UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2009
Commission file number
001-33138
KBW, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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13-4055775
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(State or other jurisdiction
of
incorporation or organization
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(I.R.S. Employer
Identification No.)
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787 Seventh Avenue, New York, New York 10019
(Address of principal executive
offices)
Registrants telephone number, including area code:
212-887-7777
Securities registered pursuant to Section 12(b) of the
Act:
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(Title of Each Class)
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(Name of Each Exchange on Which Registered)
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Common Stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
þ No
o
Indicate by check mark if the registrant is not required to file
pursuant to Section 13 or Section 15(d) of the
Act. Yes o No
þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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 the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common equity held by
non-affiliates of the registrant on June 30, 2009 was
approximately $922 million. For purposes of this
information, the then outstanding shares of common stock owned
by directors and executive officers of the registrant were
deemed to be shares of common stock held by affiliates.
The number of shares of the Registrants common stock, par
value $0.01 per share, outstanding as of February 19, 2010
was 35,482,976 which number includes 4,054,973 shares
representing unvested restricted stock awards and excludes
1,046,448 shares underlying vested restricted stock units.
Documents incorporated by reference: Portions of the
Registrants definitive proxy statement to be delivered to
stockholders in connection with the 2010 annual meeting of
stockholders to be held on June 14, 2010 are incorporated
by reference in this
Form 10-K.
Such definitive proxy statement will be filed by the registrant
with the Securities and Exchange Commission not later than
120 days after the end of the fiscal year ended
December 31, 2009.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this
Form 10-K
in Item 1 Business,
Item 1A Risk Factors,
Item 3 Legal Proceedings,
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations
and in other sections of this
Form 10-K
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 under Item 1A
Risk Factors in this
Form 10-K.
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.
ii
When we use the terms KBW, KBW, Inc.,
the Company, we, us and
our, we mean the combined business of KBW, Inc., a
Delaware corporation, and of its consolidated subsidiaries,
unless the context otherwise indicates. KBW, Inc. became the
holding company for all other subsidiary operating companies in
August 2005. Prior to August 2005, Keefe, Bruyette &
Woods, Inc., now an operating subsidiary, was the parent company
and references to KBW or the Company or
we, us and our prior to
August 2005 refer to the consolidated company structure prior to
that date. All data provided herein is as of or for the period
ended December 31, 2009 unless otherwise expressly
noted.
Overview
We are a full service investment bank specializing in the
financial services industry. Since our founding in 1962, our
commitment to this industry, our long-term relationships with
clients and our recognized industry expertise have made us a
trusted advisor to our corporate clients and a valuable resource
for our institutional investor customers. We have built our
reputation for excellence in financial services on the basis of
our research platform, our senior professionals, our track
record of market innovation, and the strength of our execution
capabilities.
Our business is organized into four general service offerings:
(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 (REITs), consumer and
specialty finance firms, financial processing companies and
securities exchanges. As of December 31, 2009, our research
department covered an aggregate of 543 financial services
companies, including 439 companies in the United States and
104 in Europe. Our revenues are derived from a broad range of
products and sectors within the financial services industry.
We have traditionally emphasized serving investment banking
clients in the small and mid cap segments of the financial
services industry, market segments that we believe have
traditionally been underserved by larger investment banks. We
are dedicated to building long-term relationships and growing
with our clients, providing them with capital raising
opportunities and strategic advice at every stage of their
development. We have continued to provide services to many of
our clients as they have grown to be large cap financial
institutions. The dislocation among competitors during the
financial crisis altered traditional relationships and expanded
opportunities to provide capital markets and advisory services
to large cap companies who were not previously clients. We have
also provided financial advisory services to large cap financial
services companies who were not previously long-term investment
banking clients.
The global financial crisis that began in late 2007 has
continued to dramatically affect the financial services
industry. In 2008, there were 25 failed banks in the
U.S. with assets totaling $374 billion. In 2009, there
were 140 failed U.S. banks with assets totaling
$170 billion. During 2009 there was a significant amount of
capital markets activity as financial institutions sought to
access increasingly stable markets in their efforts to
recapitalize their balance sheets, pay off government assistance
under the TARP program, and, in some cases, position themselves
to take advantage of acquisition opportunities that were
developing. We believe we are well positioned to serve those
companies that seek our services in accessing capital markets
and finding opportunities for growth.
We have created a number of multi-disciplinary work groups in an
effort to enhance our ability to serve our customers and clients
in the current economic environment. These groups help us to
rapidly communicate information and share ideas within the
Company on public and private market trends and issues and to
assess
1
the private and governmental responses to developing issues.
