##### 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, 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
 þ o
  o o þ
  o þ




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TABLE OF CONTENTS
 PageNumber
  
 AVAILABLE INFORMATION
    
    1PART I.
    
    FINANCIAL INFORMATION
    
    2Item 1.
    
    Financial Statements
    
    2Consolidated Statements of Financial ConditionJune 30, 2007 (Unaudited) and December 31, 2006
    
    2Consolidated Statements of IncomeThree Months and Six Months ended June 30, 2007 and 2006 (Unaudited)
    
    3Consolidated Statement of Changes in Stockholders EquitySix Months ended June 30, 2007 (Unaudited)
    
    4Consolidated Statements of Cash FlowsSix Months ended June 30, 2007 and 2006 (Unaudited)
    
    5Notes to Consolidated Financial Statements
    
    6Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    29Item 4.
    
    Controls and Procedures
    
    31PART II.
    
    OTHER INFORMATION
    
    32Item 1.
    
    Legal Proceedings
    
    32Item 1A.
    
    Risk Factors
    
    32Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    32Item 3.
    
    Defaults Upon Senior Securities
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    32Item 5.
    
    Other Information
    
    33Item 6.
    
    Exhibits
    
    33SIGNATURES
    
    34EXHIBIT INDEX
    
    35EX-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)
 June 30,2007
    
    
    December 31,(unaudited)
    
    
    2006AssetsCash and cash equivalents
    
    $
    162,380
    
    
    $
    165,647Financial instruments owned, at fair value:Equities
    
    
    169,240
    
    
    
    117,285Corporate bonds
    
    
    261,470
    
    
    
    135,744U.S. Government and agency securities
    
    
    
    
    
    
    15,905Mortgage backed securities
    
    
    
    
    
    
    14,645Other investments
    
    
    67,025
    
    
    
    47,158497,735
    
    
    
    330,737Securities purchased under resale agreements
    
    
    83,788
    
    
    
    62,319Receivables from clearing brokers
    
    
    82,882
    
    
    
    185,712Accounts receivable
    
    
    28,511
    
    
    
    25,740Furniture, equipment and leasehold improvements,
at cost, less accumulated depreciation and amortization
of $20,775 in 2007 and $18,297 in 2006
    
    
    20,947
    
    
    
    22,151Other assets
    
    
    22,119
    
    
    
    11,905Total assets
    
    $
    898,362
    
    
    $
    804,211Liabilities and Stockholders EquityLiabilities:Securities sold under repurchase agreements
    
    $
    204,053
    
    
    $
    84,536Short-term borrowings
    
    
    30,000
    
    
    
    28,500Financial instruments sold, not yet purchased, at fair value:Equities
    
    
    42,359
    
    
    
    29,528Corporate bonds
    
    
    
    
    
    
    5,082U.S. Government and agency securities
    
    
    83,420
    
    
    
    76,362125,779
    
    
    
    110,972Accounts payable, accrued expenses, and other liabilities
    
    
    101,345
    
    
    
    166,671Income taxes payable
    
    
    7,356
    
    
    
    16,772Total liabilities
    
    
    468,533
    
    
    
    407,451Stockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    293
    
    
    
    292Paid-in capital
    
    
    105,253
    
    
    
    94,419Retained earnings
    
    
    328,192
    
    
    
    310,076Notes receivable from stockholders
    
    
    (5,331
    )
    
    
    (8,843
    )Accumulated other comprehensive income
    
    
    1,422
    
    
    
    816Total stockholders equity
    
    
    429,829
    
    
    
    396,760Total liabilities and stockholders equity
    
    $
    898,362
    
    
    $
    804,211
  2




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KBW, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share information)
(unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Investment banking
    
    $
    67,308
    
    
    $
    45,786
    
    
    $
    113,945
    
    
    $
    93,629Commissions
    
    
    38,629
    
    
    
    31,622
    
    
    
    75,400
    
    
    
    60,560Principal transactions, net
    
    
    3,610
    
    
    
    7,421
    
    
    
    11,808
    
    
    
    25,741Interest and dividend income
    
    
    8,665
    
    
    
    6,192
    
    
    
    17,227
    
    
    
    11,728Investment advisory fees
    
    
    445
    
    
    
    413
    
    
    
    822
    
    
    
    785Other
    
    
    1,095
    
    
    
    274
    
    
    
    1,830
    
    
    
    702Total revenues
    
    
    119,752
    
    
    
    91,708
    
    
    
    221,032
    
    
    
