##### 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 June 30, 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
    
    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
 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-June 30, 2008 (Unaudited) and December 31, 2007
    
    
    2Consolidated Statements of Operations-Three and Six Months ended June 30, 2008 and 2007 (Unaudited)
    
    
    3Consolidated Statements of Changes in Stockholders Equity-Six Months ended June 30, 2008 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows-Six Months ended June 30, 2008 and 2007 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31ITEM 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATION
    
    
    33ITEM 1. Legal Proceedings
    
    
    33ITEM 1A. Risk Factors
    
    
    33ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33ITEM 3. Defaults Upon Senior Securities
    
    
    33ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    33ITEM 5. Other Information
    
    
    34ITEM 6. Exhibits
    
    
    34SIGNATURES
    
    
    35EXHIBIT INDEX
    
    
    36EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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AVAILABLE INFORMATION
    1




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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)
 June 30,2008
    
    
    December 31,(unaudited)
    
    
    2007ASSETSCash and cash equivalents
    
    $
    165,962
    
    
    $
    194,358Financial instruments owned, at fair value:Equities
    
    
    82,236
    
    
    
    102,966Corporate and other debt
    
    
    139,652
    
    
    
    224,812Other investments
    
    
    39,254
    
    
    
    54,515261,142
    
    
    
    382,293Securities purchased under resale agreements
    
    
    
    
    
    
    23,846Receivables from clearing brokers
    
    
    132,539
    
    
    
    191,234Accounts receivable
    
    
    34,368
    
    
    
    21,196Furniture, equipment and leasehold improvements,
at cost, less accumulated depreciation and amortization
of $21,683 in 2008 and $19,259 in 2007
    
    
    19,146
    
    
    
    19,801Other assets
    
    
    46,864
    
    
    
    31,722Total assets
    
    $
    660,021
    
    
    $
    864,450LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Securities sold under repurchase agreements
    
    $
    30,398
    
    
    $
    94,784Short-term borrowings
    
    
    61,079
    
    
    
    65,099Financial instruments sold, not yet purchased, at fair
value:Equities
    
    
    35,562
    
    
    
    48,061Corporate and other debt
    
    
    
    
    
    
    5,000U.S. Government and agency securities
    
    
    
    
    
    
    23,78035,562
    
    
    
    76,841Accounts payable, accrued expenses, and other liabilities
    
    
    73,991
    
    
    
    172,263Income taxes payable
    
    
    8,268
    
    
    
    7,037Total liabilities
    
    
    209,298
    
    
    
    416,024Stockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    295
    
    
    
    293Paid-in capital
    
    
    130,372
    
    
    
    114,014Retained earnings
    
    
    320,131
    
    
    
    337,368Notes receivable from stockholders
    
    
    (2,240
    )
    
    
    (5,254
    )Accumulated other comprehensive income
    
    
    2,165
    
    
    
    2,005Total stockholders equity
    
    
    450,723
    
    
    
    448,426Total liabilities and stockholders equity
    
    $
    660,021
    
    
    $
    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 Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Investment banking
    
    $
    47,253
    
    
    $
    67,308
    
    
    $
    90,340
    
    
    $
    113,945Commissions
    
    
    45,601
    
    
    
    38,629
    
    
    
    98,367
    
    
    
    75,400Principal transactions, net
    
    
    (29,037
    )
    
    
    3,610
    
    
    
    (59,137
    )
    
    
    11,808Interest and dividend income
    
    
    6,368
    
    
    
    8,665
    
    
    
    14,460
    
    
    
    17,227Investment advisory fees
    
    
    287
    
    
    
    445
    
    
    
    593
    
    
    
    822Other
    
    
    699
    
    
    
    1,095
    
    
    
    1,400
    
    
    
    1,830Total revenues
    
    
    71,171
    
    
    
    119,752
    
    
    
    146,023
    
    
    
    221,032Expenses:Compensation and benefits
    
    
    57,000
    
    
    
    69,456
    
    
    
    116,933
    
    
    
    130,224Occupancy and equipment
    
    
    4,539
    
    
    
