FORM 10-Q

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, 2009


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.

(Exact name of registrant as specified in its charter)


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
(Address of principal executive offices)
Registrant’s telephone number: (212) 887-7777

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of April 30, 2009 was 34,843,434 which number includes 4,648,535 shares representing unvested restricted stock awards and excludes 1,209,977 shares underlying vested restricted stock units.

AVAILABLE INFORMATION

KBW, Inc. is required to file current, annual and quarterly reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at http://www.sec.gov, from which interested persons can electronically access our SEC filings.

We will make available free of charge through our website http://www.kbw.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large stockholders, and any amendments to those documents filed or furnished pursuant to the Exchange Act. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

We also make available, on the Investor Relations page of our website, our (i) Corporate Governance Guidelines, (ii) Code of Business Conduct and Ethics, (iii) Supplement to Code of Business Conduct and Ethics for CEO and Senior Financial Officers, and (iv) charters of each of the Audit, Compensation, and Corporate Governance and Nominations Committees of our Board of Directors. You will need to have Adobe Acrobat Reader software installed on your computer to view these documents, which are in the PDF format. These documents are also available in print free of charge to any person who requests them by writing or telephoning: KBW, Inc., Office of the Corporate Secretary, 787 Seventh Avenue, 4^th Floor, New York, New York, 10019, U.S.A., telephone number (212) 887-7777. These documents, as well as the information on our website, are not a part of this report.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

KBW, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(Dollars in thousands)


	March 31,
	2009			December 31,
	(unaudited)			2008
ASSETS
Cash and cash equivalents	$	146,125		$	194,981
Financial instruments owned, at fair value:
Equities		34,931			41,765
Corporate and other debt		47,875			53,879
Other investments		36,252			34,893

		119,058			130,537

Securities purchased under resale agreements		8,058			—
Receivables from clearing brokers		126,338			130,682
Accounts receivable		19,508			19,391
Income taxes receivable		31,054			33,270
Furniture, equipment and leasehold improvements, at cost, less accumulated depreciation and amortization of $22,719 in 2009 and $21,546 in 2008		18,719			18,895
Other assets		44,612			43,710

Total assets	$	513,472		$	571,466


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Securities sold under repurchase agreements	$	8,613		$	—
Short-term borrowings		31,547			31,547
Financial instruments sold, not yet purchased, at fair value:
Equities		21,436			11,162
U.S. Government and agency securities		7,957			—

		29,393			11,162

Accounts payable, accrued expenses, and other liabilities		29,237			122,070
Income taxes payable		10,103			9,956

Total liabilities		108,893			174,735


Stockholders’ equity:
Preferred stock		—			—
Common stock		302			298
Paid-in capital		143,895			137,618
Retained earnings		275,749			275,019
Notes receivable from stockholders		(709	)		(2,225	)
Accumulated other comprehensive loss		(14,658	)		(13,979	)

Total stockholders’ equity		404,579			396,731

Total liabilities and stockholders’ equity	$	513,472		$	571,466

See accompanying notes to consolidated financial statements.

KBW, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

(Dollars in thousands, except per share information)

(unaudited)


											Notes			Accumulated
											Receivable			Other			Total
	Preferred		Common			Paid-in			Retained		from			Comprehensive			Stockholders’
	Stock		Stock			Capital			Earnings		Stockholders			Loss			Equity
Balance at December 31, 2008	$	—	$	298		$	137,618		$	275,019	$	(2,225	)	$	(13,979	)	$	396,731
Net income		—		—			—			730		—			—			730
Other comprehensive loss, currency translation adjustment		—		—			—			—		—			(679	)		(679	)

Total comprehensive income																		51

Amortization of stock-based compensation		—		—			12,025			—		—			—			12,025
Cancellation of 232,249 shares of restricted stock in satisfaction of withholding tax requirements		—		(2	)		(4,461	)		—		—			—			(4,463	)
Issuance of 590,284 shares of common stock		—		6			14,542			—		—			—			14,548
Restricted stock units converted		—		—			(1,214	)		—		—			—			(1,214	)
Stock-based awards vested		—		—			(13,281	)		—		—			—			(13,281	)
Tax shortfall related to stock-based awards		—		—			(1,334	)		—		—			—			(1,334	)
Repayment of notes receivable from stockholders		—		—			—			—		1,516			—			1,516

Balance at March 31, 2009	$	—	$	302		$	143,895		$	275,749	$	(709	)	$	(14,658	)	$	404,579

Description of preferred stock and details:


			Number of Shares
	Par Value		Authorized		Issued	Outstanding
March 31, 2009	$	0.01		10,000,000	—	—
December 31, 2008	$	0.01		10,000,000	—	—

Description of common stock and details:


			Number of Shares
	Par Value		Authorized		Issued⁽¹⁾		Outstanding⁽¹⁾
March 31, 2009	$	0.01		140,000,000		30,191,851		30,191,851
December 31, 2008	$	0.01		140,000,000		29,833,816		29,833,816


⁽¹⁾		These share amounts exclude legally vested restricted stock units.

See accompanying notes to consolidated financial statements.

KBW, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)


	Three Months Ended March 31,
	2009			2008
Cash flows from operating activities:
Net income / (loss)	$	730		$	(7,499	)
Adjustments to reconcile net income / (loss) to net cash used in operating activities:
Amortization of stock-based compensation		12,025			13,190
Depreciation and amortization		1,192			1,158
Deferred income tax expense / (benefit)		393			(4,000	)
(Increase) decrease in operating assets:
Financial instruments owned, at fair value		11,440			49,055
Securities purchased under resale agreements		(8,058	)		15,101
Receivables from clearing brokers		4,314			97,420
Accounts receivable		(200	)		(4,234	)
Income taxes receivable		2,216			—
Other assets		(1,309	)		(3,697	)
Increase (decrease) in operating liabilities:
Financial instruments sold, not yet purchased, at fair value		18,231			(27,290	)
Securities sold under repurchase agreements		8,613			(35,928	)
Short-term borrowings		—			(4,020	)
Accounts payable, accrued expenses and other liabilities		(92,354	)		(132,175	)
Income taxes payable		149			856

Net cash used in operating activities		(42,618	)		(42,063	)

Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements		(1,016	)		(343	)

Net cash used in investing activities		(1,016	)		(343	)

Cash flows from financing activities:
Issuance of shares of common stock		53			—
Cancellation of restricted stock in satisfaction of withholding tax		(4,463	)		(2,811	)
Excess (shortfall) net tax benefit related to stock-based awards		(1,334	)		113
Repayment of notes receivable from stockholders		1,516			2,959

Net cash (used in) / provided by financing activities		(4,228	)		261

Currency adjustment:
Effect of exchange rate changes on cash		(994	)		(24	)

Net decrease in cash and cash equivalents		(48,856	)		(42,169	)
Cash and cash equivalents at the beginning of the period		194,981			194,358

Cash and cash equivalents at the end of the period	$	146,125		$	152,189


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes	$	103		$	531
Interest	$	260		$	2,668

See accompanying notes to consolidated financial statements.

KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(Dollars in thousands, except per share information)

(1) Organization and Basis of Presentation

The consolidated financial statements include the accounts of KBW, Inc. and its wholly owned subsidiaries (the “Company”), Keefe, Bruyette & Woods, Inc. (“Keefe”), Keefe, Bruyette & Woods Limited (“KBWL”), KBW Asset Management, Inc. (“KBWAM”), KBW Ventures, Inc. (“Ventures”) and FIG Acquisition Corp. Keefe is a regulatory member of the Financial Industry Regulatory Authority (“FINRA”) and is principally a broker-dealer in securities and a market-maker in certain financial services stocks and bonds in the United States. KBWL is authorized and regulated by the U.K. Financial Services Authority (“FSA”) and a member of the London Stock Exchange, Euronext, SWX Europe and Deutsche Boerse. Keefe’s and KBWL’s customers are predominantly institutional investors, including other brokers and dealers, commercial banks, asset managers and other financial institutions. Keefe has clearing arrangements with Pershing LLC and Fortis Securities LLC on a fully disclosed basis. KBWL has a clearing arrangement with Pershing Securities Limited on a fully disclosed basis.

These consolidated financial statements and these notes are unaudited and exclude some of the disclosures required in annual financial statements. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2008 included in its Annual Report on Form 10-K filed with the SEC. These consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for the fair statement of the results for the interim periods. The results of operations for interim periods are not necessarily indicative of results for the entire year.

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of the Company and its consolidated subsidiaries. All inter-company transactions and balances have been eliminated.

The Company consolidates entities for which it has a controlling financial interest as defined in Financial Accounting Standards Board (“FASB”) Accounting Research Bulletin No. ARB 51, Consolidated Financial Statements. The usual condition for a controlling financial interest is ownership of a majority voting interest. As a result, the Company generally consolidates entities when they have ownership, directly or indirectly, of over 50 percent of the outstanding voting shares of another entity. Since a controlling financial interest may be achieved through arrangements that do not involve voting interest, the Company also evaluates entities for consolidation under the “variable interest model” in accordance with FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities — an interpretation of ARB No. 51. The Company consolidates variable interest entities when its interests in the entity are expected to absorb a majority the entity’s expected losses, or expected residual returns, or both. There were no variable interest entities that required consolidation at March 31, 2009.

