##### 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, 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
 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
 o þ
  o o þ
 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, 2007 (Unaudited) and December 31, 2006
    
    
    2Consolidated Statements of Income
Three Months ended March 31, 2007 and 2006 (Unaudited)
    
    
    3Consolidated Statement of Changes in Stockholders Equity
Three Months ended March 31, 2007 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows
Three Months ended March 31, 2007 and 2006 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    39PART II. OTHER INFORMATION
    
    
    40Item 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3. Defaults Upon Senior Securities
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41Item 4. Other Information
    
    
    41Item 5. Exhibits
    
    
    41SIGNATURES
    
    
    42EXHIBIT INDEX
    
    
    43EX-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 31,2007
    
    
    December 31,(unaudited)
    
    
    2006AssetsCash and cash equivalents
    
    $
    171,268
    
    
    $
    165,647Financial instruments owned, at fair value:Equities
    
    
    141,949
    
    
    
    117,285Corporate bonds
    
    
    303,851
    
    
    
    135,744U.S. Government and agency securities
    
    
    31,025
    
    
    
    15,905Mortgage backed securities
    
    
    
    
    
    
    14,645Other investments
    
    
    48,393
    
    
    
    47,158525,218
    
    
    
    330,737Securities purchased under resale agreements
    
    
    63,099
    
    
    
    62,319Receivables from clearing brokers
    
    
    72,410
    
    
    
    185,712Accounts receivable
    
    
    19,077
    
    
    
    25,740Furniture, equipment and leasehold improvements, at cost, less accumulated
depreciation and amortization of $19,603 in 2007 and $18,297 in 2006
    
    
    21,068
    
    
    
    22,151Other assets
    
    
    14,941
    
    
    
    11,905Total assets
    
    $
    887,081
    
    
    $
    804,211Liabilities and Stockholders EquityLiabilities:Securities sold under repurchase agreements
    
    $
    263,257
    
    
    
    84,536Short-term borrowings
    
    
    3,983
    
    
    
    28,500Financial instruments sold, not yet purchased, at fair value:Equities
    
    
    46,226
    
    
    
    29,528Corporate bonds
    
    
    9,936
    
    
    
    5,082U.S. Government and agency securities
    
    
    82,179
    
    
    
    76,362138,341
    
    
    
    110,972Accounts payable, accrued expenses, and other liabilities
    
    
    56,166
    
    
    
    166,671Income taxes payable
    
    
    11,142
    
    
    
    16,772Total liabilities
    
    
    472,889
    
    
    
    407,451Stockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    292
    
    
    
    292Paid-in capital
    
    
    100,798
    
    
    
    94,419Retained earnings
    
    
    317,796
    
    
    
    310,076Notes receivable from stockholders
    
    
    (5,569
    )
    
    
    (8,843
    )Accumulated other comprehensive income
    
    
    875
    
    
    
    816Total stockholders equity
    
    
    414,192
    
    
    
    396,760Total liabilities and stockholders equity
    
    $
    887,081
    
    
    $
    804,211
  2




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KBW, INC. AND SUBSIDIARIES
 
 Consolidated
Statements of Income  (unaudited)  (Dollars in thousands, except per share information)
 Three Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006Revenues:Investment banking
    
    $
    46,637
    
    
    $
    47,842Commissions
    
    
    36,771
    
    
    
    28,938Principal transactions, net
    
    
    8,198
    
    
    
    18,321Interest and dividend income
    
    
    8,562
    
    
    
    5,536Investment advisory fees
    
    
    376
    
    
    
    372Other
    
    
    735
    
    
    
    429Total revenues
    
    
    101,279
    
    
    
    101,438Expenses:Compensation and benefits
    
    
    60,768
    
    
    
    59,346Occupancy and equipment
    
    
    4,582
    
    
    
    4,283Communications and data processing
    
    
    5,121
    
    
    
    4,573Brokerage and clearance
    
    
    5,682
    
    
    
    5,348Interest
    
    
    2,557
    
    
    
    2,528Other
    
    
    8,793
    
    
    
    7,061Total expenses
    
    
    87,503
    
    
    
    83,139Income before income tax expense
    
    
    13,776
    
    
    
    18,299Income tax expense
    
    
    6,056
    
    
    
    8,143Net income (Note 9)
    
