SWS Group, Inc. Reports Fiscal 2012 Third Quarter Net Income of $8.3 Million Bank's Classified Assets Down 49 Percent from Year Ago; Retail Segment Makes Recruiting Gains

DALLAS, May 8, 2012 /PRNewswire/ -- SWS Group, Inc. (NYSE: SWS) (the "Company") today reported net income of $8.3 million for its fiscal 2012 third quarter, or $0.04 per diluted share, as compared to a net loss of $2.1 million, or $0.07 per diluted share, in the third quarter of fiscal 2011. Diluted earnings per share (EPS) for the third quarter of fiscal 2012 includes the dilutive effect of the assumed exercise of existing warrants to purchase 17.4 million shares of SWS common stock.

Revenues in the fiscal 2012 third quarter were $91.6 million, an increase of $2.1 million from $89.5 million in the same quarter of fiscal 2011. The largest contributor to the increase in revenues was a $1.5 million increase in commission revenue, primarily due to increased volume in the Company's institutional segment. Net revenues (total revenues less interest expense) were down $2.2 million as the interest cost from the $100 million capital raise completed in July 2011 increased interest expense by $3.0 million in the fiscal 2012 third quarter, as compared to the same period last fiscal year.

"At SWS, we remain encouraged by the progress we have made in executing our plan thus far to strengthen our banking segment while continuing to pursue opportunities to grow our broker-dealer business lines. Notably, we are seeing renewed traction in our recruiting efforts, having added a net total of 16 advisers in the private client and independent channels, as well as new hires in the institutional segment during the fiscal 2012 third quarter," said James H. Ross, Chief Executive Officer of SWS Group, Inc. "In our banking subsidiary, we reduced total classified assets by 49 percent at the close of the third quarter, as compared to the same time last year, and reduced total non-performing assets by 28 percent in the same period. We hope to build on these trends in the months ahead."

A non-cash credit of $12.5 million from the change in the value of the warrants issued to Hilltop Holdings Inc. ("Hilltop") and Oak Hill Capital Partners ("Oak Hill") reduced operating expenses in the fiscal 2012 third quarter to $63.0 million from $81.3 million in the third quarter of fiscal 2011. This decrease was primarily due to a decrease in the Company's stock price between December 30, 2011 and March 30, 2012. The additional decline in expenses was driven by a $4.7 million decrease in the loan loss provision at the Company's banking subsidiary, Southwest Securities, FSB ("the Bank"), from the fiscal 2011 third quarter to the third quarter of fiscal 2012.

For the first nine months of fiscal 2012, the Company recorded a net loss of $4.4 million, or $0.14 per diluted share, on net revenues of $220.9 million, as compared to a net loss of $23.2 million, or $0.71 per diluted share, on net revenues of $265.9 million for the first nine months of fiscal 2011. The results for the first nine months of fiscal 2012 include a $6.9 million unrealized loss on the change in the value of the warrants issued to Hilltop and Oak Hill.

Clearing Segment
The clearing segment recorded a pre-tax loss of $537,000 on net revenues of $4.8 million in the fiscal 2012 third quarter, as compared to a pre-tax loss of $44,000 on net revenues of $5.3 million in the same period last fiscal year. Total correspondent clearing customer assets under custody increased to $14.9 billion at March 30, 2012, from $14.5 billion at March 25, 2011. Revenue per ticket increased approximately 30 percent to $6.09 for the three months ended March 30, 2012, from $4.68 for the three months ended March 25, 2011, while the total number of tickets processed fell to approximately 390,000 from approximately 599,000 for the same periods, respectively.

Operating expenses in the segment remained flat at $5.3 million in the fiscal 2012 third quarter, as compared to the third quarter of fiscal 2011.

Retail Segment
The retail segment posted a pre-tax loss of $1.0 million in the third quarter of fiscal 2012, as compared to a pre-tax loss of $650,000 in the same quarter last fiscal year. Net revenues in the segment increased slightly to $25.9 million for the quarter, from $25.6 million in the third quarter of fiscal 2011. At March 30, 2012, total customer assets were $12.8 billion and assets under management were $705.0 million, as compared to total customer assets of $12.3 billion and assets under management of $615.0 million at March 25, 2011.