In addition, the Company evaluates its investments in general partnerships and investments in limited partnerships under Emerging Issues Task Force 04-5 (“EITF 04-5”), Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. Under EITF 04-5 the general partners in limited partnerships are presumed to control unless the limited partners have either a substantial ability to dissolve the limited partnership or otherwise can remove the general partner without cause or have substantial participating rights. There were no limited partnership interests that required consolidation at March 31, 2009.

(b) Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s financial statements and these footnotes including securities valuations, compensation accruals and other matters. Management believes that the estimates used in preparing the Company’s consolidated financial statements are reasonable. Actual results may differ from these estimates.

(c) Cash and Cash Equivalents

Cash equivalents include investments with an original maturity of three months or less when purchased. Due to the short-term nature of these instruments, carrying value approximates their fair value.

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

(d) Fair Value of Financial Instruments

The Company accounts for financial instruments that are being measured and reported on a fair value basis in accordance with Statements of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurement. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 defines fair value as “the price that would be received to sell an asset and paid to transfer a liability in an ordinary transaction between market participants at the measurement date”. Additionally, SFAS No. 157 disallows the use of block discounts on positions traded in an active market as well as nullifies certain guidance in Emerging Issues Task Force No. 02-3 regarding the recognition of inception gains on certain derivative transactions.

Under SFAS No. 157, fair value is generally based on quoted market prices. If quoted market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations, price activity for equivalent instruments and valuation pricing models. Among the factors considered by the Company in determining the fair value of financial instruments for which there are no current quoted market prices are credit spreads, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, assessing the underlying investments, market-based information, such as comparable company transactions, performance multiples and changes in market outlook as well as other measurements. Financial instruments owned and financial instruments sold, not yet purchased are stated at fair value, with related changes in unrealized appreciation or depreciation reflected in principal transactions, net in the accompanying consolidated statements of operations. Financial assets and financial liabilities carried at contract amounts include receivables from clearing brokers, securities purchased under resale agreements, short-term borrowings and securities sold under repurchase agreements. See Note 3 of the Notes to Consolidated Financial Statements for additional discussion of SFAS No. 157.

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), provides entities the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. SFAS No. 159 permits the fair value option election, on an instrument-by-instrument basis, either at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. Such election must be applied to the entire instrument and not only a portion of the instrument. The Company applied the fair value option for certain eligible instruments, including certain private equity securities and limited partnership interests. Generally, the carrying values of these securities have been determined based on company performance and, in those instances where market values are readily ascertainable, by reference to recent significant events occurring in the marketplace or quoted market prices. The Company’s partnership interests are generally recorded at fair value, which may consider information provided by general partners.

(e) Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements

Securities purchased under resale agreements and securities sold under repurchase agreements are accounted for as collateralized financing transactions. The assets and liabilities that result from these agreements are recorded in the consolidated statements of financial condition at the amounts at which the securities were sold or purchased (contract value), respectively. It is the policy of the Company to obtain possession of collateral or deliver collateral, as the case may be, with a market value equal to or in excess of the principal amount of the transactions. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged when appropriate.

The market value of collateral accepted by the Company under resale agreements was $7,962 at March 31, 2009, substantially all of which has been sold or re-pledged. There were no resale agreements as of December 31, 2008. The resale agreements have subsequently been closed out at their contract values. The market value of collateral pledged by the Company under repurchase agreements, which included corporate debt, was $9,020 at March 31, 2009. There were no repurchase agreements as of December 31, 2008.

(f) Receivables From and Payable to Clearing Brokers

Receivables from and payable to clearing brokers include proceeds from securities sold, including financial instruments sold not yet purchased, commissions related to securities transactions, margin loans and related interest and deposits with clearing brokers. Proceeds related to financial instruments sold, not yet purchased may be restricted until the securities are purchased.

(g) Furniture, Equipment and Leasehold Improvements

Furniture and equipment are carried at cost and depreciated on a straight-line basis using estimated useful lives of the related assets, generally two to five years. Leasehold improvements are amortized on a straight-line basis over the lesser of the economic

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

useful life of the improvement or the term of the respective leases.

(h) Revenue Recognition

Investment Banking

The Company earns fees for providing strategic advisory services in mergers and acquisitions (“M&A”) and other transactions which are predominantly composed of fees based on a successful completion of a transaction, and from capital markets, which is comprised of underwriting securities’ offerings and arranging private placements, including securitized debt offerings.

Strategic advisory revenues are recorded when earned, the fees are determinable and collection is reasonably assured.

Capital markets revenue consists of:

	•		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.

	•		Private placement revenues are recorded when the services related to the underlying transaction are completed under the terms of the engagement. This is generally the closing date of the transaction.

Since the Company’s investment banking revenues are generally recognized at the time of completion of each transaction or the services to be performed, these revenues typically vary between periods and may be considerably affected by the timing of the closing of significant transactions.

Commissions

The Company’s 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

Financial instruments owned, at fair value and financial instruments sold, not yet purchased, at fair value are recorded on a trade-date basis with realized and unrealized gains and losses reflected in principal transactions, net in the consolidated statements of operations.

Interest and dividend income

The Company recognizes contractual interest on financial instruments owned at fair value on an accrual basis as a component of interest and dividend income. Dividend income is recognized on the ex-dividend date.

(i) Stock-Based Compensation

Stock-based compensation is measured at fair value on the date of grant and amortized to compensation expense over the requisite service period, net of estimated forfeitures. Stock-based awards that do not require future service (i.e., vested awards, including awards granted to retirement eligible employees) are expensed immediately on the date of grant. Withholding tax obligations may be satisfied by the repurchase of shares by the Company. Such shares are cancelled upon repurchase.

(j) Income Taxes

Deferred tax assets and liabilities are recognized for the future tax effect of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. In the event it is more likely than not that a deferred tax asset will not be realized, a valuation allowance will be recorded.

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

The Company applies FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”), which prescribes a single, comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on its tax returns. Income tax expense is based on pre-tax accounting income, including adjustments made for the recognition or derecognition related to uncertain tax positions. The recognition or derecognition of income tax expense related to uncertain tax positions is determined as prescribed by FIN 48.

(k) Earnings Per Share (“EPS”)

Basic EPS is computed by dividing net income by the weighted average number of common shares. The weighted average number of common shares outstanding include restricted stock units (“RSUs”) for which no future service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of basic EPS and, in addition, give effect to dilutive potential common shares related to Company stock compensation plans.

(l) Foreign Currency Translation

The Company translates the statements of financial condition of KBWL at the exchange rates in effect as of the end of each reporting period. The consolidated statements of operations are translated at the average rates of exchange during the period. The resulting translation adjustments of KBWL are recorded directly to accumulated other comprehensive income (loss) in the consolidated statements of changes in stockholders’ equity.

(3) Financial Instruments

The Company accounts for financial instruments that are being measured and reported on a fair value basis in accordance with Statements of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurement. This includes those items currently reported in financial instruments owned, at fair value and financial instruments sold, not yet purchased, at fair value on the consolidated statements of financial condition.

As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, primarily market and income approaches. Based on these approaches, the Company utilizes assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the information set forth below according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial instrument assets and liabilities carried at fair value have been classified and disclosed in one of the following three categories:

Level 1 Quoted market prices in active markets for identical assets or liabilities.
Level 2 Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 Unobservable inputs that are not corroborated by market data.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices, such as listed equities. This category also includes U.S. Government and agency securities for which the Company typically receives independent external valuation information.

Level 2 includes those financial instruments that are valued using multiple valuation techniques, primarily the market approach. The valuation methodologies utilized are calibrated to observable market inputs. The Company considers recently executed transactions, market price quotations and various assumptions, including credit spreads, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, as well as other measurements. In order to be classified as Level 2, substantially all of these assumptions would need to be observable in the marketplace or can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category include

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

certain corporate and other debt, including investment grade collateralized debt obligations (“CDOs”) primarily collateralized by banking and insurance company trust preferred and capital securities.

Level 3 is comprised of financial instruments whose fair value is estimated based on multiple valuation techniques, primarily market and income approaches. The valuation methodologies may utilize significant inputs that are unobservable from objective sources. The Company considers various market inputs and assumptions, such as recently executed transactions, market price quotations, discount margins, market spreads applied, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, default rates, as well as other measurements. Included in this category are certain corporate and other debt, including non-rated CDOs primarily collateralized by banking and insurance company trust preferred and capital securities and bank and insurance company trust preferred and capital securities, and other investments, including private equity securities and limited and general partnership interests. The Company did not own any other type of CDOs, including those collateralized by mortgage loans, in any period presented herein.

