Exhibit 99.1
SWS Reports 31% Increase in Income from Continuing Operations for Fiscal 2007
DALLAS, August 29, 2007 – SWS Group, Inc. (NYSE: SWS) today reported net income of $37.6 million, or diluted earnings per share (EPS) of $1.38, on net revenues of $273.6 million for fiscal 2007, compared with net income of $41.4 million, or diluted EPS of $1.57, on net revenues of $252.9 million for fiscal 2006. (Net revenue is defined as total revenue less interest expense.)
The 2006 figures include operating results and a gain on sale of FSB Financial, the former auto finance subsidiary of the company’s bank. SWS sold the assets of the auto finance subsidiary in March 2006, resulting in an after-tax gain of $11.4 million. The business of this subsidiary is presented as discontinued operations.
For fiscal 2007, SWS recorded income from continuing operations of $37.5 million, or diluted EPS from continuing operations of $1.37 compared with income from continuing operations of $28.6 million, or diluted EPS from continuing operations of $1.08, for fiscal 2006.
The company’s ownership of NYSE Euronext (NYX) stock resulted in after-tax gains of $758,000 and $3.4 million for fiscal 2007 and fiscal 2006, respectively. Fiscal 2007 results also benefited from a $2.3 million non-taxable gain from insurance proceeds. Excluding these items, SWS’ adjusted income from continuing operations was $34.5 million, or $1.26 per share, in fiscal 2007, compared with $25.3 million, or 95 cents per share, a year ago. (See Non-GAAP Reconciliation Table.)
“We are very pleased with our financial results,” said Chief Executive Officer Donald W. Hultgren. “We ended the fiscal year with a strong fourth quarter, and we exceeded our ROE target of 12.5 percent for the year.”
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SWS Reports Fiscal 2007 and Fourth Quarter Results / 2
For the fourth quarter ended June 29, 2007, SWS recorded net income of $7 million, or diluted EPS of 25 cents, on net revenues of $65.5 million, compared with net income of $5.4 million, or diluted EPS of 20 cents, on net revenues of $60.2 million in the fourth quarter of the prior fiscal year.
Hultgren said Southwest Securities, FSB, the company’s community bank, continues to make progress toward having a more diversified loan portfolio. He noted that the bank began the new fiscal year by significantly expanding its SBA Department, adding eight experienced SBA professionals to expand services to small business owners and enhance the bank’s Preferred SBA Lender status.
For fiscal 2007, net revenues increased $20.7 million. Commissions increased $4.9 million or 6 percent primarily from both the retail and institutional brokerage segments. Net interest increased $12.8 million or 16 percent primarily from an increase in average loan balances at the bank and net interest from securities lending. Investment banking, advisory and administrative fees were up $3.6 million or 12 percent as a result of an increase in corporate finance fees. Other revenue increased $2.6 million or 11 percent as a result of $2.3 million in insurance policy proceeds and an increase of $3.2 million in fees from the sale of insurance products, partially offset by a $2.5 million decrease in earnings on equity investments. Net gains on principal transactions declined $1 million or 6 percent and clearing revenues decreased $2.2 million or 15 percent. The prior fiscal year’s net gains on principal transactions included $5.2 million realized upon the merger of NYSE and Archipelago into NYX. The decrease in clearing revenues was due to decreased revenue from general securities correspondents after the loss of a large correspondent through an acquisition.
Year-over-year operating expenses increased $8.5 million. Commissions and other employee compensation increased $15 million or 10 percent, partially offset by a $5.8 million decrease in other expenses. The increase in commissions and other employee compensation was primarily the result of increased variable compensation from increased commission and investment banking revenue as well as higher costs associated with employee benefits. The decrease in other expenses reflected lower legal expenses, loan loss allowance expenses, audit fees and financial advisory expenses. These decreases were offset by increases in contract labor, check processing expense and taxes.
