SWS Group, Inc. Reports Financial Results for Fiscal 2013 Third Quarter

DALLAS, May 7, 2013 /PRNewswire/ -- SWS Group, Inc. (NYSE: SWS) ("SWS" or the "Company") today reported a net loss of $5.7 million, or $0.17 per diluted share, for its fiscal 2013 third quarter, as compared to net income of $8.3 million, or $0.04 per diluted share, for the third quarter of fiscal 2012. Excluding a $3.8 million unrealized pre-tax loss from the change in the valuation of the Company's outstanding warrants, the fiscal 2013 third quarter net loss would have been $3.2 million. Fiscal 2012 third quarter net income would have been $136,000 after excluding the $12.5 million unrealized pre-tax gain from the warrant valuation.

"While market conditions and reduced customer demand in the fiscal 2013 third quarter contributed to a 26 percent decline in primary operating revenue in our fixed income business compared to the same quarter last year, we remain encouraged by the underlying strength of our core business," said James H. Ross, Chief Executive Officer of SWS Group, Inc. "Our retail segment recorded a strong performance with gains in both net revenues and pre-tax profits compared to last year's quarter, and the banking segment's loan portfolio, excluding purchased mortgage loans, increased by $6.0 million in the quarter, marking the first increase since the fourth quarter of fiscal 2010."

Mr. Ross continued, "We are focused on deploying capital prudently and, during the fiscal third quarter, SWS Group made a $20 million capital contribution to our principal broker-dealer subsidiary to support daily operations. We hold $30 million at the parent company to be used for general corporate purposes when appropriate, and we will continue to evaluate opportunities to deploy the capital into our businesses in order to facilitate growth and increase shareholder value. We believe our strong capital levels will provide a competitive advantage as the industry landscape continues to evolve and market conditions improve."

Net revenues in the fiscal 2013 third quarter were $66.8 million, as compared to $75.8 million in the third quarter of last fiscal year. The largest contributors to the $9.0 million decrease in net revenues were a $3.1 million decrease in commission revenue, primarily due to a decline in customer demand in the taxable fixed income business, and a $2.7 million decrease in net interest revenue, primarily due to reduced loan balances and net yield on interest earning assets at the company's banking subsidiary, Southwest Securities, FSB (the "Bank"). Net gains on principal transactions were $2.7 million lower in the institutional segment as a result of market conditions in the fiscal 2013 third quarter as compared to the same quarter last fiscal year.

Operating expenses in the third quarter of fiscal 2013 were $72.5 million, a decrease of $3.0 million from $75.5 million in the third quarter of fiscal 2012. The largest component of the decrease was a $2.0 million decrease in commissions and other employee compensation, primarily driven by lower revenues as compared to the same quarter last fiscal year, along with reduced non-compensation expenses primarily at the Bank.

For the first nine months of fiscal 2013, the Company reported a net loss of $993,000, or $0.03 per diluted share, on net revenues of $216.2 million, as compared to a net loss of $4.4 million, or $0.14 per diluted share, on net revenues of $220.9 million for the first nine months of fiscal 2012.   

Clearing Segment

In the fiscal 2013 third quarter, the clearing segment recorded a pre-tax loss of $617,000 on net revenues of $4.5 million, as compared to a pre-tax loss of $537,000 on net revenues of $4.8 million in the third quarter of fiscal 2012. The $260,000 decrease in net revenues was driven by a $290,000 decrease in clearing fees, primarily due to lower activity levels for existing correspondents and two fewer trading days in the fiscal 2013 third quarter as compared to the same quarter last fiscal year.

Operating expenses decreased 3 percent to $5.1 million for the third quarter of fiscal 2013 from $5.3 million for the third quarter of fiscal 2012, primarily due to a decrease in operations and technology expenses.

Total correspondent clearing customer assets under custody increased to $15.4 billion at March 29, 2013, from $14.9 billion at March 30, 2012.

Retail Segment

The retail segment recorded pre-tax income of $308,000 on net revenues of $27.8 million for the fiscal 2013 third quarter, as compared to a pre-tax loss of $1.0 million on net revenues of $25.9 million for the third quarter of fiscal 2012. The 7 percent net revenue increase was primarily due to a $1.0 million increase in insurance products revenue and a $716,000 increase in advisory fees due to an increase in assets under management. Total customer assets were $14.3 billion at March 29, 2013, as compared to $12.8 billion at March 30, 2012.

Retail segment operating expenses increased 2 percent to $27.5 million for the third quarter of fiscal 2013, from $27.0 million for the same period last fiscal year, primarily due to a $1.1 million increase in commission and other employee compensation expense.

Institutional Segment

The institutional segment recorded pre-tax income of $4.8 million on net revenues of $26.2 million in the third quarter of fiscal 2013, as compared to pre-tax income of $10.0 million on net revenues of $33.8 million in the third quarter of fiscal 2012. The $7.7 million decrease in net revenues was primarily due to a $3.1 million decrease in commission revenues, a $2.7 million decrease in net gains on principal transactions and a $1.0 million decrease in investment banking fees. Primary operating revenues in the fixed income businesses were off 26 percent as compared to the same quarter last fiscal year.