    193,145Expenses:Compensation and benefits
    
    
    69,456
    
    
    
    53,383
    
    
    
    130,224
    
    
    
    112,729Occupancy and equipment
    
    
    4,473
    
    
    
    4,236
    
    
    
    9,055
    
    
    
    8,519Communications and data processing
    
    
    6,446
    
    
    
    4,701
    
    
    
    11,567
    
    
    
    9,274Brokerage and clearance
    
    
    5,374
    
    
    
    5,669
    
    
    
    11,056
    
    
    
    11,018Interest
    
    
    4,105
    
    
    
    2,736
    
    
    
    6,663
    
    
    
    5,263Other
    
    
    11,308
    
    
    
    5,857
    
    
    
    20,100
    
    
    
    12,917Total expenses
    
    
    101,162
    
    
    
    76,582
    
    
    
    188,665
    
    
    
    159,720Income before income tax expense
    
    
    18,590
    
    
    
    15,126
    
    
    
    32,367
    
    
    
    33,425Income tax expense
    
    
    8,195
    
    
    
    6,732
    
    
    
    14,251
    
    
    
    14,875Net income (Note 9)
    
    $
    10,395
    
    
    $
    8,394
    
    
    $
    18,116
    
    
    $
    18,550Earnings per common share (Note 9):Basic
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.59
    
    
    $
    0.68Diluted
    
    $
    0.33
    
    
    $
    0.31
    
    
    $
    0.57
    
    
    $
    0.68Weighted average number
of common shares outstanding:Basic
    
    
    30,603,734
    
    
    
    26,917,398
    
    
    
    30,622,133
    
    
    
    27,147,577Diluted
    
    
    31,543,189
    
    
    
    26,917,398
    
    
    
    31,534,205
    
    
    
    27,147,577
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KBW, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders Equity
Six Months Ended June 30, 2007
(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, 2006
    
    $
    
    
    
    $
    292
    
    
    $
    94,419
    
    
    $
    310,076
    
    
    $
    (8,843
    )
    
    $
    816
    
    
    $
    396,760Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,116
    
    
    
    
    
    
    
    
    
    
    
    18,116Other comprehensive
income, currency
translation adjustment,
net of tax of $463
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    606
    
    
    
    606Total other comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,722Amortization of stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    11,212
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,212Purchase of 60,573 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    (1,658
    )
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    (1,473
    )Issuance of 125,619 shares of
common stock
    
    
    
    
    
    
    1
    
    
    
    1,338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,339Restricted stock units
converted
    
    
    
    
    
    
    
    
    
    
    (1,339
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,339
    )Excess tax benefit related
to the delivery of
restricted stock
    
    
    
    
    
    
    
    
    
    
    1,281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,281Repayment of notes
receivable from
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,327
    
    
    
    
    
    
    
    3,327Balance at June 30, 2007
    
    $
    
    
    
    $
    293
    
    
    $
    105,253
    
    
    $
    328,192
    
    
    $
    (5,331
    )
    
    $
    1,422
    
    
    $
    429,829
 Description of preferred stock and details:
 Number of SharesPar Value
    
    Authorized
    
    Issued
    
    OutstandingJune 30, 2007
    
    $
    0.01
    
    
    
    10,000,000
    
    
    
    
    
    
    
    December 31, 2006
    
    $
    0.01
    
    
    
    10,000,000
    
    
    
    
    
    
    
    Description of common stock and details:Number of SharesPar Value
    
    Authorized
    
    Issued
    
    OutstandingJune 30, 2007
    
    $
    0.01
    
    
    
    140,000,000
    
    
    
    29,269,987
    
    
    
    29,269,987December 31, 2006
    
    $
    0.01
    
    
    
    140,000,000
    
    
    
    29,204,941
    
    
    
    29,204,941
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KBW, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
 Six Months Ended June 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    18,116
    
    
    $
    18,550Adjustments to reconcile net income to net cash used in
operating activities:Deferred income tax benefit
    
    
    (5,242
    )
    
    
    (1,252
    )Depreciation and amortization
    
    
    2,433
    
    
    
    2,879Amortization of stock-based compensation
    
    
    11,212
    
    
    
    902(Increase) decrease in operating assets:Financial instruments owned, at fair value
    
    
    (166,998
    )
    
    
    35,364Securities purchased under resale agreements
    
    
    (21,469
    )
    
    
    2,574Receivables from clearing brokers
    
    
    102,830
    
    
    
    (20,583
    )Accounts receivable
    
    
    (2,771
    )
    
