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KBW, Inc. (KBW)

Q2 2008 Earnings Call Transcript

July 24, 2008 9:00 am ET

Executives

Alan Oshiki – IR

John Duffy – Chairman and CEO

Robert Giambrone – CFO

Analysts

Steve Stelmach – FBR Capital Markets

Michael Hecht – Banc of America

David Cohen – Midwood Capital

Horst Hueniken – Thomas Weisel Partners

Justin Hughes – Philadelphia Financial

Brock Vandervliet – Galleon Group

Patrick Davit – Merrill Lynch

Wayne Archambo – BlackRock

Presentation

Operator

Good day ladies and gentlemen, and welcome to the KBW second quarter earnings conference call. My name is Shawnell and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference Mr. Alan Oshiki, please proceed sir.

Alan Oshiki

Thank you, Shawnell, and good morning everyone. This is Alan Oshiki, KBW's Investor Relations contact. Joining us on the call this morning are John Duffy, Chairman and CEO of KBW; and Robert Giambrone, the Company's Chief Financial Officer.

Before we start, I want to briefly remind everyone that some of the statements made during this conference call constitute forward-looking statements within the meaning of the Federal Securities Laws. Such statements, those regarding expectations and future results, general financial performance, future business prospects, and strategies. These statements are based on management's current expectations and are subject to a number of risks and uncertainties which could cause actual results to differ materially from those described in the forward looking statements.

Investors are cautioned not to place undue reliance on these statements. Additional information about factors that could cause our results to differ materially from those in the forward-looking statements can be found in the company's filings with the U.S. Securities And Exchange Commission. At this time, I would like to turn the call over to Mr. John Duffy. John?

John Duffy

Thank you, Alan, and good morning everyone and thank you for joining us. I trust everyone has seen this morning's press release and I would summarize first half's results as disappointing, but we remain confident and excited about KBW's position in the financial services sector and the opportunities that are presenting themselves in this environment. Bob Giambrone, our CFO, will go into more of the financial details in a few minutes.

The principal reason behind the loss in the second quarter and the first half of 2008 has been the very difficult credit markets and the resulting write-downs of securities related to our PreTSL business. Many of these losses are unrealized and are a function of FAS 157 and the disarray of the credit markets. Despite the results that we have reported, I'm very confident and excited about our competitive position and the opportunities that I think our franchise can take advantage of.

Our equity commission business was strong in both the U.S. and Europe. Commissions for the first half of the year were up 30%. We benefited from increased penetration of accounts, increased trading volumes in the financial sector, and increased usage of our branded ETF products.

Our investment banking revenues in the second quarter were up 10% above the level of the first quarter, but six month revenues were down 20% from the prior year primarily because of the absence of revenues from our trust preferred securitization business. We are very focused and excited about the capital raising needs of the banking industry. Results for the first half of the year were good and we are enthused about two recent transactions that we were part of.

First, we sole managed a $600 million private capital raise for Guaranty Financial that closed this past Tuesday. This was the largest financing that we have ever done in our history and again it was sole managed and it was private. And last night, we priced the public equity raise of approximately $100 million for Boston Private Financial Holdings.

Somewhat offsetting this activity in the capital markets is the slowdown in our M&A advisory business. M&A activity is likely to remain slow due to asset quality issues, the effects of FAS 157 and purchase accounting and low valuations on acquirer stock prices. Also, our securitization business remains dormant and we expect to that to remain the case for the balance of the year.

Despite the negative effect of the valuations in the credit markets, our fixed income business has picked up due to an increase in customer business, more balance sheet restructuring among clients, more activity in our loan portfolio sales group, and more equity investors moving up the capital structure to capture equity-like returns available in the fixed income market.

Our asset management business has proven challenging in this environment. Our financial services hedge fund has performed exceedingly well, but adding assets under management has proven difficult, and the results for the fund for the first six months were a performance that was flat compared to a decline of 34% in the S&P financial index and a decline of 14% in the S&P 500, and while I haven't seen the results for peers in the first half of the year, I'm sure that we ranked very high among specialty funds. I saw one performance through, I think, it was April or May of a competitor where they were down 40% to 45% in both of their funds. So, that fair haired guy is not having much fun.

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