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SWS Group, Inc. Reports Fiscal 2013 First Quarter Results

Broker-dealer and Banking Segments Post Pre-tax Profits; Bank Reduces Classified Assets by 51 Percent from Last Year

DALLAS, Nov. 6, 2012 /PRNewswire/ -- SWS Group, Inc. (NYSE: SWS) (the "Company") today reported a net loss of $5.6 million, or $0.17 per diluted share, for its fiscal 2013 first quarter ended September 28, 2012, compared with net income of $1.7 million, or $0.05 per diluted share, for the first quarter of fiscal 2012. Net revenues (total revenue less interest expense) in the first quarter of fiscal 2013 were $74.1 million, compared to $76.7 million in the first quarter of last fiscal year.

"Though economic conditions remain challenging, SWS reported pre-tax profits in each of our four business segments – clearing, retail, institutional and banking – while continuing to reduce classified assets at our banking subsidiary in the first quarter of fiscal 2013," said James H. Ross, chief executive officer of SWS Group, Inc. "While there is still work to be done to improve results, we are encouraged by the underlying strength demonstrated by our core operating units and will continue to look for opportunities to increase efficiency and expand our presence in both new and existing markets."

Net revenues decreased by $2.6 million in the first quarter of fiscal 2013, as compared to the same period last fiscal year. The primary contributors to the decrease were a $3.5 million decrease in net interest revenue and a $3.3 million decrease in commissions, due in part to five fewer trading days in the fiscal 2013 first quarter as compared to the fiscal 2012 first quarter. These decreases were partially offset by increases in net gains on principal transactions and other revenue.

Operating expenses increased $10.1 million to $83.1 million for the first quarter of fiscal 2013, as compared to $73.0 million for the same period last fiscal year. The increase was primarily due to an $8.1 million increase in the value of the warrants held by Hilltop Holdings Inc. and Oak Hill Capital Partners, as compared to an increase of $171,000 in the first quarter of fiscal 2012.

Clearing Segment

The clearing segment reported pre-tax income of $195,000 for the first quarter of fiscal 2013, as compared to a pre-tax loss of $76,000 for the first quarter of fiscal 2012. Net revenues of $5.0 million in the segment remained flat as compared to the same period last fiscal year. A $520,000 decrease in clearing fee revenue for the fiscal 2013 first quarter was offset by a $434,000 increase in other revenue and a $78,000 increase in net interest revenue, as compared to the same period last fiscal year. The decrease in clearing fee revenue was driven primarily by a reduction in daily general securities transaction volumes and the decrease in the number of trading days in the fiscal 2013 first quarter, as compared to the same quarter last fiscal year.

Clearing segment operating expenses decreased to $4.8 million for the first quarter of fiscal 2013, from $5.0 million for the first quarter of fiscal 2012, primarily due to a decrease in operations and information technology expense.

Total customer assets under custody increased to $15.2 billion at September 28, 2012 from $13.5 billion at September 30, 2011.

Retail Segment

The retail segment posted pre-tax income of $319,000 for the first quarter of fiscal 2013, as compared to pre-tax income of $1.3 million for the first quarter of fiscal 2012. Net revenues decreased 4 percent to $28.1 million for the three months ended September 28, 2012, from $29.2 million for the three months ended September 30, 2011, in part because of the decrease in the number of trading days in the fiscal 2013 first quarter, as compared to the same period last fiscal year. In addition, the departure of two producers in the independent channel contributed to a $1.7 million decline in commission revenue in the retail segment, as compared to the first quarter of fiscal 2012.

Retail segment operating expenses were flat in the first quarter of fiscal 2013, as compared to the same period last fiscal year. A $1.0 million decrease in commission and other employee compensation expense in the quarter was offset by increases in legal expense, licenses and fees, and operations and information technology expense.

