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Securities and Exchange Commission
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Third Quarter Fiscal 2011 SWS Group Conference Call May 4, 2011 1 |
Forward-Looking Statements 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. 2 |
Presenters and Participants Presenters: James H. Ross President &CEO SWS Group, Inc. Stacy M. Hodges Executive VP & CFO SWS Group, Inc. John L. Holt, Jr. Chairman, President & CEO Southwest Securities, FSB 3 |
Agenda Opening Remarks Bank Report Chief Financial Officer’s Report 4 |
Opening Remarks Hilltop Holdings Inc. and Oak Hill Capital Partners to invest $100 million in aggregate Filed definitive proxy April 8, 2011 Bank asset quality still a major concern Regulatory Agreement impacting brokerage operations Broker (83% of Q3 Revenues) Bank (17% of Q3 Revenues) Retail 478 Reps $12.3 billion in customer assets Institutional 57 Reps $2.2 billion stock loan book $5.1 billion municipal new issue volume Clearing 628,000 tickets $14.5 billion under custody 4.16% net interest margin $1.4 billion in assets 14.5% total risk-based capital and 9.6% core capital $105 million NPAs and $255 million Classified Assets 5 |
Summary of Investment Terms $100 million proposed capital infusion into SWS by Hilltop and Oak Hill Capital In return for capital infusion, SWS would 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 – shareholder meeting set for May 18, 2011 Board of Directors unanimously approved the proposed transaction 6 |
Provides capital solution for Bank Addresses Bank regulatory concerns Supports continued growth at profitable Broker Closely aligns SWS shareholders with two highly regarded investors Hilltop (Gerald J. Ford, proposed Board representative) Oak Hill Capital (J. Taylor Crandall, proposed Board representative) Superior to other capital raising alternatives Fully negotiated and documented transaction Removes obstacles to creating stockholder value Preserves upside for SWS shareholders Investment Best Positions SWS for the Future 7 |
Rationale for Transaction – Address Bank Issues Bank’s capital base is expected to continue to suffer from deterioration in loan portfolio Bank is operating under C&D with the OTS Heightened losses and regulatory requirements have impacted operations and profitability Due to loan losses and write-offs, Bank has pre-tax loss of $71.3 million over last eighteen months Proactively reduced balance sheet to bolster capital ratios, negatively impacting earnings power 8 FY2008 FY2009 FY2010 LTM 3/31/11 |
Rationale for Transaction - 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 $80 MM of capital allocated to the Bank with proceeds being risk-weighted at 20.0% 9 Tier 1 (Core) Capital 8.00% 9.6% 15.5% Total Risk-Based Capital Ratio 12.00% 14.5% 22.7% C&D Pro-Forma Bank Capital Ratios Requirement 3/31/11 3/31/11 (3) Bank Asset Statistics 3/31/10 3/31/11 Pro-Forma 3/31/11 (3) Classified Assets ($ millions) $124 $255 $255 Non-performing assets ($ millions) 77 105 105 Texas Ratio (1) 39.4% 54.1% 38.2% Classified Asset Ratio (2) 68.9% 132.7% 93.7% |
10 Rationale for Transaction – Alleviate Uncertainty 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 Capital infusion reduces the potential for future capital calls on the broker Uncertainty has impacted SWS Difficult to retain and recruit new reps Has limited investment in profitable businesses (1) Broker includes clearing, retail and institutional business segments. |
Rationale for Transaction Provides capital to address Bank asset quality while adhering to C&D requirements Quantifies and completes already anticipated dilutive event Allows management to focus on new profitable growth opportunities Gerald J. Ford (Hilltop) and J. Taylor Crandall (Oak Hill Capital) to join SWS Board Expertise and experience additive to Board Warrants align Investors’ interests with current shareholders Preserves upside for SWS shareholders Aligns SWS Shareholders with Highly Regarded Investors Removes Obstacles to Creating Shareholder Value 11 Extensive Process Leading to Transaction Executive team and Board have evaluated multiple alternatives since Fall 2010 Terminated $95 million public convertible debt offering in December 2010 Hilltop and Oak Hill Capital conducted extensive due diligence on Bank and Broker |
