SWS Group, Inc. Reports Fiscal 2012 Second Quarter Financial Results Bank Reduces Classified Assets 18 Percent From First Quarter

DALLAS, Feb. 7, 2012 /PRNewswire/ -- SWS Group, Inc. (NYSE: SWS) (the "Company") today reported a net loss of $14.3 million for its fiscal 2012 second quarter, or $0.44 per diluted share, on net revenues of $68.4 million, as compared to a net loss of $330,000, or $0.01 per diluted share, on net revenues of $90.3 million in the second quarter of fiscal 2011.

The Company's adjusted pre-tax income, a non-GAAP measure, was $1.7 million for the fiscal 2012 second quarter, as compared to adjusted pre-tax income of $6.0 million for the second quarter of the prior year.  The results for the second quarter of fiscal 2012 include a $19.3 million pre-tax unrealized loss for the increase in the value of warrants issued to Hilltop Holdings Inc. ("Hilltop") and Oak Hill Capital Partners ("Oak Hill") as part of the Company's capital raise completed in July 2011.

"Although economic conditions remain challenging, we continued to make important progress during the second quarter," said James H. Ross, Chief Executive Officer of SWS Group, Inc. "Notably, we continued to reduce the level of non-performing and total classified assets at our banking subsidiary. Moving forward, we are focused on continuing this progress and pursuing opportunities to enhance our broker-dealer business lines and strengthen the bank."

Net revenues (total revenues less interest expense) in the fiscal 2012 second quarter were $68.4 million, a decrease of $21.9 million from $90.3 million in the same quarter of fiscal 2011. Operating expenses were $91.5 million, an increase of $396,000 compared to $91.1 million in the second quarter of the prior fiscal year.

The $21.9 million decline in net revenues for the fiscal 2012 second quarter as compared to the second quarter of fiscal 2011 was due in part to an $8.8 million decrease in net interest revenue resulting from a 27 percent decline in the average loan balance at the Company's banking subsidiary, Southwest Securities, FSB (the "Bank"), as well as incurring $3.0 million of interest expense on the $100 million loan from Hilltop and Oak Hill. Commission revenue also declined by $8.8 million as both the retail and institutional segments experienced less customer activity, partially due to five fewer trading days in the fiscal 2012 second quarter as compared to the fiscal 2011 second quarter. Investment banking revenue from the institutional segment was also down $5.0 million in the quarter from reduced transactions in both the corporate and municipal finance businesses.

For the first half of fiscal 2012, the Company posted a net loss of $12.7 million, or $0.39 per diluted share, on net revenues of $145.2 million as compared to a net loss of $21.1 million, or $0.65 per diluted share, on net revenues of $188.0 million for the first six months of fiscal 2011.

Valuation of Warrants

The largest contributor to the increase in operating expenses in the second quarter of fiscal 2012 was the $19.3 million unrealized loss recorded on the increase in the value of the warrants issued to Hilltop and Oak Hill as part of the capital raise the Company completed on July 29, 2011. The valuation increase recorded in the second quarter of fiscal 2012 was primarily due to the increase in the Company's common stock price from $4.69 at September 30, 2011, to $6.87 at December 30, 2011.  The warrants allow Hilltop and Oak Hill to each purchase approximately 8.7 million shares of SWS Group common stock at an exercise price of $5.75 per share. The warrants are presented as a liability on the Company's Consolidated Statements of Financial Condition and are carried at fair value.

This increase in expenses was offset by substantial reductions in other operating expenses including a $7.8 million reduction in commissions and other employee compensation expense in the fiscal 2012 second quarter, as compared to the same period last fiscal year. Bank-related expenses were also down significantly with a $4.3 million decrease in the Bank's loan loss provision, a $3.9 million decline in the REO loss provision and a $1.0 million decrease in legal fees.  

Clearing Segment

In the second quarter of fiscal 2012, the clearing segment recorded a pre-tax loss of $814,000 on net revenues of $4.3 million, as compared to pre-tax income of $339,000 on net revenues of $5.5 million in the same period last fiscal year. Total correspondent clearing customer assets under custody increased to $14.6 billion at December 30, 2011, from $14.2 billion at December 31, 2010, while revenue per ticket increased to $5.11 in the fiscal 2012 second quarter from $4.37 in the second quarter of fiscal 2011. For the three months ended December 30, 2011 as compared to the three months ended December 31, 2010, tickets processed for high-volume trading firms decreased 38 percent, while tickets processed for general securities broker-dealers decreased 17 percent.

Operating expenses in the segment remained flat for the second quarter of fiscal 2012, as compared to the same quarter last fiscal year.

