##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 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
 KBW, INC.
  Delaware
(State or Other Jurisdiction of Incorporation or Organization)
    
    13-4055775
(I.R.S. Employer Identification No.)
 787 Seventh Avenue, New York, New York 10019
 Registrants telephone number: (212) 887-7777
 þ  o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o   þ




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TABLE OF CONTENTS
 PageNumberAVAILABLE INFORMATION
    
    
    1PART I. FINANCIAL INFORMATION
    
    
    2ITEM 1. Financial Statements
    
    
    2Consolidated Statements of Financial ConditionMarch 31, 2008 (Unaudited) and December 31, 2007
    
    
    2Consolidated Statements of OperationsThree Months ended March 31, 2008 and 2007 (Unaudited)
    
    
    3Consolidated Statement of Changes in Stockholders EquityThree Months ended March 31, 2008 (Unaudited)
    
    
    4Consolidated Statements of Cash FlowsThree Months ended March 31, 2008 and 2007 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25ITEM 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATION
    
    
    28ITEM 1. Legal Proceedings
    
    
    28ITEM 1A. Risk Factors
    
    
    28ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28ITEM 3. Defaults Upon Senior Securities
    
    
    28ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    28ITEM 5. Other Information
    
    
    28ITEM 6. Exhibits
    
    
    28SIGNATURES
    
    
    29EXHIBIT INDEX
    
    
    30EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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AVAILABLE INFORMATION
   th




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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)
 March 31,2008
    
    
    December 31,(unaudited)
    
    
    2007ASSETSCash and cash equivalents
    
    $
    152,189
    
    
    $
    194,358Financial instruments owned, at fair value:Equities
    
    
    94,153
    
    
    
    102,966Corporate and other debt
    
    
    187,128
    
    
    
    224,812Other investments
    
    
    51,957
    
    
    
    54,515333,238
    
    
    
    382,293Securities purchased under resale agreements
    
    
    8,745
    
    
    
    23,846Receivables from clearing brokers
    
    
    93,814
    
    
    
    191,234Accounts receivable
    
    
    25,430
    
    
    
    21,196Furniture, equipment and leasehold improvements,
at cost, less accumulated depreciation and amortization
of $20,418 in 2008 and $19,259 in 2007
    
    
    18,986
    
    
    
    19,801Other assets
    
    
    39,419
    
    
    
    31,722Total assets
    
    $
    671,821
    
    
    $
    864,450LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Securities sold under repurchase agreements
    
    $
    58,856
    
    
    $
    94,784Short-term borrowings
    
    
    61,079
    
    
    
    65,099Financial instruments sold, not yet purchased, at fair value:Equities
    
    
    47,704
    
    
    
    48,061Corporate and other debt
    
    
    1,847
    
    
    
    5,000U.S. Government and agency securities
    
    
    
    
    
    
    23,78049,551
    
    
    
    76,841Accounts payable, accrued expenses, and other liabilities
    
    
    40,088
    
    
    
    172,263Income taxes payable
    
    
    7,893
    
    
    
    7,037Total liabilities
    
    
    217,467
    
    
    
    416,024Stockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    295
    
    
    
    293Paid-in capital
    
    
    124,469
    
    
    
    114,014Retained earnings
    
    
    329,869
    
    
    
    337,368Notes receivable from stockholders
    
    
    (2,260
    )
    
    
    (5,254
    )Accumulated other comprehensive income
    
    
    1,981
    
    
    
    2,005Total stockholders equity
    
    
    454,354
    
    
    
    448,426Total liabilities and stockholders equity
    
    $
    671,821
    
    
    $
    864,450
  2




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KBW, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 (Dollars in thousands, except per share information)
 (unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Revenues:Investment banking
    
    $
    43,087
    
    
    $
    46,637Commissions
    
    
    52,766
    
    
    
    36,771Principal transactions, net
    
    
    (30,100
    )
    
    
    8,198Interest and dividend income
    
    
    8,092
    
    
    
    8,562Investment advisory fees
    
    
    306
    
    
    
    376Other
    
    
    701
    
    
    
    735Total revenues
    
    
    74,852
    
    
    
    101,279Expenses:Compensation and benefits
    
    
    59,933
    
    
    
    60,768Occupancy and equipment
    
    
    4,743
    
    
    
    4,582Communications and data processing
    
    
    6,423
    
    
    
    5,121Brokerage and clearance
    
    
    7,153
    
    
    
    5,682Interest
    
    
    2,068
    
    
    