In determining the appropriate levels, the Company performed a detailed analysis of the assets and liabilities that are subject to SFAS No. 157. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

Assets at Fair Value as of March 31, 2009


	Level 1		Level 2		Level 3		Total
Financial instruments owned, at fair value:
Equities	$	19,030	$	17	$	15,128	$	34,175
Corporate and other debt		—		20,079		27,796		47,875
Other investments		—		—		36,252		36,252

Total non-derivative trading assets		19,030		20,096		79,176		118,302
Derivative financial instruments		756		—		—		756

Total financial instruments owned	$	19,786	$	20,096	$	79,176	$	119,058

Liabilities at Fair Value as of March 31, 2009


	Level 1		Level 2		Level 3		Total
Financial instruments sold, not yet purchased, at fair value:
Equities	$	20,973	$	—	$	—	$	20,973
U.S. Government and agency securities		7,957		—		—		7,957

Total non-derivative trading liabiilties		28,930		—		—		28,930
Derivative financial instruments		463		—		—		463

Total financial instruments sold, not yet purchased	$	29,393	$	—	$	—	$	29,393

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, 2008


	Level 1		Level 2		Level 3		Total
Financial instruments owned, at fair value:
Equities	$	19,169	$	7,031	$	14,722	$	40,922
Corporate and other debt		—		21,191		32,688		53,879
Other investments		—		—		34,893		34,893

Total non-derivative trading assets		19,169		28,222		82,303		129,694
Derivative financial instruments		843		—		—		843

Total financial instruments owned	$	20,012	$	28,222	$	82,303	$	130,537

Liabilities at Fair Value as of December 31, 2008


	Level 1		Level 2		Level 3		Total
Financial instruments sold, but not yet purchased, at fair value:
Equities	$	10,701	$	—	$	—	$	10,701

Total non-derivative trading liabilities		10,701		—		—		10,701
Derivative financial instruments		461		—		—		461

Total financial instruments sold, not yet purchased	$	11,162	$	—	$	—	$	11,162

The non-derivative trading assets/liabilities categories include financial instruments such as listed equities, U.S. Treasuries, other U.S. Government and agency securities, corporate and other debt, limited and general partnership interests and private equity securities. They are reported in financial instruments owned, at fair value and financial instruments sold, not yet purchased, at fair value on the Company’s consolidated statements of financial condition.

The derivative financial instruments are reported on a gross basis by level. The Company’s derivative activities included in financial instruments owned and financial instruments sold, not yet purchased consist of writing and purchasing listed equity options. The fair value of these individual derivative contracts were reported gross in their respective levels based on the fair value hierarchy.

The following table provides a reconciliation of the beginning and ending balances for the non-derivative trading assets measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2009 and March 31, 2008:

Level 3 Financial Assets

Changes in unrealized

Total gains

gains and (losses)

Balance as of

and (losses)

included in earnings

December 31,

(realized and

Purchases/

Transfers into

Balance as of

related to assets still

2008

unrealized)

(sales), net

Level 3

March 31, 2009

held at reporting date

Non-derivative trading assets

82,303

($5,030

)

1,139

764

79,176

($5,232

)

Changes in unrealized

Total gains

gains and (losses)

Balance as of

and (losses)

Transfers

included in earnings

December 31,

(realized and

Purchases/

in/(out) of Level

Balance as of

related to assets still

2007

unrealized)

(sales), net

March 31, 2008

held at reporting date

Non-derivative trading assets

171,816

($10,758

)

11,288

($6,101

)

166,245

($13,212

)

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

Total gains and losses represent the total gains and/or losses (realized and unrealized) recorded for the Level 3 assets and are reported in principal transactions, net in the accompanying consolidated statements of operations. Additionally, the change in the unrealized gains and losses are often offset by realized gains and losses during the period.

Purchases/sales represent the net amount of Level 3 assets that were either purchased or sold during the period. The amounts were recorded at their end of period fair values.

Transfers into / out of Level 3 represent existing financial assets that were previously categorized at a lower level. Transfers into / out of Level 3 result from changes in the observability of inputs used in determining fair values for different types of financial assets. Transfers are reported at their fair value as of the beginning of the month in which such changes in the fair value inputs occurs.

The amount of unrealized gains and losses included in earnings attributable to the change in unrealized gains and losses relating to Level 3 assets still held at the end of the period were reported in principal transactions, net in the accompanying consolidated statements of operations. The change in unrealized gains and losses were often offset, at least in part, by realized gains and losses during the period.

(4) Short-Term Borrowings

The Company obtains secured short-term borrowings primarily through bank loans. The short-term borrowings average balances for the three months ended March 31, 2009 and for the year ended December 31, 2008 were $31,547 and $52,924, respectively. Secured short-term borrowings were $31,547 at the rate in effect of 1.89% as of March 31, 2009. Secured short-term borrowings was $31,547 at the rate in effect of 1.631% as of December 31, 2008. Included in financial instruments owned as of March 31, 2009 and December 31, 2008 were $27,295 of and $31,064, respectively, of corporate bonds in which the lender has a security interest in connection with short-term borrowings.

(5) Commitments and Contingencies

(a) Leases

As of March 31, 2009, there were no significant changes in the Company’s lease agreements since December 31, 2008.

(b) Litigation

In the ordinary course of business, the Company may be a defendant or codefendant in legal proceedings. At March 31, 2009, the Company believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the Company’s financial condition. The results of such proceedings could be material to the Company’s operating results for any particular period, depending, in part, upon additional developments affecting such matters and the operating results for such period. Legal reserves have been established in accordance with SFAS No. 5, Accounting for Contingencies. Once established, reserves are adjusted when there is more information available or when an event occurs requiring a change.

On January 12, 2009, Frederick J. Grede, as Liquidation Trustee and Representative of the Estate of Sentinel Management Group, Inc., filed a lawsuit in the United States District Court for the Northern District of Illinois against Keefe and against Delores E. Rodriguez; Barry C. Mohr, Jr.; and Jacques De Saint Phalle (all former employees of Keefe) and Cohen & Company Securities, LLC. Ms. Rodriguez and Mr. Mohr were employed by Cohen & Company subsequent to being employed by Keefe and the complaint relates to activities by them at both Keefe and their subsequent employer.

The complaint alleges that Keefe recommended and sold to Sentinel Management Group structured finance products that were unsuitable for purchase. The complaint alleges the following causes of action against Keefe, aiding and abetting breach of fiduciary duty by an officer and director of Sentinel; commercial bribery; violations of federal and state securities laws; violation of the Illinois Consumer Fraud Act; negligence; unjust enrichment; and avoidance and recovery of fraudulent transfers. The complaint specifies that Sentinel sustained a loss associated with the sale of securities sold by Keefe of $4,920, however various causes of action in the complaint seek to recover amounts substantially in excess of that amount up to an amount in excess of $130,000, representing amounts paid for all securities purchased from Keefe regardless of suitability or whether there were losses on these securities. Keefe believes the claims are without merit and will defend these claims vigorously. On April 1, 2009, Keefe filed a Motion to Dismiss the Complaint. The Liquidation Trustee filed an Opposition to Motion to Dismiss on April 29, 2009. Keefe’s reply brief is currently due on May 20, 2009.

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

(c) Limited Partnership Commitments

As of March 31, 2009, the Company had approximately $26,141, including $10,393 to an affiliated fund, in outstanding commitments for additional funding to limited partnership investments.

(6) Financial Instruments with Off-Balance-Sheet Risk

In the normal course of its proprietary trading activities, the Company enters into transactions in financial instruments with off-balance-sheet risk. These financial instruments, primarily options, contain off-balance-sheet risk inasmuch as ultimate settlement of these transactions may have market and/or credit risk in excess of amounts which are recognized in the consolidated financial statements. Transactions in listed options are conducted through regulated exchanges, which clear and guarantee performance of counterparties.

Also, in connection with its proprietary trading activities, the Company has sold securities that it does not currently own and will, therefore, be obligated to purchase such securities at a future date. The Company has recorded this obligation in the financial statements at market values of the related securities and will record a trading loss if the market value of the securities increases subsequent to the consolidated financial statements date.

(a) Broker-Dealer Activities

The Company clears securities transactions on behalf of customers through its clearing brokers. In connection with these activities, customers’ unsettled trades may expose the Company to off-balance-sheet credit risk in the event customers are unable to fulfill their contracted obligations. The Company seeks to control the risk associated with its customer activities by monitoring the creditworthiness of its customers.

(b) Derivative Financial Instruments

The Company’s derivative activities consist of writing and purchasing listed equity options and, from time to time, futures on interest rate and currency products for trading for our own account and are included in financial instruments owned, at fair value and financial instruments sold, not yet purchased, at fair value in the accompanying consolidated statements of financial condition. See also Note 3 of the Notes to Consolidated Financial Statements for additional details. As a writer of options, the Company receives a cash premium at the beginning of the contract period and bears the risk of unfavorable changes in the value of the financial instruments underlying the options. Options written do not expose the Company to credit risk since they obligate the Company (not its counterparty) to perform.

In order to measure derivative activity, notional or contract amounts are frequently utilized. Notional contract amounts, which are not included on the consolidated statements of financial condition, are used as a basis to calculate contractual cash flows to be exchanged and generally are not actually paid or received.