Third Quarter Fiscal 2011 Overview 12 ($ in Thousands, except per share amounts) Short quarter impacts results Bank asset quality concerns still a focus Uncertainty impacting ongoing operations *Pre-tax pre-provision calculation detail provided on Non-GAAP Reconciliation, slide #26 of this presentation. Revenues $89,493 $95,247 Net Revenues 77,927 83,001 Pre-tax Pre-Provision* 1,326 6,701 Net Loss (2,147) (11,540) 3/25/11 3/26/10 Diluted EPS-Loss (0.07) (0.35) Book Value Per Share 11.06 11.93 Three Months Ended |
Bank Report 13 |
Bank Priorities 14 Reducing Classified Assets Repositioning the Balance Sheet Capital & Liquidity Sold $12.7 million in REO in third quarter Implemented internal loan review function Reduced classified assets $18 million from December quarter Reduced deposits $150 million from December quarter Substantially reduced profitable mortgage purchase business, down $100 million from December quarter Core Capital at 9.6%, total risk-based at 14.5% $300 million in balance sheet liquidity Capital infusion expected to provide cushion for future losses given higher level of criticized assets |
Classified Assets 15 ($ in Thousands) Non-accrual loans $ 75,934 $ 60,514 $ 29,742 Troubled debt restructurings 491 3,088 6,009 Loans 90 days past due -- -- -- REO & other repossessed assets 28,144 39,358 41,437 Total non-performing assets $104,569 $102,960 $77,188 Performing classified assets 150,693 170,434 47,234 Total classified assets $255,262 $273,394 $124,422 3/31/11 12/31/10 3/31/10 Classified assets / capital + reserve 132.7 % 140.0 % 68.9 % Non-performing assets / capital + reserve* 54.1 % 51.2 % 39.4 % *Texas Ratio Non-performing assets / assets 7.63 % 6.72 % 4.54 % |
Key Bank Statistics 16 ($ in Thousands) Provision and charge-offs elevated Allowance at 4.93% of loans held for investment Net interest margin of 4.16% Total loan loss provision $ 4,727 $ 6,729 $ 25,000 Net charge-offs (4,454) (5,077) (12,206) Allowance for loan losses 47,314 47,041 30,395 Reserve/loan ratio 4.93% 4.58% 2.57% Yield on earning assets 4.59% 4.67% 5.10% Cost of funds 0.49% 0.44% 0.59% Net interest margin 4.16% 4.28% 4.57% 3/31/11 12/31/10 3/31/10 |
Bank Balances 17 ($ in Millions) Mortgage purchase business reduced $100 million from December 2010 quarter Deposits down $150 million from December 2010 quarter Loans held for sale – Mtg. Purchase $ 60.6 $ 162.6 (62.7) $ 322.1 (81.2) Loans held for sale – Other $ 7.2 $ 10.1 (28.7) $ -- -- Loans held for investment – Gross $ 960.2 $ 1,027.8 (6.6) $1,183.2 (18.8) Total loans $1,028.0 $ 1,200.5 (14.4) $1,505.3 (31.7) Total deposits $1,120.2 $ 1,274.4 (12.1) $1,438.7 (22.1) Capital $ 145.1 $ 148.2 (2.1) $ 150.3 (3.5) 3/31/11 12/31/10 %Change 3/31/10 %Change Core capital 9.6% 9.4% 8.8% Total risk-based capital 14.5% 14.0% 12.4% Deposits provided by brokerage clients $ 951.3 $1,079.5 (11.9) $1,246.3 (23.7) |
Bank Loans by Type 18 ($ in Millions) 3/31/11 12/31/10 %Change 3/31/10 %Change Residential Real Estate Mortgage purchase HFS $ 60.6 $ 162.6 (62.7) $ 322.1 (81.2) 1-4 family first liens 121.2 127.3 (4.8) 141.2 (14.2) 1-4 family junior liens 6.1 7.9 (22.8) 9.0 (32.2) Construction Residential construction 41.7 50.2 (16.9) 91.0 (54.2) Multi-family construction 8.0 7.9 1.3 6.0 33.3 Commercial construction 29.8 53.9 (44.7) 38.0 (21.6) Lot and land development Residential land 49.0 61.1 (19.8) 89.8 (45.4) Commercial land 21.5 26.7 (19.5) 37.1 (42.0) Commercial real estate 431.0 417.7 3.2 504.0 (14.5) Multi-family 55.3 66.1 (16.3) 74.8 (26.1) Commercial loans 192.9 204.9 (5.9) 187.6 2.8 Consumer loans 3.7 4.1 (9.8) 4.7 (21.3) Loans held for immediate sale 7.2 10.1 (28.7) - - Total loans $1,028.0 $1,200.5 (14.4) $1,505.3 (31.7) |
Chief Financial Officer’s Report 19 |
Third Quarter Fiscal 2011 Revenues 20 ($ in Thousands) Trading revenues strong Short quarter negatively impacted commissions and net interest Municipal new issue market stagnant 3/25/11 12/31/10 %Change 3/26/10 %Change Operating Revenues: Clearing Operations $ 2,805 $ 2,824 (0.7) $ 2,476 13.3 Commissions 32,915 38,323 (14.1) 35,215 (6.5) Investment Banking & Advisory 7,271 13,479 (46.1) 7,895 (7.9) Net Gains on Principal Transactions 10,544 7,647 37.9 7,776 35.6 Other 4,352 3,226 34.9 5,661 (23.1) Total Operating Revenues $57,887 $65,499 (11.6) $59,023 (1.9) Net Interest Income: Brokerage Net Interest Income $ 5,814 $ 6,927 (16.1) $ 5,826 (0.2) Bank Net Interest Income 14,226 17,917 (20.6) 18,152 (21.6) Total Net Revenue $77,927 $90,343 (13.7) $83,001 (6.1) |