    4,473
    
    
    
    9,282
    
    
    
    9,055Communications and data processing
    
    
    6,919
    
    
    
    6,446
    
    
    
    13,342
    
    
    
    11,567Brokerage and clearance
    
    
    5,887
    
    
    
    5,374
    
    
    
    13,040
    
    
    
    11,056Interest
    
    
    1,176
    
    
    
    4,105
    
    
    
    3,244
    
    
    
    6,663Business development
    
    
    4,128
    
    
    
    3,518
    
    
    
    7,917
    
    
    
    7,195Other
    
    
    6,291
    
    
    
    7,790
    
    
    
    10,471
    
    
    
    12,905Total expenses
    
    
    85,940
    
    
    
    101,162
    
    
    
    174,229
    
    
    
    188,665(Loss) / income before income tax (benefit) /expense
    
    
    (14,769
    )
    
    
    18,590
    
    
    
    (28,206
    )
    
    
    32,367Income tax (benefit) / expense
    
    
    (5,031
    )
    
    
    8,195
    
    
    
    (10,969
    )
    
    
    14,251Net (loss) / income
    
    $
    (9,738
    )
    
    $
    10,395
    
    
    $
    (17,237
    )
    
    $
    18,116Earnings per share:Basic
    
    $
    (0.32
    )
    
    $
    0.34
    
    
    $
    (0.56
    )
    
    $
    0.59Diluted
    
    $
    (0.32
    )
    
    $
    0.33
    
    
    $
    (0.56
    )
    
    $
    0.57Weighted average number
of common shares outstanding:Basic
    
    
    30,800,637
    
    
    
    30,603,734
    
    
    
    30,767,838
    
    
    
    30,622,133Diluted
    
    
    30,800,637
    
    
    
    31,543,189
    
    
    
    30,767,838
    
    
    
    31,534,205
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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
    
    
    EquityBalance at December 31, 2007
    
    $
    
    
    
    $
    293
    
    
    $
    114,014
    
    
    $
    337,368
    
    
    $
    (5,254
    )
    
    $
    2,005
    
    
    $
    448,426Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,237
    )
    
    
    
    
    
    
    
    
    
    
    (17,237
    )Other comprehensive
income, currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160
    
    
    
    160Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    431,349Amortization of stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    19,102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,102Purchase of 115,527 shares of
common stock
    
    
    
    
    
    
    (1
    )
    
    
    (2,854
    )
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    (2,810
    )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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,969
    
    
    
    
    
    
    
    2,969Balance at June 30, 2008
    
    $
    
    
    
    $
    295
    
    
    $
    130,372
    
    
    $
    320,131
    
    
    $
    (2,240
    )
    
    $
    2,165
    
    
    $
    450,723
 Description of preferred stock and details:
 Number of SharesPar Value
    
    Authorized
    
    Issued
    
    OutstandingJune 30, 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)June 30, 2008
    
    $
    0.01
    
    
    
    140,000,000
    
    
    
    29,453,380
    
    
    
    29,453,380December 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)
 Six Months Ended June 30,2008
    
    
    2007Cash flows from operating activities:Net (loss) / income
    
    $
    (17,237
    )
    
    $
    18,116Adjustments to reconcile net (loss) / income to net cash used in
operating activities:Amortization of stock-based compensation
    
    
    19,102
    
    
    
    11,212Depreciation and amortization
    
    
    2,413
    
    
    
    2,433Deferred income tax benefit
    
    
    (8,935
    )
    
    
    (5,242
    )(Increase) decrease in operating assets:Financial instruments owned, at fair value
    
    
    121,151
    
    
    
    (166,998
    )Securities purchased under resale agreements
    
    
    23,846
    
    
    
    (21,469
    )Receivables from clearing brokers
    
    
    58,695
    
    
    
    102,830Accounts receivable
    
    
    (13,172
    )
    
    
    (2,771
    )Other assets
    
    
    (6,207
    )
    
    
    (5,192
    )Increase (decrease) in operating liabilities:Financial instruments sold, not yet purchased, at fair value
    
