SWS Group Reports Net Income of $31.9 Million for Fiscal 2008

Fourth Quarter Diluted EPS of 31 Cents versus 25 Cents

DALLAS, Aug. 27 /PRNewswire-FirstCall/ -- SWS Group, Inc. (NYSE: SWS)
today reported net income of $31.9 million, or diluted earnings per share
(EPS) of $1.17, on net revenues of $301.6 million for fiscal 2008, compared
with net income of $37.6 million, or diluted EPS of $1.38, on net revenues of
$273.6 million for fiscal 2007. Net revenue is total revenue less interest
expense.
For the fourth quarter ended June 27, 2008, SWS recorded net income of
$8.4 million, or diluted EPS of 31 cents, on net revenues of $87.8 million,
compared with net income of $7.0 million, or diluted EPS of 25 cents, on net
revenues of $65.5 million in the fourth quarter of the prior fiscal year.
A $1.1 million extraordinary gain, 4 cents per diluted share, from the
acquisition of M.L. Stern & Co. is included in net income for the fourth
quarter and fiscal year just concluded.
Adjusted income from continuing operations was $30.9 million, or diluted
EPS of $1.13, in fiscal 2008, compared with $34.5 million, or diluted EPS of
$1.26, in the prior fiscal year. In fiscal 2007, the adjustment eliminates
the 3 cents per share impact of the company's investment in NYX common stock
and the 8 cents per share gain from company-owned life insurance proceeds.
(See Non-GAAP Reconciliation table at the end of this release.)
"We are very pleased with our quarterly and annual financial results
considering the disruptions the financial industry has experienced over the
past year," said President and Chief Executive Officer Donald W. Hultgren.
"Our institutional businesses -- securities lending, fixed income, municipal
securities and investment banking -- had an outstanding year and fourth
quarter. Our retail brokerage, clearing and banking segments made progress
toward their business goals in spite of turbulent markets and a tough economic
environment."
Hultgren said the results of M.L. Stern & Co., which were included in SWS
Group's consolidated financial statements for the fourth quarter, made a
positive contribution to the company's retail segment. "M.L. Stern and Tower
Asset Management are excellent additions to our private client business," he
said. "Our associates at M.L. Stern will play an important role in growing
our brokerage business."
"Many of our business lines are in a building period," Hultgren continued.
"Our Clearing Services Division, for example, has incurred heavier than usual
expenses as the new head of clearing restructures that business to enhance the
correspondent's experience, increase operational efficiency and drive future
growth. We believe the investment we're making in building our business
segments will reward our shareholders as those efforts mature."
Hultgren said the bank continued to diversify and increase its lending in
areas that are experiencing good demand such as commercial, small business and
commercial real estate. He said interest rates began to stabilize in the
fourth quarter of fiscal 2008, resulting in improved net interest margins.
"We are continuing to recruit experienced bankers and open new, full-service
banking centers," Hultgren said. The bank recently had a grand opening for
its new banking center in Waxahachie, Texas and will open its first
out-of-state banking center in Ruidoso, New Mexico in a few weeks.
The company's net revenues increased $28.0 million from fiscal 2007 to
fiscal 2008. Commissions increased $21.0 million, net interest increased
$10.7 million, investment banking, advisory and administrative fees improved
$4.1 million, and net revenue from clearing organizations rose $1.5 million.
The rise in commission revenue primarily resulted from the acquisition of M.L.
Stern and higher commissions in the fixed income business. Net interest
revenue improved because of an improved spread earned on securities lending
balances, investments in tax-exempt municipal auction rate bonds and higher
average loan balances at the bank. An increase in money market fees and fees
from M.L. Stern resulted in increased investment banking, advisory and
administrative fee revenues. These increases were partially offset by a
decrease in net gains on principal transactions of $6.8 million. The prior
fiscal year included a $1.2 million gain on the value of NYX stock as well as
a $2.7 million gain on the restructuring of a commercial mortgage backed
security. Trading profits were also reduced in fiscal 2008 as a result of
carrying lower inventories.
Operating expenses increased $35.1 million for fiscal 2008 as compared
with operating expenses for the prior fiscal year. Commissions and other
employee compensation increased $23.9 million. Occupancy, equipment and
computer service costs increased $3.6 million, and other expense increased
$6.7 million. Compensation expenses rose as a result of the acquisition of
M.L. Stern in the fourth quarter and expenses related to the employment of a
new head of clearing and new lenders and staff at the bank. Occupancy,
equipment and computer service costs increased primarily because of increased
maintenance expenses for the CSS software system and new branch offices in the
retail, institutional and banking business segments. Other expense increased
as a result of higher professional and legal services costs of $4.2 million as
well as an increase in the provision for loan loss of $2.9 million.
Net revenue for the fourth quarter was $87.8 million, an increase of 34
percent over net revenue for the fourth quarter of fiscal 2007. Pretax income
of $11.4 million was up $451,000, or 4 percent, over pretax income recorded
for the prior year's fourth quarter. The increase in net revenue was driven
by the M.L. Stern acquisition, increased net interest revenue from improved
stock loan spreads, and improved results in the corporate finance and fixed
income businesses. While pretax income in the institutional segment increased
163.5 percent in the fourth quarter of fiscal 2008 from the prior year period,
this increase was offset by increased expenses in the other segments.
Southwest Securities processed 31.6 million securities transactions in
fiscal 2008 compared with 17.4 million in fiscal 2007, an increase of
82 percent. The firm served 201 correspondents at the end of fiscal 2008.
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., M.L. Stern & Co., SWS Financial Services, Inc., Southwest Securities,
FSB and Southwest Insurance Agency.
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

