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SWS Reports Significant Increase in Second Fiscal Quarter Earnings; Net Income Totaled $8.8 Million on Revenues of $101.7 Million

Posted on: Wednesday, 8 February 2006, 18:00 CST

DALLAS, Feb. 8 /PRNewswire-FirstCall/ -- SWS Group, Inc. today reported net income of $8.8 million, or diluted earnings per share (EPS) of 50 cents, on revenues of $101.7 million for the company's second fiscal quarter ended Dec. 30, 2005.

Net income and EPS increased more than 90 percent and revenues increased 25 percent from the prior year's second quarter when SWS earned net income of $4.5 million, or diluted EPS of 26 cents, on revenues of $81.2 million.

For the first half of fiscal 2006, SWS recorded revenues of $203.5 million, net income of $15.9 million and diluted EPS of 91 cents, compared with revenues of $165.9 million, net income of $20.4 million and diluted EPS of $1.18 a year earlier. The prior year period includes a $12.2 million gain, net of tax, from the redemption of the company's DARTS(SM) subordinated notes at maturity. Without this gain, six-month net income last year would have been $8.3 million, or 48 cents per share. (See accompanying non-GAAP financial information.)

"We are pleased with the company's progress," said Chief Executive Officer Donald W. Hultgren. "We were able to increase net revenues and income substantially while continuing to keep expenses under control."

Second quarter net revenues (total revenues less interest expense) increased $5.8 million from year-ago levels, as net interest revenue increased $2.4 million and other revenue rose $2 million. Net interest revenue was driven higher by the securities lending business and an increase in average loans outstanding at the subsidiary bank, Southwest Securities, FSB. Other revenue benefited from a $1.5 million gain from a corporate venture capital investment. Commission revenue, public finance fees, and fixed income trading revenues were all higher than in the prior year's second quarter, and net revenues from clearing operations experienced only a moderate decline.

Six-month net revenues were up slightly; however, $18.7 million of the prior year's net revenue was from the maturity of the DARTS. Excluding the DARTS, most categories showed solid gains as compared with results from the first half of the prior year. Net interest revenue increased $9 million, or 24 percent, investment banking, advisory and administrative fees increased $2.8 million, or 21 percent, and commission revenue was up $2.6 million, or 6 percent. Portfolio trading recorded the largest increases in commissions for both the quarter and six-month periods.

Net revenues from clearing operations decreased $225,000, or 3 percent, in the first half of fiscal 2006. General securities clearing correspondents generated strong trading volume, up 24 percent from year ago levels. However, the overall trading volume processed in the six-month period did not match that of a year ago. As previously reported, one of the company's high volume trading customers began clearing through an affiliate of its parent beginning in the second quarter of last year.

Second quarter operating expenses declined $424,000. The only expense category to increase, commissions and other employee compensation, was up $2.8 million or 8 percent, primarily from increased business line revenues and health insurance costs. Six-month operating expenses were up $7.4 million,

largely as a result of a $10.4 million, or 15 percent increase, in commissions and other employee compensation.

Fiscal-year-to-date transactions processed by Southwest Securities, Inc. for correspondent broker/dealers totaled approximately 7 million compared with 8.7 million in the prior year period. Book value per share was $16.00 compared with $14.90 a year ago.

The company recorded gains of $210,000 and $199,000, for the three and six-month periods, respectively, from the market appreciation of its 23,721 shares of Archipelago stock. This compares to gains of $242,000 and $900,000 for the comparable periods of the prior fiscal year.

Southwest Securities has been a member of the New York Stock Exchange since the company was established in 1972 and owns one seat on the exchange carried at a cost of $230,000. If the plan of merger between the NYSE and Archipelago proceeds as expected, Southwest Securities will surrender its seat on the exchange for the right to receive $300,000 in cash and 80,177 shares of restricted common stock from the NYSE Group. In lieu of a seat on the exchange, Southwest Securities secured the right to a trading license for $49,290 at the inaugural NYSE license auction on Jan. 4, 2006. This license will provide the firm continued physical and electronic access to the NYSE trading facilities following the close of the merger, which is anticipated to occur this month.

SWS repurchased 31,090 shares of its common stock in the second quarter at a cost of $478,000, or $15.36 per share, in accordance with an authorization by the company's board of directors. As of the end of the quarter, 468,910 shares may be repurchased under the authorization, which expires at the end of calendar 2006.

Subsequent to the end of the quarter, Southwest Securities completed the sale of the assets of its Institutional Sales/Trading and Research departments to another regional broker/dealer. Under the terms of the transaction, the company received an initial payment and will participate in a three-year earn- out based on sales production. Southwest Securities will continue to offer corporate finance and equity trading services, including portfolio trading and other services for institutional clients.

SWS Group, Inc. is a Dallas-based holding company that offers 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., Southwest Securities, FSB, SWS Financial Services, Inc., and Southwest Insurance Agency.

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, volume of trading in securities, volatility of securities prices and interest rates, customer margin loan activity, credit worthiness 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 TABLES FOLLOW

Reconciliation of GAAP Financial Information to Non-GAAP Financial Information

SWS believes that the presentation of net income and EPS excluding the gain on the maturity of the DARTS for the six months ended December 31, 2004 is useful to investors because it is more indicative of the SWS' net income from recurring operations and EPS. Management has provided this information to assist the reader in understanding the impact of the large gain recognized when the DARTS matured June 30, 2004 that is discussed herein. 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.

