Exhibit 99.1
SWS Group, Inc. Reports Third Quarter Net income
at High End of Pre-Announced Range
DALLAS, May 5, 2009 – SWS Group, Inc. (NYSE: SWS) today reported net income of $4.0 million, or diluted earnings per share (EPS) of 15 cents, on net revenues of $94.7 million for the company’s third fiscal quarter ended March 27, 2009. On April 17, SWS said it anticipated EPS in the range of 12 cents to 15 cents. Net revenue is total revenue less interest expense.
Net income and EPS declined from the prior year’s third quarter when SWS earned $8.6 million, or diluted EPS of 32 cents. Net revenues increased $20.6 million over the $74.1 million reported a year ago.
In the first nine months of fiscal 2009, SWS recorded net revenues of $282.6 million, net income of $20.0 million and diluted EPS of 74 cents, compared with net revenues of $213.8 million, net income of $23.6 million and diluted EPS of 86 cents in the comparable period of the prior fiscal year.
“Considering the continuation of the extremely weak economy and volatile market conditions, the company reported reasonably good quarterly and year-to-date earnings,” said Donald W. Hultgren, president and chief executive officer of SWS Group. “Although difficult, the current operating environment is also beneficial because of the opportunities it offers SWS to prepare for long-term growth. We anticipate being able to add experienced professionals to our team at both the bank and brokerage over the next few quarters and position the company to take advantage of economic recovery when it occurs.”
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SWS Group Announces Third Quarter Results / 2
Third quarter fiscal 2009 net revenues increased by $20.6 million compared with net revenues for the third quarter of the prior fiscal year. The largest increases were in commissions, $19.1 million, and net gains on principal transactions, $9.4 million. The institutional segment, led by fixed income, recorded $12.5 million in increased commission revenues. The retail segment contributed $6.6 million to increased commissions, as the M.L. Stern division recorded $8.2 million in commission revenues partially offset by decreased commissions from SWS’ other retail operations. The improvement in net gains on principal transactions was primarily the result of volatility and increased customer activity in the fixed income market. The increases were partially offset by decreases in net interest revenues of $3.6 million and other revenues of $2.9 million. Net interest revenues declined $6.1 million on the company’s securities lending activities but higher net interest from the bank partially offset the decrease. The change in other revenues resulted from decreased insurance product sales and a decrease in other revenues at the bank.
For the first nine months of fiscal 2009, net revenues increased by $68.8 million over those for the comparable period of the prior fiscal year. Commissions increased $59.8 million, net interest increased $5.7 million, and net gains on principal transactions increased $16.2 million. The institutional segment, primarily the fixed income business, contributed $36.6 million in increased commissions. The retail segment contributed $23.3 million in increased commissions primarily as a result of the acquisition of M.L. Stern at the beginning of the last year’s fourth quarter. The increase in net interest resulted from increased spreads in the stock loan business and a 29 percent higher average loan balance at the bank. Market volatility and increased customer activity created opportunities in the fixed income business resulting in higher net gains on principal transactions.
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SWS Group Announces Third Quarter Results / 3
Revenue increases for both the three-month and nine-month periods were partially offset by significant decreases in other revenues.
Operating expenses increased $27.7 million for the third quarter of fiscal 2009 compared with results for the third quarter of the prior fiscal year. The largest increases were $17.1 million in commissions and other employee compensation, $2.1 million in occupancy, equipment and computer service costs, and $5.9 million in other expenses. Increased variable compensation in the institutional segment and the acquisition of M.L. Stern primarily accounted for the increase in commissions and other employee compensation. The acquisition of M.L. Stern was also the primary driver of increased occupancy, equipment and computer service costs. Other expenses rose principally because of a $5.1 million increase in the bank’s provision for loan losses in the quarter just ended.
Operating expenses for the nine-month period increased $73.3 million over those for the comparable period in the prior fiscal year. Commissions and other employee compensation increased $49.4 million, occupancy, equipment and computer service costs increased $5.0 million and other expenses increased $14.2 million. The acquisition of M.L. Stern accounted for most of the increase in commissions and other employee compensation with the remainder resulting from increased variable compensation in the institutional segment. The acquisition also added most of the increase in occupancy, equipment and computer service costs. The increase in other expenses resulted from the previously reported $5.4 million write-off related to counterparty exposure to Lehman Brothers, a $6.0 million increase in the provision for loan losses, and a $2.3 million increase in losses on the sale of real estate and increased real estate expenses.
