Legg Mason Inc. reported its first quarterly earnings decline in nearly four years yesterday, as the company's investment banking business dried up a bit and higher interest rates depressed revenues from trading the firm's own securities.
Still, revenues and profits for the full fiscal year, which ended March 31, rose for the fifth consecutive year. Chairman and Chief Executive Officer Raymond A. Mason called 1994 "the most successful year in Legg Mason's history."
For the full year, Legg Mason's earnings climbed 19 percent to $36 million, or $2.98 a share, from $30.2 million, or $2.61 a share a year ago. Revenues rose 18 percent to $397.5 million.
The strong results came despite a fourth quarter in which profits fell 23 percent from a year ago to $6.7 million, or 55 cents a share. In the same period last year, the company reported a profit of $8.7 million, or 74 cents a share.
The market reacted negatively to the news, driving Legg Mason's stock down $1.25 a share, to close at $19.125.
Profits also were lower than the $9.9 million earned in the third dTC quarter, and the $11.4 million earned in the second quarter.
A 9 percent rise in expenses during the quarter was not matched by revenues, which increased only 4 percent, to $96.3 million. The main culprit was a 30 percent decline in revenues from deals in which Legg Mason, parent of Legg Mason Wood Walker Inc., acted as manager or co-manager in a securities underwriting.
"If you look at the numbers, we had a strong investment banking quarter a year ago and it went down substantially in the quarter just ended," explained Vice Chairman John F. Curley Jr. The company's $16.8 million in investment banking fees represented percent of all revenues last year but fell to $11.8 million in the latest quarter, or 12.2 percent of revenues.
"I think some of that was timing," Mr. Curley said. "We did not have a lot of managed deals in the quarter."
Legg Mason wasn't the only firm to suffer a dropoff in investment banking. Even Alex. Brown Inc., which is much more reliant on that business, said recently that investment banking revenues fell 4 percent during the latest quarter.
"It was not surprising that Legg Mason's banking revenues declined quarter over quarter, given the fact that Alex. Brown saw a downturn also," said Perrin H. Long, director of equity research at First of Michigan Corp. in Detroit.
The company's main business, commissions from securities trading for its customers, was up during the quarter to $37.4 million as well as for the year. Fees from its mutual funds and other investment advisory services showed even stronger gains.
Legg saw a 5 percent drop in the amount it earned from trading securities it owned, mostly fixed-income securities. Revenues from those "principal transactions" were hurt by rising interest rates during the quarter, Mr. Curley said.
"We're not a big trading firm, but we do carry inventories of corporate and municipal bonds to satisfy client needs," he said. "In a rising interest rate environment, which is what we had in the quarter just ended, you tend to lose money in those transactions."