    
    (41,279
    )
    
    
    14,807Securities sold under repurchase agreements
    
    
    (64,386
    )
    
    
    119,517Short-term borrowings
    
    
    (4,020
    )
    
    
    1,500Accounts payable, accrued expenses and other liabilities
    
    
    (98,272
    )
    
    
    (65,326
    )Income taxes payable
    
    
    1,231
    
    
    
    (9,416
    )Net cash used in operating activities
    
    
    (27,070
    )
    
    
    (5,999
    )Cash flows from investing activities:Purchase of furniture, equipment and leasehold improvements
    
    
    (1,758
    )
    
    
    (1,228
    )Net cash used in investing activities
    
    
    (1,758
    )
    
    
    (1,228
    )Cash flows from financing activities:Purchases of shares of common stock
    
    
    (2,810
    )
    
    
    (1,473
    )Excess net tax benefit related to stock-based awards
    
    
    113
    
    
    
    1,281Repayment of notes receivable from stockholders
    
    
    2,969
    
    
    
    3,327Net cash provided by financing activities
    
    
    272
    
    
    
    3,135Currency adjustment:Effect of exchange rate changes on cash
    
    
    160
    
    
    
    825Net decrease in cash and cash equivalents
    
    
    (28,396
    )
    
    
    (3,267
    )Cash and cash equivalents at the beginning of the period
    
    
    194,358
    
    
    
    165,647Cash and cash equivalents at the end of the period
    
    $
    165,962
    
    
    $
    162,380Supplemental disclosures of cash flow information:Cash paid during the period for:Income taxes
    
    $
    531
    
    
    $
    30,558Interest
    
    $
    4,385
    
    
    $
    6,589
  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
(unaudited)
(Dollars in thousands, except per share information)
  The Fair Value Option for Financial Assets
and Financial Liabilities AICPA Audit and Accounting Guide  Brokers And Dealers In Securities
 (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.
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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
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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 June 30, 2008
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFinancial instruments owned, at fair value:Equities
    
    $
    62,418
    
    
    $
    1,981
    
    
    $
    17,287
    
    
    $
    81,686Corporate and other debt
    
    
    
    
    
    
    60,568
    
    
    
    79,084
    
    
    
    139,652Other investments
    
    
    
    
    
    
    
    
    
    
    39,254
    
    
    
    39,254Total non-derivative trading assets
    
    
    62,418
    
    
    
    62,549
    
    
    
    135,625
    
    
    
    260,592Derivative financial instruments
    
    
    550
    
    
    
    
    
    
    
    
    
    
    
    550Total financial instruments owned
    
    $
    62,968
    
    
    $
    62,549
    
    
    $
    135,625
    
    
    $
    261,142
 Liabilities at Fair Value as of June 30, 2008
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFinancial instruments sold, not yet
purchased, at fair value:Equities
    
    $
    35,539
    
    
    $
    
    
    
    $
    
    
    
    $
    35,539Total
non-derivative trading liabilities
    
    
    35,539
    
    
    
    
    
    
    
    
    
    
    
    35,539Derivative financial instruments
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    23Total financial instruments sold, not yet purchased
    
    $
    35,562
    
    
    $
    
    
    
    $
    
    
    
    $
    35,562
 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 in unrealizedTotal gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    gains and (losses)and (losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    included in earningsBalance as of
    
    (realized and
    
    Purchases/
    
    Transfers out of
    
    Balance as of
    
    related to assets stillThree months ended June 30, 2008
    
    March 31, 2008
    
    unrealized)
    
    (sales), net
    
    Level 3
    
    June 30, 2008
    
    held at reporting dateNon-derivative trading assets
    
    $
    166,245
    
    
    
    ($19,759
    )
    
    
    ($10,861
    )
    
    $
    
    
    
    $
    135,625
    
    
    
    ($18,658
    )
 Changes in unrealizedTotal gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    gains and (losses)Balance as of
    
    and (losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    included in earningsDecember 31,
    
    (realized and
    
    Purchases/
    
    Transfers out
    
    Balance as of
    
    related to assets stillSix months ended June 30, 2008
    
    2007
    
    unrealized)
    
