Jan 9, 2014
Executives
William J. Dunaway - Chief Financial Officer and Chief Accounting Officer Sean Michael O'Connor - Chief Executive Officer, Director, Chief Executive Officer of IAHC (Bermuda) Ltd, Chief Executive Officer of INTL Trading Inc and Director of IAHC (Bermuda) Ltd
Analysts
James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC Russell C. Mollen - Bares Capital Management, Inc.
Operator
Good day, everyone, and welcome to the INTL FCStone Fourth Quarter Fiscal Year 2013 Earnings Call. Today's call is being recorded.
At this time, I'd like to turn the call over to Mr. Bill Dunaway.
Please, go ahead, sir.
William J. Dunaway
Good afternoon. My name is Bill Dunaway, CFO of INTL FCStone.
Welcome to our earnings conference call for our fiscal fourth quarter ended September 30, 2013. Before the market opened today, we issued a press release reporting our results for the fiscal fourth quarter.
This release is available on our website at www.intlfcstone.com, as well as a slide presentation, which we will refer to on this call in our discussions of our quarterly and year-to-date results. You'll need to sign on to the live webcast in order to view the presentation.
Both the presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, I'd like to cover a couple of housekeeping items.
On these conference calls and in the management discussion portions of our SEC filings, we present financial information on a non-GAAP basis in order to take into account mark-to-market adjustments in our physical commodity product lines, which are included in both our CRM and Other segments. As discussed on previous conference calls and in our filings, the requirements of accounting principles generally accepted in the U.S., which I'll refer to as GAAP, to carry derivatives at fair market value but physical commodities inventory at the lower of cost of market value, may have a significant temporary impact on our reported earnings.
Under GAAP, gains and losses on commodities inventory and derivatives, which the company intends to be offsetting, are often recognized in different periods. Additionally, in certain circumstances, GAAP does not require us to reflect changes in estimated values of forward commitments to purchase and sell commodities.
For this reason, we believe that the GAAP numbers do not reflect the commercial results of our physical commodities product lines, and therefore, the company as a whole. Instead, we assess all of our businesses, as do our banks, on a fully mark-to-market basis in our daily and monthly internal financial reporting.
Readers of our Form 10-K filings should review the selected summary financial information within Item 6 for a summary of both GAAP and non-GAAP information. This section also gives the reconciliation between GAAP and non-GAAP information required by the SEC.
Please note that whenever we talk about an adjusted number on this call, we are talking about a non-GAAP number. Secondly, we're required to advise you and all participants should note that the following discussions should be taken in conjunction with the most recent financial statements and notes thereto as well as the Form 10-K to be filed with the SEC.
This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC.
Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I'll now turn the call over to Sean O'Connor, the company's Chief Executive Officer.
Sean Michael O'Connor
Thanks, Bill. Good afternoon, everyone, and welcome to our fourth quarter earnings call.
Before we start, just apologies. I have a cold, so if I sound a little weird it's just I'm under the weather, a little bit of a cold.
I'd like to start by discussing the restatement of our previously filed financials for fiscal years 2012 and 2011. And I would ask that you refer to the earnings call presentation, which is available on our website, which I'll walk through.
Starting with the third slide, which is the first slide after the disclaimers dealing with the background of the restatement. During our year-end close procedures, we came to realize that we had an accounting error of approximately $10.2 million.
Upon further review, we have determined that we have overstated revenues by an aggregate $9.5 million relating to the prior 3 fiscal years. This was all related to our swap-dealer subsidiary.
In order to determine how to proceed with the correction, we had to identify the specific errors, reperform a vast amount of accounting reconciliations and assess the materiality of this error on each of the prior 12 quarters. This could not be done in time with the thoroughness and accuracy required, so we were forced to delay our filing.
This is not something we do lightly, and even though the aggregate correction may be deemed small relative to our net worth and even to our earnings in the aggregate over the time period in question, we believe we owe it to our investors and customers to be completely transparent and get our numbers right. We have now finalized the work and have summarized the necessary corrections in our earnings release, which went up prior to the market opening this morning.
Early next week, we will be filing our 2013 10-K, in which we will restate the previously filed results for the fiscal years 2012 and 2010. These errors occurred in one subsidiary and related to the July 2010 acquisition and the subsequent integration of the Hanley swaps business.
During the same period, we more than doubled our transactional volumes on this business and saw a dramatic ramp-up of revenues, which exacerbated the situation. For a period of time, we were running 2 separate trading and back-office platforms: Hanley's and ours.
Each of which used slightly different valuation methodologies and had to be manually reconciled. In addition, we have previously been a customer of Hanley's, and these positions had to be reconciled with the positions in our books and integrated.
In addition, we then had to move some of the traders and their trading books from the acquired Hanley legal entities into our legal entities. Again, a manual process.
The errors that occurred during the integration process were masked by a deficient reconciliation process that has also now been corrected. The integration itself was completed nearly 2 years ago, and the system deficiencies corrected, and the procedures around those have been running smoothly for some time now.
Turning to the next page, we set out the impact of these corrections by year and cumulatively over the period. In summary, the cumulative effect was less than 2% of our consolidated shareholders' funds and around 9% of the aggregate earnings over the period, both GAAP and in adjusted form.
While these may not seem to be material in the aggregate over the period, they were considered material in certain individual prior periods. And as I said earlier, we err on the side of caution and want to provide full transparency to the market.
Turning to the next slide, #5 I believe, and to sum up. As a public company, we are held to a higher standard than some of our competitors, and we believe this is valuable for our businesses -- for our business and our customers in the long term.
