
income items that are not attributed to business segments as management does not
consider such amounts in assessing the financial performance of our operating
businesses.
Non-interest Expenses
Non-interest expenses were as follows (dollars in thousands):
% Change from
Prior Year
2022 2021 2020 2022 2021
Compensation and benefits $ 2,589,044 $ 3,554,760 $ 2,944,071 (27.2) % 20.7 %
Floor brokerage and clearing fees 347,805 301,860 266,592 15.2 % 13.2 %
Underwriting costs 42,067 117,572 95,636 (64.2) % 22.9 %
Technology and communications 444,011 388,134 335,065 14.4 % 15.8 %
Occupancy and equipment rental 108,001 106,254 95,754 1.6 % 11.0 %
Business development 150,500 109,772 70,797 37.1 % 55.1 %
Professional services 240,978 215,761 176,280 11.7 % 22.4 %
Depreciation and amortization 172,902 157,420 158,439 9.8 % (0.6) %
Cost of sales 440,837 470,870 338,588 (6.4) % 39.1 %
Other 387,131 337,318 302,216 14.8 % 11.6 %
Total non-interest expenses $ 4,923,276 $ 5,759,721 $ 4,783,438 (14.5) % 20.4 %
Total Non-Interest Expenses
2022 Compared with 2021
•Non-interest expenses were $4.92 billion for 2022, a decrease of
$836.4 million , or 14.5%, compared with $5.76 billion for 2021. The decrease is
primarily due to lower compensation and benefits expense, consistent with the
decline in net revenues as well as reduced underwriting costs consistent with
the overall industry-wide decline in underwriting activity.
Compensation and Benefits
•Compensation and benefits expense consists of salaries, benefits, commissions, annual cash compensation and share-based awards and the amortization of share-based and cash compensation awards to employees.
•Cash and share-based awards and a portion of cash awards granted to employees as part of year end compensation generally contain provisions such that employees who terminate their employment or are terminated without cause may continue to vest in their awards, so long as those awards are not forfeited as a result of other forfeiture provisions (primarily non-compete clauses) of those awards. Accordingly, the compensation expense for a portion of awards granted at year end as part of annual compensation is recorded during the year of the award. Compensation and benefits expense includes amortization expense associated with these awards to the extent vesting is contingent on future service. In addition, certain awards to our Chief Executive Officer and our President and contain market and performance conditions and the awards are amortized over their service periods. •Compensation and benefits expense was$2.59 billion for 2022 compared with$3.55 billion for 2021. A significant portion of our compensation expense is highly variable with net revenues. Compensation and benefits expense as a percentage of Net revenues was 43.3% for 2022 and 44.4% for 2021. •Compensation expense related to the amortization of share- and cash-based awards amounted to$240.5 million for 2022 compared with$405.0 million for 2021. Compensation expense in 2021 includes accelerated amortization of certain cash-based awards, which were amended to remove service requirements for vesting in the awards, amounted to$188.3 million for 2021. 37
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JEFFERIES FINANCIAL GROUP INC. •Employee headcount was 5,381 globally atNovember 30, 2022 , a decrease of 175 employees from our headcount of 5,556 atNovember 30, 2021 . Our headcount decreased by 561 as a result of the sale of our wholly-owned subsidiary, Idaho Timber, offset by growth in our investment banking headcount, as well as additions in technology and other corporate services staff to support our growth and other strategic priorities.
•Refer to Note 13, Compensation Plans, included in this Annual Report on Form 10-K, for further details on compensation and benefits.
Non-Interest Expenses (Excluding Compensation and Benefits)
•Non-interest expenses, excluding Compensation and benefits, as a percentage of Net revenues was 39.0% and 27.5% for 2022 and 2021, respectively, demonstrating the operating leverage inherent in our business and was impacted by the following:
?Floor brokerage and clearing fees were higher commensurate with strong equity commission revenues.
?Underwriting costs were lower due to a decrease in the volume of equity and debt underwriting transactions.
?Technology and communication expenses were higher related to the development of various trading and management systems and increased market data costs.
?Business development expenses were higher as business travel, conferences and other events increased from the prior year, which was substantially curtailed due to COVID-19. ?Cost of sales were lower reflecting only three quarters of cost of sales in 2022 from Idaho Timber as compared to a full year of cost of sales in 2021 due to its sale during the third quarter of 2022, partially offset by cost of sales arising from the sale of a multi-family real estate project during the fourth quarter of 2022. ?Other expenses were higher and included an$80.0 million combined regulatory settlement with theSEC and the CFTC as well as our charitable donations of$13.5 million from our Ukrainian Doing Good Global Trading Day. Other expenses in the prior year comparable period included bad debt expenses related to our prime brokerage business, other charitable donations of$13.2 million as well costs related to the early redemption of senior notes.
2021 Compared with 2020
•Non-compensation expenses for 2021 increased
•The increase in non-compensation expenses was largely due to higher Floor brokerage and clearing fees on increased trading volumes in equities and higher Underwriting costs and Business Development expenses as investment banking activity increased and higher costs associated with our increased recruiting efforts. The increase also included higher Technology and communication expenses primarily related to the development of various trading and management systems and increased market data costs. Professional services expenses were also higher primarily due to legal and agency fees to support growing activity across our businesses. •Results for 2021 also included higher Other expenses primarily due to an increase in bad debt expense mostly related to a specific default in our prime brokerage business and$64.0 million in costs related to the early redemption of senior notes, partially offset by a reduction in the loss provision for investment banking receivables.
Income Taxes
•For 2022, the provision for income taxes was
•Refer to Note 21, Income Taxes, in our consolidated financial statements included in this Annual Report on Form 10-K, for further details on income taxes.
Accounting Developments
For a discussion of recently issued accounting developments and their impact on
our consolidated financial statements, see Note 3, Accounting Developments, in
our consolidated financial statements included in this Annual Report on Form
10-K.
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Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity withU.S. generally accepted accounting principles ("U.S. GAAP"), which requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. Actual results can and may differ from estimates. These differences could be material to our consolidated financial statements. We believe our application ofU.S. GAAP and the associated estimates are reasonable. Our accounting estimates are reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates. For further discussions of the following significant accounting policies and other significant accounting policies, see Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in this Annual Report on Form 10-K.
Valuation of Financial Instruments
Financial instruments owned and Financial instruments sold, not yet purchased are recorded at fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Unrealized gains or losses are generally recognized in Principal transactions revenues in our Consolidated Statements of Earnings. For information on the composition of our Financial instruments owned and Financial instruments sold, not yet purchased recorded at fair value, see Note 4, Fair Value Disclosures, in our consolidated financial statements included in this Annual Report on Form 10-K. Fair Value Hierarchy - In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs, where Level 1 uses observable prices in active markets and Level 3 uses valuation techniques that incorporate significant unobservable inputs. Greater use of management judgment is required in determining fair value when inputs are less observable or unobservable in the marketplace, such as when the volume or level of trading activity for a financial instrument has decreased and when certain factors suggest that observed transactions may not be reflective of orderly market transactions. Judgment must be applied in determining the appropriateness of available prices, particularly in assessing whether available data reflects current prices and/or reflects the results of recent market transactions. Prices or quotes are weighed when estimating fair value with greater reliability placed on information from transactions that are considered to be representative of orderly market transactions. Fair value is a market-based measure; therefore, when market observable inputs are not available, our judgment is applied to reflect those judgments that a market participant would use in valuing the same asset or liability. The availability of observable inputs can vary for different products. We use prices and inputs that are current as of the measurement date even in periods of market disruption or illiquidity. The valuation of financial instruments categorized within Level 3 of the fair value hierarchy involves the greatest extent of management judgment. (See Note 2, Summary of Significant Accounting Policies, and Note 4, Fair Value Disclosures, in our consolidated financial statements included in this Annual Report on Form 10-K for further information on the definitions of fair value, Level 1, Level 2 and Level 3 and related valuation techniques.) Level 3 Assets and Liabilities - For information on the composition and activity of our Level 3 assets and Level 3 liabilities, see Note 4, Fair Value Disclosures, in our consolidated financial statements included in this Annual Report on Form 10-K. Controls Over the Valuation Process for Financial Instruments - OurIndependent Price Verification Group , independent of the trading function, plays an important role in determining that our financial instruments are appropriately valued and that fair value measurements are reliable. This is particularly important where prices or valuations that require inputs are less observable. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. Where a pricing model is used to determine fair value, these control processes include reviews of the pricing model's theoretical soundness and appropriateness by risk management personnel with relevant expertise who are independent from the trading desks. In addition, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model. 39
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JEFFERIES FINANCIAL GROUP INC.
Income Taxes
Significant judgment is required in estimating our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. In determining the provision for income
taxes, we must make judgments and interpretations about how to apply inherently
complex tax laws to numerous transactions and business events. In addition, we
must make estimates about the amount, timing and geographic mix of future
taxable income, which includes various tax planning strategies to utilize tax
attributes of deferred tax assets before they expire.
We record a valuation allowance to reduce our net deferred tax asset to the
amount that is more likely than not to be realized. We are required to consider
all available evidence, both positive and negative, and to weigh the evidence
when determining whether a valuation allowance is required and the amount of
such valuation allowance. Generally, greater weight is required to be placed on
objectively verifiable evidence when making this assessment, in particular on
recent historical operating results.
We also record reserves for unrecognized tax benefits based on our assessment of
the probability of successfully sustaining tax filing positions. Management
exercises significant judgment when assessing the probability of successfully
sustaining tax filing positions, and in determining whether a contingent tax
liability should be recorded and if so, estimating the amount. If our tax filing
positions are successfully challenged, payments could be required that are in
excess of reserved amounts or we may be required to reduce the carrying amount
of our net deferred tax asset, either of which could be significant to our
financial condition or results of operations.
Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. When testing for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group). The determination of whether an asset group is recoverable is based on management's estimate of undiscounted future cash flows directly attributable to the asset group as compared to its carrying value. If the carrying amount of the asset group is greater than the undiscounted cash flows, an impairment loss would be recognized for the amount by which the carrying amount of the asset group exceeds its estimated fair value. Due to a decline in oil and gas prices during the second quarter of 2020, we performed an impairment analyses on certain of our proven oil and gas properties in theDJ Basin ofWyoming andColorado , theWilliston Basin inNorth Dakota andMontana and oil and gas properties in the EastEagle Ford . Estimated undiscounted cash flows were determined based on reserves and costs and updated those based on strip pricing as ofMay 31, 2020 for theDJ Basin andWilliston Basis properties and as ofFebruary 29, 2020 for the EastEagle Ford properties. The expected undiscounted future net cash flows were then compared to the end of quarter net carrying value of the oil and gas properties. No impairment of theWilliston Basin assets was necessary as the undiscounted future net cash flows significantly exceeded the carrying value of these assets. Undiscounted future net cash flows were lower than the carrying value of theDJ Basin properties and the EastEagle Ford properties, and accordingly, the fair value of such proven properties was estimated using a 10.0% discount rate and estimated future cash flows from the properties' reserve report. The estimated fair value of the proven oil and gas properties in theDJ Basin totaled$26.8 million , which was$13.2 million lower than the carrying value as of the end of the second quarter of 2020 and the estimated fair value of the proven oil and gas properties in the EastEagle Ford totaled$9.6 million , which was$33.0 million lower than the carrying value as of the end of first quarter of 2020. As a result, impairment charges of$46.2 million were recorded in Other expenses during 2020.