    $
    7,720
    
    
    $
    10,156Earnings per share (Note 9):Basic
    
    $
    0.25
    
    
    $
    0.37Diluted
    
    $
    0.24
    
    
    $
    0.37Weighted average number of common shares outstanding:Basic
    
    
    30,640,736
    
    
    
    27,386,872Diluted
    
    
    31,525,629
    
    
    
    27,412,199
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KBW, INC. AND SUBSIDIARIES
 
 Consolidated Statement of Changes in Stockholders Equity
(unaudited)
(Dollars in thousands, except per share information)
 Notes
    
    
    AccumulatedReceivable
    
    
    Other
    
    
    TotalPreferred
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    from
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Stockholders
    
    
    Income
    
    
    EquityBalance at December 31, 2006
    
    $
    
    
    
    $
    292
    
    
    $
    94,419
    
    
    $
    310,076
    
    
    $
    (8,843
    )
    
    $
    816
    
    
    $
    396,760Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,720
    
    
    
    
    
    
    
    
    
    
    
    7,720Other comprehensive income, currency translation
adjustment, net of tax of $33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    59Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,779Amortization of stock-based compensation
    
    
    
    
    
    
    
    
    
    
    6,231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,231Purchase of 7,253 shares of common stock
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    Issuance of 27,219 shares of common stock
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300Restricted stock units converted
    
    
    
    
    
    
    
    
    
    
    (300
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (300
    )Excess tax benefit related to delivery of
restricted stock units
    
    
    
    
    
    
    
    
    
    
    220
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220Repayment of notes receivable from stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,202
    
    
    
    
    
    
    
    3,202Balance at March 31, 2007
    
    $
    
    
    
    $
    292
    
    
    $
    100,798
    
    
    $
    317,796
    
    
    $
    (5,569
    )
    
    $
    875
    
    
    $
    414,192
  Number of sharesPar value
    
    
    
    Authorized
    
    Issued
    
    Outstanding$
    0.01
    
    
    March 31, 2007
    
    
    140,000,000
    
    
    
    29,224,907
    
    
    
    29,224,907$
    0.01
    
    
    December 31, 2006
    
    
    140,000,000
    
    
    
    29,204,941
    
    
    
    29,204,941
  Number of sharesPar value
    
    
    
    Authorized
    
    Issued
    
    Outstanding$
    0.01
    
    
    March 31, 2007
    
    
    10,000,000
    
    
    
    
    
    
    
    $
    0.01
    
    
    December 31, 2006
    
    
    10,000,000
    
    
    
    
    
    
    
    
  4




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KBW, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows  (unaudited)  (Dollars in thousands)
 Three Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    7,720
    
    
    $
    10,156Adjustments to reconcile net income to net cash provided by (used in) operating activities:Deferred income tax benefit
    
    
    (2,107
    )
    
    
    (733
    )Depreciation and amortization
    
    
    1,297
    
    
    
    1,435Amortization of stock-based compensation
    
    
    6,231
    
    
    
    384(Increase) decrease in operating assets:Financial instruments owned, at fair value
    
    
    (194,481
    )
    
    
    825Securities purchased under resale agreements
    
    
    (780
    )
    
    
    (3,427
    )Receivables from clearing brokers
    
    
    113,302
    
    
    
    54,488Accounts receivable
    
    
    6,663
    
    
    
    16,110Other assets
    
    
    (929
    )
    
    
    (2,205
    )Increase (decrease) in operating liabilities:Financial instruments sold, not yet purchased, at fair value
    
    
    27,369
    
    
    
    (180
    )Securities sold under repurchase agreements
    
    
    178,721
    
    
    
    (2,275
    )Short-term borrowings
    
    
    (24,517
    )
    
    
    (5,250
    )Payable to clearing broker
    
    
    
    
    
    
    (20,011
    )Accounts payable, accrued expenses, and other liabilities
    
    
    (110,505
    )
    
    
    (54,871
    )Income taxes payable
    
    
    (5,630
    )
    
    
    5,341Net cash provided by (used in) operating activities
    
    
    2,354
    
    
    
    (213
    )Cash flows from investing activities:Purchases of furniture, equipment and leasehold improvements
    
    
    (214
    )
    
    
    (444
    )Net cash used in investing activities
    
    
    (214
    )
    
