Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 9, 2012)
  • 10-Q (Aug 8, 2012)
  • 10-Q (May 8, 2012)
  • 10-Q (Nov 4, 2011)
  • 10-Q (Sep 2, 2011)
  • 10-Q (Aug 5, 2011)

 
8-K

 
Other

KBW Inc. 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-3.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
10-Q
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
     
(Mark One)    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 2007
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to
 
Commission File Number: 001-33138
 
 
     
Delaware
  13-4055775
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
 
787 Seventh Avenue, New York, New York 10019
 
Registrant’s telephone number: (212) 887-7777
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o          Accelerated Filer o          Non-Accelerated Filer þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ
 
The number of shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of October 31, 2007 was 29,289,013.
 


 

 
 
             
        Page
        Number
 
    1  
           
PART I.   FINANCIAL INFORMATION     2  
  Financial Statements     2  
    Consolidated Statements of Financial Condition — September 30, 2007 (Unaudited) and December 31, 2006     2  
    Consolidated Statements of Income — Three Months and Nine Months ended September 30, 2007 and 2006 (Unaudited)     3  
    Consolidated Statement of Changes in Stockholders’ Equity — Nine Months ended September 30, 2007 (Unaudited)     4  
    Consolidated Statements of Cash Flows — Nine Months ended September 30, 2007 and 2006 (Unaudited)     5  
    Notes to Consolidated Financial Statements     6  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     17  
  Quantitative and Qualitative Disclosures About Market Risk     33  
  Controls and Procedures     35  
           
PART II.   OTHER INFORMATION     35  
  Legal Proceedings     35  
  Risk Factors     35  
  Unregistered Sales of Equity Securities and Use of Proceeds     35  
  Defaults Upon Senior Securities     36  
  Submission of Matters to a Vote of Security Holders     36  
  Other Information     36  
  Exhibits     36  
    37  
    38  
 EX-3.1: AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32.1: CERTIFICATION
 EX-32.2: CERTIFICATION


Table of Contents

 
 
KBW, Inc. is required to file current, annual and quarterly reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the Exchange Act), with the Securities and Exchange Commission (SEC). You may read and copy any document we file with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at http://www.sec.gov, from which interested persons can electronically access our SEC filings.
 
We will make available free of charge through our website http://www.kbw.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large stockholders, and any amendments to those documents filed or furnished pursuant to the Exchange Act. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
 
We also make available, on the Investor Relations page of our website, our (i) Corporate Governance Guidelines, (ii) Code of Business Conduct and Ethics, (iii) Supplement to Code of Business Conduct and Ethics for CEO and Senior Financial Officers, and (iv) the charters of the Audit, Compensation, and Corporate Governance and Nominations Committees of our Board of Directors. You will need to have Adobe Acrobat Reader software installed on your computer to view these documents, which are in the PDF format. These documents will also be available in print without charge to any person who requests them by writing or telephoning: KBW, Inc., Office of the Corporate Secretary, 787 Seventh Avenue, 4th Floor, New York, New York, 10019, U.S.A., telephone number (212) 887-7777. These documents, as well as the information on our website, are not a part of this report.


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Table of Contents

 
PART I. FINANCIAL INFORMATION
 
ITEM 1.   Financial Statements
 
KBW, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition
(Dollars in thousands)
 
                 
    September 30,
       
    2007
    December 31,
 
    (Unaudited)     2006  
 
ASSETS
Cash and cash equivalents
  $ 175,902     $ 165,647  
Financial instruments owned, at fair value:
               
Equities
    158,138       117,285  
Corporate and other debt
    270,466       135,744  
U.S. Government and agency securities
          15,905  
Mortgage backed securities
          14,645  
Other investments
    61,860       47,158  
                 
      490,464       330,737  
                 
Securities purchased under resale agreements
    48,453       62,319  
Receivables from clearing brokers
    107,299       185,712  
Accounts receivable
    21,754       25,740  
Furniture, equipment and leasehold improvements, at cost, less accumulated depreciation and of $22,018 in 2007 and $18,297 in 2006
    20,737       22,151  
Other assets
    30,997       11,905  
                 
Total assets
  $ 895,606     $ 804,211  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
               
Payable to clearing broker
  $ 1,135     $  
Securities sold under repurchase agreements
    123,116       84,536  
Short-term borrowings
    84,750       28,500  
Financial instruments sold, not yet purchased, at fair value:
               
Equities
    55,516       29,528  
Corporate and other debt
          5,082  
U.S. Government and agency securities
    44,547       76,362  
                 
      100,063       110,972  
                 
Accounts payable, accrued expenses, and other liabilities
    133,667       166,671  
Income taxes payable
    12,849       16,772  
                 
Total liabilities
    455,580       407,451  
                 
Stockholders’ equity:
               
Preferred stock
           
Common stock
    293       292  
Paid-in capital
    109,375       94,419  
Retained earnings
    333,726       310,076  
Notes receivable from stockholders
    (5,254 )     (8,843 )
Accumulated other comprehensive income
    1,886       816  
                 
Total stockholders’ equity
    440,026       396,760  
                 
Total liabilities and stockholders’ equity
  $ 895,606     $ 804,211  
                 
 
See accompanying notes to consolidated financial statements.


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KBW, INC. AND SUBSIDIARIES

Consolidated Statements of Income
(Dollars in thousands, except per share information)
(Unaudited)
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2007     2006     2007     2006  
 
Revenues:
                               
Investment banking
  $ 60,132     $ 49,204     $ 174,077     $ 142,833  
Commissions
    44,457       25,479       119,857       86,039  
Principal transactions, net
    (14,943 )     9,567       (3,134 )     35,308  
Interest and dividend income
    10,317       7,595       27,544       19,323  
Investment advisory fees
    436       508       1,258       1,293  
Other
    736       859       2,564       1,561  
                                 
Total revenues
    101,135       93,212       322,166       286,357  
                                 
Expenses:
                               
Compensation and benefits
    58,658       54,118       188,882       166,847  
Occupancy and equipment
    4,922       4,528       13,977       13,047  
Communications and data processing
    6,205       5,113       17,771       14,387  
Brokerage and clearance
    6,361       3,976       17,417       14,993  
Interest
    4,610       3,014       11,273       8,278  
Other
    10,517       7,822       30,617       20,739  
                                 
Total expenses
    91,273       78,571       279,937       238,291  
                                 
Income before income tax expense
    9,862       14,641       42,229       48,066  
Income tax expense
    4,327       5,331       18,579       20,206  
                                 
Net income (Note 9)
  $ 5,535     $ 9,310     $ 23,650     $ 27,860  
                                 
Earnings per common share (Note 9):
                               
Basic
  $ 0.18     $ 0.35     $ 0.77     $ 1.03  
Diluted
  $ 0.18     $ 0.35     $ 0.75     $ 1.03  
Weighted average number of common shares outstanding:
                               
Basic
    30,665,945       26,749,483       30,636,898       27,013,417  
Diluted
    31,546,276       26,749,483       31,537,188       27,013,417  
 
See accompanying notes to consolidated financial statements.


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KBW, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2007
(Dollars in thousands, except per share information)
(Unaudited)
 
                                                         
                            Notes
    Accumulated
       
                            Receivable
    Other
    Total
 
    Preferred
    Common
    Paid-in
    Retained
    from
    Comprehensive
    Stockholders’
 
    Stock     Stock     Capital     Earnings     Stockholders     Income     Equity  
 
Balance at December 31, 2006
  $     $ 292     $ 94,419     $ 310,076     $ (8,843 )   $ 816     $ 396,760  
Net income
                      23,650                   23,650  
Other comprehensive income, currency translation adjustment, net of tax of $827
                                  1,070       1,070  
                                                         
Total comprehensive income
                                                    24,720  
                                                         
Amortization of stock-based compensation
                15,923                         15,923  
Purchase of 79,172 shares of common stock
                (2,170 )           205             (1,965 )
Issuance of 163,244 shares of common stock
          1       2,641                         2,642  
Restricted stock units converted
                (2,642 )                       (2,642 )
Excess tax benefit related to the delivery of restricted stock
                1,204                         1,204  
Repayment of notes receivable from stockholders
                            3,384             3,384  
                                                         
Balance at September 30, 2007
  $     $ 293     $ 109,375     $ 333,726     $ (5,254 )   $ 1,886     $ 440,026  
                                                         
 
 
                                 
    Number of Shares
    Par Value   Authorized   Issued   Outstanding
 
September 30, 2007
  $ 0.01       10,000,000              
December 31, 2006
  $ 0.01       10,000,000              
 
 
                                 
    Number of Shares
    Par Value   Authorized   Issued(1)   Outstanding(1)
 
September 30, 2007
  $ 0.01       140,000,000       29,289,013       29,289,013  
December 31, 2006
  $ 0.01       140,000,000       29,204,941       29,204,941  
 
(1) These amounts exclude legally vested Restricted Stock Units.
 
See accompanying notes to consolidated financial statements.


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KBW, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

                 
    Nine Months Ended September 30,  
    2007     2006  
 
Cash flows from operating activities:
               
Net income
  $ 23,650     $ 27,860  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Non-monetary transaction
    (6,518 )      
Amortization of stock-based compensation
    15,923       1,348  
Depreciation and amortization
    3,638       4,447  
Deferred income tax (benefit) expense
    (14,249 )     706  
(Increase) decrease in operating assets:
               
Financial instruments owned, at fair value
    (153,209 )     (46,221 )
Securities purchased under resale agreements
    13,866       11,133  
Receivables from clearing brokers
    78,413       (42,303 )
Accounts receivable
    3,986       10,889  
Other assets
    (4,843 )     (933 )
Increase (decrease) in operating liabilities:
               
Financial instruments sold, not yet purchased, at fair value
    (10,909 )     55,141  
Securities sold under repurchase agreements
    38,580       84,416  
Short-term borrowings
    56,250       (31,500 )
Payable to clearing broker
    1,135       (68,053 )
Accounts payable, accrued expenses and other liabilities
    (33,004 )     (90 )
Income taxes payable
    (3,923 )     (1,574 )
                 
Net cash provided by operating activities
    8,786       5,266  
                 
Cash flows from investing activities:
               
Purchase of furniture, equipment and leasehold improvements
    (2,224 )     (1,955 )
                 
Net cash used in investing activities
    (2,224 )     (1,955 )
                 
Cash flows from financing activities:
               
Issuance of shares of common stock
          310  
Purchases of shares of common stock
    (1,965 )     (10,981 )
Excess tax benefit related to the delivery of restricted stock units
    1,204       363  
Repayment of notes receivable from stockholders
    3,384       6,503  
                 
Net cash provided by (used in) financing activities
    2,623       (3,805 )
                 
Currency adjustment:
               
Effect of exchange rate changes on cash
    1,070       806  
                 
Net increase in cash and cash equivalents
    10,255       312  
Cash and cash equivalents at the beginning of the period
    165,647       75,642  
                 
Cash and cash equivalents at the end of the period
  $ 175,902     $ 75,954  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Income taxes
  $ 39,811     $ 20,117  
Interest
  $ 10,671     $ 7,781  
 
See accompanying notes to consolidated financial statements.