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SWS Reports Fiscal 2007 and Fourth Quarter Results / 3
Net revenue for the fourth quarter was $65.5 million, an increase of 9 percent over net revenue for the fourth quarter of fiscal 2006. Pretax income of $10.9 million was up $2.7 million, or 33 percent, over pretax income recorded for the prior year’s fourth quarter.
The retail and institutional brokerage segments both produced increased commission revenue for the quarter while the banking segment and the stock loan business contributed to the increase in net interest. Operating expenses for the quarter were up 5 percent on increased variable compensation expense offset by reduced legal and loan loss allowance expenses.
Southwest Securities processed 23.5 million securities transactions in fiscal 2007 compared with 16.2 million in fiscal 2006, an increase of 45 percent. The firm served 209 correspondents at the end of fiscal 2007.
SWS Group, Inc. is a Dallas-based holding company that offers 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, a full-service brokerage and clearing firm; Southwest Securities, FSB, a community bank; SWS Financial Services, Inc., a brokerage firm serving independent registered reps and their customers, and Southwest Insurance Agency.
This release contains forward-looking statements regarding the company’s future overall performance. 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, customer margin loan activity, creditworthiness of our correspondents and customers, demand for housing, and those 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 TABLES FOLLOW
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SWS Reports Fiscal 2007 and Fourth Quarter Results / 4
Non-GAAP Reconciliation
SWS has included the presentation of income from continuing operations and diluted earnings per share from continuing operations, excluding the impact of the gain realized with our investment in NYX common stock and the proceeds from company insurance. SWS believes this presentation is useful to investors because it is more indicative of SWS’ income from ongoing operations and diluted earnings per share from ongoing operations. Management has provided this information to assist the reader in understanding the impact of our investment in the NYX for fiscal 2006 and fiscal 2007 and the gain recognized on company owned insurance in fiscal 2007. While management believes these non-GAAP financial measures are 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.
(In thousands, except per share amounts)
| Fiscal Year 2007 | Fiscal Year 2006 | |||||||
Income from continuing operations | $ | 37,507 | $ | 28,637 | ||||
Impact of NYX | (758 | ) | (3,355 | ) | ||||
Gain from insurance proceeds | (2,289 | ) | — | |||||
Adjusted income from continuing operations | $ | 34,460 | $ | 25,282 | ||||
EPS from continuing operations – diluted – GAAP | $ | 1.37 | $ | 1.08 | ||||
Impact of NYX | (0.03 | ) | (0.13 | ) | ||||
Gain from insurance proceeds | (0.08 | ) | — | |||||
EPS from continuing operations – diluted – adjusted | $ | 1.26 | $ | 0.95 | ||||
Earnings growth | 33 | % | ||||||
Segment Results
(In thousands, except per share amounts)
| Fiscal 2007 | Fiscal 2006 | 4th Quarter 2007 | 4th Quarter 2006 | ||||||||||||||||||||||||||
| Net Revenue | Pretax Income | Net Revenue | Pretax Income | Net Revenue | Pretax Income | Net Revenue | Pretax Income | ||||||||||||||||||||||
Clearing | $ | 38,677 | $ | 19,950 | $ | 37,488 | $ | 16,462 | $ | 10,215 | $ | 5,502 | $ | 9,676 | $ | 4,391 | |||||||||||||