    2,557Business development
    
    
    3,789
    
    
    
    3,677Other
    
    
    4,180
    
    
    
    5,116Total expenses
    
    
    88,289
    
    
    
    87,503(Loss) / income before income tax (benefit) /expense
    
    
    (13,437
    )
    
    
    13,776Income tax (benefit) / expense
    
    
    (5,938
    )
    
    
    6,056Net (loss) / income
    
    $
    (7,499
    )
    
    $
    7,720Earnings per common share:Basic
    
    $
    (0.24
    )
    
    $
    0.25Diluted
    
    $
    (0.24
    )
    
    $
    0.24Weighted average number
of common shares outstanding:Basic
    
    
    30,735,039
    
    
    
    30,640,736Diluted
    
    
    30,735,039
    
    
    
    31,525,629
  3




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KBW, INC. AND SUBSIDIARIES
 
 Consolidated Statement of Changes in Stockholders Equity
 (Dollars in thousands, except per share information)
 (unaudited)
 Notes
    
    
    AccumulatedReceivable
    
    
    Other
    
    
    TotalPreferred
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    from
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Stockholders
    
    
    Income/(Loss)
    
    
    EquityBalance at December 31, 2007
    
    $
    
    
    
    $
    293
    
    
    $
    114,014
    
    
    $
    337,368
    
    
    $
    (5,254
    )
    
    $
    2,005
    
    
    $
    448,426Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,499
    )
    
    
    
    
    
    
    
    
    
    
    (7,499
    )Other comprehensive
loss, currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    440,903Amortization of
stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    13,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,190Purchase of 114,545
shares of
common stock
    
    
    
    
    
    
    (1
    )
    
    
    (2,845
    )
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    (2,811
    )Issuance of 279,894
shares of
common stock
    
    
    
    
    
    
    3
    
    
    
    6,936
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,939Restricted stock units
converted
    
    
    
    
    
    
    
    
    
    
    (779
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (779
    )Stock-based awards
vested
    
    
    
    
    
    
    
    
    
    
    (6,160
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,160
    )Excess net tax benefit
related
to stock-based awards
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113Repayment of notes
receivable from
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,959
    
    
    
    
    
    
    
    2,959Balance at March 31, 2008
    
    $
    
    
    
    $
    295
    
    
    $
    124,469
    
    
    $
    329,869
    
    
    $
    (2,260
    )
    
    $
    1,981
    
    
    $
    454,354
 Description of preferred stock and details:
 Number of SharesPar Value
    
    Authorized
    
    Issued
    
    OutstandingMarch 31, 2008
    
    $
    0.01
    
    
    
    10,000,000
    
    
    
    
    
    
    
    December 31, 2007
    
    $
    0.01
    
    
    
    10,000,000
    
    
    
    
    
    
    
    
 Description of common stock and details:
 Number of SharesPar Value
    
    Authorized
    
    Issued (1)
    
    Outstanding (1)March 31, 2008
    
    $
    0.01
    
    
    
    140,000,000
    
    
    
    29,454,362
    
    
    
    29,454,362December 31, 2007
    
    $
    0.01
    
    
    
    140,000,000
    
    
    
    29,289,013
    
    
    
    29,289,013
 
 (1)
    
    These share amounts exclude legally vested restricted stock units.  4




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KBW, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 (Dollars in thousands)
 (unaudited)
 Three Months Ended March 31,2008
    
    
    2007Cash flows from operating activities:Net (loss) / income
    
    $
    (7,499
    )
    
    $
    7,720Adjustments to reconcile net (loss) / income to net cash (used in) provided by
operating activities:Amortization of stock-based compensation
    
    
    13,190
    
    
    
    6,231Depreciation and amortization
    
    
    1,158
    
    
    
    1,297Deferred income tax benefit
    
    
    (4,000
    )
    
    
    (2,107
    )(Increase) decrease in operating assets:Financial instruments owned, at fair value
    
    
    49,055
    
    
    
    (194,481
    )Securities purchased under resale agreements
    
    
    15,101
    
    
    
    (780
    )Receivables from clearing brokers
    
    
    97,420
    
    
    
    113,302Accounts receivable
    
    
    (4,234
    )
    
    
    6,663Other assets
    
    
    (3,697
    )
    
    
    (962
    )Increase (decrease) in operating liabilities:Financial instruments sold, not yet purchased, at fair value
    
    
    (27,290
    )
    
    
    27,369Securities sold under repurchase agreements
    
    
    (35,928
    )
    