Retail Segment

The retail segment posted a pre-tax loss of $219,000 in the second quarter of fiscal 2012, as compared to pre-tax income of $1.5 million in the same period last fiscal year. Net revenues in the segment decreased 15 percent to $25.2 million from $29.6 million in the prior year period. The primary contributor to the decrease in net revenues was a $4.4 million decline in commissions due to reduced representative headcount in the Private Client Group and SWS Financial Services, as well as five fewer trading days in the December 2011 quarter. Total customer assets at December 30, 2011 were $13.0 billion, as compared to $12.6 billion at December 31, 2010, and assets under management increased to $662 million at December 30, 2011, from $615 million at December 31, 2010.

Retail segment operating expenses decreased 9 percent to $25.4 million for the fiscal 2012 second quarter from $28.0 million for the second quarter of fiscal 2011. The decrease was primarily due to a $2.5 million decline in commissions and other employee compensation expense.

Institutional Segment

The institutional segment posted pre-tax income of $8.4 million on net revenues of $28.9 million for the second quarter of fiscal 2012, as compared to pre-tax income of $12.8 million on net revenues of $38.3 million for the second quarter of the last fiscal year. Reduced customer activity, primarily in the taxable fixed income business, led to a $4.4 million decrease in commissions for the second quarter compared to the same quarter last fiscal year. Municipal finance revenues were also lower due to a decrease in new issues for the fiscal 2012 second quarter as compared to the second quarter of fiscal 2011.

Investment banking fees were down 46 percent to $5.7 million for the three-month period ended December 30, 2011, from $10.7 million in the same period last fiscal year. The decline was primarily due to a $2.4 million decrease in municipal finance fees and a $2.0 million decrease in corporate finance fees.

Operating expenses in the institutional segment decreased 20 percent to $20.4 million for the second quarter, from $25.4 million in the same quarter last fiscal year, due to a decrease in commissions and other employee compensation expense.

Banking Segment

The banking segment recorded pre-tax income of $511,000 on net revenues of $12.7 million in the second quarter of fiscal 2012, as compared to a pre-tax loss of $5.8 million on net revenues of $16.0 million in the same period last fiscal year. A 27 percent decrease in the Bank's average loan balances at December 31, 2011, and a decrease in the net yield on interest-earning assets led to a 28 percent decrease in net interest revenue for the fiscal 2012 second quarter, as compared to the second quarter of fiscal 2011.

The Bank's operating expenses decreased 44 percent to $12.2 million for the second quarter of fiscal 2012, from $21.7 million for the same period last fiscal year. The Bank recorded a loan loss provision of $2.5 million and net charge-offs of $9.1 million in the second quarter, compared to a provision of $6.7 million and charge-offs of $5.1 million in the last fiscal year's second quarter. At December 31, 2011, the Bank's allowance for loan losses was $33.1 million, or 4.55 percent of loans held for investment, excluding purchased mortgage loans, as compared to $47.0 million, or 4.58 percent of loans held for investment, excluding purchased mortgage loans, at December 31, 2010.

Non-performing assets decreased to $67.1 million at December 31, 2011, from $103.0 million at December 31, 2010. Total classified assets at December 31, 2011 were $169.6 million, or 85.0 percent of capital plus allowance for loan losses, as compared to $273.4 million, or 140.0 percent of capital plus allowance for loan losses, at December 31, 2010.

In the fiscal 2012 second quarter, SWS Group contributed $20 million to the Bank from the capital raise completed in July 2011. Following this capital contribution, at December 31, 2011, the Bank had a Tier 1 core capital ratio of 12.1 percent and a total risk-based capital ratio of 16.9 percent. At December 31, 2010, the Tier 1 core capital ratio was 9.4 percent and the total risk-based capital ratio was 14.0 percent.

Conference Call

SWS Group will hold a conference call to discuss its results for the fiscal 2012 second quarter on Wednesday, February 8, 2012, 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=84498 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 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)











Net Revenues

Pre-Tax Income (Loss)


Three Months Ended

Three Months Ended


Dec. 30, 2011

Dec. 31, 2010

Dec. 30, 2011

Dec. 31, 2010











Clearing

$4,314

$5,451

$(814)

$339

Retail

25,172

29,554

(219)

1,524

Institutional

28,877

38,269

8,429

12,828

Bank

12,718

15,983

511

(5,763)

Other consolidated entities

(2,650)

1,086

(30,929)

(9,642)

Consolidated

$68,431

$90,343

$(23,022)

$(714)



Non-GAAP Reconciliation

SWS has included the presentation of Adjusted Pre-tax Income, which is loss before income tax benefit, excluding the impact of the valuation adjustment for the Hilltop and Oak Hill warrants, the impact of interest expense on the July 2011 $100 million loan from Hilltop and Oak Hill, and the impact of the provision for loan losses for the banking segment. Adjusted Pre-tax Income is a non-GAAP financial measure as defined in Item 10(e) of Regulation S-K. SWS believes that the presentation of this non-GAAP financial measure provides useful information by excluding these items, 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.

