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KBW Inc. (KBW)

Q4 2007 Earnings Call

February 5, 2008 9:00 am ET

Executives

Alan Oshiki – IR

John Duffy – CEO

Robert Giambrone - CFO

Analysts

Michael Hecht – Banc of America Securities

[Analyst] – BlackRock

Melissa Morin – PWP

[Analyst] - Fontana Capital

David Grossman - Thomas Weisel Partners

Presentation

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2007 KBW Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to Mr. Alan Oshiki, please proceed sir.

Alan Oshiki

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, Inc. and Bob 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 clause. Such statements include 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’d like to turn the call over to Mr. John Duffy, John?

John Duffy

Thank you very much Alan and thank you are for dialing in this morning. The year 2007 marked our first full year as a public company and with the first and second halves of the year so different in their tones, frankly it felt like two years. Market conditions deteriorated rapidly in the summer and had a decidedly negative impact on a couple of our businesses. Despite these challenges we were able to continue to grow revenues and avoid many of the sub-prime mortgage driven issues that have plagued many of our competitors. Revenues for the year were $427 million up 5.2% from 2006 level. Net income was $27.3 million down 48.8%. Adjusted for the IPO awards that are being amortized, net income dropped 37% and adjusted earnings per share were $1.08 per share down 45% in part reflecting the additional shares issued in the IPO.

We are pleased that the two most important parts of our franchise, our investment banking effort and our cash equities business both were able to post growth in revenues despite the challenges the overall markets posed. Investment banking revenues for the year expanded 7.8%, just a growth in advisory fees and equity capital markets revenues more than offset the decline in revenues from our structured finance product that we know as PreTSLs. However the disruption in the credit markets have had a negative impact on the value of acquirer’s currencies and raised the issue of credit quality on targets balance sheets both of which have helped led to a slow down in M&A activity in the banking sector in recent months.

While we were able to execute successfully two issues of our trust preferred product PreTSLs in September and November of 2007 despite the turmoil that was going on in the structured finance market these issues were substantially smaller and less profitable then they had been historically. However the change in the environment over the past seven months has substantially increased the number of institutions that are considering raising capital and we feel that we have the preeminent franchise in helping banks access the capital markets whether it be in traditional underwritten offerings, rights offerings or trust preferred issuance, either in the pool concept or discrete offerings.

Our equity commission business continued to post very strong growth in revenues both in our domestic and European franchises. Commissions totaled $165.8 million up 42% from the level of 2006. Commissions grew each quarter in 2007 from the previous quarter, reaching a record $45.9 million in the fourth quarter of 2007. The growth in commissions was helped by the increased penetration of our London sales effort into European accounts, our expanded equity capital markets presence, the launch of research coverage in the property REIT sector and the volatility and turmoil that we saw in the financial services sector in the second half of the year. We are particularly pleased with our investment banking efforts in working with foreign based institutions whether it be helping [Fortis] raise capital for the ABN, Amro transaction or advising Toronto Dominion or National Australia Bank in their acquisitions of US based institutions last year.

The turmoil in the financial services sector had a pronounced negative affect on our principal transactions line. This represents our market making activities on the equity trading desk, our fixed income sales in trading operations, our warehousing operation for the PreTSL product as well as our corporate investments in proprietary trading. The loss experienced in these operations as well as the decline in the profitability of the PreTSL product was the major reason for the drop in profits in 2007.

Compensation costs for the year were 60.1% of total revenues slightly above our stated range of 55% to 60% adjusted for the amortization of the IPO awards of $12.5 million a year. Compensation of revenues equaled 57.2% for the year. We increased headcount approximately 15% in 2007 and remain confident that the investments we have made in personnel and our platform in recent years will continue to bear fruit in the coming years.

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