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KBW, Inc. (KBW)

Q4 2009 Earnings Call Transcript

February 18, 2010 9:00 am ET

Executives

Alan Oshiki – IR

John Duffy – Chairman and CEO

Robert Giambrone – CFO

Analysts

Patrick Davitt – Bank of America/Merrill Lynch

Steve Stelmach – FBR Capital Markets

Michael Hecht – JMP Securities

Hugh Miller – Sidoti & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2009 KBW Earnings Conference Call. My name is Michael 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 sessions towards the end of today's 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, KBW Investor Relations. You may proceed, sir.

Alan Oshiki

Thank you, Michael, and good morning, everyone. This is Alan Oshiki, KBW's Investor Relations contact. And 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 as those regarding expectations of 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. Good morning, everyone and thanks for joining the call and your interest in our story. We released our fourth quarter and full year 2009 results this morning. I'll spend a few minutes discussing the full year and the quarterly numbers and the trends, and then talk a little bit about our outlook for 2010. After that, Bob Giambrone, our Chief Financial Officer, will go into more detail on the numbers and we will both be available to answer questions when Bob does conclude this comments.

Our 2009 revenues were $387 million, up 60% from 2008's $242 million. We were generally pleased with our rebound from the previous year's dismal results despite a fairly challenging environment. Our net income of $23.6 million contrasted with the loss of $62 million in 2008.

Our fourth quarter revenues totaled $87.1 million and our earnings totaled $3.8 million. The fourth quarter's revenues were 29% below the record level of Q3, principally due to a 42% drop in investment banking revenues. While all the estimates that I've seen for total revenues and investment banking revenues were substantially higher than we achieved, I believe the shortfall is a function of a slowdown and softness in the markets rather than missed opportunities on our part.

It is obvious to us and most of the market that the U.S. banking industry continues to have very substantial capital needs to restore balance sheets and eventually, repay TARP funds. The raising of that equity maybe lumpy by quarter, but we continue to believe that our equity capital markets business will be quite busy over this year and next. At some point, we also believe the credit markets will open to more of the banking industry as balance sheets are repaired. We expect to be active in that business also.

The activity in our capital markets business will continue to offset the extremely low level of traditional M&A activity in the banking sector. We expect M&A activity to be modest at best this year as acquirers continue to focus on FDIC-assisted transactions.

One of our businesses that picked up substantially during 2009 was our loan portfolio sales group, which advised the FDIC on several assignments. Eventually, we expect more of the banking industry to dispose off troubled assets as the market and pricing for these assets improves and as the industry rebuilds its capital and reserve ratios. This opportunity plus the progress at our fixed income group demonstrated in 2009 as the credit markets improve, bodes well for us to continue to grow revenues in these businesses.

On the expense side, our cost of compensation and benefits totaled 58.4% of revenues for the year, if you exclude the $10 million of expense associated with the amortization over our IPO stock awards. Our compensation expense in 2009 included approximately $7.5 million of expense associated with severance costs earlier in the year and certain employee expenses incurred in the fourth quarter relative to our expansion in Asia.

As we strive to lower this key ratio, we expect to build out over our Asia franchise to negatively impact this ratio in 2010. However, we are confident that it will not push that ratio above 60%, which we have communicated to be the upper end of our target range.

Finally, we are hopeful that we will be able to announce shortly that we have received the necessary licenses to operate in Hong Kong. We are very excited about the opportunities that exist for our franchise in Asia.

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