SWS Group, Inc. Reports Financial Results for Third Quarter of Fiscal 2014 - wave3.com-Louisville News, Weather & Sports

SWS Group, Inc. Reports Financial Results for Third Quarter of Fiscal 2014

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SOURCE SWS Group, Inc.

DALLAS, May 6, 2014 /PRNewswire/ -- SWS Group, Inc. (NYSE: SWS) ("SWS" or the "Company") today reported a net loss of $8.8 million, or $0.27 per diluted share, for its third quarter of fiscal 2014 on net revenues of $65.7 million, as compared to a net loss of $5.7 million, or $0.17 per diluted share, on net revenues of $66.8 million for the third quarter of fiscal 2013. The fiscal 2014 third quarter results include a $6.7 million unrealized pre-tax loss from the change in value of the Company's outstanding warrants and $2.4 million in expenses related to the Company's proposed merger with Hilltop Holdings, Inc. In the third quarter of fiscal 2013, the Company recorded a $3.8 million unrealized pre-tax loss from the change in value of the warrants.

"Our four operating segments recorded pre-tax profits for the third quarter and showed improved results as compared to last year's quarter," said James H. Ross, Chief Executive Officer of SWS Group, Inc. "We plan to continue building on this momentum in each of our business lines as we pursue the merger with Hilltop, which we expect to complete by the end of the calendar year, subject to customary closing conditions, including regulatory approvals and approval of the shareholders of SWS Group."

The $1.1 million decrease in net revenues in the fiscal 2014 third quarter, as compared to the same quarter last fiscal year, was driven by a $2.3 million decrease in other revenues, a $1.0 million decrease in commissions revenue and a $1.0 million decrease in net interest revenues. These decreases were partially offset by a $2.7 million increase in net gains on principal transactions, primarily due to increases in the Institutional segment related to improvement in our fixed income businesses, and a $500,000 increase in investment banking, advisory and administrative fees, driven by an increase in fees earned by the Retail segment.

Fiscal 2014 third quarter operating expenses decreased $2.5 million, as compared to the third quarter of fiscal 2013. The largest component of the decrease was a $3.3 million decline in commissions and other employee compensation primarily resulting from staff reductions. The Company's banking subsidiary, Southwest Securities, FSB (the "Bank"), recorded a $1.6 million loan loss recapture in the fiscal 2014 third quarter, as compared to no recapture in the same period of last fiscal year. A decrease in travel and entertainment expenses contributed to a $463,000 decrease in advertising and promotional expenses. Offsetting these reductions was a $2.9 million increase in expense from the change in value of the Company's outstanding warrants.

For the first nine months of fiscal 2014, the Company reported a net loss of $6.8 million, on net revenues of $203.2 million, as compared to a net loss of $1.0 million, on net revenues of $216.2 million for the first nine months of fiscal 2013.

Clearing Segment
The Clearing segment reported pre-tax income of $979,000, on net revenues of $5.1 million in the third quarter of fiscal 2014, as compared to a pre-tax loss of $617,000, on net revenues of $4.5 million in the third quarter of fiscal 2013. The increase in net revenues was driven by a $418,000 increase in other revenues, primarily due to a $300,000 increase in third party servicing fees. Net interest revenue increased 7 percent, or $100,000, and clearing fee revenue increased 4 percent, or $89,000, driven by a 9 percent increase in the number of general securities tickets processed in the fiscal 2014 third quarter, as compared to the same period last fiscal year. Revenue per ticket increased approximately 48 percent to $11.66 in the third quarter of fiscal 2014, from $7.90 in the third quarter of fiscal 2013.

Clearing segment operating expenses decreased 19 percent to $4.1 million in the third quarter of fiscal 2014, as compared to $5.1 million in the same period last fiscal year, primarily due to a 17 percent decrease in operations and information technology expenses and a 54 percent reduction in compensation expenses.

Retail Segment
For the third quarter of fiscal 2014, the Retail segment reported pre-tax income of $2.4 million, on net revenues of $27.7 million, as compared to pre-tax income of $308,000, on net revenues of $27.8 million in the third quarter of fiscal 2013. Advisory fees increased $1.1 million with improvement in all areas of the business due to a 22 percent increase in assets under management, offset by a $1.0 million decline in revenue from the sale of insurance products. Total customer assets were $15.0 billion at March 31, 2014, as compared to $14.3 billion at March 29, 2013.

