United States
Securities and Exchange Commission
Washington, D.C. 20549
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![]() $100 million Capital Investment into SWS Group by Hilltop Holdings Inc. & Oak Hill Capital Partners April 12, 2011 |
![]() Forward-Looking Statements 2 This presentation 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, the ability of the bank’s borrowers to meet their contractual obligations, the value of the collateral securing the bank’s loans, demand for housing, general economic conditions, especially in Texas and New Mexico, changes in the commercial lending and regulatory environments, the ability to meet regulatory capital requirements and cease and desist order terms 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. |
![]() Investment Best Positions SWS for the Future 3 |
![]() Background on SWS & Transaction |
![]() SWS Group Overview (1) 5 SWS Group (NYSE:SWS) is a full service securities and banking firm Provides broad range of investment, commercial banking and related financial services from its headquarters in Dallas and 59 offices across 15 states Clients include individuals, corporations, institutional investors, broker-dealers, governmental entities, and other financial intermediaries Founded in 1972; publicly traded since 1991 Over 1,100 employees nationwide, with total assets of $4.3 billion Retail 498 Reps $12.6 billion in customer assets Clearing 684,000 tickets $14.2 billion under custody Broker: 83% of Q2 Revenues Bank: 17% of Q2 Revenues Institutional Multiple units include sales and trading, investment banking, stock lending 52% of firm revenue $1.5 billion in assets $1.0 billion net loans HFI ~80% Real Estate $1.3 billion of deposits 85% from brokerage customers (1) Statistics shown are as of December 31, 2010 or for second fiscal quarter ended December 31, 2010. |
![]() Recent Timeline 6 |
![]() Reasons for Raising Capital – Address Bank Issues Bank’s capital base is expected to continue to suffer from deterioration in loan portfolio Large concentration of residential and commercial real estate with material diminution in collateral values $57.5 million of problem assets sold (1) , but classified assets & NPAs remain at unacceptably high levels Bank is operating under C&D with the OTS MOU and C&D resulted from Bank’s credit losses and excessive level of classified assets Bank must maintain Tier 1 Capital Ratio > 8% and Total Risk-Based Capital Ratio > 12% continuing through any further credit deterioration Heightened losses and regulatory requirements have impacted operations and profitability Due to loan losses and write-offs, Bank had pre-tax loss of $68 million over last twelve months Proactively shrunk balance sheet to bolster capital ratios, negatively impacting earnings power Under Dodd-Frank Act, primary regulators will be the OCC and Federal Reserve 7 (1) Problem assets sold through 12/31/10; sale is still ongoing. $18 $11 ($18) ($68) -150% -120% -90% -60% -30% 0% 30% 60% -$75MM -$60MM -$45MM -$30MM -$15MM $0MM $15MM $30MM FY 2008 FY 2009 FY 2010 LTM 12/10 Bank Performance Bank Pre-Tax Income (Loss) % Change in Assets |
![]() 8 Reasons for Raising Capital – Alleviate Drag on SWS Bank’s credit & regulatory issues are a drag on Broker and pose risks to SWS Broker transferred $30.5 million of its capital to Bank during June-Sept. 2010, limiting Broker’s profits & opportunities Lack of resolution for Bank’s problems have negatively affected Broker’s operations and threatened relationships with customers, counterparties and employees SWS Group and Broker are both considered a “source of strength”; must continue to support Bank Management and SWS’ Board believe new capital is required to address Bank issues and allow Broker to operate and grow (1) Broker includes clearing, retail and institutional business segments. $69 $73 $48 $52 $18 $11 ($18) ($68) $49 $38 ($5) ($49) -$75MM -$50MM -$25MM $0MM $25MM $50MM $75MM FY 2008 FY 2009 FY 2010 LTM 12/10 Pre-Tax Income (Loss) by Segment (1) Broker Bank SWS Group, Inc. |