Impairment of Equity Method Investments
We evaluate equity method investments for impairment when operating losses or other factors may indicate a decrease in value which is other than temporary. We consider a variety of factors including economic conditions nationally and in their geographic areas of operation, adverse changes in the industry in which they operate, declines in business prospects, deterioration in earnings, increasing costs of operations and other relevant factors specific to the investee. Whenever we believe conditions or events indicate that one of these investments might be significantly impaired, we obtain from such investee updated cash flow projections. We use this information and, together with discussions with the investee's management and comparable public company analysis, evaluate if the book value of its investment exceeds its fair value, and if so and the situation is deemed other than temporary, record an impairment charge. We have an equity method interest in FXCM with rights to a majority of all distributions in respect of FXCM. In the fourth quarter of 2022, we had a triggering event to test our investment in FXCM for impairment. We estimated the fair value of our equity interest in FXCM based primarily on a discounted cash flow valuation model. The discounted cash flow valuation model used inputs including management's projections of future FXCM cash flows and a discount rate of 23.0%. The estimated fair value of our equity investment in FXCM was$61.7 million as of the date of our impairment evaluation, which was$25.3 million lower than our prior carrying value. We concluded that the decline in fair value was other than temporary and as result incurred a$25.3 million impairment charge. 40
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JEFFERIES FINANCIAL GROUP INC. We have a 49% membership interest in theRedSky JZ Fulton Mall joint venture, which owns a property inBrooklyn, New York . During the first quarter of 2020, difficulties were encountered with attempts to refinance debt within the investment. We viewed this, combined with a softening of theBrooklyn, New York real estate market during the quarter, as a triggering event and evaluated our equity method investment inRedSky JZ Fulton Mall to determine if there was an impairment. In connection with this evaluation, we obtained an appraisal which reflected a reduction in the value of the investment in comparison to an earlier appraisal obtained shortly before the beginning of the quarter. The appraisal was based off of Level 3 inputs consisting of prices of comparable properties and the appraisal indicated that the value of the property was worth less than the debt outstanding. We recorded an impairment charge of$55.6 million during 2020, which represented all of its carrying value in the joint venture.
Goodwill
AtNovember 30, 2022 , Goodwill recorded in our Consolidated Statement of Financial Condition is$1.74 billion (3.4% of total assets). The nature and accounting for goodwill is discussed in Note 2, Summary of Significant Accounting Policies, and Note 11, Goodwill and Intangible Assets, in our consolidated financial statements included in this Annual Report on Form 10-K. Goodwill must be allocated to reporting units and tested for impairment at least annually, or when circumstances or events make it more likely than not that an impairment occurred. Goodwill is tested by comparing the estimated fair value of each reporting unit with its carrying value. Our annual goodwill impairment testing date for a substantial portion of our reporting units isAugust 1 andNovember 30 for other identified reporting units. The results of our annual tests did not indicate any goodwill impairment. We use allocated tangible equity plus allocated goodwill and intangible assets for the carrying amount of each reporting unit. The amount of tangible equity allocated to a reporting unit is based on our cash capital model deployed in managing our businesses, which seeks to approximate the capital a business would require if it were operating independently. For further information on our Cash Capital Policy, refer to the Liquidity, Financial Condition and Capital Resources section herein. Intangible assets are allocated to a reporting unit based on either specifically identifying a particular intangible asset as pertaining to a reporting unit or, if shared among reporting units, based on an assessment of the reporting unit's benefit from the intangible asset in order to generate results. Estimating the fair value of a reporting unit requires management judgment and often involves the use of estimates and assumptions that could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. Estimated fair values for our reporting units utilize market valuation methods that incorporate price-to-earnings and price-to-book multiples of comparable public companies and/or projected cash flows. Under the market valuation approach, the key assumptions are the selected multiples and our internally developed projections of future profitability, growth and return on equity for each reporting unit. The weight assigned to the multiples requires judgment in qualitatively and quantitatively evaluating the size, profitability and the nature of the business activities of the reporting units as compared to the comparable publicly-traded companies. In addition, as the fair values determined under the market valuation approach represent a noncontrolling interest, we apply a control premium to arrive at the estimate fair value of each reporting unit on a controlling basis. Historically, we have performed our annual goodwill impairment testing within the Investment Banking and Capital Markets, Asset Management and Merchant Banking reportable business segments. OnNovember 1, 2022 in connection with the merger ofJefferies Group LLC intoJefferies Financial Group Inc. , we reassessed our reporting units based on the discrete financial information to be made available to segment management as of and subsequent to the merger. As a result, we identified each of the Investment Banking, Equities and Wealth Management and Fixed Income businesses to be reporting units within the Investment Banking and Capital Markets reportable business segment. Goodwill previously attributable to our Merchant Banking reportable segment is now included within our Asset Management reportable business segment. The total goodwill of$1.55 billion attributed to the Investment Banking and Capital Markets reportable business segment has been assigned to each of the Investment Banking, Equities and Wealth Management and Fixed Income reporting units as ofNovember 1, 2022 , based on the relative fair value of each of the reporting units' as ofNovember 1, 2022 . The relative fair value estimate of each of the reporting units' as ofNovember 1, 2022 , was based on methodologies consistent with the market valuation approach used in our annual impairment test, which are consistent with valuation techniques market participants would use. The results of our reassessment of the reporting units indicated that all of the reporting units had a fair value in excess of their carrying amounts based on current projections as ofNovember 1, 2022 . The valuation methodology for our reporting units are sensitive to management's forecasts of future profitability, which are a significant component of the valuation and come with a level of uncertainty regarding trading volumes and capital market transaction levels. The carrying values of goodwill by reporting unit atNovember 30, 2022 are as follows:$722.5 million in Investment Banking,$254.8 million in Equities and Wealth Management,$575.6 million in Fixed Income,$143.0 million in Asset Management and$40.2 million attributed to various individual legacy merchant banking investments. 41
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JEFFERIES FINANCIAL GROUP INC. Refer to Note 11, Goodwill and Intangible Assets, in our consolidated financial statements included in this Annual Report on Form 10-K, for further details on goodwill.
Liquidity, Financial Condition and Capital Resources
Our CFO and Global Treasurer are responsible for developing and implementing our liquidity, funding and capital management strategies. These policies are determined by the nature and needs of our day to day business operations, business opportunities, regulatory obligations, and liquidity requirements.
Our actual levels of capital, total assets and financial leverage are a function of a number of factors, including asset composition, business initiatives and opportunities, regulatory requirements and cost and availability of both long term and short term funding. We have historically maintained a balance sheet consisting of a large portion of our total assets in cash and liquid marketable securities. The liquid nature of these assets provides us with flexibility in financing and managing our business. We also own a legacy portfolio of businesses and investments that are reflected as consolidated subsidiaries, equity investments or securities. We are in the process of liquidating a substantial portion of this portfolio with the intention of selling to third parties or distributing to shareholders this portfolio over the next few years. During the year endedNovember 30, 2022 , we sold our wholly-owned manufacturing subsidiary, Idaho Timber, at a combined sales price of$239.3 million , resulting in a pre-tax gain of$138.7 million recognized in Other revenue and also sold a multi-family real estate property recognizing revenues of$122.5 million in Other revenue and Cost of sales of$70.2 million . In keeping with our strategy of returning excess liquidity to shareholders, during the year endedNovember 30, 2022 , we returned an aggregate of$1.14 billion to shareholders in the form of$280.1 million dividends and the repurchase of 25.6 million shares for a total of$859.6 million of$33.58 per share. OnJanuary 13, 2023 , we distributed our ownership interests in Vitesse Energy on a tax-free pro rata basis to all shareholders, resulting in a distribution of capital of over$500.0 million . We maintain modest leverage to support our investment grade ratings. The growth of our balance sheet is supported by our equity and we have quantitative metrics in place to monitor leverage and double leverage. Our capital plan is robust, in order to sustain our operating model through stressed conditions. We maintain adequate financial resources to support business activities in both normal and stressed market conditions, including a buffer in excess of our regulatory, or other internal or external, requirements. Our access to funding and liquidity is stable and efficient to ensure that there is sufficient liquidity to meet our financial obligations in normal and stressed market conditions.
Our Balance Sheet
A business unit level balance sheet and cash capital analysis are prepared and
reviewed with senior management on a weekly basis. As a part of this balance
sheet review process, capital is allocated to all assets and gross balance sheet
limits are adjusted, as necessary. This process ensures that the allocation of
capital and costs of capital are incorporated into business decisions. The goals
of this process are to protect the firm's platform, enable our businesses to
remain competitive, maintain the ability to manage capital proactively and hold
businesses accountable for both balance sheet and capital usage.
We actively monitor and evaluate our financial condition and the composition of
our assets and liabilities. We continually monitor our overall securities
inventory, including the inventory turnover rate, which confirms the liquidity
of our overall assets. A significant portion of our financial instruments are
valued on a daily basis and we monitor and employ balance sheet limits for our
various businesses.