Through these work groups, within regulatory permitted
limitations, we can coordinate communication of these ideas to
clients. One of these groups, the Washington Working Group,
brings together representatives of various departments with a
goal of leveraging our relationships in various governmental
agencies. We believe that sharing ideas within the Company and
among customers and providing feedback to these agencies will
improve the implementation of various government programs and
provide added value for customers trying to navigate the
uncertain regulatory environment. We also invest in privately
placed securities and limited partnerships for strategic
purposes and make strategic principal investments in publicly
traded securities.
Our wholly-owned operating subsidiaries are comprised of a
U.S. registered broker-dealer, Keefe, Bruyette &
Woods, Inc., a U.S. registered investment advisor, KBW
Asset Management, Inc. and Keefe, Bruyette & Woods
Limited, an investment firm authorized and regulated by the U.K.
Financial Services Authority. We have nine broker-dealer offices
with our headquarters in New York and other offices in Atlanta,
Boston, Chicago, Hartford, Houston, Richmond (Virginia),
San Francisco, and London. We recently hired a number of
experienced personnel in Hong Kong and Tokyo in sales and
trading, research and capital markets, who will form the core of
our new wholly-owned subsidiary, Keefe, Bruyette &
Woods Asia Limited. We have applied for a license from the Hong
Kong Securities and Futures Commission and expect to commence
operations in the first quarter of 2010. We have also hired
sales and trading personnel in New York and London who will
focus on customers interested in investing in Asian securities.
Our asset management company is located in New York in the same
building as our headquarters. Due to the integrated nature of
financial markets, we manage our business based on the
enterprise as a whole. We do not present revenues by geographic
region, as such presentation is impracticable.
Our company was directly affected by the tragedies of
September 11, 2001. Our headquarters in the World Trade
Center was destroyed and 67 employees, nearly half of our
New York staff, perished that day. Five of our nine board
members, including our co-CEO and Chairman, died. The employees
of several departments, including equity trading and fixed
income sales and trading and research, were nearly completely
lost. Despite these losses, the depth of experience and
longevity of our employee base and their personal commitment to
rebuilding our company left us with people with the knowledge
and commitment to continue, renew and significantly grow our
business. After September 11, 2001, we actively
reconstituted and grew our company from 157 surviving employees
to 518 employees as of December 31, 2009. As we have
added new personnel and businesses, management has strived to
continue the nearly half-century old tradition of camaraderie
among employees, while providing best in class
service to customers.
Our
Principal Businesses
Investment
Banking
Our investment banking practice provides a broad range of
investment banking services to bank and thrift holding
companies, banks and thrifts, insurance companies,
broker-dealers, mortgage banks, asset management companies,
REITs, consumer and specialty finance firms, financial
processing companies and securities exchanges. The services we
currently provide include:
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M&A and other strategic advisory services, and
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Equity and fixed income securities offerings.
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Our investment banking practice is based on long-term
relationships developed by the departments professionals
operating from our offices in New York, London, Chicago,
Houston, Richmond (Virginia), and San Francisco. The
locations of our U.S. offices enable us to identify local
and regional opportunities and provide clients with
locally-based services, while keeping in close touch with
developments in major financial centers and leveraging product
expertise largely headquartered in New York and London. We
believe this will be enhanced by adding knowledge and expertise
in Asia. Our international presence enables us to act on
opportunities for financial companies on an international basis
for investment and transactional purposes. We strive to offer
our clients a high level of attention from senior personnel and
have designed our organizational
2
structure so that our investment bankers who are responsible for
securing and maintaining client relationships actively
participate in related transaction execution services to those
clients.
We believe that our focus on the financial services industry and
the depth of our professionals experience have enabled us
to respond creatively and effectively when traditional solutions
fall short of achieving a clients goals. For example, for
customers seeking to raise additional equity capital in the
current market environment, we have been actively communicating
with Federal regulators and the private investment community to
develop terms on which private investors may invest in or
acquire companies or assets. During 2009, many capital raising
transactions that we participated in involved significant
investment from the private investment community. Knowledge of
the developing practices and policies of regulators, and the
establishment of lines of communication with such regulators,
have been critical to the success of these transactions.
Our investment banking business is currently structured to serve
three segments of the financial services industry: banks and
thrifts, insurance, and diversified finance (which includes all
other types of financial service businesses, such as REITs,
broker dealers, asset managers, mortgage banks, and consumer and
specialty finance firms). The department is currently in the
process of realigning its coverage of commercial real estate
companies into a real estate group. We remain a leading
authority on mutual and thrift conversions. Our focus is on
small and mid cap companies, although we have increasingly
provided services to large cap companies, reflecting the growth
of our long term clients and opportunities that have arisen as
large cap companies have sought access to our knowledgeable
institutional customer base in capital markets offerings and
independent specialized advice. We seek to build lasting
relationships with clients by providing a range of services
through the many stages of their development. As these companies
grow and mature, we attempt to sustain these relationships
through equity and debt securities offerings, sales and trading
providing access to institutional investors with a focus on
financial services, and strategic advisory services. Many of
these clients are also natural candidates for coverage by our
research department. Our execution capabilities and range of
service offerings enable us to continue serving these companies
as they engage in more complex capital markets and strategic
transactions.
