SWS Group, Inc. Announces Net Loss for Fiscal Third Quarter

DALLAS, April 27 /PRNewswire-FirstCall/ -- SWS Group, Inc. (NYSE: SWS) today reported a net loss of $11.5 million, or 35 cents per diluted share, in its fiscal 2010 third quarter ended March 26.  Deterioration in the commercial real estate loan portfolio at the company's subsidiary bank, Southwest Securities, FSB, led to a $25 million loan loss provision and the loss for the quarter.  Net revenues for the quarter were $83.0 million.

In the third quarter of the prior fiscal year, SWS reported net income of $4.0 million, or 15 cents per diluted share, on net revenues of $94.7 million.  

In the first nine months of fiscal 2010, SWS recorded net revenues of $277.6 million and a net loss of $2.6 million (9 cents per diluted share), compared with net revenues of $282.6 million, net income of $20.0 million and diluted earnings per share of 73 cents in the comparable period of the prior fiscal year.

"North Texas experienced a significant decline in commercial real estate values in the quarter, and this had an impact on our loan portfolio," said Donald W. Hultgren, president and chief executive officer of SWS Group.  

The bank determined that a $25 million loan loss provision was required for the current fiscal quarter, bringing the total loan loss allowance to $30.4 million, or 2.6 percent of loans held for investment.  "We expect to maintain the allowance at this level until non-performing assets begin to decline," Mr. Hultgren added.  After the provision, the bank still maintains a risk based capital ratio in excess of its targeted 12 percent.

Total charge-offs at Southwest Securities, FSB, for the third quarter of fiscal 2010 were $12.2 million, substantially all of which were real estate related.  Non-performing assets increased $12.6 million from the immediately preceding quarter to $77.2 million, or 4.5 percent of total assets.

SWS Group third quarter fiscal 2010 net revenues declined $11.7 million as compared to the same period of fiscal 2009.  Tighter spreads and reduced market volatility in the taxable fixed income business led to an overall decrease in commissions of $11.1 million.  Net gains on principal transactions declined $3.7 million.  The declines were partially offset by increases in other revenues of $2.4 million.

Operating expenses increased $13.5 million for the third quarter of fiscal 2010 as compared to the same period of fiscal 2009.  The largest increase resulted from a $19.3 million increase in the provision for loan loss.  These increases were partially offset by a decrease in commission expense of $8.5 million, primarily in the institutional segment.

The clearing segment recorded net revenues of $4.9 million for the three months ended March 26, 2010 compared with $5.4 million for the comparable period in the prior fiscal year.  Pre-tax income increased to $96,000 from $92,000 in the same periods, respectively.  The clearing segment's net interest revenue increased $388,000 for the third quarter of fiscal 2010 over the same period in the prior fiscal year as a result of an increase in the spread earned on customer deposits and an increase in customer balances.  Other revenues, comprised mainly of fees from money market funds, declined $961,000 because of reduced revenue sharing with various money market funds caused by a reduction in short-term interest rates.  Operating expenses for the clearing segment were down $502,000, primarily because of a reduction in commissions and other employee compensation.

The retail segment recorded net revenues of $27.3 million for the third quarter of fiscal 2010 compared with $24.1 million in the comparable period of the prior fiscal year.  The improvement resulted from a $2.4 million increase in commission revenues and a $1.2 million increase in insurance product sales, partially offset by a $932,000 decrease in advisory fees primarily due to the closing of Tower Asset Management, LLC in the prior fiscal year.  The retail segment improved its operating results from a pre-tax loss of $3.3 million in the fiscal third quarter a year ago to a pre-tax loss of $966,000 in the third quarter of fiscal 2010.  Total retail customer assets were $13.2 billion at March 26, 2010 compared with $10.3 billion at March 27, 2009.  Retail segment operating expenses increased $877,000, primarily as a result of increased commission expense.

The institutional segment recorded net revenues of $32.6 million and pre-tax income of $9.5 million for the third quarter of fiscal 2010 versus $48.8 million in net revenues and $17.3 million in pre-tax income in the comparable quarter of the prior fiscal year.  Institutional segment commissions declined $13.5 million, primarily because of tighter spreads and reduced volatility in taxable fixed income.  This decrease was partially offset by an increase in investment banking fees of $2.3 million, which resulted from increased unit investment trust underwriting activity and fees for corporate finance advisory services.  Net gains on principal transactions decreased as taxable fixed income declined $3.8 million, reflecting a return to more normal levels after benefiting from extreme market volatility, wider spreads and record revenues in the prior fiscal year's third quarter.  Increased customer activity in the municipal fixed income business partially offset this decrease.  Average securities lending balances and spreads earned on securities lending balances declined, resulting in a $1.7 million decrease in the institutional segment's net interest revenue.  Institutional segment operating expenses were down $8.4 million, primarily as a result of decreased commission expense.  

The banking segment recorded net revenues of $17.7 million for the third quarter of fiscal 2010 compared with $16.8 million in the comparable period of the prior fiscal year, but the bank posted a $20.1 million pre-tax loss versus a $329,000 loss in the same periods.  Net interest revenue increased $1.4 million for the banking segment, primarily as a result of an increase in average loans held for investment from March 31, 2009 to March 31, 2010.  Operating expenses for the banking segment increased $20.8 million to $37.9 million, primarily as a result of the loan loss provision.

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, 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 TABLES FOLLOW

SOURCE SWS Group, Inc.

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