    
    12,908Other assets
    
    
    (4,973
    )
    
    
    1,831Increase (decrease) in operating liabilities:Financial instruments sold, not yet purchased, at fair value
    
    
    14,807
    
    
    
    (6,448
    )Securities sold under repurchase agreements
    
    
    119,517
    
    
    
    20,684Short-term borrowings
    
    
    1,500
    
    
    
    (28,125
    )Payable to clearing broker
    
    
    
    
    
    
    (13,798
    )Accounts payable, accrued expenses and other liabilities
    
    
    (65,326
    )
    
    
    (27,790
    )Income taxes payable
    
    
    (9,416
    )
    
    
    323Net cash used in operating activities
    
    
    (5,780
    )
    
    
    (1,981
    )Cash flows from investing activities:Purchase of furniture, equipment and leasehold improvements
    
    
    (1,228
    )
    
    
    (1,214
    )Net cash used in investing activities
    
    
    (1,228
    )
    
    
    (1,214
    )Cash flows from financing activities:Issuance of shares of common stock
    
    
    
    
    
    
    310Purchases of shares of common stock
    
    
    (1,473
    )
    
    
    (9,995
    )Excess tax benefit related to the delivery of restricted stock units
    
    
    1,281
    
    
    
    344Repayment of notes receivable from stockholders
    
    
    3,327
    
    
    
    5,027Net cash provided by (used in) financing activities
    
    
    3,135
    
    
    
    (4,314
    )Currency adjustment:Effect of exchange rate changes on cash
    
    
    606
    
    
    
    674Net decrease in cash and cash equivalents
    
    
    (3,267
    )
    
    
    (6,835
    )Cash and cash equivalents at the beginning of the period
    
    
    165,647
    
    
    
    75,642Cash and cash equivalents at the end of the period
    
    $
    162,380
    
    
    $
    68,807Supplemental disclosures of cash flow information:Cash paid during the period for:Income taxes
    
    $
    30,588
    
    
    $
    13,306Interest
    
    $
    6,589
    
    
    $
    5,096
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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share information)
(unaudited)
 (1) Organization and Basis of Presentation
   (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
 (b) Use of Estimates
  (c) Cash and Cash Equivalents
  (d) Fair Value of Financial Instruments
 Disclosures About Fair Value of Financial Instruments
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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in thousands, except per share information)
(unaudited)
  Fair Value Measurements
   (e) Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements
   (f) Receivables From and Payable to Clearing Brokers
  (g) Investment Banking
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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 
    
    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.
  (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)
(Dollars in thousands, except per share information)
(unaudited)
  (l) Stock-Based Compensation
 Share-Based Payment
 (m) Reclassifications
  (3) Financial Instruments
 Fair Value Measurements
        9




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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in thousands, except per share information)
(unaudited)
  Assets
at Fair Value as of June 30, 2007Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFinancial instruments owned, at fair value:Non-derivative trading inventory
    
    $
    160,640
    
    
    $
    263,461
    
    
    $
    73,634
    
    
    $
    497,735
 Liabilities at Fair Value as of June 30, 2007
 Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFinancial instruments sold, not yet
purchased, at fair value:Non-derivative trading inventory
    
    $
    125,779
    
    
    $
    
    
    
    $
    
    
    
    $
    125,779
   Level 3 Financial Assets
 Changes inunrealized gainsand losses includedin earnings relatedTotal gains and
    
    
    
    
    
    
    
    
    
    to assets stillBalance as of
    
    losses (realized
    
    Purchases /
    
    Balance as of June
    
    held at reportingDecember 31, 2006
    
    and unrealized)
    
    (sales), net
    
    30, 2007
    
    dateNon-derivative
trading assets
    
    $
    56,227
    
    
    $
    3,208
    
    
    $
    14,199
    
    
    $
    73,634
    
    
    $
    110
    (4) Short-Term Borrowings
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KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 (5) Commitments and Contingencies
 (a) Leases
  (b) Litigation
 Accounting for Contingencies.
 (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)
(Dollars in thousands, except per share information)
(unaudited)
  Current
    
    Average
    
    End ofnotional
    
    fair
    
    periodamount
    
    value
    
    fair valueJune 30, 2007:Purchased options
    
    $
    
    
    
    $
    101
    
    
    $
    Written options
    
    $
    
    
    
    $
    15
    
    
    $
    Short futures contracts
    
    $
    17,202
    
    
    $
    
    
    
