SWS Group, Inc. Reports Fiscal Second Quarter Net Income of $5.9 Million
DALLAS, Feb. 8 /PRNewswire-FirstCall/ -- SWS Group, Inc. (NYSE: SWS) today reported net income of $5.9 million, or diluted earnings per share (EPS) of 21 cents, on net revenues of $95.2 million for the company's second fiscal quarter ended December 31, 2009. Net revenue is total revenue less interest expense.
Net income, EPS and net revenues decreased from the prior fiscal year's second quarter when SWS earned $9.0 million, or diluted EPS of 33 cents, on net revenues of $100.2 million.
In the first half of fiscal 2010, SWS recorded net revenues of $194.6 million, net income of $9.0 million and diluted EPS of 32 cents, compared with net revenues of $187.9 million, net income of $16.1 million and diluted EPS of 59 cents in the first half of the prior fiscal year.
"The continued profitability of our bank and the improvement we're beginning to see in the equity side of the brokerage business are important trends as the performance of our fixed income businesses, although strong, has begun to moderate from the historic levels of recent quarters," said Donald W. Hultgren, SWS Group, Inc. president and chief executive officer.
Mr. Hultgren said SWS Group's recent stock offering raised more than $54 million of new capital, which strongly enhances the company's ability to grow both its bank and broker-dealer subsidiaries. "We are in a very strong position to take advantage of opportunities, whether in the form of strategic acquisitions or attracting bankers and brokers who bring their existing customer relationships to SWS."
Fiscal 2010 second quarter net revenues decreased by $5.0 million compared with net revenues for the same period of fiscal 2009. Commissions declined $11.2 million, as institutional segment commissions decreased $13.1 million, primarily in the taxable fixed income business where spreads tightened as market volatility diminished. The decline was partially offset by an increase of $5.2 million in other revenues and an increase of $1.7 million in net gains on principal transactions. The increase in net gains on principal transactions resulted primarily from trading a broader range of fixed income products. The increase in other revenues resulted from higher valuation of deferred compensation investments of $1.9 million, a decrease in losses related to a limited partnership venture capital fund of $1.8 million, and an increase of $900,000 in the sale of insurance products in the retail segment.
Operating expenses increased $1.6 million for the second quarter of fiscal 2010 compared with results for the second quarter of the prior fiscal year. The largest increase, $4.5 million, was in other expenses and was primarily related to an increase in the bank's loan loss provision and REO loss provision. This was largely offset by a decline of $3.6 million in commission expense, primarily in the institutional segment.
The clearing segment posted a pre-tax loss of $305,000 in the second quarter of fiscal 2010 compared with pre-tax income of $1.9 million in the comparable quarter of fiscal 2009. Net revenue from clearing services decreased $344,000 to $2.7 million. A reduction in transactions processed for daytrading firms caused a substantial decrease in ticket volume and a significant increase in revenue per ticket in the second quarter of fiscal 2010 compared with the prior fiscal year's second quarter. Daytraders are high-volume correspondents that pay discounted rates as they require fewer services than general securities correspondents. Money market fee income in the segment declined $1.9 million in the second quarter of fiscal 2010 from the amount reported in the second quarter of fiscal 2009, as a result of a reduction in short-term interest rates that negatively affected Southwest Securities' revenue sharing in various money market funds. Operating expenses for the segment increased $282,000 from the second quarter of the prior fiscal year due to increased legal expenses.
The retail segment reported net revenues of $30.3 million and pre-tax income of $1.3 million for the second quarter of fiscal 2010 compared with net revenues of $28.2 million and pre-tax income of $1.5 million in the second quarter of the prior fiscal year. The improvement in net revenues resulted from increased volume in the businesses of Southwest Securities' Private Client Group and SWS Financial Services. The increases were partially offset by decreased advisory fees from closing Tower Asset Management, LLC in the prior fiscal year. Total retail customer assets were $12.9 billion at December 31, 2009 compared with $10.3 billion at December 31, 2008. Retail segment operating expenses increased 9 percent to $29.0 million in the second quarter of fiscal 2010 from the same period of fiscal 2009, primarily due to an 11 percent increase in commission expense.
The institutional segment reported net revenues of $40.4 million and pre-tax income of $14.4 million for the second quarter of fiscal 2010 compared with net revenues of $54.9 million and pre-tax income of $22.7 million in the second quarter of fiscal 2009. Tighter spreads and reduced volatility, primarily in taxable fixed income, led to a $13.1 million decline in the institutional segment's commissions in the second quarter of fiscal 2010 from the second quarter of fiscal 2009. However, investment banking fees increased $2.1 million as a result of unit investment trust underwriting activity and increased fees generated from competitive underwritings in the municipal business. Net gains on principal transactions increased $1.6 million with taxable fixed income and municipal fixed income contributing equally to the increase. Net interest revenue, primarily from stock lending activities, declined $5.1 million in the second quarter of fiscal 2010 from the same period last fiscal year. Second quarter of fiscal 2010 operating expenses in the institutional segment were down $6.2 million, or 19 percent, primarily as a result of decreased commission expenses, as compared with the second quarter of the prior fiscal year.
The banking segment posted net revenues of $18.8 million and pre-tax income of $3.0 million in the second quarter of fiscal 2010, a 29 percent increase in net revenues and a 26 percent improvement in pre-tax income from the prior fiscal year's second quarter when the bank reported net revenues of $14.6 million and pre-tax income of $2.4 million. Net interest revenue at the bank increased 30 percent to $19.1 million as average loan volume increased 14.5 percent and the cost of funds decreased 120 basis points. The bank's operating expenses increased $3.6 million second quarter over second quarter because of increases in its loan loss provision and REO loss provision of $2.9 million and $270,000, respectively, as well as increased expenses relating to loan collections and deposit insurance assessments.