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KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share information)
(unaudited)
 
(1)   Organization and Basis of Presentation
 
The consolidated financial statements include the accounts of KBW, Inc., and its wholly owned subsidiaries (the “Company”), Keefe, Bruyette & Woods, Inc. (“Keefe”), Keefe, Bruyette & Woods Limited (“KBWL”), KBW Asset Management (“KBWAM”) and KBW Ventures, Inc. (“Ventures”). Keefe is a regulatory member of the Financial Industry Regulatory Authority (“FINRA”) and is principally a broker-dealer in securities and a market-maker in certain financial services stocks and bonds in the United States. KBWL is authorized and regulated by the U.K. Financial Services Authority (“FSA”) and a member of the London Stock Exchange, Euronext, Virt-x and Deutsche Boerse. Keefe’s and KBWL’s customers are predominantly institutional investors including other brokers and dealers, commercial banks, asset managers and other financial institutions. Keefe has clearing arrangements with Pershing LLC and Fortis Securities LLC on a fully disclosed basis. KBWL has a clearing arrangement with Pershing Securities Limited on a fully disclosed basis.
 
These consolidated financial statements and these notes are unaudited and exclude some of the disclosures required in annual financial statements. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2006 included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). These consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for the fair statement of the results for the interim periods. The results of operations for interim periods are not necessarily indicative of results for the entire year.
 
(2)   Summary of Significant Accounting Policies
 
(a)   Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company transactions and balances have been eliminated.
 
In June 2005, the Financial Accounting Standards Board (“FASB”) ratified the consensus reached by the Emerging Issues Task Force on Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-5”). EITF 04-5 presumes that a general partner controls a limited partnership, and should therefore consolidate a limited partnership, unless the limited partners have the substantive ability to remove the general partner without cause based on a simple majority vote or can otherwise dissolve the limited partnership, or unless the limited partners have substantive participating rights over decision making. This guidance became effective upon ratification by the FASB on June 29, 2005 for all newly formed limited partnerships and for existing limited partnerships for which the partnership agreements have been modified. For all other limited partnerships, the guidance is effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The Company is the general partner of asset management partnerships and has generally provided limited partners with rights to terminate the partnership or remove the Company as the general partner. Therefore, the adoption of EITF 04-5 did not have a material impact on the consolidated financial statements.
 
(b)   Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s financial statements and these footnotes including securities valuations, compensation accruals and other


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KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 
matters. Management believes that the estimates used in preparing the Company’s consolidated financial statements were reasonable. Actual results may differ from these estimates.
 
(c)   Cash and Cash Equivalents
 
Cash equivalents include investments with an original maturity of three months or less when purchased. Due to the short-term nature of these instruments, carrying value approximates their fair value.
 
(d)   Fair Value of Financial Instruments
 
Substantially all of the Company’s financial instruments, as defined in Statement of Financial Accounting Standards (“SFAS”) No. 107, Disclosures About Fair Value of Financial Instruments, are recorded at fair value or contract amounts that approximate fair value. SFAS No. 107 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Financial instruments owned and financial instruments sold, not yet purchased are stated at fair value, with related changes in unrealized appreciation or depreciation reflected in principal transactions, net in the accompanying consolidated statements of income. Financial instruments carried at contract amounts include receivables from clearing brokers, payable to clearing broker, securities purchased under resale agreements, short-term borrowings and securities sold under repurchase agreements.
 
The Company elected to early adopt SFAS No. 157, Fair Value Measurements, as of January 1, 2007. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 defines fair value as “the price that would be received to sell an asset and paid to transfer a liability in an ordinary transaction between market participants at the measurement date”. Additionally, SFAS No. 157 disallows the use of block discounts on positions traded in an active market as well as nullifies certain guidance in Emerging Issues Task Force No. 02-3 regarding the recognition of inception gains on certain derivative transactions. See Note 3 of the Notes to Consolidated Financial Statements for a complete discussion of SFAS No. 157.
 
Under SFAS No. 157, fair value is generally based on quoted market prices. If quoted market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations, price activity for equivalent instruments and valuation pricing models. Among the factors considered by the Company in determining the fair value of financial instruments are discount margins, weighted average spreads, discounted anticipated cash flows, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, as well as other measurements.
 
Equity interests in certain private securities and limited partnership interests are reflected in the consolidated financial statements at fair value, which is often represented at initial cost until significant transactions or developments indicate that a change in the carrying value of the securities is appropriate. This represents the Company’s best estimate of exit price as defined by SFAS No. 157. The Company’s partnership interests are generally recorded at fair value based on valuations provided by general partners. Generally, the carrying values of these securities will be increased based on company performance and in those instances where market values are readily ascertainable by reference to substantial transactions occurring in the marketplace or quoted market prices. Reductions to the carrying value of these securities are made when the Company’s estimate of net realizable value has declined below the carrying value.


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KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 
(e)   Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements
 
Securities purchased under resale agreements and securities sold under repurchase agreements are accounted for as collateralized financing transactions. The assets and liabilities that result from these agreements are recorded in the consolidated statements of financial condition at the amounts at which the securities were sold or purchased, respectively. It is the policy of the Company to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under the resale agreements. Collateral is valued daily and the Company may require counterparties to deposit additional collateral or return collateral pledged when appropriate.
 
The market value of the collateral accepted by the Company under resale agreements was $48,288 and $62,237 at September 30, 2007 and December 31, 2006, respectfully, substantially all of which has been resold or re-pledged. The resale agreements have subsequently been closed out at their contract values.
 
(f)   Receivables From and Payable to Clearing Brokers
 
Receivables from and payable to clearing brokers include proceeds from financial instruments sold including financial instruments sold not yet purchased, commissions related to securities transactions, margin loans and related interest and deposits with clearing brokers. Proceeds related to financial instruments sold, not yet purchased may be restricted until the financial instruments are purchased.
 
(g)   Investment Banking
 
The Company earns fees for underwriting securities offerings, arranging private placements and providing strategic advisory services in mergers and acquisitions (“M&A”) and other transactions.
 
  •  Underwriting revenues.  The Company earns underwriting revenues in securities offerings in which it acts as an underwriter, such as initial public offerings, follow-on equity offerings and fixed income offerings. Underwriting revenues include management fees, underwriting fees and selling concessions, including fees related to mutual thrift conversions. Underwriting revenues are recorded, net of related syndicate expenses, at the time the underwriting is completed. In syndicated underwritten transactions, management estimates the Company’s share of transaction-related expenses incurred by the syndicate, and the Company recognizes revenue net of such expense. On final settlement, the Company adjusts these amounts to reflect the actual transaction-related expenses and resulting underwriting fee.
 
  •  Strategic advisory revenues.  The Company’s strategic advisory revenues primarily include success fees, as well as retainer fees, earned in connection with advising companies, both buyers and sellers, principally in M&A. The Company also earns fees for related advisory work and other services such as providing fairness and valuation opinions. Strategic advisory revenues are recorded when the transactions or the services (or, if applicable, separate components thereof) to be performed are substantially complete, the fees are determinable and collection is reasonably assured.
 
  •  Private placement revenues.  The Company earns agency placement fees in non-underwritten transactions such as private placements, including securitized debt offerings collateralized by financial services issuers’ securities. Private placement revenues are recorded when the services related to the underlying transaction are completed under the terms of the engagement. This is generally the closing date of the transaction.
 
Since the Company’s investment banking revenues are generally recognized at the time of completion of each transaction or the services to be performed, these revenues typically vary between periods and may be considerably affected by the timing of the closing of significant transactions.


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KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 
(h)   Furniture, Equipment and Leasehold Improvements
 
Furniture and equipment are carried at cost and depreciated on a straight-line basis using estimated useful lives of the related assets, generally two to five years. Leasehold improvements are amortized on a straight-line basis over the lesser of the economic useful life of the improvement or the term of the respective leases.
 
(i)   Income Taxes
 
Deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
 
As of January 1, 2007 the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”), which prescribes a single, comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on its tax returns. Income tax expense is based on pre-tax accounting income, including adjustments made for the recognition or derecognition related to uncertain tax positions. The recognition or derecognition of income tax expense related to uncertain tax positions is determined under the guidance as prescribed by FIN 48.
 
(j)   Foreign Currency Translation
 
The Company translates the balance sheets of KBWL at the exchange rates in effect at the balance sheet date. The resulting translation adjustments of KBWL are recorded directly to accumulated other comprehensive income. The consolidated statements of income and cash flows are translated at the average rates of exchange during the year.
 
(k)   Earnings Per Share (“EPS”)
 
In connection with the initial public offering (“IPO”), the Company completed a 43 for 1 stock split in the form of a dividend on November 1, 2006 on all then outstanding shares. All references to number of shares and restricted stock units and per share amounts in these consolidated financial statements and accompanying notes have been adjusted to reflect the stock split on a retroactive basis as if such stock split had occurred on January 1, 2004.
 
Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding for each period. Basic earnings per share includes legally vested Restricted Stock Units (“RSUs”). Diluted earnings per share are calculated by adjusting the weighted average outstanding shares to include the number of additional common shares that would have been outstanding if the diluting potential common shares had been issued.
 
(l)   Stock-Based Compensation
 
On January 1, 2006, the Company adopted SFAS No. 123 (R), Share-Based Payment, using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value at the date of grant and recognition of compensation expense over the requisite service period, net of estimated forfeitures. Stock-based awards that do not require future service (i.e. vested awards, including awards granted to retirement eligible employees) are expensed immediately on the date of grant. No adjustment to reflect the net cumulative impact of estimating forfeitures in the determination of period expense was deemed necessary.


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KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 
 
(m)   Reclassifications
 
In connection with the adoption of SFAS No. 157 in the first quarter of 2007, the Company reclassified “Securities not readily marketable, at fair value” to “Financial instruments owned, at fair value” and reclassified “Net gain on investments” to “Principal transactions, net”. Certain amounts from prior periods have been reclassified to conform to the current period presentation.
 
(3)   Financial Instruments
 
The Company elected to early adopt SFAS No. 157, Fair Value Measurements, as of January 1, 2007. SFAS No. 157 applies to all financial instruments that are being measured and reported on a fair value basis. This includes those items currently reported in financial instruments owned, at fair value and financial instruments sold, not yet purchased, at fair value on the consolidated statements of financial condition.
 
As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial instrument assets and liabilities carried at fair value have been classified and disclosed in one of the following three categories:
 
     
Level 1
  Quoted market prices in active markets for identical assets or liabilities.
Level 2
  Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3
  Unobservable inputs that are not corroborated by market data.
 
Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as listed equities. Additionally, this category also includes U.S. Government and agency securities for which the Company typically receives independent external valuation information.
 