Non-GAAP Reconciliation
SWS has included the presentation of income from continuing operations and
diluted earnings per share from continuing operations, excluding the impact of
the gain realized from our investment in NYX common stock and the proceeds
from company-owned life insurance. 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 investment in NYX
common stock for fiscal 2007 and fiscal 2008 and the gain recognized on
company-owned life insurance in fiscal 2007. 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 Year 2008 Fiscal Year 2007
Income from continuing
operations $30,854 $37,507
Impact of investment in
NYX common stock -- (758)
Gain from insurance proceeds -- (2,289)
Adjusted income from
continuing operations $30,854 $34,460

EPS from continuing
operations - diluted - GAAP $1.13 $1.37
Impact of investment in NYX
common stock -- (0.03)
Gain from insurance proceeds -- (0.08)
EPS from continuing
operations - diluted - adjusted $1.13 $1.26

Segment Results
(In thousands)

Fiscal 2008 Fiscal 2007
Pretax Pretax
Net Revenue Income Net Revenue Income

Clearing $37,138 $11,611 $38,677 $19,950
Retail 92,249 12,055 76,715 13,015
Institutional 120,739 45,140 101,619 29,839
Bank 53,970 17,701 51,106 25,235
Other consolidated
entities (2,465) (37,398) 5,498 (31,826)

Consolidated $301,631 $49,109 $273,615 $56,213

4th Quarter 2008 4th Quarter 2007
Pretax Pretax
Net Revenue Income Net Revenue Income

Clearing $8,175 $1,418 $10,215 $5,502
Retail 31,521 2,776 19,670 3,450
Institutional 34,760 14,245 23,489 5,407
Bank 14,735 3,734 13,546 6,539
Other consolidated
entities (1,402) (10,809) (1,457) (9,985)

Consolidated $87,789 $11,364 $65,463 $10,913

SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 27, 2008 and June 29, 2007
(In thousands, except par values and share amounts)

June 27, 2008 June 29, 2007
Assets
Cash and cash equivalents $39,628 $128,760
Assets segregated for regulatory purposes 322,575 319,265
Receivable from brokers, dealers and
clearing organizations 2,849,982 3,117,766
Receivable from clients, net of allowances 286,945 344,125
Loans held for sale 359,945 148,013
Loans, net 925,758 756,037
Securities owned, at market value 198,573 119,621
Securities purchased under agreements to
resell 9,862 42,486
Goodwill 7,552 7,552
Marketable equity securities available
for sale 6,964 3,793
Other assets 110,467 87,167
Total assets $5,118,251 $5,074,585