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The following table provides detail on selected balance sheet items (dollars in
millions):
November 30,
2022 2021 % Change
Total assets $ 51,057.7 $ 56,107.3 (9.0) %
Cash and cash equivalents 9,703.1 10,755.1 (9.8) %
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
957.3 1,015.1 (5.7) %
Financial instruments owned 18,666.3 18,024.6 3.6 %
Financial instruments sold, not yet purchased 11,056.5 9,267.1 19.3 %
Total Level 3 assets 791.5 602.6 31.3 %
Securities borrowed $ 5,831.1 $ 6,409.4 (9.0) %
Securities purchased under agreements to resell 4,546.7 7,642.5 (40.5) %
Total securities borrowed and securities purchased
under
agreements to resell $ 10,377.8 $ 14,051.9 (26.1) %
Securities loaned $ 1,366.0 $ 1,525.7 (10.5) %
Securities sold under agreements to repurchase 7,452.3 8,446.1 (11.8) %
Total securities loaned and securities sold under
agreements to
repurchase $ 8,818.3 $ 9,971.8 (11.6) %
Total assets at
Our total Financial instruments owned inventory was$18.67 billion and$18.02 billion atNovember 30, 2022 and 2021, respectively. During the year endedNovember 30, 2022 , our total Financial instruments owned increased primarily due to increases in corporate equity securities, government and federal agency securities, investments at fair value and sovereign obligations, partially offset by decreases in loans and derivative contracts. Financial instruments sold, not yet purchased inventory was$11.06 billion atNovember 30, 2022 , an increase of 19.3% from$9.27 billion atNovember 30, 2021 , with the increase primarily driven by government and federal agency securities, corporate equity securities and corporate debt securities. Our overall net inventory position was$7.61 billion and$8.76 billion atNovember 30, 2022 and 2021, respectively, with the decrease primarily due to decreases in loans, government and federal agency securities and derivative contracts, partially offset by an increase in investments at fair value. Our Level 3 financial instruments owned as a percentage of total Financial instruments owned increased to 4.2% atNovember 30, 2022 from 3.3% atNovember 30, 2021 primarily due to mark-to-market gains on certain securities held in connection with our investment banking activities. Securities financing assets and liabilities include financing for our financial instruments trading activity, matched book transactions and mortgage finance transactions. Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions. The aggregate outstanding balance of our securities financing assets and liabilities increase or decrease from period to period depending on fluctuations in the level of our client activity and the level of our own trading activity. Our average month end balance of total reverse repos and stock borrows during 2022 were 45.2% higher than theNovember 30, 2022 balance. Our average month end balance of total repos and stock loans during 2022 were 47.7% higher than theNovember 30, 2022 balance. 43
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The following table presents our period end balance, average balance and maximum
balance at any month end within the periods presented for Securities purchased
under agreements to resell and Securities sold under agreements to repurchase
(dollars in millions):
Year Ended
2022 2021
Securities Purchased Under Agreements to Resell:
Year end $ 4,547 $ 7,642
Month end average 7,489 9,425
Maximum month end 10,428 12,321
Securities Sold Under Agreements to Repurchase:
Year end $ 7,452 $ 8,446
Month end average 11,738 11,515
Maximum month end 17,417 19,207
Fluctuations in the balance of our repurchase agreements from period to period
and intraperiod are dependent on business activity in those periods.
Additionally, the fluctuations in the balances of our securities purchased under
agreements to resell are influenced in any given period by our clients' balances
and our clients' desires to execute collateralized financing arrangements via
the repurchase market or via other financing products. Average balances and
period end balances will fluctuate based on market and liquidity conditions and
we consider the fluctuations intraperiod to be typical for the repurchase
market.
Leverage Ratios
The following table presents total assets, total equity, total
November 30,
2022 2021
Total assets $ 51,057,683 $ 56,107,311
Total equity $ 10,295,479 $ 10,579,640
Total Jefferies Financial Group Inc. common shareholders' equity $ 10,232,846 $ 10,553,755
Deduct: Goodwill and intangible assets (1,875,576) (1,897,500)
Tangible
$ 8,357,270 $ 8,656,255 Leverage ratio (1) 5.0 5.3 Tangible gross leverage ratio (2) 5.9 6.3 (1)Leverage ratio equals total assets divided by total equity. (2)Tangible gross leverage ratio (a non-GAAP financial measure) equals total assets less goodwill and identifiable intangible assets divided by tangibleJefferies Financial Group Inc. common shareholders' equity. The tangible gross leverage ratio is used by rating agencies in assessing our leverage ratio.
Liquidity Management
The key objectives of the liquidity management framework are to support the
successful execution of our business strategies while ensuring sufficient
liquidity through the business cycle and during periods of financial distress.
Our liquidity management policies are designed to mitigate the potential risk
that we may be unable to access adequate financing to service our financial
obligations without material franchise or business impact.
The principal elements of our liquidity management framework are our Contingency
Funding Plan, our Cash Capital Policy and our assessment of Modeled Liquidity
Outflow ("MLO").
Contingency Funding Plan. Our Contingency Funding Plan is based on a model of a
potential liquidity contraction over a one year time period. This incorporates
potential cash outflows during a market or our idiosyncratic liquidity stress
event, including, but not limited to, the following:
•Repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance;
•Maturity rolloff of outstanding letters of credit with no further issuance and replacement with cash collateral;
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•Higher margin requirements than currently exist on assets on securities financing activity, including repurchase agreements and other secured funding;
•Liquidity outflows related to possible credit downgrade;
•Lower availability of secured funding;
•Client cash withdrawals;
•The anticipated funding of outstanding investment and loan commitments; and
•Certain accrued expenses and other liabilities and fixed costs.
Cash Capital Policy. We maintain a cash capital model that measures long-term funding sources against requirements. Sources of cash capital include our equity, mezzanine equity and the noncurrent portion of long-term borrowings. Uses of cash capital include the following:
•Illiquid assets such as equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments;
•A portion of securities inventory and other assets not expected to be financed on a secured basis in a credit stressed environment (i.e., margin requirements); and
•Drawdowns of unfunded commitments.
To ensure that we do not need to liquidate inventory in the event of a funding stress, we seek to maintain surplus cash capital. Our total long-term capital of$17.49 billion atNovember 30, 2022 exceeded our cash capital requirements. MLO. Our businesses are diverse, and our liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment. During a liquidity stress, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change. As a result of our policy to ensure we have sufficient funds to cover what we estimate may be needed in a liquidity stress, we hold more cash and unencumbered securities and have greater long-term debt balances than our businesses would otherwise require. As part of this estimation process, we calculate an MLO that could be experienced in a liquidity stress. MLO is based on a scenario that includes both a market-wide stress and firm-specific stress, characterized by some or all of the following elements:
•Global recession, default by a medium-sized sovereign, low consumer and corporate confidence, and general financial instability.
•Severely challenged market environment with material declines in equity markets and widening of credit spreads.
•Damaging follow-on impacts to financial institutions leading to the failure of a large bank.
•A firm-specific crisis potentially triggered by material losses, reputational damage, litigation, executive departure, and/or a ratings downgrade.
The following are the critical modeling parameters of the MLO:
•Liquidity needs over a 30-day scenario.
•A two-notch downgrade of our long-term senior unsecured credit ratings.
•No support from government funding facilities.
•A combination of contractual outflows, such as upcoming maturities of unsecured debt, and contingent outflows (e.g., actions though not contractually required, we may deem necessary in a crisis). We assume that most contingent outflows will occur within the initial days and weeks of a stress.
•No diversification benefit across liquidity risks. We assume that liquidity risks are additive.
The calculation of our MLO under the above stresses and modeling parameters considers the following potential contractual and contingent cash and collateral outflows:
•All upcoming maturities of unsecured long-term debt, commercial paper, promissory notes and other unsecured funding products assuming we will be unable to issue new unsecured debt or rollover any maturing debt.
•Repurchases of our outstanding long-term debt in the ordinary course of business as a market maker.
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JEFFERIES FINANCIAL GROUP INC. •A portion of upcoming contractual maturities of secured funding activity due to either the inability to refinance or the ability to refinance only at wider haircuts (i.e., on terms which require us to post additional collateral). Our assumptions reflect, among other factors, the quality of the underlying collateral and counterparty concentration. •Collateral postings to counterparties due to adverse changes in the value of our over-the-counter ("OTC") derivatives and other outflows due to trade terminations, collateral substitutions, collateral disputes, collateral calls or termination payments required by a two-notch downgrade in our credit ratings. •Variation margin postings required due to adverse changes in the value of our outstanding exchange-traded derivatives and any increase in initial margin and guarantee fund requirements by derivative clearing houses.
•Liquidity outflows associated with our prime services business, including withdrawals of customer credit balances, and a reduction in customer short positions.
•Liquidity outflows to clearing banks to ensure timely settlements of cash and securities transactions.
•Draws on our unfunded commitments considering, among other things, the type of commitment and counterparty.
•Other upcoming large cash outflows, such as employee compensation, tax and dividend payments, with no expectation of future dividends from any subsidiaries.
Based on the sources and uses of liquidity calculated under the MLO scenarios, we determine, based on a calculated surplus or deficit, additional long-term funding that may be needed versus funding through the repurchase financing market and consider any adjustments that may be necessary to our inventory balances and cash holdings. AtNovember 30, 2022 , we had sufficient excess liquidity to meet all contingent cash outflows detailed in the MLO. We regularly refine our model to reflect changes in market or economic conditions and our business mix. Sources of Liquidity The following are financial instruments that are cash and cash equivalents or are deemed by management to be generally readily convertible into cash, marginable or accessible for liquidity purposes within a relatively short period of time (dollars in thousands): Average Balance Quarter ended November 30, 2022 November 30, 2022 (1) November 30, 2021
Cash and cash equivalents: Cash in banks$ 2,541,021 $ 3,338,342 $ 2,266,519 Money market investments (2) 7,162,088 5,733,232 8,488,614 Total cash and cash equivalents 9,703,109 9,071,574 10,755,133 Other sources of liquidity: Debt securities owned and securities purchased under agreements to resell (3) 1,417,177 1,295,746 1,621,118 Other (4) 520,714 559,172 311,641 Total other sources 1,937,891 1,854,918 1,932,759 Total cash and cash equivalents and other liquidity sources$ 11,641,000 $ 10,926,492 $ 12,687,892 Total cash and cash equivalents and other liquidity sources as % of Total assets 22.8 % 22.6 % Total cash and cash equivalents and other liquidity sources as % of Total assets less goodwill and intangible assets 23.7 % 23.4 % (1)Average balances are calculated based on weekly balances. (2)AtNovember 30, 2022 and 2021,$7.14 billion and$8.47 billion , respectively, was invested inU.S. government money funds that invest at least 99.5% of its total assets in cash, securities issued by theU.S. government andU.S. government-sponsored entities, and repurchase agreements that are fully collateralized by cash or government securities. The remaining$23.1 million and$14.9 million atNovember 30, 2022 and 2021 are invested in AAA-rated prime money funds. The average balance ofU.S. government money funds for the quarter endedNovember 30, 2022 was$5.71 billion . 46
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(3)Consists of high quality sovereign government securities and reverse
repurchase agreements collateralized by U.S. government securities and other
high quality sovereign government securities; deposits with a central bank
within the European Economic Area, United Kingdom , Canada , Australia , Japan ,
Switzerland or the U.S. ; and securities issued by a designated multilateral
development bank and reverse repurchase agreements with underlying collateral
composed of these securities.
(4)Other includes unencumbered inventory representing an estimate of the amount
of additional secured financing that could be reasonably expected to be obtained
from our Financial instruments owned that are currently not pledged after
considering reasonable financing haircuts.