Retail Brokerage | 76,715 | 13,015 | 69,845 | 9,607 | 19,670 | 3,450 | 17,797 | 2,911 | |||||||||||||||||||||
Institutional Brokerage | 101,619 | 29,839 | 83,868 | 22,472 | 23,489 | 5,407 | 19,476 | 4,983 | |||||||||||||||||||||
Bank | 51,106 | 25,235 | 44,748 | 20,271 | 13,546 | 6,539 | 12,083 | 6,051 | |||||||||||||||||||||
Other Consolidated Entities | 5,498 | (31,826 | ) | 16,995 | (24,791 | ) | (1,457 | ) | (9,985 | ) | 1,210 | (10,146 | ) | ||||||||||||||||
Consolidated | $ | 273,615 | $ | 56,213 | $ | 252,944 | $ | 44,021 | $ | 65,463 | $ | 10,913 | $ | 60,242 | $ | 8,190 | |||||||||||||
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SWS Reports Fiscal 2007 and Fourth Quarter Results / 5
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 29, 2007 and June 30, 2006
(In thousands, except par values and share amounts)
| June 29, 2007 | June 30, 2006 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 128,760 | $ | 41,674 | ||||
Assets segregated for regulatory purposes | 319,265 | 345,028 | ||||||
Receivable from brokers, dealers and clearing organizations | 3,117,766 | 2,821,512 | ||||||
Receivable from clients, net of allowances | 344,125 | 373,245 | ||||||
Loans held for sale | 148,013 | 124,874 | ||||||
Loans, net | 756,037 | 642,541 | ||||||
Securities owned, at market value | 119,621 | 159,004 | ||||||
Securities purchased under agreements to resell | 42,486 | 63,636 | ||||||
Goodwill | 7,552 | 7,552 | ||||||
Marketable equity securities available for sale | 3,793 | 3,593 | ||||||
Other assets | 87,167 | 75,192 | ||||||
Total assets | $ | 5,074,585 | $ | 4,657,851 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Short-term borrowings | $ | 4,000 | $ | 30,500 | ||||
Payable to brokers, dealers and clearing organizations | 3,051,956 | 2,775,564 | ||||||
Payable to clients | 581,118 | 617,697 | ||||||
Deposits | 897,150 | 705,894 | ||||||
Securities sold under agreements to repurchase | 17,829 | 7,719 | ||||||
Securities sold, not yet purchased, at market value | 63,470 | 96,909 | ||||||
Drafts payable | 25,718 | 29,144 | ||||||
Advances from Federal Home Loan Bank | 66,989 | 47,094 | ||||||
Other liabilities | 59,482 | 57,217 | ||||||
Total liabilities | 4,767,712 | 4,367,738 | ||||||
Minority interest in consolidated subsidiaries | 426 | 641 | ||||||
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 28,197,278 and outstanding 27,491,528 shares at June 29, 2007; issued 27,424,611 and outstanding 26,591,891 shares at June 30, 2006 | 2,819 | 1,828 | ||||||
Additional paid-in capital | 268,575 | 255,331 | ||||||
Retained earnings | 39,729 | 37,968 | ||||||
Accumulated other comprehensive income – unrealized holding gain, net of tax | 1,417 | 1,225 | ||||||
Deferred compensation, net | 1,644 | 1,610 | ||||||
Treasury stock (705,750 shares at June 29, 2007 and 832,720 shares at June 30, 2006, at cost) | (7,737 | ) | (8,490 | ) | ||||
Total stockholders’ equity | 306,447 | 289,472 | ||||||
Total liabilities and stockholders’ equity | $ | 5,074,585 | $ | 4,657,851 | ||||
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SWS Reports Fiscal 2007 and Fourth Quarter Results / 6
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the three and twelve months ended June 29, 2007 and June 30, 2006
(In thousands, except per share and share amounts)
Three Months Ended June 29, 2007 | Three Months Ended June 30, 2006 | Twelve Months Ended June 29, 2007 | Twelve Months Ended June 30, 2006 | |||||||||||||
Revenues: | ||||||||||||||||
Net revenues from clearing operations | $ | 3,338 | $ | 3,763 | $ | 12,451 | $ | 14,671 | ||||||||
