SWS Announces Fourth Quarter and Fiscal 2010 Results

Aug 30, 2010, 16:01 ET from SWS Group, Inc.

DALLAS, Aug. 30 /PRNewswire-FirstCall/ -- SWS Group, Inc. (NYSE: SWS) today reported a net loss of $305,000 for its fiscal 2010 fourth quarter, or 1 cent per diluted share, on net revenues of $89.3 million, compared with net income of $3.6 million, or diluted earnings per share (EPS) of 13 cents, on net revenues of $99.0 million in the fourth quarter of fiscal 2009.

For the 2010 fiscal year, the company reported a net loss of $2.9 million, or 10 cents per diluted share, on net revenues of $367.0 million, compared to net income of $23.6 million, or diluted EPS of 86 cents, on net revenues of $381.6 million for fiscal 2009.

"Our brokerage segments performed well and all showed improved results from the third quarter in spite of very difficult economic conditions," said James H. Ross, chief executive officer of SWS Group, Inc. "Our banking segment, while significantly improved from the third quarter, continued to address declines in commercial real estate values."

Net revenues declined $9.7 million in the fourth quarter of fiscal 2010 from the fourth quarter of fiscal 2009 to $89.3 million primarily driven by lower commissions and trading profits in the taxable fixed income business unit.

Operating expenses were down $4.2 million in the fourth quarter, despite a $5.8 million increase in the banking segment's loan loss provision.  Variable compensation expense was the primary driver of the operating expense reduction.

Net revenues were down $14.7 million in fiscal 2010 from fiscal 2009, driven in large part by a $21.5 million decrease in commissions and a $7.0 million decline in net interest. The decrease in commission revenue was primarily due to lower taxable fixed income commissions in the institutional segment as a result of tighter spreads and reduced market volatility. The decrease in net interest resulted from lower spreads in the institutional segment's securities lending business and reduced investment in tax-exempt auction rate bonds in the municipal business.

The decrease in net revenue in fiscal 2010 versus fiscal 2009 was partially offset by a $6.5 million increase in net gains on principal transactions and an $8.9 million increase in other revenue. Net gains on principal transactions increased primarily due to an increase in the number of financings and higher retail municipal sales trading volume. The increase in other revenue was primarily due to a $2.7 million increase in insurance product sales, a $3.5 million increase in the value of deferred compensation plan assets, and a $4.0 million increase related to a limited partnership venture capital fund - which posted a $1.3 million gain in fiscal 2010 compared to a $2.7 million loss in fiscal 2009.

Operating expenses for fiscal 2010 increased $28.3 million over the previous year to $371.5 million. The largest factor in the increase was a $45.1 million loan loss provision in the banking segment, representing a $31.8 million increase from fiscal 2009. The elevated loan loss provision was driven by market conditions in Texas and a subsequent deterioration in the bank's commercial real estate loan portfolio.

The increase in the loan loss provision and a $4.8 million increase in other expenses in fiscal 2010 were partially offset by a $9.6 million decrease in commissions and other employee compensation expense, primarily in the institutional segment, as a result of lower revenues.

Banking Segment

The bank's net revenues for the fiscal 2010 fourth quarter were $20.6 million compared to $20.0 million for the fourth quarter of last year. The $10.7 million loan loss provision resulted in a $3.6 million pretax loss for the fourth quarter of fiscal 2010, as compared to pretax income of $4.7 million in the same period of the prior fiscal year.

The bank's net revenue rose 15 percent to $76.4 million in fiscal 2010 from $66.7 million in fiscal 2009, while the segment reported a pretax loss of $17.8 million for the 2010 fiscal year. Net interest revenue increased $10.9 million, primarily due to an 8 percent increase in loan volume over the previous fiscal year and a 10 basis point increase in the net yield. The bank's operating expenses increased 70 percent to $94.2 million in fiscal 2010 from $55.4 million in fiscal 2009, led by the $31.8 million loan loss provision increase. The total loan loss provision for fiscal 2010 was $45.1 million, bringing the bank's loan loss allowance to $35.1 million or 2.96 percent of loans held for investment, at June 30, 2010. Non-performing assets at the bank were 5.26 percent of total assets, or $93.7 million, at June 30, 2010, compared to 3.6 percent of total assets, or $56.1 million, at June 30, 2009.

Subsequent to the end of the 2010 fiscal year, the bank entered into an informal agreement with the Office of Thrift Supervision regarding the bank's operations in the coming months. The agreement provides, among other things, that the bank must maintain a Tier 1 core capital ratio of 8 percent and a total risk-based capital ratio of 12 percent, adopt and execute a plan to reduce classified assets, and limit certain real estate lending until the bank's concentration in real estate lending is reduced. Management believes it has taken appropriate actions to meet the terms of the agreement.

Clearing Segment

Net revenues from the clearing segment were $5.7 million in the fiscal 2010 fourth quarter, down slightly from last year's fourth quarter.  Pretax income of $592,000 was down 40 percent from the fourth quarter of fiscal 2009, primarily due to an increase in legal expenses during the quarter.