In addition to the cash balances and liquidity pool presented above, the
majority of financial instruments (both long and short) in our trading accounts
are actively traded and readily marketable. At November 30, 2022 , we had the
ability to readily obtain repurchase financing for 78.2% of our inventory at
haircuts of 10% or less, which reflects the liquidity of our inventory. In
addition, as a matter of our policy, all of these assets have internal capital
assessed, which is in addition to the funding haircuts provided in the
securities finance markets. Additionally, certain of our Financial instruments
owned primarily consisting of bank loans, consumer loans and investments are
predominantly funded by long term capital. Under our cash capital policy, we
model capital allocation levels that are more stringent than the haircuts used
in the market for secured funding; and we maintain surplus capital at these more
stringent levels. We continually assess the liquidity of our inventory based on
the level at which we could obtain financing in the marketplace for a given
asset. Assets are considered to be liquid if financing can be obtained in the
repurchase market or the securities lending market at collateral haircut levels
of 10% or less. The following summarizes our financial instruments by asset
class that we consider to be of a liquid nature and the amount of such assets
that have not been pledged as collateral at November 30, 2022 and 2021 (in
thousands):
November 30,
2022 2021
Unencumbered Unencumbered
Liquid Financial Liquid Financial Liquid Financial Liquid Financial
Instruments Instruments (2) Instruments Instruments (2)
Corporate equity securities $ 3,040,844 $
846,520
3,215,807 34,405 2,943,135 31,935
U.S. government, agency and municipal
securities 4,032,215 59,909 3,610,885 109,325
Other sovereign obligations 1,679,573 803,738 1,528,100 1,463,968
Agency mortgage-backed securities (1) 2,514,773 - 1,487,165 -
Loans and other receivables 111,681 - 132,989 -
Total $ 14,594,893 $ 1,744,572 $ 12,338,230 $ 1,952,385
(1)Consists solely of agency mortgage-backed securities issued by the Federal
Home Loan Mortgage Corporation ("Freddie Mac"), the Federal National Mortgage
Association ("Fannie Mae") and the Government National Mortgage Association
("Ginnie Mae").
(2)Unencumbered liquid balances represent assets that can be sold or used as
collateral for a loan, but have not been.
In addition to being able to be readily financed at reasonable haircut levels,
we estimate that each of the individual securities within each asset class above
could be sold into the market and converted into cash within three business days
under normal market conditions, assuming that the entire portfolio of a given
asset class was not simultaneously liquidated. There are no restrictions on the
unencumbered liquid securities, nor have they been pledged as collateral.
Sources of Funding and Capital Resources
Our assets are funded by equity capital, senior debt, securities loaned, securities sold under agreements to repurchase, customer free credit balances, bank loans and other payables.
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Secured Financing
We rely principally on readily available secured funding to finance our
inventory of financial instruments owned and financial instruments sold. Our
ability to support increases in total assets is largely a function of our
ability to obtain short and intermediate-term secured funding, primarily through
securities financing transactions. We finance a portion of our long inventory
and cover some of our short inventory by pledging and borrowing securities in
the form of repurchase or reverse repurchase agreements (collectively "repos"),
respectively. At November 30, 2022 , approximately 61.0% of our cash and noncash
repurchase financing activities use collateral that is considered eligible
collateral by central clearing corporations. During 2022, an average of
approximately 75.9% of our cash and noncash repurchase financing activities used
collateral that was considered eligible collateral by central clearing
corporations. Central clearing corporations are situated between participating
members who borrow cash and lend securities (or vice versa); accordingly, repo
participants contract with the central clearing corporation and not one another
individually. Therefore, counterparty credit risk is borne by the central
clearing corporation which mitigates the risk through initial margin demands and
variation margin calls from repo participants. The comparatively large
proportion of our total repo activity that is eligible for central clearing
reflects the high quality and liquid composition of the inventory we carry in
our trading books. For those asset classes not eligible for central clearing
house financing, we seek to execute our bi-lateral financings on an extended
term basis and the tenor of our repurchase and reverse repurchase agreements
generally exceeds the expected holding period of the assets we are financing.
The weighted average maturity of cash and noncash repurchase agreements for
non-clearing corporation eligible funded inventory is approximately six months
at November 30, 2022 .
Our ability to finance our inventory via central clearinghouses and bi-lateral
arrangements is augmented by our ability to draw bank loans on an uncommitted
basis under our various banking arrangements. At November 30, 2022 , short-term
borrowings, which must be repaid within one year or less and include bank loans
and overdrafts, borrowings under revolving credit facilities and floating rate
puttable notes totaled $528.4 million . Interest under the bank lines is
generally at a spread over the federal funds rate. Letters of credit are used in
the normal course of business mostly to satisfy various collateral requirements
in favor of exchanges in lieu of depositing cash or securities. Average daily
short-term borrowings outstanding were $432.0 million for 2022.
At November 30, 2022 and 2021, our borrowings under credit facilities classified
within bank loans in Short-term borrowings in our Consolidated Statements of
Financial Condition were $517.0 million and $200.0 million , respectively. Our
borrowings include credit facilities that contain certain covenants that, among
other things, require us to maintain a specified level of tangible net worth,
require a minimum regulatory net capital requirement for our U.S. broker-dealer,
Jefferies LLC , and impose certain restrictions on the future indebtedness of
certain of our subsidiaries that are borrowers. Interest is based on rates at
spreads over the federal funds rate or other adjusted rates, as defined in the
various credit agreements, or at a rate as agreed between the bank and us in
reference to the bank's cost of funding. At November 30, 2022 , we were in
compliance with all covenants under these credit facilities.
For additional details on our short-term borrowings, refer to Note 16, Short-Term Borrowings, in our consolidated financial statements included in this Annual Report on Form 10-K.
In addition to the above financing arrangements, we issue notes backed by eligible collateral under master repurchase agreements, which provides an additional financing source for our inventory (our "repurchase agreement financing program"). The notes issued under the program are presented within Other secured financings in our Consolidated Statements of Financial Condition. AtNovember 30, 2022 , the outstanding notes were$1.31 billion , bear interest at a spread over the London Interbank Offered Rate ("LIBOR") and mature fromSeptember 2022 toJuly 2025 . For additional details on our repurchase agreement financing program, refer to Note 8, Variable Interest Entities, in our consolidated financial statements included in this Annual Report on Form 10-K. 48
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AtNovember 30, 2022 and 2021, we had total long-term capital of$17.49 billion and$18.72 billion , respectively, resulting in a long-term debt to equity capital ratio of 0.68:1 and 0.74:1, respectively. See "Equity Capital" herein for further information on our change in total equity. Our total long-term capital base atNovember 30, 2022 and 2021 was as follows (in thousands):November 30, 2022 2021
Unsecured Long-Term Debt (1)
131,461 150,400
Total Equity 10,295,479 10,579,640
(1)The amounts at
Long-Term Debt
During 2022, long-term debt decreased by$351.7 million to$8.77 billion atNovember 30, 2022 , as presented in our Consolidated Statements of Financial Condition. This decrease is primarily due to fair value changes in our structured notes and gains on certain of our senior notes associated with interest rate swaps based on their designation as fair value hedges, partially offset by structured notes issuances, net of retirements, of approximately$209.4 million and net issuances of approximately$176.7 million related to our secured credit facilities. AtNovember 30, 2022 , all of our structured notes contain various interest rate payment terms and are accounted for at fair value, with changes in fair value resulting from a change in the instrument-specific credit risk presented in other comprehensive income and changes in fair value resulting from non-credit components recognized in Principal transactions revenues. The fair value of all of our structured notes atNovember 30, 2022 was$1.58 billion . AtNovember 30, 2022 and 2021, our borrowings under several credit facilities classified within Long-term debt in our Consolidated Statements of Financial Condition amounted to$933.5 million and$774.1 million , respectively. Interest on these credit facilities are based on adjusted London Interbank Offered Rate ("LIBOR") rates, Secured Overnight Financing Rate ("SOFR") plus a spread or other adjusted rates, as defined in the various credit agreements. The credit facility agreements contain certain covenants that, among other things, require us to maintain specified levels of tangible net worth and liquidity amounts, and impose certain restrictions on future indebtedness of and require specified levels of regulated capital and cash reserves for certain of our subsidiaries. AtNovember 30, 2022 , we were in compliance with all covenants under theses credit facilities, except for certain facilities secured by automobile loans with an amount outstanding of$112.9 million for which technical covenant violations have occurred that are in the process of being resolved with the lenders. In addition, one of our subsidiaries has a Loan and Security Agreement with a bank for a term loan ("SecuredBank Loan "). AtNovember 30, 2022 , borrowings under the SecuredBank Loan amounted to$100.0 million and are also classified within Long-term debt in our Consolidated Statements of Financial Condition. The SecuredBank Loan matures onSeptember 13, 2024 and is collateralized by certain trading securities with an interest rate of 1.25% plus LIBOR. The agreement contains certain covenants that, among other things, restricts lien or encumbrance upon any of the pledged collateral. AtNovember 30, 2022 , we were in compliance with all covenants under the SecuredBank Loan .HomeFed funds certain of its real estate projects in part by raising funds under the Immigrant Investor Program administered by theU.S. Citizenship and Immigration Services pursuant to the Immigration and Nationality Act ("EB-5 Program"). This debt is secured by certain real estate ofHomeFed . AtNovember 30, 2022 ,HomeFed was in compliance with all debt covenants which include, among other requirements, limitations on incurrence of debt, collateral requirements and restricted use of proceeds. Primarily all ofHomeFed's EB-5 Program debt matures in 2024 through 2026. AtNovember 30, 2022 ,HomeFed has construction loans with an aggregate committed amount of$101.9 million . The proceeds are being used for construction at certain of its real estate projects. The outstanding principal amount of the loans bear interest based on the 30 day LIBOR or the SOFR, plus spreads of 1.35% to 3.00%, subject to adjustment on the first of each calendar month. AtNovember 30, 2022 , the weighted average interest rate on these loans was 6.07%. The loans mature betweenOctober 2023 andMay 2024 and are collateralized by the property underlying the related project with a guarantee byHomeFed . AtNovember 30, 2022 andNovember 30, 2021 ,$57.0 million and$45.6 million , respectively, was outstanding under the construction loan agreements.
At
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For further information, see Note 17, Long-Term Debt, in our consolidated financial statements included in this Annual Report on Form 10-K.
Our long-term debt ratings at
Rating Outlook
Moody's Investors Service Baa2 Stable
Standard and Poor's BBB Stable
Fitch Ratings (1) BBB Positive
(1)On
At
Jefferies LLC Jefferies International Limited Jefferies GmbH
Rating Outlook Rating Outlook Rating Outlook
Moody's Investors
Service Baa1 Stable Baa1 Stable Baa1 Stable
Standard and Poor's BBB+ Stable BBB+ Stable BBB+ Stable
Access to external financing to finance our day to day operations, as well as
the cost of that financing, is dependent upon various factors, including our
debt ratings. Our current debt ratings are dependent upon many factors,
including industry dynamics, operating and economic environment, operating
results, operating margins, earnings trend and volatility, balance sheet
composition, liquidity and liquidity management, our capital structure, our
overall risk management, business diversification and our market share and
competitive position in the markets in which we operate. Deterioration in any of
these factors could impact our credit ratings. While certain aspects of a credit
rating downgrade are quantifiable pursuant to contractual provisions, the impact
on our business and trading results in future periods is inherently uncertain
and depends on a number of factors, including the magnitude of the downgrade,
the behavior of individual clients and future mitigating action taken by us.