    
    178,721Short-term borrowings
    
    
    (4,020
    )
    
    
    (24,517
    )Accounts payable, accrued expenses and other liabilities
    
    
    (132,175
    )
    
    
    (110,505
    )Income taxes payable
    
    
    856
    
    
    
    (5,630
    )Net cash (used in) provided by operating activities
    
    
    (42,063
    )
    
    
    2,321Cash flows from investing activities:Purchase of furniture, equipment and leasehold improvements
    
    
    (343
    )
    
    
    (214
    )Net cash used in investing activities
    
    
    (343
    )
    
    
    (214
    )Cash flows from financing activities:Purchases of shares of common stock
    
    
    (2,811
    )
    
    
    Excess net tax benefit related to stock-based awards
    
    
    113
    
    
    
    220Repayment of notes receivable from stockholders
    
    
    2,959
    
    
    
    3,202Net cash provided by financing activities
    
    
    261
    
    
    
    3,422Currency adjustment:Effect of exchange rate changes on cash
    
    
    (24
    )
    
    
    92Net (decrease) increase in cash and cash equivalents
    
    
    (42,169
    )
    
    
    5,621Cash and cash equivalents at the beginning of the period
    
    
    194,358
    
    
    
    165,647Cash and cash equivalents at the end of the period
    
    $
    152,189
    
    
    $
    171,268Supplemental disclosures of cash flow information:Cash paid during the period for:Income taxes
    
    $
    531
    
    
    $
    15,510Interest
    
    $
    2,668
    
    
    $
    1,913
  5




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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars in thousands, except per share information)
 (1) Organization and Basis of Presentation
   (2) Summary of Significant Accounting Policies
 (a) Principles of Consolidation
  (b) Use of Estimates
  (c) Cash and Cash Equivalents
  (d) Fair Value of Financial Instruments
 Fair Value Measurements
  6




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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
  The Fair Value Option for Financial Assets
and Financial Liabilities
 (e) Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements
   (f) Receivables From and Payable to Clearing Brokers
  (g) Furniture, Equipment and Leasehold Improvements
  (h) Revenue Recognition
 Investment Banking
  
    
    Underwriting revenues are recognized on trade date, 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 are recorded when the transactions or the services to be
performed are substantially complete, the fees are determinable and collection is
reasonably assured.
 7




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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 
    
    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.
  Commissions
  Principal transactions
  Interest and dividend income
  (i) Securitization Activities
 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement
No. 125
 (j) Stock-Based Compensation
  (k) Income Taxes
  Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109
 8




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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (l) Earnings Per Share (EPS)
  (m) Foreign Currency Translation
  (n) Reclassifications
  (3) Financial Instruments
 Fair Value Measurements
  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.
   9




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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
   Assets at Fair Value as of March 31, 2008
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFinancial instruments owned, at fair value:Equities
    
    $
    64,833
    
    
    $
    9,787
    
    
    $
    17,843
    
    
    $
    92,463Corporate and other debt
    
    
    
    
    
    
    90,683
    
    
    
    96,445
    
    
    
    187,128Other investments
    
    
    
    
    
    
    
    
    
    
    51,957
    
    
    
    51,957Total non-derivative trading assets
    
    
    64,833
    
    
    
    100,470
    
    
    
    166,245
    
    
    
    331,548Derivative financial instruments
    
    
    1,690
    
    
    
    
    
    
    
    
    
    
    
    1,690Total financial instruments owned
    
    $
    66,523
    
    
    $
    100,470
    
    
    $
    166,245
    
    
    $
    333,238
 Liabilities at Fair Value as of March 31, 2008
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFinancial instruments sold, not yet
purchased, at fair value:Equities
    
    $
    46,966
    
    
    $
    
    
    
    $
    
    
    
    $
    46,966Corporate and other debt
    
    
    
    
    
    
    1,847
    
    
    
    
    
    
    
    1,847Total non-derivative trading liabiilties
    
    
    46,966
    
    
    
    1,847
    
    
    
    
    
    
    
    48,813Derivative financial instruments
    
    
    738
    
    
    
    
    
    
    
    
    
    
    
    738Total financial instruments sold, not yet purchased
    
    $
    47,704
    
    
    $
    1,847
    
    
    $
    
    
    
    $
    49,551
 10




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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 Assets at Fair Value as of December 31, 2007
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFinancial instruments owned, at fair value:Equities
    
    $
    76,581
    
    
    $
    2,741
    
    
    $
    23,541
    
    
    $
    102,863Corporate and other debt
    
    
    
    
    