Third Quarter Fiscal 2011 Operating Expenses 21 ($ in Thousands) 3/25/11 12/31/10 %Change 3/26/10 %Change Non-Interest Expenses: Commissions and other employee compensation $52,841 $57,040 (7.4) $53,032 (0.4) Occupancy, equipment and computer service costs 8,375 8,452 (0.9) 8,607 (2.7) Communications 3,254 3,319 (2.0) 3,370 (3.4) Floor brokerage and clearing organization charges 1,112 1,222 (9.0) 1,008 10.3 Advertising and promotional 702 701 0.1 881 (20.3) Other 10,317 13,594 (24.1) 9,402 9.7 Total non-provision operating expenses $76,601 $84,328 (9.2) $ 76,300 0.4 Provision for loan losses $ 4,727 $ 6,729 (29.8) $ 25,000 (81.1) Total operating expenses $81,328 $91,057 (10.7) $101,300 (19.7) Variable compensation down in line with revenue decline Provision for loan loss down, but remains elevated |
22 Segment Results ($ in Thousands) Institutional business remains strong PCG headcount decline impacting results Retail $25,596 $27,278 $(650) $(966) Net Revenues Pre-Tax 3/25/11 3/26/10 3/25/11 3/26/10 Developments Difficult recruiting environment Independent channel strong Continued pressure on stock loan spread Fixed income trading strong Weak municipal new issue market Volumes and revenues up Preparing for regulatory exam Deposits down $150 million from December quarter Maintained compliance with C&D Institutional 32,791 32,602 9,521 9,534 Clearing 5,279 4,925 (44) 96 Bank 13,871 17,730 (3,753) (20,122) |
Key Brokerage and Firm Metrics 23 3/25/11 12/31/10 %Change 3/26/10 %Change Representatives: PCG 175 186 (5.9) 207 (15.5) Fixed Income 57 56 1.8 55 3.6 Independent Contractors 303 312 (2.9) 308 (1.6) Correspondents 165 168 (1.8) 183 (9.8) Total Employees 1,080 1,102 (2.0) 1,157 (6.7) Transactions Processed 0.6 mm 0.7 mm (14.3) 0.5 mm 20.0 Retail Client Assets $12.3 bn $12.6 bn (2.4) $13.2 bn (6.8) Balances ($ in mm): Avg. Margin Balances $227.6 $207.7 9.6 $174.6 30.4 Avg. Credit Balances 342.2 350.4 (2.3) 385.9 (11.3) Avg. Stock Loan Balances 2,129.0 1,855.0 14.8 1,753.0 21.4 Net Capital ($ in mm) $114.2 $121.6 (6.1) $121.7 (6.2) Net capital of $114.2 million at March 25, 2011 Average margin balances up 10% from December 2010 quarter and 30% from last fiscal year |
New Capital Essential New capital necessary To protect profitable brokerage franchise To ensure bank’s long term strength Proposed transaction is the best solution Provides capital at bank to address asset quality and regulatory concerns Supports continued growth at broker/dealer Aligns investors’ and shareholders’ interests Fully negotiated and documented transaction Preserves upside for SWS shareholders Board of directors unanimously approved the proposed transaction 24 |
SWS Office Locations 25 |
Non-GAAP Reconciliation 26 SWS has included the presentation of loss before income tax benefit, excluding the impact of the provision for loan losses for the Banking segment, which is a non-GAAP financial measure as defined in item 10(e) of Regulation S-K. SWS believes that the presentation of this non-GAAP financial measure is useful to investors because it provides additional information about the impact of the Bank’s loan loss provision on the Company’s earnings. While management believes this non-GAAP financial measure is 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. Loss before income tax benefit $ (3,401) $ (18,299) Provision for loan loss 4,727 25,000 Pre-tax pre-provision 1,326 6,701 ($ in Thousands) 3/25/11 3/26/10 Three Months Ended |
Other Information 27 Additional Information and Where to Find it SWS Group has filed with the SEC a definitive proxy statement and other relevant materials in connection with the transaction with the Investors. The definitive proxy statement has been sent to the stockholders of SWS Group. Before making any voting decision with respect to the Investor transaction, stockholders are urged to read the proxy statement and the other relevant materials because they contain important information about the Investor transaction. The proxy statement and other relevant materials and any other documents filed by SWS Group with the SEC may be obtained free of charge at the SEC’s website at www.sec.gov or at SWS Group’s website at www.swst.com. Participants SWS Group and its directors, executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies in respect of the Investor transaction. Information concerning SWS Group’s executive officers and directors is set forth in its definitive proxy statement filed with the SEC on April 8, 2011. You can obtain free copies of these documents from SWS Group using the contact information above. Three Months Ended |