UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-33138

KBW, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or Other Jurisdiction of Incorporation or Organization) 13-4055775
(I.R.S. Employer Identification No.)

787 Seventh Avenue, New York, New York 10019

(Address of principal executive offices)
Registrant’s telephone number: (212) 887-7777

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o     No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

     The number of shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of October 30, 2009 was 34,878,036, which number includes 4,569,589 shares representing unvested restricted stock awards and excludes 1,046,448 shares underlying vested restricted stock units.

TABLE OF CONTENTS

	Page
	Number
AVAILABLE INFORMATION	1
PART I. FINANCIAL INFORMATION	2
ITEM 1. Financial Statements	2
Consolidated Statements of Financial Condition-September 30, 2009 (Unaudited) and December 31, 2008	2
Consolidated Statements of Operations-Three and Nine Months ended September 30, 2009 and 2008 (Unaudited)	3
Consolidated Statement of Changes in Stockholders’ Equity-Nine Months ended September 30, 2009 (Unaudited)	4
Consolidated Statements of Cash Flows-Nine Months ended September 30, 2009 and 2008 (Unaudited)	5
Notes to Consolidated Financial Statements	6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	36
ITEM 4. Controls and Procedures	37
PART II. OTHER INFORMATION	38
ITEM 1. Legal Proceedings	38
ITEM 1A. Risk Factors	38
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	38
ITEM 3. Defaults Upon Senior Securities	38
ITEM 4. Submission of Matters to a Vote of Security Holders	39
ITEM 5. Other Information	39
ITEM 6. Exhibits	39
SIGNATURES	40
EXHIBIT INDEX	41
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION
EX-10.1
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2

AVAILABLE INFORMATION

     KBW, Inc. is required to file current, annual and quarterly reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at http://www.sec.gov, from which interested persons can electronically access our SEC filings.

     We will make available free of charge through our website http://www.kbw.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large stockholders, and any amendments to those documents filed or furnished pursuant to the Exchange Act. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

     We also make available, on the Investor Relations page of our website, our (i) Corporate Governance Guidelines, (ii) Code of Business Conduct and Ethics, (iii) Supplement to Code of Business Conduct and Ethics for CEO and Senior Financial Officers, and (iv) charters of each of the Audit, Compensation, and Corporate Governance and Nominations Committees of our Board of Directors. You will need to have Adobe Acrobat Reader software installed on your computer to view these documents, which are in the PDF format. These documents are also available in print free of charge to any person who requests them by writing or telephoning: KBW, Inc., Office of the Corporate Secretary, 787 Seventh Avenue, New York, New York, 10019, U.S.A., telephone number (212) 887-7777. These documents, as well as the information on our website, are not a part of this report.

1

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

KBW, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition
(Dollars in thousands)

	September 30,
	2009			December 31,
	(unaudited)			2008
ASSETS
Cash and cash equivalents	$	179,838		$	194,981
Financial instruments owned, at fair value:
Equities		79,738			41,765
Corporate and other debt		63,463			53,879
Mortgage-backed securities		4,570			—
Other investments		40,302			34,893
		188,073			130,537
Receivables from clearing brokers		173,000			130,682
Accounts receivable		24,156			19,391
Income taxes receivable		1,942			33,270
Furniture, equipment and leasehold improvements, at cost, less accumulated depreciation and amortization of $25,270 in 2009 and $21,546 in 2008		18,860			18,895
Other assets		48,124			43,710
Total assets	$	633,993		$	571,466
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Financial instruments sold, not yet purchased, at fair value:
Equities	$	34,463		$	11,162
Corporate debt		1,166			—
U.S. Government and agency securities		2,895			—
		38,524			11,162
Short-term borrowings		—			31,547
Accounts payable, accrued expenses, and other liabilities		131,869			122,070
Income taxes payable		20,557			9,956
Total liabilities		190,950			174,735
Stockholders’ equity:
Preferred stock		—			—
Common stock		303			298
Paid-in capital		159,368			137,618
Retained earnings		294,856			275,019
Notes receivable from stockholders		(609	)		(2,225	)
Accumulated other comprehensive loss		(10,875	)		(13,979	)
Total stockholders’ equity		443,043			396,731
Total liabilities and stockholders’ equity	$	633,993		$	571,466

See accompanying notes to consolidated financial statements.

2

KBW, INC. AND SUBSIDIARIES

Consolidated Statements of Operations
(Dollars in thousands, except per share information)
(unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009		2008
Revenues:
Investment banking	$	57,785	$	46,042		$	126,958	$	136,382
Commissions		36,595		54,527			108,466		152,894
Principal transactions, net		23,675		(53,836	)		51,371		(112,973	)
Interest and dividend income		2,655		5,891			6,430		20,351
Investment advisory fees		341		222			974		815
Other		1,588		789			5,812		2,189
Total revenues		122,639		53,635			300,011		199,658
Expenses:
Compensation and benefits		73,819		60,318			184,965		177,251
Occupancy and equipment		5,567		5,297			16,168		14,579
Communications and data processing		7,399		7,290			21,301		20,632
Brokerage and clearance		4,939		6,039			12,423		19,079
Business development		4,427		5,054			10,672		12,971
Interest		135		871			361		4,115
Other		4,829		6,902			17,058		17,373
Total expenses		101,115		91,771			262,948		266,000
Income / (loss) before income taxes		21,524		(38,136	)		37,063		(66,342	)
Income tax expense / (benefit)		9,630		(15,136	)		17,226		(26,105	)
Net income / (loss)	$	11,894	$	(23,000	)	$	19,837	$	(40,237	)
Earnings per common share:
Basic (Note 10)	$	0.33	$	(0.75	)	$	0.55	$	(1.31	)
Diluted (Note 10)	$	0.33	$	(0.75	)	$	0.55	$	(1.31	)
Weighted average number of common shares outstanding:
Basic		31,410,337		30,794,738			31,390,229		30,776,870
Diluted		31,410,337		30,794,738			31,390,229		30,776,870

See accompanying notes to consolidated financial statements.

3

KBW, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

(Dollars in thousands, except per share information)

(unaudited)

											Notes			Accumulated
											Receivable			Other			Total
	Preferred		Common			Paid-in			Retained		from			Comprehensive			Stockholders’
	Stock		Stock			Capital			Earnings		Stockholders			(Loss) / Income			Equity
Balance at December 31, 2008	$	—	$	298		$	137,618		$	275,019	$	(2,225	)	$	(13,979	)	$	396,731
Net income		—		—			—			19,837		—			—			19,837
Other comprehensive income, currency translation adjustment		—		—			—			—		—			3,104			3,104
Total comprehensive income																		22,941
Amortization of stock-based compensation		—		—			28,512			—		—			—			28,512
Cancellation of 304,564 shares of restricted stock in satisfaction of withholding tax requirements		—		(3	)		(6,761	)		—		—			—			(6,764	)
Issuance of 779,195 shares of common stock		—		8			17,039			—		—			—			17,047
Restricted stock units converted		—		—			(2,939	)		—		—			—			(2,939	)
Stock-based awards vested		—		—			(13,952	)		—		—			—			(13,952	)
Tax shortfall related to stock-based awards		—		—			(149	)		—		—			—			(149	)
Repayment of notes receivable from stockholders		—		—			—			—		1,616			—			1,616
Balance at September 30, 2009	$	—	$	303		$	159,368		$	294,856	$	(609	)	$	(10,875	)	$	443,043

Description of preferred stock and details:

			Number of Shares
	Par Value		Authorized		Issued		Outstanding
September 30, 2009	$	0.01		10,000,000		—		—
December 31, 2008	$	0.01		10,000,000		—		—

Description of common stock and details:

			Number of Shares
	Par Value		Authorized		Issued(*)		Outstanding(*)
September 30, 2009	$	0.01		140,000,000		30,308,447		30,308,447
December 31, 2008	$	0.01		140,000,000		29,833,816		29,833,816

^(*) These share amounts exclude legally vested restricted stock units.

See accompanying notes to consolidated financial statements.

4

KBW, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)

	Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities:
Net income / (loss)	$	19,837		$	(40,237	)
Adjustments to reconcile net income / (loss) to net cash used in
operating activities:
Amortization of stock-based compensation		28,512			24,648
Depreciation and amortization		3,639			3,603
Deferred income tax benefit		(941	)		(15,714	)
(Increase) decrease in operating assets:
Financial instruments owned, at fair value		(57,113	)		170,708
Securities purchased under resale agreements		—			5,505
Receivables from clearing brokers		(42,050	)		52,072
Accounts receivable		(4,480	)		9,668
Income taxes receivable		31,328			—
Other assets		(3,415	)		(14,674	)
Increase (decrease) in operating liabilities:
Financial instruments sold, not yet purchased, at fair value		27,294			(39,041	)
Securities sold under repurchase agreements		—			(71,579	)
Payable to clearing broker		—			1,785
Short-term borrowings		(31,547	)		(33,552	)
Accounts payable, accrued expenses and other liabilities		8,414			(66,652	)
Income taxes payable		10,597			3,349
Net cash used in operating activities		(9,925	)		(10,111	)
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements		(3,603	)		(2,796	)
Net cash used in investing activities		(3,603	)		(2,796	)
Cash flows from financing activities:
Issuance of shares of common stock		156			75
Cancellation of restricted stock in satisfaction of withholding tax		(6,764	)		(2,907	)
Excess (shortfall) net tax benefit related to stock-based awards		(149	)		120
Repayment of notes receivable from stockholders		1,616			2,969
Net cash (used in) / provided by financing activities		(5,141	)		257
Currency adjustment:
Effect of exchange rate changes on cash		3,526			(4,467	)
Net decrease in cash and cash equivalents		(15,143	)		(17,117	)
Cash and cash equivalents at the beginning of period		194,981			194,358
Cash and cash equivalents at the end of period	$	179,838		$	177,241
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes	$	11,967		$	1,138
Interest	$	472		$	5,380

See accompanying notes to consolidated financial statements.

5

KBW, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars in thousands, except per share information)

(1) Organization and Basis of Presentation

     The consolidated financial statements include the accounts of KBW, Inc. and its wholly owned subsidiaries (the “Company”), Keefe, Bruyette & Woods, Inc. (“Keefe”), Keefe, Bruyette & Woods Limited (“KBWL”), KBW Asset Management, Inc. and KBW Ventures, Inc. Keefe is a regulatory member of the Financial Industry Regulatory Authority (“FINRA”) and is principally a broker-dealer in securities and a market-maker in certain financial services stocks and bonds in the United States. KBWL is authorized and regulated by the U.K. Financial Services Authority (“FSA”) and a member of the London Stock Exchange, Euronext, SWX Europe and Deutsche Boerse. Keefe’s and KBWL’s customers are predominantly institutional investors, including other brokers and dealers, commercial banks, asset managers and other financial institutions. Keefe has a clearing arrangement with Pershing LLC on a fully disclosed basis. KBWL has a clearing arrangement with Pershing Securities Limited on a fully disclosed basis.

     These consolidated financial statements and these notes are unaudited and exclude some of the disclosures required in annual financial statements. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2008 included in its Annual Report on Form 10-K filed with the SEC. These consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for the fair statement of the results for the interim periods. The results of operations for interim periods are not necessarily indicative of results for the entire year.

(2) Summary of Significant Accounting Policies

(a) Financial Accounting Standards Board (“FASB”) Accounting Standards Codification

     In September 2009, the Company adopted FASB Statement of Financial Accounting Standards (“SFAS”) No. 168, The “FASB Accounting Standards Codification™” and the Hierarchy of Generally Accepted Accounting Principles (FASB Accounting Standards Codification 105). Statement 168 establishes the FASB Accounting Standards Codification™ (“Codification” or “ASC”) as the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the Codification is nonauthoritative.

     Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

     Reference to GAAP requirements, where provided in these financial statements are to the ASC.

(b) Principles of Consolidation

     The consolidated financial statements have been prepared in accordance with GAAP and include the accounts of the Company and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated.