The clearing segment recorded net revenues of $5.4 million and pre-tax income of $92,000 for the third quarter, a decline of $3.2 million in net revenues and $2.9 million in
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SWS Group Announces Third Quarter Results / 4
pre-tax income from results for the same quarter a year ago. Ticket volume was down substantially for the quarter compared with the same period a year ago, primarily as a result of decreased volume from day trading customers. Net interest earned by the clearing segment declined $1.5 million, or 61 percent, as a result of a 50 percent decline in margin balances and a 36 basis point drop in the spread earned on customer deposits. The number of correspondents was 200 versus 201 at the end of the third quarter a year ago. Third quarter operating expenses decreased $320,000. For the nine-month period, the clearing segment earned $4.2 million in pre-tax income with net revenues of $20.8 million.
The retail segment recorded net revenues of $25.9 million and pre-tax loss of $1.9 million for the third quarter, an increase of $6.7 million in net revenues and a decrease of $3.9 million in pre-tax income compared with results for the comparable quarter a year ago. The increase in net revenues was driven by $11.2 million in commissions, fees and other revenues from the acquisition of M.L. Stern. Retail net interest revenue declined substantially as a result of a reduced spread earned on customer deposits. Total retail customer assets stood at $10.3 billion at the end of the quarter versus $6.9 billion a year ago, reflecting the addition of M.L. Stern. Third quarter operating expenses increased $10.6 million over those for retail in the prior year’s third quarter. Commission expenses, the primary component of operating expenses for the retail segment, increased as the acquisition of M.L. Stern added $8.6 million in commission expenses and $3.6 million in other operating expenses. For the nine-month period, the retail segment earned $5.1 million in pre-tax income with net revenues of $86.8 million.
The institutional segment recorded net revenues of $47.1 million and pre-tax income of $16.0 million for the third quarter compared with $33.8 million in net revenue and $13.5 million in pre-tax earnings in the comparable quarter a year ago. Institutional
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SWS Group Announces Third Quarter Results / 5
commissions increased 79 percent over those for the third quarter of the prior year as volumes in both the taxable fixed income and municipal areas improved significantly. Investment banking fees declined because of the current economic environment and a scarcity of new municipal issues. Net gains on principal transactions increased $7.8 million, or 359 percent, as a result of increased market volatility and wider spreads in the secondary market. Institutional net interest revenue, generated primarily by the company’s securities lending activities, decreased $6.1 million due to a decrease in the spread earned on securities lending balances and a decline in the average balance. Market disruptions and regulatory limits on short sales caused average stock loan balances to fall to $1.8 billion. Third quarter operating expenses increased $10.9 million over those for the same period last fiscal year primarily because of increases in commissions and other expenses. For the nine-month period, the institutional segment earned $47.0 million in pre-tax income with net revenues of $136.1 million.
The banking segment recorded net revenues of $16.8 million and a pre-tax loss of $329,000 for the third quarter compared with net revenues of $13.9 million and pre-tax income of $4.8 million for the third quarter of the prior fiscal year. Net interest revenue increased to $16.8 million from $12.3 million a year earlier as a result of increased loan volume and an increase in the yield on interest earning assets. Operating expenses increased $8.0 million over those recorded for the prior year’s third quarter. The largest portion of the increase was due to an increase in the provision for loan losses of $5.1 million, an increase in compensation expense of $1.1 million, and additional expense for the cost of maintaining real estate and other foreclosed property. For the nine-month period, the banking segment earned $6.6 million in pre-tax income with net revenues of $46.7 million.
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SWS Group Announces Third Quarter Results / 6
Management noted that credit quality at the bank continues to be adversely affected by the current economic downturn. Net charge-offs for the third quarter of fiscal 2009 were $3.5 million compared with $410,000 in the second quarter of fiscal 2009 and $177,000 in the third quarter of fiscal 2008. The allowance for loan losses increased to $11.1 million or 0.99 percent of loans, up from 0.74 percent of loans in the third quarter of fiscal 2008. Charge-offs and provision expense are expected to continue at elevated levels for the next few quarters.