    (sales), net
    
    of Level 3
    
    June 30, 2008
    
    held at reporting dateNon-derivative trading assets
    
    $
    171,816
    
    
    
    ($30,517
    )
    
    $
    427
    
    
    
    ($6,101
    )
    
    $
    135,625
    
    
    
    ($31,870
    )
 11




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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)
 Changes inunrealized gainsand (losses)Total gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    included in earningsand (losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    related to assets stillBalance as of
    
    (realized and
    
    Purchases/
    
    Transfers out
    
    Balance as of
    
    held at reportingThree months ended June 30, 2007
    
    March 31, 2007
    
    unrealized)
    
    (sales), net
    
    of Level 3
    
    June 30, 2007
    
    dateNon-derivative trading assets
    
    $
    63,072
    
    
    $
    2,123
    
    
    $
    8,439
    
    
    $
    
    
    
    $
    73,634
    
    
    $
    241
 Changes inunrealized gainsand (losses)Total gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    included in earningsBalance as of
    
    and (losses)
    
    
    
    
    
    
    
    
    
    
    
    
    
    related to assets stillDecember 31,
    
    (realized and
    
    Purchases/
    
    Transfers out
    
    Balance as of
    
    held at reportingSix months ended June 30, 2007
    
    2006
    
    unrealized)
    
    (sales), net
    
    of Level 3
    
    June 30, 2007
    
    dateNon-derivative trading assets
    
    $
    56,227
    
    
    $
    3,208
    
    
    $
    14,199
    
    
    $
    
    
    
    $
    73,634
    
    
    $
    110
     (4) Short-Term Borrowings
  (5) Commitments and Contingencies
 (a) Leases
  (b) Litigation
  12




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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)
  (c) Limited Partnership Commitments
  (6) Financial Instruments with Off-Balance-Sheet Risk
   (a) Broker-Dealer Activities
  (b) Derivative Financial Instruments
   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)
  Current
    
    Average
    
    End ofNotional
    
    Fair
    
    PeriodValue
    
    Value
    
    Fair ValueJune 30, 2008:Purchased options
    
    $
    1,000
    
    
    $
    857
    
    
    $
    550Written options
    
    $
    750
    
    
    $
    301
    
    
    $
    23Short futures contracts
    
    $
    
    
    
    
    
    
    
    
    December 31, 2007:Purchased options
    
    $
    1,110
    
    
    $
    101
    
    
    $
    103Written options
    
    $
    2,600
    
    
    $
    100
    
    
    $
    78Short futures contracts
    
    $
    3,923
    
    
    $
    
    
    
    $
    
 (7) Concentrations of Credit Risk
   (8) Notes Receivable from Stockholders
  (9) Stock-Based Compensation
    (10) Earnings Per Share
  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)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator for basic and diluted EPS-net (loss) /
income
    
    $
    (9,738
    )
    
    $
    10,395
    
    
    $
    (17,237
    )
    
    $
    18,116Denominator for EPS  weighted average number of
common shares outstanding(1):Basic
    
    
    30,800,637
    
    
    
    30,603,734
    
    
    
    30,767,838
    
    
    
    30,622,133Effect of dilutive securities  restricted stock
    
    
    
    
    
    
    939,455
    
    
    
    
    
    
    
    912,072Diluted
    
    
    30,800,637
    
    
    
    31,543,189
    
    
    
    30,767,838
    
    
    
    31,534,205Earnings per common share(1):Basic
    
    $
    (0.32
    )
    
    $
    0.34
    
    
    $
    (0.56
    )
    
    $
    0.59Diluted
    
    $
    (0.32
    )
    
    $
    0.33
    
    
    $
    (0.56
    )
    
    $
    0.57
 
 (1)
    
    In accordance with SFAS No. 128, as a result of a net loss, basic and diluted common shares outstanding are equal for the three and six months ended June 30, 2008. (11) Income Taxes
  