![]() Extensive Process Leading to Proposed Transaction New Executive Team has worked closely with Board since Fall 2010 Extensive dialogue with OTS, investment bankers, SWS stockholders and potential capital providers Analyzed and explored significant number of public and private capital alternatives Special Finance Committee has evaluated multiple courses of action since November 2010 Public offering of convertible notes and/or other equity securities Private financing options with multiple potential investment partners Evaluated a range of capital raising alternatives, potential offering sizes and uses of proceeds Extensive discussions & diligence work with Oak Hill Capital and Hilltop separately Discussions began with Hilltop in Fall 2010; terminated to pursue canceled public offering Oak Hill Capital submitted IOI in January 2011 to lead $100 million investment in SWS Group Hilltop joined as second investor following SWS inquiry into its continued interest 9 |
![]() Extensive Due Diligence Conducted Hilltop, Oak Hill Capital & their advisors performed two phases of credit reviews Phase One: Initial on-site credit diligence (4 week process) Based on 9/30/10 loan trial balance & REO 261 loans comprising $653 million of loan commitments (51% of loan portfolio (1) ) Average loan size reviewed: $2.5 million Utilizing Bank loan files, full re-underwriting and review of Bank’s risk weighting Phase Two: Leveraged work done in Phase One for deep dive (5 week process) Based on 1/31/11 loan trial balance & REO 373 loans comprising $677 million of loan commitments (60% of loan portfolio (1) ) Deep penetration in each loan segment (1) : 50% of A&D, 66% of Commercial Real Estate, 93% of Multifamily, 74% of C&I, 21% of SBA, 23% of Residential and 67% of REO Included virtually all borrower relationships > $2.0 million, 130 relationships reviewed Reviewed complete loan files, appraisals, rent rolls and financial statements, as well as visited many collateral properties Extensive due diligence also performed on all Broker units over same period 10 (1) Based on outstanding loan commitments. |
![]() Summary of Investment Terms $100 million capital infusion into SWS by Hilltop and Oak Hill Capital In return for capital infusion, SWS will issue to Hilltop and Oak Hill Capital: $100 million of five year, 8% unsecured senior notes 17.4 million, 5-year warrants exercisable at $5.75 per share • 8.7 million warrants issued to each investor (~17% pro forma ownership each) Hilltop and Oak Hill Capital to each receive one Board seat and Observer rights Each board seat maintained with ownership in SWS above 9.9% Observer right for each maintained with ownership in SWS above 4.9% $80 million of proceeds to be contributed to Bank, with remaining $20 million held initially at SWS Group, Inc. (holding company) Subject to stockholder and regulatory approvals 11 |
![]() Transaction Rationale |
![]() Provides Capital Solution for Bank New capital allows Bank to address asset quality issues and adhere to C&D’s capital requirements while not further shrinking Bank’s profitable segments (1) Texas Ratio = Total non performing assets / (Bank capital plus ALLL); Pro-forma ratio assumes $80 MM capital transfer to the Bank (2) Classified Asset Ratio = Total classified assets / (Bank capital plus ALLL); Pro-forma ratio assumes $80 MM capital transfer to the Bank (3) Assumes $80 MM of capital allocated to the Bank with proceeds being risk-weighted at 20.0% 13 Tier 1 (Core) Capital 8.00% 9.43% 14.04% Total Risk-Based Capital Ratio 12.00% 14.04% 20.33% C&D Pro-Forma Bank Capital Ratios Requirement 12/31/10 12/31/10 (3) Bank Asset Statistics 12/31/09 12/31/10 Pro-Forma 12/31/10 (3) Classified Assets ($ millions) $93 $273 $273 Non-performing assets ($ millions) 65 103 103 Texas Ratio (1) 34.8% 51.2% 36.3% Classified Asset Ratio (2) 51.3% 140.0% 99.3% |
![]() New Capital Addresses Bank Regulatory Concerns Bank entered into C&D with OTS on February 2011, requiring it to: Maintain Tier 1 (Core) Capital Ratio > 8% and Total Risk-Based Capital Ratio > 12% Implement and adhere to classified asset reduction plan Engage third-party to review loan portfolios that were not classified as substandard Conduct management study Not pay any dividends Investment enables Bank to proactively satisfy C&D requirements Provides sufficient capital to sustain losses and maintain C&D’s required capital ratios Greater flexibility in reducing classified and non-performing loans Bank will continue to work diligently towards satisfying all regulatory requirements and exiting C&D Proactively addressing Bank’s regulatory issues allows SWS to move forward #1 investor concern for past 12 months, depressing stock’s valuation Expertise and experience of investors’ representatives additive to Board 14 |