In connection with certain over-the-counter derivative contract arrangements and
certain other trading arrangements, we may be required to provide additional
collateral to counterparties, exchanges and clearing organizations in the event
of a credit rating downgrade. At November 30, 2022 , the amount of additional
collateral that could be called by counterparties, exchanges and clearing
organizations under the terms of such agreements in the event of a downgrade of
our long-term credit rating below investment grade was $46.8 million . For
certain foreign clearing organizations, credit rating is only one of several
factors employed in determining collateral that could be called. The above
represents management's best estimate for additional collateral to be called in
the event of a credit rating downgrade. The impact of additional collateral
requirements is considered in our Contingency Funding Plan and calculation of
MLO, as described above.
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Equity Capital
At November 30, 2022 and 2021, we had 600,000,000 authorized shares of common
stock with a par value of $1.00 per share. At November 30, 2022 , we had
outstanding 226,129,626 common shares, 19,036,746 share-based awards that do not
require the holder to pay any exercise price and 5,024,532 stock options that
require the holder to pay an average exercise price of $23.75 per share. The
19,036,746 share-based awards include the target number of shares under the
senior executive award plan until the performance period is complete.
The Board of Directors has authorized the repurchase of common stock under a
share repurchase program. Additionally
The table below presents information about common stock repurchases during the year endedNovember 30, 2022 (in thousands, except share and per share amounts): Year Ended
22,167,689
Approximate Dollar Value of Shares Purchased $
737,350
Average Share Price of Shares Purchased $
33.26
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
$ 158,570
At
In addition, we have mandatorily redeemable convertible preferred shares that as
of
The following table sets forth the declaration dates, record dates, payment date and per common share amounts for the dividends declared during the years endedNovember 30, 2022 and 2021. Year Ended November 30, 2022 Declaration Date Record Date Payment date Per common share amount January 12, 2022 February 14, 2022 February 25, 2022$0.30 March 28, 2022 May 16, 2022 May 27, 2022$0.30 June 27, 2022 August 15, 2022 August 26, 2022$0.30 September 28, 2022 November 14, 2022 November 29, 2022$0.30 Year Ended November 30, 2021 Declaration Date Record Date Payment date Per common share amount January 4, 2021 February 12, 2021 February 26, 2021$0.20 March 24, 2021 May 17, 2021 May 28, 2021$0.20 June 28, 2021 August 16, 2021 August 27, 2021$0.25 September 30, 2021 November 15, 2021 November 29, 2021$0.25
On
As compared toNovember 30, 2021 , the decrease to totalJefferies Financial Group Inc. shareholders' equity atNovember 30, 2022 is primarily attributed to purchases of common shares for treasury and dividends paid, partially offset by increases from net earnings and contributions from noncontrolling interests.
As a broker-dealer registered with theSEC and a member firm of theFinancial Industry Regulatory Authority ("FINRA"),Jefferies LLC is subject to theSEC Commission Uniform Net Capital Rule ("Rule 15c3-1"), which requires the maintenance of minimum net capital, and has elected to calculate minimum capital requirements using the alternative method permitted by Rule 15c3-1 in calculating net capital.Jefferies LLC , as a dually-registeredU.S. broker-dealer and futures commission merchant ("FCM"), is also subject to Rule 1.17 of theCommodity Futures Trading Commission ("CFTC"), which sets forth minimum financial requirements. The minimum net capital requirement in determining excess net capital for a dually-registeredU.S. broker-dealer and FCM is equal to the greater of the requirement under Rule 15c3-1 or CFTC Rule 1.17. 51
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JEFFERIES FINANCIAL GROUP INC. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers, and/or major security-based swap participants. One of our subsidiaries,Jefferies Financial Services, Inc. ("JFSI"), a registered swap dealer, is subject to the CFTC's regulatory capital requirements and holds regulatory capital in excess of the minimum regulatory requirement. Additionally, JFSI is registered as a security-based swap dealer with theSEC and is subject to theSEC's security-based swap dealer regulatory rules. Further, JFSI is registered with theSEC as an OTC derivatives dealer, and is subject to compliance with theSEC's net capital requirements. As a security-based swap dealer and swap dealer, JFSI is subject to the net capital requirements of theSEC , CFTC and the NFA, as a member of the NFA. JFSI is required to maintain minimum net capital, as defined under SEC Rule 18a-1 of not less than the greater of 2% of the risk margin amount, as defined, or$20 million .
At
Net Capital Excess Net Capital
Jefferies LLC $ 903,349 $ 806,238
JFSI $ 436,681 $ 416,681
FINRA is the designated examining authority for Jefferies LLC and the National
Futures Association is the designated self-regulatory organization for Jefferies
LLC as an FCM.
Certain other U.S. and non-U.S. subsidiaries are subject to capital adequacy
requirements as prescribed by the regulatory authorities in their respective
jurisdictions, including Jefferies International Limited which is subject to the
regulatory supervision and requirements of the Financial Conduct Authority in
the U.K. The regulatory capital requirements referred to above may restrict our ability to withdraw capital from our regulated subsidiaries.
Other Developments
InFebruary 2022 ,Russia invadedUkraine . FollowingRussia's invasion, theU.S. , theU.K. , and theEuropean Union governments, among others, developed coordinated financial and economic sanctions targetingRussia that, in various ways, constrain transactions with numerous Russian entities, including major Russian banks and individuals; transactions in Russian sovereign debt; and investment, trade and financing to, from, or in certain regions ofUkraine . We do not have any operations inRussia or any clients with significant Russian operations and we have minimal market risk related to securities of companies either domiciled or operating inRussia . We continue to monitor the status of trading and the credit risk of our counterparties and we believe that any loss we might incur will be immaterial. OnJanuary 1, 2022 , the publication of the one-week and two-monthU.S. Dollar LIBOR maturities and all non-U.S. Dollar LIBOR maturities ceased and the remainingU.S. Dollar LIBOR maturities will cease immediately afterJune 30, 2023 . We are a counterparty to a number of LIBOR-based contracts composed primarily of cleared derivative contracts and floating rate notes. We continue to make progress with our transition program to orderly transition from Interbank Offered Rates to alternative reference rates in accordance with industry timelines, which includes a policy that limits new agreements that referenceU.S. Dollar LIBOR or non-U.S Dollar LIBOR, except as permitted under certain circumstances. Our transition plan is designed to enable operational readiness and robust risk management and we are taking steps to update operational processes, models and contracts for any changes that may be required as well as reduce our overall exposure to LIBOR. We are actively engaged with our counterparties to ensure that our contracts adhere to theInternational Swaps and Derivative Association, Inc. fallback protocol or are actively converted to alternative risk-free reference rates and are both educating and assisting our clients with the transition from and cessation of LIBOR.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
We have contractual commitments arising in the ordinary course of business for
securities loaned or purchased under agreements to resell, repurchase
agreements, future purchases and sales of foreign currencies, securities
transactions on a when-issued basis, purchases and sales of corporate loans in
the secondary market and underwriting. Each of these financial instruments and
activities contains varying degrees of off-balance sheet risk whereby the fair
values of the securities underlying the financial instruments may be in excess
of, or less than, the contract amount. The settlement of these transactions is
not expected to have a material effect upon our consolidated financial
statements.
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In the normal course of business we engage in other off balance-sheet
arrangements, including derivative contracts. Neither derivatives' notional
amounts nor underlying instrument values are reflected as assets or liabilities
in our Consolidated Statements of Financial Condition. Rather, the fair values
of derivative contracts are reported in our Consolidated Statements of Financial
Condition as Financial instruments owned or Financial instruments sold, not yet
purchased as applicable. Derivative contracts are reflected net of cash paid or
received pursuant to credit support agreements and are reported on a net by
counterparty basis when a legal right of offset exists under an enforceable
master netting agreement. For additional information about our accounting
policies and our derivative activities, see Note 2, Summary of Significant
Accounting Policies, Note 4, Fair Value Disclosures, and Note 5, Derivative
Financial Instruments, in our consolidated financial statements included in this
Annual Report on Form 10-K.
Contractual Obligations
The table below provides information about our contractual obligations at
November 30, 2022 . The table presents principal cash flows with expected
maturity dates (in millions):
Expected Maturity Date
2025 2027 2029
and and and
2023 2024 2026 2028 Later Total
Contractual obligations:
Unsecured long-term debt (contractual
principal payments net of unamortized
discounts and premiums) (1) $ 409.6 $ 910.3 $
111.1
146.7 1,107.8 48.3 - - 1,302.8
Interest payment obligations on
long-term debt (2) 110.3 91.5 136.0 195.8 835.9 1,369.5
Operating leases (3) 76.8 78.7 152.6 137.5 162.5 608.1
Purchase obligations (4) 195.6 132.7 70.3 29.0 2.7 430.3
Total $ 939.0 $ 2,321.0 $ 518.3 $ 1,597.7 $ 5,806.0 $ 11,182.0
(1)For additional information on long-term debt, see Note 17, Long-Term Debt, in
our consolidated financial statements included in this Annual Report on Form
10-K.
(2)Amounts based on applicable interest rates at November 30, 2022 .
(3)For additional information on operating leases related to certain premises
and equipment agreements, see Note 15, Leases, in our consolidated financial
statements included in this Annual Report on Form 10-K.
(4)Purchase obligations for goods and services primarily include payments for
outsourcing and computer and telecommunications maintenance agreements. Purchase
obligations at November 30, 2022 reflect the minimum contractual obligations
under legally enforceable contracts.
Subsequent to November 30, 2022 and on or before January 31, 2023 , we expect to
make cash payments of $1.50 billion related to compensation awards for fiscal
2022. See Note 13, Compensation Plans, in our consolidated financial statements
included in this Annual Report on Form 10-K for further information.
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JEFFERIES FINANCIAL GROUP INC.
Risk Management
Overview
Risk is an inherent part of our business and activities. The extent to which we
properly and effectively identify, assess, monitor and manage each of the
various types of risk involved in our activities is critical to our financial
soundness, viability and profitability. Accordingly, we have a comprehensive
risk management approach, with a formal governance structure and policies and
procedures outlining frameworks and processes to identify, assess, monitor and
manage risk. Principal risks involved in our business activities include market,
credit, liquidity and capital, operational, legal and compliance, new business
and reputational risk.
Risk management is a multifaceted process that requires communication, judgment
and knowledge of financial products and markets. Our risk management process
encompasses the active involvement of executive and senior management, and also
many departments independent of the revenue-producing business units, including
the Risk Management, Operations, Information Technology, Compliance, Legal and
Finance Departments . Our risk management policies, procedures and methodologies
are flexible in nature and are subject to ongoing review and modification.