     The Company consolidates entities for which it has a controlling financial interest as defined in ASC 810, Consolidation. The usual condition for a controlling financial interest is ownership of a majority voting interest. As a result, the Company generally consolidates entities when they have ownership, directly or indirectly, of over 50 percent of the outstanding voting shares of another entity. Since a controlling financial interest may be achieved through arrangements that do not involve voting interest, the Company also evaluates entities for consolidation under the “variable interest model” in accordance with ASC 810. The Company consolidates variable interest entities when its interests in the entity are expected to absorb a majority the entity’s expected losses, or expected residual returns, or both. The Company had no variable interest entities that required consolidation at September 30, 2009.

     In addition, the Company evaluates its investments in general partnerships and investments in limited partnerships under ASC 810. Under ASC 810, the general partners in limited partnerships are presumed to have control unless the limited partners have either a substantial ability to dissolve the limited partnership or otherwise can remove the general partner without cause or have substantial participating rights. There were no limited partnership interests that required consolidation at September 30, 2009.

6

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars in thousands, except per share information)

(c) Use of Estimates

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s financial statements and these footnotes including securities valuations, compensation accruals and other matters. Management believes that the estimates used in preparing the Company’s consolidated financial statements are reasonable. Actual results may differ from these estimates.

(d) Cash and Cash Equivalents

     Cash equivalents include investments with an original maturity of three months or less when purchased. Due to the short-term nature of these instruments, carrying value approximates their fair value.

(e) Fair Value of Financial Instruments

     The Company accounts for financial instruments that are being measured and reported on a fair value basis in accordance with ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between current market participants at the measurement date”.

     Fair value is generally based on quoted market prices. If quoted market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations, price activity for equivalent instruments and valuation pricing methods. Among the factors considered by the Company in determining the fair value of financial instruments for which there are no current quoted market prices are credit spreads, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, assessing the underlying investments, market-based information, such as comparable company transactions, performance multiples and changes in market outlook as well as other measurements. Financial instruments owned and financial instruments sold, not yet purchased are stated at fair value, with related changes in unrealized appreciation or depreciation reflected in principal transactions, net in the accompanying consolidated statements of operations. Financial assets and financial liabilities carried at contract amounts include receivables from clearing brokers, securities purchased under resale agreements, short-term borrowings and securities sold under repurchase agreements. See Note 3 of the Notes to Consolidated Financial Statements for additional discussion of ASC 820.

     ASC 825, Financial Instruments, provides entities the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. ASC 825 permits the fair value option election, on an instrument-by-instrument basis, either at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. Such election must be applied to the entire instrument and not only a portion of the instrument. The Company applied the fair value option for certain eligible instruments, including all private equity securities and limited partnership interests, as these financial instruments had been accounted for at fair value by the Company prior to the fair value option election in accordance with the AICPA Audit and Accounting Guide — Brokers And Dealers In Securities (ASC 940). Generally, the fair values of these securities have been determined based on company performance and, in those instances where market values are readily ascertainable, by reference to recent significant events occurring in the marketplace or quoted market prices. The Company’s partnership interests are generally recorded at fair value, which may consider information provided by general partners.

(f) Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements

Securities purchased under resale agreements and securities sold under repurchase agreements are accounted for as collateralized financing transactions. The assets and liabilities that result from these agreements are recorded in the consolidated statements of financial condition at the amounts at which the securities were sold or purchased (contract value), respectively. It is the policy of the Company to obtain possession of collateral or deliver collateral, as the case may be, with a market value equal to or in excess of the principal amount of the transactions. Collateral is valued daily, and the Company may require counterparties to deposit additional collateral or return collateral pledged when appropriate. Interest on securities purchased under resale agreements and securities sold under repurchase agreements is recognized in interest and dividend income and interest expense, respectively, in the consolidated statements of operations over the life of the transaction.

     There were no resale or repurchase agreements outstanding as of September 30, 2009 and December 31, 2008.

7

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

(g) Receivables From and Payable to Clearing Brokers

     Receivables from and payable to clearing brokers include proceeds from securities sold, including financial instruments sold not yet purchased, commissions related to securities transactions, margin loans and related interest and deposits with clearing brokers. Proceeds related to financial instruments sold, not yet purchased may be restricted until the securities are purchased.

(h) Furniture, Equipment and Leasehold Improvements

     Furniture and equipment are carried at cost and depreciated on a straight-line basis using estimated useful lives of the related assets, generally two to five years. Leasehold improvements are amortized on a straight-line basis over the lesser of the economic useful life of the improvement or the term of the respective leases.

(i) Revenue Recognition

     Investment Banking

     The Company earns fees for providing strategic advisory services in mergers and acquisitions (“M&A”) and other transactions which are predominantly composed of fees based on a successful completion of a transaction, and from capital markets, which is comprised of underwriting securities’ offerings and arranging private placements, including securitized debt offerings.

     Strategic advisory revenues are recorded when earned, the fees are determinable and collection is reasonably assured. Non-refundable upfront fees are deferred and recognized as revenue ratably over the expected period in which the related services are rendered. Upon successful completion of a transaction or termination of an engagement, the recognition of revenue would be accelerated.

     Capital markets revenue consists of:

• Underwriting revenues are recognized on trade date, net of related syndicate expenses, at the time the underwriting is completed. In syndicated underwritten transactions, management estimates the Company’s share of transaction-related expenses incurred by the syndicate, and the Company recognizes revenue net of such expense. On final settlement, the Company adjusts these amounts to reflect the actual transaction-related expenses and resulting underwriting fee.

• Private placement revenues are recorded when the services related to the underlying transaction are completed under the terms of the engagement. This is generally the closing date of the transaction.

     Since the Company’s investment banking revenues are generally recognized at the time of completion of each transaction or when the services are performed, these revenues typically vary between periods and may be considerably affected by the timing of the closing of significant transactions.

   Commissions

     The Company’s sales and trading business generates revenue from equity securities trading commissions paid by institutional investor customers. Commissions are recognized on a trade date basis.

   Principal transactions

     Financial instruments owned, at fair value and financial instruments sold, not yet purchased, at fair value are recorded on a trade-date basis with realized and unrealized gains and losses reflected in principal transactions, net in the consolidated statements of operations.

   Interest and dividend income

     The Company recognizes contractual interest on financial instruments owned at fair value on an accrual basis as a component of interest and dividend income. Dividend income is recognized on the ex-dividend date.

8

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

   Investment advisory fees

     The Company recognizes management fees from managed funds over the period that the related service is provided based upon a percentage of account balances, capital invested, capital commitments or some combination thereof. The Company also may be entitled to receive incentive fees based on a percentage of a fund’s return or when the return on assets under management exceeds certain performance targets. Some incentive fees are based on investment performance over a 12-month period and are subject to adjustment prior to the end of the measurement period. Accordingly, these incentive fees are recognized in the consolidated statements of operations when the measurement period ends.

(j) Stock-Based Compensation

     Stock-based compensation is measured at fair value on the date of grant and amortized to compensation expense over the requisite service period, net of estimated forfeitures. Stock-based awards that do not require future service (i.e., vested awards, including awards granted to retirement eligible employees) are expensed immediately on the date of grant. Withholding tax obligations may be satisfied by the repurchase of shares by the Company. Such shares are cancelled upon repurchase.

(k) Income Taxes

     Deferred tax assets and liabilities are recognized for the future tax effect of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. In the event it is more likely than not that a deferred tax asset will not be realized, a valuation allowance will be recorded.

     The Company applies ASC 740, Income Taxes, which prescribes a single, comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on its tax returns. Income tax expense is based on pre-tax accounting income, including adjustments made for the recognition or derecognition related to uncertain tax positions. The recognition or derecognition of income tax expense related to uncertain tax positions is determined as prescribed by ASC 740.

(l) Earnings Per Common Share (“EPS”)

     Basic EPS is computed by dividing net income applicable to common shareholders, which represents net income reduced by the allocation of earnings to participating securities, by the weighted average number of common shares. Losses are not allocated to participating securities. The weighted average number of common shares outstanding include restricted stock units for which no future service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of basic EPS and, in addition, give effect to dilutive potential common shares related to Company stock compensation plans.

     ASC 260, Earnings Per Share, addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating EPS under the two-class method. Accordingly, the Company treats unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating EPS. There was no impact on basic or diluted EPS amounts for the three and nine month periods ended 2008.

(m) Foreign Currency Translation

     The Company translates the statements of financial condition of KBWL at the exchange rates in effect as of the end of each reporting period. The consolidated statements of operations are translated at the average rates of exchange during the period. The resulting translation adjustments of KBWL are recorded directly to accumulated other comprehensive income (loss) in the consolidated statements of changes in stockholders’ equity.

(3) Financial Instruments

     The Company accounts for financial instruments that are being measured and reported on a fair value basis in accordance with ASC 820. This includes those items currently reported in financial instruments owned, at fair value and financial instruments sold, not yet purchased, at fair value on the consolidated statements of financial condition.

9

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

     As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, primarily market and income approaches. Based on these approaches, the Company utilizes assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the information set forth below according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial instrument assets and liabilities carried at fair value have been classified and disclosed in one of the following three categories:

Level 1	Quoted market prices in active markets for identical assets or liabilities.
Level 2	Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3	Unobservable inputs that are not corroborated by market data.

     Level 1 primarily consists of financial instruments whose value is based on quoted market prices, such as listed equities and options, and convertible preferred stock. This category also may include U.S. Government and agency securities for which the Company typically receives independent external valuation information.

     Level 2 includes those financial instruments that are valued using multiple valuation techniques, primarily the market approach. The valuation methodologies utilized are calibrated to observable market inputs. The Company considers recently executed transactions, market price quotations and various assumptions, including credit spreads, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, as well as other measurements. In order to be classified as Level 2, substantially all of these assumptions would need to be observable in the marketplace or can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category include certain corporate debt, residential mortgage-backed securities, rated collateralized debt obligations (“CDOs”) primarily collateralized by banking and insurance company trust preferred and capital securities, certain preferred stock and convertible debt.

     Fair value of corporate debt, residential mortgage-backed securities, preferred stock and convertible debt classified as Level 2 was determined by using quoted market prices, broker or dealer quotes, or alternate pricing sources with reasonable levels of price transparency. Fair value of rated CDOs primarily collateralized by banking and insurance company trust preferred and capital securities was determined primarily by considering recently executed transactions and certain assumptions, including the financial condition, operating results and credit ratings of the issuer or underlying companies.

     Level 3 is comprised of financial instruments whose fair value is estimated based on multiple valuation techniques, primarily market and income approaches. The valuation methodologies utilized may include significant inputs that are unobservable from objective sources. The Company considers various market inputs and assumptions, such as recently executed transactions, market price quotations, discount margins, market spreads applied, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, default rates, as well as other measurements. Included in this category are certain corporate and other debt, including banking and insurance company trust preferred and capital securities and non-rated CDOs primarily collateralized by banking and insurance company trust preferred and capital securities, private equity securities and other investments including limited and general partnership interests. The Company did not own any other type of CDOs, including those collateralized by mortgage loans, in any period presented herein.

     Fair value of banking and insurance company trust preferred and capital securities was determined by utilizing a market spread method for each of the individual trust preferred and capital securities utilizing credit spreads for secondary market trades for trust preferred and capital securities for issues which were substantially similar to such positions based on certain assumptions. The key market inputs in this method are the discount margins, market spreads applied and the yield expectations for similar instruments.

     Fair value of private equity securities was determined by assessing market-based information, such as performance multiples, comparable company transactions and changes in market outlook. Fair value of limited and general partnership interests was determined by using net asset values or capital statements provided by the general partner, updated for changes in market conditions up to the reporting date. Private equity securities and limited and general partnership interests generally trade infrequently.

10

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

     In determining the appropriate levels, the Company performed a detailed analysis of the assets and liabilities that are subject to ASC 820. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

Assets at Fair Value as of September 30, 2009
	Level 1		Level 2		Level 3		Total
Financial instruments owned, at fair value:
Equities	$	62,828	$	1,206	$	15,454	$	79,488
Corporate and other debt:
Corporate debt		9,963		12,228		10,501		32,692
CDOs		—		5,404		1		5,405
Other debt obligations(1)		—		—		25,366		25,366
Total corporate and other debt		9,963		17,632		35,868		63,463
Mortgage-backed securities — residential		—		4,570		—		4,570
Other investments(2)		—		—		40,302		40,302
Total non-derivative trading assets		72,791		23,408		91,624		187,823
Derivative financial instruments		250		—		—		250
Total financial instruments owned	$	73,041	$	23,408	$	91,624	$	188,073

(1)	Principally consists of bank and insurance company trust preferred and capital securities.
(2)	Principally consists of limited and general partnership interests.

