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KBW, Inc. (KBW)

Q4 2008 Earnings Call

February 11, 2009 9:00 AM ET

Executives

Alan Oshiki - Investor Relations

John G. Duffy - Chairman and Chief Executive Officer

Robert Giambrone - Chief Financial and Administrative Officer

Analysts

Steve Stelmach - FBR Capital Markets

David Trone - Fox Pitt Kelton

Horst Hueniken - Thomas Weisel Partners

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2008 KBW Inc. Earnings Conference Call. My name is Erika and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer sessions 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, Mr. Alan Oshiki. You may proceed, sir.

Alan Oshiki

Thank you, operator, 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. Including such statements are 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 G. Duffy

Thank you Alan, good morning to everyone and thank you for joining us this morning. 2008 was truly an extraordinary year and I think we're all happy it's behind us. Though we are very disappointed with the results for the quarter and the year, we are glad that we've come through this environment as well as we have.

There were really two major developments that impacted our results in 2008. First, the loss on trust preferred securities held in our warehouse and losses on CDOs resulted from the complete freeze-up in the credit and securitization markets. Secondly, the dramatic slowdown in the markets starting in September, following the collapse of Lehman and the turmoil at AIG and Merrill Lynch, and the resulting government intervention impacted our fourth quarter revenues. We firmly believe that our losses are behind us. We took some additional write-downs in Q4 as interest rates declined and the floating rate trust preferred securities that we held in warehouse depreciated in value because of their floating rate nature.

Fourth quarter results were also impacted by a drop in cash equity commissions and lower investment banking revenue. Capital markets revenue declined as investors went to the sidelines to assess the effects of government intervention in the financial services sector. We feel particularly well positioned to participate in the banking industry's recapitalization. The industry's needs are enormous, but we are uncertain as to how and when this free capital will be affected.

In light of the current environment, we are being much more aggressive on expenses that has been our habit to ensure our return to profitability. We have been selectively hiring talented personnel from firms and have been devastated by recent events but expect our headcount will be down for the year.

We have not changed our target comp to revenue ratio of 55 to 60% and we would expect that to be at the upper end of the range for 2009 given this difficult environment. At this point, I'd like to turn it over to Bob Giambrone, our CFO to go over the numbers in more detail. Bob?

Robert Giambrone

Thank you John, and good morning to everyone. As usual, I'll be discussing results on an operating basis. Our operating results are based on our GAAP results, adjusted for the amortization of one time restricted stock awards issued in connection with the initial public offering of our common stock which was completed in November of 2006.

First, I'd like to mention significant items for the fourth quarter and for the full year. As John mentioned, although we had significant principle transaction losses, core investment banking and cash equity's revenues were relatively strong given the very difficult environment for many financial services companies which constitute most of our customer base.

Equity commissions were a record $192.8 million for the full year, that's a $27 million increase or 16.3% from the net 2007 total of $165.8 million. This was in spite of lower commissions by European equity securities in the fourth quarter which were significantly impacted by a drop of over 50% in the value of shares traded, compared to the third quarter of '08.

Commissions on European equities are based on the value of transactions, not the number of shares. Commissions for the fourth quarter of 2008 were $39.9 million, compared to $45.9 million for the same period in '07. That's a decrease of $6.1 million or 13.3%.

Investment banking revenues for full year '08 were $163.7 million, compared to $226.5 million for 2007. That's a decrease of 27.7%, that reflects the difficult conditions throughout the year, and in particular in the fourth quarter. Equity and debt capital markets revenues for 2008, and that excludes structured finance were $88.8 million, compared to a $113.1 million for 2007, a decrease of $24.3 million. Principle transactions losses reflect the continued significant lack of liquidity and declining valuations of many securities markets and in particular the CDO market at the end of the year.

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