Exhibit 99.1
SWS Announces Fourth Quarter and Fiscal 2010 Results
DALLAS, August 30, 2010 – SWS Group, Inc. (NYSE: SWS) today reported a net loss of $305,000 for its fiscal 2010 fourth quarter, or 1 cent per diluted share, on net revenues of $89.3 million, compared with net income of $3.6 million, or diluted earnings per share (EPS) of 13 cents, on net revenues of $99.0 million in the fourth quarter of fiscal 2009.
For the 2010 fiscal year, the company reported a net loss of $2.9 million, or 10 cents per diluted share, on net revenues of $367.0 million, compared to net income of $23.6 million, or diluted EPS of 86 cents, on net revenues of $381.6 million for fiscal 2009.
“Our brokerage segments performed well and all showed improved results from the third quarter in spite of very difficult economic conditions,” said James H. Ross, chief executive officer of SWS Group, Inc. “Our banking segment, while significantly improved from the third quarter, continued to address declines in commercial real estate values.”
Net revenues declined $9.7 million in the fourth quarter of fiscal 2010 from the fourth quarter of fiscal 2009 to $89.3 million primarily driven by lower commissions and trading profits in the taxable fixed income business unit.
Operating expenses were down $4.2 million in the fourth quarter, despite a $5.8 million increase in the banking segment’s loan loss provision. Variable compensation expense was the primary driver of the operating expense reduction.
Net revenues were down $14.7 million in fiscal 2010 from fiscal 2009, driven in large part by a $21.5 million decrease in commissions and a $7.0 million decline in net interest. The decrease in commission revenue was primarily due to lower taxable fixed income commissions in the institutional segment as a result of tighter spreads and reduced market volatility. The decrease in net interest resulted from lower spreads in
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the institutional segment’s securities lending business and reduced investment in tax-exempt auction rate bonds in the municipal business.
The decrease in net revenue in fiscal 2010 versus fiscal 2009 was partially offset by a $6.5 million increase in net gains on principal transactions and an $8.9 million increase in other revenue. Net gains on principal transactions increased primarily due to an increase in the number of financings and higher retail municipal sales trading volume. The increase in other revenue was primarily due to a $2.7 million increase in insurance product sales, a $3.5 million increase in the value of deferred compensation plan assets, and a $4.0 million increase related to a limited partnership venture capital fund—which posted a $1.3 million gain in fiscal 2010 compared to a $2.7 million loss in fiscal 2009.
Operating expenses for fiscal 2010 increased $28.3 million over the previous year to $371.5 million. The largest factor in the increase was a $45.1 million loan loss provision in the banking segment, representing a $31.8 million increase from fiscal 2009. The elevated loan loss provision was driven by market conditions in Texas and a subsequent deterioration in the bank’s commercial real estate loan portfolio.
The increase in the loan loss provision and a $4.8 million increase in other expenses in fiscal 2010 were partially offset by a $9.6 million decrease in commissions and other employee compensation expense, primarily in the institutional segment, as a result of lower revenues.
Banking Segment
The bank’s net revenues for the fiscal 2010 fourth quarter were $20.6 million compared to $20.0 million for the fourth quarter of last year. The $10.7 million loan loss provision resulted in a $3.6 million pretax loss for the fourth quarter of fiscal 2010, as compared to pretax income of $4.7 million in the same period of the prior fiscal year.
The bank’s net revenue rose 15 percent to $76.4 million in fiscal 2010 from $66.7 million in fiscal 2009, while the segment reported a pretax loss of $17.8 million for the 2010 fiscal year. Net interest revenue increased $10.9 million, primarily due to an 8 percent increase in loan volume over the previous fiscal year and a 10 basis point increase in the net yield. The bank’s operating expenses increased 70 percent to $94.2 million in fiscal 2010 from $55.4 million in fiscal 2009, led by the $31.8 million loan loss provision increase.
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The total loan loss provision for fiscal 2010 was $45.1 million, bringing the bank’s loan loss allowance to $35.1 million or 2.96 percent of loans held for investment, at June 30, 2010. Non-performing assets at the bank were 5.26 percent of total assets, or $93.7 million, at June 30, 2010, compared to 3.6 percent of total assets, or $56.1 million, at June 30, 2009.