Liabilities at Fair Value as of September 30, 2009
	Level 1		Level 2		Level 3		Total
Financial instruments sold, not yet purchased, at fair value:
Equities	$	34,031	$	—	$	—	$	34,031
Corporate debt		30		1,136				1,166
US Government and agency securities		2,895		—		—		2,895
Total non-derivative trading liabiilties		36,956		1,136		—		38,092
Derivative financial instruments		432		—		—		432
Total financial instruments sold, not yet purchased	$	37,388	$	1,136	$	—	$	38,524

11

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

Assets at Fair Value as of December 31, 2008
	Level 1		Level 2		Level 3		Total
Financial instruments owned, at fair value:
Equities	$	19,169	$	7,031	$	14,722	$	40,922
Corporate and other debt		—		21,191		32,688		53,879
Other investments		—		—		34,893		34,893
Total non-derivative trading assets		19,169		28,222		82,303		129,694
Derivative financial instruments		843		—		—		843
Total financial instruments owned	$	20,012	$	28,222	$	82,303	$	130,537

Liabilities at Fair Value as of December 31, 2008
	Level 1		Level 2		Level 3		Total
Financial instruments sold, but not yet purchased, at fair value:
Equities	$	10,701	$	—	$	—	$	10,701
Total non-derivative trading liabilities		10,701		—		—		10,701
Derivative financial instruments		461		—		—		461
Total financial instruments sold, not yet purchased	$	11,162	$	—	$	—	$	11,162

     The non-derivative trading assets/liabilities categories were reported in financial instruments owned, at fair value and financial instruments sold, not yet purchased, at fair value on the Company’s consolidated statements of financial condition.

     The derivative financial instruments are reported on a gross basis by level. The Company’s derivative activities included in financial instruments owned and financial instruments sold, not yet purchased consist of writing and purchasing listed equity options. The fair value of these individual derivative contracts were reported gross in their respective levels based on the fair value hierarchy.

12

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

     The following table provides a reconciliation of the beginning and ending balances for the non-derivative trading assets measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2009 and September 30, 2008:

Level 3 Financial Assets

											Changes in
											unrealized gains
											and (losses)
											included in
			Total gains								earnings related
			and (losses)				Transfers		Balance as of		to assets still
Three months ended	Balance as of		(realized and		Purchases/		in/out of		September 30,		held at reporting
September 30, 2009	June 30, 2009		unrealized)		(sales), net		Level 3		2009		date
Equities	$	15,247	$	207	$	—	$	—	$	15,454	$	207
Corporate and other debt:
Corporate debt		501		—		10,000		—		10,501		(2	)
CDOs		1		—		—		—		1		—
Other debt obligations		25,359		7		—		—		25,366		6
Total coporate and other debt		25,861		7		10,000		—		35,868		4
Other investments		37,034		2,071		1,197		—		40,302		2,071
Total Level 3 Financial Assets	$	78,142	$	2,285	$	11,197	$	—		91,624		2,282

												Changes in
												unrealized gains
												and (losses)
												included in
												earnings related
			Total gains and							Balance as of		to assets still held
Three months ended	Balance as of		(losses) (realized			Purchases/		Transfers		September 30,		at reporting
September 30, 2008	June 30, 2008		and unrealized)			(sales), net		in/out of Level 3		2008		date
Non-derivative trading assets	$	135,625	$	(34,918	)	$	471	$	—	$	101,178	$	(32,302	)

13

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

													Changes in
													unrealized gains
													and (losses)
			Total gains										included in
	Balance as of		and (losses)						Transfers				earnings related
Nine months ended	December 31,		(realized			Purchases/			in/out of		Balance as of		to assets still held
September 30, 2009	2008		and unrealized)			(sales), net			Level 3		September 30, 2009		at reporting date
Equities	$	14,722	$	(32	)	$	—		$	764	$	15,454	$	(32	)
Corporate and other debt:
Corporate debt		1,581		(1,080	)		10,000			—		10,501		(1,081	)
CDOs		44		2			(45	)		—		1		(26	)
Other debt obligations		31,063		(53	)		(5,644	)		—		25,366		4,447
Total corporate and other debt		32,688		(1,131	)		4,311			—		35,868		3,340
Other investments		34,893		3,191			2,218			—		40,302		3,104
Total Level 3 Financial Assets	$	82,303	$	2,028		$	6,529		$	764	$	91,624	$	6,412

													Changes in
													unrealized gains
													and (losses)
													included in
			Total gains and										earnings related to
Nine months ended	Balance as of		(losses) (realized			Purchases/ (sales),		Transfers in/out of			Balance as of		assets still held
September 30, 2008	December 31, 2007		and unrealized)			net		Level 3			September 30, 2008		at reporting date
Non-derivative trading assets	$	171,816	$	(65,435	)	$	898	$	(6,101	)	$	101,178	$	(61,520	)

     Total gains and losses represent the total gains and/or losses (realized and unrealized) recorded for the Level 3 assets and are reported in principal transactions, net in the accompanying consolidated statements of operations. Additionally, the change in the unrealized gains and losses are often offset by realized gains and losses during the period.

     Purchases/sales represent the net amount of Level 3 assets that were either purchased or sold during the period. The amounts were recorded at their end of period fair values.

     Transfers in/out of Level 3 represent existing financial assets that were previously categorized at a lower level. Transfers into / out of Level 3 result from changes in the observability of inputs used in determining fair values for different types of financial assets. Transfers are reported at their fair value as of the beginning of the month in which such changes in the fair value inputs occurs.

     The amount of unrealized gains and losses included in earnings attributable to the change in unrealized gains and losses relating to Level 3 assets still held at the end of the period were reported in principal transactions, net in the accompanying consolidated statements of operations. The change in unrealized gains and losses were often offset, at least in part, by realized gains and losses during the period.

(4) Short-Term Borrowings

     From time to time, the Company obtains secured short-term borrowings primarily through bank loans. At September 30, 2009, there were no short-term borrowings obligations outstanding. Secured short-term borrowings were $31,547 at the rate in effect of 1.63% as of December 31, 2008. Included in financial instruments owned as of December 31, 2008 was $31,064 of corporate bonds in which the lender had a security interest in connection with short-term borrowings.

14

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

(5) Commitments and Contingencies

   (a) Leases

     As of September 30, 2009, there were no significant changes in the Company’s lease agreements since December 31, 2008.

   (b) Litigation

     In the ordinary course of business, the Company may be a defendant or codefendant in legal proceedings. At September 30, 2009, the Company believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the Company’s financial condition. The results of such proceedings could be material to the Company’s operating results for any particular period, depending, in part, upon additional developments affecting such matters and the operating results for such period. Legal reserves have been established in accordance with ASC 450, Contingencies. Once established, reserves are adjusted when there is more information available or when an event occurs requiring a change.

     On January 12, 2009, Frederick J. Grede, as Liquidation Trustee and Representative of the Estate of Sentinel Management Group, Inc., filed a lawsuit in the United States District Court for the Northern District of Illinois against Keefe and against Delores E. Rodriguez; Barry C. Mohr, Jr.; and Jacques De Saint Phalle (all former employees of Keefe) and Cohen & Company Securities, LLC. Ms. Rodriguez and Mr. Mohr were employed by Cohen & Company subsequent to being employed by Keefe and the complaint relates to activities by them at both Keefe and their subsequent employer.

     The complaint alleges that Keefe recommended and sold to Sentinel Management Group structured finance products that were unsuitable for purchase. The complaint alleges the following causes of action against Keefe, aiding and abetting breach of fiduciary duty by an officer and director of Sentinel; commercial bribery; violations of federal and state securities laws; violation of the Illinois Consumer Fraud Act; negligence; unjust enrichment; and avoidance and recovery of fraudulent transfers. The complaint specifies that Sentinel sustained a loss associated with the sale of securities sold by Keefe of $4,920, however various causes of action in the complaint seek to recover amounts substantially in excess of that amount up to an amount in excess of $130,000, representing amounts paid for all securities purchased from Keefe regardless of suitability or whether there were losses on these securities. Keefe believes the claims are without merit and will defend these claims vigorously. On April 1, 2009, Keefe filed a Motion to Dismiss the Complaint. On July 29, 2009, the court denied most of the relief sought in Keefe’s Motion to Dismiss, though it dismissed the Illinois Consumer Fraud Act claim and granted Keefe’s motion to sever the Trustee’s case against Keefe from the case against Cohen.

     On May 21, 2009 the Trustee filed an additional complaint in the same court and against the same parties (the “Second Complaint”). The Trustee claimed to be acting in the Second Complaint in his capacity as liquidation trustee and as an assignee of claims of Sentinel’s customers. The Second Complaint makes substantially the same allegations as the complaint described above. Keefe believes the claims in the Second Complaint are also without merit and will defend these claims vigorously. On July 28, 2009, in Grede v. Bank of New York Mellon et al filed in the same court, in which the Trustee alleged similar customer claims as an assignee, the court dismissed the Trustee’s claims due to lack of standing. The Trustee has appealed the court’s dismissal of Grede v. Bank of New York Mellon and, on August 19, 2009, the court stayed the Second Complaint while the Trustee’s appeal in Grede v. Bank of New York Mellon is pending.

   (c) Limited Partnership Commitments

     As of September 30, 2009, the Company had approximately $23,856, including $8,787 to an affiliated fund, in outstanding commitments for additional funding to limited partnership investments.

(6) Financial Instruments with Off-Balance-Sheet Risk

     In the normal course of its proprietary trading activities, the Company enters into transactions in financial instruments with off- balance-sheet risk. These financial instruments, such as options and mortgage-backed to-be-announced securities (“TBAs”), contain off-balance-sheet risk inasmuch as ultimate settlement of these transactions may have market and/or credit risk in excess of amounts which are recognized in the consolidated financial statements. Transactions in listed options are conducted through regulated exchanges, which clear and guarantee performance of counterparties.

15

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

     Also, in connection with its proprietary trading activities, the Company has sold securities that it does not currently own and will, therefore, be obligated to purchase such securities at a future date. The Company has recorded this obligation in the financial statements at market values of the related securities and will record a trading loss if the market value of the securities increases subsequent to the consolidated financial statements date.

   (a) Broker-Dealer Activities

     The Company clears securities transactions on behalf of customers through its clearing brokers. In connection with these activities, customers’ unsettled trades may expose the Company to off-balance-sheet credit risk in the event customers are unable to fulfill their contracted obligations. The Company seeks to control the risk associated with its customer activities by monitoring the creditworthiness of its customers.

   (b) Derivative Financial Instruments

     The Company’s derivative activities consist of writing and purchasing listed equity options and, from time to time, futures on interest rate, currency and equity products for trading for our own account and are included in financial instruments owned, at fair value and financial instruments sold, not yet purchased, at fair value in the accompanying consolidated statements of financial condition. See also Note 3 of the Notes to Consolidated Financial Statements for additional details. As a writer of options, the Company receives a cash premium at the beginning of the contract period and bears the risk of unfavorable changes in the value of the financial instruments underlying the options. Options written do not expose the Company to credit risk since they obligate the Company (not its counterparty) to perform.

     In order to measure derivative activity, notional or contract amounts are frequently utilized. Notional contract amounts, which are not included on the consolidated statements of financial condition, are used as a basis to calculate contractual cash flows to be exchanged and generally are not actually paid or received.

     A summary of the Company’s listed options and futures contracts is as follows:

	Current		Average		End of
	Notional		Fair		Period
	Value		Value		Fair Value
September 30, 2009:
Purchased options	$	9,832	$	362	$	250
Written options	$	5,596	$	651	$	432
Short futures contracts	$	6,639	$	—	$	—
December 31, 2008:
Purchased options	$	7,721	$	557	$	843
Written options	$	6,100	$	344	$	461
Short futures contracts	$	—	$	—	$	—

     The following table summarizes the net gains / (losses) from trading activities included in principal transactions, net on the statements of operations for the three and nine months ended September 30, 2009:

	Three Months Ended		Nine Months Ended
Type of Instrument	September 30, 2009		September 30, 2009
Equities	$	6,427	$	12,126
Corporate and other debt		10,085		21,154
Mortgage-backed securities		4,583		15,737
Other investments		2,580		2,354
Total	$	23,675	$	51,371

     The revenue related to the equities and mortgage-backed securities categories include realized and unrealized gains and losses on both derivative instruments and non-derivative instruments. Corporate and other debt and other investments include realized and unrealized gains and losses on non-derivative instruments.