Retail segment operating expenses decreased 8 percent to $25.4 million for the fiscal 2014 third quarter, from $27.5 million for the fiscal 2013 third quarter. The decline was driven by a $1.2 million decrease in commissions and other employee compensation, due to headcount reductions made earlier in the year and lower production in the Company's independent contractor business. In addition, travel and entertainment expenses decreased $354,000 and legal expenses fell by $120,000.

Institutional Segment
The Institutional segment reported pre-tax income of $6.1 million, on net revenues of $27.8 million, for the fiscal 2014 third quarter, as compared to pre-tax income of $4.8 million, on net revenues of $26.2 million, for the third quarter of fiscal 2013. The largest contributor to the increase in net revenues was a $2.9 million increase in net gains on principal transactions, primarily due to improvements in the municipal finance business in the fiscal 2014 third quarter, as compared to the same period last fiscal year. Investment banking and advisory fees decreased by $640,000, due to an $843,000 decrease in the taxable fixed income business on lower government agency underwriting revenue, partially offset by a $292,000 increase in municipal finance fees. Commissions revenue also declined by $626,000 in the fiscal 2014 third quarter, as compared to the third quarter of fiscal 2013, as portfolio trading commissions decreased $2.0 million and municipal finance commissions decreased $692,000. These decreases were partially offset by a $2.0 million increase in taxable fixed income commissions.

Institutional segment operating expenses in the fiscal 2014 third quarter increased 2 percent to $21.8 million, from $21.3 million in the third quarter of fiscal 2013, primarily due to a $180,000 increase in compensation expenses on higher segment revenues and a $188,000 increase in clearing charges.

Banking Segment
The Banking segment reported pre-tax income of $2.1 million, on net revenues of $8.3 million for the fiscal 2014 third quarter, as compared to pre-tax income of $1.2 million, on net revenues of $10.5 million for the fiscal 2013 third quarter. The 21 percent decrease in net revenues was primarily due to a $948,000 decline in net interest revenues due to a 21 percent decrease in average loan balances and a 20 basis point decrease in the net yield on interest-earning assets. Other revenue decreased $1.3 million, primarily due to a $1.2 million decrease in gains on Small Business Administration loan sales, a $599,000 decrease in gains recognized on the valuation of the Bank's equity method investments, and a $493,000 loss in earnings from the Bank's hedged interest rate swap positions. These decreases were partially offset by a $483,000 gain on the sale of available for sale securities, a $462,000 increase in the fair value of real estate owned (REO) and a $301,000 increase in net gains on the sale of REO.

The Bank's operating expenses in the fiscal 2014 third quarter decreased 33 percent to $6.2 million, from $9.4 million in the fiscal 2013 third quarter, primarily due to the $1.6 million increase in the Bank's loan loss recapture and a $623,000 decrease in commissions and other employee compensation. REO-related expenses decreased $904,000 as REO balances declined to $5.9 million at the end of the fiscal 2014 third quarter, from $23.7 million at the end of the same period last fiscal year.

At March 31, 2014, the Bank's allowance for loan losses was $8.1 million, or 1.83 percent of loans held for investment, excluding purchased mortgage and fair value loans, as compared to $18.8 million, or 4.07 percent of loans held for investment, excluding purchased mortgage loans, at March 31, 2013.

Non-performing assets decreased 45 percent to $25.1 million at March 31, 2014, from $45.7 million at March 31, 2013. Total classified assets at March 31, 2014, were $40.9 million, or 22.9 percent of capital plus allowance for loan losses, as compared to $78.5 million, or 41.4 percent, at March 31, 2013.

At March 31, 2014, the Bank's Tier 1 (core) capital ratio was 13.9 percent and total risk-based capital ratio was 27.4 percent, as compared to a Tier 1 (core) capital ratio of 13.1 percent and total risk-based capital ratio of 23.2 percent at March 31, 2013.