We take our public obligations very seriously, and we are committed to being transparent and straightforward with our shareholders, our customers, regulators, bankers and our stock. In light of this obligation, we've begun a full review of our accounting procedures to ensure that we are satisfied that they are sufficiently robust to better discharge our obligations.
That said, no customer accounts or funds were affected at any point. We never breached any covenants or regulatory requirements.
It was never an unrecognized trading position or an unknown market exposure. These errors were a result of clerical errors and were immaterial to the overall health of the company.
So with that out of the way, let's move onto the quarterly earnings and then also a review of our fiscal 2013 results. Bill will deal with both of these in more detail.
Starting with the Q4 results. The difficult market conditions we experienced in Q3 continued into Q4.
And again, we realized a disappointing result. We had a wide disparity of performances from a revenue perspective between our different businesses with our Securities business up 66% versus a quarter ago or a year ago.
And our Clearing and Foreign Exchange and Payments business all showing good gains. Offsetting this was a 30% reduction in our largest segment, the Commodities business, which represents just over 40% of our aggregate revenues.
Excluding Commodities, the revenues were up an aggregate 18% quarter-on-quarter. The loss of [indiscernible] in the Commodities segment was due to the ongoing reduction in volume from the core grains franchise, especially on the structured products side, as well as the fact that physical base metals has now been closed and was a revenue contributor a year ago, although this business wasn't profitable at that time.
We have pockets of good results from some of our nongrains verticals. The grains business continues to be affected by the drought, and although we believe this to be a cyclical issue which should work itself out in the spring.
Looking at the year as a whole, this has been a tough 2-year stretch for us, probably the most difficult I've had in my career. We have faced the perfect storm, which has encompassed the following: Reduced volatility in almost all markets, which for us, reduces overall customer activity and also shrinks our trading margins.
Two, lower prices in most commodities, especially grains, which reduces activities in our producer-buyers business. Customers see no point in locking in low prices.
Two consecutive droughts in the U.S., which has severely impacted our core grains franchise. Fourth, profound regulatory changes which has fundamentally changed how we have to run our business, changed our cost structures and will have a fundamental impact on the market structure, the effects of which is still uncertain.
And of course, lastly, sustained low interest rates. As we have mentioned on previous calls, 100 basis points increase in short-term interest rates would add an additional $12 million to $13 million to our pretax results.
Exacerbating these external factors was the time, effort and significant cost incurred to close our base metals business. Strategically, this business no longer met our criteria, and we had to take a tough decision to reallocate this capital to higher margin activities.
This was a tough but necessary decision. Turning to the numbers.
Our gross revenues were up slightly versus a year ago as were our net operating revenues. Net operating revenues is a new metric we are using, which really nets out our external transaction base costs, such as exchange fees and clearing, and gives us a sense as to what net revenue comes to the company.
Looking at the segment results, the Commodities business was down 30% for all the reasons mentioned above while the remaining segments showed an aggregate 18% gain in revenues. We think this is an exceptional result for the noncommodity segments given the general market environment we experienced.
A real bright spot for us to focus on. As we mentioned before, our focus on cost has paid off, and although we continue to upgrade and expand our capabilities at huge cost pressures due to regulatory changes and have made some meaningful acquisitions, our costs remain virtually flat year-on-year.
We regard this as a significant achievement as well. We continue to believe that there are synergies and efficiencies that we can realize in future, but the impact of these will be muted by the underlying regulatory cost pressures.
But in the current environment, every bit helps and cost-containment is still a high priority for the management team. The net result for the year was $12.4 million on an adjusted basis and $19.3 million under GAAP.
This equated to low single-digit ROE. For accounting technicalities, the base metals business will be shown as a discontinued business only in the second quarter of fiscal 2014.
If this is excluded from current year results, this would add around $10 million in pretax or $6 million to net earnings. As we mentioned last time, we completed the term debt issue and have now also renewed and expanded our holding company revolver and terminated our commodity syndicated facility.
Compared to a year ago, we have reduced our debt facilities and extended the tenor. More importantly, we able to better manage cash usage and reduce borrowings through a more efficient capital structure, which has material cost implications, especially if interest rates rise, which, of course, is something we hope for.
We also see our improved capital structure as a bright spot for the year and something we have been working on hard for a long period of time to achieve. I would like to digress from our normal conference call approach and highlight one of our more interesting businesses.
Many of our more diligent investors have raised this issue directly with us and contend that we do not give sufficient detail and metrics to enable a full valuation certain of our business units, most notably our payments activity. We agree, and we will be addressing this in future filings.
And we start this process by giving some background to everyone on the call on our Payments business. Firstly, the payment sector has some of the highest valuations in the financial markets, and there are a number of transaction data points and some listed comparable companies demonstrating these valuation metrics.
There are interesting dynamics at play in this market and many startups that are employing technology to disintermediate and disrupt the more traditional payments companies, something we, too, have been successful in doing. So a very dynamic marketplace and probably easy to conclude that our own Payments business is not likely fully valued in our share price, at least if these external metrics have any applicability or validity to our business.
I would like to make clear that I'm not suggesting that these metrics are in any way appropriate or justifiable. As many of you know, I am a deep value guy.
Indeed, if we apply some of these valuation metrics, our Payments business could be worth a significant portion of our current market value. Given some background on this business, our payments -- we provide an international payments solution to banks, commercial businesses, charities and nongovernmental organizations as well as government organizations.
We do not deal with individuals, and we do not deliver physical cash. We offer payment services in more than 130 countries, more than any organization in the world, with competitive and transparent pricing.
