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SWS Group Reports Fiscal 2009 Net Income of $23.6 Million, Fourth Quarter Net Income of $3.6 Million
PR Newswire
Aug 26, 2009
DALLAS, Aug. 26 /PRNewswire-FirstCall/ -- SWS Group, Inc. (NYSE: SWS) today reported net income of $23.6 million, or diluted earnings per share (EPS) of 87 cents, on net revenues of $381.6 million for fiscal 2009, compared with net income of $31.9 million, or diluted EPS of $1.17, on net revenues of $301.6 million for fiscal 2008. Net revenue is total revenue less interest expense.
For the fourth quarter ended June 26, 2009, SWS recorded net income of $3.6 million, or diluted EPS of 13 cents, on net revenues of $99.0 million, compared with net income of $8.4 million, or diluted EPS of 31 cents, on net revenues of $87.8 million in the fourth quarter of the prior fiscal year.
Diluted EPS for fiscal 2009 and the June quarter was reduced by 12 cents when the company classified the impairment of two common stocks it holds for investment as "other than temporary." Accounting rules required recording the decline in market value of the stocks - NYSE Euronext (NYX) and U.S. Home Systems, Inc. (USHS) - through the income statement. The prior year's fourth quarter included a $1.1 million, or 4 cents per diluted share, extraordinary gain from the acquisition of M.L. Stern & Co.
Income from continuing operations was $23.6 million, or diluted EPS of 87 cents, in fiscal 2009, compared with $30.9 million, or diluted EPS of $1.13, in the prior fiscal year. Fourth quarter income from continuing operations was $3.6 million, or 13 cents per diluted share, versus $7.3 million, or 27 cents per diluted share, in the fourth quarter a year ago.
"All of our business segments were profitable in fiscal 2009 - a year marked by a credit crisis, volatile markets and deep recession," said President and Chief Executive Officer Donald W. Hultgren. "Parts of the company performed extraordinarily well, and our business managers demonstrated their skill and experience in a very tough environment. All in all we are pleased with the results and believe we are well positioned to benefit as the economy and markets improve."
Mr. Hultgren said the institutional segment, led by taxable fixed income, had its best year with $181.1 million in net revenues and $63.7 million in pre-tax income.
"Our operating expenses have increased," Mr. Hultgren said, "in part because we took advantage of opportunities for expansion of both our brokerage and banking businesses by recruiting experienced advisors and bankers while they were available."
The company injected a total of $25 million of capital into its subsidiary bank, Southwest Securities, FSB, $15 million in the third quarter and $10 million in the fourth quarter of fiscal 2009, to strengthen the balance sheet and support additional growth.
The company's net revenues increased $80 million from fiscal 2008 to fiscal 2009. Commissions increased $67.6 million, net gains on principal transactions increased $26.2 million, and net interest increased $2.3 million. Most of the commission revenue gain came from the institutional segment, which recorded a $46.7 million increase. Greater volatility and lack of liquidity resulted in wider spreads that in turn led to increased client activity, primarily in the fixed income business. The retail segment benefitted from recording a full year of M.L. Stern revenue, $35.2 million, versus only one quarter of revenue, $9.6 million, in fiscal 2008 when that acquisition was made. These increases in commission revenue were partially offset by decreases for SWS Financial Services, Inc., $2.2 million, and the private client group of Southwest Securities, Inc., $2.4 million. The increase in net gains on principal transactions resulted primarily from greater market volatility and increased customer activity in our fixed income business. The increase in net interest resulted primarily from an increase in the average loan balances at the bank. The increase in these revenues was partially offset by a $12.6 million decline from a variety of sources of other revenue including a $3.5 million decrease in revenue from the sale of insurance products, $2.9 million increase in losses related to a limited partnership venture capital fund, $1.9 million decrease in regulatory fees collected, and $1.7 million in net losses on the sale of real estate owned (REO) property at the bank.