Net revenues from the clearing segment were $21.0 million in fiscal 2010, compared to $26.6 million in the prior fiscal year. Pretax income fell from $5.2 million in fiscal 2009 to a pretax loss of $5.3 million in fiscal 2010.  While the number of tickets processed fell substantially from the prior year, revenue per ticket in fiscal 2010 was $4.46, compared to $1.23 for fiscal 2009. Net interest revenue in the clearing segment was up 9 percent as compared to fiscal 2009, driven by higher spreads earned on customer deposits. Other revenue, made up primarily of fees from money market funds, was down $5.1 million for fiscal 2010 from fiscal 2009. This decrease was primarily due to a reduction in short-term interest rates. Operating expenses in the segment were up $5.0 million in fiscal 2010 over fiscal 2009, due in large part to a $6.3 million loss incurred on a correspondent's short sale of securities in the first quarter of fiscal 2010. The increase in operating expenses was partially offset by decreases in information technology expenses, as well as commissions and other employee compensation.

Retail Segment

The retail segment's increase in net revenues for the fourth quarter of fiscal 2010, combined with cost savings from the integration of the company's California operations, led to an $891,000 pretax profit versus a $2.1 million loss in the fourth quarter of fiscal 2009.

Net revenues in the retail segment increased 3 percent to $110.6 million in fiscal 2010 from $107.5 million in fiscal 2009, while pretax income improved to $219,000 from a $2.4 million loss in the prior fiscal year. A $4.5 million increase in commission revenue and a $2.7 million increase in insurance product sales led the increase in net revenues. Advisory fees decreased by $5.5 million, primarily due to the closing of Tower Asset Management, LLC on June 30, 2009. Total customer assets were $12.6 billion at June 25, 2010, compared to $11.5 billion at June 26, 2009. Assets under management were $517.0 million at June 25, 2010, compared to $419.0 million at June 26, 2009, excluding Tower Asset Management, LLC. Net interest revenue for fiscal 2010 increased 28 percent over fiscal 2009 due to an increase in the spread earned on customer deposits. Operating expenses in the retail segment increased by less than 1 percent over the prior fiscal year, primarily due to higher commissions and other employee compensation expense.

Institutional Segment

While down from the results posted in the fourth quarter of fiscal 2009, the institutional segment finished fiscal 2010 strong with net revenue of $35.8 million and pretax income of $11.4 million.  

Net revenues from the institutional segment in fiscal 2010 were $158.0 million, and pretax income totaled $53.2 million.  Net revenues decreased 16 percent and pretax income fell 24 percent from fiscal 2009's record high of $188.0 million and $69.7 million, respectively. Tighter spreads and lower market volatility in the last nine months of fiscal 2010 led to decreased commissions in the taxable fixed income business as compared to fiscal 2009. A $7.7 million increase in investment banking fees partially offset the decrease in commissions. Net gains from principal transactions rose 20 percent in fiscal 2010 over fiscal 2009 to $41.6 million, largely due to a larger number of financings in the municipal business and an increase in municipal sales trading volume. The spread earned on securities lending declined 64 basis points in fiscal 2010 as compared to fiscal 2009 due to continuing low interest rates, which contributed to a 54 percent decrease in net interest revenue for fiscal 2010 as compared to fiscal 2009. Operating expenses in the institutional segment were down 11 percent in fiscal 2010 as compared to fiscal 2009. Factors contributing to the lower expenses included a $5.4 million write-off of a counterparty exposure included in the prior fiscal year, as well as a decrease in commission and other employee compensation.

SWS Group, Inc. is a Dallas-based holding company offering a broad range of investment and financial services through its subsidiaries.  The company's common stock is listed and traded on the New York Stock Exchange under the symbol SWS.  SWS Group, Inc. subsidiaries include Southwest Securities, Inc., SWS Financial Services, Inc., and Southwest Securities, FSB.

Forward-Looking Statements

This news release contains forward-looking statements.  Readers are cautioned that any forward-looking statements, including those predicting or forecasting future events or results, which depend on future events for their accuracy, embody projections or assumptions, or express the intent, belief or current expectations of the company or management, are not guarantees of future performance and involve risks and uncertainties.  Actual results may differ materially as a result of various factors, some of which are out of our control, including, but not limited to, volume of trading in securities, volatility of securities prices and interest rates, liquidity in capital and credit markets, availability of lines of credit, customer margin loan activity, creditworthiness of our correspondents and customers, demand for housing, general economic conditions, especially in Texas and New Mexico, changes in the commercial lending and regulatory environments and other factors discussed in our Annual Report on Form 10-K and in our other reports filed with and available from the Securities and Exchange Commission.