SWS Group, Inc. is a Dallas-based financial services holding company offering a broad range of services through its subsidiaries. The company's common stock is listed and traded on the New York Stock Exchange under the symbol SWS. Subsidiaries include Southwest Securities, Inc., SWS Financial Services, Inc., and Southwest Securities, FSB.
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, availability of lines of credit, customer margin loan activity, creditworthiness of our correspondents and customers, demand for housing, 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
Three Months Ended Three Months Ended
------------------ ------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2009 2008 2009 2008
--------------------------------------------------
Clearing $5,266 $7,173 $ (305) $1,884
Retail 30,274 28,215 1,291 1,526
Institutional 40,386 54,904 14,424 22,727
Bank 18,756 14,587 2,972 2,359
Other consolidated
entities 495 (4,703) (9,427) (12,964)
--- ----- ----- ------
Consolidated $95,177 $100,176 $8,955 $15,532
======= ======== ====== =======
FINANCIAL TABLES FOLLOW
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2009 and June 26, 2009
(In thousands, except par values and share amounts)
December 31, 2009
(Unaudited) June 26, 2009
----------- -------------
Assets
Cash and cash equivalents $54,792 $96,253
Assets segregated for regulatory
purposes 305,367 313,153
Receivable from brokers, dealers and
clearing organizations 1,776,973 1,892,739
Receivable from clients, net of
allowances 190,430 158,032
Loans held for sale 340,635 262,780
Loans, net 1,154,856 1,138,602
Securities owned, at market value 149,226 175,030
Securities purchased under agreements
to resell 22,651 21,622
Goodwill 7,552 7,552
Marketable equity securities available
for sale 1,170 4,094
Other assets 156,349 129,182
------- -------
Total assets $4,160,001 $4,199,039
========== ==========
Liabilities and Stockholders' Equity
Short-term borrowings $28,500 $10,000
Payable to brokers, dealers and
clearing organizations 1,662,393 1,853,544
Payable to clients 476,552 426,300
Deposits 1,349,962 1,292,366
Securities sold under agreements
to repurchase - 4,462
Securities sold, not yet purchased,
at market value 43,364 53,236
Drafts payable 28,487 27,457
Advances from Federal Home Loan Bank 112,965 117,492
Other liabilities 58,127 73,825
------ ------
Total liabilities 3,760,350 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
33,309,140 and outstanding 32,361,244
shares at December 31, 2009; issued
28,309,139 and outstanding 27,262,923
shares at June 26, 2009 3,331 2,831
Additional paid-in capital 325,171 271,131
Retained earnings 79,556 75,918
Accumulated other comprehensive
income – unrealized holding loss,
net of tax 157 180
Deferred compensation, net 2,988 2,639
Treasury stock (947,896 shares at
December 31, 2009 and 1,046,216
shares at June 26, 2009, at cost) (11,552) (12,342)
------ ------
Total stockholders' equity 399,651 340,357
------- -------
Total liabilities and stockholders'
equity $4,160,001 $4,199,039
========== ==========
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the three and six months ended December 31, 2009
and December 31, 2008
(In thousands, except per share and share amounts)
(Unaudited)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
December December December December
31, 31, 31, 31,
2009 2008 2009 2008
--------------------------------------------
Revenues:
Net revenues from
clearing operations $2,730 $3,077 $5,356 $6,373
Commissions 42,152 53,309 84,764 89,054
Interest 40,736 53,299 82,173 120,079
Investment banking,
advisory and
administrative fees 9,018 9,430 18,288 20,354
Net gains on principal
transactions 9,656 7,958 24,475 10,662
Other 5,235 21 11,356 2,920
--------------------------------------------
Total revenue 109,527 127,094 226,412 249,442
Interest expense 14,350 26,918 31,782 61,498
--------------------------------------------
Net revenues 95,177 100,176 194,630 187,944
--------------------------------------------
Non-Interest Expenses:
Commissions and other
employee compensation 59,802 63,441 121,828 115,852
Occupancy, equipment and
computer service costs 8,699 8,032 17,089 15,772
Communications 3,307 3,308 6,555 6,469
Floor brokerage and
clearing organization
charges 972 997 1,931 1,914
Advertising and promotional 1,170 1,141 2,175 1,940
Other 12,272 7,725 31,120 19,672
--------------------------------------------
Total non-interest expenses 86,222 84,644 180,698 161,619
--------------------------------------------
Income before income tax
expense 8,955 15,532 13,932 26,325
Income tax expense 3,088 6,486 4,980 10,256
--------------------------------------------
Net income 5,867 9,046 8,952 16,069
Net loss recognized in other
comprehensive income 23 (1,111) (23) (1,979)
--------------------------------------------
Comprehensive income $5,890 $7,935 $8,929 $14,090
============================================
Earnings per share – basic
Net income $0.21 $0.33 $0.32 $0.59
============================================
Weighted average shares
outstanding – basic 28,672,282 27,416,457 28,094,256 27,390,720
============================================
Earnings per share – diluted
Net income $0.21 $0.33 $0.32 $0.59
============================================
Weighted average shares
outstanding – diluted 28,725,022 27,492,949 28,151,941 27,483,544
============================================
SOURCE SWS Group, Inc.
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