SWS Group, Inc. Reports Financial Results for Fiscal 2013 Third Quarter

DALLAS, May 7, 2013 /PRNewswire/ -- SWS Group, Inc. (NYSE: SWS) ("SWS" or the "Company") today reported a net loss of $5.7 million, or $0.17 per diluted share, for its fiscal 2013 third quarter, as compared to net income of $8.3 million, or $0.04 per diluted share, for the third quarter of fiscal 2012. Excluding a $3.8 million unrealized pre-tax loss from the change in the valuation of the Company's outstanding warrants, the fiscal 2013 third quarter net loss would have been $3.2 million. Fiscal 2012 third quarter net income would have been $136,000 after excluding the $12.5 million unrealized pre-tax gain from the warrant valuation.

"While market conditions and reduced customer demand in the fiscal 2013 third quarter contributed to a 26 percent decline in primary operating revenue in our fixed income business compared to the same quarter last year, we remain encouraged by the underlying strength of our core business," said James H. Ross, Chief Executive Officer of SWS Group, Inc. "Our retail segment recorded a strong performance with gains in both net revenues and pre-tax profits compared to last year's quarter, and the banking segment's loan portfolio, excluding purchased mortgage loans, increased by $6.0 million in the quarter, marking the first increase since the fourth quarter of fiscal 2010."

Mr. Ross continued, "We are focused on deploying capital prudently and, during the fiscal third quarter, SWS Group made a $20 million capital contribution to our principal broker-dealer subsidiary to support daily operations. We hold $30 million at the parent company to be used for general corporate purposes when appropriate, and we will continue to evaluate opportunities to deploy the capital into our businesses in order to facilitate growth and increase shareholder value. We believe our strong capital levels will provide a competitive advantage as the industry landscape continues to evolve and market conditions improve."

Net revenues in the fiscal 2013 third quarter were $66.8 million, as compared to $75.8 million in the third quarter of last fiscal year. The largest contributors to the $9.0 million decrease in net revenues were a $3.1 million decrease in commission revenue, primarily due to a decline in customer demand in the taxable fixed income business, and a $2.7 million decrease in net interest revenue, primarily due to reduced loan balances and net yield on interest earning assets at the company's banking subsidiary, Southwest Securities, FSB (the "Bank"). Net gains on principal transactions were $2.7 million lower in the institutional segment as a result of market conditions in the fiscal 2013 third quarter as compared to the same quarter last fiscal year.

Operating expenses in the third quarter of fiscal 2013 were $72.5 million, a decrease of $3.0 million from $75.5 million in the third quarter of fiscal 2012. The largest component of the decrease was a $2.0 million decrease in commissions and other employee compensation, primarily driven by lower revenues as compared to the same quarter last fiscal year, along with reduced non-compensation expenses primarily at the Bank.

For the first nine months of fiscal 2013, the Company reported a net loss of $993,000, or $0.03 per diluted share, on net revenues of $216.2 million, as compared to a net loss of $4.4 million, or $0.14 per diluted share, on net revenues of $220.9 million for the first nine months of fiscal 2012.   

Clearing Segment

In the fiscal 2013 third quarter, the clearing segment recorded a pre-tax loss of $617,000 on net revenues of $4.5 million, as compared to a pre-tax loss of $537,000 on net revenues of $4.8 million in the third quarter of fiscal 2012. The $260,000 decrease in net revenues was driven by a $290,000 decrease in clearing fees, primarily due to lower activity levels for existing correspondents and two fewer trading days in the fiscal 2013 third quarter as compared to the same quarter last fiscal year.

Operating expenses decreased 3 percent to $5.1 million for the third quarter of fiscal 2013 from $5.3 million for the third quarter of fiscal 2012, primarily due to a decrease in operations and technology expenses.

Total correspondent clearing customer assets under custody increased to $15.4 billion at March 29, 2013, from $14.9 billion at March 30, 2012.

Retail Segment

The retail segment recorded pre-tax income of $308,000 on net revenues of $27.8 million for the fiscal 2013 third quarter, as compared to a pre-tax loss of $1.0 million on net revenues of $25.9 million for the third quarter of fiscal 2012. The 7 percent net revenue increase was primarily due to a $1.0 million increase in insurance products revenue and a $716,000 increase in advisory fees due to an increase in assets under management. Total customer assets were $14.3 billion at March 29, 2013, as compared to $12.8 billion at March 30, 2012.

Retail segment operating expenses increased 2 percent to $27.5 million for the third quarter of fiscal 2013, from $27.0 million for the same period last fiscal year, primarily due to a $1.1 million increase in commission and other employee compensation expense.