    $
    December 31, 2006:Purchased options
    
    $
    500
    
    
    $
    92
    
    
    $
    160Written options
    
    $
    400
    
    
    $
    87
    
    
    $
    5Short futures contracts
    
    $
    2,375
    
    
    $
    
    
    
    $
    
 (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)
(Dollars in thousands, except per share information)
(unaudited)
  (11) Earnings Per Share
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator for basic and diluted EPS-net income
    
    $
    10,395
    
    
    $
    8,394
    
    
    $
    18,116
    
    
    $
    18,550Denominator for earnings per common share weighted average common shares outstanding:Basic
    
    
    30,603,734
    
    
    
    26,917,398
    
    
    
    30,622,133
    
    
    
    27,147,577Effect of dilutive securities  restricted stock
    
    
    939,455
    
    
    
    
    
    
    
    912,072
    
    
    
    Diluted
    
    
    31,543,189
    
    
    
    26,917,398
    
    
    
    31,534,205
    
    
    
    27,147,577Earnings per common share:Basic
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.59
    
    
    $
    0.68Diluted
    
    $
    0.33
    
    
    $
    0.31
    
    
    $
    0.57
    
    
    $
    0.68
 (12) Income Taxes
  
    
    Unrecognized tax benefits including interest were approximately $5.8 million as of
January 1, 2007 and approximately $5.8 million as of June 30, 2007, the majority of which,
if recognized, would impact the effective tax rate.
    
    Following the adoption of FIN 48, the Company continues to classify interest and
penalties, if any, related to tax uncertainties as income taxes. As of January 1, 2007
and June 30, 2007, $0.5 million and $0.6 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.
 13




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##### Table of Contents



KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in thousands, except per share information)
(unaudited)
 (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
  June 30, 2007Net Capital
    
    $
    105,314Excess Capital
    
    $
    102,406
  14




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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
  
    
    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.
     15




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##### Table of Contents



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.
  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.
 16




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##### Table of Contents




 Interest and Dividend Income
  Investment Advisory Fees
  Other
  Expenses
   Compensation and Benefits
    Non-Compensation Expense
 Occupancy and Equipment
  Communications and Data Processing
  17




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Brokerage and Clearance
  Interest
  Other
  Income Tax Expense
 Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109,
 Business Environment
   Results of Operations
 Three Months Ended June 30, 2007 Compared with Three Months Ended June 30, 2006
 Overview
    18




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##### Table of Contents



Three Months EndedJune 30,
    
    
    Period-to-Period2007
    
    
    2006
    
    
    $ Change
    
    
    % Change(unaudited)Revenues:Investment banking
    
    $
    67,308
    
    
    $
    45,786
    
    
    $
    21,522
    
    
    
    47.0
    %Commissions
    
    
    38,629
    
    
    
    31,622
    
    
    
    7,007
    
    
    
    22.2Principal transactions, net
    
    
    3,610
    
    
    
    7,421
    
    
    
    (3,811
    )
    
    
    (51.4
    )Interest and dividend income
    
    
    8,665
    
    
    
    6,192
    
    
    
    2,473
    
    
    
    39.9Investment advisory fees
    
    
    445
    
    
    
    413
    
    
    
    32
    
    
    
    7.7Other
    
    
    1,095
    
    
    
    274
    
    
    
    821
    
    
    
    299.6Total revenues
    
    
    119,752
    
    
    
    91,708
    
    
    
    28,044
    
    
    
    30.6Expenses:Compensation and benefits
    
    
    69,456
    
    
    
    53,383
    
    
    
    16,073
    
    
    
    30.1Non-compensation expenses:Occupancy and equipment
    
    
    4,473
    
    
    
    4,236
    
    
    
    237
    
    
    
    5.6Communications and
data processing
    
    
    6,446
    
    
    
    4,701
    
    
    
    1,745
    
    
    
    37.1Brokerage and clearance
    
    
    5,374
    
    
    
    5,669
    
    
    
    (295
    )
    
    
    (5.2
    )Interest
    
    
    4,105
    
    
    
    2,736
    
    
    
    1,369
    
    
    
    50.0Other
    
    
    11,308
    
    
    
    5,857
    
    
    
    5,451
    
    
    
    93.1Total non-compensation expenses
    
    
    31,706
    
    
    
    23,199
    
    
    
    8,507
    
    
    
    36.7Total expenses
    
    
    101,162
    
    
    
    76,582
    
    
    
    24,580
    
    
    
    32.1Income before income tax expense
    
    
    18,590
    
    
    
    15,126
    
    
    
    3,464
    
    
    