Level 2 includes those financial instruments that are valued using models or other valuation methodologies calibrated to observable market inputs. These models are primarily industry-standard models that consider various assumptions, including discount margins, weighted average spreads, discounted anticipated cash flows, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, default rates, as well as other measurements. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category include certain corporate and other debt, including pooled trust preferred securities and trust preferred securities held for PreTSL securitizations, and certain restricted stock.
 
Level 3 is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are unobservable from objective sources. Included in this category are limited and general partnership interests, private equity securities and certain corporate debt.
 
In determining the appropriate levels, the Company performed a detailed analysis of the assets and liabilities that are subject to SFAS No. 157. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.


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KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 
 
                                 
    Level 1     Level 2     Level 3     Total  
 
Financial instruments owned, at fair value:
                               
Non-derivative trading inventory
  $ 133,416     $ 276,621     $ 80,355     $ 490,392  
Derivative trading inventory
    72                   72  
                                 
Total financial instruments owned
  $ 133,488     $ 276,621     $ 80,355     $ 490,464  
                                 
 
 
                                 
    Level 1     Level 2     Level 3     Total  
 
Financial instruments sold, not yet purchased, at fair value:
                               
Non-derivative trading inventory
  $ 99,922     $     $     $ 99,922  
Derivative trading inventory
    141                   141  
                                 
Total financial instruments sold, not yet purchased
  $ 100,063     $     $     $ 100,063  
                                 
 
The non-derivative trading inventory category includes securities such as listed equities, U.S. Treasuries, other U.S. Government and agency securities, corporate and other debt, limited and general partnership interests and private equity securities. They are reported in financial instruments owned, at fair value and financial instruments sold, not yet purchased, at fair value on the consolidated statements of financial condition.
 
The derivatives trading inventory balances in the table above are reported on a gross basis by level. The Company’s derivative activities included in financial instruments owned and financial instruments sold, not yet purchased consist of writing and purchasing listed equity options. The fair value of the individual derivative contracts are reported gross in their respective levels based on the fair value hierarchy.
 
The following tables provide a reconciliation of the beginning and ending balances for the non-derivative trading assets measured at fair value using significant unobservable inputs (Level 3):
 
 
                                                 
                        Changes in Unrealized
                        Gains and (Losses)
    Balance as of
  Total Gains and
      Transfers
  Balance as of
  Included in Earnings
    December 31,
  (Losses) (Realized
  Purchases/
  in/(Out) of
  September 30,
  Related to Assets Still
    2006   and Unrealized)   (Sales), Net   Level 3   2007   Held at Reporting Date
 
Non-derivative trading assets
  $ 56,227     $ (3,104 )   $ 21,842     $ 5,390     $ 80,355     $ (6,202 )
 
 
                                                 
                        Changes in Unrealized
                        Gains and (Losses)
        Total Gains and
      Transfers
  Balance as of
  Included in Earnings
    Balance as of
  (Losses) (Realized
  Purchases/
  in/(Out) of
  September 30,
  Related to Assets Still
    June 30, 2007   and Unrealized)   (Sales), Net   Level 3   2007   Held at Reporting Date
 
Non-derivative trading assets
  $ 73,634     $ (6,312 )   $ 7,643     $ 5,390     $ 80,355     $ (6,312 )


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KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 
Total gains and losses represent the total gains and/or losses (realized and unrealized) recorded for the Level 3 assets and are reported in principal transactions, net in the accompanying consolidated statements of income. Additionally, the change in the unrealized gains and losses are often offset by realized gains and losses during the period.
 
Purchases/sales represent the net amount of Level 3 assets that were either purchased or sold during the period. The amounts are recorded at their end of period fair values.
 
Net transfers in and/or out represents existing assets that were previously categorized as a higher level and the inputs to the model became unobservable during the period. Such reclassifications are reported at fair value in the month in which the changes occur.
 
The amount of unrealized gains and losses included in earnings attributable to the change in unrealized gains and losses relating to Level 3 assets still held at the end of the period were reported in principal transactions, net in the accompanying consolidated statements of income. The change in unrealized gains and losses are often offset by realized gains and losses during the period.
 
(4)   Short-Term Borrowings
 
The Company obtains secured short-term borrowings primarily through bank loans. The short-term borrowings average balances for the nine months ended September 30, 2007 and for the year ended December 31, 2006 were $34,898 and $54,500, respectively. Secured short-term borrowings was $84,750 at the rate in effect of 5.33% as of September 30, 2007. Secured short-term borrowings were $28,500 at the rate in effect of 5.92% as of December 31, 2006. Included in financial instruments owned as of September 30, 2007 and December 31, 2006 was $113,000 and $38,000 of corporate bonds, respectively, in which the lender has a security interest in connection with short-term borrowings.
 
(5)   Commitments and Contingencies
 
(a)   Leases
 
The Company entered into a sublease in August 2007 for additional space in its New York office, expected to commence June 2008. As a result, future minimum lease payments will increase approximately $0 for 2007, $1,000 for 2008, $3,000 for 2009, $3,000 for 2010, $3,000 for 2011 and $11,000 thereafter.
 
(b)   Litigation
 
In the ordinary course of business, the Company may be a defendant or codefendant in legal actions or the subject of a regulatory investigation. The Company believes, based on currently available information, that the results of such proceedings or investigations, in the aggregate, will not have a material adverse effect on the Company’s financial condition. The results of such proceedings or investigations could be material to the Company’s operating results for any particular period, depending, in part, upon additional developments affecting such matters and the operating results for such period. Legal reserves are established in accordance with SFAS No. 5, Accounting for Contingencies, which considers the probability of the loss and whether the amount can be reasonably estimated. Once established, reserves are adjusted based on changes in the probability of loss or when an event occurs requiring a change.
 
(c)   Limited Partnership Commitments
 
As of September 30, 2007, the Company had approximately $41,654 in outstanding commitments for additional funding to limited partnership investments.


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KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 
(6)   Financial Instruments with Off-Balance-Sheet Risk
 
In the normal course of its proprietary trading activities, the Company enters into transactions in financial instruments with off-balance-sheet risk. These financial instruments, primarily options, contain off-balance-sheet risk inasmuch as ultimate settlement of these transactions may have market and/or credit risk in excess of amounts which are recognized in the consolidated financial statements. Transactions in listed options are conducted through regulated exchanges, which clear and guarantee performance of counterparties.
 
Also, in connection with its proprietary trading activities, the Company has sold securities that it does not currently own. The Company will therefore be obligated to purchase such securities at a future date. The Company has recorded this obligation in the financial statements at market values of the related securities and will record a trading loss if the market value of the securities increases subsequent to the consolidated financial statements date.
 
(a)   Broker-Dealer Activities
 
The Company clears securities transactions on behalf of customers through its clearing brokers. In connection with these activities, customers’ unsettled trades may expose the Company to off-balance-sheet credit risk in the event customers are unable to fulfill their contracted obligations. The Company seeks to control the risk associated with its customer activities by monitoring the creditworthiness of its customers.
 
(b)   Derivative Financial Instruments
 
The Company’s derivative activities consist of writing and purchasing listed equity options and futures on interest rate and currency products for trading purposes and are included in financial instruments owned, at fair value in the accompanying consolidated statements of financial condition. As a writer of options, the Company receives a cash premium at the beginning of the contract period and bears the risk of unfavorable changes in the value of the financial instruments underlying the options. Options written do not expose the Company to credit risk since they obligate the Company (not its counterparty) to perform.
 
In order to measure derivative activity, notional or contract amounts are frequently utilized. Notional contract amounts, which are not included on the consolidated statements of financial condition, are used as a basis to calculate contractual cash flows to be exchanged and generally are not actually paid or received.
 
A summary of the Company’s listed options and futures contracts is as follows:
 
                         
    Current
    Average
    End of
 
    Notional
    Fair
    Period
 
    Amount     Value     Fair Value  
 
September 30, 2007:
                       
Purchased options
  $ 2,100     $ 104     $ 72  
Written options
  $ 9,020     $ 29     $ 141  
Short futures contracts
  $ 19,874     $     $  
December 31, 2006:
                       
Purchased options
  $ 500     $ 92     $ 160  
Written options
  $ 400     $ 87     $ 5  
Short futures contracts
  $ 2,375     $     $  
 
(7)   Concentrations of Credit Risk
 
The Company is engaged in various securities trading and brokerage activities servicing primarily domestic and foreign institutional investors. Nearly all of the Company’s transactions are executed with and on behalf of institutional investors, including other brokers and dealers, commercial banks, mutual funds, and


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KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 
other financial institutions. The Company’s exposure to credit risk associated with the nonperformance of these customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile securities markets.
 
A substantial portion of the Company’s financial instruments owned are common stock and debt of financial institutions. The credit and/or market risk associated with these holdings can be directly impacted by factors that affect this industry such as volatile equity and credit markets and actions of regulatory authorities.
 
(8)   Notes Receivable from Stockholders
 
Notes receivable from stockholders represent full recourse notes issued to employees for their purchases of stock acquired pursuant to the Company’s book value stock purchase plan. Loans are payable in annual installments and bear interest between 2.7% and 5.0% per annum.
 
(9)   Common Stock
 
Prior to the completion of the IPO and termination of the 2005 Amended and Restated Stockholders’ Agreement, common stock was considered mandatorily redeemable and the amounts classified as stockholders’ equity were previously classified as a liability captioned as mandatorily redeemable common stock. Amounts classified as net income were previously classified as net income available to mandatorily redeemable common stockholders. Earnings per share were previously classified as net income available to mandatorily redeemable common stockholders per share.
 
(10)   Non-Monetary Transaction
 
In the third quarter of 2007, the Company received cash and warrants exercisable in common stock as advisory fees in connection with the closing of a private placement transaction. The warrants received were measured at fair value on the closing date of the transaction. The Company recorded investment banking revenues of $6,518 as a result of this non-monetary transaction for the three and nine months ended September 30, 2007. Shortly after the closing of the private placement transaction, the Company exercised these warrants and received common stock.
 
(11)   Stock-Based Compensation
 
At September 30, 2007, the Company had two types of stock-based compensation arrangements: RSUs and the 2006 Equity Incentive Plan (the “Plan”). There was no material change to the RSU balance in 2007.
 
The Plan permits the granting of up to 6,150,000 shares of common stock. As part of the 2006 year-end performance award process (“2006 Bonus Awards”), the Company granted 360,067 restricted stock awards (“RSAs”) under the Plan to certain directors and employees in February 2007. The aggregate fair value of the 2006 bonus awards granted in February 2007 was $10,752. This value was based upon the grant date share price of $29.86. RSAs are actual shares of common stock issued to the participant that are restricted. The 2006 Bonus Awards generally vest over a three year period. Vesting would accelerate on a change in control, death or permanent disability. Unvested RSAs are subject to forfeiture upon termination of employment.
 