Through technology platforms and a commitment to customer service, we are able to provide simple, fast and secure execution, ensuring electronic delivery of funds in any of these countries in the shortest time possible. We are both a global network of correspondent banks and are able to receive and disburse funds from these local accounts.
We maintain modest balances in certain of these countries to efficiently satisfy customer demand. We also are able to aggregate customer demand to obtain better execution costs locally.
This Payment business started organically 10 years ago as part of our foreign exchange activities, which were focused on smaller, less liquid currencies in the developing world. This is why we still include this business as part of our Foreign Exchange segment.
We recognized that we were able to access foreign exchange rates that were significantly more competitive than those offered by the big international banks for payments to these countries. Our original customer focus was on charities, NGOs and government agencies, given their broad focus on difficult markets.
But over time, we expanded the business to include large multinational corporations. We now believe that we are the dominant provider of payment services to the charitable NGO community.
More recent developments of our own proprietary technology, largely completed in fiscal 2013, combined with becoming a SWIFT member, that stands for the Society for Worldwide Interbank Financial Telecommunications, has allowed us to offer our services to large money centers [ph] in global banks looking for more competitive international payment services. Our customers now include the largest international banks in the world as well as a large number of smaller regional and money center banks.
The vast majority of our payments are now no-touch and executed electronically from order initiation by the customer through SWIFT messaging to the local banks to the execution of final payment instructions. This has resulted in our transactional costs being reduced substantially allowing us to compete for smaller payments that constitute a much larger aggregate revenue opportunity for the organization.
The total value of the international payments industry is extremely large with the size and method of transfer varying significantly. The key drivers of the market segment that we serve are based on the level of cross-border transactions in goods and services, which continues to exhibit strong growth.
While the market is traditionally serviced by the banks, there are an increasing number of new entrants leveraging technologies to provide and use payment services. We believe that we have developed a unique capability that cannot easily be replicated, including the use of proprietary technology that provides for an efficient and effective service to our customers, an unparalleled network of banks around the world that provide competitive exchange rates, a dominant market position in key markets, a global footprint allowing us to position our marketing and trading staff close to key customers and markets, local regulatory permission in key markets, and effective risk management and robust compliance.
So I hope that was a useful background to one of our more interesting businesses. And we will try and get this information as well as related and useful data points on this and our other businesses better presented to our investors in the future.
So with that, I will hand you over to Bill Dunaway for a more detailed discussion of our financial results. Bill?
William J. Dunaway
Thank you, Sean. I'd like to start my discussion with the review of the quarterly results and refer to the eighth page of the slide presentation titled Quarterly Financial Dashboard.
This slide lays out the quarterly operating results as well as related balance sheet information in comparison to the prior year period, as well as in some cases, the internal target which management has for our operating results. Adjusted operating revenues were $113.8 million for the current period, which represents a 9% decrease from $124.7 million in the fourth quarter of 2012.
Adjusted operating revenues decreased 5% from the $119.7 million recorded in the third quarter of 2013. Adjusted operating revenues declined in the core CRM segment, however, all other segments of the company has experienced growth in adjusted operating revenues in the fourth quarter as compared to the prior year, highlighted by a 66% increase in the adjusted operating revenues in our Securities segment.
Looking at our revenues on a segmental basis, adjusted operating revenues in our Commodity and Risk Management Services segment decreased 30%, from $69.1 million in the prior year to $48.1 million in the fourth quarter of 2013. Adjusted operating revenues decreased 9% as compared to the third quarter revenues of $53 million.
Our CRM segment is further broken down into 3 product lines: Soft commodities, precious metals and base metals. Starting with soft commodities, operating revenues decreased 33% from $57.7 million in the fourth quarter of 2012 to $38.5 million in the current period.
Third quarter 2013 revenues were $46.5 million. Exchange traded contract volumes decreased 14% and OTC contract volumes decreased 33%, respectively, over the prior year period.
The decrease in exchange traded contract volume was primarily driven by the diminished hedging volume from our domestic grain customers as a result of low commodity prices and volatility. The decline in OTC contract volumes, primarily in the Latin American, Mexican and Brazilian agricultural markets, contributed to a $17.2 million decrease in overall OTC revenues.
Average investable client balances declined 35% versus the prior year period to $838 million as the overall agricultural industry volumes and margin requirements were lower as compared to the prior year period. A 28% decline in the number of ounces traded, primarily in the Far Eastern and the U.S.
markets, resulted in a 29% decline in adjusted operating revenues in our precious metals product line, from $3.7 million in the prior year to $2.6 million in the fourth quarter of 2013. Third quarter revenues were $4.7 million.
As a result of our planned exit of the physical base metals business, I want to separate the results of our physical base metals business from that of our nonphysical hedging business on the London Metal Exchange. Adjusted operating revenues in the physical base metals business were negative $164,000 in the fourth quarter of 2013 as compared to negative $368,000 in the prior year period.
Adjusted operating revenues in our physical base metals business were negative $3.3 million in the third quarter of fiscal 2013, primarily as a result of $1.9 million in premiums paid to exit forward contracts as well as the orderly wind down of other open forward contracts and inventory positions. The exit from the physical base metals business will leave our LME metals operations unaffected.
Operating revenues in this business decreased 13% from $8.1 million in the fourth quarter of 2012 to $7 million in this current period. This was relatively flat with the $7.1 million in operating revenues recognized in the third quarter of 2013.
Moving onto the Foreign Exchange segment. Operating revenues increased 3% in the fourth quarter to $15.6 million as compared to $15.2 million in the prior year quarter.
Current quarter operating revenues decreased 18% versus very strong third quarter revenues of $19 million. Operating revenues in the global payments product line increased 6%, from $9.8 million in the prior year period to a record $10.4 million with the volume of payments being made increasing 16% as we continue to add additional commercial banks and following the successful implementation of a new back-office platform.