A summary of the Company’s listed options is as follows:


	Current		Average		End of
	Notional		Fair		Period
	Value		Value		Fair Value
March 31, 2009:
Purchased options	$	25,115	$	477	$	756
Written options	$	4,010	$	1,151	$	463

December 31, 2008:
Purchased options	$	7,721	$	557	$	843
Written options	$	6,100	$	344	$	461

The following table summarizes the net gains / (losses) from trading activities included in principal transactions, net on the statements of operations for the three months ended March 31, 2009:

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)


	Principal
Type of Instrument	Transactions, Net
Equities	$	(1,115	)
Corporate and other debt		6,683
Other investments		(1,452	)

Total	$	4,116

The revenue related to the equities category includes realized and unrealized gains and losses on both derivative instruments and non-derivative instruments. Corporate and other debt and other investments include realized and unrealized gains and losses on non-derivative instruments.

(7) Concentrations of Credit Risk

The Company is engaged in various securities trading and brokerage activities servicing primarily domestic and foreign institutional investors. Nearly all of the Company’s transactions are executed with and on behalf of institutional investors, including other brokers and dealers, commercial banks, mutual funds, and other financial institutions. The Company’s exposure to credit risk associated with the non-performance of these customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile securities markets.

A substantial portion of the Company’s marketable securities are common stock and debt of financial institutions. The credit and/or market risk associated with these holdings can be directly impacted by factors that affect this industry such as volatile equity and credit markets and actions of regulatory authorities.

(8) Notes Receivable from Stockholders

Notes receivable from stockholders represent full recourse notes issued to employees for their purchases of stock acquired pursuant to the Company’s book value stock purchase plan. Loans are payable in annual installments and bear interest between 4.19% and 5.0% per annum.

(9) Stock-Based Compensation

At March 31, 2009, the Company had one effective stock-based compensation arrangement under the 2006 Equity Incentive Plan (the “Plan”). The Plan permits the granting of up to 6,150,000 shares of common stock. As part of the 2008 year-end performance award process (“2008 Bonus Awards”), the Company granted 2,134,555 restricted stock awards (“RSAs”) under the Plan to certain employees in February 2009. The aggregate fair value of the RSAs granted in connection with the 2008 Bonus Awards in February 2009 was $41,538. This value was based upon the grant date share price of $19.46. RSAs are actual shares of common stock issued to the participant that are restricted. The stock granted in connection with the 2008 Bonus Awards generally vests over a three year period. Vesting would accelerate on a change in control, death or permanent disability. Unvested RSAs are subject to forfeiture upon termination of employment.

For 2008 Bonus Awards that were granted to retirement-eligible employees, the Company recognized the grant date fair value as compensation expense for such awards on the date of grant instead of over the service period specified in the award terms. For employees who will be retirement-eligible prior to vesting of the 2008 Bonus Awards, the Company recognizes compensation expense ratably from the grant date to the retirement eligibility date. The Company recorded accelerated non-cash incremental compensation expense of $5,084 in the first quarter of 2009 related to 2008 Bonus Awards granted to retirement-eligible employees (including employees who will be retirement-eligible prior to vesting).

(10) Employee Terminations

During the first quarter of 2009, the Company implemented a reduction in force in order to manage headcount and control costs. The Company accrued for severance and other termination benefits totaling $2,750, which is reflected in compensation and benefits in the accompanying consolidated statements of operations. The Company expects the benefits to be paid during the second quarter of 2009.

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

(11) Earnings Per Share

The computations of basic and diluted earnings per share are set forth below:


	Three Months Ended
	March 31,
	2009		2008
Numerator for basic and diluted EPS-net income / (loss)	$	730	$	(7,499	)


Denominator for EPS — weighted average number of common shares outstanding⁽¹⁾:
Basic		31,354,507		30,735,039
Effect of dilutive securities — restricted stock		1,256,147		n/a

Diluted		32,610,654		30,735,039


Earnings per common share⁽¹⁾:
Basic	$	0.02	$	(0.24	)

Diluted	$	0.02	$	(0.24	)


⁽¹⁾		In accordance with SFAS No. 128, basic and diluted common shares outstanding are equal for the quarter ended March 31, 2008.

(12) Income Taxes

The Company applies the provisions of FIN 48, which prescribes the recognition and measurement criteria related to tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. In addition, the following information required by FIN 48 is provided:

	•		The Company’s gross unrecognized tax benefits, excluding interest, have not changed significantly since December 31, 2008.

	•		The Company classifies interest and penalties, if any, related to tax uncertainties as income tax expenses. As of March 31, 2009, this amount had not changed significantly since December 31, 2008.

	•		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) Industry Segment Data

The Company follows the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, in disclosing its business segments. Pursuant to that statement, an entity is required to determine its business segments based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. Based upon these criteria, the Company has determined that its entire business should be considered a single segment.

(14) Net Capital Requirement

Keefe is a registered U.S. broker-dealer that is subject to the Uniform Net Capital Rule (SEC Rule 15c3-1 or the Net Capital Rule) administered by the SEC and FINRA, which requires the maintenance of minimum net capital. Keefe has elected to use the basic method to compute net capital as permitted by the Net Capital Rule, which requires Keefe to maintain minimum net capital, as defined, of $2,291 as of March 31, 2009. These rules also require Keefe to notify and sometimes obtain approval from FINRA for significant withdrawals of capital.

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

We have made statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this report that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are or may be important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the historical or future results, level of activity, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, those discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of filing of this report to conform such statements to actual results or revised expectations.

Overview

We are a leading full service investment bank specializing in the financial services industry. Our principal activities are: (i) investment banking, including mergers and acquisitions (“M&A”) and other strategic advisory services, equity and fixed income securities offerings, and mutual thrift conversions, (ii) equity and fixed income sales and trading, (iii) research that provides fundamental, objective analysis that identifies investment opportunities and helps our investor customers make better investment decisions, and (iv) asset management, including investment management and other advisory services to institutional clients and private high net worth clients and various investment vehicles.

Within our full service business model, our focus includes bank and thrift holding companies, banking companies, thrift institutions, insurance companies, broker-dealers, mortgage banks, asset management companies, mortgage and equity real estate investment trusts, consumer and specialty finance firms, financial processing companies and securities exchanges. We emphasize serving investment banking clients in the small and mid cap segments of the financial services industry although our clients also include many large-cap companies. Our sales customers are primarily institutional investors.

Most revenues with respect to our services provided are primarily determined as a result of active competition in the marketplace. Our revenues are primarily generated through advisory, underwriting and private placement fees earned through our investment banking activities, commissions earned on equity sales and trading activities, interest and dividends earned on our securities’ inventories and profit and losses from trading activities related to the securities’ inventories.

Our largest expense is compensation and benefits. Our performance is dependant on our ability to attract, develop and retain highly skilled employees who are motivated to provide quality service and guidance to our clients.

Many external factors affect our revenues and profitability. Such factors include equity and fixed income trading prices and volumes, the volatility of these markets, the level and shape of the yield curve, political events and regulatory developments, including recent government participation in providing capital to financial institutions, and competition. These factors influence our investment banking operations in that such factors affect the number and timing of equity and fixed income securities issuances and M&A activity within the financial services industry. These same factors also affect our sales and trading business by impacting equity and fixed income trading prices and volumes and valuations in secondary financial markets. Commission rates, market volatility and other factors also affect our sales and trading revenues. These market forces may cause our revenues and earnings to fluctuate significantly from period to period and the results of any one period should not be considered indicative of future results. See “-Business Environment.”

A significant portion of our expense base is variable, including employee compensation and benefits, brokerage and clearance, communication and data processing and business development expenses. Our remaining costs generally do not directly relate to the service revenues earned.

Certain data processing systems that support equity and fixed income trading, research, payroll, human resources and employee benefits are service bureau based and are operated in the vendors’ data centers. We believe that this stabilizes our fixed costs associated with data processing. We also license vendor information databases to support investment banking, sales and trading and research. Vendors may, at the end of contractual terms, terminate our rights or modify or significantly alter product and service offerings or related fees, which may affect our ongoing business activities or related costs.

Business Environment

Our business activities focus on the financial services sector, the landscape of which, in the U.S. and globally, has dramatically and rapidly changed. Although a great deal of effort has been made by governments and the private sector to stabilize the financial services sector of the economy, the sector remains under enormous stress. The stress primarily relates to continuing uncertainties in credit markets affecting asset valuation. The market capitalization of many companies in this sector has decreased materially. While the financial services industry remains one of the largest sectors of the U.S. and European economies, its share of the market capitalization of these economies has been substantially reduced.

In the U.S., this sector remains highly fragmented. There are approximately 1,100 publicly traded banks and thrifts and 8,300 different banking entities in the U.S. Because of our focus, we are particularly impacted by economic and market conditions affecting this sector. Trends in the global economy and domestic and international financial markets have a significant impact on the outlook for financial services, including the market prices for our securities and the securities of other companies in the sector.

