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KBW, Inc. (KBW)

Q308 Earnings Call

October 22, 2008 9:00 am ET


Alan Oshiki - Investor Relation

Robert Giambrone - Chief Financial Officer

John Duffy - Chairman and Chief Executive Officer


Steve Stelmach - FBR Capital Markets

Erin Caddell - Hovde Capital Advisors

Horst Hueniken - Thomas Weisel Partners

Hugh Miller - Sidoti & Co.



Good day, ladies and gentlemen, and welcome to the KBW, Inc. Third Quarter 2008 Earnings Conference Call. My name is Madge and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting 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 call, Mr. Alan Oshiki. Please proceed, sir.

Alan Oshiki - Investor Relations

Thank you, Madge, 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 Chief Executive Officer 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 US Securities and Exchange Commission.

At this time, I would like to turn the call over to Mr. John Duffy. John?

John Duffy - Chairman and Chief Executive Officer

Thank you, Alan. Good morning everyone and thank you for joining us today. I assume everyone has seen this morning's press release and I would like to say first that we normally have not planned to do a conference call after the third quarter. However, given the truly extraordinary events of the past quarter, we thought such a call was in order.

While the amount of the loss for the quarter was larger than the losses for the first two quarters combined, we are confident and excited about our competitive position and the opportunities that either exist today or will exist for our franchise in the future. The reasons for the loss in the third quarter were the unrealized and realized losses on our inventory and PreTSL securities and trust preferred and capital securities held in our warehouse facility. While we made progress during the quarter reducing the amount of original par value that we honor these securities, the credit markets effectively remain closed for most types of CDO securities and the quarter-end valuations of these positions in inventory reflect the current disarray in those markets. Our belief is that the intrinsic or real value of most of these securities is well above the current market value, where there is a market, and we have adequate capital to conduct our businesses so that our decision has been, in most cases, to continue to own and not sell these securities. Away from those markets we are very pleased with our performance and our results. Our cash equities business continued to post extremely strong growth numbers.

We are up 27.6% for the first nine months of the year. We benefited from increased penetration of accounts, increased trading volumes of stocks in the financial services sector and increased usage of our branded ETF products. While our investment banking results for the quarter were down from the prior year period and are down 22% for the first three quarters due to the absence of revenues from our trust preferred securitization business, our revenues for the third quarter were down less than 3% from the prior quarter and exceeded the average revenues for the first two quarters of the year. We are actively discussing with many clients the feasibility of both public and private capital markets transactions and believe the recent actions that the treasury and other regulators have taken will strengthen certain institutions and improve their chances of being able to access the capital markets. While the M&A environment remains quiet with the exception of government intervened transactions, we believe that further consolidation in the banking industry is inevitable and that access to capital and the thawing of the credit markets will lead to a heightened level of activity.

Some of you may have questions about our compensation expense for the quarter and the nine months. We have continued to accrue total compensation in our previously disclosed range of 55% to 60% of total revenues, but we've adjusted our revenues to account for the unusual losses, both realized and unrealized, that we have experienced this year. Those losses approximate $50 million for the quarter and $100 million for the nine months. We have every intent to continue to pay our employees for their production and our employees and our cash equities business and investment banking business have generated $289 million in revenues for the first three quarters, down 1.6% from the comparable 2007 period. Accrued compensation and benefits are down 6.2%, our employees are our most valuable assets and they currently own 74% of the Company's stock, so they are as disappointed with the bottom line as anyone is.

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