    
    (444
    )Cash flows from financing activities:Issuance of shares of common stock
    
    
    
    
    
    
    310Purchase of shares of common stock
    
    
    
    
    
    
    (8,128
    )Excess tax benefit related to delivery of restricted stock units
    
    
    220
    
    
    
    87Repayment of notes receivable from stockholders
    
    
    3,202
    
    
    
    5,027Net cash provided by (used in) financing activities
    
    
    3,422
    
    
    
    (2,704
    )Currency adjustment:Effect of exchange rate changes on cash
    
    
    59
    
    
    
    71Net increase (decrease) in cash and cash equivalents
    
    
    5,621
    
    
    
    (3,290
    )Cash and cash equivalents at beginning of period
    
    
    165,647
    
    
    
    75,642Cash and cash equivalents at end of period
    
    $
    171,268
    
    
    $
    72,352Supplemental disclosures of cash flow information:Cash paid during the period for:Income taxes
    
    $
    15,510
    
    
    $
    5,937Interest
    
    $
    1,913
    
    
    $
    2,099
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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
  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
 6




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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars in thousands, except per share information
 (b) Use of Estimates
  (c) Cash and Cash Equivalents
  (d) Fair Value of Financial Instruments
 Disclosures About Fair Value of Financial Instruments
 Fair Value
Measurements
 7




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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
    (e) Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements
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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (f) Receivables From and Payable to Clearing Brokers
  (g) Investment Banking
  
    
    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 on the closing date
of the transaction.
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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (h) Furniture, Equipment and Leasehold Improvements
  (i) Income Taxes
 Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109,
 (j) Foreign Currency Translation
  (k) Earnings Per Share (EPS)
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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (l) Stock-Based Compensation
 Share-Based Payment
 (m) Reclassifications
  11




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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (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.
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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, 2007
 Balance as ofLevel 1
    
    Level 2
    
    Level 3
    
    March 31, 2007Financial instruments ownedNon-derivative trading inventory
    
    $
    155,440
    
    
    $
    306,405
    
    
    $
    63,072
    
    
    $
    524,917Derivative trading inventory
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    301Total financial instruments owned
    
    $
    155,741
    
    
    $
    306,405
    
    
    $
    63,072
    
    
    $
    525,218
 Liabilities at Fair Value as of March 31, 2007
 Balance as ofLevel 1
    
    Level 2
    
    Level 3
    
    March 31, 2007Financial instruments sold, not
yet purchasedNon-derivative trading inventory
    
    $
    128,316
    
    
    $
    9,936
    
    
    $
    
    
    
    $
    138,252Derivative trading inventory
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    89Total financial instruments sold,
not yet purchased
    
    $
    128,405
    
    
    $
    9,936
    
    
    $
    
    
    
    $
    138,341
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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
  Level 3 Financial Assets
 Changes in unrealized gainsTotal gains
    
    
    
    
    
    
    
    
    
    
    and (losses) included inBalance as of
    
    and losses
    
    
    
    
    
    
    Balance as
    
    earnings relating to assetsDecember 31,
    
    (realized and
    
    Purchases /
    
    
    of March 31,
    
    and liabilities still held at2006
    
    unrealized)
    
    (sales), net
    
    
    2007
    
    reporting dateNon-derivative trading assets
    
    $
    56,227
    
    
    $
    1,085
    
    
    $
    5,760
    
    
    
    $
    63,072
    
    
    $
    (131
    )
    (4) Short-Term Borrowings
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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (5) Commitments and Contingencies
 (a) Leases
  (b) Litigation
 Accounting for Contingencies.
 Direct General Litigation
 Jeffrey H. Winokur v. Direct General,
et al.
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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
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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
   Current
    
    Average
    
    End ofnotional
    
    fair
    
    periodamount
    
    value
    
    fair valueMarch 31, 2007:Purchased options
    
    $
    3,550
    
    
    $
    188
    
    
    $
    301Written options
    
    $
    3,154
    
    
    $
    30
    
    
    $
    89Short futures contracts
    
    $
    2,019
    
    
    
    
    
    
    
    December 31, 2006:Purchased options
    
    $
    500
    
    
    $
    92
    
    
    $
    160Written options
    
    $
    400
    
    
    $
    87
    
    
    $
    5Short futures contracts
    
    $
    2,375
    
    
    