![]() Supports Continued Growth at Profitable Broker Non-bank profit growth remains strong $18 million in pre-tax earnings over the last twelve months and $70 million since Jan 2008 (1) Broker excess net capital of $115 million at 12/31/2010 Capital infusion alleviates future “capital call” on Broker Critical for Broker to have >$100 million excess net capital for transactions with counterparties As “sources of strength”, potential for further capital transfers to Bank has necessitated above- desired liquidity at Broker Cash coupon payments less than SWS’ previous common dividend Broker already was funding entire dividend for past several years Transaction could also facilitate additional investments in Broker: Recruiting additional retail brokers Increased capital commitments in institutional businesses 15 (1) Represents consolidated pre-tax earnings less those attributable to the Bank segment for periods ended December 31, 2010. |
![]() Closely Aligns SWS Shareholders with Two Highly Regarded Investors Headquartered in Dallas, TX Publicly-traded holding company seeking strategic opportunities $600 million of freely-usable cash to invest Through wholly-owned subsidiary (NLASCO, Inc.), operates property and casualty insurance company Gerald J. Ford is Chairman Hilltop Holdings Inc. (NYSE: HTH) Headquartered in New York, NY Successor firm (established in 1999) to Robert M. Bass’s family office, which was first formed in 1986 Assets under management ~ $8.2 billion + Oak Hill Capital targets opportunities to partner with exceptional entrepreneurs, management teams and corporations who share Oak Hill Capital’s vision for value creation and philosophy of aligning interests Oak Hill Capital has completed over 60 transactions since mid-1980s Oak Hill Capital Partners 16 |
![]() Proposed New SWS Group Directors Gerald J. Ford Chairman of the Board of Hilltop since August 2007; Director since June 2005 Banking and financial institutions entrepreneur who has purchased and managed over 50 depository institutions and financial services companies in his more than 35-year career Acquired a majority stake in Pacific Capital Bancorp in August 2010 through Ford Financial Fund, L.P. Served as Chairman of the Board and CEO of Golden State Bancorp Inc. and its predecessors from 1994-2002 Holds B.A. in Economics and J.D. from Southern Methodist University, where he currently serves on the Board of Trustees J. Taylor Crandall Managing Partner of Oak Hill Capital; affiliated with Oak Hill Capital since 1986 Over 25 year relationship with the Bass organization Previously Vice President with First National Bank of Boston, where he managed a leveraged buyout group and the bank's Dallas energy office Holds B.A. (magna cum laude) from Bowdoin College, where he has served on the Board of Overseers; also received an honorary doctorate in humane letters from Bowdoin in 2010 17 |
![]() Superior Choice vs. Other Capital Raising Alternatives 18 |
![]() Attractive Pricing vs. Recent SWS Share Prices Warrant Strike Price $5.75 3/16/11 Closing Price $4.93 16.6% 5 Day Average Price (1) 5.07 13.4 10 Day Average Price (1) 5.24 9.7 3 Month Average Price (1) 5.13 12.1 12/8/10 Closing Price (2) 3.91 47.1 SWS Strike Price Pricing Comparison Price Premium (1) Prices represent the volume weighted average prices over the period ended 3/16/11, the last closing price before details of unsolicited proposal were made public. (2) Closing price on 12/8/10, the date on which SWS cancelled its planned $95 million convertible debt public offering. 19 |
![]() Removes Obstacles to Creating Shareholder Value Addresses capital and regulatory uncertainty regarding Bank Provides capital to address asset quality while adhering to requirements of C&D Provides flexibility in maximizing value of problem assets Eliminates uncertainty impacting SWS and its stock Opportunity for fair valuation in stock market for Broker Quantifies and completes already anticipated dilutive event Opens door for Broker growth Provides financial stability for firm, its employees and trading partners Alleviates uncertainty and concerns for both prospective recruits and clients Allows management team to focus on addressing new, profitable growth opportunities Deepens financial expertise of the Board 20 |
![]() Investment Best Positions SWS for the Future 21 |
![]() Shareholder Approval 22 The Board of Directors of SWS Group unanimously recommends a vote FOR the Investment |