We have expanded our service to additional commercial customers as we can process more significant volumes, including smaller payments without having to add additional personnel. Operating revenues from customer hedging activities increased $300,000, as compared to the prior year period, to $800,000.
Operating revenues in the customer prime brokerage product line increased $1 million to $3.1 million in the fourth quarter as compared to the prior year. Under the proprietary foreign exchange arbitrage desk, which arbitrages the cash versus the exchange traded market, experienced a 54% decline in operating revenues to $1.2 million as compared to the prior year driven by low volatility.
In our Securities segment, operating revenues increased by 66% from $11.1 million in the prior year to $18.4 million in the current quarter. This represents a 33% increase in -- over the third quarter revenues of $13.8 million.
This segment includes 2 product lines: The equity market-making business and the debt capital markets. Operating revenues in the equities market-making product line increased 96% from $6.2 million in the prior year to $12.2 million in the current period.
Operating revenues in our debt capital market product line, which includes both investment banking activities as well as debt trading, increased 26% to $6.2 million as compared to the prior year period. This was a $2.9 million increase over the $3.3 million recognized in the third quarter of 2013.
In the Clearing and Execution Services segment, operating revenues were $25.2 million in the fourth quarter of 2013, which was a $2.6 million increase over the prior year, but represent a 10% decrease versus the $27.9 million in operating revenues in the third quarter of 2013. Revenues increased over the prior year despite a 1% drop in exchange traded volumes as an increase in commission rate per contract offset this decline in volumes.
Average investable client balances in the current period increased 15% as compared to the prior year period to $868 million. Interest income has continued to be constrained by historically low short-term interest rates.
Adjusted operating revenues in our Other segment, which contains both our asset management business and our commodity origination and financing product lines, increased from $6 million in the prior year period to $6.7 million in the fourth quarter of 2013. Adjusted operating revenues were $6.8 million in the third quarter of 2013.
Operating revenues in the asset management product line increased $800,000 to $2.8 million in the current period, while adjusted operating revenues in the commodity financing and origination product line were relatively flat with the prior year period at $3.9 million. Back to Slide #8 on the dashboard, noninterest expenses were $112.2 million for the fourth quarter of 2013, which was an 8% increase as compared to the $104.2 million in the fourth quarter of last year.
This increase is primarily driven by an increase in variable clearing and related expenses in introducing broker commissions, the acquisition of Tradewire Securities, and the acceleration of restricted stock expense related to the retirement of an executive of one of our wholly owned subsidiaries. This was a 2% decrease in total as compared to the $114.7 million in the third quarter of 2013.
Internally, the company targets key variable expenses as a percentage of total expenses in excess of 50%. During the current period, the majority of noninterest expenses were variable with 54% of the total noninterest expenses being variable in nature as compared to 56% in the prior year period.
Nonvariable expenses include fixed expenses as well as bad debts and impairments. During the fourth quarter of both 2012 and '13, we recorded no significant bad debts or impairments.
Fixed expenses were $50.6 million for the fourth quarter of 2013, which represents a $6.1 million increase over the fourth quarter of last year. Fixed expenses were $50.4 million in the third quarter of 2013.
Next, the company targets to keep total compensation expense as a percentage of adjusted operating revenues at less than 40%. And for the fourth quarter of 2013, we're above this goal at 44.6%, primarily as a result of the wind down of the base metals business, the aggregate level of operating revenues and the accelerated restricted stock expense.
In the prior year period, compensation and benefits were 37.6% of adjusted operating revenues. Compensation and benefits expense increased 8% from $46.9 million in the prior year period to $50.7 million in the current quarter.
The variable portion of compensation and benefits decreased 6% from $22.4 million in the fourth quarter of 2012 to $21.1 million in the current quarter, while the fixed portion of compensation and benefits increased $5.1 million to $29.6 million in the current period. The average number of employees increased to 1,097 for the fourth quarter of 2013 as compared to 1,074 in the prior year period.
Our second largest expense is clearing and related costs, which increased 8% compared to the prior year quarter to $28.3 million. This increase was primarily driven by higher ADR conversion fees and increased transactional charges in the FX business.
Third quarter 2013 clearing and related costs were $28.7 million. The adjusted net income from continuing operations for the fourth quarter was $2 million versus a record $12.5 million in the prior year period.
The prior year period benefited from strong short-term volatility driven by the effect of the drought in the U.S. agricultural markets while the current year period is affected by $1.1 million of expense related to -- consideration expense related to prior acquisitions as well as $2.6 million of accelerated restricted stock expense discussed earlier.
The physical base metals business, which we intend to report under discontinued operations in the second quarter of fiscal 2014, recognized a $1.6 million pretax segment loss in the fourth quarter of 2013. When taking a longer view over the trailing 12 months, adjusted net income and adjusted EBITDA decreased 27% and 23%, respectively, over the year-ago period.
The company looks to achieve a minimum return on equity of 15% or greater on its adjusted stockholders' equity, and for the current period, the company was well below that target at 2.3%. The ROE for the prior year period was 15.9%.
Total assets on the balance sheet decreased 7% to $2.8 billion, while adjusted stockholders' equity closed the period at $338.1 million, a 5% increase over the prior year. Another key metric the company focuses on is keeping a 1:1 ratio between revenue-generating employees and administrative or operations employees.
Along these lines, the company targets to have at least $500,000 in annualized revenues across the entire employee base. For the current period, this metric was $414,000 per employee as compared to $464,000 for the prior year period.
