SWS Group, Inc. Reports Fourth Quarter and Fiscal 2013 Financial Results Fourth quarter net loss of $32.5 million includes $30.4 million increase to deferred tax asset valuation allowance and $2.5 million after tax gain from change in valuation of warrants

DALLAS, Aug. 28, 2013 /PRNewswire/ -- SWS Group, Inc. (NYSE: SWS) ("SWS" or the "Company") today reported a net loss of $32.5 million for its fourth quarter of fiscal 2013, or $0.99 per diluted share, on net revenues of $55.4 million, as compared to a net loss of $303,000, or $0.01 per diluted share, on net revenues of $72.5 million for the fourth quarter of fiscal 2012.

The fiscal 2013 fourth quarter results include a $30.4 million increase to the Company's deferred tax asset valuation allowance. Although the Company's current financial forecasts indicate that sufficient income will be generated in the future to realize existing deferred tax benefits, the forecasts were not considered to constitute sufficient positive evidence, as required by generally accepted accounting principles, to overcome the observable negative evidence associated with the cumulative losses in recent years.

For the 2013 fiscal year, the Company reported a net loss of $33.4 million, or $1.02 per diluted share, on net revenues of $271.7 million, as compared to a net loss of $4.7 million, or $0.14 per diluted share, on net revenues of $293.4 million for fiscal 2012.

"Our retail, clearing and banking segments collectively grew revenue and reported improved performance for both the fourth quarter and 2013 fiscal year, as equity markets continued to strengthen and economic conditions improved," said James H. Ross, Chief Executive Officer of SWS Group, Inc. "In addition, our banking subsidiary posted a pre-tax profit for the second consecutive fiscal year and recorded a $6.3 million loan loss recapture in the fourth quarter. However, market volatility continued to impact our fixed income businesses in our fourth quarter, primarily in June, with significant increases in municipal and taxable yields resulting in trading losses that contributed to a decline in institutional segment revenues as compared to last year."

Excluding the valuation allowance for deferred tax assets and the impact of the warrant valuation, the fiscal 2013 fourth quarter adjusted net loss was $4.6 million, compared to an adjusted net loss of $2.4 million for the fourth quarter of fiscal 2012.

The decrease in fiscal 2013 fourth quarter net revenues, as compared to the same quarter last year, was driven in large part by taxable and municipal trading losses of $7.8 million, as compared to trading gains of $6.7 million last year. Late in the quarter, the announcement of the Federal Reserve's intentions to curtail its quantitative easing programs led to an immediate and substantial reaction across fixed income markets. Consequently, the yield on 10-year Treasury bonds increased 65 basis points in the fourth quarter and the impact on the municipal markets was even more pronounced. Offsetting the fixed income declines, fiscal 2013 fourth quarter net revenues in SWS's Clearing and Retail segments increased 4 percent and 7 percent, respectively, as equity markets improved.

Operating expenses in the fourth quarter of fiscal 2013 decreased 18 percent to $59.2 million, from $71.9 million in the fourth quarter of fiscal 2012, primarily due to a $6.3 million loan loss recapture at the Company's banking subsidiary, Southwest Securities, FSB (the "Bank"), in the fourth quarter of fiscal 2013, and a $3.2 million decrease in commissions and other employee compensation, primarily as a result of reduced operating revenues.

Net revenues for fiscal 2013 decreased 7 percent to $271.7 million from $293.4 million in fiscal 2012, primarily due to a $10.7 million decrease in net gains on principal transactions and a $10.9 million decrease in net interest revenue. The decline in net gains on principal transactions was driven by the taxable and municipal trading losses experienced in the fourth quarter of fiscal 2013. Decreases in the average loan balance and net interest yield at the Bank, as compared to the same period last fiscal year, were the primary contributors to the decline in net interest revenue.

Fiscal 2013 operating expenses decreased $21.0 million to $278.3 million from $299.4 million in fiscal 2012, primarily due to a $10.2 million decrease in the loan loss provision at the Bank, and a $7.3 million decrease in the change in value of the Company's outstanding warrants.

Clearing Segment
The Clearing segment reported pre-tax income of $56,000 for the fiscal 2013 fourth quarter on net revenues of $4.7 million, as compared to a pre-tax loss of $327,000 on net revenues of $4.6 million for the fourth quarter of fiscal 2012. The primary contributor to the increase in net revenues was a $248,000 increase in net revenue from clearing fees. Despite a slight decrease in the number of clearing correspondents, revenue per ticket increased 57 percent to $11.76 in the fiscal 2013 fourth quarter from $7.47 in the fourth quarter of fiscal 2012.