Subsequent to the end of the 2010 fiscal year, the bank entered into an informal agreement with the Office of Thrift Supervision regarding the bank’s operations in the coming months. The agreement provides, among other things, that the bank must maintain a Tier 1 core capital ratio of 8 percent and a total risk-based capital ratio of 12 percent, adopt and execute a plan to reduce classified assets, and limit certain real estate lending until the bank’s concentration in real estate lending is reduced. Management believes it has taken appropriate actions to meet the terms of the agreement.
Clearing Segment
Net revenues from the clearing segment were $5.7 million in the fiscal 2010 fourth quarter, down slightly from last year’s fourth quarter. Pretax income of $592,000 was down 40 percent from the fourth quarter of fiscal 2009, primarily due to an increase in legal expenses during the quarter.
Net revenues from the clearing segment were $21.0 million in fiscal 2010, compared to $26.6 million in the prior fiscal year. Pretax income fell from $5.2 million in fiscal 2009 to a pretax loss of $5.3 million in fiscal 2010. While the number of tickets processed fell substantially from the prior year, revenue per ticket in fiscal 2010 was $4.46, compared to $1.23 for fiscal 2009. Net interest revenue in the clearing segment was up 9 percent as compared to fiscal 2009, driven by higher spreads earned on customer deposits. Other revenue, made up primarily of fees from money market funds, was down $5.1 million for fiscal 2010 from fiscal 2009. This decrease was primarily due to a reduction in short-term interest rates. Operating expenses in the segment were up $5.0 million in fiscal 2010 over fiscal 2009, due in large part to a $6.3 million loss incurred on a correspondent’s short sale of securities in the first quarter of fiscal 2010. The increase in operating expenses was partially offset by decreases in information technology expenses, as well as commissions and other employee compensation.
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Retail Segment
The retail segment’s increase in net revenues for the fourth quarter of fiscal 2010, combined with cost savings from the integration of the company’s California operations, led to an $891,000 pretax profit versus a $2.1 million loss in the fourth quarter of fiscal 2009.
Net revenues in the retail segment increased 3 percent to $110.6 million in fiscal 2010 from $107.5 million in fiscal 2009, while pretax income improved to $219,000 from a $2.4 million loss in the prior fiscal year. A $4.5 million increase in commission revenue and a $2.7 million increase in insurance product sales led the increase in net revenues. Advisory fees decreased by $5.5 million, primarily due to the closing of Tower Asset Management, LLC on June 30, 2009. Total customer assets were $12.6 billion at June 25, 2010, compared to $11.5 billion at June 26, 2009. Assets under management were $517.0 million at June 25, 2010, compared to $419.0 million at June 26, 2009, excluding Tower Asset Management, LLC. Net interest revenue for fiscal 2010 increased 28 percent over fiscal 2009 due to an increase in the spread earned on customer deposits. Operating expenses in the retail segment increased by less than 1 percent over the prior fiscal year, primarily due to higher commissions and other employee compensation expense.
Institutional Segment
While down from the results posted in the fourth quarter of fiscal 2009, the institutional segment finished fiscal 2010 strong with net revenue of $35.8 million and pretax income of $11.4 million.
Net revenues from the institutional segment in fiscal 2010 were $158.0 million, and pretax income totaled $53.2 million. Net revenues decreased 16 percent and pretax income fell 24 percent from fiscal 2009’s record high of $188.0 million and $69.7 million, respectively. Tighter spreads and lower market volatility in the last nine months of fiscal 2010 led to decreased commissions in the taxable fixed income business as compared to fiscal 2009. A $7.7 million increase in investment banking fees partially offset the decrease in commissions. Net gains from principal transactions rose 20 percent in fiscal 2010 over fiscal 2009 to $41.6 million, largely due to a larger number of financings in the municipal business and an increase in municipal sales trading volume. The spread earned on securities lending declined 64 basis points in fiscal 2010 as compared to fiscal 2009 due to continuing low interest rates, which contributed to a 54 percent decrease in net interest revenue for fiscal 2010 as compared to fiscal 2009. Operating expenses in the
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institutional segment were down 11 percent in fiscal 2010 as compared to fiscal 2009. Factors contributing to the lower expenses included a $5.4 million write-off of a counterparty exposure included in the prior fiscal year, as well as a decrease in commission and other employee compensation.