Operating expenses increased $90.7 million for fiscal 2009 as compared with operating expenses for the prior fiscal year. Commissions and other employee compensation increased $55.2 million. Occupancy, equipment and computer service costs increased $5.9 million, and other expense increased $24.6 million. The increase in commissions and other employee compensation included a full year of M.L. Stern expenses, $32.8 million, for fiscal 2009 versus three months, $8.6 million, for fiscal 2008, as the acquisition was finalized at the start of the fourth quarter last fiscal year. The rest of the increase resulted from variable compensation because of increased profitability in the institutional segment. Most of the increase in occupancy, equipment and computer service costs was because of the M.L. Stern acquisition. Other expenses increased as a result of a $9.8 million increase in the provision for loan loss, a $5.4 million write-off that resulted from our exposure to Lehman Brothers at the time of its bankruptcy, $5 million in losses recognized on the company's investment in NYX and USHS stock, $4 million in REO, other loan related expenses and Deposit Insurance Fund (DIF) assessments, and $1.6 million in increased legal fees.
Net revenue for the fourth quarter was $99 million, an increase of 13 percent over net revenue for the fourth quarter of fiscal 2008. Fourth quarter pre-tax income declined to $5.3 million from $11.4 million in the fourth quarter of the prior fiscal year. The increase in net revenues for the fourth quarter was driven by increased net gains on principal transactions and commission revenues in the fixed income businesses offset by declines in investment banking and clearing revenues. The decline in pretax income was due primarily to the increased loan loss provision, REO expenses, and DIF assessments at the bank coupled with the other than temporary impairment of the company's investments in NYX and USHS.
Institutional Segment
Institutional segment net revenues increased 50 percent and pre-tax income rose 41 percent from fiscal 2008 to fiscal 2009. Increased commissions in the taxable fixed income and municipal businesses accounted for the additional revenues as volumes in both areas improved significantly. A decline in corporate finance and public finance advisory fees and portfolio trading revenues partially offset the increases. Net gains on principal transactions increased 277 percent year to year with the municipal business unit increasing $5.4 million and the taxable fixed income unit increasing $16 million. Net interest revenue, primarily generated in the institutional segment from securities lending, declined 10 percent. Average securities lending balances declined $938 million as a result of market disruptions and other factors while the spread earned on securities lending balances increased due to unusually high spreads in the first two quarters of fiscal 2009. Operating expenses for the segment increased 55 percent primarily because increased revenues resulted in $33.8 million in additional commission expense.
Clearing Segment
The clearing segment posted a 28 percent decrease in net revenues to $26.6 million and a 55 percent decrease in pre-tax income to $5.2 million in fiscal 2009 as compared with fiscal 2008. Southwest Securities processed 9.4 million securities transactions compared with 31.6 million in the prior fiscal year. The departure of one high volume trading customer and substantially reduced volume from another accounted for the large decline in tickets processed. The segment recorded a 79 cent increase in revenue per ticket as general securities correspondents comprised a larger portion of the volume than in the prior year. Average margin balances declined 43 percent and spreads earned on customer deposits decreased because of lower interest rates. Operating expenses for the segment decreased $4.2 million year to year as a result of reduced employee compensation and other expense. The clearing segment served 203 correspondents at the end of fiscal 2009 compared with 201 at the end of the prior fiscal year.
Retail Segment
The retail segment recorded net revenues of $114.4 million in fiscal 2009. Pre-tax income declined 70 percent to $3.6 million from $12.1 million in the prior fiscal year. Total customer assets rose slightly from $11.4 billion to $11.5 billion year to year. Net interest revenue earned by the retail segment decreased 50 percent from the prior fiscal year primarily as a result of reduced spreads earned on customer deposits. Operating expenses increased to $110.8 million primarily because of a 29 percent increase in commission expense driven by the additional commission expense stemming from the acquisition of M.L. Stern. In addition, operating expenses increased because of the addition of new branches, increased expenses for computer services, licenses and fees, professional and legal services, and shared information and technology expenses.
Banking Segment
The banking segment's net revenues increased 24 percent to $66.7 million in fiscal 2009 while pre-tax income declined 36 percent to $11.3 million. The bank's average gross loan balance increased to $1.3 billion from $1.1 billion at the end of the prior fiscal year. The banking segment's year-to-year operating expenses increased 53 percent to $55.4 million because of an increase of $9.8 million in the provision for loan losses, an increase of $3.1 million in compensation expense that included establishing five new banking centers in fiscal 2009 and various other expenses. The bank's allowance for probable loan losses stood at $14.7 million at the end of fiscal 2009.