On November 15, 2012, the company's Board of Directors authorized a repurchase plan in which the company may repurchase up to 1.5 million shares of its outstanding common stock. During the fourth quarter of 2013, the company repurchased 90,091 shares of its outstanding common stock in open market transactions.
Finally, in closing out the review of the quarterly results, the trailing 12-month results have led to an increase of 3% in the book value per share, closing up the quarter at $17.60 per share. Next, I would like to direct you to Slide #9 of the presentation for a short review of the year-to-date results.
Adjusted operating revenues increased 1% to $467.3 million in the fiscal 2013 as compared to the prior year period. Adjusted operating revenues in the core CRM segment declined 16% or $40.2 million as compared to the prior year, primarily driven by the decline in revenues associated with the effect of last year's drought on our agricultural commodities business as well as the $10.1 million decline in physical base metals revenues.
All other segments of the company experienced revenue growth as compared to the first 9 -- or compared to the prior year. Operating revenues in the Securities and Other segments grew at 53% and 40%, respectively.
Total noninterest expenses increased 4% to $443.4 million compared to the prior year; 54% of the total expenses were variable in nature as compared to 55% in the prior year period. Nonvariable expenses increased $12 million or 6%, primarily related to the acquisition of the LME Metals Team, TRX Futures and Tradewire Securities, as well as the increased costs related to the current regulatory environment and particularly Dodd-Frank compliance costs.
The adjusted net income from continuing operations decreased $4.6 million to $12.4 million for fiscal 2013 as compared to the prior year, which represents a 3.7 -- 3.7% return on equity, which is below our stated goal of 15%. With that, I'd like to turn it back to Sean to wrap up.
Sean Michael O'Connor
Thanks, Bill. I mentioned earlier about our team in the middle of a perfect storm with generally reduced market volatility, lower commodity prices, cyclical drought-related issues and regulatory changes as well as depressed interest rates.
These are tough headwinds for our business to sustain as currently configured. And as a result, the returns have been significantly below expectations and our targets for a couple of years now, but fortunately, have been at least positive.
We have been asked recently by some investors and have internally deliberated if our long-term target of 15% ROE can be achieved. And certainly in the face of these headwinds, it's not possible in the short term.
However, we run our business for the long term, and this is a long-term objective, and we should not be altering it based on short-term or cyclical circumstances. But the question we are left with is whether these headwinds are more permanent in nature and part of a new normal, or are they a short-term phenomenon.
We may all have different opinions on this. My thoughts are that some of these headwinds are here to stay, especially the regulatory issues insofar as they affect us and how we conduct our business and also potentially the impact on the market.
This is unlikely to change anytime soon, and we need to assume that this is, in fact, a new normal. Volatility may be somewhat subdued for a longer period due to the industry impact of these regulatory changes as well as the abnormal Fed activities, which have tended to drive up volatility in the market.
But price levels, absolute price levels, and drought conditions, both material factors for us, are short-term phenomena and are unlikely to continue. And while interest rates may take a little longer to move up, it is hard to see that they'll remain low forever.
So kind of a mixed bag in my opinion. As far as the long-term regulatory changes go, we continue to maintain that the regulatory pressures will drive a long-term consolidation of the industry, and we aim to be a beneficiary of that inevitable trend.
There is now clear evidence that consolidation has started and perhaps may be accelerating. This is now a game for scale players that can afford the minimum infrastructure and costs.
We have developed a global infrastructure that is fairly unique, we think, for a midsized financial services firm. We have regulated operating subsidiaries in all the key financial markets and are capable of executing futures, options, securities, swaps and foreign exchange.
Hopefully, we are well positioned for this longer term consolidation trend. So where does this leave us on our ROE expectations?
Recent history, and I guess some battle scars, make it possible to concede that we may not achieve our target in the short term. In the longer term, achieving the target will likely require greater scale, either through market share gains or industry consolidation, both of which we feel we are well positioned for.
With that, I would like to turn it back to the operator and see if we have any questions. Operator?
Operator
[Operator Instructions] We'll take our first question from Justin Hughes with Philadelphia Financial.
James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC
I was wondering, the strongest part of your revenue this quarter was the Securities. It was $18 million, which is up over 60% year-over-year.
Could you just give us a little bit of color on what's going on with that line item? And is this sustainable?
Or is there something maybe special in the quarter?
Sean Michael O'Connor
Okay. Well, Bill, feel free to chime in as well.
I think the biggest impact on that was the acquisition we made of Tradewire about a year ago. So if you look on a year-on-year comparison, that acquisition was in for a full year this time and not for a full year last time.
And I think that's a big part of the delta. Additionally, I think we are just gaining market share in all of our related Securities businesses.
And I think with what's happening in the market, there is generally sort of more activity in the equity markets as equity prices are running up. And bear in mind, we're picking up ultimately largely retail flow.
I mean, we pick it up from institutions but sitting behind that is retail flow. I think retail investors are just becoming more active in the market, and I think that always happens when equity markets do well.
And I think we're sort of in that abnormal situation 2, 3 years ago where everyone bailed out of the equity markets and were seeding [ph] long cash money markets or bonds. I think those are probably the 3 biggest factors.
Bill, you got anything else?
William J. Dunaway
No. That's it, Sean.
James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC
Seasonally, usually, third quarter has lower activity. Do you see higher activity this year?
Because your revenue in that line item was up $5 million quarter-over-quarter.
Sean Michael O'Connor
Yes, honestly, it's hard to see if there's seasonality. I mean, I think largely you are correct because that's kind of summer and so on.
But honestly, it's hard for me to know whether seasonality applied this time. I think the markets are just kind of on fire at the moment.
