SWS Group, Inc. (SWS)

F4Q2010 Earnings Call Transcript

August 31, 2010 10:00 am ET

Executives

Kathy Kennedy – Corporate Staff

Jim Ross – CEO

John Holt – President and CEO, Southwest Securities, FSB

Ken Hanks – CFO

Analysts

Joel Jeffrey – Keefe, Bruyette & Woods

Hugh Miller – Sidoti & Company

Patrick Davitt – Bank of America/Merrill Lynch

Mac Sykes – Gabelli & Company

Chris Luka – Philadelphia Financial

David Knott – Dorset Management

Presentation

Kathy Kennedy

Good morning everyone and welcome to the SWS Group’s quarterly conference call and webcast. This is Kathy Kennedy of SWS Corporate Staff. We are pleased you could join us today.

The quarterly earnings press release can be found on our Website at swst.com or on the Yahoo! Finance Website under SWS News. Market professionals on our distribution list should have also received the slides for today's call via e-mail. If you would like to be added to our e-mail list to receive press releases or to be notified of future quarterly calls, please contact us at 214-859-6351.

This conference call is being webcast live on the Internet along with the accompanying slides at swst.com where it will be archived for the next 30 days. During the question-and-answer session, call participants can access the queue to ask questions by pressing star one on their telephone. Those participating via the Internet can ask questions from the link provided on the webcast page or by e-mailing them to questions@swst.com.

This presentation contains forward-looking statements. Viewers 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, liquidity and capital and credit market, availability of lines of credit, customer margin loan activity, creditworthiness of our correspondents and customers, demand for housing, general economic conditions, especially in Texas and New Mexico, changes in the commercial lending and regulatory environment, 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.

At this point, it is a pleasure to introduce Mr. Jim Ross, Chief Executive Officer of SWS. Jim?

Jim Ross

Thanks Kathy and good morning everyone. First, let me introduce additional participants this morning. Mr. Ken Hanks, CFO of SWS Group; and Mr. John Holt, President and CEO of Southwest Securities, FSB. This morning, I will touch on some important topics for SWS Group since our last earnings call. John Holt will provide an update on activities at the Bank, then Ken will provide a detailed review of the numbers for the quarter and the fiscal year. I will finish up with a discussion of our business model and strategic direction, and finally we will open it up for questions. Questions are star one on the telephone, and questions@swst.com.

If you have been following our recent press releases, it is clear we have been going through a period of change in SWS Group. Today, I would like to touch on what has changed as well as what remains the same at SWS.

I am going to talk about our business model, the regulatory environment, what we are doing at the banks and the approach we are taking to fill the CEO position. The recent changes in management at SWS Group have not changed our basic broker bank business model. We continue to believe that the ability provides liquidity to our Bank through low-cost deposits from our brokerage company gives us a very attractive platform. 55 basis points cost of funds is hard to beat. We are still committed to organic growth at the brokerage business by recruiting both retail and institutional businesses.

While the environment for recruiting is not as robust as year ago, we are still finding opportunities to hire quality sales professionals in all of our channels. And while the long-term focus on growth at the Bank has not changed, the current economic environment requires that the Bank focus in short term for credit quality issues. John will discuss this in more detail a little later in the call.

The passage of the Dodd-Frank Act has finalized some of the regulatory uncertainty growth in the Bank side. Our regulatory or our primary regulator will transition from the OTS to the OTC and our holding company will be regulated by the Federal Reserve. We are taking steps at the Bank in the holding company levels to be prepared for these changes. The holding company will be subject to more specific rules and is currently the case in the Bank and the Bank will be developing relationships with a new set of regulators. We believe we will be ready for this transaction, this transition.

On the brokerage side of the business, the SEC and others have a lot of studies to perform, and rule-making to do before we know the specifics of the changes for the brokerage business. Of course, we are monitoring these changes as they develop, and believe we will be able to respond in a timely manner. We have made a lot of changes at the Bank from the last quarter of fiscal 2010 to focus on credit quality and regulatory issues. We have hired staff and special assets, credit and portfolio management discipline to reduce our exposure to real estate and to deal with re-possessed assets in a timely manner. John and the team at the Bank are making progress on items highlighted in the informal agreement with the OTS in moving the Bank to a lower-risk profile.

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