Conference Call
SWS Group will hold a conference call to discuss its results for the fiscal 2014 third quarter on Wednesday, May 7, 2014, at 10:00 a.m. Eastern Time (9:00 a.m. Central Time). The conference call will be broadcast live over the internet:  http://www.videonewswire.com/event.asp?id=99055. 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.

Important Information for Investors and Shareholders
This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction.  Hilltop will file with the SEC a registration statement on Form S-4 containing a proxy statement/prospectus of SWS and Hilltop, and SWS and Hilltop will each file other documents with respect to the proposed transaction and a definitive proxy statement/prospectus will be mailed to shareholders of SWS.  Investors and security holders of SWS are urged to read the proxy statement/prospectus and other documents that will be filed with the SEC carefully and in their entirety when they become available because they will contain important information.  Investors and security holders of SWS will be able to obtain free copies of the registration statement and the proxy statement/prospectus (when available) and other documents filed with the SEC by SWS or Hilltop through the website maintained by the SEC at www.sec.gov.  Copies of the documents filed with the SEC by SWS will be available free of charge on SWS's internet website at www.swst.com or by contacting SWS's Investor Relations Department at (214) 859-1800.  Copies of the documents filed with the SEC by Hilltop will be available free of charge on Hilltop's internet website at www.hilltop-holdings.com or by contacting Hilltop's Investor Relations Department at (214) 252-4029.

SWS, Hilltop, their respective directors and certain of their executive officers and other members of management and employees may be considered participants in the solicitation of proxies in connection with the proposed transaction.  Information about the directors and executive officers of SWS is set forth in its Annual Report on Form 10-K for the year ended June 30, 2013, which was filed with the SEC on September 6, 2013, its proxy statement for its 2013 annual meeting of shareholders, which was filed with the SEC on October 3, 2013, and its Current Reports on Form 8-K, which were filed with the SEC on September 17, 2013 and October 1, 2013.  Information about the directors and executive officers of Hilltop is set forth in its most recent proxy statement, which was filed with the SEC on April 30, 2013.  Other information regarding the participants in the proxy solicitations and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the proxy statement/prospectus and other relevant materials to be filed with the SEC when they become available.

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, trading counterparties 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.

Segment Results

(In thousands)




 Net Revenues


Pre-Tax Income (Loss)



Three Months Ended


Three Months Ended



March 31, 2014


March 29, 2013


March 31, 2014


 March 29, 2013










Clearing 


$     5,118


$       4,511


$      979


$      (617)

Retail


27,722


27,797


2,355


308

Institutional


27,849


26,165


6,086


4,831

Bank


8,295


10,540


2,067


1,186

Other consolidated entities


(3,310)


(2,259)


(19,658)


(15,264)

Consolidated


$   65,674


$     66,754


$  (8,171)


$   (9,556)

Non-GAAP Reconciliation
SWS has included the presentation of Adjusted Pre-tax Loss, which is Loss before income tax expense (benefit), excluding the impact of the valuation adjustment for the warrants held by Hilltop and Oak Hill, the impact of the loan loss recapture for the banking segment and the impact of legal and financial advisory fee expenses associated with the proposed merger with Hilltop Holdings, Inc. Adjusted Pre-tax 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 these items, 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.



 Three Months Ended

(In thousands)


March 31, 2014


March 29, 2013

Loss before income tax expense (benefit)


$      (8,171)


$       (9,556)

Valuation adjustment for warrants


6,745


3,840

Merger agreement expenses 


2,356


--

Loan loss recapture


(1,578)


--

Adjusted pre-tax loss (non-GAAP)


$         (648)


$       (5,716)

 

 


SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

March 31, 2014 and June 30, 2013

(In thousands, except par values and share amounts)



March 31,
2014


June 30, 2013

Assets

 (Unaudited)