M&A and Strategic Advisory Services. We
provide a broad range of advice to our clients in relation to
mergers, acquisitions and similar corporate finance matters and
are positioned to be involved at each stage of these
transactions, from initial structuring to final execution. We
have consistently been among the top ranking M&A advisors
for companies in the financial services industry. The current
economic conditions have resulted in a significant reduction in
M&A activity for depositary and other financial
institutions as asset valuations remain very uncertain. However,
a number of the recent capital markets transactions have been
undertaken to position healthier companies to pursue
consolidation opportunities that may develop, including those
where assets or institutions may be purchased from, or with the
assistance of, government regulators. Our advisement and related
services to clients considering potential acquisitions of a
target company or certain of its assets may include:
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evaluating potential acquisition targets,
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providing valuation analyses,
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evaluating and proposing financial and strategic alternatives,
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rendering, if appropriate, fairness opinions,
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providing advice regarding the timing, structure and
pricing of a proposed acquisition, and
assisting in negotiating and closing the acquisition.
Our advisement and related services to clients contemplating the
sale of their entire company or certain of their businesses or
assets may include:
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evaluating and recommending financial and strategic alternatives
with respect to a sale,
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advising on the appropriate sale process,
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providing valuation analyses,
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assisting in preparing an offering memorandum or other
appropriate sales materials,
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rendering, if appropriate, fairness opinions,
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identifying and contacting selected qualified acquirors, and
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assisting in negotiating and closing the proposed sale.
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Our strategic advisory services also include more specialized
advisory assignments, such as divestitures, hostile takeover
defenses and special committee assignments. Fees for advisory
services may be based on a flat fee, based on the value of the
transaction, or based on a combination of the two. It is common
for portions of fees to be payable upon the occurrence of
certain events, such as deal announcement, rendering of fairness
opinions, mailing of proxy or other deal solicitation documents
and closing. The majority of total fees are paid usually upon
the successful completion of a transaction.
Capital Raising Services. Capital raising is
especially important in the financial services industry, and we
have traditionally been one of the leading underwriters in such
transactions. Many of our clients, such as banks, thrifts,
brokerage firms and insurance companies operate under statutes
or regulations that require the maintenance of certain capital
levels in order to provide many of their services. We act as
underwriter and placement agent in both public and private
offerings of equity and debt securities.
Capital raising requires the close global coordination of our
investment banking practice, our capital markets department and
our equity and fixed income sales and trading departments.
Investors in financial services companies often consider equity,
fixed income and hybrid investments. During 2009, we
consolidated our equity and fixed income capital markets groups,
which operate globally, in order to coordinate opportunities and
transactions across various operating subsidiaries. Our capital
markets group works with the investment banking department in
efforts to obtain capital markets investment banking mandates
and also coordinate with syndicate departments of other
investment banks in obtaining underwriting and co-manager roles.
By coordinating these capital raising services, we introduce
companies seeking to raise capital to customers that we believe
will be supportive, long term investors. In addition, the
ability to provide after market support as a leading market
maker or significant trader of listed securities, is a critical
factor in receiving public equity capital raising assignments.
During 2009, equity capital markets transactions at the Company
were at a record level, reflecting the efforts of companies to
recapitalize in the revitalized capital markets and our
important position in this sector. We believe that, while our
market share of financial services industry transactions is
significant, there is still an opportunity for growth in this
area.
Equity
and Fixed Income Sales and Trading
Equity Sales and Trading. Our institutional
equity sales team serves clients out of our New York, London,
Boston, Hartford, Atlanta and San Francisco offices. Our
Hong Kong office will also provide such services to largely
institutional professional investors. Unlike many of our larger,
less specialized competitors, all of our sales representatives
are specifically trained in the analysis of financial services
companies. Our sales and trading team provides specialized
services, including value-added, industry and sector-specific
trading expertise, research and access to capital markets
transactions. Through an extensive use of sector-focused
presentations and transaction-related teach-ins, we have
emphasized educating our sales force as we have expanded our
business model to include additional sectors of the financial
services industry.
We have access to all major exchanges in the United States and
Europe. As of December 31, 2009, our U.S. equity
trading team made markets in over 950 Nasdaq and NYSE listed
financial services stocks, convertible securities and warrants
and consistently ranks among the top traders of financial
services securities.
We maintain relationships with many of the worlds largest
institutional investors including both domestic and
international investment advisors, banks, mutual funds, hedge
funds, pension funds and insurance companies.