    
    131,052
    
    
    
    93,760
    
    
    
    224,812Other Investments
    
    
    
    
    
    
    
    
    
    
    54,515
    
    
    
    54,515Total non-derivative trading assets
    
    
    76,581
    
    
    
    133,793
    
    
    
    171,816
    
    
    
    382,190Derivative financial instruments
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    103Total financial instruments owned
    
    $
    76,684
    
    
    $
    133,793
    
    
    $
    171,816
    
    
    $
    382,293
 Liabilities at Fair Value as of December 31, 2007
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFinancial instruments sold, but not yet
purchased, at fair value:Equities
    
    $
    47,983
    
    
    $
    
    
    
    $
    
    
    
    $
    47,983Corporate and other debt
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    5,000U.S. Government and agency securities
    
    
    23,780
    
    
    
    
    
    
    
    
    
    
    
    23,780Total non-derivative trading liabilities
    
    
    71,763
    
    
    
    5,000
    
    
    
    
    
    
    
    76,763Derivative financial instruments
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    78Total financial instruments sold, not yet
purchased
    
    $
    71,841
    
    
    $
    5,000
    
    
    $
    
    
    
    $
    76,841
    Level 3 Financial Assets
 Changes inunrealized gainsand (losses)included inTotal gains and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    earnings related toBalance as of
    
    
    (losses) (realized
    
    
    Purchases/(sales),
    
    
    Transfers out of
    
    
    Balance as of March
    
    
    assets still heldDecember 31, 2007
    
    
    and unrealized)
    
    
    net
    
    
    Level 3
    
    
    31, 2008
    
    
    at reporting dateNon-derivative trading assets
    
    $
    171,816
    
    
    
    ($10,758
    )
    
    $
    11,288
    
    
    
    ($6,101
    )
    
    $
    166,245
    
    
    
    ($13,212
    )
   11




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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
   (4) Short-Term Borrowings
  (5) Commitments and Contingencies
 (a) Leases
  (b) Litigation
  (c) Limited Partnership Commitments
  (6) Financial Instruments with Off-Balance-Sheet Risk
   12




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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (a) Broker-Dealer Activities
  (b) Derivative Financial Instruments
    Current
    
    
    Average
    
    
    End ofNotional
    
    
    Fair
    
    
    PeriodValue
    
    
    Value
    
    
    Fair ValueMarch 31, 2008:Purchased options
    
    $
    15,256
    
    
    $
    566
    
    
    $
    1,690Written options
    
    $
    17,613
    
    
    $
    538
    
    
    $
    738Short futures contracts
    
    $
    1,510
    
    
    
    
    
    
    
    December 31, 2007:Purchased options
    
    $
    1,100
    
    
    $
    101
    
    
    $
    103Written options
    
    $
    2,600
    
    
    $
    100
    
    
    $
    78Short futures contracts
    
    $
    3,923
    
    
    
    
    
    
    
    
 (7) Concentrations of Credit Risk
   (8) Notes Receivable from Stockholders
  13




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##### Table of Contents



KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (9) Stock-Based Compensation
    (10) Earnings Per Share
  Three Months EndedMarch 31,2008
    
    
    2007Numerator for basic and diluted EPS-net (loss) /
income
    
    $
    (7,499
    )
    
    $
    7,720Denominator for EPS  weighted average number of
common shares outstanding(1):Basic
    
    
    30,735,039
    
    
    
    30,640,736Effect of dilutive securities  restricted stock
    
    
    n/a
    
    
    
    884,893Diluted
    
    
    30,735,039
    
    
    
    31,525,629Earnings per common share(1):Basic
    
    $
    (0.24
    )
    
    $
    0.25Diluted
    
    $
    (0.24
    )
    
    $
    0.24
 
 (1) In accordance with SFAS No. 128, basic and diluted common shares outstanding are equal for the quarter ended March 31, 2008. (11) Income Taxes
  
    
    As of March 31, 2008, the Companys unrecognized tax benefits, including interest, have
not significantly changed since December 31, 2007.
    