SWS Group, Inc. is a Dallas-based financial services company offering a broad range of securities, investment and banking 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) (Unaudited)
| | | | | | | | | | | | | | | | |
| | | Net Revenues
Three Months Ended | | | Pre-Tax Income (Loss)
Three Months Ended | |
| | | 3/27/2009 | | | 3/28/2008 | | | 3/27/2009 | | | 3/28/2008 | |
Clearing | | $ | 5,423 | | | $ | 8,666 | | | $ | 92 | | | $ | 3,015 | |
Retail | | | 25,854 | | | | 19,165 | | | | (1,906 | ) | | | 1,977 | |
Institutional | | | 47,053 | | | | 33,767 | | | | 15,950 | | | | 13,536 | |
Bank | | | 16,766 | | | | 13,874 | | | | (329 | ) | | | 4,800 | |
Other consolidated entities | | | (428 | ) | | | (1,400 | ) | | | (6,953 | ) | | | (9,376 | ) |
| | | | | | | | | | | | | | | | |
Consolidated | | $ | 94,668 | | | $ | 74,072 | | | $ | 6,854 | | | $ | 13,952 | |
| | | | | | | | | | | | | | | | |
FINANCIAL TABLES FOLLOW
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SWS Group Announces Third Quarter Results / 7
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 27, 2009 and June 27, 2008
(In thousands, except par values and share amounts)
| | | | | | | | |
| | | March 27, 2009
(Unaudited) | | | June 27, 2008 | |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 37,015 | | | $ | 39,628 | |
Assets segregated for regulatory purposes | | | 284,750 | | | | 322,575 | |
Receivable from brokers, dealers and clearing organizations | | | 1,793,070 | | | | 2,849,982 | |
Receivable from clients, net of allowances | | | 147,073 | | | | 286,945 | |
Loans held for sale | | | 298,143 | | | | 359,945 | |
Loans, net | | | 1,109,812 | | | | 925,758 | |
Securities owned, at market value | | | 113,710 | | | | 198,573 | |
Securities purchased under agreements to resell | | | 5,342 | | | | 9,862 | |
Goodwill | | | 7,552 | | | | 7,552 | |
Marketable equity securities available for sale | | | 2,952 | | | | 6,964 | |
Other assets | | | 121,252 | | | | 110,467 | |
| | | | | | | | |
Total assets | | $ | 3,920,671 | | | $ | 5,118,251 | |
| | | | | | | | |
| | |
| Liabilities and Stockholders’ Equity | | | | | | | | |
Short-term borrowings | | $ | 7,500 | | | $ | 86,800 | |
Payable to brokers, dealers and clearing organizations | | | 1,683,089 | | | | 2,794,377 | |
Payable to clients | | | 409,811 | | | | 556,029 | |
Deposits | | | 1,214,815 | | | | 1,071,973 | |
Securities sold under agreements to repurchase | | | 5,039 | | | | 6,342 | |
Securities sold, not yet purchased, at market value | | | 28,080 | | | | 26,511 | |
Drafts payable | | | 25,425 | | | | 19,657 | |
Advances from Federal Home Loan Bank | | | 142,569 | | | | 166,250 | |
Other liabilities | | | 69,405 | | | | 67,306 | |
| | | | | | | | |
Total liabilities | | | 3,585,733 | | | | 4,795,245 | |
| | |
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 28,302,822 and outstanding 27,296,992 shares at March 27, 2009; issued 28,269,134 and outstanding 27,195,609 shares at June 27, 2008 | | | 2,830 | | | | 2,827 | |
Additional paid-in capital | | | 270,506 | | | | 269,360 | |
Retained earnings | | | 74,763 | | | | 62,100 | |
Accumulated other comprehensive income – unrealized holding loss, net of tax | | | (3,800 | ) | | | (1,194 | ) |
Deferred compensation, net | | | 2,408 | | | | 1,994 | |
Treasury stock (1,005,830 shares at March 27, 2009 and 1,073,525 shares at June 27, 2008, at cost) | | | (11,769 | ) | | | (12,081 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 334,938 | | | | 323,006 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 3,920,671 | | | $ | 5,118,251 | |
| | | | | | | | |
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SWS Group Announces Third Quarter Results / 8
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the three and nine months ended March 27, 2009 and March 28, 2008
(In thousands, except per share and share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | | Three Months
Ended
March 27,
2009 | | | Three Months
Ended
March 28,
2008 | | | Nine Months
Ended
March 27,
2009 | | | Nine Months
Ended
March 28,
2008 | |
Revenues: | | | | | | | | | | | | | | | | |