16

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

   (7) Concentrations of Credit Risk

     The Company is engaged in various securities trading and brokerage activities servicing primarily domestic and foreign institutional investors. Nearly all of the Company’s transactions are executed with and on behalf of institutional investors, including other brokers and dealers, commercial banks, mutual funds, and other financial institutions. The Company’s exposure to credit risk associated with the non-performance of these customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile securities markets.

     A substantial portion of the Company’s marketable securities are common stock and debt of financial institutions. The credit and/or market risk associated with these holdings can be directly impacted by factors that affect this industry such as volatile equity and credit markets and actions of regulatory authorities.

   (8) Notes Receivable from Stockholders

     Notes receivable from stockholders represent full recourse notes issued to employees for their purchases of stock acquired pursuant to the Company’s book value stock purchase plan. Loans are payable in annual installments and bear interest between 4.2% and 5.0% per annum.

   (9) Stock-Based Compensation

     During the second quarter of 2009, the Board of Directors adopted and the shareholders approved the 2009 Incentive Compensation Plan (“2009 Plan”). The 2009 Plan permits the granting of up to 6,641,638 shares of common stock, including 641,638 common shares which remained available from the 2006 Equity Incentive Plan (“2006 Plan”). Shares granted under the 2009 Plan are expected to be awarded in connection with the Company’s regular annual employee compensation and hiring processes. As a result of the approval and adoption of the 2009 Plan, the 2006 Plan will have no further grants or awards. However, awards outstanding under the 2006 Plan will remain in effect in accordance with the terms of such awards.

     As part of the 2008 year-end performance award process (“2008 Bonus Awards”), under the terms of the 2006 Plan, the Company granted 2,134,555 restricted stock awards (“RSAs”) to certain employees in February 2009. The aggregate fair value of the RSAs granted in connection with the 2008 Bonus Awards in February 2009 was $41,538. This value was based upon the grant date share price of $19.46. RSAs are actual shares of common stock issued to the participant that are restricted. The stock granted in connection with the 2008 Bonus Awards generally vests over a three year period. Vesting would accelerate on a change in control, death or permanent disability. Unvested RSAs are subject to forfeiture upon termination of employment.

   (10) Earnings Per Share

     The computations of basic and diluted earnings per share are set forth below:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009		2008
Net income / (loss)	$	11,894	$	(23,000	)	$	19,837	$	(40,237	)
Less: Allocation of earnings to participating securities		1,532		—			2,471		—
Net income / (loss) applicable to common shareholders	$	10,362	$	(23,000	)	$	17,366	$	(40,237	)
Weighted average number of common shares outstanding(1)(2):
Basic		31,410,337		30,794,738			31,390,229		30,776,870
Effect of dilutive securities — restricted stock		—		—			—		—
Diluted		31,410,337		30,794,738			31,390,229		30,776,870
Earnings per common share(1)(2):
Basic	$	0.33	$	(0.75	)	$	0.55	$	(1.31	)
Diluted	$	0.33	$	(0.75	)	$	0.55	$	(1.31	)

(1)	Participating securities in the form of unvested share based payment awards amounted to weighted average shares of 4,643,055 and 4,467,396 for the three and nine months ended September 30, 2009, respectively.
(2)	Basic and diluted common shares outstanding were equal for the three and nine months ended September 30, 2009 and 2008 under the two-class method.

17

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

(11) Income Taxes

     The Company applies the provisions of ASC 740, which prescribes the recognition and measurement criteria related to tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. In addition, the following information required by ASC 740 is provided:

• The Company’s gross unrecognized tax benefits, excluding interest, increased approximately $1,800 since December 31, 2008 primarily due to a re-evaluation of tax positions taken in prior years.

• The Company classifies interest and penalties, if any, related to tax uncertainties as income tax expenses. As of September 30, 2009, this amount had increased approximately $450 since December 31, 2008.

• The Company and its subsidiaries file federal consolidated and various state, local and foreign tax returns. The federal income tax returns have been audited through 2005. Various state, local and foreign returns are subject to audits by tax authorities beginning with the 2002 tax year. The settlement of certain state and local audits within the next 12 months, if any, is not anticipated to have a significant impact on the Company’s results or financial position.

(12) Industry Segment Data

     The Company follows the provisions of ASC 280, Segment Reporting, in disclosing its business segments. Pursuant to that statement, an entity is required to determine its business segments based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. Based upon these criteria, the Company has determined that its entire business should be considered a single segment.

(13) Net Capital Requirement

     Keefe is a registered U.S. broker-dealer that is subject to the Uniform Net Capital Rule (SEC Rule 15c3-1 or the Net Capital Rule) administered by the SEC and FINRA, which requires the maintenance of minimum net capital. Keefe has elected to use the basic method to compute net capital as permitted by the Net Capital Rule, which requires Keefe to maintain minimum net capital, as defined, of $4,146 as of September 30, 2009. These rules also require Keefe to notify and sometimes obtain approval from FINRA for significant withdrawals of capital.

	September 30, 2009
Net Capital	$	139,761
Excess	$	135,615

     KBWL is an investment firm authorized and regulated by the FSA in the United Kingdom and is subject to the capital requirements of the FSA. As of September 30, 2009, KBWL was in compliance with its local capital adequacy requirements. At September 30, 2009, KBWL’s capital resources of approximately $36,023 exceeded the capital resources requirement by approximately $27,141.

(14) Recent Accounting Developments

     In September 2009, FASB issued Accounting Standard Update (“ASU”) No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value Per Share (or Its Equivalent). ASU No. 2009-12 provides amendments to ASC 820, Fair Value Measurements and Disclosures, for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendments in ASU No. 2009-12 permit, as a practical expedient, a reporting entity to measure the fair value of an investment on the basis of the net asset value per share of the investment (or its equivalent). The amendments in ASU No. 2009-12 also require additional disclosures by major category of investment, such as the nature of any restrictions on the investor’s ability to redeem its investments at the measurement date, any unfunded commitments and the investment strategies of the investees. ASU No. 2009-12 is effective for interim and annual periods ending after December 15, 2009. The Company expects additional disclosure

18

KBW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Dollars in thousands, except per share information)

requirements related to certain financial instruments as a result of the implementation of ASU No. 2009-12 but does not expect it to have a material effect on the consolidated financial statements.

     In June 2009, FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 is a revision to FASB Interpretation No. 46(R) (ASC 810), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009. The Company is evaluating the impact to its consolidated financial statements of adopting this standard.

     In June 2009, FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140. SFAS No. 166 is a revision to Statement No. 140 (ASC 860), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009. The Company does not expect the implementation of this standard to have a material effect on its consolidated financial statements.

(15) Subsequent Events

     The Company has evaluated subsequent events through the date the accompanying financial statements were issued, which was November 6, 2009.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this report.

Cautionary Statement Regarding Forward-Looking Statements

     We have made statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this report that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are or may be important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the historical or future results, level of activity, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, those discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.

     Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of filing of this report to conform such statements to actual results or revised expectations.

Overview

     We are a leading full service investment bank specializing in the financial services industry. Our principal activities are: (i) investment banking, including mergers and acquisitions (“M&A”) and other strategic advisory services, equity and fixed income securities offerings, and mutual thrift conversions, (ii) equity and fixed income sales and trading, (iii) research that provides fundamental, objective analysis that identifies investment opportunities and helps our investor customers make better investment decisions, and (iv) asset management, including investment management and other advisory services to institutional clients and private high net worth clients and various investment vehicles.

     Within our full service business model, our focus includes bank and thrift holding companies, banking companies, thrift institutions, insurance companies, broker-dealers, mortgage banks, asset management companies, mortgage and equity real estate investment trusts, consumer and specialty finance firms, financial processing companies and securities exchanges. We emphasize serving investment banking clients in the small and mid cap segments of the financial services industry although our clients also include many large-cap companies. Our sales customers are primarily institutional investors.

     Most revenues with respect to our services provided are primarily determined as a result of active competition in the marketplace. Our revenues are primarily generated through advisory, underwriting and private placement fees earned through our investment banking activities, commissions earned on equity sales and trading activities, interest and dividends earned on our securities’ inventories and profit and losses from trading activities related to the securities’ inventories.

     Our largest expense is compensation and benefits. Our performance is dependant on our ability to attract, develop and retain highly skilled employees who are motivated to provide quality service and guidance to our clients.

     Many external factors affect our revenues and profitability. Such factors include equity and fixed income trading prices and volumes, the volatility of these markets, the level and shape of the yield curve, political events and regulatory developments, including recent government participation in providing capital to financial institutions, and competition. These factors influence our investment banking operations in that such factors affect the number and timing of equity and fixed income securities issuances and M&A activity within the financial services industry. These same factors also affect our sales and trading business by impacting equity and fixed income trading prices and volumes and valuations in secondary financial markets. Commission rates, market volatility and other factors also affect our sales and trading revenues. These market forces may cause our revenues and earnings to fluctuate significantly from period to period and the results of any one period should not be considered indicative of future results. See “—Business Environment.”

     A significant portion of our expense base is variable, including employee compensation and benefits, brokerage and clearance, communication and data processing and business development expenses. Our remaining costs generally do not directly relate to the service revenues earned.

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     Certain data processing systems that support equity and fixed income trading, research, payroll, human resources and employee benefits are service bureau based and are operated in the vendors’ data centers. We believe that this stabilizes our fixed costs associated with data processing. We also license vendor information databases to support investment banking, sales and trading and research. Vendors may, at the end of contractual terms, terminate our rights or modify or significantly alter product and service offerings or related fees, which may affect our ongoing business activities or related costs.

Business Environment

     Our business activities focus on the financial services sector, the landscape of which, in the U.S. and globally, has continued to evolve since the global financial crisis began in 2007. The financial services sector in the third quarter of 2009 reflected a continuation of the trend that began in the first half, with some stabilization and return of market confidence and active capital markets transactions reflecting the recapitalization of selected companies. In particular there have been significant improvements in the equity and credit markets for securities of financial services companies. The Company continued to be very active in capital markets transactions, participating in 28 public capital raises during the third quarter of 2009. However, the sector remains under stress and the market stability and continuation of current trends is not certain. The valuation of certain classes of assets remains uncertain and loss reserves have been increasing reflecting continuing concerns in the credit quality of commercial real estate and personal lending and securitization markets have not broadly reopened. U.S. unemployment remains high and lenders have not widely reopened consumer and commercial credit.

     In the U.S., the financial services sector remains highly fragmented. There are approximately 1,050 publicly traded banks and thrifts and approximately 8,200 different banking entities in the U.S. Because of our focus, we are particularly impacted by economic and market conditions affecting this sector. Although many larger financial institutions have succeeded in recapitalizing and have repaid government assistance, there continues to be bank failures among smaller institutions. Trends in the global economy and domestic and international financial markets have a significant impact on the outlook for financial services, including the market prices for our securities and the securities of other companies in the sector. During the third quarter of 2009, in the U.S., select small and mid size financial institutions have sought to recapitalize and we have participated in many offerings for companies in the bank and REIT segments of the financial services sector.

     Globally, actions by various government agencies and central banks have been implemented with a view to restoring capital, creating market liquidity and opening credit sources. While certain financial institutions have accessed additional capital, there is likely to be continued stress in many of these markets.

     It is difficult to predict how long these conditions will continue or whether additional deteriorations in asset quality, further credit market dislocations or sustained market downturns may exacerbate the impact of these factors on our overall revenues. Even with the market stabilization in recent quarters, there has not been a significant return of M&A activity. During the third quarter of 2009, many financial institutions have reported operating profitability, although others reported significant losses, in particular resulting from increases to loan loss reserves. There have been no further failures of large financial institutions in the US. It is likely that there will be significant changes imposed in the regulation of financial institutions in the U.S. in the future, including the emergence of new regulatory entities with broader oversight and more stringent capital requirements. We believe that we are well capitalized and remain well positioned to assist in capital markets and M&A transactions for the financial services industry in both the U.S. and Europe.