Liabilities and Stockholders' Equity
Short-term borrowings $86,800 $4,000
Payable to brokers, dealers and clearing
organizations 2,794,377 3,051,956
Payable to clients 556,029 581,118
Deposits 1,071,973 897,150
Securities sold under agreements to repurchase 6,342 17,829
Securities sold, not yet purchased, at
market value 26,511 63,470
Drafts payable 19,657 25,718
Advances from Federal Home Loan Bank 166,250 66,989
Other liabilities 67,306 59,482
Total liabilities 4,795,245 4,767,712

Minority interest in consolidated subsidiaries -- 426

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
28,269,134 and outstanding 27,195,609
shares at June 27, 2008; issued 28,197,278
and outstanding 27,491,528 shares at
June 29, 2007 2,827 2,819
Additional paid-in capital 269,360 268,575
Retained earnings 62,100 39,729
Accumulated other comprehensive income -
unrealized holding gain (loss), net of tax (1,194) 1,417
Deferred compensation, net 1,994 1,644
Treasury stock (1,073,525 shares at
June 27, 2008 and 705,750 shares at
June 29, 2007, at cost) (12,081) (7,737)
Total stockholders' equity 323,006 306,447
Total liabilities and stockholders' equity $5,118,251 $5,074,585

SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the three and twelve months ended June 27, 2008 and June 29, 2007
(In thousands, except per share and share amounts)

Three Months Three Months Twelve Months Twelve Months
Ended Ended Ended Ended
June 27, June 29, June 27, June 29,
2008 2007 2008 2007
Revenues:
Net revenues
from
clearing
operations $3,319 $3,338 $13,951 $12,451
Commissions 35,790 25,136 111,368 90,398
Interest 68,792 73,904 281,422 292,062
Investment
banking,
advisory and
administrative
fees 11,093 7,164 37,517 33,411
Net gains
(losses) on
principal
transactions 2,720 (1,006) 8,653 15,460
Other 6,059 6,618 24,616 27,116
Total revenue 127,773 115,154 477,527 470,898

Interest expense 39,984 49,691 175,896 197,283
Net revenues 87,789 65,463 301,631 273,615

Non-Interest
Expenses:
Commissions and
other employee
compensation 55,811 39,378 183,830 159,915
Occupancy,
equipment
and computer
service costs 7,726 6,357 27,093 23,454
Communications 2,888 2,319 10,091 8,826
Floor brokerage
and clearing
organization
charges 1,031 1,213 2,257 3,904
Advertising and
promotional 1,430 678 3,861 2,586
Other 7,539 4,605 25,390 18,717
Total non-interest
expenses 76,425 54,550 252,522 217,402

Income from
continuing
operations before
income tax expense 11,364 10,913 49,109 56,213
Income tax expense 4,054 3,984 18,255 18,706
Income from
continuing
operations 7,310 6,929 30,854 37,507
Discontinued
operations:
Income from
discontinued
operations -- 44 29 175
Income tax expense -- (14) (9) (55)
Minority interest -- (5) (3) (18)
Income from
discontinued
operations -- 25 17 102
Income before
extraordinary gain 7,310 6,954 30,871 37,609
Extraordinary gain,
net of tax of $571 1,061 -- 1,061 --
Net income 8,371 6,954 31,932 37,609
Net income (loss)
recognized in
other comprehensive
income (494) (570) (2,611) 192
Comprehensive income $7,877 $6,384 $29,321 $37,801

Earnings per share
- basic
Income from
continuing
operations $0.27 $0.25 $1.13 $1.39
Income from
discontinued
operations -- -- -- --
Income from
extraordinary
gain 0.04 -- 0.04 --
Net income $0.31 $0.25 $1.17 $1.39
Weighted average
shares
outstanding
- basic 26,940,762 27,332,891 27,227,848 26,972,392

Earnings per
share - diluted
Income from
continuing
operations $0.27 $0.25 $1.13 $1.37
Income from
discontinued
operations -- -- -- 0.01
Income from
extraordinary
gain 0.04 -- 0.04 --
Net income $0.31 $0.25 $1.17 $1.38
Weighted average
shares
outstanding
- diluted 27,129,046 27,650,866 27,378,437 27,284,218

SOURCE SWS Group, Inc.

Jim Bowman, VP, Corporate Communications of Southwest Securities,
+1-214-859-9335, jbowman@swst.com