    
    Unrecognized tax benefits, including interest were approximately $6,492 as of January 1,
2008 and approximately $6,950 as of June 30, 2008, 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 tax expenses. As of January 1,
2008 and June 30, 2008, $841 and $1,138 of interest, net of federal 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.
 (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
 15




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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)
 (14) Net Capital Requirement
  June 30, 2008Net Capital
    
    $
    125,648Excess
    
    $
    122,471
  16




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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
      17




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##### Table of Contents



Business Environment
     Results of Operations
 Three Months Ended June 30, 2008 Compared with Three Months Ended June 30, 2007
 Overview
    18




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##### Table of Contents



Three Months EndedJune 30,
    
    
    Period-to-Period2008
    
    
    2007
    
    
    $ Change
    
    
    % Change(unaudited)Revenues:Investment banking
    
    $
    47,253
    
    
    $
    67,308
    
    
    $
    (20,055
    )
    
    
    (29.8)
    %Commissions
    
    
    45,601
    
    
    
    38,629
    
    
    
    6,972
    
    
    
    18.0Principal transactions, net
    
    
    (29,037
    )
    
    
    3,610
    
    
    
    (32,647
    )
    
    
    N/MInterest and dividend income
    
    
    6,368
    
    
    
    8,665
    
    
    
    (2,297
    )
    
    
    (26.5
    )Investment advisory fees
    
    
    287
    
    
    
    445
    
    
    
    (158
    )
    
    
    (35.5
    )Other
    
    
    699
    
    
    
    1,095
    
    
    
    (396
    )
    
    
    (36.2
    )Total revenues
    
    
    71,171
    
    
    
    119,752
    
    
    
    (48,581
    )
    
    
    (40.6
    )Expenses:Compensation and benefits
    
    
    57,000
    
    
    
    69,456
    
    
    
    (12,456
    )
    
    
    (17.9
    )Non-compensation expenses:Occupancy and equipment
    
    
    4,539
    
    
    
    4,473
    
    
    
    66
    
    
    
    1.5Communications and
data processing
    
    
    6,919
    
    
    
    6,446
    
    
    
    473
    
    
    
    7.3Brokerage and clearance
    
    
    5,887
    
    
    
    5,374
    
    
    
    513
    
    
    
    9.5Interest
    
    
    1,176
    
    
    
    4,105
    
    
    
    (2,929
    )
    
    
    (71.4
    )Business development
    
    
    4,128
    
    
    
    3,518
    
    
    
    610
    
    
    
    17.3Other
    
    
    6,291
    
    
    
    7,790
    
    
    
    (1,499
    )
    
    
    (19.2
    )Total non-compensation expenses
    
    
    28,940
    
    
    
    31,706
    
    
    
    (2,766
    )
    
    
    (8.7
    )Total expenses
    
    
    85,940
    
    
    
    101,162
    
    
    
    (15,222
    )
    
    
    (15.0
    )(Loss) / income before income tax (benefit)/ expense
    
    
    (14,769
    )
    
    
    18,590
    
    
    
    (33,359
    )
    
    
    N/MIncome tax (benefit) / expense
    
    
    (5,031
    )
    
    
    8,195
    
    
    
    (13,226
    )
    
    
    N/MNet (loss) / income
    
    $
    (9,738
    )
    
    $
    10,395
    
    
    $
    (20,133
    )
    
    
    N/M
    %
  Three Month Non-GAAP Financial Measures
 Share-Based Payment,
   19




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##### Table of Contents



Three Month Non-GAAP Financial Measures (Continued)
  ReconciliationThree Months Ended June 30, 2008
    
    GAAP
    
    
    Amount
    
    
    Non-GAAPCompensation and benefits expense
    
    $
    57,000
    
    
    $
    (2,874
    )(a)
    
    $
    54,126(Loss) / income before income
tax (benefit) / expense
    
    $
    (14,769
    )
    
    $
    2,874
    (a)
    
    $
    (11,895
    )Income tax (benefit) / expense
    
    $
    (5,031
    )
    
    $
    976
    (b)
    
    $
    (4,055
    )Net (loss) / income
    
    $
    (9,738
    )
    