In achieving our strategic business objectives, our risk appetite incorporates
keeping our clients' interests as top priority and ensuring we are in compliance
with applicable laws, rules and regulations, as well as adhering to the highest
ethical standards. We undertake prudent risk-taking that protects the capital
base and franchise, utilizing risk limits and tolerances that avoid outsized
risk-taking. We maintain a diversified business mix and avoid significant
concentrations to any sector, product, geography, or activity and set
quantitative concentration limits to manage this risk. We consider contagion,
second order effects and correlation in our risk assessment process and actively
seek out value opportunities of all sizes. We manage the risk of opportunities
larger than our approved risk levels through risk sharing and risk distribution,
sell-down and hedging as appropriate. We have a limited appetite for illiquid
assets and complex derivative financial instruments. We maintain the asset
quality of our balance sheet through conducting trading activity in liquid
markets and generally ensure high turnover of our inventory. We subject less
liquid positions and derivative financial instruments to particular scrutiny and
use a wide variety of specific metrics, limits, and constraints to manage these
risks. We protect our reputation and franchise, as well as our standing within
the market. We operate a federated approach to risk management and assign risk
oversight responsibilities to a number of functions with specific areas of
focus.
For discussion of liquidity and capital risk management, refer to the "Liquidity, Financial Condition and Capital Resources" section herein.
Governance and Risk Management Structure
Our Board of Directors ("Board") and Risk and Liquidity Oversight Committee
("Committee"). Our Board and Committee play an important role in reviewing our
risk management process and risk appetite. The Committee assists the Board in
its oversight of: (i) the Company's enterprise risk management, (ii) the
Company's capital, liquidity and funding guidelines and policies and (iii) the
performance of the Company's Chief Risk Officer . Our Global Chief Risk Officer
("CRO") and Global Treasurer meet with the Committee on no less than a quarterly
basis to present our risk profile and liquidity profile and to respond to
questions. Our Chief Information Officer also meets with the Committee at least
semi-annually to receive and review reports related to any exposure to
cybersecurity risk and our plans and programs to mitigate and respond to
cybersecurity risks. Additionally, our risk management team continuously
monitors our various businesses, the level of risk the businesses are taking and
the efficacy of potential risk mitigation strategies and presents this
information to our senior management and the Committee.
Our Board also fulfills its risk oversight role through the operations of its
various committees, including its Audit Committee. The Audit Committee has
responsibility for risk oversight in connection with its review of our financial
statements, internal audit function and internal control over financial
reporting, as well as assisting the Board with our legal and regulatory
compliance and overseeing our Code of Business Practice. The Audit Committee is
also updated on risk controls at each of its regularly scheduled meetings.
Internal Audit, which reports to the Audit Committee of the Board and includes
professionals with a broad range of audit and industry experience, including
risk management expertise, is responsible for independently assessing and
validating key controls within our risk management framework.
We make extensive use of internal committees to govern risk taking and ensure
that business activities are properly identified, assessed, monitored and
managed. The Risk Management Committee ("RMC") and membership comprises our
Chief Executive Officer, President, CFO, CRO and Global Treasurer. Our other
risk related committees govern risk taking and ensure that business activities
are properly managed for their area of oversight.
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JEFFERIES FINANCIAL GROUP INC.
Risk Committees.
•RMC - the principal committee that governs our risk taking activities. The RMC
meets weekly to discuss our risk profile and discuss business or market trends
and their potential impact on the business. The Committee approves our limits as
a whole, and across risk categories and business lines, reviews limit breaches,
and approves risk policies and stress testing methodologies and is supported by
the subcommittees, e.g., Credit Committee , Model Governance Committee and Stress
Testing Committee, and management forums in risk management functions.
•Executive Committee - provides insight, perspective and guidance for the day-to-day operations and strategic direction of their respective businesses and us as a whole.
•Operating Committee - brings together the managers of all control areas and the business line chief operating officers, whereby each department presents issues regarding current and proposed business. This committee provides the key forum for coordination and communication between the control managers entirely focused on our activities as a whole. •Asset / Liability Committee - seeks to ensure effective management and control of the balance sheet in terms of risk profile, adequacy of capital and liquidity resources, and funding profile and strategy. The committee is responsible for developing, implementing and enforcing our liquidity, funding and capital policies. This includes recommendations for capital and balance sheet size, as well as the allocation of capital to our businesses. •Independent Price Verification Committee - establishes our valuation policies and procedures and is responsible for independently validating the fair value of our financial instruments. The committee, which comprises stakeholders represented by the CFO, Internal Audit, Risk Management and Controllers, meets monthly to assess and approve the results of our inventory price testing. •New Business Committee - reviews new business, products and activities and extensions of existing businesses, products and activities that may introduce materially different or greater risks than those of a business' existing activities. The new business approval process is a key control over new business activity. The objectives are to notify all relevant functions of the intention to introduce a new product, business or activity, to share information between functions and to ensure there is a thorough understanding of the proposal.
Risk Considerations
We apply a comprehensive framework of limits on a variety of key metrics to
constrain the risk profile of our business activities. The size of the limits
reflects our risk appetite for a certain activity under normal business
conditions. Key metrics included in our risk management framework include
inventory position and exposure limits on a gross and net basis, scenario
analysis and stress tests, Value-at-Risk ("VaR"), sensitivities, exposure
concentrations, aged inventory, Level 3 assets, counterparty exposure, leverage
and cash capital.
Market Risk
Market risk is defined as the risk of loss due to fluctuations in the market value of financial assets and liabilities attributable to changes in market variables.
Our market risk principally arises from interest rate risk, from exposure to
changes in the yield curve, the volatility of interest rates, and credit
spreads, and from equity price risks from exposure to changes in prices and
volatilities of individual equities, equity baskets and equity indices. In
addition, commodity price risk results from exposure to the changes in prices
and volatilities of individual commodities, commodity baskets and commodity
indices, and foreign exchange risk results from changes in foreign currency
rates.
Market risk is present in our capital markets business through market making,
proprietary trading, underwriting and investing activities and is present in our
asset management business through investments in separately managed accounts and
direct investments in funds. Given our involvement in a broad set of financial
products and markets, market risk exposures are diversified, and economic hedges
are established as appropriate.
Market risk is monitored and managed through a set of key risk metrics such as
VaR, stress scenarios, risk sensitivities and position exposures. Limits are set
on the key risk metrics to monitor and control the risk exposure ensuring that
it is in line with our risk appetite. Our risk appetite, including the market
risk limits, is periodically reviewed to reflect business strategy and market
environment. Material risk changes, top/emerging risks and limit
utilizations/breaches are highlighted, through risk reporting, and escalated as
necessary.
Trading is principally managed through front office trader mandates, where each
trader is provided a specific mandate in line with our product registry.
Mandates set out the activities, currencies, countries and products that the
desk is permitted to trade in and set the limits applicable
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JEFFERIES FINANCIAL GROUP INC.
Trader Mandates
Trading is principally managed through front office trader mandates, where each
trader is provided a specific mandate in line with our product registry.
Mandates set out the activities, currencies, countries and products that the
desk is permitted to trade in and set the limits applicable to the desk. Traders
are responsible for knowing their trading limits and trading in a manner
consistent with their mandate.
VaR
VaR is a statistical estimate of the potential loss from adverse market
movements over a specified time horizon within a specified probability
(confidence level). It provides a common risk measure across financial
instruments, markets and asset classes. We estimate VaR using a model that
simulates revenue and loss distributions by applying historical market changes
to the current portfolio. We calculate a one-day VaR using a one year look-back
period measured at a 95% confidence level.
As with all measures of VaR, our estimate has inherent limitations due to the
assumption that historical changes in market conditions are representative of
the future. Furthermore, the VaR model measures the risk of a current static
position over a one-day horizon and might not capture the market risk over a
longer time horizon where moves may be more extreme. Previous changes in market
risk factors may not generate accurate predictions of future market movements.
While we believe the assumptions and inputs in our risk model are reasonable, we
could incur losses greater than the reported VaR. Consequently, this VaR
estimate is only one of a number of tools we use in our daily risk management
activities.
The table below shows firmwide VaR for each component of market risk by interest
rate and credit spreads, equity, currency and commodity products using the past
365 days of historical data (in millions):
Daily VaR (1)
VaR at Value-at-Risk in Trading Portfolios VaR at
November 30, Daily VaR for 2022 November 30, Daily VaR for 2021
Risk Categories: 2022 Average High Low 2021 Average High Low
Interest Rates and Credit
Spreads $ 6.26 $ 5.93 $ 9.01 $ 3.63 $ 4.60 $ 5.46 $ 11.15 $ 3.21
Equity Prices 7.91 7.83 17.59 3.55 9.85 11.66 18.98 6.17
Currency Rates 0.22 0.12 0.34 0.02 0.12 0.12 0.31 0.03
Commodity Prices 0.09 0.29 0.83 0.09 0.15 0.39 0.77 0.13
Diversification Effect (2) (3.12) (3.13) N/A N/A (2.06) (4.00) N/A N/A
Firmwide VaR (3) $ 11.36 $ 11.04 $ 18.94 $ 5.90 $ 12.66 $ 13.63 $ 22.91 $ 6.94
(1)For the firmwide VaR numbers reported above, a one day time horizon, with a
one year look-back period, and a 95% confidence level were used.
(2)The diversification effect is not applicable for the maximum and minimum VaR
values as firmwide VaR and the VaR values for the four risk categories might
have occurred on different days during the period.
(3)The aggregated VaR presented here is less than the sum of the individual
components (i.e., interest rate risk, foreign exchange rate risk, equity risk
and commodity price risk) due to the benefit of diversification among the four
risk categories. Diversification benefit equals the difference between
aggregated VaR and the sum of VaRs for the four risk categories and arises
because the market risk categories are not perfectly correlated.