Cash and cash equivalents

$         87,763


$         111,046

Restricted cash and cash equivalents

-


30,047

Assets segregated for regulatory purposes

189,961


164,737

Receivable from brokers, dealers and clearing organizations

1,869,238


1,698,474

Receivable from clients, net of allowances

264,038


286,446

Loans, net

558,041


608,583

Securities owned, at fair value

288,969


209,633

Securities held to maturity

13,553


17,423

Securities purchased under agreements to resell

97,504


51,996

Goodwill

7,552


7,552

Securities available for sale

575,679


503,276

Other assets

97,928


91,160

     Total assets

$     4,050,226


$     3,780,373





Liabilities and Stockholders' Equity




Short-term borrowings

$         50,000


$         131,500

Payable to brokers, dealers and clearing organizations

1,795,811


1,532,971

Payable to clients

359,494


335,655

Deposits

995,601


993,719

Securities sold under agreements to repurchase

69,961


37,012

Securities sold, not yet purchased, at fair value

177,460


134,735

Drafts payable

30,624


28,889

Advances from Federal Home Loan Bank

92,430


97,565

Long-term debt, net

86,537


83,102

Warrants

31,033


24,197

Other liabilities

54,215


65,742

     Total liabilities

3,743,166


3,465,087





Commitments and contingencies








Stockholders' equity:




Preferred stock of $1.00 par value.  Authorized 100,000 shares; none issued

-


-

Common stock of $0.10 par value.  Authorized 60,000,000 shares, issued 33,312,140 and outstanding 32,754,033 shares at March 31, 2014; issued 33,312,140 and outstanding 32,629,213 shares at June 30, 2013

3,331


3,331

   Additional paid-in capital

324,221


325,030

Accumulated deficit

(10,134)


(3,361)

Accumulated other comprehensive income – unrealized holding loss, net of tax

(7,331)


(5,334)

   Deferred compensation, net

3,176


3,352

   Treasury stock (558,107 shares at March 31, 2014 and 682,927 shares at June 30, 2013, at cost)

(6,203)


(7,732)

           Total stockholders' equity

307,060


315,286

     Total liabilities and stockholders' equity

$     4,050,226


$     3,780,373

 

 

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

For the three and nine-months ended March 31, 2014 and March 29, 2013

(In thousands, except per share and share amounts)

(Unaudited)



Three Months

Ended

March 31, 2014

Three Months

Ended

March 29, 2013

Nine Months

Ended

March 31, 2014

Nine Months

Ended

March 29, 2013

Revenues:





     Net revenues from clearing operations

$             2,170

$           2,082

$             6,676

$             6,398

     Commissions

30,247

31,275

90,558

94,965

     Interest

22,273

22,800

65,501

72,696

     Investment banking, advisory and administrative fees

9,704

9,196

31,103

31,361

     Net gains on principal transactions

8,203

5,511

23,843

25,163

     Other

4,891

7,191

19,785

18,953

Total revenue

77,488

78,055

237,466

249,536






     Interest expense

11,814

11,301

34,311

33,328

          Net revenues

65,674

66,754

203,155

216,208






Non-interest expenses:





     Commissions and other employee compensation

48,753

52,077

150,082

158,338

     Occupancy, equipment and computer service costs

7,676

7,829

23,157

23,089

     Communications

3,384

3,371

10,094

9,925

     Floor brokerage and clearing organization charges

1,189

951

3,374

2,913

     Advertising and promotional

459

922

1,721

2,327

     Loan loss recapture

(1,578)

__

(4,869)

(1,450)

     Other

7,217

7,320

19,507

23,780

Total non-interest expenses

67,100

72,470

203,066

218,922






Other losses:





Unrealized loss on warrants valuation

(6,745)

(3,840)

(6,836)

(264)

Loss before income tax expense (benefit)

(8,171)

(9,556)

(6,747)

(2,978)

Income tax expense (benefit)

586

(3,838)

27

(1,985)

Net loss

(8,757)

(5,718)

(6,774)

(993)

Net income (loss) recognized in other comprehensive loss

2,060

(725)

(1,997)

(1,260)

Comprehensive loss

$        (6,697)

$        (6,443)

$           (8,771)

$        (2,253)

 Loss per share – basic





   Net loss

$           (0.27)

$           (0.17)

$           (0.21)

$           (0.03)

   Weighted average shares outstanding – basic

33,020,499

32,896,805

32,987,933

32,857,860






Loss per share – diluted





   Net loss

$           (0.27)

$           (0.17)

$           (0.21)

$          (0.03)

   Weighted average shares outstanding – diluted

33,020,499

32,896,805

32,987,933

32,857,860

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