Institutional Segment

For the fiscal 2013 first quarter, the institutional segment posted pre-tax income of $9.9 million on net revenues of $32.9 million, compared to pre-tax income of $10.2 million on net revenues of $33.3 million in the first quarter of fiscal 2012. The slight decrease in net revenues in the segment was driven by a $1.6 million decline in commissions and the decrease in the number of trading days in the fiscal 2013 first quarter, as compared to the same quarter last fiscal year. Taxable fixed income accounted for $1.8 million of the decrease in commissions and municipal finance accounted for $934,000. These decreases were partially offset by a $1.1 million increase in portfolio trading commissions, as compared to the same period last fiscal year.

Investment banking fees decreased 12 percent to $6.5 million, from $7.4 million in the first quarter of fiscal 2012, due to a $1.7 million decrease in corporate finance fees. This decrease was due to a decline in merger and acquisition activity in the quarter, and was partially offset by a $734,000 increase in municipal finance fees during the quarter, as compared to the same period last fiscal year.

Net gains on principal transactions increased 52 percent to $10.1 million for the fiscal 2013 first quarter, from $6.6 million for the first quarter of fiscal 2012. The increase was primarily due to a $3.9 million increase in taxable fixed income trading gains, partially offset by a $447,000 decrease in municipal finance trading gains.

Institutional segment operating expenses decreased 1 percent for the first quarter of fiscal 2013, as compared to last fiscal year's first quarter, primarily due to a decline in commission and other employee compensation expense.

Banking Segment

The banking segment reported pre-tax income of $1.3 million in the first quarter of fiscal 2013, on net revenues of $11.6 million, as compared to pre-tax income of $2.7 million on net revenues of $13.0 million in the first quarter of fiscal 2012. The primary contributor to the decrease in net revenues was a $1.1 million decline in net interest revenue. This decline was due to a 16 percent decrease in average loan balances and a 20-basis point decrease in the net yield on interest-earning assets at the Company's banking subsidiary, Southwest Securities, FSB (the "Bank"), as compared to the same period last fiscal year. Other revenue for the Bank decreased $281,000, primarily due to a $227,000 increase in net losses on the sale of real estate owned.

The Bank's operating expenses remained flat for the three-month period ended September 30, 2012, as compared to the three months ended September 30, 2011.

The Bank did not record a provision for loan losses in the first quarters of fiscal 2013 or 2012. At September 30, 2012, the Bank's allowance for loan losses was $20.9 million, or 4.28 percent of loans held for investment, excluding purchased mortgage loans, as compared to $39.7 million, or 4.90 percent of loans held for investment, excluding purchased mortgage loans, at September 30, 2011.

Total classified assets at the Bank were $100.7 million, or 52.7 percent of capital plus allowance for loan losses, at September 30, 2012, down 51 percent from $206.7 million, or 111.0 percent of capital plus allowance for loan losses, at September 30, 2011.  Non-performing assets were $67.8 million at September 30, 2012, down 13 percent from $78.3 million, at September 30, 2011.

At September 30, 2012, the Bank's Tier 1 core capital ratio was 12.7 percent and total risk-based capital ratio was 19.2 percent, as compared to a Tier 1 core capital ratio of 10.4 percent and total risk-based capital ratio of 15.4 percent at September 30, 2011.

Conference Call

SWS Group will hold a conference call to discuss its results for the fiscal 2013 first quarter on Wednesday, November 7, 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=89873 or www.swst.com. An archive of the webcast will also be posted to the Company's website at www.swst.com.