    $
    1,898
    (c)
    
    $
    (7,840
    )Compensation ratio (d)
    
    
    80.1
    %
    
    
    
    
    
    
    76.1
    %Earnings per share (e):Basic
    
    $
    (0.32
    )
    
    $
    0.07
    
    
    $
    (0.25
    )Diluted
    
    $
    (0.32
    )
    
    $
    0.07
    
    
    $
    (0.25
    )Weighted average number of common
shares outstanding (e):Basic
    
    
    30,800,637
    
    
    
    
    (f)
    
    
    30,800,637Diluted
    
    
    30,800,637
    
    
    
    
    (f)
    
    
    30,800,637
 ReconciliationThree Months Ended June 30, 2007
    
    GAAP
    
    
    Amount
    
    
    Non-GAAPCompensation and benefits expense
    
    $
    69,456
    
    
    $
    (2,935
    )(a)
    
    $
    66,521Income before income tax expense
    
    $
    18,590
    
    
    $
    2,935
    (a)
    
    $
    21,525Income tax expense
    
    $
    8,195
    
    
    $
    1,294
    (b)
    
    $
    9,489Net income
    
    $
    10,395
    
    
    $
    1,641
    (c)
    
    $
    12,036Compensation ratio (d)
    
    
    58.0
    %
    
    
    
    
    
    
    55.5
    %Earnings per share:Basic
    
    $
    0.34
    
    
    $
    0.05
    
    
    $
    0.39Diluted
    
    $
    0.33
    
    
    $
    0.05
    
    
    $
    0.38Weighted average number of common
shares outstanding:Basic
    
    
    30,603,734
    
    
    
    
    (f)
    
    
    30,603,734Diluted
    
    
    31,543,189
    
    
    
    
    (f)
    
    
    31,543,189
 
 (a)
    
    The non-GAAP adjustment represents the pre-tax expense with respect to the amortization of the
IPO restricted stock awards granted to employees in 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 compensation ratio for the three months ended June 30, 2008 and 2007 were calculated by
dividing compensation and benefits expense by total revenues of $71,171 and $119,752,
respectively.(e)
    
    In accordance with Statement of Financial Accounting Standards No. 128, basic and diluted common
shares outstanding are equal for the quarter ended June 30, 2008.(f)
    
    Both the basic and diluted weighted average number of common shares outstanding were not adjusted. 20




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##### Table of Contents



Revenues
 Investment Banking
  Commissions
  Principal Transactions, Net
   21




---



##### Table of Contents



Interest and Dividend Income
  Investment Advisory Fees
  Other
  Expenses
 Compensation and Benefits
  Occupancy and Equipment
  Communications and Data Processing
  Brokerage and Clearance
  Interest
  Business Development
  Other
  22




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##### Table of Contents



Income Tax Benefit / Expense
  Six Months Ended June 30, 2008 Compared with Six Months Ended June 30, 2007
 Overview
     For the Six Months EndedJune 30,
    
    
    Period-to-Period2008
    
    
    2007
    
    
    $ Change
    
    
    % Change(unaudited)Revenues:Investment banking
    
    $
    90,340
    
    
    $
    113,945
    
    
    $
    (23,605
    )
    
    
    (20.7)
    %Commissions
    
    
    98,367
    
    
    
    75,400
    
    
    
    22,967
    
    
    
    30.5Principal transactions, net
    
    
    (59,137
    )
    
    
    11,808
    
    
    
    (70,945
    )
    
    
    N/MInterest and dividend income
    
    
    14,460
    
    
    
    17,227
    
    
    
    (2,767
    )
    
    
    (16.1
    )Investment advisory fees
    
    
    593
    
    
    
    822
    
    
    
    (229
    )
    
    
    (27.9
    )Other
    
    
    1,400
    
    
    
    1,830
    
    
    
    (430
    )
    
    
    (23.5
    )Total revenues
    
    
    146,023
    
    
    
    221,032
    
    
    
    (75,009
    )
    
    
    (33.9
    )Expenses:Compensation and benefits
    
    
    116,933
    
    
    