For 2006 Bonus Awards that were granted to retirement-eligible employees, the Company recognized the grant date fair value as compensation expense for such awards on the date of grant instead of over the service period specified in the award terms. For employees who will be retirement-eligible prior to vesting of the 2006 Bonus Awards, the Company recognizes compensation expense from the grant date to the retirement eligibility date. The Company recorded non-cash incremental compensation expense of $740 and $4,336 in the three and nine months ended September 30, 2007, respectively, for the 2006 Bonus Awards. Accelerated compensation expense associated with grants to retirement-eligible employees (including employees who will be retirement-eligible prior to vesting) for the nine months ended September 30, 2007 was $2,106. Prior to 2007, the


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KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 
Company did not grant stock-based awards which would require accelerated expense recognition upon retirement under SFAS No. 123(R).
 
(12)   Earnings Per Share
 
In connection with the IPO, the Company completed a 43 for 1 stock split on November 1, 2006 (see Note 2). Accordingly, basic and diluted shares for all periods presented have been calculated based on the average shares outstanding, as adjusted, for the stock split.
 
The computations of basic and diluted earnings per share are set forth below:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2007     2006     2007     2006  
 
Numerator for basic and diluted EPS-net income
  $ 5,535     $ 9,310     $ 23,650     $ 27,860  
                                 
Denominator for earnings per common share — weighted-average common shares outstanding:
                               
Basic
    30,665,945       26,749,483       30,636,898       27,013,417  
Effect of dilutive securities — restricted stock
    880,331             900,290        
                                 
Diluted
    31,546,276       26,749,483       31,537,188       27,013,417  
                                 
Earnings per common share:
                               
Basic
  $ 0.18     $ 0.35     $ 0.77     $ 1.03  
                                 
Diluted
  $ 0.18     $ 0.35     $ 0.75     $ 1.03  
                                 
 
(13)   Income Taxes
 
Effective January 1, 2007, the Company adopted the provisions of FIN 48. FIN 48 prescribes the recognition and measurement criteria related to tax positions taken or expected to be taken in a tax return. For those benefits to be recognized a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company had no cumulative effect of adopting FIN 48, and therefore, no adjustment was recorded to retained earnings upon such adoption. In addition, the following information required by FIN 48 is provided:
 
  •  Unrecognized tax benefits including interest were approximately $5.8 million as of January 1, 2007 and approximately $6.3 million as of September 30, 2007, the majority of which, if recognized, would impact the effective tax rate.
 
  •  Following the adoption of FIN 48, the Company continues to classify interest and penalties, if any, related to tax uncertainties as income taxes. As of January 1, 2007 and September 30, 2007, $0.5 million and $0.8 million of interest, net of federal tax benefit, respectively, were included in the total unrecognized tax benefit indicated above.
 
  •  The Company and its subsidiaries file federal consolidated and various state, local and foreign tax returns. The federal income tax returns have been audited through 2004. Various state, local and foreign returns are subject to audits by tax authorities beginning with the 2002 tax year. The settlement of certain state and local audits within the next 12 months, if any, is not anticipated to have a significant impact on the Company’s results or financial position.


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KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 
 
(14)   Industry Segment Data
 
The Company follows the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, in disclosing its business segments. Pursuant to that statement, an entity is required to determine its business segments based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. Based upon these criteria, the Company has determined that its entire business should be considered a single segment. There were no individual customers which contributed more than 10% to the Company’s total revenues.
 
(15)   Recent Accounting Developments
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically scoped out of the Statement) at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. The effective date for SFAS No. 159 is as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company will adopt SFAS No. 159 on January 1, 2008. The Company is currently evaluating the impact, if any, the adoption of SFAS No. 159 will have on its consolidated financial statements.
 
(16)   Net Capital Requirement
 
Keefe is a registered U.S. broker-dealer that is subject to the Uniform Net Capital Rule (SEC Rule 15c3-1 or the Net Capital Rule) administered by the SEC and FINRA, which requires the maintenance of minimum net capital. Keefe has elected to use the basic method to compute net capital as permitted by the Net Capital Rule, which requires Keefe to maintain minimum net capital, as defined, of $3,484 as of September 30, 2007. These rules also require Keefe to notify and sometimes obtain approval from the FINRA for significant withdrawals of capital.
 
         
    September 30, 2007
 
Net Capital
  $ 142,750  
Excess Capital
  $ 139,266  
 
KBWL is an investment firm authorized and regulated by the FSA and is subject to the capital requirements of the FSA. As of September 30, 2007, KBWL was in compliance with its local capital adequacy requirements.


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ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this report.
 
 
We have made statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Form 10-Q that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are or may be important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the historical or future results, level of activity, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, those discussed under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006.
 
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of filing of this report to conform such statements to actual results or revised expectations.
 
 
We are a leading full service investment bank specializing in the financial services industry. Our principal activities are:
 
  •  Investment banking.  We provide a full range of investment banking services, including M&A and other strategic advisory services, equity and fixed income securities offerings and structured finance.
 
  •  Equity and fixed income sales and trading.  We trade a broad array of financial services stocks, with an emphasis on the small and mid cap segment, and a wide range of fixed income securities. Our sales force is trained in the analysis of financial services companies and has strong relationships with many of the world’s largest institutional investors.
 
  •  Research.  We provide fundamental, objective analysis that identifies investment opportunities and assists our investor customers in making investment decisions.
 
Our customers are primarily institutional investors which include banks and thrifts, insurance companies, broker-dealers, mortgage banks, asset management companies, mortgage REITs, consumer and specialty finance firms, financial processing companies and securities exchanges. We emphasize serving clients in the small and mid cap segments of the financial services industry, as we believe these clients have traditionally been underserved by larger investment banks.
 
Most revenues with respect to our services provided are primarily determined as a result of active competition in the marketplace. Our revenues are primarily generated through advisory, underwriting and private placement fees earned through our investment banking activities, commissions earned on equity and fixed income sales and trading activities, interest and dividends earned on our securities’ inventories and profit and losses from trading activities related to the securities’ inventories.


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Table of Contents

Compensation and benefits comprise the most significant component with respect to our expenses. Our performance is dependant on our ability to attract, develop and retain highly skilled employees who are motivated to provide quality service and guidance to our clients.
 
Many external factors affect our revenues and profitability. Such factors include equity and fixed income trading prices and volumes, the volatility of these markets, the level and shape of the yield curve, political events and regulatory developments and competition. These factors influence our investment banking operations, including the number and timing of equity and fixed income securities issuances and M&A activity within the financial services industry. These same factors also affect our sales and trading business by impacting equity and fixed income trading prices and volumes and valuations in secondary financial markets. Commission rates, market volatility and other factors also affect our sales and trading revenues. Such external factors may contribute to significant fluctuations in our revenues and earnings from period to period and the results of any one period should not be considered indicative of our future results.
 
A significant portion of our expense base is variable, including employee compensation and benefits, brokerage and clearance, communication and data processing and travel and entertainment expenses. Our remaining costs generally do not directly relate to the service revenues earned.
 
Certain data processing systems that support equity and fixed income trading, research, payroll, human resources and employee benefits are service bureau based and are operated in the vendors’ data centers. We believe that this stabilizes our fixed costs associated with data processing. We also license vendor information databases to support investment banking, sales and trading and research. Vendors may, at the end of contractual terms, terminate our rights or modify or significantly alter product and service offerings or related fees, which may affect our ongoing business activities or related costs.
 
 
We operate our business as a single segment. However, we derive revenues from two primary sources — Investment banking and sales and trading.
 
 
We earn fees for underwriting securities offerings, arranging private placements and providing strategic advisory services in M&A and other transactions.
 
  •  Underwriting revenues.  We earn underwriting revenues in securities offerings in which we act as an underwriter, such as initial public offerings, follow-on equity offerings and fixed income offerings. Underwriting revenues include management fees, underwriting fees and selling concessions, including fees related to mutual thrift conversions. We record underwriting revenues, net of related syndicate expenses, at the time the underwriting is completed. In syndicated underwritten transactions, management estimates our share of transaction-related expenses incurred by the syndicate, and we recognize revenue net of such expense. On final settlement, we adjust these amounts to reflect the actual transaction-related expenses and our resulting underwriting fee. We receive a higher proportion of total fees in underwritten transactions in which we act as a lead manager.
 
  •  Strategic advisory revenues.  Our strategic advisory revenues primarily include success fees, as well as retainer fees, earned in connection with advising companies, both buyers and sellers, principally in M&A. We also earn fees for related advisory work and other services such as providing fairness and valuation opinions. We record strategic advisory revenues when the transactions or the services (or, if applicable, separate components thereof) to be performed are substantially complete, the fees are determinable and collection is reasonably assured.
 
  •  Private placement revenues.  We earn agency placement fees in non-underwritten transactions such as private placements, including securitized debt offerings collateralized by financial services issuers’ securities, which we refer to as “PreTSLs”. We record private placement revenues when the services related to the underlying transaction are completed under the terms of the engagement. This is generally the closing date of the transaction.


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Since our investment banking revenues are generally recognized at the time of completion of each transaction or the services to be performed, these revenues typically vary between periods and may be considerably affected by the timing of the closing of significant transactions.
 
 
Our sales and trading revenues include commissions and principal transactions revenues. The trading gains and losses include net gains from trading for our own account and the results of activities that support the facilitation of customer orders in both listed and over-the-counter stocks and fixed income securities.
 
  •  Commissions.  Our sales and trading business generates revenue from equity securities trading commissions paid by institutional investor customers. Commissions are recognized on a trade date basis.
 
  •  Principal transactions.  Fixed Income — Our sales and trading revenues include net trading gains and losses from acting as a principal in the facilitation of customer orders. Our fixed income sales and trading includes new issue and secondary market trading in mortgage backed securities, U.S. government and agency securities and corporate debt securities. We also maintain a financial strategies group that advises customers on the structure of their investment portfolios. Our loan portfolio sales group also performs similar services arranging for the purchase or sale of performing or non-performing loans.
 
Equities — Our sales and trading revenues include net trading gains and losses from principal transactions, which include investing in securities for our own account. In addition, we act as a market-maker in over-the-counter common equity securities. Our market-maker positions are typically held for a short duration.
 
 
Interest and dividend income primarily includes interest earned on our interest bearing assets including securities held for securitization and interest and dividends on securities included in financial instruments owned related to our sales and trading business.
 
 
Investment advisory fees include management and investment performance fees accrued on assets under management by KBW Asset Management, a wholly owned registered investment advisor subsidiary. Investment performance fees are not included in revenues until the end of the performance period.
 
 
Other income primarily includes sublease income and other miscellaneous fee income.
 
 
A significant portion of our expense base is variable, including employee compensation and benefits, brokerage and clearance, communication and data processing and travel and entertainment expenses. We intend to maintain our employee compensation and benefits expense within a general target range of 55% to 60% of total revenues, although we may change this rate at any time. This percentage range includes all cash and non-cash compensation and benefit expense.
 
Non-compensation expenses include occupancy and equipment, communications and data processing, brokerage and clearance, interest and other expenses.
 