(In thousands except per share amounts) 6 months ended 6 months ended 12/30/2005 12/31/2004 (Restated) Net Income -- GAAP $15,937 $20,429 Gain on Maturity of DARTS, net of tax --- (12,176) Net Income Excluding DARTS $15,937 $ 8,253 Earnings per share-diluted -- GAAP $ 0.91 $ 1.18 Gain on Maturity of DARTS, net of tax --- (0.70) Earnings per share-diluted Excluding DARTS $ 0.91 $ 0.48 SWS GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition December 30, 2005 and June 24, 2005 (In thousands, except par values and share amounts) (Unaudited) Dec. 30, 2005 June 24, 2005 Assets Cash and cash equivalents $27,607 $23,045 Assets segregated for regulatory purposes 367,641 330,788 Marketable equity securities available for sale 3,077 2,372 Receivable from brokers, dealers and clearing organizations 2,427,645 2,855,296 Receivable from clients, net 366,407 372,143 Loans held for sale, net 136,857 172,023 Loans, net 647,434 591,857 Securities owned, at market value 176,407 166,954 Securities purchased under agreements to resell 34,107 28,890 Goodwill 11,746 11,660 Other assets 70,153 76,116 Total assets $4,269,081 $4,631,144 Liabilities and Stockholders' Equity Short-term borrowings $47,300 $68,400 Payable to brokers, dealers and clearing organizations 2,318,032 2,755,076 Payable to clients 643,387 609,477 Deposits 642,028 587,978 Securities sold under agreements to repurchase 29,417 8,061 Securities sold, not yet purchased, at market value 115,106 106,163 Drafts payable 37,401 32,018 Advances from Federal Home Loan Bank 75,189 93,539 Bank borrowings 27,950 47,150 Other liabilities 52,261 56,346 Total liabilities 3,988,071 4,364,208 Minority interest in consolidated subsidiaries 1,273 1,166 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 18,048,475 and outstanding 17,484,402 shares at December 30, 2005; issued 17,977,240 and outstanding 17,329,779 shares at June 24, 2005 1,804 1,797 Additional paid-in capital 250,903 248,955 Retained earnings 36,012 23,920 Accumulated other comprehensive income - unrealized holding gain (loss), net of tax 598 138 Deferred compensation, net (907) 529 Treasury stock (564,073 shares at December 30, 2005 and 647,461 shares at June 24, 2005, at cost) (8,673) (9,569) Total stockholders' equity 279,737 265,770 Commitments and contingencies Total liabilities and stockholders' equity $4,269,081 $4,631,144 SWS GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income For the three and six months ended December 30, 2005 and December 31, 2004 (In thousands, except per share and share amounts) (Unaudited) Three Three Six Six Months Months Months Months Ended Ended Ended Ended Dec. 30, Dec. 31, Dec. 30, Dec. 31, 2005 2004 2005 2004 (Restated) (Restated) Net revenues from clearing operations $3,449 $3,724 $7,166 $7,391 Commissions 25,056 24,304 46,126 43,529 Interest 55,307 38,167 112,175 65,519 Investment banking, advisory and administrative fees 6,931 6,459 16,107 13,306 Net gains on principal transactions 3,844 3,456 8,844 25,772 Other 7,147 5,122 13,115 10,338 Total revenue 101,734 81,232 203,533 165,855 Commissions and other employee compensation 38,680 35,853 77,698 67,346 Interest 32,158 17,442 65,349 27,722 Occupancy, equipment and computer service costs 6,078 6,699 11,838 13,566 Communications 2,338 3,098 4,822 6,185 Floor brokerage and clearing organization charges 798 1,587 2,093 3,169 Advertising and promotional 709 1,093 1,398 1,925 Other 7,423 8,120 15,676 13,946 Total expense 88,184 73,892 178,874 133,859 Income before income tax expense and minority interest in consolidated subsidiaries 13,550 7,340 24,659 31,996 Income tax expense 4,723 2,546 8,706 11,052 Income before minority interest in consolidated subsidiaries 8,827 4,794 15,953 20,944 Minority interest in consolidated subsidiaries (62) (253) (91) (515) Income before cumulative effect of change in accounting principles 8,765 4,541 15,862 20,429 Cumulative effect of change in accounting principles, net of tax of $40 --- --- 75 --- Net income 8,765 4,541 15,937 20,429 Net income (loss) recognized in other comprehensive income, net of tax 202 327 460 (12,288) Comprehensive income $8,967 $4,868 $16,397 $8,141 Earnings per share - basic Income before cumulative effect of change in accounting principles $0.51 $0.27 $0.91 $1.19 Cumulative effect of change in accounting principles, net of tax --- --- 0.01 --- Net income $0.51 $0.27 $0.92 $1.19 Weighted average shares outstanding - basic 17,353,831 17,181,347 17,340,925 17,158,916 Earnings per share - diluted Income before cumulative effect of change in accounting principles $0.50 $0.26 $0.90 $1.18 Cumulative effect of change in accounting principles, net of tax --- --- 0.01 --- Net income $0.50 $0.26 $0.91 $1.18 Weighted average shares outstanding - diluted 17,615,354 17,436,580 17,564,369 17,340,738

FCMN Contact: jbowman@swst.com

SWS Group, Inc.

CONTACT: Jim Bowman, Vice President - Corporate Communications of SWSGroup, Inc., +1-214-859-9335, or jbowman@swst.com

Web site: http://www.swsgroupinc.com/

Source: PRNewswire-FirstCall

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