4
Our equity sales group provides institutional customers with
significant access to company managements and our research
analysts. This is accomplished through our many industry-focused
conferences, roadshow access for capital markets transactions,
and a combination of management marketing days, including
marketing trips, group meetings and field trips, along with
analyst marketing trips and Best Ideas presentations
and our annual investor idea Bruyette Dinners.
We have been an active participant in corporate repurchase
programs for small, mid and large cap companies. We have also
been willing to commit our capital to participate in
bought deals and accelerated share repurchase
programs.
Fixed Income Sales and Trading. Our fixed
income group conducts sales and trading operations in
New York with sales branches in Boston, Chicago, Hartford
and San Francisco. We trade and underwrite a wide range of
fixed income securities, including mortgage-backed securities,
U.S. Treasury and Federal Agency securities, a wide array
of corporate bonds and preferred stock, including those issued
by banks, insurance companies, REITs, and finance companies,
including trust preferred or other capital securities and
collateralized debt obligations comprised of such securities and
bank-qualified municipal securities.
Our loan portfolio sales group has provided valuation support
services to our effort to work with the government and private
investors on bank recapitalizations. The group is also actively
involved in assisting the government in the disposition of
assets acquired by failed financial institutions. The ability to
offer valuation services for loan portfolios has been an
important element in helping investors understand opportunities
related to capital markets transactions for financial
institutions who own significant portfolios of these assets. Our
financial balance sheet management group provides valuations and
restructuring strategies for the full range of securities and
loans, including those loans which are
sub-performing,
non-performing and charged-off.
Research
As of December 31, 2009, our research covered 543 domestic
and international financial services companies such as bank and
thrift holding companies, banks, thrifts, REITs, and specialty
finance, insurance and securities firms and securities
exchanges. Our research group follows nearly all of the
financial services industry companies in the S&P 500 and
Dow Jones STOXX 600 Index, as well as hundreds of other
U.S. and European financial services companies on a daily
basis. Our research provides the foundation for seven widely
followed domestic industry indices: the KBW Bank Index (BKX),
the KBW Regional Banking Index (KRX), the KBW Insurance Index
(KIX), the KBW Capital Markets Index (KSX), the KBW Mortgage
Finance Index (MFX), the KBW Premium Yield Equity REITs Index
(KYX), and the KBW Property & Casualty Index (KPX).
The first five indices are also used in widely traded exchange
traded funds and exchange traded options under licenses from us.
Similarly, our London based research team provides the
foundation for the five European financial indices and a Global
financial index. These include: the KBW European Large-Cap
Banking Index (KEBI-Euros and KEBID-US Dollars); the KBW
European Mid & Small-Cap Banking Index (KMBI-Euros and
KMBID-US Dollars); the KBW European Insurance Index
(KEII-Euros and KEIID-US Dollars); the KBW Miscellaneous
Financials Index (KMFI-Euros and KMFID-US Dollars); the KBW
Emerging European Financials Index (KEEI-Euros and
KEEID-US Dollars) and the KBW Global Financials (ex-U.S.)
Index (KGX-US Dollars).
In recent years we have maintained our position as a leading
research provider in the financial services sector. We believe
that our effort is rewarded in enhancing our reputation and the
value of our market franchise and in attracting sales and
trading customers seeking specialized research. The expansion of
coverage to Asian financial companies will expand our global
research presence.
The expansion of our research coverage is an integral part of
the expansion of our investment banking and sales activities.
This model initially supported our growth in the banking
industry, followed by our growth into insurance and diversified
financials, and in recent years, REITs, commercial real estate
operating companies and home builders. It was an integral part
of the development of our European operations.
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Our U.S. based research analysts covered the equity
securities of 439 companies in the United States as of
December 31, 2009. Our U.S. equity coverage as of
December 31, 2009 is summarized in the following table:
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Number of
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Sector
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Companies
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Banks and Thrifts Regional Banks and Thrifts
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169
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Large Cap Banks and Thrifts
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17
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Trust and Custody Banks
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3
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Total
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189
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Insurance Property Casualty Insurance
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56
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Life Insurance
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15
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Other Insurance
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8
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Total
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79
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Diversified Financials Equity REITs
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53
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Specialty Finance
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32
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Asset Managers
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18
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Broker Dealers
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18
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Mortgage Finance
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14
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Exchange & Order Execution
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11
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Processing/Business Information
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8
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Financial Guarantors
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6
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REOCs
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6
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Homebuilders
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3
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Capital/Derivative Markets
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2
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Total
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171
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Total U.S. Companies under coverage
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439
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Our U.S. research team covers all segments of market
capitalization across the financial services industry. The
median market capitalization of companies covered in the United
States is approximately $910 million.
Our European research team covers 104 companies in diverse
portions of the financial services sector predominantly in
various countries in Europe and emerging markets. The group
covers 53 banks, including 50 commercial banks and three
investment banks; 38 insurance companies, including 28 European
insurers, four reinsurance companies and six integrated
Lloyds of London market vehicles. The group also covers
diversified financial companies including consumer finance
companies, securities exchanges, private banks and asset
managers.
