 Third
Quarter Fiscal 2014 SWS Group Conference Call
May 7, 2014
1
Filed by
SWS
Group,
Inc.
Pursuant
to
Rule
425
of
the
Securities
Act
of
1933
and
deemed
filed
pursuant
to
Rule
14a-12
of
the
Securities
Exchange
Act
of
1934
Subject
Company:
SWS
Group,
Inc.
(Commission
File
No.:
000-19483)
The
following
Earnings
Presentation
was
used
in
SWS
Group,
Inc.’s
quarterly
earnings
conference
call
on
Wednesday,
May
7,
2014
at
10:00
a.m.
Eastern
Time
(9:00
a.m.
Central
Time): |
 Forward-Looking Statements
This presentation 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
and
general
level of securities prices and interest rates, liquidity in capital markets,
availability of borrowings under credit lines, credit agreements and credit
facilities, customer margin loan activity, credit-worthiness of our
correspondents, trading counterparties and customers, the ability of our
borrowers to meet their contractual obligations, the value of the collateral
securing the loans that we hold, demand for real estate and investment banking
services, general
economic
conditions,
especially
in
Texas
and
New
Mexico,
changes
in
the
commercial lending and regulatory environments and the ability to meet regulatory
capital requirements and other factors discussed in our most recent Annual
Report on Form 10-K, Quarterly Report on Form 10-Q, and in our other
reports filed with and available from the Securities and Exchange
Commission. 2 |
 Use of
Non-GAAP Measures (Slides 8 & 14) 3
SWS
Group,
Inc.
(“SWS”
or
the
“Company”)
has
included
presentations
of
Adjusted
Pre-tax
Loss (Slide #8) and Adjusted Compensation Ratio (Slide #14). Adjusted Pre-tax
Loss 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 Compensation Ratio is the ratio of commissions and other employee
compensation to net revenues adjusted for the exclusion of interest expense
on the $100 million loan from Hilltop and Oak Hill and the $3.6 million gain
from the sale of shares of US Home Systems common stock in the second quarter of
fiscal 2013. Adjusted Pre-tax Loss and the Adjusted Compensation Ratio
are non-GAAP financial measures as defined in Item 10(e) of Regulation
S-K. SWS believes that the presentation of these
non-GAAP
financial
measures
provides
useful
information
by
excluding
these
items,
which SWS believes may not be indicative of the Company’s core operating
results. 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. |
 Presenters
Presenters:
James H. Ross
President & CEO
SWS Group, Inc.
J. Michael Edge
SVP & CFO
SWS Group, Inc.
4 |
 Agenda
Opening Remarks
Chief Financial Officer’s Report
Questions
5 |
 Opening
Remarks Merger agreement with Hilltop Holdings
Improvement in all business segments
Continued improvement at Bank
Broker
(88% of Q3 Revenues)
Bank
(12% of Q3 Revenues)
Retail
Institutional
Clearing
2.79% net interest
margin
$1.3 billion in assets
27.4% total risk-based
capital and 13.9% core
capital ratios
$40.9 million classified
assets including $25.1
million non-performing
assets
6
157 Reps
$15.0 billion in
customer assets
50 Reps
$1.9 billion daily
average stock
loan book
$11.7 billion
municipal new
issue volume
186,059 tickets
$16.6 billion in
assets under
custody |
 Third
Quarter Fiscal 2014 Overview 7
Three Months Ended
($ in Thousands, except per share amounts)
3/31/14
3/29/13
Revenues
$77,488
$78,055
Net Revenues
65,674
66,754
Pre-tax Loss
(8,171)
(9,556)
Net Loss
(8,757)
(5,718)
Diluted EPS –
Loss
(0.27)
(0.17)
Book Value Per Share
9.37
10.85 |
 8
Adjusted Pre-tax Loss (Non-GAAP)*
Three Months Ended
(in thousands)
3/31/14
3/29/13
Change
Loss before income tax expense
(benefit)
$(8,171)
$(9,556)
$1,385
Valuation adjustment for warrants
6,745
3,840
2,905
Merger-related expenses
2,356
--
2,356
Loan loss recapture
(1,578)
--
(1,578)
Adjusted Pre-tax Loss (Non-GAAP)
$ (648)
$(5,716)
$5,068
*See discussion of Non-GAAP reconciliation on Slide #3
|
 SWS
Priorities 9
Improve operating results
Address impact of challenging markets
Continue improvement at Bank |
 10
Chief Financial Officer’s Report |
 11
3/31/14
12/31/13
%Change
3/29/13
%Change
Operating Revenues:
Clearing Operations
$ 2,170
$ 2,213
(1.9)
$ 2,082
4.2
Commissions
30,247
29,788
1.5
31,275
(3.3)
Investment Banking & Advisory
9,704
10,084
(3.8)
9,196
5.5
Net Gains on Principal Transactions
8,203
7,465
9.9
5,511
48.8
Other
4,891
8,331
(41.3)
7,191
(32.0)
Total Operating Revenues
$55,215
$57,881
(4.6)
$55,255
(0.1)
Net Interest Income:
Brokerage
$ 5,150
$ 4,999
3.0
$ 5,101
1.0
SWS Group, Inc.