Adjusted Pre-tax Income



(In thousands)

Three Months Ended


Dec. 30, 2011

Dec. 31, 2010







Loss before income tax benefit

$(23,022)

$(714)

Valuation adjustment for warrants

19,262

--

Interest expense on transaction

2,975

--

Provision for loan loss

2,475

6,729

Adjusted Pre-tax Income

$1,690

$6,015



SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

December 30, 2011 and June 24, 2011

(In thousands, except par values and share amounts)



December  30,

2011


June 24,

2011

Assets

(Unaudited)



Cash and cash equivalents

$         130,857


$         298,903

Restricted cash and cash equivalents

80,042


Assets segregated for regulatory purposes

207,399


238,325

Receivable from brokers, dealers and clearing organizations

1,499,785


1,620,523

Receivable from clients, net of allowances

250,341


240,491

Loans held for sale

4,916


5,241

Loans, net

1,006,295


946,768

Securities owned, at fair value

193,115


221,587

Securities held to maturity

30,528


34,176

Securities purchased under agreements to resell

10,145


42,649

Goodwill

7,552


7,552

Securities available for sale

104,102


2,020

Other assets

134,862


143,922

    Total assets

$     3,659,939


$     3,802,157





Liabilities and Stockholders' Equity




Short-term borrowings

$         104,000


$         110,000

Payable to brokers, dealers and clearing organizations

1,398,807


1,568,033

Payable to clients

375,749


397,590

Deposits

1,069,580


1,106,471

Securities sold under agreements to repurchase

9,374


10,313

Securities sold, not yet purchased, at fair value

61,488


68,661

Drafts payable

28,162


23,656

Advances from Federal Home Loan Bank

88,133


94,712

Long-term debt, net

77,275


Warrants

43,569


Other liabilities

58,171


65,252

    Total liabilities

3,314,308


3,444,688





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 32,324,839 shares at December 30, 2011; issued 33,312,140 and outstanding 32,285,076 shares at June 24, 2011

3,331


3,331

Additional paid-in capital

326,784


326,986

Retained earnings

22,126


34,813

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

1,293


765

Deferred compensation, net

3,305


3,308

Treasury stock (987,301 shares at December 30, 2011 and 1,027,064 shares at June 24, 2011, at cost)

(11,208)


(11,734)

          Total stockholders' equity

345,631


357,469

    Total liabilities and stockholders' equity

$     3,659,939


$     3,802,157




SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Loss and Comprehensive Income (Loss)

For the three and six months ended December 30, 2011 and December 31, 2010

(In thousands, except per share and share amounts)

(Unaudited)



Three Months

Ended

December 30, 2011

Three Months

Ended

December 31, 2010

Six Months

Ended

December 30, 2011

Six Months

Ended

December 31, 2010

Revenues:





    Net revenues from clearing operations

$          2,280

$          2,824

$       4,940

$       5,260

    Commissions

29,521

38,323

65,160

77,095

    Interest

31,067

36,734

64,728

75,574

    Investment banking, advisory and administrative fees

7,982

13,479

17,858

24,266

    Net gains on principal transactions

7,644

7,647

13,915

19,842

    Other

5,002

3,226

9,492

9,546

Total revenue

83,496

102,233

176,093

211,583






    Interest expense

15,065

11,890

30,923

23,630

         Net revenues

68,431

90,343

145,170

187,953






Non-Interest Expenses:





    Commissions and other employee compensation

49,281

57,040

102,439

116,043

    Occupancy, equipment and computer service costs

7,849

8,452

15,726

16,945

    Communications

3,106

3,319

6,025

6,557

    Floor brokerage and clearing organization charges

1,034

1,222

2,107

2,184

    Advertising and promotional

678

701

1,227

1,355

    Provision for loan loss

2,475

6,729

2,475

46,240

    Unrealized loss on warrant valuation

19,262

---

19,433

---

    Other

7,768

13,594

15,064

29,620

Total non-interest expenses

91,453

91,057

164,496

218,944






Loss before income tax expense

(23,022)

(714)

(19,326)

(30,991)

Income tax benefit

(8,682)

(384)

(6,638)

(9,913)

Net loss

(14,340)

(330)

(12,688)

(21,078)

Net income recognized in other comprehensive income (loss)

606

509

528

443

Comprehensive income (loss)

$       (13,734)

$        179

$      (12,160)

$      (20,635)






  Loss per share – basic





      Net loss

$          (0.44)

$          (0.01)

$          (0.39)

$          (0.65)

      Weighted average shares outstanding – basic

32,505,204

32,284,271

32,500,324

32,303,390






  Loss per share – diluted





      Net loss

$         (0.44)

$         (0.01)

$          (0.39)

$          (0.65)

      Weighted average shares outstanding – diluted

32,505,204

32,284,271

32,500,324

32,303,390




SOURCE SWS Group, Inc.



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