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



Three Months Ended


Three Months Ended



Sept. 28, 2012


Sept. 30, 2011


Sept. 28, 2012


Sept. 30, 2011











Clearing

$ 4,958


$ 4,966


$ 195


$ (76)


Retail

28,066


29,210


319


1,279


Institutional

32,895


33,272


9,925


10,160


Bank

11,633


13,021


1,281


2,748


Other consolidated entities

(3,443)


(3,730)


(20,752)


(10,415)


Consolidated

$ 74,109


$ 76,739


$ (9,032)


$ 3,696


 

 

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

September 28, 2012 and June 29, 2012

(In thousands, except par values and share amounts)






September 28,

   2012


June 29,

2012

Assets

 (Unaudited)



Cash and cash equivalents

$         71,153


$         81,826

Restricted cash and cash equivalents

30,045


30,044

Assets segregated for regulatory purposes

213,636


176,299

Receivable from brokers, dealers and clearing organizations

1,261,812


1,425,697

Receivable from clients, net of allowances

251,328


256,840

Loans, net

796,578


833,640

Securities owned, at fair value

265,562


231,151

Securities held to maturity

23,880


25,904

Securities purchased under agreements to resell

21,823


25,186

Goodwill

7,552


7,552

Securities available for sale

356,713


307,789

Other assets

145,118


144,915

     Total assets

$     3,445,200


$     3,546,843





Liabilities and Stockholders' Equity




Short-term borrowings

$         126,500


$           67,500

Payable to brokers, dealers and clearing organizations

1,167,808


1,349,370

Payable to clients

378,074


347,574

Deposits

1,059,250


1,062,233

Securities sold under agreements to repurchase

23,173


27,465

Securities sold, not yet purchased, at fair value

77,046


70,155

Drafts payable

24,586


24,970

Advances from Federal Home Loan Bank

67,318


68,641

Long-term debt, net

80,027


79,076

Warrants

35,995


27,810

Other liabilities

52,787


66,347

     Total liabilities

3,092,564


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 32,557,735 shares at September 28, 2012; issued 33,312,140 and outstanding 32,576,307 shares at June 29, 2012

3,331


3,331

   Additional paid-in capital

324,895


324,556

Retained earnings

24,440


30,084

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

5,043


2,745

   Deferred compensation, net

3,436


3,427

   Treasury stock (754,405 shares at September 28, 2012 and 735,833 shares at June 29, 2012, at cost)

(8,509)


(8,441)

           Total stockholders' equity

352,636


355,702

     Total liabilities and stockholders' equity

$     3,445,200


$     3,546,843

 

 

 

SWS GROUP, INC. AND SUBSIDIARIES

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

For the three months ended September 28, 2012 and September 30, 2011

(In thousands, except per share and share amounts)

(Unaudited)





Three Months

Ended

September 28, 2012

Three Months

Ended

September 30, 2011

Revenues:



     Net revenues from clearing operations

$             2,139

$             2,660

     Commissions

32,323

35,639

     Interest

26,625

33,661

     Investment banking, advisory and administrative fees

9,794

9,876

     Net gains on principal transactions

9,358

6,271

     Other

6,185

4,490

Total revenue

86,424

92,597




     Interest expense

12,315

15,858

          Net revenues

74,109

76,739




Non-interest expenses:



     Commissions and other employee compensation

54,259

53,158

     Occupancy, equipment and computer service costs

7,697

7,877

     Communications

3,219

2,919

     Floor brokerage and clearing organization charges

1,023

1,073

     Advertising and promotional

668

549

     Unrealized loss on Warrant valuation

8,185

171

     Other

8,090

7,296

Total non-interest expenses

83,141

73,043




Income (loss) before income tax expense (benefit)

(9,032)

3,696

Less: Income tax expense (benefit)

(3,388)

2,044

Net income (loss)

(5,644)

1,652

Net gain (loss) recognized in other comprehensive income

2,298

(78)

Comprehensive income (loss)

$        (3,346)

$        1,574

 Earnings (loss) per share – basic



   Net income (loss)

$           (0.17)

$           0.05

   Weighted average shares outstanding – basic

32,801,381

32,506,613




 Earnings (loss) per share – diluted



   Net income (loss)

$          (0.17)

$          0.05

   Weighted average shares outstanding – diluted

 

32,801,381

 

32,506,613

 

 

SOURCE SWS Group, Inc.

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