    
    
    
    
    
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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (7) Concentrations of Credit Risk
   (8) Notes Receivable from Stockholders
  (9) Common Stock
  (10) Stock-Based Compensation
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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (11) Earnings Per Share
   Three Months Ended March 31,2007
    
    
    2006Numerator for basic and diluted EPS-net income
    
    $
    7,720
    
    
    $
    10,156Denominator for basic EPS-weighted average number of common shares
    
    
    30,640,736
    
    
    
    27,386,872Effect of dilutive securities restricted stock
    
    
    884,893
    
    
    
    25,327Denominator for diluted EPS-weighted average number of
common shares and dilutive potential common shares
    
    
    31,525,629
    
    
    
    27,412,199Basic EPS
    
    $
    0.25
    
    
    $
    0.37Diluted EPS
    
    $
    0.24
    
    
    $
    0.37
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KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (12) Income Taxes
  
    
    Unrecognized tax benefits including interest were approximately $5.8 million as of
January 1, 2007 and approximately $6.0 million as of March 31, 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 March 31, 2007, $0.5 million and $0.7 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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##### Table of Contents



KBW, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(unaudited)
(Dollars in thousands, except per share information)
 (13) Industry Segment Data
 Disclosures about Segments of an
Enterprise and Related Information
 (14) Recent Accounting Developments
 The Fair Value Option for Financial Assets and
Financial Liabilities
 (15) Net Capital Requirement
  March 31, 2007Net Capital
    
    $
    70,720Excess
    
    $
    68,556
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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.
 Cautionary Statement Regarding Forward Looking Statements
   Overview
  
    
    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.
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Revenues
  Investment Banking
  
    
    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 on the closing date of the transaction.
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Sales and Trading
  
    
    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 very short duration.
 Interest and Dividend Income
  Investment Advisory Fees
  Other
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Expenses
    Compensation and Benefits
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Non-Compensation Expense
 Occupancy and Equipment
  Communications and Data Processing
  Brokerage and Clearance
  Interest
  Other
  Income Tax Expense
 Accounting for Income Taxes.
 Results of Operations
 Three Months Ended March 31, 2007 Compared with Three Months Ended March 31, 2006
 Overview
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##### Table of Contents



Three Months EndedMarch 31,
    
    
    Period-to-Period2007
    
    
    2006
    
    
    $ Change
    
    
    % Change(unaudited)(dollars in thousands)Revenues:Investment banking
    
    $
    46,637
    
    
    $
    47,842
    
    
    $
    (1,205
    )
    
    
    (2.5
    )%Commissions
    
    
    36,771
    
    
    
    28,938
    
    
    
    7,833
    
    
    
    27.1Principal transactions, net
    
    
    8,198
    
    
    
    18,321
    
    
    
    (10,123
    )
    
    
    (55.3
    )Interest and dividend income
    
    
    8,562
    
    
    
    5,536
    
    
    
    3,026
    
    
    
    54.7Investment advisory fees
    
    
    376
    
    
    
    372
    
    
    
    4
    
    
    
    1.1Other
    
    
    735
    
    
    
    429
    
    
    
    306
    
    
    
    71.3Total Revenues
    
    
    101,279
    
    
    
    101,438
    
    
    
    (159
    )
    
    
    (0.2
    )Expenses:Compensation and benefits
    
    
    60,768
    
    
    
    59,346
    
    
    
    1,422
    
    
    
    2.4Occupancy and equipment
    
    
    4,582
    
    
    
    4,283
    
    
    
    299
    
    
    
    7.0Communications and data processing
    
    
    5,121
    
    
    
    4,573
    
    
    
    548
    
    
    
    12.0Brokerage and clearance
    
    
    5,682
    
    
    
    5,348
    
    
    
    334
    
    
    
    6.2Interest
    
    
    2,557
    
    
    
    2,528
    
    
    
    29
    
    
    
    1.1Other
    
    
    8,793
    
    
    
    7,061
    
    
    
    1,732
    
    
    
    24.5Total non-compensation expense
    
    
    26,735
    
    
    
    23,793
    
    
    
    2,942
    
    
    
    12.4Total Expenses
    
    
    87,503
    
    
    
    83,139
    
    
    
    4,364
    
    
    