Both our U.S. and European research teams produce a
significant amount of analytical material, including daily
notes, email and printed company reports, industry compilations,
quarterly and annual outlooks and summary results and strategic
think pieces. The research department supports our
extensive sales and trading efforts by organizing and
participating in an extensive client contact program, that
includes
sub-sector
conferences, client-company marketing trips and direct access to
analysts by investors. In addition, our numerous industry
conferences put companies and investors together and provide
valuable
one-on-one
contact with potential clients and customers who can observe the
full strength of our investment banking, sales and trading and
research capabilities in one forum.
6
Asset
Management
KBW Asset Management, Inc. (KBWAM) is a registered
investment adviser focused on investments in the securities of
financial services companies. We are the advisor to a hedge fund
and a private equity fund. As of December 31, 2009, KBWAM
had approximately $79.1 million in assets under management,
including committed capital for unaffiliated clients.
Employees
As of December 31, 2009, we had 518 employees. None of
our employees are represented by any collective bargaining
agreements. We have not experienced any work stoppages and
believe that our relationship with our employees is good.
Competition
All areas of our business are subject to a high level of
competition. Our competitors are other investment banks,
brokerage firms, merchant banks and financial advisory firms.
Our focus on the financial services industry also subjects us to
direct competition from a number of specialty securities firms
and smaller investment banking boutiques that specialize in
providing services to the financial services industry.
The principal competitive factors influencing our business
include the ability of our professionals, industry expertise,
client relationships, business reputation, market focus and
product capabilities and quality and price of our products and
services.
We face a high level of competition in recruiting and retaining
experienced and qualified professionals. The success of our
business and our ability to continue to compete effectively will
depend significantly upon our continued ability to retain and
incentivize our existing professionals and attract new
professionals.
Many of our competitors have substantially greater capital and
resources than we do and offer a broader range of financial
products and services. These firms have the ability to offer a
wider range of products than we do, which may enhance their
competitive position. They also have the ability to support
investment banking with commercial banking, insurance and other
financial services in an effort to gain market share, which has
resulted, and could further result, in pricing pressure in our
businesses. In particular, the ability to provide financing has
been an important advantage for some of our larger competitors
and, because we do not provide such financing, we may be unable
to compete as effectively for clients in a significant part of
the investment banking market.
We have experienced intense price competition in some of our
businesses, in particular discounts in trading commissions. A
particular source of this pricing pressure has been
Internet-based and other alternative trading platforms, the
expansion of which has led to a reduction of trading
commissions. We believe that this trend toward alternative
trading systems will continue. In addition, the trend,
particularly in the equity underwriting business, toward
multiple book runners and co-managers has increased the
competitive pressure in the investment banking industry, and may
lead to lower average transaction fees. We may experience
competitive pressures in these and other areas in the future as
some of our competitors seek to increase market share by
reducing prices.
Many of our largest competitors were materially negatively
affected by the global financial crisis. Certain of our larger
competitors ceased to do business as a result of the crisis,
while others merged, obtained substantial government assistance,
and changed their business models and regulatory status,
including becoming bank holding companies. There are a number of
proposals which may limit the ability of certain large financial
institutions to conduct certain activities or provide certain
services which currently compete with us. Nevertheless, it is
likely that many of these companies will continue to have
resources and product offerings which continue to have a
competitive impact on us.
In our asset management business, we face competition in the
pursuit of investors for our investment funds, in the
identification and completion of investments in attractive
portfolio companies and in the recruitment and retention of
asset management professionals.
7
Regulation
Our business, as well as the financial services industry
generally, is subject to extensive regulation in the United
States and elsewhere. As a matter of public policy, regulatory
bodies in the United States and the rest of the world are
charged with safeguarding the integrity of the securities and
other financial markets and with protecting the interests of
customers participating in those markets. In the United States,
the Securities and Exchange Commission (the SEC) is
the federal agency responsible for the administration of the
federal securities laws. Keefe, Bruyette & Woods, Inc.
(Keefe), our wholly owned subsidiary, is registered
as a broker-dealer with the SEC and in all 50 states, the
District of Columbia and Puerto Rico. Accordingly, Keefe is
subject to regulation and oversight by the SEC and the Financial
Industry Regulatory Authority (FINRA), a
self-regulatory organization which is subject to oversight by
the SEC and adopts, and enforces rules governing the conduct,
and examines the activities, of their member firms. State
securities regulators also have regulatory or oversight
authority over Keefe. FINRA was created in July 2007 through the
consolidation of the NASD and the member regulation, enforcement
and arbitration functions of the New York Stock Exchange.
Pending finalization of a single regulatory scheme, FINRA
continues to enforce the rules of both the NASD and NYSE.