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 release contains forward-looking statements regarding the company's future overall performance. 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, the volume of trading in securities, the volatility of securities prices and interest rates, customer margin loan activity, creditworthiness of our correspondents and customers, demand for housing, and those 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 STATEMENTS FOLLOW
Segment Results
(In thousands)
Fiscal 2009 Fiscal 2008
----------- -----------
Pretax Pretax
Net Revenue Income Net Revenue Income
----------- ------ ----------- ------
Clearing $26,565 $5,233 $37,138 $11,611
Retail 114,386 3,581 92,249 12,055
Institutional 181,102 63,708 120,739 45,140
Banking 66,710 11,281 53,970 17,701
Other consolidated
entities (7,142) (45,374) (2,465) (37,398)
----------------------------------------------
Consolidated $381,621 $38,429 $301,631 $49,109
==============================================
4th Quarter 2009 4th Quarter 2008
---------------- ----------------
Pretax Pretax
Net Revenue Income Net Revenue Income
----------- ------ ----------- ------
Clearing $5,793 $985 $8,175 $1,418
Retail 27,633 (1,498) 31,521 2,776
Institutional 45,020 16,689 34,760 14,245
Banking 20,030 4,703 14,735 3,734
Other consolidated
entities 533 (15,629) (1,402) (10,809)
----------------------------------------------
Consolidated $99,009 $5,250 $87,789 $11,364
==============================================
Non-GAAP Reconciliation
SWS has included below a presentation of adjusted income from continuing operations and adjusted diluted earnings per share from continuing operations, which exclude the impact of the loss realized from our investments in NYX and USHS common stock. SWS believes this presentation is useful to investors because it is more indicative of SWS' income and diluted earnings per share from ongoing operations. Management has provided this information to assist the reader in understanding the impact of our investments in NYX and USHS common stock for fiscal 2009. While management believes these non-GAAP financial measures are 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.
(In thousands, except per share amounts)
Fiscal Fiscal Fourth Fourth
Year Year Qtr. Qtr.
2009 2008 2009 2008
---- ---- ---- ----
Income from continuing
operations-GAAP $23,631 $30,854 $3,608 $7,310
Impact of investment in
marketable equity securities 3,231 - 3,231 -
----- --- ----- ---
Adjusted income from continuing
operations $26,862 $30,854 $6,839 $7,310
====== ====== ===== =====
EPS from continuing operations
-diluted-GAAP $0.87 $1.13 $0.13 $0.27
Impact of investment in
marketable equity securities 0.12 - 0.12 -
---- --- ---- ---
Adjusted EPS from continuing
operations $0.99 $1.13 $0.25 $0.27
==== ==== ==== ====
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 26, 2009 and June 27, 2008
(In thousands, except par values and share amounts)
June 26, June 27,
2009 2008
------- -------
Assets
Cash and cash equivalents $96,253 $39,628
Assets segregated for regulatory purposes 313,153 322,575
Receivable from brokers, dealers and
clearing organizations 1,892,739 2,849,982
Receivable from clients, net of allowances 158,032 286,945
Loans held for sale 262,780 359,945
Loans, net 1,138,602 925,758
Securities owned, at market value 175,030 198,573
Securities purchased under agreements to resell 21,622 9,862
Goodwill 7,552 7,552
Marketable equity securities available for sale 4,094 6,964
Other assets 129,182 110,467
------- -------
Total assets $4,199,039 $5,118,251
========== ==========
Liabilities and Stockholders' Equity
Short-term borrowings $10,000 $86,800
Payable to brokers, dealers and clearing
organizations 1,853,544 2,794,377
Payable to clients 426,300 556,029
Deposits 1,292,366 1,071,973
Securities sold under agreements to repurchase 4,462 6,342
Securities sold, not yet purchased, at
market value 53,236 26,511
Drafts payable 27,457 19,657