    5.2Income before income taxes
    
    
    13,776
    
    
    
    18,299
    
    
    
    (4,523
    )
    
    
    (24.7
    )Income tax expense
    
    
    6,056
    
    
    
    8,143
    
    
    
    (2,087
    )
    
    
    (25.6
    )$
    7,720
    
    
    $
    10,156
    
    
    $
    (2,436
    )
    
    
    (24.0
    )%
 Non-GAAP Financial Measures
 Share-Based Payment
  28




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ReconcilliationsGAAP
    
    Amount
    
    Non-GAAPFirst Quarter 2007:Compensation and benefits expense
    
    $
    60,768
    
    
    $
    (3,227)
    (a)
    
    $
    57,541Income tax expense
    
    $
    6,056
    
    
    $
    1,420
    (b)
    
    $
    7,476Net income
    
    $
    7,720
    
    
    $
    1,807
    (c)
    
    $
    9,527Compensation ratio
    
    
    60.0
    %(d)
    
    
    
    
    
    
    56.8
    %(d)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
    
    
    
    
    (e)
    
    
    30,640,736Diluted
    
    
    31,525,629
    
    
    
    
    (e)
    
    
    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 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 first quarter 2007 compensation ratio was calculated by dividing compensation and benefits
expense by total revenues of $101,279.(e)
    
    Both the basic and diluted weighted average number of common shares outstanding were not adjusted.    29




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Revenues
 Investment Banking
  Commissions
  Principal Transactions, Net
  
    
    In the first quarter 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.
    
    Lower realized and unrealized gains from trading in equity
securities 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
  Investment Advisory Fees
  Other
  30




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Expenses
 Compensation and Benefits
  Occupancy and Equipment
  Communications and Data Processing
  Brokerage and Clearance
  Interest
  Other
  Income Tax Expense
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Critical Accounting Policies and Estimates
   
    
    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.
  Fair Value of Financial Instruments
 Disclosures About Fair Value of Financial
Instruments
 Fair Value Measurements
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Contractual Obligations
  Off-Balance Sheet Arrangements
   Recently Issued Accounting Standards, Not Yet Adopted
 The Fair Value Option for Financial Assets and
Financial Liabilities
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Liquidity and Capital Resources
         34




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Cash Flows
 Three months ended March 31, 2007.
   Three months ended March 31, 2006.
   35




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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk
    36




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High
    
    Low
    
    Average(dollars in thousands)Long ValueEquities
    
    $
    143,860
    
    
    $
    124,596
    
    
    $
    134,777Corporate bonds
    
    $
    304,253
    
    
    $
    132,498
    
    
    $
    197,927U.S. Government and agency securities
    
    $
    31,025
    
    
    $
    5,900
    
    
    $
    15,242Short ValueEquities
    
    $
    46,912
    
    
    $
    43,861
    
    
    $
    45,666Corporate bonds
    
    $
    9,936
    
    
    $
    2,081
    
    
    $
    6,459U.S. Government and agency securities
    
    $
    82,179
    
    
    $
    48,916
    
    
    $
    62,536Mortgage Backed Securities
    
    $
    5,876
    
    
    $
    
    
    
    $
    1,959
 Interest Rate Risk
  Credit Risk
  37




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Inflation Risk
  Operational Risk
  38




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ITEM 4. Controls and Procedures
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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 ProgramsMonth #1
(January 1, 2007 to
January 31, 2007)
    
    
    3,613
    
    
    
    $10.19
    
    
    
    
    
    
    
    Month #2
(February 1, 2007
to February 28,
2007)
    
    
    2,064
    
    
    
    $10.19
    
    
    
    
    
    
    
    Month #3
(March 1, 2007 to
March 31, 2007)
    
    
    1,576
    
    
    
    $  9.48
    
    
    
    
    
    
    
    Total
    
    
    7,253
    
    
    
    $10.04
    
    
    
    
    
    
    
    
 
 (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
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ITEM 4. Submission of Matters to a Vote of Security Holders
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
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KBW, INC.By:
    /s/ JOHN G. DUFFYName:
    John G. DuffyTitle:
    Chairman and Chief Executive
OfficerBy:
    /s/ ROBERT GIAMBRONEName:
    Robert GiambroneTitle:
    Chief Financial Officer 42




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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.
 43