Net revenues from clearing operations | | $ | 2,401 | | | $ | 3,544 | | | $ | 8,774 | | | $ | 10,632 | |
Commissions | | | 46,360 | | | | 27,305 | | | | 135,414 | | | | 75,578 | |
Interest | | | 43,260 | | | | 73,776 | | | | 163,339 | | | | 212,630 | |
Investment banking, advisory and administrative fees | | | 7,374 | | | | 7,564 | | | | 27,728 | | | | 26,424 | |
Net gains on principal transactions | | | 11,466 | | | | 2,056 | | | | 22,128 | | | | 5,933 | |
Other | | | 3,230 | | | | 6,126 | | | | 6,150 | | | | 18,557 | |
| | | | | | | | | | | | | | | | |
Total revenue | | | 114,091 | | | | 120,371 | | | | 363,533 | | | | 349,754 | |
| | | | |
Interest expense | | | 19,423 | | | | 46,299 | | | | 80,921 | | | | 135,912 | |
| | | | | | | | | | | | | | | | |
Net revenues | | | 94,668 | | | | 74,072 | | | | 282,612 | | | | 213,842 | |
| | | | | | | | | | | | | | | | |
| | | | |
Non-Interest Expenses: | | | | | | | | | | | | | | | | |
Commissions and other employee compensation | | | 61,571 | | | | 44,510 | | | | 177,423 | | | | 128,019 | |
Occupancy, equipment and computer service costs | | | 8,574 | | | | 6,469 | | | | 24,346 | | | | 19,367 | |
Communications | | | 3,366 | | | | 2,493 | | | | 9,835 | | | | 7,203 | |
Floor brokerage and clearing organization charges | | | 751 | | | | (790 | ) | | | 2,665 | | | | 1,226 | |
Advertising and promotional | | | 1,175 | | | | 916 | | | | 3,115 | | | | 2,431 | |
Other | | | 12,377 | | | | 6,522 | | | | 32,049 | | | | 17,851 | |
| | | | | | | | | | | | | | | | |
Total non-interest expenses | | | 87,814 | | | | 60,120 | | | | 249,433 | | | | 176,097 | |
| | | | | | | | | | | | | | | | |
| | | | |
Income from continuing operations before income tax expense | | | 6,854 | | | | 13,952 | | | | 33,179 | | | | 37,745 | |
Income tax expense | | | 2,900 | | | | 5,360 | | | | 13,156 | | | | 14,201 | |
| | | | | | | | | | | | | | | | |
Income from continuing operations | | | 3,954 | | | | 8,592 | | | | 20,023 | | | | 23,544 | |
Discontinued operations: | | | | | | | | | | | | | | | | |
Income from discontinued operations | | | — | | | | — | | | | — | | | | 29 | |
Income tax expense | | | — | | | | — | | | | — | | | | (9 | ) |
Minority interest | | | — | | | | — | | | | — | | | | (3 | ) |
| | | | | | | | | | | | | | | | |
Income from discontinued operations | | | — | | | | — | | | | — | | | | 17 | |
| | | | | | | | | | | | | | | | |
Net income | | | 3,954 | | | | 8,592 | | | | 20,023 | | | | 23,561 | |
Net loss recognized in other comprehensive income | | | (627 | ) | | | (1,785 | ) | | | (2,606 | ) | | | (2,117 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive income | | $ | 3,327 | | | $ | 6,807 | | | $ | 17,417 | | | $ | 21,444 | |
| | | | | | | | | | | | | | | | |
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SWS Group Announces Third Quarter Results / 9
| | | | | | | | | | | | |
| | | Three Months
Ended
March 27,
2009 | | Three Months
Ended
March 28,
2008 | | Nine Months
Ended
March 27,
2009 | | Nine Months
Ended
March 28,
2008 |
Earnings per share – basic | | | | | | | | | | | | |
Income from continuing operations | | $ | 0.15 | | $ | 0.32 | | $ | 0.74 | | $ | 0.86 |
Income from discontinued operations | | | — | | | — | | | — | | | — |
| | | | | | | | | | | | |
Net income | | $ | 0.15 | | $ | 0.32 | | $ | 0.74 | | $ | 0.86 |
| | | | | | | | | | | | |
Weighted average shares outstanding – basic | | | 27,112,560 | | | 27,098,122 | | | 27,081,384 | | | 27,334,584 |
| | | | | | | | | | | | |
| | | | |
Earnings per share – diluted | | | | | | | | | | | | |
Income from continuing operations | | $ | 0.15 | | $ | 0.32 | | $ | 0.74 | | $ | 0.86 |
Income from discontinued operations | | | — | | | — | | | — | | | — |
| | | | | | | | | | | | |
Net income | | $ | 0.15 | | $ | 0.32 | | $ | 0.74 | | $ | 0.86 |
| | | | | | | | | | | | |
Weighted average shares outstanding – diluted | | | 27,242,522 | | | 27,184,943 | | | 27,218,875 | | | 27,472,919 |
| | | | | | | | | | | | |
| | |
| CONTACT: | | Jim Bowman, Vice President Corporate Communications 1201 Elm Street Suite 3500 Dallas, Texas 75270 (214) 859-9335 jbowman@swst.com |
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