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 our 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 our 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 our Annual Report on Form 10-K and in our other reports filed with and available from the Securities and Exchange Commission.
FINANCIAL STATEMENTS FOLLOW
Segment Results
(In thousands)
| Fiscal 2010 | Fiscal 2009 | 4th Quarter 2010 | 4th Quarter 2009 | |||||||||||||||||||||||||||
| Pretax | Pretax | Pretax | Pretax | |||||||||||||||||||||||||||
| Income | Income | Income | Income | |||||||||||||||||||||||||||
| Net Revenue | (Loss) | Net Revenue | (Loss) | Net Revenue | (Loss) | Net Revenue | (Loss) | |||||||||||||||||||||||
Clearing | $ | 21,041 | $ | (5,305 | ) | $ | 26,565 | $ | 5,233 | $ | 5,694 | $ | 592 | $ | 5,793 | $ | 985 | |||||||||||||
Retail | 110,578 | 219 | 107,518 | (2,425 | ) | 27,951 | 891 | 26,520 | (2,144 | ) | ||||||||||||||||||||
Institutional | 157,977 | 53,222 | 187,970 | 69,714 | 35,841 | 11,438 | 46,133 | 17,335 | ||||||||||||||||||||||
Banking | 76,409 | (17,826 | ) | 66,710 | 11,281 | 20,621 | (3,644 | ) | 20,030 | 4,703 | ||||||||||||||||||||
Other consolidated entities | 966 | (34,862 | ) | (7,142 | ) | (45,374 | ) | (767 | ) | (9,462 | ) | 533 | (15,629 | ) | ||||||||||||||||
Consolidated | $ | 366,971 | $ | (4,552 | ) | $ | 381,621 | $ | 38,429 | $ | 89,340 | $ | (185 | ) | $ | 99,009 | $ | 5,250 | ||||||||||||
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SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 25, 2010 and June 26, 2009
(In thousands, except par values and share amounts)
| June 25, 2010 | June 26, 2009 | |||||||
| Assets | ||||||||
Cash and cash equivalents | $ | 27,190 | $ | 96,253 | ||||
Assets segregated for regulatory purposes | 284,827 | 313,153 | ||||||
Receivable from brokers, dealers and clearing organizations | 1,889,400 | 1,892,739 | ||||||
Receivable from clients, net of allowances | 216,574 | 158,032 | ||||||
Loans held for sale | 424,055 | 262,780 | ||||||
Loans, net | 1,154,065 | 1,138,602 | ||||||
Securities owned, at market value | 245,587 | 175,030 | ||||||
Securities held to maturity | 87,140 | 6,237 | ||||||
Securities purchased under agreements to resell | 30,507 | 21,622 | ||||||
Goodwill | 7,552 | 7,552 | ||||||
Securities available for sale | 1,388 | 4,094 | ||||||
Other assets | 162,406 | 122,945 | ||||||
Total assets | $ | 4,530,691 | $ | 4,199,039 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
Short-term borrowings | $ | 110,000 | $ | 10,000 | ||||
Payable to brokers, dealers and clearing organizations | 1,819,995 | 1,853,544 | ||||||
Payable to clients | 420,672 | 426,300 | ||||||
Deposits | 1,488,425 | 1,292,366 | ||||||
Securities sold under agreements to repurchase | 12,389 | 4,462 | ||||||
Securities sold, not yet purchased, at market value | 67,594 | 53,236 | ||||||
Drafts payable | 27,346 | 27,457 | ||||||
Advances from Federal Home Loan Bank | 132,821 | 117,492 | ||||||
Other liabilities | 68,055 | 73,825 | ||||||
Total liabilities | 4,147,297 | 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 33,312,140 and outstanding 32,342,190 shares at June 25, 2010; issued 28,309,139 and outstanding 27,262,923 shares at June 26, 2009 | 3,331 | 2,831 | ||||||