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Results of Operations

   Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008

   Overview

     Total revenues increased $69.0 million, or 128.7%, to $122.6 million for the three months ended September 30, 2009 compared with $53.6 million for the three months ended September 30, 2008. The increase was primarily due to revenue of $23.7 million in principal transactions, net in 2009, a substantial improvement compared to negative revenues of $53.8 million in 2008, and an increase in investment banking revenues of $11.7 million, partially offset by a decrease in commissions revenue of $17.9 million.

     Total expenses were $101.1 million for the three months ended September 30, 2009 compared with $91.8 million for the three months ended September 30, 2008. The increase was due to a $13.5 million increase in compensation and benefits expense, partially offset by a $4.2 million decrease in non-compensation expenses.

     We recorded net income of $11.9 million, or $0.33 per diluted share, for the three months ended September 30, 2009 compared with a net loss of $23.0 million, or $0.75 per diluted share, for the third quarter of 2008. After adjusting for the 2006 one-time restricted stock awards granted to employees in connection with our initial public offering (“IPO”), our non-GAAP operating net income was $13.4 million, or $0.37 per diluted share, for the three months ended September 30, 2009, compared with a net loss of $21.3 million, or $0.69 per diluted share, for the same period in 2008. See “-Three Month Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to their corresponding GAAP amounts. The following table provides a comparison of our revenues and expenses for the periods presented (dollars in thousands):

	Three Months Ended
	September 30,					Period-to-Period
	2009		2008			$ Change			% Change
	(unaudited)
Revenues:
Investment banking	$	57,785	$	46,042		$	11,743			25.5	%
Commissions		36,595		54,527			(17,932	)		(32.9	)
Principal transactions, net		23,675		(53,836	)		77,511			N/M
Interest and dividend income		2,655		5,891			(3,236	)		(54.9	)
Investment advisory fees		341		222			119			53.6
Other		1,588		789			799			101.3
Total revenues		122,639		53,635			69,004			128.7
Expenses:
Compensation and benefits		73,819		60,318			13,501			22.4
Non-compensation expenses:
Occupancy and equipment		5,567		5,297			270			5.1
Communications and data processing		7,399		7,290			109			1.5
Brokerage and clearance		4,939		6,039			(1,100	)		(18.2	)
Business development		4,427		5,054			(627	)		(12.4	)
Interest		135		871			(736	)		(84.5	)
Other		4,829		6,902			(2,073	)		(30.0	)
Non-compensation expenses		27,296		31,453			(4,157	)		(13.2	)
Total expenses		101,115		91,771			9,344			10.2
Income / (loss) before income taxes		21,524		(38,136	)		59,660			N/M
Income tax expense / (benefit)		9,630		(15,136	)		24,766			N/M
Net income / (loss)	$	11,894	$	(23,000	)	$	34,894			N/M	%

N/M = Not Meaningful

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Three Month Non-GAAP Financial Measures

     Compensation cost for stock-based awards are measured at fair value on the date of grant and recognized as compensation expense over the requisite service period, net of estimated forfeitures.

     We reported our compensation and benefits expense, income / (loss) before income taxes, income tax expense / (benefit), net income / (loss), compensation ratio and basic and diluted earnings per share on a non-GAAP basis for the three and nine months ended September 30, 2009 and 2008 in our October 29, 2009 press release. The non-GAAP amounts excludes compensation expense related to the amortization of IPO restricted stock awards granted in November 2006.

     Our management has utilized such non-GAAP calculations as an additional device to aid in understanding and analyzing our financial results for the period ended September 30, 2009. Specifically, our management believes that these non-GAAP measures provide useful information by excluding certain items that may not be indicative of our core operating results and business outlook. Our management believes that these non-GAAP measures will allow for a better evaluation of the operating performance of our business and facilitate meaningful comparison of our results in the current period to those in prior and future periods. Such periods did not in the past, and likely will not in the future include substantial grants of restricted stock awards to employees such as the Company-wide IPO restricted stock awards. Our reference to these non-GAAP measures should not be considered as a substitute for results that are presented in a manner consistent with GAAP. These non-GAAP measures are provided to enhance investors’ overall understanding of our current financial performance.

     A limitation of utilizing these non-GAAP measures is that the determination of these amounts in accordance with GAAP reflects the underlying financial results of our business. These effects should not be ignored in evaluating and analyzing our financial results. Therefore, management believes that, with respect to the items set forth in the table below, both our GAAP and respective non-GAAP measures should be considered together.

     The following table provides details with respect to reconciling compensation and benefits expense, income / (loss) before income taxes, income tax expense / (benefit), net income / (loss), compensation ratio and basic and diluted earnings per share on a non-GAAP basis for the three months ended September 30, 2009 and 2008.

23

	GAAP			Reconciliation Amount			Non-GAAP
	(dollars in thousands, except per share information)
Three months ended September 30, 2009:
Compensation and benefits expense	$	73,819		$	(2,689)	(a)	$	71,130
Income before income taxes	$	21,524		$	2,689	(a)	$	24,213
Income tax expense	$	9,630		$	1,136	(b)	$	10,766
Net income	$	11,894		$	1,553	(c)	$	13,447
Compensation ratio (d):		60.2	%					58.0	%
Earnings per share (e):
Basic	$	0.33		$	0.04		$	0.37
Diluted	$	0.33		$	0.04		$	0.37
Weighted average number of common shares outstanding (e):
Basic		31,410,337			—	(f)		31,410,337
Diluted		31,410,337			—	(f)		31,410,337
Three months ended September 30, 2008:
Compensation and benefits expense	$	60,318		$	(2,843	)(a)	$	57,475
(Loss) / income before income taxes	$	(38,136	)	$	2,843	(a)	$	(35,293	)
Income tax (benefit) / expense	$	(15,136	)	$	1,145	(b)	$	(13,991	)
Net (loss) / income	$	(23,000	)	$	1,698	(c)	$	(21,302	)
Compensation ratio (d):		112.5	%					107.2	%
Earnings per share (e):
Basic	$	(0.75	)	$	0.06		$	(0.69	)
Diluted	$	(0.75	)	$	0.06		$	(0.69	)
Weighted average number of common shares outstanding (e):
Basic		30,794,738			—	(f)		30,794,738
Diluted		30,794,738			—	(f)		30,794,738

(a)	The non-GAAP adjustment represents the pre-tax expense with respect to the amortization of the IPO restricted stock awards granted to employees on November 2006.
(b)	The non-GAAP adjustment with respect to income tax expense / (benefit) represents the elimination of the tax expense / (benefit) resulting from the amortization of the IPO restricted stock awards in the period.
(c)	The non-GAAP adjustment with respect to net income / (loss) was the after-tax amortization of the IPO restricted stock awards in the period.
(d)	The third quarter 2009 and 2008 compensation ratios were calculated by dividing compensation and benefits expense by total revenues of $122,639 and $53,635 respectively.
(e)	Basic and diluted common shares outstanding were equal for each respective period under the two-class method.
(f)	Both the basic and diluted weighted average number of common shares outstanding were not adjusted.

     Our management utilizes these non-GAAP calculations in understanding and analyzing our financial results. Our management believes that the non-GAAP measures provide useful information by excluding certain items that may not be indicative of our core operating results and business outlook. Our management believes that these GAAP measures will allow for a better evaluation of the operating performance of our business and facilitate meaningful comparison of our results in the current period to those in prior periods and future periods. Our reference to these non-GAAP measures should not be considered as a substitute for results that are presented in a manner consistent with GAAP. These non-GAAP measures are provided to enhance investors’ overall understanding of our current financial performance.

24

     A limitation of utilizing these non-GAAP measures is that the GAAP accounting effects of these events do in fact reflect the underlying financial results of our business and these effects should not be ignored in evaluating and analyzing our financial results. Therefore, management believes that our GAAP measures of compensation and benefits expense, income / (loss) before income taxes, income tax expense / (benefit), net income / (loss), and basic and diluted earnings per share and the same respective non-GAAP measures of our financial performance should be considered together.

     We expect to grant restricted stock awards and other share-based compensation in the future. We do not expect to make any such substantial grants to employees outside of our regular compensation and hiring process, as we did when we granted IPO restricted stock awards.

Revenues

  Investment Banking

     Investment banking revenue increased $11.7 million, or 25.5%, to $57.8 million for the three months ended September 30, 2009 compared with $46.0 million for the same period in 2008. Capital markets revenue increased $16.3 million, or 46.0%, to $51.7 million for the three months ended September 30, 2009 compared with $35.4 million for the same period in 2008. The 2009 increase reflects the completion of a record number of equity capital market transactions when 28 capital markets transactions were completed compared with 8 for same period in 2008. M&A and advisory revenue was $6.1 million for the three months ended September 30, 2009 compared with $10.6 million for the same period in 2008. This decrease was primarily due to a decline in completed mergers and acquisitions and the smaller average size of transactions that closed in the third quarter of 2009 compared with the same period in 2008.

  Commissions

     Commissions revenue was $36.6 million for the three months ended September 30, 2009 compared with $54.5 million for the same period in 2008, a decrease of $17.9 million, or 32.9%. U.S. equity commissions were $25.5 million for the three months ended September 30, 2009 compared with $36.8 million for the same 2008 period, a decrease of $11.3 million, or 30.7%, reflecting lower trading volume due to lower levels of market volatility and a less favorable mix of order flow. European equity commissions were $11.1 million for the three months ended September 30, 2009 compared with $17.7 million for the same period in 2008, a decrease of $6.6 million, or 37.3%, reflecting the lower value of most European financial services stocks on which our European commissions are based and the impact of translating our non-U.S. commissions revenues to U.S. dollars at less favorable exchange rates in 2009 compared to 2008.

  Principal Transactions, Net

     Principal transactions, net resulted in revenue of $23.7 million for the three months ended September 30, 2009 compared to a net loss of $53.8 million for the same period in 2008. The net gain in the current quarter reflects the absence of significant negative valuation adjustments on certain financial instruments owned, primarily related to trust preferred backed collateralized debt obligations and related securities, and higher revenue from our fixed income customer business. Our fixed income revenue was $16.2 million for the three months ended September 30, 2009 compared to $3.9 million for the same period in 2008, reflecting strong client-driven activity as credit markets continued to improve. Our equity market making activity resulted in a loss of $2.9 million for the three months ended September 30, 2009 compared to a loss of $1.2 million for the same period in 2008. Trading for our own account, including firm investments, resulted in a net gain of $10.4 million for the three months ended September 30, 2009 compared to a net loss of $6.3 million for the same period in 2008, reflecting an improved trading environment. The change in the fair value of our trust preferred backed collateralized debt obligations and related securities owned was nil for the three months ended September 30, 2009 compared to a loss of $50.6 million for the same period in 2008, reflecting improved market conditions and continued stability of issuer credit quality in the third quarter of 2009. At September 30, 2009, our trust preferred backed collateralized debt obligations and related securities owned were carried at an aggregate fair value of approximately $31 million (or 23% of original par value or an unrealized loss of approximately $103 million).

  Interest and Dividend Income

     Interest and dividend income was $2.7 million for the three months ended September 30, 2009, a decrease of $3.2 million, or 54.9%, compared with $5.9 million for the three months ended September 30, 2008. The decrease was primarily due to significantly reduced interest rates compared with the third quarter of 2008.

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  Other

     Other revenues increased $0.8 million to $1.6 million for the three months ended September 30, 2009 compared with $0.8 million for the three months ended September 30, 2008. The increase was primarily due to higher loan portfolio sales fees compared with the third quarter of 2008.

Expenses

  Compensation and Benefits

     Compensation and benefits expense was $73.8 million, an increase of $13.5 million, or 22.4% for the three months ended September 30, 2009 compared with $60.3 million for the three months ended September 30, 2008, reflecting higher revenues. Compensation and benefits as a percentage of total revenue, after adjusting for expenses associated with the IPO restricted stock awards, was 58.0% in the third quarter of 2009 compared to 107.2% in the same 2008 period. See “-Three Month Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to their corresponding GAAP amounts.