Commencing in the third quarter of 2008, the U.S. government began to implement numerous programs designed to provide infusions of capital to qualifying financial institutions as well as a senior debt guarantee and non-interest bearing deposit guarantee programs. In addition, several programs are being implemented to stimulate securitization markets and encourage an inflow of private investment in establishing a liquid market for various asset classes. Under the Troubled Asset Relief Program (“TARP”) the U.S. government injected and proposed to provide approximately $700 billion as capital investments in qualifying financial institutions. In February 2009, the Treasury Secretary proposed a new Financial Stability Plan with three central elements: additional capital investment in banks; the creation of a Public-Private Investment Fund that would combine between $500 million and $1 trillion of government capital and financing with private capital to purchase “legacy” loans and assets from banks, designed to reopen the private markets for asset purchases; and the expansion of the Term Asset-Backed Securities Loan Facility (“TALF”) to $1 trillion for the purchase of an expanded list of asset backed securities, designed to facilitate the issuance of asset backed securities to make credit more readily available to consumers and small businesses. The U.S. government has also adopted a $275 billion program designed to provide up to $75 billion support to lenders who restructure interest rates on residential mortgages and $200 billion of additional support to the Federal National Mortgage Association and Freddie Mac in connection with the refinancing of residential mortgages in danger of foreclosure. The scope, timing and potential success of these programs remains unknown.

In February 2009, the Obama Administration announced that federal regulators would conduct stress tests on 19 banking institutions with more than $100 billion in assets. The purpose of the tests was to determine the adequacy of capital in the large cap portion of the banking sector. The methodology for the testing has been released, but as of the end of the April 2009, the results of the tests have not yet been revealed. Numerous reports have been circulating that significant additional capital will be required for some of the companies tested. The results of these tests coupled with recent continued deterioration in the credit portfolios of many banks may lead to further pressure on the banking industry.

Globally, actions by various government agencies and central banks have been implemented, and additional actions are being proposed and considered, with a view to restoring capital, creating market liquidity and opening credit sources. While some countries appear to be achieving some stability in their financial companies, there is likely to be continued stress in many of these markets and the scope, timing and potential success of many of these efforts also is not predictable at this time.

It is difficult to predict how long these conditions will continue or whether additional deteriorations in asset quality, further credit market dislocations or sustained market downturns may exacerbate the impact of these factors on our overall revenues. Even the successful implementation of some of these government initiatives may influence the number, size and structure of capital markets and mergers and acquisitions transactions and our ability to participate in these transactions. The availability of capital from the Treasury could continue for some time to be a significant source of competition for traditional private capital markets transactions. Until some level of certainty as to asset values is achieved and credit markets stabilize, it is unlikely that there will be a large-scale resumption of private sector capital raising transactions and a return of M&A activity. During the first quarter, there appeared to be more signs of stability in the financial services sector and market prices for stocks of banking companies increased significantly by quarter end from their lows in early March. Several financial institutions have reported returns to operating profitability for the first quarter of 2009 although others report significant losses, in particular resulting from increases to loan loss reserves. There have been no further failures of large financial institutions in the US. We believe that we are well capitalized and remain well positioned to assist in capital markets and M&A transactions for the financial services industry in both the U.S. and Europe and we have no plans to seek government assistance.

Results of Operations

Three Months Ended March 31, 2009 Compared with Three Months Ended March 31, 2008

Overview

Total revenues decreased $2.6 million, or 3.4%, to $72.3 million for the three months ended March 31, 2009 compared with $74.9 million for the three months ended March 31, 2008. The decrease was primarily due to decreases in commissions revenue and investment banking revenue of $16.7 million and $16.2 million, respectively, partially offset by a $34.2 million increase in principal transactions.

Total expenses were $70.3 for the three months ended March 31, 2009 compared with $88.3 million for the three months ended March 31, 2008. The decrease was due to a $14.3 million decrease in compensation and benefits expense and a $3.7 million decrease in non-compensation expenses.

We recorded net income of $0.7 million, or $0.02 per diluted share, for the three months ended March 31, 2009 compared with a net loss of $7.5 million, or $0.24 per diluted share, for the first quarter of 2008. After adjusting for the 2006 one-time restricted stock awards granted to employees in connection with our initial public offering (“IPO”), our non-GAAP operating net income was $1.6 million, or $0.05 per diluted share, for the three months ended March 31, 2009, compared with a net loss of $6.0 million, or $0.20 per diluted share, for the first quarter of 2008. See “-Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to their corresponding GAAP amounts. The following table provides a comparison of our revenues and expenses for the periods presented (dollars in thousands):


	Three Months Ended
	March 31,					Period-to-Period
	2009		2008			$ Change			% Change
			(unaudited)
Revenues:
Investment banking	$	26,860	$	43,087		$	(16,227	)		(37.7	)%
Commissions		36,019		52,766			(16,747	)		(31.7	)
Principal transactions, net		4,116		(30,100	)		34,216			N/M
Interest and dividend income		1,738		8,092			(6,354	)		(78.5	)
Investment advisory fees		313		306			7			2.3
Other		3,230		701			2,529			360.8

Total revenues		72,276		74,852			(2,576	)		(3.4	)


Expenses:
Compensation and benefits		45,667		59,933			(14,266	)		(23.8	)

Non-compensation expenses:
Occupancy and equipment		5,159		4,743			416			8.8
Communications and data processing		6,660		6,423			237			3.7
Brokerage and clearance		3,882		7,153			(3,271	)		(45.7	)
Business development		3,032		3,789			(757	)		(20.0	)
Interest		169		2,068			(1,899	)		(91.8	)
Other		5,777		4,180			1,597			38.2

Non-compensation expenses		24,679		28,356			(3,677	)		(13.0	)

Total expenses		70,346		88,289			(17,943	)		(20.3	)

Income / (loss) before income taxes		1,930		(13,437	)		15,367			N/M
Income tax expense / (benefit)		1,200		(5,938	)		7,138			N/M

Net income / (loss)	$	730	$	(7,499	)	$	8,229			N/M	%


N/M = Not Meaningful

Non-GAAP Financial Measures

SFAS No. 123(R), Share-Based Payment, requires the measurement of compensation cost for stock-based awards at fair value on the date of grant and recognition of compensation expense over the requisite service period, net of estimated forfeitures.

We reported our compensation and benefits expense, income / (loss) before income taxes, income tax expense / (benefit), net income / (loss), compensation ratio and basic and diluted earnings per share on a non-GAAP basis for the three months ended March 31, 2009 in our April 23, 2009 press release. The non-GAAP amounts excludes compensation expense related to the amortization of IPO restricted stock awards granted in November 2006.

Our management has utilized such non-GAAP calculations as an additional device to aid in understanding and analyzing our financial results for the period ended March 31, 2009. Specifically, our management believes that these non-GAAP measures provide useful information by excluding certain items that may not be indicative of our core operating results and business outlook. Our management believes that these non-GAAP measures will allow for a better evaluation of the operating performance of our business and facilitate meaningful comparison of our results in the current period to those in prior and future periods. Such periods did not in the past, and likely will not in the future include substantial grants of restricted stock awards to employees such as the Company-wide IPO restricted stock awards. Our reference to these non-GAAP measures should not be considered as a substitute for results that are presented in a manner consistent with GAAP. These non-GAAP measures are provided to enhance investors’ overall understanding of our current financial performance.

A limitation of utilizing these non-GAAP measures is that the determination of these amounts in accordance with GAAP reflects the underlying financial results of our business. These effects should not be ignored in evaluating and analyzing our financial results. Therefore, management believes that, with respect to the items set forth in the table below, both our GAAP and respective non-GAAP measures should be considered together.

The following table provides details with respect to reconciling compensation and benefits expense, income / (loss) before income taxes, income tax expense / (benefit), net income / (loss), compensation ratio and basic and diluted earnings per share on a non-GAAP basis for the three months ended March 31, 2009 and 2008 for the same respective periods.


	GAAP			Reconciliation Amount			Non-GAAP
	(dollars in thousands, except per share information)
Quarter Ended March 31, 2009:
Compensation and benefits expense	$	45,667		$	(2,302	) (a)	$	43,365

Income before income taxes	$	1,930		$	2,302	(a)	$	4,232
Income tax expense	$	1,200		$	1,431	(b)	$	2,631

Net income	$	730		$	871	(c)	$	1,601

Compensation ratio (d)		63.2	%					60.0	%

Earnings per share:
Basic	$	0.02		$	0.03		$	0.05
Diluted	$	0.02		$	0.03		$	0.05

Weighted average number of common shares outstanding:
Basic		31,354,507			—	(f)		31,354,507
Diluted		32,610,654			—	(f)		32,610,654

Quarter Ended March 31, 2008:
Compensation and benefits expense	$	59,933		$	(2,673	) (a)	$	57,260

(Loss) / income before income taxes	$	(13,437	)	$	2,673	(a)	$	(10,764	)
Income tax (benefit) / expense	$	(5,938	)	$	1,181	(b)	$	(4,757	)

Net (loss) / income	$	(7,499	)	$	1,492	(c)	$	(6,007	)

Compensation ratio (d)		80.1	%					76.5	%

Earnings per share (e):
Basic	$	(0.24	)	$	0.04		$	(0.20	)
Diluted	$	(0.24	)	$	0.04		$	(0.20	)

Weighted average number of common shares outstanding (e):
Basic		30,735,039			—	(f)		30,735,039
Diluted		30,735,039			—	(f)		30,735,039


(a)		The non-GAAP adjustment represents the pre-tax expense with respect to the amortization of the IPO restricted stock awards granted to employees on November 2006.