Because of its status prior to the creation of FINRA as a
regulatory member of the New York Stock Exchange and member of
the NASD, Keefe is subject to FINRA regulations and to both
previous sets of regulation. Our U.S. business may also be
subject to regulation by
non-U.S. governmental
and regulatory bodies and self-regulatory authorities in other
countries where we operate. Keefe, Bruyette & Woods
Limited, our U.K. broker-dealer subsidiary, is authorized and
regulated by the U.K. Financial Services Authority. Keefe,
Bruyette & Woods Asia Limited will be subject to
licensing and regulation by the Hong Kong Securities and Futures
Commission, and potentially other Asian regulatory bodies in
countries where it may conduct business.
Broker-dealers are subject to regulations that cover all aspects
of the securities business, including sales methods, trade
practices among broker-dealers, use and safekeeping of
customers funds and securities, capital structure,
record-keeping, the financing of customers purchases and
the conduct and qualifications of directors, officers and
employees. In particular, as a registered broker-dealer and
member of various self-regulatory organizations, Keefe is
subject to the SECs uniform net capital rule,
Rule 15c3-1.
Rule 15c3-1
specifies the minimum level of net capital a broker-dealer must
maintain and also requires that a significant part of a
broker-dealers assets be kept in relatively liquid form.
The SEC and various self-regulatory organizations impose rules
that require notification when net capital falls below certain
predefined criteria, limit the ratio of subordinated debt to
equity in the regulatory capital composition of a broker-dealer
and constrain the ability of a broker-dealer to expand its
business under certain circumstances. Additionally, the
SECs uniform net capital rule imposes certain requirements
that may have the effect of prohibiting a broker-dealer from
distributing or withdrawing capital and requiring prior notice
to FINRA for certain withdrawals of capital. There are also
financial resources requirements of the Financial Services
Authority in the United Kingdom that apply to Keefe,
Bruyette & Woods Limited and of the Hong Kong
Securities and Futures Commission that will apply to Keefe,
Bruyette & Woods Asia Limited.
The research areas of investment banks have been and remain the
subject of regulatory scrutiny. The SEC, NYSE and NASD (now
adopted by FINRA) have adopted rules imposing restrictions on
the interaction between equity research analysts and investment
banking personnel at member securities firms. Various
non-U.S. jurisdictions
have imposed both substantive and disclosure-based requirements
with respect to research, and continue to consider additional
regulation.
The effort to combat money laundering and terrorist financing is
a priority in governmental policy with respect to financial
institutions. The USA PATRIOT Act of 2001 contains anti-money
laundering and financial transparency laws and mandates the
implementation of various new regulations applicable to
broker-dealers and other financial services companies, including
requirements to maintain an anti-money laundering compliance
program that includes written policies and procedures,
designated compliance officer(s), appropriate training and
independent review of the program, standards for verifying
client identification at account opening, and obligations to
monitor client transactions and report suspicious activities.
Through these and other provisions, the USA PATRIOT Act of 2001
seeks to promote the identification of parties that may be
involved in terrorism or money laundering. Anti-money laundering
laws outside the United States contain
8
some similar provisions. The obligation of financial
institutions, including ourselves, to identify their customers,
watch for and report suspicious transactions, respond to
requests for information by regulatory authorities and law
enforcement agencies, and share information with other financial
institutions, has required the implementation and maintenance of
internal practices, procedures and controls which have
increased, and may continue to increase, our costs, and any
failure with respect to our programs in this area could subject
us to serious regulatory consequences, including substantial
fines, and potentially other liabilities.
Certain of our businesses are subject to compliance with laws
and regulations of U.S. federal and state governments,
non-U.S. governments,
their respective agencies
and/or
various self-regulatory organizations or exchanges relating to
the privacy of client information, and any failure to comply
with these regulations could expose us to liability
and/or
reputational damage.
Additional legislation, changes in rules promulgated by the SEC
and self-regulatory organizations or changes in the
interpretation or enforcement of existing laws and rules, either
in the United States or elsewhere, may directly affect the mode
of our operation and profitability.
U.S. and
non-U.S. government
agencies and self-regulatory organizations, as well as state
securities commissions in the United States, are empowered to
conduct administrative proceedings that can result in censure,
fine, the issuance of
cease-and-desist
orders or the suspension or expulsion of a broker-dealer or its
directors, officers or employees. Occasionally, we have been
subject to investigations and proceedings. We have not had any
significant sanctions imposed for infractions of various
regulations relating to our activities.
Available
Information
We are 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 SECs 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 internet site
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) the charters 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 will also be available in print without charge to any
person who requests them by writing or telephoning: KBW, Inc.,
Office of the General Counsel, 787 Seventh Avenue,
4th Floor, New York, New York, 10019, U.S.A., telephone
number
(212) 887-7777.