FINANCIAL STATEMENTS FOLLOW

Segment Results

(In thousands)

Fiscal 2010

Fiscal 2009

4th Quarter 2010

4th Quarter 2009

Pretax

Pretax

Pretax

Pretax

Income

Income

Income

Income

Net Revenue

(Loss)

Net Revenue

(Loss)

Net Revenue

(Loss)

Net Revenue

(Loss)

Clearing

$21,041

$(5,305)

$26,565

$5,233

$5,694

$592

$5,793

$985

Retail

110,578

219

107,518

(2,425)

27,951

891

26,520

(2,144)

Institutional

157,977

53,222

187,970

69,714

35,841

11,438

46,133

17,335

Banking

76,409

(17,826)

66,710

11,281

20,621

(3,644)

20,030

4,703

Other

  consolidated

  entities

966

(34,862)

(7,142)

(45,374)

(767)

(9,462)

533

(15,629)

Consolidated

$366,971

$ (4,552)

$381,621

$38,429

$89,340

$(185)

$99,009

$5,250

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

June 25, 2010 and June 26, 2009

(In thousands, except par values and share amounts)

June 25, 2010

June 26, 2009

Assets

Cash and cash equivalents

$         27,190

$         96,253

Assets segregated for regulatory purposes

284,827

313,153

Receivable from brokers, dealers and clearing organizations

1,889,400

1,892,739

Receivable from clients, net of allowances

216,574

158,032

Loans held for sale

424,055

262,780

Loans, net

1,154,065

1,138,602

Securities owned, at market value

245,587

175,030

Securities held to maturity

87,140

6,237

Securities purchased under agreements to resell

30,507

21,622

Goodwill

7,552

7,552

Securities available for sale

1,388

4,094

Other assets

162,406

122,945

    Total assets

$     4,530,691

$     4,199,039

Liabilities and Stockholders' Equity

Short-term borrowings

$         110,000

$          10,000

Payable to brokers, dealers and clearing organizations

1,819,995

1,853,544

Payable to clients

420,672

426,300

Deposits

1,488,425

1,292,366

Securities sold under agreements to repurchase

12,389

4,462

Securities sold, not yet purchased, at market value

67,594

53,236

Drafts payable

27,346

27,457

Advances from Federal Home Loan Bank

132,821

117,492

Other liabilities

68,055

73,825

    Total liabilities

4,147,297

3,858,682

Commitments and contingencies

Stockholders' equity:

   Preferred stock of $1.00 par value.  Authorized 100,000 shares; none issued

   Common stock of $.10 par value.  Authorized 60,000,000 shares, issued 33,312,140 and outstanding 32,342,190 shares at June 25, 2010; issued 28,309,139 and outstanding 27,262,923 shares at June 26, 2009

3,331

2,831

   Additional paid-in capital

326,462

271,131

   Retained earnings

61,893

75,918

   Accumulated other comprehensive income – unrealized holding gain, net of tax

304

180

   Deferred compensation, net

3,176

2,639

   Treasury stock (969,950 shares at June 25, 2010 and 1,046,216 shares at June 26, 2009, at cost)

(11,772)

(12,342)

          Total stockholders' equity

383,394

340,357

    Total liabilities and stockholders' equity

$     4,530,691

$      4,199,039

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

For the three and twelve months ended June 25, 2010 and June 26, 2009

(In thousands, except per share and share amounts)

Three Months

Ended

June 25, 2010

Three Months

Ended

June 26, 2009

Twelve Months

Ended

June 25, 2010

Twelve Months

Ended

June 26, 2009

Revenues:

    Net revenues from clearing operations

$          2,752

$          2,767

$       10,584

$      11,541

    Commissions

37,481

43,589

157,460

179,003

    Interest

37,666

48,534

156,063

211,873

    Investment banking, advisory and administrative fees

9,650

8,654

35,833

36,382

    Net gains on principal transactions

9,110

12,703

41,361

34,831

    Other

3,909

5,897

20,926

12,047

Total revenue

100,568

122,144

422,227

485,677

    Interest expense

11,228

23,135

55,256

104,056

         Net revenues

89,340

99,009

366,971

381,621

Non-Interest Expenses:

    Commissions and other employee compensation

54,551

61,580

229,411

239,003

    Occupancy, equipment and computer service costs

8,581

8,648

34,277

32,994

    Communications

3,321

3,289

13,246

13,124

    Floor brokerage and clearing organization charges

1,021

832

3,960

3,497

    Advertising and promotional

976

1,432

4,032

4,547

    Provision for loan loss

10,698

4,880

45,118

13,323

    Other

10,377

13,098

41,479

36,704

Total non-interest expenses

89,525

93,759

371,523

343,192

Income (loss) before income tax expense

(185)

5,250

(4,552)

38,429

Income tax expense (benefit)

120

1,642

(1,659)

14,798

Net income (loss)

(305)

3,608

(2,893)

23,631

Net gain recognized in other comprehensive income

146

3,980

124

1,374

Comprehensive income (loss)

$        (159)

$        7,588

$      (2,769)

$      25,005

  Earnings per share – basic

     Net income (loss)

$        ( 0.01)

$          0.13

$          (0.10)

$          0.86

     Weighted average shares outstanding – basic

32,531,846

27,434,907

30,252,732

27,429,382

  Earnings per share – diluted

     Net income (loss)

$        ( 0.01)

$         0.13

$          (0.10)

$          0.86

     Weighted average shares outstanding – diluted

32,531,846

27,490,640

30,252,732

27,508,585

SOURCE SWS Group, Inc.



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