  Brokerage and Clearance

     Brokerage and clearance expense decreased $1.1 million, or 18.2%, to $4.9 million for the three months ended September 30, 2009 compared with $6.0 million for the three months ended September 30, 2008. This decrease was primarily a result of lower trading volume in the third quarter of 2009 compared with the third quarter of 2008.

  Business Development

     Business development expense decreased $0.6 million, or 12.4% , to $4.4 million for the three months ended September 30, 2009 compared with $5.1 million for the same 2008 period. The decrease was primarily due to lower travel and entertainment expenses for the third quarter of 2009 relative to 2008.

  Interest

     Interest expense decreased $0.7 million to $0.1 million for the three months ended September 30, 2009 compared with $0.9 million for the three months ended September 30, 2008. The decrease was primarily due to lower average balances of securities sold under repurchased agreements and short-term borrowings and reduced interest rates in the third quarter of 2009 relative to 2008.

  Income Tax Expense / (Benefit)

     Income tax expense was $9.6 million for the quarter ended September 30, 2009, which resulted in an effective tax rate of 44.7%, compared to an income tax benefit of $15.1 million for the quarter ended September 30, 2008, which resulted in an effective tax rate of 39.7%. The change in the effective tax rate was primarily due to the effect of permanent differences relative to the income / (loss) level.

  Nine months Ended September 30, 2009 Compared with Nine months Ended September 30, 2008

  Overview

     Total revenues increased $100.4 million, or 50.3%, to $300.0 million for the nine months ended September 30, 2009 compared with $199.7 million for the same period in 2008. The increase was primarily due to a swing to a net gain of $51.4 million in principal transactions, net in 2009 compared to net losses of $113.0 million in 2008, an increase of $164.3 million, partially offset by decreases in commissions revenue and investment banking revenue of $44.4 million and $9.4 million, respectively. The principal transactions net losses in 2008 were substantially unrealized losses on trust preferred backed collateralized debt obligations and related securities.

     Total expenses decreased $3.1 million, or 1.1%, to $262.9 million for the nine months ended September 30, 2009 compared with $266.0 million for the same period in 2008. This decrease was due to a decrease in non-compensation expenses of $10.8 million, partially offset by an increase in compensation and benefits expense of $7.7 million.

     We recorded net income of $19.8 million, or $0.55 per diluted share, for the nine months ended September 30, 2009 compared with a net loss of $40.2 million, or $1.31 per diluted share for the nine months ended September 30, 2008. After adjusting for the 2006 one-time restricted stock awards granted to employees in connection with our IPO, our non-GAAP operating net income was $23.8 million, or $0.66 per diluted share for the nine months ended September 30, 2009, compared with a net loss of $35.1 million, or $1.14 per diluted share for the same period in 2008. See “-Nine Month Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to their corresponding GAAP amounts.

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     The following table provides a comparison of our revenues and expenses for the periods presented (dollars in thousands):

	For the Nine Months Ended
	September 30,					Period-to-Period
	2009		2008			$ Change			% Change
	(unaudited)
Revenues:
Investment banking	$	126,958	$	136,382		$	(9,424	)		(6.9	)%
Commissions		108,466		152,894			(44,428	)		(29.1	)
Principal transactions, net		51,371		(112,973	)		164,344			N/M
Interest and dividend income		6,430		20,351			(13,921	)		(68.4	)
Investment advisory fees		974		815			159			19.5
Other		5,812		2,189			3,623			165.5
Total revenues		300,011		199,658			100,353			50.3
Expenses:
Compensation and benefits		184,965		177,251			7,714			4.4
Non-compensation expenses:
Occupancy and equipment		16,168		14,579			1,589			10.9
Communications and data processing		21,301		20,632			669			3.2
Brokerage and clearance		12,423		19,079			(6,656	)		(34.9	)
Business development		10,672		12,971			(2,299	)		(17.7	)
Interest		361		4,115			(3,754	)		(91.2	)
Other		17,058		17,373			(315	)		(1.8	)
Total non-compensation expenses		77,983		88,749			(10,766	)		(12.1	)
Total expenses		262,948		266,000			(3,052	)		(1.1	)
Income / (loss) before income taxes		37,063		(66,342	)		103,405			N/M
Income tax expense / (benefit)		17,226		(26,105	)		43,331			N/M
Net income / (loss)	$	19,837	$	(40,237	)	$	60,074			N/M	%

N/M — Not Meaningful

  Nine Month Non-GAAP Financial Measures

     The following table reconciles GAAP compensation and benefits expense, income / (loss) before income taxes, income tax expense / (benefit), net income / (loss), compensation ratio and basic and diluted earnings per share for the nine months ended September 30, 2009 and 2008 to these items on a non-GAAP basis for the same respective periods.

     See the section “Three Month Non-GAAP Financial Measures” elsewhere herein for a discussion regarding why management uses non-GAAP measures.

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	GAAP			Reconciliation Amount			Non-GAAP
	(dollars in thousands, except per share information)
Nine months ended September 30, 2009:
Compensation and benefits expense	$	184,965		$	(7,412)	(a)	$	177,553
Income before income taxes	$	37,063		$	7,412	(a)	$	44,475
Income tax expense	$	17,226		$	3,445	(b)	$	20,671
Net income	$	19,837		$	3,967	(c)	$	23,804
Compensation ratio (d)		61.7	%					59.2	%
Earnings per share (e):
Basic	$	0.55		$	0.11		$	0.66
Diluted	$	0.55		$	0.11		$	0.66
Weighted average number of common shares outstanding (e):
Basic		31,390,229			—	(f)		31,390,229
Diluted		31,390,229			—	(f)		31,390,229
Nine months ended September 30, 2008:
Compensation and benefits expense	$	177,251		$	(8,389)	(a)	$	168,862
(Loss) / income before income taxes	$	(66,342	)	$	8,389	(a)	$	(57,953	)
Income tax (benefit) / expense	$	(26,105	)	$	3,301	(b)	$	(22,804	)
Net (loss) / income	$	(40,237	)	$	5,088	(c)	$	(35,149	)
Compensation ratio (d)		88.8	%					84.6	%
Earnings per share (e):
Basic	$	(1.31	)	$	0.17		$	(1.14	)
Diluted	$	(1.31	)	$	0.17		$	(1.14	)
Weighted average number of common shares outstanding (e):
Basic		30,776,870			—	(f)		30,776,870
Diluted		30,776,870			—	(f)		30,776,870

(a)	The non-GAAP adjustment represents the pre-tax expense with respect to the amortization of the IPO restricted stock awards granted to employees in November 2006.
(b)	The non-GAAP adjustment with respect to income tax expense / benefit represents the elimination of the tax expense / (benefit) resulting from the amortization of the IPO restricted stock awards in the period.
(c)	The non-GAAP adjustment with respect to net income / (loss) was the after-tax amortization of the IPO restricted stock awards in the period.
(d)	The compensation ratio for the nine months ended September 30, 2009 and 2008 were calculated by dividing compensation and benefits expense by total revenues of $300,011 and $199,658, respectively.
(e)	Basic and diluted common shares outstanding were equal for each respective period under the two-class method.
(f)	Both the basic and diluted weighted average number of common shares outstanding were not adjusted.

     See the section entitled “—Three Month Non-GAAP Financial Measures” for a discussion regarding the reasons why management believes a presentation of non-GAAP financial measures provides useful information for investors regarding our financial condition and results of operations.

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Revenues

Investment Banking

     Investment banking revenue was $127.0 million for the nine months ended September 30, 2009 compared with $136.4 million for the same period in 2008, a decrease of $9.4 million, or 6.9%. Capital markets revenue increased $34.2 million, or 47.9%, to $105.6 million for the nine months ended September 30, 2009 compared with $71.4 million for the same period in 2008. This increase was primarily due to the higher number of equity capital markets transactions that were completed in 2009 compared to the same period in 2008. M&A and advisory revenue was $21.4 million for the nine months ended September 30, 2009 compared with $65.0 million for the same period in 2008, a decrease of $43.6 million. This decrease was primarily due to a decline in completed mergers and acquisitions and the smaller average size of transactions that closed in 2009 compared with the same period in 2008.

Commissions

     Commissions revenue was $108.5 million for the nine months ended September 30, 2009 compared with $152.9 million for the same period in 2008, a decrease of $44.4 million, or 29.1%. U.S. equity commissions were $79.9 million for the nine months ended September 30, 2009 compared with $99.9 million for the same period in 2008, a decrease of $20.0 million, reflecting lower trading volume and less favorable mix of order flow. European equity commissions were $28.6 million for the nine months ended September 30, 2009 compared with $53.0 million for the same period in 2008, a decrease of $24.4 million, reflecting the lower value of most European financial services stocks on which our European commissions are based and the impact of translating our non-U.S. commissions revenues to U.S. dollars at less favorable exchange rates.

Principal Transactions, Net

     Principal transactions, net resulted in revenue of $51.4 million for the nine months ended September 30, 2009 compared to a net loss of $113.0 million for the same period in 2008. The return to a net gain in the current period reflects the absence of significant negative valuation adjustments on financial instruments owned, primarily related to trust preferred backed collateralized debt obligations and related securities and higher revenue from our fixed income customer business. Our fixed income customer business resulted in revenue of $38.7 million for the nine months ended September 30, 2009 compared to $3.3 million for the same period in 2008, reflecting the strong client-driven activity as credit markets improved. Equity market making activity resulted in a loss of $5.4 million for the nine months ended September 30, 2009 compared to a loss of $4.7 million for the same period in 2008. Trading for our own account, including firm investments, resulted in a net gain of $18.1 million for the nine months ended September 30, 2009 compared to a net loss of $16.4 million for the same period in 2008, reflecting an improved trading environment. The change in the fair value of our trust preferred backed collateralized debt obligations and related securities owned was nil for the nine months ended September 30, 2009 compared to a loss of $95.6 million for the same period in 2008, reflecting a sale of a trust preferred security, improved market conditions and stabilization of issuer credit quality.

Interest and Dividend Income

     Interest and dividend income was $6.4 million for the nine months ended September 30, 2009 compared with $20.4 million for the same period in 2008, a decrease of $13.9 million, primarily due to reduced interest rates in 2009 compared with the same period in 2008.

Other

     Other revenues increased $3.6 million, or 165.5%, to $5.8 million for the nine months ended September 30, 2009 compared with $2.2 million for the same period in 2008. The increase was primarily due to higher loan portfolio sales fees in 2009 compared with the same period in 2008.

Expenses

Compensation and Benefits

     Compensation and benefits expense was $185.0 million for the nine months ended September 30, 2009 compared with $177.3 million for the same period in 2008, an increase of $7.7 million, or 4.4%. Compensation and benefits as a comparative percentage of total revenue after deducting the expenses associated with the IPO restricted stock awards was 59.2% in the first nine months of 2009 compared to 84.6% for the same period in 2008 period. See “—Nine Month Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to their corresponding GAAP amounts.

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Occupancy and Equipment

     Occupancy and equipment expense was $16.2 million for the nine months ended September 30, 2009, an increase of $1.6 million, or 10.9%, compared with $14.6 million for the same period in 2008, primarily due to higher rent expense.

Brokerage and Clearance

     Brokerage and clearance expense decreased $6.7 million, or 34.9%, to $12.4 million for the nine months ended September 30, 2009 compared with $19.1 million for the same period in 2008. This decrease was primarily a result of lower trading volume in 2009 compared with the same period in 2008.

Business Development

     Business development expense decreased $2.3 million, or 17.7%, to $10.7 million for the nine months ended September 30, 2009 compared with $13.0 million for the same period in 2008. The decrease was primarily due to lower travel and entertainment expenses.

Interest

     Interest expense decreased $3.8 million to $0.4 million for the nine months ended September 30, 2009 compared with $4.1 million for the same period in 2008. The decrease is primarily due to lower average balances of securities sold under repurchased agreements and short-term borrowings and reduced interest rates in 2009 relative to the same period in 2008.

Income Tax Expense/ (Benefit)

     Income tax expense was $17.2 million for the nine months ended September 30, 2009, which resulted in an effective tax rate of 46.5%, compared with an income tax benefit of $26.1 million for the same period in 2008, which resulted in an effective tax rate of 39.3%. The change in the tax rate reflects the effect of permanent differences relative to the income / (loss) level.