(3,221)
(3,266)
1.4
(3,080)
(4.6)
Bank
8,530
8,872
(3.9)
9,478
(10.0)
Total Interest Income
10,459
10,605
(1.4)
11,499
(9.0)
Total Net Revenue
$65,674
$68,486
(4.1)
$66,754
(1.6)
Third Quarter Fiscal 2014 Net Revenues
($ in Thousands) |
 12
3/31/14
12/31/13
Change
3/29/13
Change
Taxable Fixed Income
$3,775
$3,172
$603
$3,225
$550
Municipal Finance
$4,475
$4,158
$317
$2,095
$2,380
All other units, net
$(47)
$135
$(182)
$191
$(238)
Total
$8,203
$7,465
$738
$5,511
$2,692
Net Gains on Principal Transactions
($ in Thousands) |
 13
3/31/14
12/31/13
%Change
3/29/13
%Change
Operating Expenses:
Commissions and Other
Employee Compensation
$48,753
$48,766
--
$52,077
(6.4)
Occupancy, Equipment and
Computer Service Costs
7,676
7,729
(0.7)
7,829
(2.0)
Communications
3,384
3,362
0.7
3,371
0.4
Floor Brokerage and Clearing
Organization Charges
1,189
1,073
10.8
951
25.0
Advertising and Promotional
459
612
(25.0)
922
(50.2)
Other
7,217
6,442
12.0
7,320
(1.4)
Total Non-provision
Operating Expenses
$68,678
$67,984
1.0
$72,470
(5.2)
Loan Loss Recapture
(1,578)
(2,825)
(44.1)
--
--
Valuation Adjustment for Warrants
6,745
2,058
>100
3,840
75.7
Total Operating Expenses and
Valuation Adjustment for Warrants
$73,845
$67,217
9.9
$76,310
(3.2)
Third Quarter Fiscal 2014 Expenses
($ in Thousands) |
 14
Compensation Ratios
($ in Thousands)
Three Months Ended
3/31/14
12/31/13
3/29/13
Commissions and Other Employee Compensation
$48,753
$48,766
$52,077
Net Revenues
$65,674
$68,486
$66,754
GAAP Compensation Ratio
74.2%
71.2%
78.0%
Adjusted Compensation Ratio (Non-GAAP)*:
Three Months Ended
3/31/14
12/31/13
3/29/13
Commissions and Other Employee Compensation
$48,753
$48,766
$52,077
Net Revenues
$65,674
$68,486
$66,754
Interest Expense on Hilltop/Oak Hill Loan
$ 3,310
$ 3,268
$ 3,147
Adjusted Net Revenues (Non-GAAP)*
$68,984
$71,754
$69,901
Adjusted Compensation Ratio (Non-GAAP)*
70.7%
68.0%
74.5%
*See discussion of Non-GAAP reconciliation on Slide #3
|
 Warrant
Valuation 3/31/14
12/31/13
3/29/13
Derived Volatility
30%
46%
47%
Price
$ 7.48
$ 6.08
$ 6.05
Valuation
(in millions)
$ 31.0
$ 24.3
$ 28.1
Adjustment
(in millions)
$ 6.7
$ 2.1
$ 3.8
15 |
 Third
Quarter Fiscal 2014 Segment Results (In Thousands)
16
3/31/14
12/31/13
%Change
3/29/13
%Change
Clearing
Net Revenues
$ 5,118
$ 5,301
(3.5)
$ 4,511
13.5
Pre-Tax
$ 979
$ 1,339
(26.9)
$ (617)
>100
Retail
Net Revenues
$27,722
$28,071
(1.2)
$27,797
(0.3)
Pre-Tax
$ 2,355
$ 3,003
(21.6)
$ 308
>100
Institutional
Net Revenues
$27,849
$27,265
2.1
$26,165
6.4
Pre-Tax
$ 6,086
$ 5,949
2.3
$ 4,831
26.0
Bank
Net Revenues
$ 8,295
$10,464
(20.7)
$10,540
(21.3)
Pre-Tax
$ 2,067
$ 5,324
(61.2)
$ 1,186
74.3 |
 Key
Metrics 17
3/31/14
12/31/13
%Change
3/29/13
%Change
Clearing Transactions Processed