Operating expenses in the Clearing segment were $4.7 million for the fiscal 2013 fourth quarter, as compared to $4.9 million for the fourth quarter of fiscal 2012. The primary contributor to the decrease was a decline in operating and information technology expenses.

For the 2013 fiscal year, the Clearing segment reported a pre-tax loss of $481,000 on net revenues of $18.9 million, as compared to a pre-tax loss of $1.8 million on net revenues of $18.6 million in fiscal 2012. The increase in net revenues was primarily due to a $982,000 increase in other revenues driven by an increase in revenue sharing with money market fund providers and increased earnings on customer assets. These increases were partially offset by a $665,000 decline in clearing fee revenues due to lower activity levels for existing correspondents and seven fewer trading days in fiscal 2013 as compared to fiscal 2012.

Fiscal 2013 Clearing segment operating expenses decreased 5 percent to $19.4 million in fiscal 2013 from $20.4 million in fiscal 2012, primarily due to a decrease in operations and information technology expenses.

Retail Segment
The Retail segment reported pre-tax income of $1.3 million for the fourth quarter of fiscal 2013 on net revenues of $28.5 million, as compared to a pre-tax loss of $1.9 million on net revenues of $26.6 million for the fourth quarter of fiscal 2012. The primary contributor to the increase in net revenues was a $1.0 million increase in advisory fees due to an increase in assets under management from $761.1 million at June 29, 2012, to $1.1 billion at June 30, 2013.

The Retail segment's operating expenses were $27.1 million in the fiscal 2013 fourth quarter, as compared to $28.5 million in the fourth quarter of fiscal 2012. The $1.4 million decrease was primarily driven by a $2.0 million decrease in legal expenses, partially offset by a $551,000 increase in commission expense due to increased revenues in the segment.

For fiscal 2013, the Retail segment reported pre-tax income of $2.5 million on net revenues of $110.4 million, as compared to a pre-tax loss of $1.9 million on net revenues of $106.9 million in fiscal 2012. Retail segment advisory fees were up in all areas of the business, due to a 43 percent increase in assets under management and increased fees from money market fund revenue sharing. Insurance product revenue also increased $1.7 million in fiscal 2013, as compared to fiscal 2012. Total customer assets increased to $14.3 billion at June 30, 2013, from $13.6 billion at June 29, 2012.

For fiscal 2013, operating expenses in the Retail segment decreased slightly to $107.9 million from $108.8 million in fiscal 2012. The 1 percent decrease was primarily due to a $2.5 million decrease in legal expenses, offset by a $1.1 million increase in commissions and other employee compensation in fiscal 2013, as compared to fiscal 2012.

Institutional Segment
The Institutional segment reported a pre-tax loss of $3.2 million for the fiscal 2013 fourth quarter on net revenues of $16.3 million, as compared to pre-tax income of $11.1 million on net revenues of $34.1 million for the fourth quarter of fiscal 2012. The 52 percent decrease in net revenues was driven by a $14.5 million decrease in net gains on principal transactions due to market conditions in the fourth quarter of fiscal 2013. Commission revenue also decreased $2.3 million in the fiscal 2013 fourth quarter, as compared to the same quarter last fiscal year, due to a decrease in customer activity.

Institutional segment operating expenses in the fourth quarter of fiscal 2013 were $19.6 million, as compared to $23.1 million in the fourth quarter of fiscal 2012. The primary contributor to the decrease was a $4.9 million decrease in commissions expense, as a result of reduced revenue.

For the 2013 fiscal year, the Institutional segment reported pre-tax income of $20.9 million on net revenues of $107.9 million, as compared to pre-tax income of $39.7 million on net revenues of $130.1 million in fiscal 2012. The 17 percent decrease in net revenues was primarily due to a $14.7 million decrease in net gains on principal transactions, a $4.7 million decrease in commission revenues and a $3.2 million decline in net interest revenue.

The decrease in net gains on principal transactions was primarily driven by a $12.5 million decrease in municipal finance trading gains and a $2.3 million decrease in taxable fixed income gains due to market conditions in the second half of fiscal 2013. Market volatility during this period and a narrowing of the bid/ask spread also contributed to the decrease in commission revenues. The decline in net interest revenue was primarily driven by a 12 basis point decrease in the average net interest spread in the Company's stock loan business and 6 percent reduction in average stock loan balances.

Fiscal 2013 operating expenses in the Institutional segment decreased 4 percent to $87.1 million from $90.4 million in fiscal 2012, primarily due to a $6.6 million decrease in compensation expense due to weaker revenues in the segment, partially offset by a $1.1 million increase in quotations and a $941,000 increase in operations and technology expense.