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Critical Accounting Policies and Estimates

     The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and of revenues and expenses during the reporting periods. We base our estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances. The use of different estimates and assumptions could produce materially different results. For example, if factors such as those described in Item 1A under “Risk Factors” cause actual events to differ from the assumptions we used in applying the accounting policies, our results of operations, financial condition and liquidity could be materially adversely affected.

     Our significant accounting policies are summarized in Note 2 of the Notes to Consolidated Financial Statements. On an ongoing basis, we evaluate our estimates and assumptions, particularly as they relate to accounting policies that we believe are most important to the presentation of our financial condition and results of operations. We regard an accounting estimate or assumption to be most important to the presentation of our financial condition and results of operations where the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, as well as the impact of the estimate or assumption on our financial condition or operating performance is material.

     Based on these criteria, we believe the following to be our critical accounting policies:

Fair Value of Financial Instruments

     We account for financial instruments that are being measured and reported on a fair value basis in accordance with FASB Accounting Standards Codification™ (“ASC”) 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC 820 defines fair value as “the price that would be received to sell an asset and paid to transfer a liability in an ordinary transaction between current market participants at the measurement date.” See Note 3 of the Notes to Consolidated Financial Statements for a more detailed discussion of fair value of financial instruments.

     ASC 825, Financial Instruments, provides entities the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. ASC 825 permits the fair value option election, on an instrument-by-instrument basis, either at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. Such election must be applied to the entire instrument and not only a portion of the instrument. We applied the fair value option for certain eligible instruments, including all private equity securities and limited partnership interests, as these financial instruments had been accounted for at fair value prior to the fair value option election in accordance with the AICPA Audit and Accounting Guide — Brokers And Dealers In Securities (ASC 940).

     Financial instruments are valued at quoted market prices, if available. For financial instruments that do not have readily determinable fair values through quoted market prices, the determination of fair value is based upon consideration of available information, including types of financial instruments, current financial information, restrictions on dispositions, fair values of underlying financial instruments and quotations for similar instruments.

     The valuation process for financial instruments may include the use of valuation models and other techniques. Adjustments to valuations derived from valuations models may be made when, in management’s judgment, either the size of the position in the financial instrument in a nonactive market or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded (such as counterparty, credit, concentration or liquidity) require that an adjustment be made to the value derived from the models. An adjustment may be made if a financial instrument is subject to sales restrictions that would result in a price less than the quoted market price. Adjustments from the price derived from a valuation model reflects management’s judgment that other participants in the market for the financial instrument being measured at fair value would also consider in valuing that same financial instrument and are adjusted for assumptions about risk uncertainties and market conditions. Results from valuation models and valuation techniques in one period may not be indicative of future period fair value measurements.

Fair Value Hierarchy

     In determining fair value, we utilize various methods including the market and income approaches. Based on these approaches, we utilize assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, we are required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to

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determine fair values. Financial instrument assets and liabilities carried at fair value have been classified and disclosed in one of the following three categories:

Level 1	Quoted market prices in active markets for identical assets or liabilities.
Level 2	Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3	Unobservable inputs that are not corroborated by market data.

     Level 1 primarily consists of financial instruments whose value is based on quoted market prices, such as listed equities and options, and convertible preferred stock. This category may also include U.S. Government and agency securities for which we typically receive independent external valuation information.

     Level 2 includes those financial instruments that are valued using multiple valuation techniques, primarily a market approach. The valuation methodologies utilized are calibrated to observable market inputs. We consider recently executed transactions, market price quotations and various assumptions, such as credit spreads, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, as well as other measurements. In order to be classified as Level 2, substantially all of these assumptions would need to be observable in the marketplace or can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category include certain corporate debt, residential mortgage-backed securities, rated collateralized debt obligations (“CDOs”) primarily collateralized by banking and insurance company trust preferred and capital securities, certain preferred stock and convertible debt.

     Fair value of corporate debt, residential mortgage-backed securities, preferred stock and convertible debt classified as Level 2 was determined by using quoted market prices, broker or dealer quotes, or alternate pricing sources with reasonable levels of price transparency. Fair value of rated CDOs primarily collateralized by banking and insurance company trust preferred and capital securities was determined primarily by considering recently executed transactions and certain assumptions, including the financial condition, operating results and credit ratings of the issuer or underlying companies.

     Level 3 is comprised of financial instruments whose fair value is estimated based on multiple valuation techniques, primarily market and income approaches. The valuation methodologies utilized may include significant inputs that are unobservable from objective sources. We consider various market inputs and assumptions, such as recently executed transactions, market price quotations, discount margins, market spreads applied, the terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, default rates, as well as other measurements. Included in this category are certain corporate and other debt, including banking and insurance company trust preferred and capital securities and non-rated CDOs primarily collateralized by banking and insurance company trust preferred and capital securities, private equity securities and other investments including limited and general partnership interests. We did not own any other type of CDOs, including those collateralized by mortgage loans, in any period presented herein.

     Fair value of banking and insurance company trust preferred and capital securities was determined by utilizing a market spread method for each of the individual trust preferred and capital securities utilizing credit spreads for secondary market trades for trust preferred and capital securities for issues which were substantially similar to such positions based on certain assumptions. The key market inputs in this method are the discount margins, market spreads applied and the yield expectations for similar instruments.

     Fair value of private equity securities was determined by assessing market-based information, such as performance multiples, comparable company transactions and changes in market outlook. Fair value of limited and general partnership interests was determined by using net asset values or capital statements provided by the general partner, updated for changes in market conditions up to the reporting date. Private equity securities and limited and general partnership interests generally trade infrequently.

     The variables affecting fair value estimates of these financial instruments can change rapidly and unexpectedly, which could have a significant impact on the fair value estimates of these financial instruments. Results from valuation techniques in one period may not be indicative of future period fair value measurements.

     Our Level 3 assets were $91.6 million as of September 30, 2009, which represented approximately 14% of total assets and approximately 49% of total assets measured at fair value.

     The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in level 3. In certain cases, the inputs used to measure fair value may fall into different

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levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

     Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. When market assumptions are not readily available, management’s assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from level 1 to level 2, or from level 2 to level 3.

Fair Value of Financial Instruments Control Process

     We employ a variety of control processes to validate the fair value of our financial instruments, including those derived from utilizing valuation techniques. Individuals outside of the trading departments obtain independent prices, as appropriate. Where a valuation technique is used to determine fair value, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the valuation technique. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. These control processes include reviews by personnel with relevant expertise who are independent from the trading desks, including involvement by senior management.

Income Taxes

     Deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. In the event it is more likely than not that a deferred tax asset will not be realized, a valuation allowance will be recorded.

     We apply ASC 740, Income Taxes, which prescribes a single, comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on its tax returns. Income tax expense is based on pre-tax accounting income, including adjustments made for the recognition or derecognition related to uncertain tax positions. The recognition or derecognition of income tax expense related to uncertain tax positions is determined under the guidance prescribed by ASC 740.

Contractual Obligations

     As of September 30, 2009, our contractual obligations with respect to operating leases and partnership commitments have not significantly changed since December 31, 2008.

Off-Balance Sheet Arrangements

     In the normal course of our proprietary trading activities, we may enter into transactions in financial instruments with off-balance-sheet risk. These financial instruments, such as options, futures contracts and mortgage-backed to-be-announced securities (“TBAs”), contain off-balance-sheet risk inasmuch as ultimate settlement of these transactions may have market and/or credit risk in excess of amounts which are recognized in the consolidated financial statements. Transactions in listed options are conducted through regulated exchanges, which clear and guarantee performance of counterparties. As described in Item 3 — “Qualitative and Quantitative Disclosures About Market Risk — Credit Risk,” through indemnification provisions in our clearing agreements with our clearing brokers, customer activities may expose us to off-balance sheet credit risk, which we seek to mitigate through customer screening and collateral requirements.

     We are a member of various exchanges that trade and clear securities, options or futures contracts. As a member of these exchanges, we may be required to pay a proportionate share of the financial obligations of another member who may default on its obligations to the exchange. To mitigate these performance risks, the exchanges often require members to post collateral as well as meet minimum financial standards. While the rules governing different exchange memberships vary, our guarantee obligations generally would arise only if the exchange had previously exhausted its resources. In addition, any such guarantee obligation would be apportioned among the other non-defaulting members of the exchange. Any potential contingent liability under these membership agreements cannot be estimated. We have not recorded any contingent liability in our consolidated financial statements for these agreements and currently believe that any potential requirement to make payments under these agreements is remote.

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Recently Issued Accounting Standards, Not Yet Adopted

     In September 2009, FASB issued Accounting Standard Update (“ASU”) No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value Per Share (or Its Equivalent). ASU No. 2009-12 provides amendments to ASC 820, Fair Value Measurements and Disclosures, for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendments in ASU No. 2009-12 permit, as a practical expedient, a reporting entity to measure the fair value of an investment on the basis of the net asset value per share of the investment (or its equivalent). The amendments in ASU No. 2009-12 also require additional disclosures by major category of investment, such as the nature of any restrictions on the investor’s ability to redeem its investments at the measurement date, any unfunded commitments and the investment strategies of the investees. ASU No. 2009-12 is effective for interim and annual periods ending after December 15, 2009. We expect additional disclosure requirements related to certain financial instruments as a result of the implementation of ASU No. 2009-12 but do not expect it to have a material effect on the consolidated financial statements.

     In June 2009, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 is a revision to FASB Interpretation No. 46(R) (ASC 810), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009. We are evaluating the impact to the consolidated financial statements of adopting this standard.

     In June 2009, FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140. SFAS No. 166 is a revision to Statement No. 140 (ASC 860), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009. We do not expect the implementation of this standard to have a material effect on the consolidated financial statements.

Liquidity and Capital Resources

     We are the parent of Keefe, Bruyette & Woods, Inc. (“Keefe”), Keefe, Bruyette & Woods Limited (“KBWL”), KBW Asset Management, Inc. (“KBWAM”) and KBW Ventures, Inc. Dividends and other transfers from our subsidiaries are our primary source of funds to satisfy our capital and liquidity requirements. Applicable laws and regulations, primarily the net capital rules discussed below, restrict dividends and transfers from Keefe and KBWL to us. Our rights to participate in the assets of any subsidiary are also subject to prior claims of the subsidiary’s creditors, including customers and trade creditors of Keefe, KBWL and KBWAM.

     We monitor and evaluate the composition and size of our assets and operating liabilities. As a result of our market making, customer and proprietary activities (including securitization activities), the overall size of total assets and operating liabilities fluctuate from period to period. Our assets generally consist of cash and cash equivalents, securities, resale agreement balances and receivables.

     Our operating activities in the period generate and use cash resulting from net income or loss and fluctuations in our current assets and liabilities. The most significant fluctuations in current assets and liabilities have resulted from changes in the level of customer activity, changes in the types of and value of the financial instruments owned on a proprietary basis and shifts in our investment positions in response to changes in our trading strategies or prevailing market conditions. We have not relied significantly on leverage. Our moderate use of leverage does not expose us to potential requirements to sell assets as a result of margin calls due to decreases in the fair value of financial instruments.

     We have historically satisfied our capital and liquidity requirements through capital from our stockholders and internally generated cash from operations. As of September 30, 2009, we had liquid assets of $352.8 million, primarily consisting of cash and cash equivalents and receivables from clearing brokers. From time to time, we may obtain a short term subordinated loan from one of our clearing brokers to support underwriting activity over a very short time. We may also finance fixed income positions with securities sold under repurchase agreements as well as utilizing margin borrowing from the clearing brokers.

     Although we believe such sources remain available, we do not currently plan to obtain such short-term subordinated financing from any outside source. We do not currently have any long term debt obligations and therefore, are not exposed to the breach of any debt covenants.

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     We have an effective “universal” shelf registration statement on form S-3 on file with the SEC. This shelf registration statement enables us to sell, from time to time, the securities covered by the registration statement in one or more public offerings. The securities covered by the registration statement include common stock, preferred stock, depositary shares, senior debt securities, subordinated debt securities, warrants, stock purchase contracts, and stock purchase units. We may offer any of these securities independently or together in any combination with other securities. In addition, selling shareholders may use the shelf registration statement to offer, from time to time, shares of our common stock. Our status as a “well-known seasoned issuer,” as such term is defined in the federal securities laws, enables us, among other things, to enter the public markets and consummate sales off the shelf registration statement in rapid fashion and with little or no notice.