Institutional Segment

The institutional segment recorded pre-tax income of $4.8 million on net revenues of $26.2 million in the third quarter of fiscal 2013, as compared to pre-tax income of $10.0 million on net revenues of $33.8 million in the third quarter of fiscal 2012. The $7.7 million decrease in net revenues was primarily due to a $3.1 million decrease in commission revenues, a $2.7 million decrease in net gains on principal transactions and a $1.0 million decrease in investment banking fees. Primary operating revenues in the fixed income businesses were off 26 percent as compared to the same quarter last fiscal year.

The taxable fixed income business accounted for $2.4 million of the commission revenue decrease, while municipal finance accounted for $593,000. The 31 percent decrease in net gains on principal transactions was primarily due to a $1.6 million decrease in municipal finance trading gains and a $1.1 million decrease in taxable fixed income gains. Narrowing spreads and an increase in market volatility led to the declines in the quarter. The 16 percent decrease in investment banking fees for the three months ended March 29, 2013, was driven by decreases in advisory service fees in the taxable fixed income and municipal finance businesses, as compared to the same period last fiscal year. Taxable fixed income advisory fees decreased $680,000 due to decreased unit investment trust offerings, while municipal finance advisory fees decreased $236,000 due to a decrease in the aggregate amount of offerings in the fiscal 2013 third quarter, as compared to the same quarter last fiscal year.

Net interest revenue in the segment decreased $822,000 for the three months ended March 29, 2013, as compared to the same period last fiscal year, primarily due to a 22 basis point decrease in the average net interest spread in the stock loan business.

Institutional segment operating expenses decreased 10 percent to $21.3 million for the third quarter of fiscal 2013, from $23.8 million in the third quarter of fiscal 2012. The primary contributor to the decrease was a $3.4 million decrease in commissions and other employee compensation expense.

Banking Segment

In the fiscal 2013 third quarter, the banking segment recorded pre-tax income of $1.2 million on net revenues of $10.5 million, as compared to pre-tax income of $2.6 million on net revenues of $12.6 million in the third quarter of fiscal 2012.

The decrease in the Bank's net revenues was driven by a $1.7 million decline in net interest revenue, primarily due to a 27 percent decrease in average loan balances and a 50 basis point decrease in the net yield on interest-earning assets. Other revenue decreased $368,000 in the fiscal 2013 third quarter, as compared to the same quarter last fiscal year, primarily due to declines in net gains on the Bank's equity investments and gains on the sale of real estate owned, partially offset by a $1.4 million increase in the gain on sales of Small Business Administration loans.

The Bank's operating expenses decreased $674,000 to $9.4 million in the fiscal 2013 third quarter, from $10.0 million in the third quarter of fiscal 2012, primarily due to decreases in regulatory assessments, legal fees and occupancy expenses, partially offset by an increase in compensation expense.

At March 31, 2013, the Bank's allowance for loan losses was $18.8 million, or 4.07 percent of loans held for investment excluding purchased mortgage loans, as compared to $26.2 million, or 4.13 percent of loans held for investment excluding purchased mortgage loans at March 31, 2012. The bank did not record a loan loss provision in the third quarter of fiscal 2013 or fiscal 2012.

Non-performing assets decreased to $45.7 million at March 31, 2013, from $75.1 million at March 31, 2012. Total classified assets decreased to $78.5 million, or 41.4 percent of capital plus allowance for loan losses, at March 31, 2013, as compared to $129.8 million, or 67.0 percent of capital plus allowance for loan losses, at March 31, 2012.

At March 31, 2013, the Bank's Tier 1 (core) capital ratio was 13.1 percent and total risk-based capital ratio was 23.2 percent, as compared to a Tier 1 (core) capital ratio of 12.3 percent and total risk-based capital ratio of 20.4 percent at March 31, 2012.

Conference Call

SWS Group will hold a conference call to discuss its results for the fiscal 2013 third quarter on Wednesday, May 8, 2013, at 10:00 a.m. Eastern Time (9:00 a.m. Central Time). The conference call will be broadcast live over the internet at http://www.videonewswire.com/event.asp?id=93307 or www.swst.com. An archive of the webcast will also be posted to the Company's website at www.swst.com.

About SWS Group

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 the Company's 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 the Company's 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 the Company's Annual Report on Form 10-K and in the Company's other reports filed with and available from the Securities and Exchange Commission.

Non-GAAP Reconciliation
SWS has included the presentation of Adjusted Net Income (Loss), which is Net income (loss), excluding the impact of the valuation adjustment for the warrants held by Hilltop and Oak Hill. Adjusted Net Income (Loss) is a non-GAAP financial measure as defined by Securities and Exchange Commission rules.  SWS believes that the presentation of this non-GAAP financial measure provides useful information by excluding this item, which may not be indicative of the Company's core operating results. 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.

SOURCE SWS Group, Inc.