 
Compensation and benefits expense for our employees is the principal component of our expenses and includes salaries, overtime, bonuses, amortization expense with respect to grants of restricted awards and restricted stock units of our common stock, benefits, employment taxes and other employee costs. As is the


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widespread practice in our industry, we pay bonuses on an annual basis, which for senior employees typically make up a large portion of their total compensation. Cash compensation is generally accrued based on a ratio of total compensation and benefits to total revenues. We accrue for the estimated amount of these bonus payments ratably over the applicable service period. Bonus payments may have a greater impact on our cash position and liquidity in the periods in which they are paid than would otherwise be reflected in our consolidated statements of income.
 
Beginning with the 2006 discretionary bonuses paid in February 2007, certain employees were compensated in cash and with restricted stock awards. These awards generally vest and are expensed ratably over a three-year service period from date of grant. In the future, we expect that such awards will be a portion of the compensation of certain employees.
 
Equity awards issued in connection with our initial public offering (“IPO”) vest over a four-year period, subject to continued employment. The non-cash compensation expense associated with these awards will be amortized ratably over the requisite service period.
 
 
 
These expenses include rent and utilities associated with our various offices, depreciation of leasehold improvements and furniture and fixtures, occupancy and premises taxes and other fixed asset service fees.
 
 
These expenses include costs for data processing and telephone and data communication, primarily consisting of expenses for obtaining third-party market data primarily used by personnel in sales and trading. We also incur expenses related to electronic trading network connections and depreciation of computer and communication equipment.
 
 
These expenses include floor brokerage, local broker commissions and clearance charges paid to clearing firms that fluctuate depending on the volume of trades we complete.
 
 
Interest expense includes interest incurred on bank loans, repurchase agreements, interest bearing financial instruments sold short and inventory financing provided by clearing firms.
 
 
Other expenses include consulting fees, professional fees, insurance costs, business development costs, charitable contributions and research delivery costs.
 
 
We account for income taxes consistent with the asset and liability method prescribed by SFAS 109 and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”), which prescribes a single, comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on its tax returns. Income tax expense is based on pre-tax accounting income, including adjustments made for the recognition or derecognition related to uncertain tax positions. The recognition or derecognition of income tax expense related to uncertain tax positions is determined under the guidance as prescribed by FIN 48. Deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be


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recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
 
 
The Company’s business activities focus on the financial services sector and are uniquely impacted by economic and market conditions affecting this sector. The outlook for the financial services sector, including the market prices for the securities of companies in the sector, such as the Company, should be viewed against the backdrop of the global economies, financial markets activity and the geopolitical environment, all of which are integrally linked.
 
During the third quarter, concerns about the impact of deterioration in credit quality for sub-prime loans spread to affect the broader credit markets, leading to a repricing of credit risks, general widening of credit spreads, lower levels of liquidity and a significant decrease in transparency in pricing for many classes of fixed income securities. In addition, criteria used by rating agencies has also come under scrutiny, with the possibility of future revisions to such criteria and practices. There was increased volatility across fixed income and equity markets which has led and could continue to lead to reductions in trading revenues. This has been offset by growth in equity commissions associated with higher trading volumes. The broad impact of these trends, particularly in respect of reported continuing write downs of inventory positions associated with the CDO markets, has put significant pressure on credit ratings and equity prices for companies in the financial service sector. Tightening of credit may also affect the ability of companies to finance M&A activity in this sector. The Company’s focus on the financial services industry makes it susceptible to the economic factors which particularly affect this industry segment.
 
It is difficult to predict how long these conditions will continue. The performance of each of the Company’s lines of business will be affected by overall global economic growth, financial market movements (including interest rate movements and credit spread), the competitive environment and customer and client activity levels in any given time period.
 
Results of Operations
 
Three Months Ended September 30, 2007 Compared with Three Months Ended September 30, 2006
 
 
Total revenues increased $7.9 million, or 8.5%, to $101.1 million for the three months ended September 30, 2007 compared with $93.2 million for the three months ended September 30, 2006. This increase was primarily due to increases in investment banking, commissions and interest and dividend income revenues of $10.9 million, $19.0 million and $2.7 million, respectively, offset by a decrease of $24.5 million in principal transactions, net.
 
Total expenses increased $12.7 million, or 16.2%, to $91.3 million for the three months ended September 30, 2007 compared with $78.6 million for the three months ended September 30, 2006. This increase was due to increases in compensation and benefits expense of $4.5 million and non-compensation expenses of $8.2 million.
 
On a U.S. Generally Accepted Accounting Principles (“GAAP”) basis, we recorded net income of $5.5 million for the three months ended September 30, 2007 compared with $9.3 million for the three months ended September 30, 2006. After excluding from net income a non-GAAP adjustment related to the net of tax compensation and benefits expense with respect to the amortization of the 2006 IPO restricted stock awards, the resulting non-GAAP net income and the related diluted earnings per share decreased 21.7% and 34.3%, respectively, to $7.3 million and $0.23 per share, respectively. This is compared with net income of $9.3 million and diluted earnings per share of $0.35 for the third quarter of 2006. See the section below entitled “— Three Month Non-GAAP Financial Measures” for a reconciliation to our GAAP results.


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The following table sets forth our revenues and expenses for the periods presented (dollars in thousands):
 
                                 
    Three Months Ended
       
    September 30,     Period-to-Period  
    2007     2006     $ Change     % Change  
    (Unaudited)  
 
Revenues:
                               
Investment banking
  $ 60,132     $ 49,204     $ 10,928       22.2 %
Commissions
    44,457       25,479       18,978       74.5  
Principal transactions, net
    (14,943 )     9,567       (24,510 )     (256.2 )
Interest and dividend income
    10,317       7,595       2,722       35.8  
Investment advisory fees
    436       508       (72 )     (14.2 )
Other
    736       859       (123 )     (14.3 )
                                 
Total revenues
    101,135       93,212       7,923       8.5  
                                 
Expenses:
                               
Compensation and benefits
    58,658       54,118       4,540       8.4  
                                 
Non-compensation expenses:
                               
Occupancy and equipment
    4,922       4,528       394       8.7  
Communications and data processing
    6,205       5,113       1,092       21.4  
Brokerage and clearance
    6,361       3,976       2,385       60.0  
Interest
    4,610       3,014       1,596       53.0  
Other
    10,517       7,822       2,695       34.5  
                                 
Total non-compensation expenses
    32,615       24,453       8,162       33.4  
                                 
Total expenses
    91,273       78,571       12,702       16.2  
                                 
Income before income tax expense
    9,862       14,641       (4,779 )     (32.6 )
Income tax expense
    4,327       5,331       (1,004 )     (18.8 )
                                 
Net income
  $ 5,535     $ 9,310     $ (3,775 )     (40.5 )%
                                 
 
 
Our management has utilized non-GAAP calculations of presented compensation and benefits expense, income before income tax expense, income tax expense, net income, compensation ratio and basic and diluted earnings per share that were adjusted in the manner presented above as an additional device to aid in understanding and analyzing our financial results for the three months ended September 30, 2007. Specifically, our management believes that the non-GAAP measures provide useful information by excluding certain items that may not be indicative of our core operating results and business outlook. Our management believes that these non-GAAP measures will allow for a better evaluation of the operating performance of our business and facilitate meaningful comparison of our results in the current period to those in prior periods and future periods. Our reference to these non-GAAP measures should not be considered as a substitute for results that are presented in a manner consistent with GAAP. These non-GAAP measures were provided to enhance investors’ overall understanding of our current financial performance.
 
A limitation of utilizing these non-GAAP measures of compensation benefits expense, income before income tax expense, income tax expense, net income, compensation ratio and basic and diluted earnings per share is that the GAAP accounting effects of these events do in fact reflect the underlying financial results of our business and these effects should not be ignored in evaluating and analyzing our financial results. Therefore, management believes that both our GAAP measures of compensation benefits expense, income before income tax expense, income tax expense, net income, compensation ratio and basic and diluted earnings per share and the same respective non-GAAP measures of our financial performance should be considered together.


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In accordance with SFAS No. 123(R), Share-Based Payment we measure compensation cost for stock-based awards at fair value on the date of grant and recognition of compensation expense generally over the service period for awards expected to vest. Such grants were recognized as expenses over the requisite service period, net of estimated forfeitures.
 
In this report we include our compensation and benefits expense, income before income tax expense, income tax expense, net income, compensation ratio and basic and diluted earnings per share on a non-GAAP basis for the three months ended September 30, 2007. Such non-GAAP results exclude the expense resulting from the amortization of stock awards associated with the grant of the November 2006 IPO restricted stock awards to our employees. Therefore, there is no reconciling item for compensation expense for the three and nine months ended September 30, 2006.
 
We expect to grant restricted stock awards and other share-based compensation in the future. We do not expect to make substantial grants to employees outside of our regular compensation and hiring process, as we did when we granted IPO restricted stock awards in connection with our IPO.
 
The following provides details with respect to reconciling compensation and benefits expense, income before income tax expense, income tax expense, net income, compensation ratio and basic and diluted earnings per share on a GAAP basis for the three months ended September 30, 2007 to such items on a non-GAAP basis in the same period:
 
                                 
(Dollars in thousands, except per share information)
 
Three Months Ended:
                   
    9/30/2007     9/30/2006  
    GAAP     Reconciliation     Non-GAAP     GAAP  
 
Compensation and benefits expense
  $ 58,658     $ (3,128 )(a)   $ 55,530     $ 54,118  
                                 
Income before income tax expense
  $ 9,862     $ 3,128 (a)   $ 12,990     $ 14,641  
Income tax expense
  $ 4,327     $ 1,372 (b)   $ 5,699     $ 5,331  
                                 
Net income
  $ 5,535     $ 1,756 (c)   $ 7,291     $ 9,310  
                                 
Compensation ratio(d)
    58.0 %             54.9 %     58.1 %
Earnings per share:
                               
Basic
  $ 0.18     $ 0.06     $ 0.24     $ 0.35  
Diluted
  $ 0.18     $ 0.05     $ 0.23     $ 0.35  
Weighted average number of common shares outstanding:
                               
Basic
    30,665,945       (e)     30,665,945       26,749,483  
Diluted
    31,546,276       (e)     31,546,276       26,749,483  
 
 
(a) The non-GAAP adjustment represents the pre-tax expense with respect to the amortization of the IPO restricted stock awards granted to employees on November 8, 2006.
 
(b) The non-GAAP adjustment with respect to income tax expense represents the elimination of the tax benefit resulting from the amortization of the IPO restricted stock awards in the period.
 
(c) The non-GAAP adjustment with respect to net income was the after-tax amortization of the IPO restricted stock awards in the period.
 
(d) The compensation ratio with respect to the three months ended September 30, 2007 and 2006 was calculated by dividing compensation and benefits expense by total revenues of $101,135 and $93,212, respectively.
 
(e) Both the basic and diluted weighted average number of common shares outstanding were not adjusted.