The taxable fixed income business accounted for $2.4 million of the commission revenue decrease, while municipal finance accounted for $593,000. The 31 percent decrease in net gains on principal transactions was primarily due to a $1.6 million decrease in municipal finance trading gains and a $1.1 million decrease in taxable fixed income gains. Narrowing spreads and an increase in market volatility led to the declines in the quarter. The 16 percent decrease in investment banking fees for the three months ended March 29, 2013, was driven by decreases in advisory service fees in the taxable fixed income and municipal finance businesses, as compared to the same period last fiscal year. Taxable fixed income advisory fees decreased $680,000 due to decreased unit investment trust offerings, while municipal finance advisory fees decreased $236,000 due to a decrease in the aggregate amount of offerings in the fiscal 2013 third quarter, as compared to the same quarter last fiscal year.

Net interest revenue in the segment decreased $822,000 for the three months ended March 29, 2013, as compared to the same period last fiscal year, primarily due to a 22 basis point decrease in the average net interest spread in the stock loan business.

Institutional segment operating expenses decreased 10 percent to $21.3 million for the third quarter of fiscal 2013, from $23.8 million in the third quarter of fiscal 2012. The primary contributor to the decrease was a $3.4 million decrease in commissions and other employee compensation expense.

Banking Segment

In the fiscal 2013 third quarter, the banking segment recorded pre-tax income of $1.2 million on net revenues of $10.5 million, as compared to pre-tax income of $2.6 million on net revenues of $12.6 million in the third quarter of fiscal 2012.

The decrease in the Bank's net revenues was driven by a $1.7 million decline in net interest revenue, primarily due to a 27 percent decrease in average loan balances and a 50 basis point decrease in the net yield on interest-earning assets. Other revenue decreased $368,000 in the fiscal 2013 third quarter, as compared to the same quarter last fiscal year, primarily due to declines in net gains on the Bank's equity investments and gains on the sale of real estate owned, partially offset by a $1.4 million increase in the gain on sales of Small Business Administration loans.

The Bank's operating expenses decreased $674,000 to $9.4 million in the fiscal 2013 third quarter, from $10.0 million in the third quarter of fiscal 2012, primarily due to decreases in regulatory assessments, legal fees and occupancy expenses, partially offset by an increase in compensation expense.

At March 31, 2013, the Bank's allowance for loan losses was $18.8 million, or 4.07 percent of loans held for investment excluding purchased mortgage loans, as compared to $26.2 million, or 4.13 percent of loans held for investment excluding purchased mortgage loans at March 31, 2012. The bank did not record a loan loss provision in the third quarter of fiscal 2013 or fiscal 2012.

Non-performing assets decreased to $45.7 million at March 31, 2013, from $75.1 million at March 31, 2012. Total classified assets decreased to $78.5 million, or 41.4 percent of capital plus allowance for loan losses, at March 31, 2013, as compared to $129.8 million, or 67.0 percent of capital plus allowance for loan losses, at March 31, 2012.

At March 31, 2013, the Bank's Tier 1 (core) capital ratio was 13.1 percent and total risk-based capital ratio was 23.2 percent, as compared to a Tier 1 (core) capital ratio of 12.3 percent and total risk-based capital ratio of 20.4 percent at March 31, 2012.

Conference Call

SWS Group will hold a conference call to discuss its results for the fiscal 2013 third quarter on Wednesday, May 8, 2013, at 10:00 a.m. Eastern Time (9:00 a.m. Central Time). The conference call will be broadcast live over the internet at http://www.videonewswire.com/event.asp?id=93307 or www.swst.com. An archive of the webcast will also be posted to the Company's website at www.swst.com.

About SWS Group

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 the Company's 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 the Company's 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 the Company's Annual Report on Form 10-K and in the Company's other reports filed with and available from the Securities and Exchange Commission.

Segment Results

(In thousands)


Net Revenues


Pre-Tax Income (Loss)


Three Months Ended


Three Months Ended


March 29, 2013


March 30, 2012


March 29, 2013


March 30, 2012

















Clearing

$   4,511


$   4,771


$   (617)


$    (537)

Retail

27,797


25,944


308


(1,039)

Institutional

26,165


33,816


4,831


10,008

Bank

10,540


12,640


1,186


2,612

Other consolidated entities

(2,259)


(1,411)


(15,264)


1,704

Consolidated

$ 66,754


$ 75,760


$ (9,556)


$ 12,748

Non-GAAP Reconciliation
SWS has included the presentation of Adjusted Net Income (Loss), which is Net income (loss), excluding the impact of the valuation adjustment for the warrants held by Hilltop and Oak Hill. Adjusted Net Income (Loss) is a non-GAAP financial measure as defined by Securities and Exchange Commission rules.  SWS believes that the presentation of this non-GAAP financial measure provides useful information by excluding this item, which may not be indicative of the Company's core operating results. While management believes this non-GAAP financial measure is useful in evaluating SWS, this information should be considered as supplemental in nature and not as a substitute for, or superior to, the related financial information prepared in accordance with GAAP.