Banking Segment
The Bank reported pre-tax income of $7.3 million on net revenues of $10.2 million for the fourth quarter fiscal 2013, as compared to pre-tax income of $1.4 million on net revenues of $11.6 million for the fourth quarter of fiscal 2012. The decrease in net revenues was driven by a decrease in net interest revenue due to a 20 percent decline in the average loan balance and a 36 basis point decrease in the net yield on earning assets in the fiscal 2013 fourth quarter, as compared to the same quarter last fiscal year.

Operating expenses in the Banking segment decreased to $2.9 million for the fiscal 2013 fourth quarter, as compared to $10.1 million in the fourth quarter of fiscal 2012, primarily due to the $6.3 million loan loss recapture. The Bank did not record a provision for loan loss in the fourth quarter of fiscal 2012. At June 30, 2013, the Bank's allowance for loan losses was $12.3 million, or 2.85 percent of loans held for investment excluding purchased mortgage loans and loans measured at fair value, compared to $22.4 million, or 3.99 percent of loans held for investment excluding purchased mortgage loans, at June 30, 2012.

For the 2013 fiscal year, the Bank reported pre-tax income of $12.7 million on net revenues of $44.1 million, as compared to pre-tax income of $7.3 million on net revenues of $49.9 million in fiscal 2012. The decrease in the Bank's net revenues was driven by a $5.8 million decline in net interest, primarily due to a 21 percent decrease in average loan balances and a 30 basis point decrease in the net yield on earning assets in fiscal 2013, as compared to fiscal 2012.

Fiscal 2013 operating expenses for the Bank decreased $11.3 million to $31.4 million in fiscal 2013, from $42.6 million in fiscal 2012, primarily due to a $10.2 million decrease in the provision for loan losses. The Bank recorded a $7.7 million loan loss recapture in fiscal 2013, compared to a $2.5 million provision expense in fiscal 2012. Other operating expenses decreased $1.1 million in fiscal 2013, as compared to fiscal 2012, due to decreases in legal expenses, regulatory fees and real estate owned related expenses, partially offset by an increase in employee compensation.

At June 30, 2013, the Bank's non-performing assets were $38.0 million, a decrease of 48 percent from $72.7 million at June 30, 2012. Total classified assets were $67.6 million at June 30, 2013, or 37.4 percent of capital plus allowance for loan losses, as compared to $110.7 million, or 58 percent of capital plus allowance for loan losses at June 30, 2012.

At June 30, 2013, the Bank's Tier 1 (core) capital ratio was 13.5 percent and total risk-based capital ratio was 24.9 percent, compared to a Tier 1 (core) capital ratio of 12.6 percent and total risk-based capital ratio of 19.2 percent at June 30, 2012.

Conference Call
SWS Group will hold a conference call to discuss its results for the fiscal 2013 fourth quarter on Thursday, August 29, 2013, at 10:00 a.m. Eastern Time (9:00 a.m. Central Time). The conference call will be broadcast live over the internet http://www.videonewswire.com/event.asp?id=95369 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, trading counterparties 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)












Fiscal 2013

Fiscal 2012

4th Quarter 2013

4th Quarter 2012


Net Revenue

Pretax

Income

(Loss)

Net Revenue

Pretax

Income (Loss)

Net Revenue

Pretax

Income

(Loss)

Net Revenue

Pretax

Income

(Loss)










Clearing

$  18,938

$ (481)

$18,614

$(1,754)

$  4,748

$  56

$  4,563

$  (327)

Retail

110,440

2,498

106,882

(1,906)

28,453

1,343

26,556

(1,927)

Institutional

107,947

20,866

130,077

39,654

16,329

(3,229)

34,112

11,057

Banking

44,101

12,742

49,942

7,316

10,157

7,303

11,563

1,445

Other consolidated entities

(9,773)

(42,315)

(12,092)

(49,250)

(4,242)

(9,185)

(4,301)

(9,610)

Consolidated

$271,653

$ (6,690)

$293,423

$ (5,940)

$55,445

$(3,712)

$72,493

$   638

Non-GAAP Reconciliation
SWS has included the presentation of Adjusted Net Loss, which is Net Loss, excluding the impact of the valuation adjustment for the warrants held by Hilltop and Oak Hill and the valuation allowance for deferred tax assets. Adjusted Net 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 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.