(b)		The non-GAAP adjustment with respect to income tax expense / (benefit) 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 / (loss) was the after-tax amortization of the IPO restricted stock awards in the period.

(d)		The first quarter 2009 and first quarter 2008 compensation ratios were calculated by dividing compensation and benefits expense by total revenues of $72,276, and $74,852, respectively.

(e)		In accordance with Statement of Financial Accounting Standards No. 128, basic and diluted common shares outstanding are equal for the quarter ended March 31, 2008.

(f)		Both the basic and diluted weighted average number of common shares outstanding were not adjusted.

Our management utilizes these non-GAAP calculations in understanding and analyzing our financial results. Our management believes that the non-GAAP measures provide useful information by excluding certain items that may not be indicative of our core operating results and business outlook. Our management believes that these non-GAAP measures will allow for a better evaluation of the operating performance of our business and facilitate meaningful comparison of our results in the current period to those in prior periods and future periods. Our reference to these non-GAAP measures should not be considered as a substitute for results that are

presented in a manner consistent with GAAP. These non-GAAP measures are provided to enhance investors’ overall understanding of our current financial performance.

A limitation of utilizing these non-GAAP measures is that the GAAP accounting effects of these events do in fact reflect the underlying financial results of our business and these effects should not be ignored in evaluating and analyzing our financial results. Therefore, management believes that our GAAP measures of compensation and benefits expense, income / (loss) before income taxes, income tax expense / (benefit), net income / (loss), and basic and diluted earnings per share and the same respective non-GAAP measures of our financial performance should be considered together.

We expect to grant restricted stock awards and other share-based compensation in the future. We do not expect to make any such substantial grants to employees outside of our regular compensation and hiring process, as we did when we granted IPO restricted stock awards.

Revenues

Investment Banking

Investment banking revenue was $26.9 million for the three months ended March 31, 2009 compared with $43.1 million for the same period in 2008, a decrease of $16.2 million, or 37.7%. M&A and advisory revenue was $9.4 million for the three months ended March 31, 2009 compared with $23.7 million for the same period in 2008, a decrease of $14.3 million, primarily due to a reduced number of M&A transaction fees. Capital markets revenue was $17.5 million for the three months ended March 31, 2009 compared with $19.3 million for the same period in 2008, a decrease of $1.9 million, reflecting fewer completed public offerings partially offset by a larger-than-average private placement transaction.

Commissions

Commissions revenue was $36.0 million for the three months ended March 31, 2009 compared with $52.8 million for the same 2008 period, a decrease of $16.7 million, or 31.7%. European equity commissions were $8.6 million for the three months ended March 31, 2009 compared with $18.8 million for the same period in 2008, a decrease of $10.2 million, or 54.3%, reflecting the steep drop in the value of most European financial services stocks on which our European commissions are based and the negative impact of translating our non-U.S. commissions revenues to U.S. dollars. U.S. equity commissions were $27.5 million for the three months ended March 31, 2009 compared with $34.0 million for the same 2008 period, a decrease of $6.5 million, or 19.3%, reflecting lower trading volume, significantly lower market prices for many securities and fewer equity capital markets transactions.

Principal Transactions, Net

Principal transactions resulted in revenue of $4.1 million for the three months ended March 31, 2009 compared to a net loss of $30.1 million for the same period in 2008. The return to a net gain in the current quarter reflects higher revenue from our fixed income customer business and the absence of significant valuation adjustments on financial instruments owned, primarily related to trust preferred backed collateralized debt obligations and related securities. Fixed income trading resulted in revenue of $10.2 million for the three months ended March 31, 2009 compared to a net loss of $4.4 million for the same period in 2008. Our trust preferred backed collateralized debt obligations and related securities owned resulted in a loss of $3.5 million for the three months ended March 31, 2009 compared to a loss of $20.1 million for the same period in 2008. Our trust preferred backed collateralized debt obligations and related securities owned were carried at an aggregate fair value of approximately $33 million (or 23% of original par value or an unrealized loss of approximately $111 million) at March 31, 2009. In addition, equity market making activity and trading for our own account resulted in a net loss of $1.1 million for the three months ended March 31, 2009 compared to a net loss of $3.8 million in 2008 and firm investments resulted in a net loss of $1.5 million for the three months ended March 31, 2009 compared to a net loss of $1.8 million for the same period in 2008.

Interest and Dividend Income

Interest and dividend income was $1.7 million for the three months ended March 31, 2009, a decrease of $6.4 million, or 78.5%, compared with $8.1 million for the three months ended March 31, 2008. The decrease was primarily due to lower holdings of interest-bearing financial instruments and reduced interest rates compared with the first quarter of 2008.

Other

Other revenues increased $2.5 million to $3.2 million for the three months ended March 31, 2009 compared with $0.7 million for the three months ended March 31, 2008. The increase was primarily due to higher loan portfolio sales fees compared with the first quarter of 2008.

Expenses

Compensation and Benefits

Compensation and benefits expense was $45.7 million, which includes severance expense of $2.8 million related to a staff reduction of approximately 7%, a decrease of $14.3 million, or 23.8% for the three months ended March 31, 2009 compared with $59.9 million for the three months ended March 31, 2008. The decrease was primarily due to lower core revenues compared with 2008. Compensation and benefits as a percentage of total revenue, after adjusting for expenses associated with the IPO restricted stock awards, was 60.0% in the first quarter of 2009 compared to 76.5% in the same 2008 period. See “-Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to their corresponding GAAP amounts.

Brokerage and Clearance

Brokerage and clearance expense decreased $3.3 million, or 45.7%, to $3.9 million for the three months ended March 31, 2009 compared with $7.2 million for the three months ended March 31, 2008. This decrease was primarily a result of lower value of European financial stocks in the first quarter of 2009 compared with the first quarter of 2008.

Interest

Interest expense decreased $1.9 million, or 91.8%, to $0.2 million for the three months ended March 31, 2009 compared with $2.1 million for the three months ended March 31, 2008. The decrease was primarily due to lower average balances of securities sold under repurchased agreements in the first quarter of 2009 relative to 2008.

Business Development

Business development expense decreased to $3.0 million, or 20.0%, for the three months ended March 31, 2009 compared with $3.8 million for the same 2008 period. The decrease was primarily due to lower travel and entertainment expenses for the first quarter of 2009 relative to 2008.

Other

Other expenses were $5.8 million for the three months ended March 31, 2009, an increase of $1.6 million, or 38.2%, to compared with $4.2 million for the three months ended March 31, 2008. The increase was primarily due to higher professional fees in the first quarter of 2009 relative to 2008.

Income Tax Expense / (Benefit)

Income tax expense was $1.2 million for the quarter ended March 31, 2009, which resulted in an effective tax rate of 62.2%, compared to an income tax benefit of $5.9 million for the quarter ended March 31, 2008, which resulted in an effective tax rate of 44.2%. The change in the effective tax rate was primarily due to the effect of permanent items relative to the income level.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting periods. We base our estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. The use of different estimates and assumptions could produce materially different results. For example, if factors such as those described in Item 1A under “Risk Factors” cause actual events to differ from the assumptions we used in applying the accounting policies, our results of operations, financial condition and liquidity could be materially adversely affected.

Our significant accounting policies are summarized in Note 2 of the Notes to Consolidated Financial Statements. On an ongoing basis, we evaluate our estimates and assumptions, particularly as they relate to accounting policies that we believe are most important to the presentation of our financial condition and results of operations. We regard an accounting estimate or assumption to be most important to the presentation of our financial condition and results of operations where the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, as well as the impact of the estimate or assumption on our financial condition or operating performance is material.

Based on these criteria, we believe the following to be our critical accounting policies:

Fair Value of Financial Instruments

We account for financial instruments that are being measured and reported on a fair value basis in accordance with SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 defines fair value as “the price that would be received to sell an asset and paid to transfer a liability in an ordinary transaction between market participants at the measurement date.” Additionally, SFAS No. 157 disallows the use of block discounts on positions traded in an active market as well as nullifies certain guidance in Emerging Issues Task Force No. 02-3 regarding the recognition of inception gains on certain derivative transactions. See Note 3 of the Notes to Consolidated Financial Statements for a more detailed discussion of SFAS No. 157.

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”) provides entities the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. SFAS No. 159 permits the fair value option election, on an instrument-by-instrument basis, either at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. Such election must be applied to the entire instrument and not only a portion of the instrument. We applied the fair value option for certain eligible instruments, including certain private equity securities and limited partnership interests.

Financial instruments are valued at quoted market prices, if available. For financial instruments that do not have readily determinable fair values through quoted market prices, the determination of fair value is based upon consideration of available information, including types of financial instruments, current financial information, restrictions on dispositions, fair values of underlying financial instruments and quotations for similar instruments.

The valuation process for financial instruments may include the use of valuation models and other techniques. Adjustments to valuations derived from valuations models may be made when, in management’s judgment, either the size of the position in the financial instrument in a nonactive market or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded (such as counterparty, credit, concentration or liquidity) require that an adjustment be made to the value derived from the models. An adjustment may be made if a financial instrument is subject to sales restrictions that would result in a price less than the quoted market price. Adjustments from the price derived from a valuation model reflects management’s judgment that other participants in the market for the financial instrument being measured at fair value would also consider in valuing that same financial instrument and are adjusted for assumptions about risk uncertainties and market conditions. Results from valuation models and valuation techniques in one period may not be indicative of future period fair value measurements.