    Following the adoption of FIN 48, the Company continues to classify interest and
penalties, if any, related to tax uncertainties as income tax expenses. As of March 31,
2008, this amount had not significantly changed since December 31, 2007 and was included
in the unrecognized tax benefits indicated above.
 14




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##### Table of Contents



KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 
    
    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.
 (12) Industry Segment Data
 Disclosures about Segments of an
Enterprise and Related Information
 (13) Recent Accounting Developments
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133
 (14) Net Capital Requirement
  March 31, 2008Net Capital
    
    $
    100,134Excess
    
    $
    98,183
  15




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##### Table of Contents



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.
 Cautionary Statement Regarding Forward Looking Statements
   Overview
      16




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Business Environment
     Results of Operations
 Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007
 Overview
    17




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##### Table of Contents



Three Months EndedMarch 31,
    
    
    Period-to-Period2008
    
    
    2007
    
    
    $ Change
    
    
    % Change(unaudited)Revenues:Investment banking
    
    $
    43,087
    
    
    $
    46,637
    
    
    $
    (3,550
    )
    
    
    (7.6
    )%Commissions
    
    
    52,766
    
    
    
    36,771
    
    
    
    15,995
    
    
    
    43.5Principal transactions, net
    
    
    (30,100
    )
    
    
    8,198
    
    
    
    (38,298
    )
    
    
    N/MInterest and dividend income
    
    
    8,092
    
    
    
    8,562
    
    
    
    (470
    )
    
    
    (5.5
    )Investment advisory fees
    
    
    306
    
    
    
    376
    
    
    
    (70
    )
    
    
    (18.6
    )Other
    
    
    701
    
    
    
    735
    
    
    
    (34
    )
    
    
    (4.6
    )Total revenues
    
    
    74,852
    
    
    
    101,279
    
    
    
    (26,427
    )
    
    
    (26.1
    )Expenses:Compensation and benefits
    
    
    59,933
    
    
    
    60,768
    
    
    
    (835
    )
    
    
    (1.4
    )Non-compensation expenses:Occupancy and equipment
    
    
    4,743
    
    
    
    4,582
    
    
    
    161
    
    
    
    3.5Communications and
data processing
    
    
    6,423
    
    
    
    5,121
    
    
    
    1,302
    
    
    
    25.4Brokerage and clearance
    
    
    7,153
    
    
    
    5,682
    
    
    
    1,471
    
    
    
    25.9Interest
    
    
    2,068
    
    
    
    2,557
    
    
    
    (489
    )
    
    
    (19.1
    )Business development
    
    
    3,789
    
    
    
    3,677
    
    
    
    112
    
    
    
    3.0Other
    
    
    4,180
    
    
    
    5,116
    
    
    
    (936
    )
    
    
    (18.3
    )Non-compensation expenses
    
    
    28,356
    
    
    
    26,735
    
    
    
    1,621
    
    
    
    6.1Total expenses
    
    
    88,289
    
    
    
    87,503
    
    
    
    786
    
    
    
    0.9(Loss) / income before income tax
(benefit) / expense
    
    
    (13,437
    )
    
    
    13,776
    
    
    
    (27,213
    )
    
    
    N/MIncome tax (benefit) / expense
    
    
    (5,938
    )
    
    
    6,056
    
    
    
    (11,994
    )
    
    
    N/MNet (loss) / income
    
    $
    (7,499
    )
    
    $
    7,720
    
    
    $
    (15,219
    )
    
    
    N/M
    %
  18




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Non-GAAP Financial Measures
 Share-Based Payment,
     19




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##### Table of Contents



(Dollars in thousands, except per share information)GAAP
    
    
    Reconciliation Amount
    
    
    Non-GAAPFirst
Quarter 2008:Compensation and benefits expense
    
    $
    59,933
    
    
    $
    (2,673
    )(a)
    
    $
    57,260(Loss) / income before income tax benefit
    
    $
    (13,437
    )
    
    
    2,673
    (a)
    
    
    (10,764
    )Income tax (benefit) / expense
    
    $
    (5,938
    )
    
    $
    1,181
    (b)
    
    $
    (4,757
    )Net (loss) / income
    
    $
    (7,499
    )
    
    $
    1,492
    (c)
    
    $
    (6,007
    )Compensation ratio (d)
    
    
    80.1
    %
    
    
    
    
    
    
    76.5
    %Earnings per share (e):Basic
    
    $
    (0.24
    )
    
    $
    0.04
    
    
    $
    (0.20
    )Diluted
    
    $
    (0.24
    )
    
    $
    0.04
    
    
    $
    (0.20
    )Weighted average number of
common shares outstanding (e):Basic
    
    
    30,735,039
    
    
    
    
    (f)
    
    
    30,735,039Diluted
    
    
    30,735,039
    
    
    
    
    (f)
    
    
    30,735,039
 GAAP
    
    
    Reconciliation Amount
    
    
    Non-GAAPFirst Quarter 2007:Compensation and benefits expense
    
    $
    60,768
    
    
    $
    (3,227
    )(a)
    