    22.9Income tax expense
    
    
    8,195
    
    
    
    6,732
    
    
    
    1,463
    
    
    
    21.7Net income
    
    $
    10,395
    
    
    $
    8,394
    
    
    $
    2,001
    
    
    
    23.8
    %
 Three Month Non-GAAP Financial Measures
 Share-Based Payment
   19




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(Dollars in thousands, except per share information)Reconciliation
    
    
    Non-GAAPThree months ended June 30, 2007:
    
    GAAP Basis
    
    
    Amount

    
    
    BasisCompensation 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
    
    
    
    
    (e)
    
    
    30,603,734Diluted
    
    
    31,543,189
    
    
    
    
    (e)
    
    
    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 on November 8, 2006.(b)
    
    The non-GAAP adjustment with respect to income tax expense represents the elimination of the tax
benefit resulting from the amortization of the IPO restricted stock awards in the period.(c)
    
    The non-GAAP adjustment with respect to net income was the after-tax amortization of the IPO
restricted stock awards in the period.(d)
    
    The compensation ratio with respect to the three months ended June 30, 2007 was calculated by
dividing compensation and benefits expense by total revenues of $119,752.(e)
    
    Both the basic and diluted weighted average number of common shares outstanding were not adjusted.    Revenues
 Investment Banking
  20




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Commissions
  Principal Transactions, Net
  
    
    Higher equity market making losses.
    
    Lower realized and unrealized gains on fixed income securities.
    
    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
  Expenses
 Compensation and Benefits
   Occupancy and Equipment
  Communications and Data Processing
  21




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Brokerage and Clearance
  Interest
  Other
  Income Tax Expense
  Six Months Ended June 30, 2007 Compared with Six Months Ended June, 2006
 Overview
    22




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For the Six Months EndedJune 30,
    
    
    Period-to-Period2007
    
    
    2006
    
    
    $ Change
    
    
    % Change(unaudited)Revenues:Investment banking
    
    $
    113,945
    
    
    $
    93,629
    
    
    $
    20,316
    
    
    
    21.7
    %Commissions
    
    
    75,400
    
    
    
    60,560
    
    
    
    14,840
    
    
    
    24.5Principal transactions, net
    
    
    11,808
    
    
    
    25,741
    
    
    
    (13,933
    )
    
    
    (54.1
    )Interest and dividend income
    
    
    17,227
    
    
    
    11,728
    
    
    
    5,499
    
    
    
    46.9Investment advisory fees
    
    
    822
    
    
    
    785
    
    
    
    37
    
    
    
    4.7Other
    
    
    1,830
    
    
    
    702
    
    
    
    1,128
    
    
    
    160.7Total revenues
    
    
    221,032
    
    
    
    193,145
    
    
    
    27,887
    
    
    
    14.4Expenses:Compensation and benefits
    
    
    130,224
    
    
    
    112,729
    
    
    
    17,495
    
    
    
    15.5Non-compensation expenses:Occupancy and equipment
    
    
    9,055
    
    
    
    8,519
    
    
    
    536
    
    
    
    6.3Communications and
data processing
    
    
    11,567
    
    
    
    9,274
    
    
    
    2,293
    
    
    
    24.7Brokerage and clearance
    
    
    11,056
    
    
    
    11,018
    
    
    
    38
    
    
    
    0.3Interest
    
    
    6,663
    
    
    
    5,263
    
    
    
    1,400
    
    
    
    26.6Other
    
    
    20,100
    
    
    
    12,917
    
    
    
    7,183
    
    
    
    55.6Total non-compensation expenses
    
    
    58,441
    
    
    
    46,991
    
    
    
    11,450
    
    
    
    24.4Total expenses
    
    
    188,665
    
    
    
    159,720
    
    
    
    28,945
    
    
    
    18.1Income before income tax expense
    
    
    32,367
    
    
    
    33,425
    
    
    
    (1,058
    )
    
    
    (3.2
    )Income tax expense
    
    
    14,251
    
    
    
    14,875
    
    
    
    (624
    )
    
    
    (4.2
    )Net income
    
    $
    18,116
    
    
    $
    18,550
    
    
    $
    (434
    )
    
    
    (2.3)
    %
 Six Month Non-GAAP Financial Measures
  (Dollars in thousands, except per share information)Reconciliation
    
    
    Non-GAAPGAAP Basis
    
    
    Amount
    
    BasisSix months ended June 30, 2007:Compensation 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
    
    
    
    (e)
    
    
    
    30,622,133Diluted
    
    
    31,534,205
    
    
    