Three Months Ended

(In Thousands)

March 29, 2013


March 30, 2012



Net Income (Loss)

$       (5,718)


$         8,262

Valuation Adjustment for Warrants - after tax

2,496


(8,126)

Adjusted Net Income (Loss) (Non-GAAP)

$       (3,222)


$            136

            


SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

March 29, 2013 and June 29, 2012

(In thousands, except par values and share amounts)


March 29, 2013


June 29, 2012

Assets

 (Unaudited)



Cash and cash equivalents

$       179,160


$         81,826

Restricted cash and cash equivalents

30,047


30,044

Assets segregated for regulatory purposes

177,042


176,299

Receivable from brokers, dealers and clearing organizations

1,775,574


1,425,697

Receivable from clients, net of allowances

262,946


256,840

Loans, net

641,931


833,640

Securities owned, at fair value

333,252


231,151

Securities held to maturity

19,498


25,904

Securities purchased under agreements to resell

44,558


25,186

Goodwill

7,552


7,552

Securities available for sale

401,002


307,789

Other assets

123,923


144,915

     Total assets

$    3,996,485


$     3,546,843





Liabilities and Stockholders' Equity




Short-term borrowings

$        186,000


$           67,500

Payable to brokers, dealers and clearing organizations

1,642,722


1,349,370

Payable to clients

349,227


347,574

Deposits

1,046,120


1,062,233

Securities sold under agreements to repurchase

44,801


27,465

Securities sold, not yet purchased, at fair value

119,232


70,155

Drafts payable

26,676


24,970

Advances from Federal Home Loan Bank

56,468


68,641

Long-term debt, net

82,039


79,076

Warrants

28,074


27,810

Other liabilities

60,815


66,347

     Total liabilities

3,642,174


3,191,141





Commitments and contingencies








Stockholders' equity:




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

---


Common stock of $0.10 par value.  Authorized 60,000,000 shares, issued 33,312,140 and outstanding 32,640,886 shares at March 29, 2013; issued 33,312,140 and outstanding 32,576,307 shares at June 29, 2012

3,331


3,331

   Additional paid-in capital

324,753


324,556

Retained earnings

29,092


30,084

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

1,485


2,745

   Deferred compensation, net

3,283


3,427

   Treasury stock (671,254 shares at March 29, 2013 and 735,833 shares at June 29, 2012, at cost)

(7,633)


(8,441)

           Total stockholders' equity

354,311


355,702

     Total liabilities and stockholders' equity

$    3,996,485


$     3,546,843

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

For the three and nine-months ended March 29, 2013 and March 30, 2012

(In thousands, except per share and share amounts)

(Unaudited)


For the Three-Months

Ended

For the Nine-Months

Ended


March 29, 2013

March 30, 2012

March 29, 2013

March 30, 2012

Revenues:





     Net revenues from clearing operations

$       2,082

$              2,371

$      6,398

$              7,311

     Commissions

31,275

34,411

94,965

99,571

     Interest

22,800

29,999

72,696

94,727

     Investment banking, advisory and administrative fees

8,470

8,771

29,011

26,629

     Net gains on principal transactions

6,237

8,529

27,513

22,444

     Other

7,191

7,476

18,953

16,968

Total revenue

78,055

91,557

249,536

267,650






     Interest expense

11,301

15,797

33,328

46,720

          Net revenues

66,754

75,760

216,208

220,930






Non-interest expenses:





     Commissions and other employee compensation

52,077

54,073

158,338

156,512

     Occupancy, equipment and computer service costs

7,829

8,134

23,089

23,860

     Communications

3,371

3,191

9,925

9,216

     Floor brokerage and clearing organization charges

951

1,004

2,913

3,111

     Advertising and promotional

922

1,049

2,327

2,276

     (Recapture) provision for loan loss

__

__

(1,450)

2,475

     Other

7,320

8,063

23,780

23,127

Total non-interest expenses

72,470

75,514

218,922

220,577






Other gains (losses):





     Unrealized gain (loss) on Warrants valuation

(3,840)

12,502

(264)

(6,931)

Income (loss) before income tax expense (benefit)

(9,556)

12,748

(2,978)

(6,578)

Less:  Income tax expense (benefit)

(3,838)

4,486

(1,985)

(2,152)

Net income (loss)

(5,718)

8,262

(993)

(4,426)

Net gain (loss) recognized in other comprehensive income (loss)

(725)

690

(1,260)

1,218

Comprehensive income (loss)

$     (6,443)

$        8,952

$    (2,253)

$           (3,208)

Earnings (loss) per share – basic





    Net income (loss)

$   (0.17)

$              0.25

$    (0.03)

$              (0.14)

    Weighted average shares outstanding – basic

32,896,805

32,716,251

32,857,860

32,589,539

Earnings (loss) per share – diluted





    Net income (loss)

$     (0.17)

$0.04

$     (0.03)

$            (0.14)

    Weighted average shares outstanding – diluted

32,896,805

50,107,555

32,857,860

32,589,539






SOURCE SWS Group, Inc.



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