So I think everyone is kind of getting back and involved, and I think that's probably the biggest factor for us.
James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC
Okay. And then you spent some time talking about your payments business.
Can you tell us how much -- first of all, where would we find that, which revenue segment? And how much is your revenue and earnings from your payments business?
Sean Michael O'Connor
Okay. Yes, well, firstly, let me -- Bill can give you the exact numbers.
We're going to try to do a better job and one of our thoughts [ph] is to break the payments numbers out in our future filings. So to answer that question, Justin, as I said in my little prepared remarks, I think you're going to see more detail from us on that business.
Bill, do you have some fill that you could throw out there just for the big numbers: revenue and net segment earnings?
William J. Dunaway
Yes. On an annual basis for the full year, Justin, the payments business generated about $41 million worth of adjusted operating revenues and about $20.5 million of segment income for the full year 2013.
James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC
Okay. And how much was that up over the prior year?
William J. Dunaway
As compared to the prior year, it's up about 5% in revenue, and it's down slightly. It's down about 5% in segment income.
Most of that's related to the system costs. As I touched on, they put in a new back-office platform, so there were some costs associated with getting that platform up and running and ongoing.
Sean Michael O'Connor
Justin, that business is really done kind of a real pivot in our mind, which is why we want to highlight it. We really started that business along with our sort of general strategy, I guess, of focusing on sort of underserved market segments, underserved customers, generally high-touch type businesses, and that's how that business started.
We dealt with very unsophisticated NGOs trying to do payments in very difficult markets. And we kind of exhausted that opportunity -- or not exhausted it, but I think we -- that became a mature opportunity for us.
And our decision was we had to really turn ourselves into a much more efficient technology-driven business. And the last 2 years has been a lot of costs that we put through the income statement in making that pivot.
And as I mentioned in my prepared remarks, we've gone from, maybe I'm off a little bit, but something like 90% of our payments being some manual interface to probably 90% of them being -- or higher being no touch now. So that involved a lot of cost and a lot of expense in developing those proprietary systems, all of which sort of impacted the bottom line.
It's a great business, growing, we think, very nicely. Transaction revenues are growing.
We sort of made good headway and proof of concept in getting banks onboard. But that was all possible because of these technology costs.
So we're kind of at an interesting point now because if we can really see these volumes go up, we should have a lot of operational leverage due to our new technology platform. So I hope that gives you some feel for it.
Unknown Executive
Bill, you may also want to repeat some of the quarterly information that you gave on that business in your presentation. So you just went through the year, but perhaps you can touch on the Q4 results for that business as well.
I know you covered it in your presentation but maybe just repeat it.
William J. Dunaway
Sure. They were -- for the fourth quarter, they generated about $10.4 million in revenue, which is up about 6% over the prior year and about 5.5 -- almost $5.6 million in segment income, which was 9% over the prior year period.
James Justin Hughes - Philadelphia Financial Management of San Francisco, LLC
Okay. So I mean, just -- and that compares to, looks like, segment income of -- for the full fourth quarter full company, negative 2.6.
So really, we should spend a lot more time on this because it looks like it's the only segment making money. Is that fair to say?
Sean Michael O'Connor
Well, the segment income is before sort of the central overhead and so on. So I'm not sure that's exactly a fair comparison, but it's certainly one of our highest margin businesses and I think has made an interesting pivot to being a mainstream business.
Honestly, serving some of the biggest banks in the world, so I just think that's interesting. Very hard for me to predict how successful we are in turning that into sustained growing revenues.
I think we've got a great shot at doing that, and there is kind of a lottery ticket kind of effect in that business if we can really crack it. I mean, we could be on to something that's pretty interesting.
But it's very hard to get big banks to deal with you, so I caution everyone by saying we've made progress, we've got these banks on, they're all dealing with us, but you're dealing with huge organizations, and sometimes it's hard to get them to sort of work with you and use you the way you want them to use you.
William J. Dunaway
Justin, just to give you some clarity -- just to give you some clarity, Justin, on the segment income. The total segment income, which is a measure of profitability before central overheads, the total segment income for the fourth quarter was just under $25 million.
So this represented about $5 million, $5.5 million of the $25 million.
Operator
We'll go next to Russell Mollen with Bares Capital.
Russell C. Mollen - Bares Capital Management, Inc.
My first question is the impact from the accounting issues. Was there any post release that you guys had last month?
Any issues with loss of business or customers leaving or anything like that being scared away from that uncertainty?
Sean Michael O'Connor
Yes. And again, we're going to be very candid and forthright with you here.
We worked pretty hard to make sure that when we made our initial announcement that we quantified the extent of the problem because I think oftentimes, people go out and just say, "We don't know what our numbers are, it's a mess." And that's obviously very damaging.
And clearly, our accountants and our advisers have to be onboard with that. So we went out and gave a number, and we thought the number from a counterparty creditworthiness point of view was largely immaterial.
And honestly, we got a much worse reaction than we anticipated, both in terms of the stock price, which you've probably seen that, and we did have a number, particularly sort of our larger banks and our larger customers, they did come on and start asking lots of questions. A couple of our big customers, said, you know, we're going to scale back our business until you guys can verify for us that these numbers are indeed what we think they are, and we've now done that.
So very hard for me to -- you don't know what's happening with people that aren't talking to you, so don't know. I think we feel pretty confident that we have great relationships with our customers.
They're all long-term relationships. We do things kind of that other people don't initially do in the same way.
But certainly, there's going to be some impact. Whether it's noticeable or not, we'll have to see.
Russell C. Mollen - Bares Capital Management, Inc.