    $
    57,541Income before income tax expense
    
    $
    13,776
    
    
    $
    3,227
    (a)
    
    
    17,003Income tax expense
    
    $
    6,056
    
    
    $
    1,420
    (b)
    
    $
    7,476Net income
    
    $
    7,720
    
    
    $
    1,807
    (c)
    
    $
    9,527Compensation ratio (d)
    
    
    60.0
    %
    
    
    
    
    
    
    56.8
    %Earnings per share:Basic
    
    $
    0.25
    
    
    $
    0.06
    
    
    $
    0.31Diluted
    
    $
    0.24
    
    
    $
    0.06
    
    
    $
    0.30Weighted average number of
common shares outstanding:Basic
    
    
    30,640,736
    
    
    
    
    (f)
    
    
    30,640,736Diluted
    
    
    31,525,629
    
    
    
    
    (f)
    
    
    31,525,629
 
 (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 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 first quarter 2008 and 2007 compensation ratios were calculated by dividing compensation and
benefits expense by total revenues of $74,852 and $101,279, respectively.(e)
    
    In accordance with Statement of Financial Accounting Standards No. 128, basic and diluted common
shares outstanding are equal for the quarter ended March 31, 2008.(f)
    
    Both the basic and diluted weighted average number of common shares outstanding were not adjusted.  20




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Revenues
 Investment Banking
  Commissions
  Principal Transactions, Net
  Interest and Dividend Income
  Investment Advisory Fees
  Other
  Expenses
 Compensation and Benefits
  21




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##### Table of Contents



Occupancy and Equipment
  Communications and Data Processing
  Brokerage and Clearance
  Interest
  Business Development
  Other
  Income Tax Benefit/Expense
  Critical Accounting Policies and Estimates
   22




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##### Table of Contents



Fair Value of Financial Instruments
 Fair Value Measurements
   The Fair Value Option for Financial Assets and
Financial Liabilities
 Income Taxes
  Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109,
 Contractual Obligations
  23




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Off-Balance Sheet Arrangements
   Recently Issued Accounting Standards, Not Yet Adopted
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133
 Liquidity and Capital Resources
       24




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Cash Flows
 Three months ended March 31, 2008.
   Three months ended March 31, 2007.
   
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk
   25




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##### Table of Contents



High
    
    
    Low
    
    
    Average(dollars in thousands)Long ValueEquities
    
    $
    102,941
    
    
    $
    73,405
    
    
    $
    86,961Corporate and other debt
    
    $
    235,444
    
    
    $
    187,128
    
    
    $
    217,640Other investments
    
    $
    54,540
    
    
    $
    51,957
    
    
    $
    53,693Short ValueEquities
    
    $
    48,061
    
    
    $
    33,656
    
    
    $
    42,572Corporate and other debt
    
    $
    7,034
    
    
    $
    1,847
    
    
    $
    4,460U.S. Government and agency securities
    
    $
    23,780
    
    
    $
    
    
    
    $
    10,338
 Interest Rate Risk
  Credit Risk
  Inflation Risk
  Operational Risk
  26




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##### Table of Contents



ITEM 4. Controls and Procedures
    27




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Total Number ofShares Purchased as
    
    Approximate Dollar ValueTotal Number
    
    
    
    
    
    Part of Publicly
    
    of Shares that May Yet Beof Shares
    
    Average Price Paid
    
    Announced Plans or
    
    Purchased Under the PlansPeriod
    
    Purchased(1)(2)
    
    per Share
    
    Programs
    
    or ProgramsJanuary 1, 2008 to January 31, 2008
    
    
    37,870
    
    
    $
    24.48
    
    
    
    
    
    
    
    February 1, 2008 to February 29, 2008
    
    
    43,075
    
    
    $
    27.34
    
    
    
    
    
    
    
    March 1, 2008 to March 31, 2008
    
    
    33,600
    
    
    $
    22.05
    
    
    
    
    
    
    
    Total
    
    
    114,545
    
    
    $
    24.62
    
    
    
    
    
    
    
    
 
 (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
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
  28




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##### Table of Contents



KBW, INC.By:
    /s/ JOHN G. DUFFYName:
    John G. DuffyTitle:
    Chairman and Chief Executive Officer By:
    /s/ ROBERT GIAMBRONEName:
    Robert GiambroneTitle:
    Chief Financial Officer 29




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ExhibitNumber
    
    Description31.1
    
    
    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.
 30