SWS Group, Inc. Reports First Quarter Net Income of $3.1 Million or 11 Cents per Share
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DALLAS, Nov. 2 /PRNewswire-FirstCall/ -- SWS Group, Inc. (NYSE: SWS) today announced net income of $3.1 million, or diluted earnings per share (EPS) of 11 cents, for its fiscal first quarter ended September 25, 2009, compared with net income of $7.0 million, or diluted EPS of 26 cents, for the first quarter of its prior fiscal year. Net revenues (total revenues less interest expense) were $99.5 million compared with $87.8 million in the first fiscal quarter a year ago.
Results for the quarter just ended included a previously announced pre-tax loss of $6.3 million resulting from a clearing correspondent's unauthorized trading. The prior fiscal year's first quarter included a $5.4 million pre-tax write-off of a Lehman Brothers counterparty obligation.
"Our businesses are meeting the challenges presented by the current economic environment," said SWS Group President and CEO Donald W. Hultgren. "While the U.S. government has reported preliminary third quarter GDP growth of 3.5 percent, high unemployment and tight credit markets persist and are continuing to have an impact on our business. Despite these difficulties, the company's fixed income businesses continue to perform at a high level, and we are beginning to see some stabilization and improvement in our operating environment."
Net revenues in the first quarter of fiscal 2010 increased by $11.7 million over those reported for the comparable period of the prior fiscal year. The largest components of the increase were commissions, $6.9 million, net gains on principal transactions, $12.1 million, and other revenue, $3.2 million. The increase in commissions was driven primarily by an $8.2 million increase in the institutional segment, as volatility and lack of liquidity resulted in wider spreads and led to increased client activity and higher transaction levels in the taxable fixed income business. This was partially offset by a $1.3 million decrease in commissions in the retail segment, which continued to operate in a difficult market environment. Volatility and wider spreads in fixed income primarily accounted for the increase in net gains on principal transactions. The increase in other revenue resulted primarily from a $1.5 million increase in income earned on deferred compensation investments and a $1.0 million decrease in losses related to the company's investment in a venture capital fund. These increases were partially offset by an $8.2 million decrease in net interest, which resulted from a 34 percent decline in the average stock loaned balance and a decrease in spreads earned on securities lending balances.
Operating expenses for the first quarter of fiscal 2010 increased $17.5 million over those reported for the first quarter of the prior fiscal year. The largest increases were in commissions and other employee compensation, $9.6 million, and other expenses, $6.9 million. The institutional segment accounted for $9.2 million of the increased expenses in commissions and other employee compensation. The previously mentioned $6.3 million loss resulting from a correspondent's unauthorized trading accounted for most of the increase in other expenses.
Clearing segment net revenues declined $3.0 million in the first quarter of fiscal 2010 to $5.2 million from $8.2 million in the first quarter of the prior fiscal year, and the segment reported a pre-tax loss of $5.7 million versus pre-tax income of $2.3 million for the same periods. Tickets processed in the first fiscal quarter of 2010 declined significantly as tickets for high-volume trading firms dropped to under 400,000 from 5.4 million in the first quarter of the prior fiscal year. Tickets processed for general securities broker/dealers increased modestly, and the revenue per ticket increased by $3.80 as a result of the changed mix of business. Other expenses for the clearing segment increased $5.2 million, primarily as a result of the previously mentioned $6.3 million loss.
Retail segment net revenues decreased $3.6 million in the first quarter of fiscal 2010 to $25.1 million from $28.7 million in the first quarter of the prior fiscal year. The retail segment recorded a $1.0 million pre-tax loss for the first quarter of fiscal 2010 compared with $1.5 million in pre-tax income in the first quarter of fiscal 2009. The decline in retail segment revenues resulted from a $1.7 million reduction in private client group commission revenues and a $1.1 million reduction in fees as a result of the closure of Tower Asset Management, LLC. Total customer assets were $12.7 billion at September 25, 2009 compared with $10.8 billion a year earlier. Retail operating expenses declined $1.2 million from the prior year's first quarter, primarily as a result of an 8 percent decrease in commission expense, the main component of operating expenses in the retail segment.
Institutional segment net revenues increased $11.1 million in the first quarter of fiscal 2010 to $49.1 million from $38.1 million in the comparable period of the prior fiscal year. The institutional segment also increased pre-tax income by $5.5 million to $17.8 million in the first fiscal quarter of 2010 from $12.3 million a year ago. Institutional segment commissions increased $8.2 million in the first quarter of fiscal 2010 compared with the same period of the prior fiscal year, while net gains on principal transactions increased $12.2 million to $14.7 million from $2.4 million a year ago. Institutional segment operating expenses increased $5.5 million year over year, primarily because higher revenues resulted in increased commission expense.
Banking segment net revenues increased $4.0 million in the first quarter of fiscal 2010 to $19.3 million from $15.3 million in the first quarter of the prior fiscal year, while pre-tax income declined to $3.0 million from $4.5 million. The bank's net interest revenue increased to $18.0 million in the first quarter of fiscal 2010 from $14.7 million in the same period a year ago, as loan volume increased and the cost of funds declined. Banking segment operating expenses increased to $16.3 million from $10.8 million in a comparison of year-to-year first quarters. An increase in the bank's loan loss provision and real estate owned provision of $3.8 million and $1.4 million, respectively, along with costs associated with maintaining real estate and other foreclosed property accounted for most of the rise in operating expenses.