The table below shows VaR for our capital markets trading activities, which
excludes the impact on VaR for each component of market risk from our asset
management activities by interest rate and credit spreads, equity, currency and
commodity products using the past 365 days of historical data (in millions):
Daily VaR (1)
VaR at Value-at-Risk in Trading Portfolios VaR at
November 30, Daily VaR for 2022 November 30, Daily VaR for 2021
Risk Categories: 2022 Average High Low 2021 Average High Low
Interest Rates and Credit
Spreads $ 6.01 $ 5.60 $ 8.63 $ 3.20 $ 4.63 $ 5.45 $ 11.25 $ 3.29
Equity Prices 8.09 8.07 31.13 3.42 5.20 5.80 13.44 3.23
Currency Rates 0.01 0.05 0.29 - 0.07 0.11 0.31 0.02
Commodity Prices - 0.02 0.56 - 0.01 0.04 0.27 -
Diversification Effect (2) (2.48) (4.54) N/A N/A (2.21) (3.75) N/A N/A
Capital Markets VaR (3) $ 11.63 $ 9.20 $ 19.56 $ 4.78 $ 7.70 $ 7.65 $ 12.18 $ 5.10
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JEFFERIES FINANCIAL GROUP INC. (1)For the capital markets VaR numbers reported above, a one-day time horizon, with a one year look-back period, and a 95% confidence level were used. (2)The diversification effect is not applicable for the maximum and minimum VaR values as the capital markets VaR and the VaR values for the four risk categories might have occurred on different days during the period. (3)The aggregated VaR presented here is less than the sum of the individual components (i.e., interest rate risk, foreign exchange rate risk, equity risk and commodity price risk) due to the benefit of diversification among the four risk categories. Diversification benefit equals the difference between aggregated VaR and the sum of VaRs for the four risk categories and arises because the market risk categories are not perfectly correlated. Our average daily firmwide VaR decreased to$11.04 million for 2022 from$13.63 million for 2021. The decrease was primarily due to lower exposures from our asset management activities, which was partially offset by an increase in firmwide VaR from periodic residual exposures to equity block trades. Average daily capital markets VaR increased to$9.20 million for 2022 from$7.65 million for 2021 driven by periodic residual exposure to equity block trades. The efficacy of the VaR model is tested by comparing our actual daily net revenues for those positions included in VaR calculation with the daily VaR estimate. This evaluation is performed at various levels, from the overall level down to specific business lines. For the VaR model, revenue is defined as principal transactions revenues, trading related commissions, revenue from securitization activities and net interest income. VaR backtesting methodologies differ for regulated entities with approved capital models. For a 95% confidence one day VaR model (i.e., no intra-day trading), assuming current changes in market value are consistent with the historical changes used in the calculation, losses would not be expected to exceed the VaR estimates more than twelve times on an annual basis (i.e., once in every 20 days). During 2022, there were three days when the aggregate net trading loss exceeded the 95% one day VaR. The chart below reflects our daily VaR over the last four quarters. The drop in VaR from January to end ofFebruary 2022 was driven by exposure reductions in response to market volatility driven by inflation, rate hike expectations andRussia /Ukraine crisis. VaR increase in earlyMarch 2022 was driven by higher equity exposure which was subsequently reduced. VaR trended lower fromJune 2022 to midJuly 2022 driven by defensive positioning. The temporary increase in VaR inmid-July 2022 was driven by a block trade which was subsequently reduced. VaR was relatively stable during the three months endedNovember 30, 2022 . [[Image Removed: jef-20221130_g2.jpg]] 57
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JEFFERIES FINANCIAL GROUP INC.
Daily Net Trading Revenue
There were 30 days with trading losses out of a total of 252 trading days in
2022. The histogram below presents the distribution of our actual daily net
trading revenue for substantially all of our trading activities for 2022 (in
millions).
[[Image Removed: jef-20221130_g3.jpg]]
Other Risk Measures
Sensitivity analysis is viewed as the most appropriate measure of risks for certain positions within financial instruments and therefore such positions are not included in the VaR model. Accordingly, Risk Management has additional procedures in place to assure that the level of potential loss that would arise from market movements are within acceptable levels. Such procedures include performing stress tests and profit and loss analysis. The table below presents the potential reduction in net earnings associated with a 10% stress of the fair value of the positions that are not included in the VaR model atNovember 30, 2022 (in thousands): 10% Sensitivity Investment in funds (1)$ 127,498 Private investments 20,087 Corporate debt securities in default 7,211 Trade claims 2,588 (1)Includes investments in hedge funds, fund of funds and private equity funds. For additional details on these investments refer to "Investments at Fair Value" within Note 4, Fair Value Disclosures, in our consolidated financial statements included in this Annual Report on Form 10-K. The impact of changes in our own credit spreads on our structured notes for which the fair value option was elected is not included in VaR. The estimated credit spread risk sensitivity for each one basis point widening in our own credit spreads on financial liabilities for which the fair value option was elected was an increase in value of approximately$1.5 million atNovember 30, 2022 , which is included in other comprehensive income.
Other Risk
We are also subject to interest rate risk on our long-term fixed interest rate
debt. Generally, the fair market value of debt securities with a fixed interest
rate will increase as interest rates fall, and the fair market value will
decrease as interest rates rise. The following table represents principal cash
flows by expected maturity dates and the related weighted-average interest rate
on those maturities for our consolidated long-term debt obligations, inclusive
of any related interest rate hedges. For the variable rate borrowings, the
weighted-average interest rates are based on the rates in effect at the
reporting date. Our market risk with respect to foreign currency exposure on our
long-term debt is also shown below. For additional information, see Note 17 to
our consolidated financial statements.
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JEFFERIES FINANCIAL GROUP INC.
Expected Maturity Date (Fiscal Years)
2023 2024 2025 2026 2027 Thereafter Total Fair Value
(Dollars in thousands)
Rate Sensitive Liabilities:
Fixed Interest Rate Borrowings $ 393,748 $ 242,000 $ 4,635,851 $ 4,248,868 Weighted-Average Interest Rate 5.54 % 2.92 % 1.95 % 4.18 % 5.88 % 5.03 %
Variable Interest Rate Borrowings
$ 3,451,592 $ 3,122,061 Weighted-Average Interest Rate 5.42 % 6.05 % 5.46 % 6.64 % 6.49 % 5.93 % Borrowings with Foreign Currency Exposure $ -$ 520,650
$ - $ - $ -
$ 1,282,465 $ 1,085,148 Weighted-Average Interest Rate - % 1.00 % - % - % - % 6.59 %
Stress Tests and Scenario Analysis
Stress tests are used to analyze the potential impact of specific events or extreme market moves on the current portfolio both firm-wide and within business segments. Stress testing is an important part of our risk management approach because it allows us to quantify our exposure to tail risks, highlight potential loss concentrations, undertake risk/reward analysis, set risk controls and overall assess and mitigate our risk. We employ a range of stress scenarios, which comprise both historical market price and rate changes and hypothetical market environments, and generally involve simultaneous changes of many risk factors. Indicative market changes in the scenarios include, but are not limited to, a large widening of credit spreads, a substantial decline in equities markets, significant moves in selected emerging markets, large moves in interest rates and changes in the shape of the yield curve. Unlike our VaR, which measures potential losses within a given confidence interval, stress scenarios do not have an associated implied probability. Rather, stress testing is used to estimate the potential loss from market moves that tend to be larger than those embedded in the VaR calculation. Stress testing complements VaR to cover for potential limitations of VaR such as the breakdown in correlations, non-linear risks, tail risk and extreme events and capturing market moves beyond the confidence levels assumed in the VaR calculations. Stress testing is performed and reported at least weekly as part of our risk management process and on an ad hoc basis in response to market events or concerns. Current stress tests provide estimated revenue and loss of the current portfolio through a range of both historical and hypothetical events. The stress scenarios are reviewed and assessed at least annually so that they remain relevant and up to date with market developments. Additional hypothetical scenarios are also conducted on a sub-portfolio basis to assess the impact of any relevant idiosyncratic stress events as needed.
Counterparty Credit Risk
Credit risk is the risk of loss due to adverse changes in a counterparty's credit worthiness or its ability or willingness to meet its financial obligations in accordance with the terms and conditions of a financial contract.
We are exposed to credit risk as a trading counterparty to other broker-dealers and customers, as a counterparty to derivative contracts, as a direct lender and through extending loan commitments and providing securities-based lending and as a member of exchanges and clearing organizations. Credit exposure exists across a wide-range of products, including cash and cash equivalents, loans, securities finance transactions and over-the-counter derivative contracts. The main sources of credit risk are: •Loans and lending arising in connection with our investment banking and capital markets activities, which reflects our exposure at risk on a default event with no recovery of loans. Current exposure represents loans that have been drawn by the borrower and lending commitments that are outstanding. In addition, credit exposures on forward settling traded loans are included within our loans and lending exposures for consistency with the balance sheet categorization of these items. Loans and lending also arise in connection with our portion of a Secured Revolving Credit Facility that is with us andMassachusetts Mutual Life Insurance Company , to be funded equally, to support loan underwritings byJefferies Finance . For further information on this facility, refer to Note 9, Investments, in our consolidated financial statements included in this Annual Report on Form 10-K. In addition, we have loans outstanding to certain of our officers and employees (none of whom are executive officers or directors). For further information on these employee loans, refer to Note 25,Related Party Transactions, in our consolidated financial statements included in this Annual Report on Form 10-K. •Securities and margin financing transactions, which reflect our credit exposure arising from reverse repurchase agreements, repurchase agreements and securities lending agreements to the extent the fair value of the underlying collateral differs from the contractual agreement amount and from margin provided to customers. 59
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JEFFERIES FINANCIAL GROUP INC. •OTC derivatives, which are reported net by counterparty when a legal right of setoff exists under an enforceable master netting agreement. OTC derivative exposure is based on a contract at fair value, net of cash collateral received or posted under credit support agreements. In addition, credit exposures on forward settling trades are included within our derivative credit exposures.
•Cash and cash equivalents, which includes both interest-bearing and non-interest-bearing deposits at banks.
Credit is extended to counterparties in a controlled manner and in order to generate acceptable returns, whether such credit is granted directly or is incidental to a transaction. All extensions of credit are monitored and managed as a whole to limit exposure to loss related to credit risk. Credit risk is managed according to the Credit Risk Management Policy, which sets out the process for identifying counterparty credit risk, establishing counterparty limits, and managing and monitoring credit limits. The policy includes our approach for:
•Client on-boarding and approving counterparty credit limits;
•Negotiating, approving and monitoring credit terms in legal and master documentation;
•Determining the analytical standards and risk parameters for ongoing management and monitoring credit risk books;
•Actively managing daily exposure, exceptions and breaches; and
•Monitoring daily margin call activity and counterparty performance.
Counterparty credit exposure limits are granted within our credit ratings framework, as detailed in the Credit Risk Management Policy.The Credit Risk Department assesses counterparty credit risk and sets credit limits at the counterparty master agreement level. Limits must be approved by appropriate credit officers and initiated in our credit and trading systems before trading commences. All credit exposures are reviewed against approved limits on a daily basis. Our Secured Revolving Credit Facility, which supports loan underwritings byJefferies Finance , is governed under separate policies other than the Credit Risk Management Policy and is approved by our Board. The loans outstanding to certain of our officers and employees are extended pursuant to a review by our most senior management. Current counterparty credit exposures atNovember 30, 2022 and 2021 are summarized in the tables below and provided by credit quality, region and industry (in millions). Credit exposures presented take netting and collateral into consideration by counterparty and master agreement. Collateral taken into consideration includes both collateral received as cash as well as collateral received in the form of securities or other arrangements. Current exposure is the loss that would be incurred on a particular set of positions in the event of default by the counterparty, assuming no recovery. Current exposure equals the fair value of the positions less collateral. Issuer risk is the credit risk arising from inventory positions (for example, corporate debt securities and secondary bank loans). Issuer risk is included in our country risk exposure tables below. 60
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JEFFERIES FINANCIAL GROUP INC.