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Investment banking revenues increased $10.9 million, or 22.2%, to $60.1 million for the three months ended September 30, 2007 compared with $49.2 million for the three months ended September 30, 2006. Underwriting revenues increased $17.3 million, or 176.8%, to $27.1 million and M&A advisory fees increased $6.8 million, or 39.2%, to $24.1 million in the third quarter of 2007 compared with the same period in 2006. The increases in underwriting revenues and M&A advisory fees were primarily due to a larger than average underwriting transaction and a larger than average M&A advisory deal, each of which closed in the third quarter of 2007. These increases were offset by a $13.1 million, or 59.4%, decline in private placement revenues in the third quarter of 2007 compared with the same period in 2006.
 
In the third quarter of 2007, we received cash and warrants exercisable in the customers company stock as advisory fees in connection with the closing of a private placement transaction. The warrants received were measured at fair value on the closing date of the transaction. We recorded investment banking revenues of $6.5 million as a result of this non-monetary transaction in 2007. Shortly after the closing of the private placement transaction, we exercised these warrants and received common stock.
 
 
Commissions revenues increased $19.0 million, or 74.5%, to $44.5 million for the three months ended September 30, 2007 compared with $25.5 million for the three months ended September 30, 2006, primarily due to increases of $9.1 million and $9.9 million in commissions revenue related to our European and U.S. equity activities, respectively.
 
 
Principal transactions revenue decreased $24.5 million to a loss of $14.9 million for the three months ended September 30, 2007 compared with revenue of $9.6 million for the three months ended September 30, 2006. Such decrease was primarily the result of:
 
  •  Unrealized losses on fixed income securities including securities held for PreTSL securitizations.
 
  •  Higher equity market making losses.
 
  •  Lower gains on equity securities trading for our own account.
 
  •  Decreased volume in transactions with customers in fixed-income securities, leading to lower aggregate markups and markdowns.
 
 
Interest and dividend income increased $2.7 million, or 35.8%, to $10.3 million for the three months ended September 30, 2007 compared with $7.6 million for the three months ended September 30, 2006. This increase was primarily due to higher average holdings of interest bearing financial instruments.
 
 
Investment advisory fees declined slightly for the three months ended September 30, 2007 compared with the three months ended September 30, 2006.
 
 
Other revenues decreased $0.2 million to $0.7 million for the three months ended September 30, 2007 compared with $0.9 million for the three months ended September 30, 2006.


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Compensation and benefits expense increased $4.5 million, or 8.4%, to $58.7 million for the three months ended September 30, 2007 compared with $54.1 million for the three months ended September 30, 2006. In the third quarter of 2007, compensation and benefits expense included $3.1 million related to the non-cash expense resulting from the amortization of restricted stock awards granted in connection with the November 2006 IPO.
 
Compensation and benefits expense as a percentage of total revenue, after deducting from such expense the non-cash amortization expense associated with the IPO restricted stock awards, was 54.9% in the third quarter of 2007 compared with 58.1% in the same 2006 period. The unadjusted compensation and benefits percentage of total revenue in the third quarter of 2007 was 58.0%. See the section above entitled “— Three Month Non-GAAP Financial Measures” for a reconciliation to our GAAP results.
 
 
Occupancy and equipment expense increased $0.4 million, or 8.7%, to $4.9 million for the three months ended September 30, 2007 compared with $4.5 million for the three months ended September 30, 2006.
 
 
Communications and data processing expense increased $1.1 million, or 21.4%, to $6.2 million for the three months ended September 30, 2007 compared with $5.1 million for the three months ended September 30, 2006. This increase was primarily due to higher market data and network communications costs.
 
 
Brokerage and clearance expense increased $2.4 million, or 60.0%, to $6.4 million for the three months ended September 30, 2007 compared with $4.0 million for the three months ended September 30, 2006. This increase was primarily due to increased clearing expenses resulting from strong customer volume in equity sales.
 
 
Interest expense increased $1.6 million, or 53.0%, to $4.6 million for the three months ended September 30, 2007 compared with $3.0 million for the three months ended September 30, 2006. This increase was primarily due to higher financing expense related to fixed income inventory.
 
 
Other expense increased $2.7 million, or 34.5%, to $10.5 million for the three months ended September 30, 2007 compared with $7.8 million for the three months ended September 30, 2006. The increase was primarily due to higher professional fees, insurance costs and business development costs.
 
 
Income tax expense was $4.3 million for the three months ended September 30, 2007, which equals an effective tax rate of 43.9%, compared with to $5.3 million for the three months ended September 30, 2006, which equals an effective tax rate of 36.4%. The increase in the effective tax rate reflects the reversal of 2005 tax provisions as a result of the finalization and filing of 2005 state and local tax returns in the third quarter of 2006. Such final returns reflected lower than estimated tax liabilities for 2005 for state and local taxes as a result of favorable allocations of taxable income among various state and local jurisdictions for 2005.


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Nine Months Ended September 30, 2007 Compared with Nine Months Ended September 30, 2006
 
 
Total revenues increased $35.8 million, or 12.5%, to $322.2 million for the nine months ended September 30, 2007 compared with $286.4 million for the nine months ended September 30, 2006. This increase was primarily due to increases in investment banking, commissions and interest and dividend income revenues of $31.2 million, $33.8 million and $8.2 million, respectively, offset by a decrease of $38.4 million in principal transactions, net. In the first nine months of 2006, principal transactions, net included a gain of $5.0 million resulting from the conversion of our New York Stock Exchange seat for cash and shares of NYSE Group, Inc.
 
Total expenses increased $41.6 million, or 17.5%, to $279.9 million for the nine months ended September 30, 2007 compared with $238.3 million for the nine months ended September 30, 2006. This increase was due to an increase in compensation and benefits expense of $22.0 million and non-compensation expenses of $19.6 million.
 
We recorded net income of $23.7 million for the nine months ended September 30, 2007 compared with $27.9 million for the nine months ended September 30, 2006. After excluding from net income a non-GAAP adjustment related to the net of tax compensation and benefits expense with respect to the amortization of the 2006 IPO restricted stock awards, the resulting non-GAAP net income increased $1.0 million, or 3.5%, to $28.9 million. This is compared with $27.9 million for the first nine months of 2006. Diluted earnings per share, on a non-GAAP basis, decreased 11.7% to $0.91 per share for the first nine months of 2007, compared to $1.03 per share for the same 2006 period. See the section below entitled “— Nine Month Non-GAAP Financial Measures” for a reconciliation to our GAAP results. Net income and diluted earnings per shares for the first nine months of 2006 included an after-tax gain with respect to the New York Stock Exchange seat conversion of $2.8 million and $0.09 per diluted share, respectively.
 
The following table provides a comparison of our revenues and expenses for the periods presented (dollars in thousands):
 
                                 
    For the Nine Months
       
    Ended September 30,     Period-to-Period  
    2007     2006     $ Change     % Change  
    (Unaudited)  
 
Revenues:
                               
Investment banking
  $ 174,077     $ 142,833     $ 31,244       21.9 %
Commissions
    119,857       86,039       33,818       39.3  
Principal transactions, net
    (3,134 )     35,308       (38,442 )     (108.9 )
Interest and dividend income
    27,544       19,323       8,221       42.5  
Investment advisory fees
    1,258       1,293       (35 )     (2.7 )
Other
    2,564       1,561       1,003       64.3  
                                 
Total revenues
    322,166       286,357       35,809       12.5  
                                 
Expenses:
                               
Compensation and benefits
    188,882       166,847       22,035       13.2  
                                 
Non-compensation expenses:
                               
Occupancy and equipment
    13,977       13,047       930       7.1  
Communications and data processing
    17,771       14,387       3,384       23.5  
Brokerage and clearance
    17,417       14,993       2,424       16.2  
Interest
    11,273       8,278       2,995       36.2  
Other
    30,617       20,739       9,878       47.6  
                                 
Total non-compensation expenses
    91,055       71,444       19,611       27.4  
                                 
Total expenses
    279,937       238,291       41,646       17.5  
                                 
Income before income tax expense
    42,229       48,066       (5,837 )     (12.1 )
Income tax expense
    18,579       20,206       (1,627 )     (8.1 )
                                 
Net income
  $ 23,650     $ 27,860     $ (4,210 )     (15.1 )%
                                 


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The following provides details with respect to reconciling compensation and benefits expense, income before income tax expense, income tax expense, net income, compensation ratio and basic and diluted earnings per share on a GAAP basis for the nine months ended September 30, 2007 to such items on a non-GAAP basis in the same period:
 
                                 
(Dollars in thousands, except per share information)
 
Nine Months Ended:
                   
    9/30/2007     9/30/2006  
    GAAP     Reconciliation     Non-GAAP     GAAP  
 
Compensation and benefits expense
  $ 188,882     $ (9,290 )(a)   $ 179,592     $ 166,847  
                                 
Income before income tax expense
  $ 42,229     $ 9,290 (a)   $ 51,519     $ 48,066  
Income tax expense
  $ 18,579     $ 4,088 (b)   $ 22,667     $ 20,206  
                                 
Net income
  $ 23,650     $ 5,202 (c)   $ 28,852     $ 27,860  
                                 
Compensation ratio(d)
    58.6 %             55.7 %     58.3 %
Earnings per share:
                               
Basic
  $ 0.77     $ 0.17     $ 0.94     $ 1.03  
Diluted
  $ 0.75     $ 0.16     $ 0.91     $ 1.03  
Weighted average number of common shares outstanding:
                               
Basic
    30,636,898       (e)     30,636,898       27,013,417  
Diluted
    31,537,188       (e)     31,537,188       27,013,417  
 
 
(a) The non-GAAP adjustment represents the pre-tax expense with respect to the amortization of the IPO restricted stock awards granted to employees on November 8, 2006.
 
(b) The non-GAAP adjustment with respect to income tax expense represents the elimination of the tax benefit resulting from the amortization of the IPO restricted stock awards in the period.
 
(c) The non-GAAP adjustment with respect to net income was the after-tax amortization of the IPO restricted stock awards in the period.
 
(d) The compensation ratio with respect to the nine months ended September 30, 2007 and 2006 was calculated by dividing compensation and benefits expense by total revenues of $322,166 and $286,357, respectively.
 
(e) Both the basic and diluted weighted average number of common shares outstanding were not adjusted.
 
See the section entitled “— Three Month Non-GAAP Financial Measures” for a discussion regarding the reasons why management believes a presentation of non-GAAP financial measures provides useful information for investors regarding our financial condition and results of operations.
 
 
 
Investment banking revenues increased $31.2 million, or 21.9%, to $174.1 million for the nine months ended September 30, 2007 compared with $142.8 million for the nine months ended September 30, 2006. Underwriting revenues increased $26.4 million, or 64.9%, to $67.1 million and M&A advisory fees increased $29.2 million, or 82.4%, to $64.6 million for the nine months ended September 30, 2007 compared with the same period in 2006. The increases in underwriting revenues and M&A advisory fees were primarily due to larger than average underwriting transactions and larger than average M&A advisory deals closing in 2007. These increases were offset by a $24.3 million, or 36.3%, decline in private placement revenues in the first nine months of 2007 compared with the same period in 2006. The closing of a larger than average transaction in the second quarter of 2006 contributed to this comparative decline in the nine months ended September 30, 2007.