Additional paid-in capital | 326,462 | 271,131 | ||||||
Retained earnings | 61,893 | 75,918 | ||||||
Accumulated other comprehensive income – unrealized holding gain, net of tax | 304 | 180 | ||||||
Deferred compensation, net | 3,176 | 2,639 | ||||||
Treasury stock (969,950 shares at June 25, 2010 and 1,046,216 shares at June 26, 2009, at cost) | (11,772 | ) | (12,342 | ) | ||||
Total stockholders’ equity | 383,394 | 340,357 | ||||||
Total liabilities and stockholders’ equity | $ | 4,530,691 | $ | 4,199,039 | ||||
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SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
For the three and twelve months ended June 25, 2010 and June 26, 2009
(In thousands, except per share and share amounts)
| Three Months Ended June 25, 2010 | Three Months Ended June 26, 2009 | Twelve Months Ended June 25, 2010 | Twelve Months Ended June 26, 2009 | |||||||||||
Revenues: | ||||||||||||||
Net revenues from clearing operations | $ | 2,752 | $ | 2,767 | $ | 10,584 | $ | 11,541 | ||||||
Commissions | 37,481 | 43,589 | 157,460 | 179,003 | ||||||||||
Interest | 37,666 | 48,534 | 156,063 | 211,873 | ||||||||||
Investment banking, advisory and administrative fees | 9,650 | 8,654 | 35,833 | 36,382 | ||||||||||
Net gains on principal transactions | 9,110 | 12,703 | 41,361 | 34,831 | ||||||||||
Other | 3,909 | 5,897 | 20,926 | 12,047 | ||||||||||
Total revenue | 100,568 | 122,144 | 422,227 | 485,677 | ||||||||||
Interest expense | 11,228 | 23,135 | 55,256 | 104,056 | ||||||||||
Net revenues | 89,340 | 99,009 | 366,971 | 381,621 | ||||||||||
Non-Interest Expenses: | ||||||||||||||
Commissions and other employee compensation | 54,551 | 61,580 | 229,411 | 239,003 | ||||||||||
Occupancy, equipment and computer service costs | 8,581 | 8,648 | 34,277 | 32,994 | ||||||||||
Communications | 3,321 | 3,289 | 13,246 | 13,124 | ||||||||||
Floor brokerage and clearing organization charges | 1,021 | 832 | 3,960 | 3,497 | ||||||||||
Advertising and promotional | 976 | 1,432 | 4,032 | 4,547 | ||||||||||
Provision for loan loss | 10,698 | 4,880 | 45,118 | 13,323 | ||||||||||
Other | 10,377 | 13,098 | 41,479 | 36,704 | ||||||||||
Total non-interest expenses | 89,525 | 93,759 | 371,523 | 343,192 | ||||||||||
Income (loss) before income tax expense | (185 | ) | 5,250 | (4,552 | ) | 38,429 | ||||||||
Income tax expense (benefit) | 120 | 1,642 | (1,659 | ) | 14,798 | |||||||||
Net income (loss) | (305 | ) | 3,608 | (2,893 | ) | 23,631 | ||||||||
Net gain recognized in other comprehensive income | 146 | 3,980 | 124 | 1,374 | ||||||||||
Comprehensive income (loss) | $ | (159 | ) | $ | 7,588 | $ | (2,769 | ) | $ | 25,005 | ||||
Earnings per share – basic | ||||||||||||||
Net income (loss) | $ | (0.01 | ) | $ | 0.13 | $ | (0.10 | ) | $ | 0.86 | ||||
Weighted average shares outstanding – basic | 32,531,846 | 27,434,907 | 30,252,732 | 27,429,382 | ||||||||||
Earnings per share – diluted | ||||||||||||||
Net income (loss) | $ | (0.01 | ) | $ | 0.13 | $ | (0.10 | ) | $ | 0.86 | ||||
Weighted average shares outstanding – diluted | 32,531,846 | 27,490,640 | 30,252,732 | 27,508,585 | ||||||||||
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CONTACT: Ben Brooks, Corporate Communications, 214.859.6351,bdbrooks@swst.com