186,059
181,319
2.6
263,605
(29.4)
Representatives:
PCG
157
160
(1.9)
164
(4.3)
Fixed Income
50
53
(5.7)
59
(15.3)
Independent Contractors
279
280
(0.4)
302
(7.6)
Correspondents
145
146
(0.7)
147
(1.4)
Total Loan Officers
22
23
(4.3)
33
(33.3)
Total Employees
923
933
(1.1)
1,066
(13.4)
Retail Client Assets ($ in billions)
$ 15.0
$14.8
1.4
$14.3
4.9
Balances ($ in millions):
Avg. Margin Balances
$ 238.9
$ 240.9
(0.8)
$ 237.4
0.6
Avg. Credit Balances
335.5
354.9
(5.5)
329.4
1.9
Avg. Stock Loan Balances
1,914.3
1,864.7
2.7
1,584.4
20.8
Net Capital ($ in millions)
$ 148.2
$ 153.9
(3.7)
$ 145.1
2.1 |
 Classified Assets
18
($ in Thousands)
3/31/14
12/31/13
3/31/13
Non-accrual Loans
$14,388
$16,017
$19,394
Performing Troubled Debt Restructurings
4,819
3,544
2,604
REO & Other Repossessed Assets
5,880
7,355
23,694
Total Non-performing Assets
$25,087
$26,916
$45,692
Current Classified Assets
15,835
21,099
32,831
Total Classified Assets
$40,922
$48,015
$78,523
Non-performing Assets / Assets
1.98%
2.13%
3.57%
Classified Assets / Capital + Reserve
22.9%
27.2%
41.4% |
 Key Bank
Statistics *Excludes
purchased
mortgage
loans
held
for
investment
and
loans
measured
at
fair
value
19
($ in Thousands)
3/31/14
12/31/13
3/31/13
Total Loan Loss Recapture
$(1,578)
$(2,825)
$ --
Net Recovery (Charge-offs)
222
67
129
Allowance for Loan Losses
8,092
9,448
18,766
Reserve / Loan Ratio*
1.83%
2.29%
4.07%
Yield on Earning Assets
3.02%
3.04%
3.28%
Cost of Funds
0.27%
0.28%
0.28%
Net Interest Margin
2.79%
2.80%
3.04% |
 Bank
Balances 20
($ in Millions)
3/31/14
12/31/13
%Change
3/31/13
%Change
Investment Portfolio
$ 596.9
$ 603.6
(1.1)
$ 426.9
39.8
Loans
Held
for
Investment
–
Gross
566.1
537.7
5.3
660.7
(14.3)
Total Core
Deposits
995.9
995.0
0.1
1,046.3
(4.8)
Capital
170.3
167.3
1.8
170.8
(0.3)
Core Capital
13.9%
13.8%
13.1%
Total Risk-based Capital
27.4%
27.4%
23.2%
Deposits Provided by
Brokerage Clients
$ 878.3
$ 876.5
0.2
$ 927.4
(5.3) |
 Bank
Loans by Type 21
($ in Millions)
3/31/14
12/31/13
%Change
3/31/13
%Change
Residential Real Estate
Purchased Mortgage –
HFI
$ 72.5
$ 89.6
(19.1)
$ 200.0
(63.8)
1-4 Family
92.4
55.2
67.4
65.6
40.9
Construction
Residential Construction
0.8
0.7
14.3
2.2
(63.6)
Commercial Construction
5.5
3.6
52.8
8.9
(38.2)
Lot & Land Development
Residential Land
0.6
0.6
--
3.9
(84.6)
Commercial Land
5.4
5.4
--
6.3
(14.3)
Commercial Real Estate
182.8
187.0
(2.2)
233.8
(21.8)
Multi-family
133.7
123.2
8.5
75.5
77.1
Commercial Loans
69.7
69.7
--
62.9
10.8
Consumer Loans
2.7
2.7
--
1.6
68.8
Total Loans
$ 566.1
$ 537.7
5.3
$ 660.7
(14.3) |
 SWS Office
Locations 22 |
 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. 23
Important Information for Investors & Shareholders |
 24
Questions & Answers |