Fair Value Hierarchy

In determining fair value, we utilize various methods including the market and income approaches. Based on these approaches, we utilize assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, we are required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial instrument assets and liabilities carried at fair value have been classified and disclosed in one of the following three categories:

Level 1 Quoted market prices in active markets for identical assets or liabilities.

Level 2 Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3 Unobservable inputs that are not corroborated by market data.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as listed equities. This category also includes U.S. Government and agency securities for which we typically receive independent external valuation information.

Level 2 includes those financial instruments that are valued using multiple valuation techniques, primarily a market approach. The valuation methodologies utilized are calibrated to observable market inputs. We consider recently executed transactions, market price quotations and various assumptions, such as credit spreads, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, as well as other measurements. In order to be classified as level 2, substantially all of these assumptions would need to be observable in the marketplace or can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category include certain corporate and other

debt, including investment grade CDOs primarily collateralized by banking and insurance company trust preferred and capital securities.

Level 3 is comprised of financial instruments whose fair value is estimated based on multiple valuation techniques, primarily market and income approaches. The valuation methodologies utilized may include significant inputs that are unobservable from objective sources. We consider various market inputs and assumptions, such as recently executed transactions, market price quotations, discount margins, market spreads applied, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, default rates, as well as other measurements. Included in this category are certain corporate and other debt, including non-rated CDOs primarily collateralized by banking and insurance company trust preferred and capital securities and banking and insurance company trust preferred and capital securities, private equity securities and other investments including limited and general partnership interests. We did not own any other type of CDOs, including those collateralized by mortgage loans, in any period presented herein.

Fair value of private equity securities and limited and general partnership interests was determined by assessing the underlying investments, expected cash flows and market-based information, such as comparable company transactions, performance multiples and changes in market outlook. Private equity securities and limited and general partnership interests generally trade infrequently.

The variables affecting fair value estimates of these financial instruments can change rapidly and unexpectedly, which could have a significant impact on the fair value estimates of these financial instruments. Results from valuation techniques in one period may not be indicative of future period fair value measurements.

Our Level 3 assets were $79.2 million as of March 31, 2009, which represented approximately 15% of total assets and approximately 67% of total assets measured at fair value.

The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. When market assumptions are not readily available, management’s assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from level 1 to level 2, or from level 2 to level 3.

Fair Value of Financial Instruments Control Process

We employ a variety of control processes to validate the fair value of our financial instruments, including those derived from pricing models. Individuals outside of the trading departments obtain independent prices, as appropriate. Where a pricing model is used to determine fair value, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. These control processes include reviews by personnel with relevant expertise who are independent from the trading desks, including involvement by senior management.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

We apply FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, (“FIN 48”), which prescribes a single, comprehensive model for how a company should recognize, measure, present and disclose in its

financial statements uncertain tax positions that the company has taken or expects to take on its tax returns. Income tax expense is based on pre-tax accounting income, including adjustments made for the recognition or derecognition related to uncertain tax positions. The recognition or derecognition of income tax expense related to uncertain tax positions is determined under the guidance prescribed by FIN 48.

Contractual Obligations

As of March 31, 2009, our contractual obligations with respect to operating leases and partnership commitments have not significantly changed since December 31, 2008.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of March 31, 2009. However, as described in Item 3 — “Qualitative and Quantitative Disclosures About Market Risk — Credit Risk,” through indemnification provisions in our clearing agreements with our clearing brokers, customer activities may expose us to off-balance sheet credit risk, which we seek to mitigate through customer screening and collateral requirements.

We are a member of various exchanges that trade and clear securities or futures contracts. As a member of these exchanges, we may be required to pay a proportionate share of the financial obligations of another member who may default on its obligations to the exchange. To mitigate these performance risks, the exchanges often require members to post collateral as well as meet minimum financial standards. While the rules governing different exchange memberships vary, our guarantee obligations generally would arise only if the exchange had previously exhausted its resources. In addition, any such guarantee obligation would be apportioned among the other non-defaulting members of the exchange. Any potential contingent liability under these membership agreements cannot be estimated. We have not recorded any contingent liability in our consolidated financial statements for these agreements and currently believe that any potential requirement to make payments under these agreements is remote.

Recently Issued Accounting Standards, Not Yet Adopted

In April 2009, the FASB issued FSP FAS 157–4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157–4). FSP FAS 157–4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157. FSP FAS 157–4 is effective for interim and annual periods ending after June 15, 2009. We plan to adopt FSP FAS 157–4 in the second quarter of 2009 and do not expect the adoption to have a material impact on our consolidated financial statements.

Liquidity and Capital Resources

We are the parent of Keefe, Bruyette & Woods, Inc. (“Keefe”), Keefe, Bruyette & Woods Limited (“KBWL”), KBW Asset Management, Inc. (“KBWAM”) and KBW Ventures, Inc. Dividends and other transfers from our subsidiaries are our primary source of funds to satisfy our capital and liquidity requirements. Applicable laws and regulations, primarily the net capital rules discussed below, restrict dividends and transfers from Keefe and KBWL to us. Our rights to participate in the assets of any subsidiary are also subject to prior claims of the subsidiary’s creditors, including customers and trade creditors of Keefe, KBWL and KBWAM.

We monitor and evaluate the composition and size of our assets and operating liabilities. As a result of our market making, customer and proprietary activities (including securitization activities), the overall size of total assets and operating liabilities fluctuate from period to period. Our assets generally consist of cash and cash equivalents, securities, resale agreement balances and receivables.

Our operating activities in the period generate and use cash resulting from net income or loss and fluctuations in our current assets and liabilities. The most significant fluctuations in current assets and liabilities have resulted from changes in the level of customer activity, changes in the types of and value of the financial instruments owned on a proprietary basis and shifts in our investment positions in response to changes in our trading strategies or prevailing market conditions. We have not relied significantly on leverage. Our moderate use of leverage does not expose us to potential requirements to sell assets as a result of margin calls due to decreases in the fair value of financial instruments.

We have historically satisfied our capital and liquidity requirements through capital from our stockholders and internally generated cash from operations. As of March 31, 2009, we had liquid assets of $280.5 million, primarily consisting of cash and cash equivalents, receivables from clearing brokers and securities purchased under resale agreements. From time to time, we may obtain a short term subordinated loan from one of our clearing brokers to support underwriting activity over a very short time. We may also finance fixed income positions with securities sold under repurchase agreements.

Although we believe such sources remain available, we do not currently plan to obtain such short-term subordinated financing from any outside source. We do not currently have any long term debt obligations and therefore, are not exposed to the breach of any debt covenants.

We have an effective “universal” shelf registration statement on form S-3 on file with the SEC. This shelf registration statement enables us to sell, from time to time, the securities covered by the registration statement in one or more public offerings. The securities covered by the registration statement include common stock, preferred stock, depositary shares, senior debt securities, subordinated debt securities, warrants, stock purchase contracts, and stock purchase units. We may offer any of these securities independently or together in any combination with other securities. In addition, selling shareholders may use the shelf registration statement to offer, from time to time, shares of our common stock. Our status as a “well-known seasoned issuer,” as such term is defined in the federal securities laws, enables us, among other things, to enter the public markets and consummate sales off the shelf registration statement in rapid fashion and with little or no notice.

The timing of cash bonus payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees are generally paid salaries semi-monthly during the year, cash bonus payments, which make up a larger portion of total compensation, are generally paid once a year. Cash bonus payments for a given year are generally paid in February of the following year. We continually monitor our liquidity position and believe our available liquidity will be sufficient to fund our operations over the next twelve months.

As a registered broker-dealer and member firm of the NYSE, Keefe is subject to the uniform net capital rule of the SEC. We use the basic method permitted by the uniform net capital rule, which generally requires that the ratio of aggregate indebtedness to net capital cannot exceed 15 to 1. The NYSE may prohibit a member firm from expanding its business or paying dividends if resulting net capital would be below the regulatory limit. We do not expect that these limits will materially impact our ability to meet our current and future obligations. We have not been the subject to any regulatory restrictions as a result of the decreases in the fair value of our financial instruments.

At March 31, 2009, Keefe’s net capital under the SEC’s Uniform Net Capital Rule was $106.1 million, or $103.9 million in excess of the minimum required net capital.

KBWL is subject to the capital requirements of the U.K. Financial Services Authority. KBWL’s total capital resources of $32.3 million exceeded the capital resources requirement by approximately $24.7 million at March 31, 2009.

The regulatory requirements referred to above restrict our ability to withdraw capital from our regulated subsidiaries, which was approximately $138.4 million at March 31, 2009.

Cash Flows

Three months ended March 31, 2009. Cash decreased $48.9 million during the three months ended March 31, 2009, primarily due to negative cash flows from operating activities.