The bank has seen some stabilization in its residential construction loan portfolio; however, that improvement has been offset by continued deterioration in commercial real estate loans. The bank's management expects overall non-performing assets to stabilize over the next few quarters but remain at historically high levels for some time. The allowance for loan losses increased to $16.9 million at September 30, 2009 from $14.7 million at June 30, 2009. The allowance represents 1.44 percent of loans held for investment at September 30, 2009, up from 1.28 percent at June 30, 2009 and 0.77 percent at September 30, 2008.
SWS Group, Inc. is a Dallas-based financial services holding company offering a broad range of 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, availability of lines of credit, customer margin loan activity, creditworthiness of our correspondents and customers, demand for housing, 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.
Segment Results
(In thousands)
Net Revenues Pre-Tax Income
Three Months Ended Three Months Ended
---------------------- ------------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
2009 2008 2009 2008
---------- --------- --------- ---------
Clearing $5,156 $8,176 $(5,688) $2,272
Retail 25,075 28,714 (997) 1,491
Institutional 49,148 38,095 17,826 12,310
Bank 19,302 15,327 2,968 4,548
Other consolidated
entities 772 (2,544) (9,132) (9,828)
------- ------- ------ -------
Consolidated $99,453 $87,768 $4,977 $10,793
======= ======= ====== =======
FINANCIAL TABLES FOLLOW
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 25, 2009 and June 26, 2009
(In thousands, except par values and share amounts)
September 25,
2009 June 26,
(Unaudited) 2009
---------- ----------
Assets
Cash and cash equivalents $142,793 $96,253
Assets segregated for regulatory
purposes 300,405 313,153
Receivable from brokers, dealers and
clearing organizations 1,927,649 1,892,739
Receivable from clients, net of
allowances 187,671 158,032
Loans held for sale 235,325 262,780
Loans, net 1,157,117 1,138,602
Securities owned, at market value 202,230 175,030
Securities purchased under agreements
to resell - 21,622
Goodwill 7,552 7,552
Marketable equity securities available
for sale 1,139 4,094
Other assets 138,373 129,182
---------- ----------
Total assets $4,300,254 $4,199,039
========== ==========
Liabilities and Stockholders' Equity
Short-term borrowings $38,000 $10,000
Payable to brokers, dealers and
clearing organizations 1,844,067 1,853,544
Payable to clients 463,375 426,300
Deposits 1,337,161 1,292,366
Securities sold under agreements to
repurchase - 4,462
Securities sold, not yet purchased, at
market value 74,694 53,236
Drafts payable 24,104 27,457
Advances from Federal Home Loan Bank 115,850 117,492
Other liabilities 61,825 73,825
---------- ----------
Total liabilities 3,959,076 3,858,682
Commitments and contingencies
Stockholders' equity:
Preferred stock of $1.00 par value.
Authorized 100,000 shares; none
issued - -
Common stock of $.10 par value.
Authorized 60,000,000 shares, issued
28,309,139 and outstanding 27,371,943
shares at September 25, 2009; issued
28,309,139 and outstanding 27,262,923
shares at June 26, 2009 2,831 2,831
Additional paid-in capital 270,232 271,131
Retained earnings 76,540 75,918
Accumulated other comprehensive income
- unrealized holding gain, net of tax 134 180
Deferred compensation, net 2,849 2,639
Treasury stock (937,196 shares at
September 25, 2009 and 1,046,216
shares at June 26, 2009, at cost) (11,408) (12,342)
---------- ----------
Total stockholders' equity 341,178 340,357
---------- ----------
Total liabilities and stockholders'
equity $4,300,254 $4,199,039
========== ==========
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the three months ended September 25, 2009 and September 26, 2008
(In thousands, except per share and share amounts)
(Unaudited)
Three Months Three Months
Ended Ended
September September
25, 2009 26, 2008
---------- ----------
Revenues:
Net revenues from clearing operations $2,626 $3,296
Commissions 42,612 35,745
Interest 41,437 66,780
Investment banking, advisory and
administrative fees 9,270 10,924
Net gains on principal transactions 14,819 2,704
Other 6,121 2,899
---------- ----------
Total revenue 116,885 122,348
Interest expense 17,432 34,580
---------- ----------
Net revenues 99,453 87,768
---------- ----------
Non-Interest Expenses:
Commissions and other employee
compensation 62,026 52,411
Occupancy, equipment and computer
service costs 8,390 7,740
Communications 3,248 3,161
Floor brokerage and clearing
organization charges 959 917
Advertising and promotional 1,005 799
Other 18,848 11,947
---------- ----------
Total non-interest expenses 94,476 76,975
---------- ----------
Income before income tax expense 4,977 10,793
Income tax expense 1,892 3,770
---------- ----------
Net income 3,085 7,023
Net loss recognized in other
comprehensive income (46) (868)
---------- ----------
Comprehensive income $3,039 $6,155
========== ==========
Earnings per share - basic
Net income $0.11 $0.26
========== ==========
Weighted average shares outstanding
- basic 27,151,162 27,022,556
========== ==========
Earn Earnings per share - diluted
Net income $0.11 $0.26
========== ==========
Weighted average shares outstanding
- diluted 27,264,710 27,198,585
========== ==========
SOURCE SWS Group, Inc.
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