Got it. And then secondly is, either on the last call or the one before that, you guys talked about sort of a potential for it to be a really good crop season and things sort of picking up and the fall and winter and things like that, particularly on the soft grain business.
Are you kind of saying the opposite now. Did that not happen?
Was it not a good crop season? What's sort of going on there?
Sean Michael O'Connor
Okay. There are kind of a lot of dynamics that drive our revenues coming out of that crop things and maybe -- and I think we've chatted about this before but let me just give you some of the impacts.
So firstly, the main thing that drives our full futures business is how much grain is sitting in storage with the elevator networks. And once they take the grain in storage, they have to hedge it, right?
So that's kind of the underpinning of our business. And with what's happened with the drought, those stocks went down to historic lows.
So the bins were empty. There just wasn't a lot of hedging that had to happen.
So irrespective of whether it's a good or bad crop, what matters to us is how much of that is sitting in storage, right? So that's one issue.
The other issue around that for our structured products business is what's the volatility in the market? Because if there's volatility, that certainly helps us put structured products together.
It helps -- customers are more interested in trading. And then the third factor you've got in all of this is kind of the absolute price levels and the leads and lags that causes with the grain actually coming into storage.
So for example, if prices are very high, I would guess the argument would be farmers and producers would rush that grain to market so they could get paid a high price. Or even if they couldn't get it to market, they would ask the elevators to maybe hedge for them, and we would in turn see that business from the elevators.
When prices are low, even if there's a good crop, the farmers may hang on to their grain because they think, "Why should I deliver it now, hedge it now, because I'm just locking into a low price?" So they tend to probably move faster and the pipeline comes to us faster if prices are higher.
And I think that's a relative concept, right, because it's like, what did I get last year? When are my bills coming due?
So there are a lot of factors in that respect. So where we stand today, there is a record crop out there.
We know that. We know that the crop is starting to come in.
The question is, I think there's probably a bit of a lag because the farmers are sort of saying, "Well, hang on, I don't really need the money right now. Let me just put it in my on-farm storage.
Let me just wait a while." And we don't have a lot of volatility to help us on the structured product side.
That will eventually end. I mean, that can't carry on indefinitely because at some point, the next crop comes, bills have to be paid, and the grain has to be delivered in no matter what.
So that can cause a 3- to 5-month delay in the cycle, either accelerating it or delaying it. So those are the major factors, just so you could sort of understand commercially maybe what happens.
And we are not really in control of any of those factors, but we are definitely certain that those bins are going to be pretty full towards the end of summer as people are moving into the next crop season, and that in turn means we should see a lot more revenue at that time. It happens sooner or later.
It may depend on where prices are or volatility is. Is that helpful?
Operator
We'll go next to Paul Siegel [ph] with Columbia Management.
Unknown Analyst
I'm not sure if I missed this, but how much of -- how much was the severance payment on the compensation line, the one large severance agreement?
William J. Dunaway
It wasn't actually a severance payment, Paul, it was a -- the person was retiring, and he had restricted stock in our plan, which we would have recognized that the expense on that restricted stock over a period of about 2.5 more years. But the way our restricted stock plan works, if you do retire, that stock immediately vests, and thus, we have to recognize that compensation expense all in the current period.
So it was about $2.6 million on a pretax...
Sean Michael O'Connor
And just to be clear, that stock was in lieu of cash bonuses. I mean, we have a mechanism where our traders and our executives can take a portion of their cash bonus in stocks.
So that stock, that executive elected to take restricted stock. We only allow that stock to vest over a period of time, and when he retired, we had to accelerate the write-off of that stock.
Unknown Analyst
And then within the foreign exchange payments business, now that you've broadened your offering, are you now addressing the entire market? Or are you moving from the smaller niche that you were in to a different segment?
Sean Michael O'Connor
I'm not sure exactly what your question is or how to answer that. Let me just say this, I mean, certainly, I think when we started in the business, I think it was a little bit more of a niche approach in the sense we were going for kind of the easy access point, right, which was small NGOs who were relatively unsophisticated.
They didn't need a fancy system. They just needed someone who could help them and sit down with them, right?
And they were also doing a lot of business in very quirky places, so it was sort of high-touch, hard work kind of business, and that's kind of where we built this business from. And now we're offering this out to pretty much anyone, including the biggest banks you can think of here in the U.S.
down to the NGOs, but we're now doing it in a much more automated way with technology. And this has been sort of a challenge for the last 2, 3 years and cost us a lot of money to do, but we now think we've got a pretty broad offering.
We can do payments in more countries than any organization on the planet. So that's a pretty strong offering for us, and we are truly one of the few one-stop shops.
Even the big banks can't do as many countries as we can do. So I hope that answers your question, but it certainly moved from initially where we took a very targeted approach at a customer base we thought we could compete for.
And as we've developed our abilities, we now think we have a business that has a pretty broad appeal.
Unknown Analyst
What do you think your...
William J. Dunaway
Just to add one other comment there, as I touched on a little bit earlier, with the new back-office platform, we're actually able to do far more smaller payments than we used to because we used to have to touch each payment, so we're able to do higher volume of lower value payments, which before, we would have had to touch and would have been more manual. That kind of expands our offering to commercial customers as well.
Unknown Analyst
Okay. So what do you think your market share is, loosely?
Sean Michael O'Connor
I think it's infinitesimal. I mean, the global payments business is massive, I mean and still dominated largely by the big banks.
And I would probably say, most of the payments of the world go to sort of between the G7 countries just because those are the biggest economies. And even the part where I think we offer more of a value proposition, which is the developing markets, I mean, we can do anything in the developing market.