Commissions | 25,136 | 20,033 | 90,398 | 85,516 | ||||||||||||
Interest | 73,904 | 62,900 | 292,062 | 220,666 | ||||||||||||
Investment banking, advisory and administrative fees | 7,164 | 7,900 | 33,411 | 29,781 | ||||||||||||
Net gains on principal transactions | (1,006 | ) | (145 | ) | 15,460 | 16,502 | ||||||||||
Other | 6,618 | 6,197 | 27,116 | 24,482 | ||||||||||||
Total revenue | 115,154 | 100,648 | 470,898 | 391,618 | ||||||||||||
Interest expense | 49,691 | 40,406 | 197,283 | 138,674 | ||||||||||||
Net revenues | 65,463 | 60,242 | 273,615 | 252,944 | ||||||||||||
Non-Interest Expenses: | ||||||||||||||||
Commissions and other employee compensation | 39,378 | 35,175 | 159,915 | 144,941 | ||||||||||||
Occupancy, equipment and computer service costs | 6,357 | 6,103 | 23,454 | 23,833 | ||||||||||||
Communications | 2,319 | 2,137 | 8,826 | 9,062 | ||||||||||||
Floor brokerage and clearing organization charges | 1,213 | 1,126 | 3,904 | 3,562 | ||||||||||||
Advertising and promotional | 678 | 753 | 2,586 | 3,010 | ||||||||||||
Other | 4,605 | 6,758 | 18,717 | 24,515 | ||||||||||||
Total non-interest expenses | 54,550 | 52,052 | 217,402 | 208,923 | ||||||||||||
Income from continuing operations before income tax expense | 10,913 | 8,190 | 56,213 | 44,021 | ||||||||||||
Income tax expense | 3,984 | 2,752 | 18,706 | 15,384 | ||||||||||||
Income from continuing operations | 6,929 | 5,438 | 37,507 | 28,637 | ||||||||||||
Discontinued operations: | ||||||||||||||||
Income from discontinued operations | 44 | 20 | 175 | 22,596 | ||||||||||||
Income tax expense | (14 | ) | (7 | ) | (55 | ) | (6,833 | ) | ||||||||
Minority interest | (5 | ) | (2 | ) | (18 | ) | (3,067 | ) | ||||||||
Income from discontinued operations | 25 | 11 | 102 | 12,696 | ||||||||||||
Income before cumulative effect of change in accounting principles | 6,954 | 5,449 | 37,609 | 41,333 | ||||||||||||
Cumulative effect of change in accounting principles, net of tax of $40 | — | — | — | 75 | ||||||||||||
Net income | 6,954 | 5,449 | 37,609 | 41,408 | ||||||||||||
Net income (loss) recognized in other comprehensive income | (570 | ) | (51 | ) | 192 | 1,087 | ||||||||||
Comprehensive income | $ | 6,384 | $ | 5,398 | $ | 37,801 | $ | 42,495 | ||||||||
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SWS Reports Fiscal 2007 and Fourth Quarter Results / 7
Three Months Ended June 29, 2007 | Three Months Ended June 30, 2006 | Twelve Ended June 29, 2007 | Twelve Ended June 30, 2006 | |||||||||
Earnings per share – basic | ||||||||||||
Income from continuing operations | $ | 0.25 | $ | 0.21 | $ | 1.39 | $ | 1.09 | ||||
Income from discontinued operations | — | — | — | 0.49 | ||||||||
Cumulative effect of change in accounting principles, net of tax | — | — | — | — | ||||||||
Net income | $ | 0.25 | $ | 0.21 | $ | 1.39 | $ | 1.58 | ||||
Weighted average shares outstanding – basic | 27,332,891 | 26,418,801 | 26,972,392 | 26,161,552 | ||||||||
Earnings per share – diluted | ||||||||||||
Income from continuing operations | $ | 0.25 | $ | 0.20 | $ | 1.37 | $ | 1.08 | ||||
Income from discontinued operations | — | — | 0.01 | 0.49 | ||||||||
Cumulative effect of change in accounting principles, net of tax | — | — | — | — | ||||||||
Net income | $ | 0.25 | $ | 0.20 | $ | 1.38 | $ | 1.57 | ||||
Weighted average shares outstanding – diluted | 27,650,866 | 26,754,236 | 27,284,218 | 26,420,404 | ||||||||
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CONTACT: Jim Bowman, Vice President – Corporate Communications, (214) 859-9335jbowman@swst.com