Retail segment operating expenses increased 3 percent to $27.0 million for the fiscal 2012 third quarter, from $26.2 million in the fiscal 2011 third quarter. The increase was primarily due to a $742,000 increase in compensation and recruiting expenses.

Institutional Segment
The institutional segment's pre-tax income increased 5 percent to $10.0 million for the fiscal 2012 third quarter on net revenues of $33.8 million, as compared to pre-tax income of $9.5 million on net revenues of $32.8 million for the fiscal 2011 third quarter. Commission revenue increased $1.4 million, while investment banking fees were $1.2 million higher in the fiscal 2012 third quarter compared to the third quarter of fiscal 2011. Portfolio trading commissions accounted for $1.0 million of the increase in commission revenue due to a one time change in customer business mix. In the same period, there was a $2.0 million increase in municipal finance fees due to increased volume in the new issue market during the quarter, which led to the increase in investment banking fees. The increase in municipal finance fees was partially offset by a $400,000 decrease in both corporate finance and taxable fixed income fees in the third quarter of fiscal 2012, as compared to the third quarter of fiscal 2011. Net gains on principal transactions decreased $2.0 million, or 19 percent, primarily due to a decline in municipal trading gains during the fiscal 2012 third quarter as compared to the fiscal 2011 third quarter.

Institutional segment operating expenses increased 2 percent to $23.8 million for the fiscal 2012 third quarter from $23.3 million in the same period last fiscal year, primarily due to increased commissions and other employee compensation expense.

Banking Segment
The banking segment posted pre-tax income of $2.6 million on net revenues of $12.6 million for the third quarter of fiscal 2012, as compared to a pre-tax loss of $3.8 million on $13.9 million of net revenues in the third quarter of fiscal 2011. The decline in net revenues was primarily due to a 16 percent decrease in the Bank's average loan balances, as well as a 71 basis point decrease in the net yield on earning assets. This decline was offset by a decrease in the net losses on the sale of real estate owned (REO) and an increase in income earned on the Bank's equity investments.

The Bank's operating expenses decreased 43 percent to $10.0 million for the fiscal 2012 third quarter, from $17.6 million in the third quarter of fiscal 2011. This decrease was primarily due to a $4.7 million decrease in the Bank's loan loss provision and a $2.2 million decrease in other expenses. At March 31, 2012, the Bank's allowance for loan losses was $26.2 million, or 4.13 percent of loans held for investment excluding purchased mortgage loans, compared to $47.3 million, or 4.93 percent of loans held for investment excluding purchased mortgage loans, at March 31, 2011.

Non-performing assets decreased 28.2 percent from $104.6 million at March 31, 2011, to $75.1 million at March 31, 2012, while total classified assets decreased 49.1 percent from $255.3 million, or 132.7 percent of capital plus allowance for loan losses, at March 31, 2011, to $129.8 million, or 67.0 percent of capital plus allowance for loan losses, at March 31, 2012.

At March 31, 2012, the Bank's Tier 1 core capital ratio was 12.3 percent and total risk-based capital ratio was 20.4 percent, compared to a Tier 1 core capital ratio of 9.6 percent and total risk-based capital ratio of 14.5 percent at March 31, 2011.

Conference Call
SWS Group will hold a conference call to discuss its results for the fiscal 2012 third quarter on Wednesday, May 9, 2012, at 10 a.m. Eastern Time (9 a.m. Central Time). The conference call will be broadcast live over the internet at http://www.videonewswire.com/event.asp?id=86257 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.

Segment Results

(In thousands)







Net Revenues

Pre-Tax Income (Loss)      


Three Months Ended

Three Months Ended


March 30, 2011

March 25, 2011

March 30, 2012

March 25, 2011











Clearing

$   4,771

$   5,279

$    (537)

$      (44)

Retail

25,944

25,596

(1,039)

(650)

Institutional

33,816

32,791

10,008

9,521

Bank

12,640

13,871

2,612

(3,753)

Other consolidated entities

(1,411)

390

1,704

(8,475)

Consolidated

$ 75,760

$ 77,927

$ 12,748

$ (3,401)

 

 

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

March 30, 2012 and June 24, 2011

(In thousands, except par values and share amounts)



March  30,

2012


June 24,

2011

Assets

 (Unaudited)