It's still an enormous business. And what we -- who we're really disintermediating are the banks in this business.
In fact, banks have become our customers because the banks that we are disintermediating are the local, colonial, multinational banks who have had this business for generations, and they're just not competitive, and that's really who we're displacing and disrupting in this industry.
Unknown Analyst
Okay. And then, I guess, finally, in terms of acquisitions, you said that the pace was accelerating.
Have you noted that it accelerated further in the fourth calendar quarter of '13?
Sean Michael O'Connor
I can't point to any specific data points that would lead me to think that over a quarter it's accelerated. But if you watch some of the industry data, I mean, the tab [ph] report is probably a good place to go.
We talk to our regulators who can tell us how many people they regulate and so on. I mean, if you just look at the FCM space, you go back 3, 4 years, there were probably 200, 220 FCMs.
I think it's down to 120 now or 130, and it's probably going to be 75 is everyone's view pretty soon. Now there are a lot of small guys at the bottom end there that, in aggregate, don't amount to a lot, but you're sort of seeing a massive consolidation, I think.
And the same is happening on the broker-dealer space, and the same is happening with swap dealers. I mean, in fact, swap dealers, there haven't been a lot out there, but there've been a lot of entities that have been engaging in swaps that are just going to be out of business because they can't sustain infrastructure costs of being a regulated swap dealer.
And maybe just to give you some anecdotal kind of data points here, we are a regulated swap dealer, and we did this business a year ago as an unregulated entity, and part of our regulatory regime is we have to prepare a compliance report annually, which we have to take to our board, and it has to go to our regulators. And a part of that compliance report is you have to list out all the regulations that you are subject to, and you have to map those to your internal controls and make sure that every one of those regulations has a control that is robust and continuously ensures compliance.
In our swap dealer, we are subject to 715 regulations. I mean, this is a massive change for us.
We were subject to no regulations other than basic money laundering and good commercial sense a year ago. These 715 regulations, there are not a lot of people, particularly smaller entities, that have the wherewithal to even begin to think about doing that.
And that's the same in our FCM, and it's the same in the broker-dealer world right now. So you know that regulators have significantly upped the ante, and that is going to force a consolidation.
There's no doubt in my mind that's going to happen. How does it happen?
When does it happen? Timing, those are all the imponderables at this point.
Operator
[Operator Instructions] We'll go next to Bartley Cohen [ph] with -- private investor.
Unknown Attendee
I was just curious if you could -- I know last year, you were repurchasing shares and then you stopped for a few quarters and then you started recently again. I just -- if you could just go through the thought process of why you stopped and then why you restarted.
Sean Michael O'Connor
Okay. So I think we had a pretty explicit conversation about the process of share repurchases about a year or so ago.
And maybe just to refresh everyone on that, I mean, firstly, we don't believe, and I think a lot of companies our size use the share repurchase plan to either indicate to the market what the executives think the share price should be or to support the share price. We have absolutely no interest in doing either of those 2 things.
We are clearly focused on compounding our book value, and therefore, buying shares at significantly above book value destroys our book value per share, right? If we can buy shares at or around book value, that can be very accretive over a period of time to book value.
So that's sort of our methodology, and we believe in discipline because if you try and do it on the fly, you'd probably screw it up. So what we do is a very mechanical process where we set out how many shares we will buy at increments relative to book value.
And these aren't exact numbers, but just to give you an example, at 20% over current book value, we might buy 100 shares. At 15% over book value, we might buy 200 shares.
And at book value, we might buy 500 shares. So we will incrementally buy more shares as the share price goes down.
And ultimately, anyone who's selling us their shares should know we're buying them because we think they're cheap, and we know better than they do. And so -- and we also have a -- as kind of a timeout kind of policy because we don't want to be supporting the share price.
If the share price goes down, in a funny way, we want it to go down so we can buy more shares cheaper, right? So what we do is we will only accumulate a certain number of shares, and then we will withdraw from the market and let the market find its true level.
And if it's lower, we'll buy more at that point. So a very mechanical process.
We implement it every quarter. Unfortunately, and probably a lesson for us, is we recalibrate our quarterly share purchase program in an open period because we're not allowed to do it in a closed period because the company has inside information.
And clearly, when we delayed our filings, we went into a quiet period and -- or a closed period, and we weren't able to kind of re-up our plan, which was unfortunate. So obviously, once we file on Monday or Tuesday morning, that we will be able to recalibrate for the next quarter our share purchase plan, and it will be a mechanical process.
We leave the orders with our agent, and they execute. Did that make sense?
Unknown Attendee
Right. It does.
I just -- I mean, I thought you guys stopped for a while this -- yes, it makes sense. So the last question was, I know last year, you guys were getting -- gaining like a lot of customers per month, and it was like 300 or 400 or something.
Has that picked up? Has it slowed down?
Sean Michael O'Connor
I think it's sort of -- it's -- I don't want to say flatlined. I think it's not accelerating, but we're still acquiring customers at a pretty steady rate.
But the rate is the same. It's 200, 300 customers a month or whatever it is.
So at one point, it was sort of rapidly expanding, and I think that was sort of a little bit in the aftermath of MF Global and a couple of other things. But there's a steady stream of inbound customers, higher than it’s been 3, 4 years ago.
Still higher, but not accelerating necessarily.
Operator
And at this time, we have no other questions.
Sean Michael O'Connor
Okay. Well, thanks, everybody, for your attention, and sorry you had to wait so long to hear from us.
We will hopefully be on time with our first quarter, and we'll be speaking to you soon. Thank you.
Operator
This does conclude the conference. We thank you for your participation.