Executive
Officers
Our executive officers and their ages and titles as of
December 31, 2009 are set forth below.
John G. Duffy (60). Mr. Duffy has been
Chairman, Chief Executive Officer and a director of KBW, Inc.
since its formation in August 2005. He joined us in 1978 as
manager of our Bank Watch Department evaluating credit ratings
for financial institutions nationwide. He became a director of
Keefe Bruyette & Woods, Inc., our wholly-owned
registered broker-dealer subsidiary (Keefe), in
1990, was named its Co-CEO and President in 1999 and its
Chairman and CEO in 2001. Prior to that, Mr. Duffy was
Executive Vice President in charge of Keefes Corporate
Finance Department. He is a graduate of the City College of
9
New York. Mr. Duffy serves on the Board of Trustees of
the Michael Smurfit Graduate School of Business, University
College in Dublin, Ireland, as well as St. Michaels
College in Colchester, Vermont. In addition, he is a trustee of
The Ursuline School in New Rochelle, New York and Cardinal Hayes
High School in Bronx, New York and is a director of the American
Ireland Fund. He also serves on the Advisory Council of the
Weissman Center for International Business at Baruch College.
Andrew M. Senchak (62). Mr. Senchak has
been President, Vice Chairman and a director of KBW, Inc. since
its formation in August 2005. He has been with our Investment
Banking Department since 1985. In 1997 he became a director of
Keefe as well as head of the Investment Banking Department, and
was elected its Vice Chairman and its President in 2001.
Mr. Senchak stepped down as President of Keefe in 2006.
Prior to joining the firm Mr. Senchak taught Economics at
Rutgers University and spent two and a half years in Brazil with
the Peace Corps. He received a B.A. in Liberal Arts from
Lafayette College and earned a Ph.D. in Economics from Columbia
University. Mr. Senchak is a member of the Board of
Trustees of the National September 11 Memorial and Museum at the
World Trade Center, the KBW Family Fund and the MacDowell
Colony. He is also on the board of WeatherWise USA, Inc.
Thomas B. Michaud (45). Mr. Michaud has
been Chief Operating Officer, Vice Chairman and a director of
KBW, Inc. since its formation in August 2005.
Mr. Michauds primary responsibilities with the firm
are to oversee our sales and trading businesses. He began his
career with us in 1986 as a credit trainee in the Bank Watch
Department and transferred to the Research Department before
joining our Equity Sales Team in 1988. He was named Director of
Equity Sales and Executive Vice President in 1999. He became a
director of Keefe in 1999 and its Vice Chairman and Chief
Operating Officer in 2001. He was elected President of Keefe in
2006. Mr. Michaud is a graduate of Middlebury College and
earned an M.B.A. from the Stern School of Business at New York
University. From 1994 until 2001 he was an elected member of the
Representative Town Meeting of the Town of Greenwich,
Connecticut. The Representative Town Meeting is the legislative
body for the Town of Greenwich. He is also a member of the Board
of Advisors of the Greenwich Chapter of the American Red Cross.
Robert Giambrone (55). Mr. Giambrone has
served as our Chief Financial and Administrative Officer and as
an Executive Vice President since 2002. Prior to joining us,
Mr. Giambrone was an Executive Director of the Asset
Management Division of Morgan Stanley from 1995 to 2002.
Mr. Giambrone was a director of KBW, Inc. from April 2006
until completion of its IPO in November 2006.
Mitchell B. Kleinman (55). Mr. Kleinman
has served as General Counsel of Keefe since 1998, as an
Executive Vice President of Keefe since 2002 and as General
Counsel and an Executive Vice President of KBW, Inc. since its
formation in August 2005. Prior to joining Keefe,
Mr. Kleinman was a partner in the law firm of
Brown & Wood LLP (now Sidley Austin LLP).
10
Risks
Related to Our Business
Uncertain
economic conditions have continued to adversely affect the
financial services industry, which is the industry on which we
focus.
We focus on the financial services industry, which has
experienced unprecedented change and volatility in recent years.
Since 2008, several large securities, insurance and finance
firms in the United States and elsewhere have failed outright or
have been acquired by other financial institutions, often in
distressed sales. Others received substantial government
assistance and in certain cases continue to function with
substantial government equity and oversight. During 2009,
several additional large industrial and financial companies
declared bankruptcy, in some cases after receiving government
assistance, including General Motors Corp., Chrysler LLC and CIT
Group Inc. In 2008, there were 25 failed banks in the
U.S. with assets totaling $374 billion. In 2009, the
number of failed banks increased to 140, with total assets of
$170 billion. In the U.S., where our principal businesses
are conducted, depressed home prices and consumer and commercial
credit concerns have continued to contribute to uncertainties in
the value of related asset categories. Concern about the
stability of financial markets and the strength of
counterparties has caused many traditional sources of credit,
such as banks, securities firms and insurers, as well as
institutional and private investors, to reduce or cease
providing funding to borrowers. Although financial markets began
to stabilize during 2009, reflecting government measures to
stabilize the financial markets and recapitalize major financial
institutions, it is still not possible to predict the long term
impact of these factors.