    130,224
    
    
    
    (13,291
    )
    
    
    (10.2
    )Non-compensation expenses:Occupancy and equipment
    
    
    9,282
    
    
    
    9,055
    
    
    
    227
    
    
    
    2.5Communications and
data processing
    
    
    13,342
    
    
    
    11,567
    
    
    
    1,775
    
    
    
    15.3Brokerage and clearance
    
    
    13,040
    
    
    
    11,056
    
    
    
    1,984
    
    
    
    17.9Interest
    
    
    3,244
    
    
    
    6,663
    
    
    
    (3,419
    )
    
    
    (51.3
    )Business development
    
    
    7,917
    
    
    
    7,195
    
    
    
    722
    
    
    
    10.0Other
    
    
    10,471
    
    
    
    12,905
    
    
    
    (2,434
    )
    
    
    (18.9
    )Total non-compensation expenses
    
    
    57,296
    
    
    
    58,441
    
    
    
    (1,145
    )
    
    
    (2.0
    )Total expenses
    
    
    174,229
    
    
    
    188,665
    
    
    
    (14,436
    )
    
    
    (7.7
    )(Loss) / income before income tax (benefit)
/ expense
    
    
    (28,206
    )
    
    
    32,367
    
    
    
    (60,573
    )
    
    
    N/MIncome tax (benefit) / expense
    
    
    (10,969
    )
    
    
    14,251
    
    
    
    (25,220
    )
    
    
    N/MNet (loss) / income
    
    $
    (17,237
    )
    
    $
    18,116
    
    
    $
    (35,353
    )
    
    
    N/M
    %
  23




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##### Table of Contents



Six Month Non-GAAP Financial Measures
  ReconciliationSix Months Ended June 30, 2008
    
    GAAP
    
    
    Amount
    
    
    Non-GAAPCompensation and benefits expense
    
    $
    116,933
    
    
    $
    (5,547)
    (a)
    
    $
    111,386(Loss) / income before income
tax (benefit) / expense
    
    $
    (28,206
    )
    
    $
    5,547
    (a)
    
    $
    (22,659
    )Income tax (benefit) / expense
    
    $
    (10,969
    )
    
    $
    2,157
    (b)
    
    $
    (8,812
    )Net (loss) / income
    
    $
    (17,237
    )
    
    $
    3,390
    (c)
    
    $
    (13,847
    )Compensation ratio (d)
    
    
    80.1
    %
    
    
    
    
    
    
    76.3
    %Earnings per share (e):Basic
    
    $
    (0.56
    )
    
    $
    0.11
    
    
    $
    (0.45
    )Diluted
    
    $
    (0.56
    )
    
    $
    0.11
    
    
    $
    (0.45
    )Weighted average number of common
shares outstanding (e):Basic
    
    
    30,767,838
    
    
    
    
    (f)
    
    
    30,767,838Diluted
    
    
    30,767,838
    
    
    
    
    (f)
    
    
    30,767,838
 ReconciliationSix Months Ended June 30, 2007
    
    GAAP
    
    
    Amount
    
    
    Non-GAAPCompensation and benefits expense
    
    $
    130,224
    
    
    $
    (6,162)( a
    )
    
    $
    124,062Income before income tax expense
    
    $
    32,367
    
    
    $
    6,162    ( a
    )
    
    $
    38,529Income tax expense
    
    $
    14,251
    
    
    $
    2,713    ( b
    )
    
    $
    16,964Net income
    
    $
    18,116
    
    
    $
    3,449    ( c
    )
    
    $
    21,565Compensation ratio (d)
    
    
    58.9
    %
    
    
    
    
    
    
    56.1
    %Earnings per share:Basic
    
    $
    0.59
    
    
    $
    (0.11
    )
    
    $
    0.70Diluted
    
    $
    0.57
    
    
    $
    (0.11
    )
    
    $
    0.68Weighted average number of common
shares outstanding:Basic
    
    
    30,622,133
    
    
    
    ( f
    )
    
    
    30,622,133Diluted
    
    
    31,534,205
    
    
    
    ( f
    )
    