Advances from Federal Home Loan Bank 117,492 166,250
Other liabilities 73,825 67,306
------ ------
Total liabilities 3,858,682 4,795,245
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 27,262,923
shares at June 26, 2009; issued 28,269,134
and outstanding 27,195,609 shares at June
27, 2008 2,831 2,827
Additional paid-in capital 271,131 269,360
Retained earnings 75,918 62,100
Accumulated other comprehensive income -
unrealized holding loss, net of tax 180 (1,194)
Deferred compensation, net 2,639 1,994
Treasury stock (1,046,216 shares at June 26,
2009 and 1,073,525 shares at June 27, 2008,
at cost) (12,342) (12,081)
------- -------
Total stockholders' equity 340,357 323,006
------- -------
Total liabilities and stockholders' equity $4,199,039 $5,118,251
========== ==========
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the three and twelve months ended June 26, 2009 and June 27, 2008
(In thousands, except per share and share amounts)
Three Three Twelve Twelve
Months Months Months Months
Ended Ended Ended Ended
June 26, June 27, June 26, June 27,
2009 2008 2009 2008
------- ------- ------- -------
Revenues:
Net revenues from clearing
operations $2,767 $3,319 $11,541 $13,951
Commissions 43,589 35,790 179,003 111,368
Interest 48,534 68,792 211,873 281,422
Investment banking, advisory
and administrative fees 8,654 11,093 36,382 37,517
Net gains on principal
transactions 12,703 2,720 34,831 8,653
Other 5,897 6,059 12,047 24,616
----- ----- ------ ------
Total revenue 122,144 127,773 485,677 477,527
Interest expense 23,135 39,984 104,056 175,896
------ ------ ------- -------
Net revenues 99,009 87,789 381,621 301,631
------ ------ ------- -------
Non-Interest Expenses:
Commissions and other
employee compensation 61,580 55,811 239,003 183,830
Occupancy, equipment and
computer service costs 8,648 7,726 32,994 27,093
Communications 3,289 2,888 13,124 10,091
Floor brokerage and clearing
organization charges 832 1,031 3,497 2,257
Advertising and promotional 1,432 1,430 4,547 3,861
Other 17,978 7,539 50,027 25,390
------ ----- ------ ------
Total non-interest expenses 93,759 76,425 343,192 252,522
------ ------ ------- -------
Income from continuing
operations before income
tax expense 5,250 11,364 38,429 49,109
Income tax expense 1,642 4,054 14,798 18,255
----- ----- ------ ------
Income from continuing
operations 3,608 7,310 23,631 30,854
Discontinued operations:
Income from discontinued
operations - - - 29
Income tax expense - - - (9)
Minority interest - - - (3)
--- --- --- ---
Income from discontinued
operations - - - 17
--- --- --- ---
Income before extraordinary gain 3,608 7,310 23,631 30,871
Extraordinary gain, net of tax
of $571 - 1,061 - 1,061
--- ----- --- -----
Net income 3,608 8,371 23,631 31,932
Net gain (loss) recognized in
other comprehensive income 3,980 (494) 1,374 (2,611)
----- ---- ----- ------
Comprehensive income $7,588 7,877 $25,005 $29,321
====== ===== ======= =======
Three Three Twelve Twelve
Months Months Months Months
Ended Ended Ended Ended
June 26, June 27, June 26, June 27,
2009 2008 2009 2008
------- ------- ------- -------
Earnings per share - basic
Income from continuing
operations $0.13 $0.27 $0.87 $1.13
Income from discontinued
operations - - - -
Income from extraordinary
gain - 0.04 - 0.04
--- ---- --- ----
Net income $0.13 $0.31 $0.87 $1.17
===== ===== ===== =====
Weighted average shares
outstanding - basic 27,132,912 26,940,762 27,104,449 27,227,848
========== ========== ========== ==========
Earnings per share -
diluted
Income from continuing
operations $0.13 $0.27 $0.87 $1.13
Income from discontinued
operations - - - -
Income from extraordinary
gain - 0.04 - 0.04
--- ---- --- ----
Net income $0.13 $0.31 $0.87 $1.17
===== ===== ===== =====
Weighted average shares
outstanding - diluted 27,235,104 27,129,046 27,233,139 27,378,437
========== ========== ========== ==========
SOURCE SWS Group, Inc.
Copyright (2009) PR Newswire. All Rights Reserved.
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