Counterparty Credit Exposure by Credit Rating
Securities and Margin Cash and Total with Cash and
Loans and Lending Finance OTC Derivatives Total Cash Equivalents Cash Equivalents
At At At At At At
November November November November November November
November 30 , 30, November 30 , 30, November 30 , 30, November 30 , 30, November 30 , 30, November 30 , 30,
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
AAA Range $ - $ - $ 2.0 $ 0.8 $ 0.1 $ - $ 2.1 $ 0.8 $ 7,162.1 $ 8,518.2 $ 7,164.2 $ 8,519.0
AA Range 70.1 60.0 142.7 111.7 3.9 13.0 216.7 184.7 4.7 5.1 221.4 189.8
A Range 1.8 0.4 575.1 530.4 207.8 338.0 784.7 868.8 2,114.1 1,869.4 2,898.8 2,738.2
BBB Range 251.1 250.3 155.3 170.9 (1.3) 37.2 405.1 458.4 419.3 349.0 824.4 807.4
BB or Lower 61.6 40.0 22.1 11.4 44.0 71.0 127.7 122.4 - 0.1 127.7 122.5
Unrated 377.8 164.2 - - - - 377.8 164.2 2.9 13.3 380.7 177.5
Total $ 762.4 $ 514.9 $ 897.2 $ 825.2 $ 254.5 $ 459.2 $ 1,914.1 $ 1,799.3 $ 9,703.1 $ 10,755.1 Counterparty Credit Exposure by Region
Securities and Margin Cash and Total with Cash and
Loans and Lending Finance OTC Derivatives Total Cash Equivalents Cash Equivalents
At At At At At At
November November November November November November
November 30 , 30, November 30 , 30, November 30 , 30, November 30 , 30, November 30 , 30, November 30 , 30,
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
56.3
72.4
$ 355.4 $ 347.6 Europe and theMiddle East 1.7 0.3 273.2 300.8 35.2 66.4 310.1 367.5 43.9 57.0 354.0 424.5North America 744.9 499.7 567.7 460.7 219.0 391.9 1,531.6 1,352.3 9,376.2 10,430.0 10,907.8 11,782.3 Total$ 762.4 $ 514.9 $
897.2
1,914.1
Counterparty Credit Exposure by Industry
Securities and Margin Cash and Total with Cash and
Loans and Lending Finance OTC Derivatives Total Cash Equivalents Cash Equivalents
At At At At At At
November November November November November November
November 30 , 30, November 30 , 30, November 30 , 30, November 30 , 30, November 30 , 30, November 30 , 30,
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
Asset Managers $ 20.8 $ - $ - $ - $ - $ - $ 20.8 $ - $ 7,162.1 $ 8,518.2 $ 7,182.9 $ 8,518.2
Banks, Broker-dealers 251.9 250.7 623.1 602.9 211.2 388.9 1,086.2 1,242.5 2,541.0 2,236.9 3,627.2 3,479.4 Corporates 197.8 158.2 - - 36.6 68.0 234.4 226.2 - - 234.4 226.2 As Agent Banks - -
182.7 185.2 - - 182.7 185.2 - - 182.7 185.2 Other 291.9 106.0 91.4 37.1 6.7 2.3 390.0 145.4 - - 390.0 145.4 Total$ 762.4 $ 514.9 $ 897.2 $ 825.2 $ 254.5 $ 459.2 $ 1,914.1 $ 1,799.3 $ 9,703.1 $ 10,755.1
For additional information regarding credit exposure to OTC derivative contracts, refer to Note 5, Derivative Financial Instruments, in our consolidated financial statements included in this Annual Report on Form 10-K.
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Country Risk Exposure
Country risk is the risk that events or developments that occur in the general
environment of a country or countries due to economic, political, social,
regulatory, legal or other factors, will affect the ability of obligors of the
country to honor their obligations. We define the country of risk as the country
of jurisdiction or domicile of the obligor, and monitor country risk resulting
from both trading positions and counterparty exposure, which may not include the
offsetting benefit of any financial instruments utilized to manage market risk.
The following tables reflect our top exposure at November 30, 2022 and 2021 to
the sovereign governments, corporations and financial institutions in those non-
U.S. countries in which we have a net long issuer and counterparty exposure (in
millions):
November 30, 2022
Issuer Risk Counterparty Risk Issuer and Counterparty Risk
Fair Value of Fair Value of Net Derivative Excluding Cash Including Cash
Long Debt Short Debt Notional Loans and Securities and Cash and Cash and Cash and Cash
Securities Securities Exposure Lending Margin Finance OTC Derivatives Equivalents Equivalents Equivalents
Canada $ 273.6 $ (98.3) $ (68.7) $ 0.1 $ 91.5 $ 181.1
$ 1.8 $ 379.3 $ 381.1
United Kingdom 555.0 (350.1) (117.5) 1.7 48.7 15.8 27.8 153.6 181.4
Hong Kong 18.8 (46.7) - - 1.3 - 187.4 (26.6) 160.8
France 330.3 (239.7) (42.8) - 82.0 6.7 - 136.5 136.5
Netherlands 322.2 (212.4) 5.5 - 3.8 0.2 0.2 119.3 119.5
Italy 911.7 (674.8) (133.3) - - - 0.5 103.6 104.1
Germany 323.8 (381.5) 68.5 - 69.3 2.5 11.4 82.6 94.0
Spain 437.3 (376.9) (38.0) - 46.0 - 0.5 68.4 68.9
China 200.1 (129.3) (6.3) - - - - 64.5 64.5
Brazil 137.2 (61.3) (16.7) - - - - 59.2 59.2
Total $ 3,510.0 $ (2,571.0) $ (349.3) $ 1.8 $ 342.6 $ 206.3 $ 229.6 $ 1,140.4 $ 1,370.0
November 30, 2021
Issuer Risk Counterparty Risk Issuer and Counterparty Risk
Fair Value of Fair Value of Excluding Cash Including Cash
Long Debt Short Debt Net Derivative Loans and Securities and Cash and Cash and Cash and Cash
Securities Securities Notional Exposure Lending Margin Finance OTC Derivatives Equivalents Equivalents Equivalents
Canada $ 196.4 $ (94.2) $ 1.3 $ - $ 63.1 $ 259.5 $ 1.7$ 426.1 $ 427.8 United Kingdom 570.6 (350.1) (1.4) 0.3 68.9 24.9 26.7 313.2 339.9Hong Kong 27.9 (18.3) (1.8) - 2.5 - 160.6 10.3 170.9Japan 247.3 (205.4) (3.1) - 18.3 0.1 51.4 57.2 108.6Spain 191.4 (111.8) (0.1) - 25.3 0.3 - 105.1 105.1Australia 134.1 (78.5) 0.6 - 25.5 - 7.5 81.7 89.2Netherlands 220.2 (142.0) 0.7 - 3.9 0.1 1.3 82.9 84.2Switzerland 97.3 (67.6) 3.5 - 40.3 2.5 2.7 76.0 78.7France 210.7 (201.7) (59.5) - 99.6 26.9 - 76.0 76.0China 458.4 (356.9) (34.1) - - - - 67.4 67.4 Total$ 2,354.3 $ (1,626.5) $ (93.9) $ 0.3 $ 347.4 $ 314.3$ 251.9 $ 1,295.9 $ 1,547.8 Operational Risk Operational risk is the risk of financial or non-financial impact, resulting from inadequate or failed internal processes, people and systems or from external events. We interpret this definition as including not only financial loss or gain but also other negative impacts to our objectives such as reputational impact, legal/regulatory impact and impact on our clients. Third-party risk is also included as a subset of Operational Risk and is defined as the potential threat presented to us, or our employees or clients, from our supply chain and other third-parties used to perform a process, service or activity on our behalf. Our Operational Risk framework includes governance as well as operational risk processes, which comprises operational risk event capture and analysis, risk and control self-assessments, operational risk key indicators, action tracking, risk monitoring and reporting, deep dive risk assessments, new business approvals and vendor risk management. Each revenue producing and support department is responsible for the management and reporting of operational risks and the implementation of the Operational Risk Management Policy and processes within the department with regular operational risk training provided to our employees. 62
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Operational Risk events are mapped to Risk Categories used for the consistent classification of risk data to support root cause and trend analysis, which includes:
•Fraud and Theft
•Clients and Business Practices
•Market Conduct / Regulatory Compliance
•Business Disruption
•Technology
•Data Protection and Privacy
•Trading
•Transaction and Process Management
•People
•Cyber
•Vendor Risk
Operational Risk Management Policy, framework, infrastructure, methodology,
processes, guidance and oversight of the operational risk processes are
centralized and consistent firmwide and additionally subject to regional and
legal entity operational risk governance as required. We also maintain a
firmwide Third-Party ("Vendor") Risk Management Policy & Framework to ensure
adequate control and monitoring over our critical third parties which includes
processes for conducting periodic reviews covering areas of risk including
financial health, information security, privacy, business continuity management,
disaster recovery and operational risk.
Our leadership continuously monitors circumstances around COVID-19 and provides
as-needed communications to both our clients and our employees to keep them
fully abreast of our policies and protocols. We follow local and federal
guidelines to ensure the safety of our people and clients and operate
effectively with a hybrid working environment across all functions with no
disruptions to our business or control processes. As the incidence of COVID-19
decreases, our employees have returned to our offices in numbers matching
pre-COVID-19 attendance levels.
Model Risk
Model risk refers to the risk of losses resulting from decisions that are based on the output of models, due to errors or weaknesses in the design and development, implementation, or improper use of models. We use quantitative models primarily to value certain financial assets and liabilities and to monitor and manage our risk. Model risk is a function of the model materiality, frequency of use, complexity and uncertainty around inputs and assumptions used in a given model. Robust model risk management is a core part of our risk management approach and is overseen through our risk governance structure and risk management controls. Legal and Compliance Risk Legal and compliance risk includes the risk of noncompliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in which we conduct our business. We have various procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, anti-money laundering and record keeping. These risks also reflect the potential impact that changes in local and international laws and tax statutes have on the economics and viability of current or future transactions. In an effort to mitigate these risks, we continuously review new and pending regulations and legislation and participate in various industry interest groups. We also maintain an anonymous hotline for employees or others to report suspected inappropriate actions by us or by our employees or agents.
New Business Risk
New business risk refers to the risks of entering into a new line of business or
offering a new product. By entering a new line of business or offering a new
product, we may face risks that we are unaccustomed to dealing with and may
increase the magnitude of the risks we currently face. The New Business
Committee reviews proposals for new businesses and new products to determine if
we are prepared to handle the additional or increased risks associated with
entering into such activities.
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Reputational Risk
We recognize that maintaining our reputation among clients, investors,
regulators and the general public is an important aspect of minimizing legal and
operational risks. Maintaining our reputation depends on a large number of
factors, including the selection of our clients and the conduct of our business
activities. We seek to maintain our reputation by screening potential clients
and by conducting our business activities in accordance with high ethical
standards. Our reputation and business activity can be affected by statements
and actions of third-parties, even false or misleading statements by them. We
actively monitor public comment concerning us and are vigilant in seeking to
assure accurate information and perception prevails.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations -Risk Management" in Part II, Item 7 of this Form 10-K.
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