SWS Group Inc. ( SWS)

Q3 2010 Earnings Call

November 03, 2010 10:00 am ET

Executives

Kathy Kennedy - Corporate Staff

Jim Ross - President and CEO

John Holt. - Chairman, President and CEO, Southwest Securities, FSB

Stacy Hodges - Interim CFO & Treasurer

Analysts

Joel Jeffrey - Keefe, Bruyette & Woods

Hugh Miller - Sidoti & Co

Mac Sykes - Gabelli & Company

Presentation

Kathy Kennedy

Good morning, everyone and welcome to the SWS Group quarterly conference call and webcast. This is Kathy Kennedy of the 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 email. If you would like to be added to our email 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, the call participants can access the queue to ask questions by pressing *1 on their telephone. Those participating via the internet can ask questions from the link provided on the webcast page or by emailing them to questions@swst.com.

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 and body projections or assumptions or express the intent, belief or current expectations of the Company or management, are not guarantees of future performance and involve risk 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 security prices and interest rates, liquidity in capital and credit markets, availability of lines of credit, customer margin loan activity, credit worthiness of our correspondents and customers, the ability of the bank's borrowers to meet their contractual obligations, the value of the collateral securing the bank loans, demand for housing, general economic conditions, especially in Texas and New Mexico, changes in the commercial lending and regulatory environment, the ability to meet regulatory capital requirements and other factors discussed in our annual reports on Form 10-K and in our other reports filed with and available from the Securities and Exchange Commission.

This conference also contains references to non-GAAP financial information, which is being presented to provide additional information regarding the Company's operations and should not be used in place of GAAP measures. The Company's press release and today's slides include a reconciliation of these non-GAAP measures with the Company's GAAP results.

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

Jim Ross

Thank you, Kathy. Good morning, everyone. Let me take this opportunity to introduce our other participants. We have with us this morning Ms. Stacy Hodges, CFO of SWS Group and Mr. John Holt, CEO of Southwest Securities FSB, our bank.

Our agenda for this morning, first, 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. Stacy Hodges will follow up and provide a detailed review of the numbers for the quarter and I will finish with a discussion of our strategic direction. After that, we will open it up for questions. As Kathy said earlier, star one for those of you on the phone, that is questions@swst.com for people participating on the internet.

This morning, I am going to give you an update on SWS Group. SWS Group is a diverse group of businesses composed of a great brokerage operation, a bank, one that is working to become stronger and more diversified and a holding company with no debt and access to capital markets. This call will focus on what is going well at SWS Group, as well as what is more challenging.

To start, what is going well is the brokerage side of the business. We believe we have a significant opportunity in this business and we are well-positioned in our marketplace. With the challenges experienced by the national firms in the current economic cycle, regional firms have benefited from a good recruiting environment and a chance to enter new business lines. All of our brokerage operations, but particularly the retail and institutional segments, are taking advantage of this opportunity.

The combined scope of our brokerage operations is approximately 78% of first-quarter net revenues. We are pleased to report that each of these segments was profitable in the September quarter. These business lines are operating very well despite the interest rate environment and sluggish economic growth.

Southwest Securities, our primary brokerage subsidiary, ended the quarter with a strong net capital position, over $105 million. It is our plan to operate Southwest Securities at a minimum of $100 million net capital level. The bank, at 22% of net revenue, is facing some challenges on both the regulatory and economic front. Bank management is focused on reducing classified assets, repositioning the balance sheet while maintaining excess capital liquidity.

The Retail segment had a nice quarter, especially considering the summer months are generally a slower time in this segment. The key to growth in this business is the recruiting of representatives that will be a good fit for Southwest Securities. Sometimes our recruiting opportunities lead us to evaluate and then move into new office locations. The December quarter is always a difficult one for recruiting as we look forward, but we are looking forward to starting off a strong new calendar year.

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