    
    31,534,205
 
 (a)
    
    The non-GAAP adjustment represents the pre-tax expense with respect to the amortization of the
IPO restricted stock awards granted to employees in 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 compensation ratio for the six months ended June 30, 2008 and 2007 were calculated by
dividing compensation and benefits expense by total revenues of $146,023 and $221,032,
respectively.(e)
    
    In accordance with Statement of Financial Accounting Standards No. 128, basic and diluted common
shares outstanding are equal for the six months ended June 30, 2008.(f)
    
    Both the basic and diluted weighted average number of common shares outstanding were not adjusted. 24




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##### Table of Contents



Revenues
 Investment Banking
  Commissions
  Principal Transactions, Net
   Interest and Dividend Income
  Investment Advisory Fees
  25




---



##### Table of Contents



Other
  Expenses
 Compensation and Benefits
  Occupancy and Equipment
  Communications and Data Processing
  Brokerage and Clearance
  Interest
  Business Development
  Other
  Income Tax Benefit / Expense
  26




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##### Table of Contents



Critical Accounting Policies and Estimates
    Fair Value of Financial Instruments
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities AICPA Audit and Accounting Guide
- Brokers And Dealers In Securities
   Fair Value Hierarchy
  27




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##### Table of Contents



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.
          28




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##### Table of Contents



Fair Value of Financial Instruments Control Process
  Income Taxes
  Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109,
 Contractual Obligations
  Off-Balance Sheet Arrangements
   29




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##### Table of Contents



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
   .
 .
      30




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##### Table of Contents



Cash Flows
 Six months ended June 30, 2008 .
   Six months ended June 30, 2007 .
   
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk
     31




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##### Table of Contents



High
    
    Low
    
    Average(dollars in thousands)Long ValueEquities
    
    $
    102,941
    
    
    $
    73,405
    
    
    $
    87,652Corporate and other debt
    
    $
    235,444
    
    
    $
    139,652
    
    
    $
    192,640Other investments
    
    $
    54,540
    
    
    $
    39,254
    
    
    $
    51,138Short ValueEquities
    
    $
    48,061
    
    
    $
    33,656
    
    
    $
    41,699Corporate and other debt
    
    $
    7,034
    
    
    $
    
    
    
    $
    2,548U.S. Government and agency securities
    
    $
    23,780
    
    
    $
    
    
    
    $
    5,907
 Interest Rate Risk
  Credit Risk
  Inflation Risk
  Operational Risk
  
 ITEM 4. Controls and Procedures
    32




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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 ProgramsApril 1, 2008 to April 30, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 1, 2008 to May 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 1, 2008 to June 30, 2008
    
    
    982
    
    
    $
    10.18
    
    
    
    
    
    
    
    Total
    
    
    982
    
    
    $
    10.18
    
    
    
    
    
    
    
    
 
 (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
     33




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##### Table of Contents



Proposal 1  Election of Class II Directors.
 Nominee
    
    For
    
    WithheldAndrew M. Senchak
    
    
    23,595,410
    
    
    
    1,041,328Christopher M. Condron
    
    
    24,065,881
    
    
    
    570,857
  Proposal 2  Approval of the KBW, Inc. 2008 Employee Stock Purchase Plan
 For
    
    Against
    
    Abstain23,416,861
    
    
    71,135
    
    
    
    50,064
 Proposal 3  Ratification of the Appointment of KPMG as the Companys Independent Registered
Public Accounting Firm.
 For
    
    Against
    
    Abstain24,529,526
    
    
    102,283
    
    
    
    4,929
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
  34




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##### Table of Contents



KBW, INC.By:
    /s/ JOHN G. DUFFYName:
    John G. DuffyTitle:
    Chairman and Chief Executive OfficerBy:
    /s/ ROBERT GIAMBRONEName:
    Robert GiambroneTitle:
    Chief Financial Officer 35




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##### Table of Contents



ExhibitNumber
    
    Description10.1
    
    KBW, Inc. 2008 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.1 to the Registrants current report on
From 8-K filed June 9, 2008).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.
 36