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Commissions revenues increased $33.8 million, or 39.3%, to $119.9 million for the nine months ended September 30, 2007 compared with $86.0 million for the nine months ended September 30, 2006, primarily due to increases of $18.4 million and $15.4 million in commissions revenue related to our European and U.S. equity activities, respectively.
 
 
Principal transactions revenue decreased $38.4 million to a loss of $3.1 million for the nine months ended September 30, 2007 compared with revenue of $35.3 million for the nine months ended September 30, 2006, reflecting the difficult market conditions in 2007 including the market dislocation in the third quarter. In addition, in the first nine months of 2006, principal transactions, net included a gain of $5.0 million on the conversion of our New York Stock Exchange seat for cash and shares of NYSE Group, Inc.
 
 
Interest and dividend income increased $8.2 million, or 42.5%, to $27.5 million for the nine months ended September 30, 2007 compared with $19.3 million for the nine months ended September 30, 2006. This increase was primarily due to higher average holdings of interest bearing financial instruments.
 
 
Investment advisory fees remained unchanged at $1.3 million for the nine months ended September 30, 2007 compared with the nine months ended September 30, 2006.
 
 
Other revenues increased $1.0 million to $2.6 million for the nine months ended September 30, 2007 compared with $1.6 million for the nine months ended September 30, 2006.
 
 
 
Compensation and benefits expense increased $22.0 million, or 13.2%, to $188.9 million for the nine months ended September 30, 2007 compared with $166.8 million for the nine months ended September 30, 2006. In the nine months ended September 30, 2007, compensation expense included $9.3 million related to the non-cash expense resulting from the amortization of restricted stock awards granted in connection with the November 2006 IPO. Also included in the nine months ended September 30, 2007 was $4.3 million relating to the amortization of 2006 bonus restricted stock awards granted in February 2007, of which $2.1 million related to accelerated compensation expense associated with grants to employees who were or will be eligible to retire prior to the vesting date.
 
Compensation and benefits expense as a percentage of total revenue, after deducting from such expense the non-cash amortization expense associated with the IPO restricted stock awards, was 55.7% for the nine months ended September 30, 2007 compared with 58.3% in the same 2006 period. The unadjusted compensation and benefits percentage of total revenue for the nine months ended September 30, 2007 was 58.6%. See the section above entitled “— Nine Month Non-GAAP Financial Measures” for a reconciliation to our GAAP results.
 
 
Occupancy and equipment expense increased $1.0 million, or 7.1%, to $14.0 million for the nine months ended September 30, 2007 compared with $13.0 million for the nine months ended September 30, 2006.


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Communications and data processing expense increased $3.4 million, or 23.5%, to $17.8 million for the nine months ended September 30, 2007 compared with $14.4 million for the nine months ended September 30, 2006. This increase was primarily due to higher market data and network communications costs.
 
 
Brokerage and clearance expense increased $2.4 million, or 16.2%, to $17.4 million for the nine months ended September 30, 2007 compared with $15.0 million for the nine months ended September 30, 2006. This increase was primarily due to increased clearing expenses resulting from strong customer volume in equity sales.
 
 
Interest expense increased $3.0 million or 36.2% to $11.3 million for the nine months ended September 30, 2007 compared with $8.3 million for the nine months ended September 30, 2006. This increase was primarily due to higher financing expense related to fixed income inventory.
 
 
Other expense increased $9.9 million, or 47.6%, to $30.6 million for the nine months ended September 30, 2007 compared with $20.7 million for the nine months ended September 30, 2006. The increase was primarily due to higher professional fees, insurance costs and business development costs.
 
 
Income tax expense was $18.6 million for the nine months ended September 30, 2007, which equals an effective tax rate of 44.0%, compared with $20.2 million for the nine months ended September 30, 2006, which equals an effective tax rate of 42.0%. The increase in the effective tax rate reflects the reversal of 2005 tax provisions as a result of the finalization and filing of 2005 state and local tax returns in the third quarter of 2006. Such final returns reflected lower than estimated tax liabilities for 2005 for state and local taxes as a result of favorable allocations of taxable income among various state and local jurisdictions for 2005.
 
 
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting periods. We base our estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. The use of different estimates and assumptions could produce materially different results. For example, if factors such as those described in “Risk Factors” cause actual events to differ from the assumptions we used in applying the accounting policies, our results of operations, financial condition and liquidity could be materially adversely affected.
 
Our significant accounting policies are summarized in Note 2 to our unaudited consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions, particularly as they relate to accounting policies that we believe are most important to the presentation of our financial condition and results of operations. We regard an accounting estimate or assumption to be most important to the presentation of our financial condition and results of operations where:
 
  •  The nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
 
  •  The impact of the estimate or assumption on our financial condition or operating performance is material.


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Using these criteria, we believe the following to be our critical accounting policies:
 
 
Substantially all of the Company’s financial instruments, as defined in Statement of Financial Accounting Standards (“SFAS”) No. 107, Disclosures About Fair Value of Financial Instruments, are recorded at fair value or contract amounts that approximate fair value. SFAS No. 107 defines fair value of a financial instrument as the amount that would be received to sell an asset or paid to transfer a liability, between market participants as of the measurement date other than in a forced sale or liquidation. Financial instruments owned and financial instruments sold, not yet purchased are stated at fair value, with related changes in unrealized appreciation or depreciation reflected in principal transactions, net in the accompanying consolidated statements of income. Financial instruments carried at contract amounts include receivables from clearing brokers, payable to clearing broker, securities purchased under resale agreements, short-term borrowings and securities sold under repurchase agreements.
 
The Company elected to early adopt SFAS No. 157, Fair Value Measurements, as of January 1, 2007. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 defines fair value as “the price that would be received to sell an asset and paid to transfer a liability in an ordinary transaction between market participants at the measurement date”. Additionally, SFAS No. 157 disallows the use of block discounts on positions traded in an active market as well as nullifies certain guidance in Emerging Issues Task Force No. 02-3 regarding the recognition of inception gains on certain derivative transactions. See Note 3 of the Notes to Consolidated Financial Statements for a complete discussion on SFAS No. 157.
 
Under SFAS No. 157, fair value is generally based on quoted market prices. If quoted market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations, price activity for equivalent instruments and valuation pricing models. Among the factors considered by the Company in determining the fair value of financial instruments are discount margins, weighted average spreads, discounted anticipated cash flows, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, as well as other measurements.
 
Equity interests in certain private securities and limited partnership interests are reflected in the consolidated financial statements at fair value, which is often represented at initial cost until significant transactions or developments indicate that a change in the carrying value of the securities is appropriate. This represents the Company’s best estimate of exit price as defined by SFAS No. 157. The Company’s partnership interests are generally recorded at fair value based on valuations provided by general partners. Generally, the carrying values of these securities will be increased based on company performance and in those instances where market values are readily ascertainable by reference to substantial transactions occurring in the marketplace or quoted market prices. Reductions to the carrying value of these securities are made when the Company’s estimate of net realizable value has declined below the carrying value.
 
 
We entered into a sublease in August 2007 for additional space in the NewYork office, expected to commence June 2008. Future minimum lease payments are expected to be approximately $0 for 2007, $1,000 for 2008, $3,000 for 2009, $3,000 for 2010, $3,000 for 2011 and $11,000 thereafter. Contractual obligations have not otherwise significantly changed since December 31, 2006.
 
 
We had no material off-balance sheet arrangements as of September 30, 2007. However, as described below under “— Qualitative and Quantitative Disclosures About Market Risk — Credit Risk,” through indemnification provisions in our clearing agreements with our clearing brokers, customer activities may expose us to off-balance sheet credit risk, which we seek to mitigate through customer screening and collateral requirements.


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We are a member of various exchanges that trade and clear securities or futures contracts. As a member of these exchanges, we may be required to pay a proportionate share of the financial obligations of another member who may default on its obligations to the exchange. To mitigate these performance risks, the exchanges often require members to post collateral as well as meet minimum financial standards. While the rules governing different exchange memberships vary, our guarantee obligations generally would arise only if the exchange had previously exhausted its resources. In addition, any such guarantee obligation would be apportioned among the other non-defaulting members of the exchange. Any potential contingent liability under these membership agreements cannot be estimated. We have not recorded any contingent liability in our consolidated financial statements for these agreements and believe that any potential requirement to make payments under these agreements is remote.
 
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically scoped out of the Statement) at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. The effective date for SFAS No. 159 is as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We will adopt SFAS No. 159 on January 1, 2008. We are currently evaluating the impact, if any, the adoption of SFAS No. 159 will have on our consolidated financial statements.
 
 
We are the parent of Keefe, Bruyette & Woods, Inc. (“Keefe”), Keefe, Bruyette & Woods Limited (“KBWL”), KBW Asset Management, Inc. and KBW Ventures, Inc. Dividends and other transfers from our subsidiaries are our primary source of funds to satisfy our capital and liquidity requirements. Applicable laws and regulations, primarily the net capital rules discussed below, restrict dividends and transfers from Keefe and KBWL to us. Our rights to participate in the assets of any subsidiary are also subject to prior claims of the subsidiary’s creditors, including customers and trade creditors of Keefe, KBWL and KBW Asset Management.
 
We monitor and evaluate the composition and size of our assets and operating liabilities. As a result of our market making, customer and proprietary activities (including securitization activities), the overall size of total assets and operating liabilities fluctuate from period to period. Our assets generally consist of cash and cash equivalents, securities, resale agreement balances and receivables.
 
Our operating activities generate cash resulting from net income earned during the period and fluctuations in our current assets and liabilities. The most significant fluctuations in current assets and liabilities have resulted from changes in the level of customer activity, changes in financial instruments owned on a proprietary basis and investment positions in response to changing trading strategies and market conditions.
 
We have historically satisfied our capital and liquidity requirements through capital raised from our stockholders and internally generated cash from operations. As of September 30, 2007, we had liquid assets of $331.7 million, primarily consisting of cash and cash equivalents, securities purchased under resale agreements and receivables from clearing brokers. We also periodically utilize short term bank debt to finance certain capital securities positions held at the holding company level to support the PreTSL product pool formation. On one occasion in the past six years, we obtained a short term subordinated loan from one of our clearing brokers to support underwriting activity over a very short time period. Although we believe such sources remain available, we do not currently have any plans to obtain such short-term subordinated financing from any outside source.
 
The timing of cash bonus payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees are generally paid salaries semi-monthly during the year, cash bonus payments, which make up a larger portion of total compensation, are generally paid once a year. Cash bonus payments for a given year are generally paid in February of the following year. We continually


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monitor our liquidity position and believe our available liquidity will be sufficient to fund our ongoing activities over the next twelve months.
 
