SWS (SWS) DEFA14A Additional proxy soliciting materials

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