Cash and cash equivalents

$     303,407


$  298,903

Restricted cash and cash equivalents

30,044


Assets segregated for regulatory purposes

209,139


238,325

Receivable from brokers, dealers and clearing organizations

1,313,839


1,620,523

Receivable from clients, net of allowances

265,769


240,491

Loans held for sale


5,241

Loans, net

824,538


946,768

Securities owned, at fair value

244,153


221,587

Securities held to maturity

28,408


34,176

Securities purchased under agreements to resell

12,033


42,649

Goodwill

7,552


7,552

Securities available for sale

125,191


2,020

Other assets

142,977


143,922

     Total assets

$ 3,507,050


$3,802,157





Liabilities and Stockholders' Equity




Short-term borrowings

$  126,000


$   110,000

Payable to brokers, dealers and clearing organizations

1,240,227


1,568,033

Payable to clients

354,165


397,590

Deposits

1,061,647


1,106,471

Securities sold under agreements to repurchase

4,270


10,313

Securities sold, not yet purchased, at fair value

61,379


68,661

Drafts payable

27,502


23,656

Advances from Federal Home Loan Bank

78,746


94,712

Long-term debt, net

78,159


Warrants

31,067


Other liabilities

88,897


65,252

     Total liabilities

3,152,059


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 32,607,401 shares at March 30, 2012; issued 33,312,140 and outstanding 32,285,076 shares at June 24, 2011

3,331


3,331

   Additional paid-in capital

324,192


326,986

Retained earnings

30,388


34,813

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

1,983


765

   Deferred compensation, net

3,364


3,308

   Treasury stock (704,739 shares at March 30, 2012 and 1,027,064 shares at June 24, 2011, at cost)

(8,267)


(11,734)

           Total stockholders' equity

354,991


357,469

     Total liabilities and stockholders' equity

$  3,507,050


$3,802,157

 

 

 

SWS GROUP, INC. AND SUBSIDIARIES

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

For the three and nine months ended March 30, 2012 and March 25, 2011

(In thousands, except per share and share amounts)

(Unaudited)



Three Months

Ended

March 30,

2012

Three Months

Ended

March 25, 2011

Nine Months

Ended

March 30,

2012

Nine Months

Ended

March 25, 2011

Revenues:





     Net revenues from clearing operations

$          2,371

$          2,805

$       7,311

$      8,065

     Commissions

34,411

32,915

99,571

110,010

     Interest

29,999

31,606

94,727

107,180

     Investment banking, advisory and administrative fees

8,771

7,271

26,629

31,537

     Net gains on principal transactions

8,529

10,544

22,444

30,386

     Other

7,476

4,352

16,968

13,898

Total revenue

91,557

89,493

267,650

301,076






     Interest expense

15,797

11,566

46,720

35,196

          Net revenues

75,760

77,927

220,930

265,880






Non-Interest Expenses:





     Commissions and other employee compensation

54,073

52,841

156,512

168,884

     Occupancy, equipment and computer service costs

8,134

8,375

23,860

25,320

     Communications

3,191

3,254

9,216

9,811

     Floor brokerage and clearing organization charges

1,004

1,112

3,111

3,296

     Advertising and promotional

1,049

702

2,276

2,057

     Provision for loan loss

---

4,727

2,475

50,967

     Unrealized (gain) loss on warrant valuation

(12,502)

---

6,931

---

     Other

8,063

10,317

23,127

39,937

Total non-interest expense

63,012

81,328

227,508

300,272






Income (loss) before income tax expense (benefit)

12,748

(3,401)

(6,578)

(34,392)

Income tax expense (benefit)

4,486

(1,254)

(2,152)

(11,167)

Net income (loss)

8,262

(2,147)

(4,426)

(23,225)

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

690

(110)

1,218

333

Comprehensive income (loss)

$       8,952

$      (2,257)

$      (3,208)

$      (22,892)

   Income (loss) per share – basic





   Net income (loss)

$         0.25

$        ( 0.07)

$        (0.14)

$          (0.71)

   Weighted average shares outstanding – basic

32,716,251

32,501,344

32,589,539

32,510,570






   Income (loss) per share – diluted





   Net income(loss)

$         0.04

$         (0.07)

$        (0.14)

$          (0.71)

   Weighted average shares outstanding – diluted

 

50,107,555

32,501,344

32,589,539

32,510,570

 

SOURCE SWS Group, Inc.



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