Our operating activities used $42.6 million of cash. Cash used as a result of decreasing operating liabilities by $65.4 million was partially offset by net income, adjusted for non-cash revenue and expense items of $13.6 million, which contributed $14.3 million and cash provided from operating assets of $8.4 million. The non-cash items consisted of amortization of stock-based compensation related to restricted stock of $12.0 million, depreciation and amortization expense of $1.2 million and deferred income tax expense of $0.4 million. Cash provided by operating assets was primarily attributable to decreases in financial instruments owned, at fair value of $11.4 million and receivables from clearing brokers of $4.3 million, partially offset by an increase in securities purchased under resale agreements of $8.1 million. Cash used in operating liabilities consisted primarily of a decrease of accounts payable, accrued expenses and other liabilities of $92.4 million, partially offset by increases in financial instruments sold, not yet purchased, at fair value of $18.2 million and securities sold under repurchase agreements of $8.6 million.

We used $1.0 million in our investing activities, in the purchase of fixed assets. Cash used in financing activities was $4.2 million primarily as a result of the cancellation of restricted stock in satisfaction of withholding tax requirements.

Three months ended March 31, 2008. Cash decreased $42.2 million during the three months ended March 31, 2008, primarily due to negative cash flows from operating and investing activities, partially offset by cash provided by financing activities.

Our operating activities used $42.1 million of cash due to a net loss of $7.5 million, adjusted for non-cash revenue and expense items of $10.3 million, and cash used from decreasing operating liabilities of $198.6 million, offset by cash provided from operating assets of $153.6 million. The non-cash items consisted primarily of amortization of stock-based compensation related to restricted stock of $13.2 million, deferred income tax benefits of $4.0 million and depreciation and amortization expense of $1.2 million. Cash used

from the decreases in operating liabilities consisted primarily of decreases in accounts payable, accrued expenses and other liabilities of $132.2 million, securities sold under repurchase agreements of $35.9 million, financial instruments sold, not yet purchased, at fair value of $27.3 million and short-term borrowings of $4.0 million. The increase in cash provided by operating assets was primarily attributable to decreases in receivables from clearing broker of $97.4 million, financial instruments owned, at fair value of $49.1 million and securities purchased under resale agreements of $15.1 million.

We used $0.3 million in our investing activities, primarily in the purchase of fixed assets. Cash from financing activities increased $0.3 million primarily as a result of the repayment of loans we provided to certain employees in connection with their purchase of our common stock.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk represents the risk of loss that may result from the change in value of a financial instrument due to fluctuations in its market price. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is directly related to our role as a financial intermediary in customer trading and to our market making and investment activities. Market risk is inherent in financial instruments.

We trade in equity and debt securities as an active participant in both listed and over the counter markets. We typically maintain securities in inventory to facilitate our market making activities and customer order flow. We may use a variety of risk management techniques and hedging strategies in the ordinary course of our trading business to manage our exposures.

In connection with our sales and trading business, management also reviews reports appropriate to the risk profile of specific trading activities. Management monitors risks in its trading activities by establishing and periodically reviewing limits for each trading desk and reviewing daily trading results, inventory aging, securities concentrations and ratings. Typically, market conditions are evaluated and transaction details and securities positions are reviewed. These activities seek to ensure that trading strategies are within acceptable risk tolerance parameters. Activities include price verification procedures, position reconciliations and reviews of transaction bookings. We believe these procedures, which stress timely communications between traders, trading management and senior management, are important elements of the risk management process.

The following table sets forth our monthly high, low and average long/short financial instruments owned for the three months ended March 31, 2009:


	High		Low		Average
	(dollars in thousands)
Long Value:
Equities	$	41,765	$	33,323	$	36,721
Corporate and other debt	$	53,879	$	44,373	$	49,768
Other investments	$	36,252	$	34,893	$	35,615
Short Value:
Equities	$	21,436	$	11,162	$	15,670
Corporate and other debt	$	41	$	—	$	14
U.S. Government and agency securities	$	7,957	$	—	$	1,989

Interest Rate Risk

Interest rate risk represents the potential loss from adverse changes in market interest rates. As we may hold debt securities from time to time, we are exposed to interest rate risk arising from changes in the level and volatility of interest rates and in the shape of the yield curve. Interest rate risk is primarily managed through the use of short positions in U.S. Government and agency securities.

Credit Risk

We engage in various securities underwriting, trading and brokerage activities servicing a diverse group of domestic and foreign corporations and institutional investor clients. Our exposure to credit risk associated with the nonperformance of these clients in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets which may impair the client’s ability to satisfy its obligations to us. Our principal activities are also subject to the risk of counterparty nonperformance. Pursuant to our Clearing Agreements with Pershing LLC, Pershing Securities Limited and Fortis Securities LLC, we are required to reimburse our clearing broker without limit for any losses incurred due to a counterparty’s failure to satisfy its contractual

obligations. In these situations, we may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to other customers or counterparties. We seek to mitigate the risks associated with sales and trading services through active customer screening and selection procedures and through requirements that clients maintain collateral in appropriate amounts where required or deemed necessary.

Inflation Risk

Because a significant portion of our assets are relatively liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation and communications charges, which may not be readily recoverable in the prices of services we offer. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our combined financial condition and results of operations in certain businesses.

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. We are focused on maintaining our overall operational risk management framework and minimizing or mitigating these risks through continual assessment, reporting and monitoring of potential operational risks.

ITEM 4. Controls and Procedures

Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the current quarter covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Our businesses, as well as the financial services industry generally, are subject to extensive regulation. From time to time, in the ordinary course of our business, we are involved in judicial, regulatory and arbitration proceedings and inquiries concerning matters arising in connection with the conduct of our businesses. In response to the lawsuit filed on January 12, 2009 by Frederick J. Grede, as Liquidation Trustee and Representative of the Estate of Sentinel Management Group, Inc., in the United States District Court for the Northern District of Illinois against Keefe and against Delores E. Rodriguez; Barry C. Mohr, Jr.; and Jacques De Saint Phalle (all former employees of Keefe) and Cohen & Company Securities, LLC, as described in the “Legal Proceedings” section of our Annual Report on Form 10-K for the year ended December 31, 2008, Keefe filed a motion to dismiss the complaint on April 1, 2009. The Liquidation Trustee filed an Opposition to Motion to Dismiss on April 29, 2009. Keefe’s reply brief is currently due on May 20, 2009.

ITEM 1A. Risk Factors

There have not been any material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities during the quarter ended March 31, 2009.

The table below sets forth the information with respect to purchases made by or on behalf of KBW, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common stock during the quarter ended March 31, 2009:


					Total Number of
					Shares Purchased as		Approximate Dollar Value
	Total Number				Part of Publicly		of Shares that May Yet Be
	of Shares		Average Price Paid		Announced Plans or		Purchased Under the Plans
Period	Purchased(1)(2)		per Share		Programs		or Programs
January 1, 2009 to January 31, 2009		—		—		—		—
February 1, 2009 to February 28, 2009		175,836	$	18.78		—		—
March 1, 2009 to March 31, 2009		56,413	$	20.57		—		—

Total		232,249	$	19.68		—		—


(1)		All shares purchased were other than as part of a publicly announced plan or program. The purchased shares consist of common stock previously purchased by employees with funds loaned by us that were subsequently forfeited by such employees upon their departure. As a result of such forfeitures, the outstanding balances on the related loans were reduced to zero.

(2)		All shares were immediately retired upon purchase by us.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

See Exhibit Index.


KBW, INC.
By:	/s/ JOHN G. DUFFY
	Name:	John G. Duffy
	Title:	Chairman and Chief Executive Officer


By:	/s/ ROBERT GIAMBRONE
	Name:	Robert Giambrone
	Title:	Chief Financial Officer


Exhibit
Number		Description
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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	Page
	Number

AVAILABLE INFORMATION		1

PART I. FINANCIAL INFORMATION		2

ITEM 1. Financial Statements		2

Consolidated Statements of Financial Condition-March 31, 2009 (Unaudited) and December 31, 2008		2

Consolidated Statements of Operations-Three Months ended March 31, 2009 and 2008 (Unaudited)		3

Consolidated Statement of Changes in Stockholders’ Equity-Three Months ended March 31, 2009 (Unaudited)		4

Consolidated Statements of Cash Flows-Three Months ended March 31, 2009 and 2008 (Unaudited)		5

Notes to Consolidated Financial Statements		6

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		28

ITEM 4. Controls and Procedures		30

PART II. OTHER INFORMATION		31

ITEM 1. Legal Proceedings		31

ITEM 1A. Risk Factors		31

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		31

ITEM 3. Defaults Upon Senior Securities		31

ITEM 4. Submission of Matters to a Vote of Security Holders		31

ITEM 5. Other Information		31

ITEM 6. Exhibits		31

SIGNATURES		32

EXHIBIT INDEX		33
EX-31.1
EX-31.2
EX-32.1
EX-32.2

1.		I have reviewed this Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 of KBW, Inc. (the “Registrant”);

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.		The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

	d)		Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.


Date: May 7, 2009

/s/ JOHN G. DUFFY John G. Duffy
Chief Executive Officer


Date: May 7, 2009

/s/ ROBERT GIAMBRONE Robert Giambrone
Chief Financial Officer

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


*		The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.