    (e)
    
    
    
    31,534,205
 23




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##### Table of Contents



(a)
    
    The non-GAAP adjustment represents the pre-tax expense with respect to the amortization of the
 IPO restricted stock awards granted to employees on November 8, 2006.(b)
    
    The non-GAAP adjustment with respect to income tax expense represents the elimination of the tax
benefit resulting from the amortization of the IPO restricted stock awards in the period.(c)
    
    The non-GAAP adjustment with respect to net income was the after-tax amortization of the IPO
restricted stock awards in the period.(d)
    
    The compensation ratio with respect to the three months ended June 30, 2007 was calculated by
dividing compensation and benefits expense by total revenues of $221,032.(e)
    
    Both the basic and diluted weighted average number of common shares outstanding were not adjusted.  Revenues
 Investment Banking
  Commissions
  Principal Transactions, Net
  
    
    In the first half of 2006, principal transactions, net included a gain of
$4.8 million on the conversion of our New York Stock Exchange seat for cash
and shares of NYSE Group, Inc.
    
    Higher equity market making losses
    
    Lower net realized and unrealized gains in fixed income and equity securities.
    
    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
 24




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##### Table of Contents



Expenses
 Compensation and Benefits
   Occupancy and Equipment
  Communications and Data Processing
  Brokerage and Clearance
  Interest
  Other
  Income Tax Expense
  Critical Accounting Policies and Estimates
  25




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##### Table of Contents




    
    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
   Contractual Obligations
  Off-Balance Sheet Arrangements
   26




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##### Table of Contents



Recently Issued Accounting Standards, Not Yet Adopted
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Liquidity and Capital Resources
         27




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Cash Flows
 Six months ended June 30, 2007 .
   Six months ended June 30, 2006 .
   28




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk
     High
    
    Low
    
    Average(dollars in thousands)Long value:Equities
    
    $
    169,240
    
    
    $
    111,643
    
    
    $
    147,899Corporate bonds
    
    $
    304,253
    
    
    $
    132,498
    
    
    $
    218,716U.S. Government and agency securities
    
    $
    45,591
    
    
    $
    
    
    
    $
    18,850Mortgage Backed Securities
    
    $
    14,645
    
    
    $
    
    
    
    $
    3,291Other investments
    
    $
    66,623
    
    
    $
    46,306
    
    
    $
    53,097Short value:Equities
    
    $
    56,430
    
    
    $
    29,528
    
    
    $
    45,183Corporate bonds
    
    $
    9,936
    
    
    $
    
    
    
    $
    4,219U.S. Government and agency securities
    
    $
    110,057
    
    
    $
    48,916
    
    
    $
    77,654Mortgage Backed Securities
    
    $
    5,876
    
    
    $
    
    
    
    $
    839
 Interest Rate Risk
  Credit Risk
  29




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Inflation Risk
  Operational Risk
  30




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ITEM 4. Controls and Procedures
    31




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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 of
    
    Approximate DollarShares Purchased as
    
    Value of SharesTotal Number
    
    
    
    
    
    Part of Publicly
    
    that May Yet Beof Shares
    
    Average Price Paid
    
    Announced Plans or
    
    Purchased Under thePeriod
    
    Purchased(1)(2)
    
    per Share
    
    Programs
    
    Plans or ProgramsApril 1  April 30,
2007
    
    
    44,158
    
    
    $
    31.48
    
    
    
    
    
    
    
    May 1  May 31, 2007
    
    
    8,181
    
    
    $
    22.59
    
    
    
    
    
    
    
    June 1  June 30, 2007
    
    
    981
    
    
    $
    10.19
    
    
    
    
    
    
    
    Total
    
    
    53,320
    
    
    $
    21.42
    
    
    
    
    
    
    
    
 
 (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
  (1)
    
    the election of one Class III Director to serve on the Board of Directors until the 2010
annual meeting of stockholders; and(2)
    
    the ratification of KPMG LLP (KPMG) as the Companys independent registered public
accounting firm (independent auditors) for the fiscal year
ending December 31, 2007.
 32




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##### Table of Contents



Proposal 1  Election of Class III Director.
 Nominee
    
    For
    
    WithheldThomas B. Michaud
    
    19,851,503
    
    2,528,793
  Proposal 2  Ratification of the Appointment of KPMG as the Companys Independent Registered
Public Accounting Firm.
 For
    
    Against
    
    Abstain22,116,652
    
    140,133
    
    123,512
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
  33




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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 34




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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.
 35