As a registered broker-dealer and member firm of the NYSE, Keefe is subject to the uniform net capital rule of the SEC. We use the basic method permitted by the uniform net capital rule, which generally requires that the ratios of aggregate indebtedness to net capital shall not exceed 15 to 1. The NYSE may prohibit a member firm from expanding its business or paying dividends if resulting net capital would be below the regulatory limit. We expect these limits will not impact our ability to meet current and future obligations.
 
At September 30, 2007, Keefe’s net capital under the SEC’s Uniform Net Capital Rule was $142.8 million, or $139.3 million in excess of the minimum required net capital.
 
KBWL is subject to the capital requirements of the U.K. Financial Services Authority.
 
 
Nine months ended September 30, 2007.  Cash increased $10.3 million during the nine months ended September 30, 2007, primarily as a result of cash generated through our operating activities.
 
Operating activities for the nine months ended September 30, 2007 produced $8.8 million. This positive cash flow resulted from net income of $23.7 million, reduced for non-cash revenue and expense items of $1.2 million and cash provided from the increase in operating liabilities of $48.1 million offset by cash used through the increase in operating assets of $61.8 million. The non-cash adjustments consisted of non-monetary revenue of $6.5 million, amortization of stock-based compensation related to restricted stock of $15.9 million, depreciation and amortization expense of $3.6 million, and deferred income tax benefits of $14.2 million. Cash generated from the increase in operating liabilities consisted primarily of an increase in securities sold under repurchase agreements of $38.6 million and short-term borrowings of $56.3 million offset by declines in accounts payable, accrued expenses and other liabilities of $33.0 million, financial instruments sold, not yet purchased, at fair value of $10.9 million, and income taxes payable of $3.9 million. The cash used in the increase in the operating assets was primarily attributable to an increase in financial instruments owned, at fair value of $153.2 million, partially offset by a decline in receivables from clearing brokers of $78.4 million and securities purchased under resale agreements of $13.9 million.
 
We used $2.2 million in our investing activities, primarily in the purchase of fixed assets. Cash provided from financing activities increased $2.6 million primarily as a result of the repayment of loans which were provided to certain employees in connection with their purchase of our common stock.
 
Nine months ended September 30, 2006.  Cash increased by $0.3 million for the nine months ended September 30, 2006, primarily as a result of cash provided by operating activities partially offset by cash used in financing and investing activities.
 
Our operating activities for the nine months ended September 30, 2006 provided cash of $5.3 million. Net income for that period, adjusted for non-cash expense items of $6.5 million, was $34.4 million. Non-cash expenses consisted primarily of depreciation and amortization of $4.4 million and compensation expense related to restricted stock units of $1.3 million. Operating liabilities increased $38.3 million, and were offset by increases in operating assets of $67.4 million. The increases in operating assets consisted primarily of a $42.3 million increase in receivables from clearing brokers, a $46.2 million increase in financial instruments owned, at fair value, partially offset by decreases of $11.1 million and $10.9 million in securities purchased under resale agreements and accounts receivable, respectively. Cash provided by operating liabilities consisted primarily of increases of $84.4 million in securities sold under repurchase agreements and $55.1 million in financial instruments sold, not yet purchased, at fair value partially offset by a $68.1 million and $31.5 million decrease in payable to clearing broker and in short-term borrowings, respectively.
 
Our investing activities used cash of $2.0 million in the purchase of furniture, equipment and leasehold improvements.


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Our financing activities used $3.8 million primarily as a result of purchases of common stock from stockholders of $11.0 million partially offset by repayments of notes receivable from stockholders of $6.5 million.
 
ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk
 
 
Market risk represents the risk of loss that may result from the change in value of a financial instrument due to fluctuations in its market price. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is directly related to our role as a financial intermediary in customer trading and to our market making and investment activities. Market risk is inherent in financial instruments.
 
We trade in equity and debt securities as an active participant in both listed and over-the-counter markets. We typically maintain securities in inventory to facilitate our market making activities and customer order flow. We may use a variety of risk management techniques and economic hedging strategies in the ordinary course of our trading business to manage our exposures.
 
In connection with our sales and trading business, management also reviews reports appropriate to the risk profile of specific trading activities. Management monitors risks in its trading activities by establishing limits for each trading desk and reviewing daily trading results, inventory aging, securities concentrations and ratings. Typically, market conditions are evaluated and transaction details and securities positions are reviewed. These activities seek to ensure that trading strategies are within acceptable risk tolerance parameters. Activities include price verification procedures, position reconciliations and reviews of transaction bookings. We believe these procedures, which stress timely communications between traders, trading management and senior management, are important elements of the risk management process.
 
The following table sets forth our month-end high, low and average fair value of long/short securities owned for the nine months ended September 30, 2007:
 
                         
    High     Low     Average  
    (Dollars in thousands)  
 
Long value:
                       
Equities
  $ 173,990     $ 116,393     $ 153,328  
Corporate and other debt
  $ 323,765     $ 132,498     $ 244,045  
U.S. Government and agency securities
  $ 45,591     $     $ 13,598  
Mortgage Backed Securities
  $ 14,645     $     $ 2,304  
Other investments
  $ 62,777     $ 41,556     $ 52,509  
Short value:
                       
Equities
  $ 56,430     $ 29,528     $ 46,102  
Corporate and other debt
  $ 9,936     $     $ 2,953  
U.S. Government and agency securities
  $ 110,057     $ 42,841     $ 70,610  
Mortgage Backed Securities
  $ 5,876     $     $ 588  
 
 
Interest rate risk represents the potential loss from adverse changes in market interest rates. As we may hold debt securities from time to time, we are exposed to interest rate risk arising from changes in the level and volatility of interest rates and in the shape of the yield curve. Interest rate risk is primarily managed through the use of short positions in U.S. Treasury and corporate debt securities.
 
 
We engage in various securities underwriting, trading and brokerage activities servicing a diverse group of domestic and foreign corporations and institutional investor clients. Our exposure to credit risk associated


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with the nonperformance of these clients in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets which may impair the client’s ability to satisfy its obligations to us. Our principal activities are also subject to the risk of counterparty nonperformance. Pursuant to our Clearing Agreements with Pershing LLC, Pershing Securities Limited and Fortis Securities LLC, we are required to reimburse our clearing broker without limit for any losses incurred due to counterparty’s failure to satisfy its contractual obligations. In these situations, we may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to other customers or counterparties. We seek to mitigate the risks associated with sales and trading services through active customer screening and selection procedures and through requirements that clients maintain collateral in appropriate amounts where required or deemed necessary.
 
 
Because our assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation and communications charges, which may not be readily recoverable in the prices of services we offer. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our consolidated financial condition and results of operations.
 
 
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. We are focused on maintaining our overall operational risk management framework and minimizing or mitigating these risks through continual assessment, reporting and monitoring of potential operational risks.


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ITEM 4.   Controls and Procedures
 
Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.
 
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the current quarter covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II — OTHER INFORMATION
 
ITEM 1.   Legal Proceedings
 
Except as discussed in the following paragraph, the information required to be disclosed pursuant to this Item has been “previously reported” (as such term is defined in Rule 12b-2 of the Exchange Act) in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2006 and in Note 5 of Part  I, Item 1 of our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2007 and March 31, 2007.
 
On September 7, 2007, a New York Stock Exchange Hearing Board accepted the Company’s Stipulation of Facts and Consent to Penalty in connection with an investigation into certain violations relating to prospectus delivery practices by the Company during the period from July 1, 2003 through October 31, 2004. The findings were part of a “sweep” investigation involving 15 brokerage firms, all of whom entered into consents. Penalties include fines ranging from $375,000 to $2,250,000 and various ancillary corrective actions. The Company, without admitting or denying guilt, entered into the agreement to pay a fine of $375,000 and agreed to certain undertakings.
 
ITEM 1A.   Risk Factors
 
There have not been any material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006.
 
ITEM 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
The net offering proceeds to us from the IPO were $75.4 million, which amount includes the portion of the aggregate underwriters’ discount attributable to Keefe, a lead underwriter of the offering and our wholly-owned subsidiary. We have used approximately $21 million of such proceeds to increase the regulatory capitalization of KBWL, our U.K. broker dealer subsidiary. The remaining proceeds remain invested in a money market fund. It is our expectation that the remaining proceeds will be used for general corporate purposes, including providing seed capital for new asset management funds, support for our securization transactions and expansion opportunities for our investment banking and broker dealer businesses.
 
The table below sets forth the information with respect to purchases made by or on behalf of KBW, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common stock during the quarter ended September 30, 2007.
 


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                Total Number of
    Approximate Dollar
 
                Shares Purchased as
    Value of Shares that
 
    Total Number
          Part of Publicly
    May Yet be
 
    of Shares
    Average Price
    Announced Plans
    Purchased Under the
 
Period
  Purchased(1)(2)     Paid per Share     or Programs     Plans or Programs  
 
July 1 — July 31, 2007
    18,599     $ 27.56              
August 1 — August 31, 2007
                       
September 1 — September 30, 2007
                       
                                 
Total
    18,599     $ 27.56              
                                 
 
 
(1) All shares purchased were other than as part of a publicly announced plan or program. The purchased shares consist of common stock previously purchased by employees with funds loaned by us that were subsequently forfeited by such employees upon their departure. As a result of such forfeitures, the outstanding balances on the related loans were reduced to zero.
 
(2) All shares were immediately retired upon purchase by us.
 
ITEM 3.   Defaults Upon Senior Securities
 
None.
 
ITEM 4.   Submission of Matters to a Vote of Security Holders
 
None.
 
ITEM 5.   Other Information
 
Effective November 9, 2007, the Board of Directors (the “Board”) of the Registrant approved an amendment to the Registrant’s second amended and restated certificate of incorporation, which amendment changed the location of the Registrant’s registered office in the state of Delaware as well as the name of the Registrant’s registered agent.
 
Also effective November 9, 2007, the Board appointed Michael J. Zimmerman, a director that was elected to the Board on October 26, 2007, to the Audit Committee. Mr. Zimmerman was appointed to the Audit Committee in replacement of James K. Schmidt. Mr. Schmidt’s status as a member of the Board, a member of the Compensation Committee and a member and chairperson of the Corporate Governance and Nominations Committee, remains unchanged.
 
ITEM 6.   Exhibits
 
See Exhibit Index.

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: November 13, 2007
 
KBW, INC.
 
  By: 
/s/  JOHN G. DUFFY
Name:     John G. Duffy
  Title:  Chairman and Chief Executive Officer
 
  By: 
/s/  ROBERT GIAMBRONE
Name: Robert Giambrone
  Title:  Chief Financial Officer


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Exhibit
   
Number
 
Description
 
  3 .1   Second Amended and Restated Certificate of Incorporation of KBW, Inc. (as further amended effective November 9, 2007).
  10 .1   Sublease between Keefe, Bruyette & Woods, Inc. and National Financial Partners Corp., dated as of August 31, 2007 (incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed September 7, 2007).
  31 .1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31 .2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32 .1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32 .2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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