 


Three Months Ended

(In Thousands)

June 30, 2013

June 29, 2012







Net Loss

$     (32,452)

$           (303)

Valuation Adjustment for Warrants - after tax

(2,520)

(2,117)

Allowance for Deferred Tax Asset

30,388

--

Adjusted Net Loss (Non-GAAP)

$       (4,584)

$         (2,420)

 


SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

June 30, 2013 and June 29, 2012

(In thousands, except par values and share amounts)

 


June 30, 2013


June 29, 2012

Assets




Cash and cash equivalents

$     111,046


$         81,826

Restricted cash and cash equivalents

30,047


30,044

Assets segregated for regulatory purposes

164,737


176,299

Receivable from brokers, dealers and clearing organizations

1,698,474


1,425,697

Receivable from clients, net of allowances

286,446


256,840

Loans, net

608,583


833,640

Securities owned, at fair value

209,633


231,151

Securities held to maturity

17,423


25,904

Securities purchased under agreements to resell

51,996


25,186

Goodwill

7,552


7,552

Securities available for sale

503,276


307,789

Other assets

91,160


144,915

     Total assets

$    3,780,373


$     3,546,843





Liabilities and Stockholders' Equity




Short-term borrowings

$131,500


$           67,500

Payable to brokers, dealers and clearing organizations

1,532,971


1,349,370

Payable to clients

335,655


347,574

Deposits

993,719


1,062,233

Securities sold under agreements to repurchase

37,012


27,465

Securities sold, not yet purchased, at fair value

134,735


70,155

Drafts payable

28,889


24,970

Advances from Federal Home Loan Bank

97,565


68,641

Long-term debt, net

83,102


79,076

Stock purchase warrants

24,197


27,810

Other liabilities

65,742


66,347

     Total liabilities

3,465,087


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 32,629,213 shares at June 30, 2013; issued 33,312,140 and outstanding 32,576,307 shares at June 29, 2012

3,331


3,331

   Additional paid-in capital

325,030


324,556

Retained earnings

(3,361)


30,084

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

(5,334)


2,745

   Deferred compensation, net

3,352


3,427

   Treasury stock (682,927 shares at June 30,2013 and 735,833 shares at June 29, 2012, at cost)

(7,732)


(8,441)

           Total stockholders' equity

315,286


355,702

     Total liabilities and stockholders' equity

$3,780,373


$     3,546,843

 

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

For the three and twelve-months ended June 30, 2013 and June 29, 2012

(In thousands, except per share and share amounts)

 


For the Three-Months

Ended

For the Twelve-Months

Ended


June 30, 2013

June 29, 2012

June 30, 2013

June 29, 2012

Revenues:





     Net revenues from clearing operations

$2,321

$              2,074

$8,719

$              9,385

     Commissions

30,655

32,284

125,620

131,855

     Interest

24,654

27,393

97,350

122,120

     Investment banking, advisory and administrative

           fees

13,894

13,326

45,255

40,814

     Net gains on principal transactions

(7,768)

6,464

17,395

28,049

     Other

4,822

4,550

23,775

21,518

Total revenue

68,578

86,091

318,114

353,741






     Interest expense

13,133

13,598

46,461

60,318

          Net revenues

55,445

72,493

271,653

293,423






Non-interest expenses:





     Commissions and other employee compensation

48,908

52,123

207,246

208,635

     Occupancy, equipment and computer service costs

8,189

8,009

31,278

31,869

     Communications

3,352

3,164

13,277

12,380

     Floor brokerage and clearing organization charges

1,027

1,090

3,940

4,201

     Advertising and promotional

714

817

3,041

3,093

     (Recapture) provision for loan loss

(6,268)


(7,718)

2,475

     Other

7,112

9,909

30,892

33,036

Total non-interest expenses

63,034

75,112

281,956

295,689






Other gains/(losses):





     Unrealized gain (loss) on stock purchase warrants

          valuation

3,877

3,257

3,613

(3,674)

Income (loss) before income tax expense (benefit)

(3,712)

638

(6,690)

(5,940)

Less:  Income tax expense (benefit)

28,740

941

26,755

(1,211)

Net loss

(32,452)

(303)

(33,445)

(4,729)

Net gain (loss) recognized in other comprehensive

     income (loss)

(6,819)

762

(8,079)

1,980

Comprehensive income (loss)

$(39,271)

$           459

$(41,524)

$          (2,749)

Loss per share – basic





    Net loss

$(0.99)

$        (0.01)

$(1.02)

$            (0.14)

    Weighted average shares outstanding – basic

32,896,814

32,825,827

32,870,003

32,649,544

Loss per share – diluted

 

 





    Net loss

$(0.99)

$        (0.01)

$(1.02)

$            (0.14)

    Weighted average shares outstanding – diluted

32,896,814

32,825,827

32,870,003

32,649,544






 

 

 

SOURCE SWS Group, Inc.



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