     The timing of cash bonus payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees are generally paid salaries semi-monthly during the year, cash bonus payments, which make up a larger portion of total compensation, are generally paid once a year. Cash bonus payments for a given year are generally paid in February of the following year. We continually monitor our liquidity position and believe our available liquidity will be sufficient to fund our operations over the next twelve months.

     As a registered broker-dealer and member firm of the NYSE, Keefe is subject to the uniform net capital rule of the SEC. We use the basic method permitted by the uniform net capital rule, which generally requires that the ratio of aggregate indebtedness to net capital cannot exceed 15 to 1. The NYSE may prohibit a member firm from expanding its business or paying dividends if resulting net capital would be below the regulatory limit. We do not expect that these limits will materially impact our ability to meet our current and future obligations. We have not been the subject to any regulatory restrictions as a result of the decreases in the fair value of our financial instruments.

     At September 30, 2009, Keefe’s net capital under the SEC’s Uniform Net Capital Rule was $139.9 million, or $135.6 million in excess of the minimum required net capital.

     KBWL is subject to the capital requirements of the U.K. Financial Services Authority. KBWL’s total capital resources of $36.0 million exceeded the capital resources requirement by approximately $27.1 million at September 30, 2009.

Cash Flows

     Nine months ended September 30, 2009. Cash decreased $15.1 million during the nine months ended September 30, 2009, primarily due to negative cash flows from operating and financing activities.

     Net income, after adjusting for non-cash expense and revenue items of $31.2 million, provided cash of $51.0 million. The non-cash items consisted of expenses of $28.5 million resulting from the amortization of stock based compensation expenses, $3.6 million related to depreciation and amortization expense and $0.9 million related to deferred income tax benefit. Cash of $75.7 million was used as a result of an increase in operating assets, primarily attributable to increases related to financial instruments owned, at fair value of $57.1 million and receivables from clearing brokers of $42.1 million, partially offset by a $31.3 million decline in income taxes receivable. Cash of $14.8 million was provided by an increase in operating liabilities, primarily attributable to increases in financial instruments sold, not yet purchased, at fair value and income taxes payable of $27.3 million and $10.6 million, respectively, partially offset by a $31.5 million reduction in short-term borrowings.

     We used $3.6 million in our investing activities for the purchase of fixed assets. Cash used in financing activities was $5.1 million primarily as a result of the cancellation of restricted stock in satisfaction of withholding tax requirements.

     Nine months ended September 30, 2008. Cash decreased $17.1 million in the nine months ended September 30, 2008, primarily due to negative cash flows from operating activities.

     Our operating activities used $10.1 million of cash due to a net loss of $40.2 million, adjusted for non-cash revenue and expense items of $12.5 million, and cash used to decrease operating liabilities was $205.7 million, offset by cash provided from operating assets of $223.3 million. The non-cash items consisted of amortization of stock-based compensation related to restricted stock of $24.6 million, deferred income tax benefits of $15.7 million and depreciation and amortization expense of $3.6 million. Cash used from the decreases in operating liabilities consisted primarily of decreases in securities sold under repurchase agreements of $71.6 million, accounts payable, accrued expenses and other liabilities of $66.7 million, financial instruments sold, not yet purchased, at fair value of $39.0 million and short-term borrowings of $33.6 million. The increase in cash provided by operating assets was primarily attributable to decreases in financial instruments owned, at fair value of $170.7 million and receivables from clearing broker of $52.1 million.

     We used $2.8 million in our investing activities, in the purchase of fixed assets. Cash provided from financing activities was $0.3 million primarily as a result of the repayment of loans we provided to certain employees in connection with their purchase of our common stock.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

     Market risk represents the risk of loss that may result from the change in value of a financial instrument due to fluctuations in its market price. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is directly related to our role as a financial intermediary in customer trading and to our market making and investment activities. Market risk is inherent in financial instruments.

     We trade in equity and debt securities as an active participant in both listed and over the counter markets. We typically maintain securities in inventory to facilitate our market making activities and customer order flow. We may use a variety of risk management techniques and hedging strategies in the ordinary course of our trading business to manage our exposures.

     In connection with our sales and trading business, management also reviews reports appropriate to the risk profile of specific trading activities. Management monitors risks in its trading activities by establishing and periodically reviewing limits for each trading desk and reviewing daily trading results, inventory aging, securities concentrations and ratings. Typically, market conditions are evaluated and transaction details and securities positions are reviewed. These activities seek to ensure that trading strategies are within acceptable risk tolerance parameters. Activities include price verification procedures, position reconciliations and reviews of transaction bookings. We believe these procedures, which stress timely communications between traders, trading management and senior management, are important elements of the risk management process.

     The following table sets forth our monthly high, low and average long/short financial instruments owned for the nine months ended September 30, 2009:

	High		Low		Average
	(dollars in thousands)
Long Value:
Equities	$	79,738	$	31,691	$	44,532
Corporate and other debt	$	76,933	$	36,742	$	51,569
Mortgage-backed securities	$	29,545	$	—	$	3,428
Other investments	$	40,302	$	34,893	$	36,667
Short Value:
Equities	$	34,463	$	11,162	$	20,058
Corporate debt	$	3,855	$	—	$	689
U.S. Government and agency securities	$	7,957	$	—	$	1,085

Interest Rate Risk

     Interest rate risk represents the potential loss from adverse changes in market interest rates. As we may hold debt securities from time to time, we are exposed to interest rate risk arising from changes in the level and volatility of interest rates and in the shape of the yield curve. Interest rate risk is primarily managed through the use of short positions in U.S. Government and agency securities.

Credit Risk

     We engage in various securities underwriting, trading and brokerage activities servicing a diverse group of domestic and foreign corporations and institutional investor clients. Our exposure to credit risk associated with the nonperformance of these clients in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets which may impair the client’s ability to satisfy its obligations to us. Our principal activities are also subject to the risk of counterparty nonperformance. Pursuant to our Clearing Agreements with Pershing LLC and Pershing Securities Limited, we are required to reimburse our clearing broker without limit for any losses incurred due to a counterparty’s failure to satisfy its contractual obligations. In these situations, we may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to other customers or counterparties. We seek to mitigate the risks associated with sales and trading services through active customer screening and selection procedures and through requirements that clients maintain collateral in appropriate amounts where required or deemed necessary.

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Inflation Risk

     Because a significant portion of our assets are relatively liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation and communications charges, which may not be readily recoverable in the prices of services we offer. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our combined financial condition and results of operations in certain businesses.

Operational Risk

     Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. We are focused on maintaining our overall operational risk management framework and minimizing or mitigating these risks through continual assessment, reporting and monitoring of potential operational risks.

ITEM 4. Controls and Procedures

     Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.

     Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the current quarter covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

     There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

     Our businesses, as well as the financial services industry generally, are subject to extensive regulation. From time to time, in the ordinary course of our business, we are involved in judicial, regulatory and arbitration proceedings and inquiries concerning matters arising in connection with the conduct of our businesses. In response to the lawsuit filed on January 12, 2009 by Frederick J. Grede, as Liquidation Trustee and Representative of the Estate of Sentinel Management Group, Inc., in the United States District Court for the Northern District of Illinois against Keefe and against Delores E. Rodriguez; Barry C. Mohr, Jr.; and Jacques De Saint Phalle (all former employees of Keefe) and Cohen & Company Securities, LLC, as described in the “Legal Proceedings” section of our Annual Report on Form 10-K for the year ended December 31, 2008, Keefe filed a motion to dismiss the complaint on April 1, 2009. On July 29, 2009, the court denied most of the relief sought in Keefe’s Motion to Dismiss, though it dismissed the Illinois Consumer Fraud Act claim and granted Keefe’s motion to sever the Trustee’s case against Keefe from the case against Cohen.

     On May 21, 2009 the Trustee filed an additional complaint in the same court and against the same parties (the “Second Complaint”). The Trustee claimed to be acting in the Second Complaint in his capacity as liquidation trustee and as an assignee of claims of Sentinel’s customers. The Second Complaint makes substantially the same allegations as the complaint described above. Keefe believes the claims in the Second Complaint are also without merit and will defend these claims vigorously. On July 28, 2009, in Grede v. Bank of New York Mellon et al filed in the same court, in which the Trustee alleged similar customer claims as an assignee, the court dismissed the Trustee’s claims due to lack of standing. The Trustee has appealed the court’s dismissal of Grede v. Bank of New York Mellon and, on August 19, 2009, the court stayed the Second Complaint while the Trustee’s appeal in Grede v. Bank of New York Mellon is pending.

ITEM 1A. Risk Factors

     There have not been any material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

     There were no unregistered sales of equity securities during the quarter ended September 30, 2009.

     The table below sets forth the information with respect to purchases made by or on behalf of KBW, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common stock during the quarter ended September 30, 2009:

					Total Number of
					Shares Purchased as		Approximate Dollar Value
	Total Number				Part of Publicly		of Shares that May Yet Be
	of Shares		Average Price Paid		Announced Plans or		Purchased Under the Plans
Period	Purchased(1)(2)		per Share		Programs		or Programs
July 1, 2009 to July 31, 2009		—		—		—		—
August 1, 2009 to August 31, 2009		—		—		—		—
September 1, 2009 to September 30, 2009		67,040	$	32.24		—		—
Total		67,040	$	32.24		—		—

(1)	All shares purchased were other than as part of a publicly announced plan or program. The purchased shares consist of cancelled shares of restricted stock in satisfaction of withholding tax requirements.
(2)	All shares were immediately retired upon purchase by us.

ITEM 3. Defaults Upon Senior Securities

     None.

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ITEM 4. Submission of Matters to a Vote of Security Holders

     None.

ITEM 5. Other Information

     On December 31, 2008, KBW, Inc. (the “Company”) had entered into Amended and Restated Employment Agreements (the “Employment Agreements”) with each of John G. Duffy, Thomas B. Michaud, and Andrew M. Senchak, all senior executive officers of the Company. Each of the Employment Agreements was an amendment and restatement of an earlier agreement that had originally been entered into with each such executive in connection with the Company’s initial public offering. The expiration date for each of the Employment Agreements is November 8, 2009.

     In light of the upcoming expiration date, the independent compensation committee of the Company’s board of directors (the “Committee”) determined it to be in the best interests of the Company and its stockholders to extend the expiration date for a limited interim period. Such limited extension was intended to allow the benefit of these contractual agreements to continue to inure to the Company and the officers, and at the same time afford the Committee adequate time to thoroughly review current industry standards for executive employment agreements, consult with outside experts to the extent deemed necessary or advisable, and negotiate and enter into new agreements with such executives on terms that are reasonable and acceptable to the Committee. Consequently, at its meeting on November 3, 2009, the Committee authorized and directed the Company to enter into amendments to the Employment Agreements (the “Amendments”) which extend the expiration date to January 31, 2010, and also approved the retention of an independent compensation consultant to assist the Committee with this matter.

     The Company and each of the three executive officers entered into the Amendments on November 4, 2009. Each Amendment is included as an exhibit to this Form 10-Q.

ITEM 6. Exhibits

     See Exhibit Index.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 6, 2009

KBW, INC.
By:	/s/ JOHN G. DUFFY
	Name:	John G. Duffy
	Title:	Chairman and Chief Executive Officer
By:	/s/ ROBERT GIAMBRONE
	Name:	Robert Giambrone
	Title:	Chief Financial Officer

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EXHIBIT INDEX

Exhibit
Number		Description
	10.1*	Amendment, dated November 4, 2009, to the Amended and Restated Employment Agreement with John G. Duffy and KBW, Inc., dated as of December 31, 2008.
	10.2*	Amendment, dated November 4, 2009, to the Amended and Restated Employment Agreement with Thomas B. Michaud and KBW, Inc., dated as of December 31, 2008.
	10.3*	Amendment, dated November 4, 2009, to the Amended and Restated Employment Agreement with Andrew M. Senchak and KBW, Inc., dated as of December 31, 2008.
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Indicates a management or compensatory arrangement.

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