The economic uncertainties affecting the financial industry may
continue to change or delay the plans of our clients to conduct
capital markets transactions and may delay or slow consolidation
in the industry. This factor
and/or a
continuation or worsening of current conditions may cause us to
face some or all of the following risks:
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The number of M&A transactions where we act as adviser
could continue to be adversely affected by continued
uncertainties in valuations related to asset quality and
creditworthiness, volatility in the equity markets and
difficulties in obtaining financing. Reduced merger
consideration because of lower valuations of financial service
companies may also reduce our fees to the extent they are based
on a percentage of merger consideration. Also, these conditions
could increase the execution risk in M&A transactions where
we act as an adviser.
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Our opportunity to act as underwriter or placement agent in
equity and debt offerings could be adversely affected by
volatile equity or debt markets.
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We may experience losses in securities trading and investment
activities or as a result of write downs in the value of
financial instruments that we own as a result of deteriorations
in the businesses or creditworthiness of the issuers of such
financial instruments.
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We may incur unexpected costs or losses as a result of the
bankruptcy or other failure of companies for which we have
performed sales and trading or investment banking services to
honor ongoing obligations such as settlement obligations
relating to securities transactions and indemnification or
expense reimbursement agreements.
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Any plans for expansion outside of the United States of our
client base or the services we provide, particularly, as a
result of uncertainties in Europe, through our existing United
Kingdom (UK) subsidiary, may be delayed or impaired.
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Competition in our investment banking, sales and trading
businesses could intensify as a result of the increasing
pressures on financial services companies.
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Our industry could face increased regulation as a result of
legislative or regulatory initiatives.
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Government intervention may not succeed in stabilizing the
financial and credit markets and may have negative consequences
for our business.
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11
Lack
of sufficient liquidity or access to capital could impair our
business and financial condition.
Historically, we have satisfied our need for funding with
revenue from our operating and financing activities. As a result
of the low level of leverage which we have traditionally
employed in our business model, we have not been forced to
significantly curtail our business activities and we believe
that our capital resources are currently sufficient to continue
to support our current business activities. In the event
existing financial resources did not satisfy our needs, we might
have to seek additional outside financing. The availability of
outside financing will depend on a variety of factors, such as
our financial condition and results of operations, the
availability of acceptable collateral, market conditions, the
general availability of credit, the volume of trading
activities, the overall availability of credit to the financial
services industry. Similarly, our access to funds may be
impaired if regulatory authorities take significant action
against us.
Difficulty
in determining the fair value of financial
instruments.
We maintain inventories of securities as a market maker of
equity and fixed income securities. In addition, we make
investments in various privately placed securities, including
restricted debt and equity securities and interests in certain
private investment partnerships or similar entities. We also
hold various trust preferred and debt securities issued by
financial institutions which were purchased for inclusion in
future pools of such securities. We are no longer able to pool
such securities into a collateralized debt structure and have
been forced to retain such securities or dispose of them in
sales at available prices.
The valuation of such securities is complex and involves a
comprehensive process, including management judgment. Valuation
of these securities will also continue to be influenced by
external market and other factors, including implementation of
SEC and Financial Accounting Standards Board (FASB)
guidance on fair value accounting, issuer specific credit
deteriorations and deferral and default rates, rating agency
actions, and the prices at which observable market transactions
occur.
Our future results of operations and financial condition may be
adversely affected by changes in valuations of these securities.
For a further discussion regarding the valuation of financial
instruments owned see Note 3, Financial
Instruments, to our consolidated financial statements.
Our
liquidity and profitability could be adversely affected by the
actions and commercial soundness of other financial
institutions.
Financial services institutions are interrelated as a result of
trading, clearing, counterparty or other relationships. We have
exposure to many different counterparties, and we routinely
execute transactions with counterparties, including brokers and
dealers, commercial banks, investment banks, mutual and hedge
funds, and other institutional clients. Many of these
transactions expose us to credit risk in the event of default of
our counterparty or client. In addition, our credit risk may be
exacerbated when the collateral held by us cannot be realized
upon or is liquidated at prices not sufficient to recover the
full amount of the loan or derivative exposure due us. Even
rumors or questions about one or more financial services
institutions, or the financial services industry generally, may
create market-wide liquidity problems and could lead to losses
or defaults by us or by other institutions. Although we have not
suffered any material or significant losses as a result of the
failure of any financial counterparty, any such losses may
materially adversely affect our results of operations.
Our
risk management policies and procedures may leave us exposed to
unidentified or unanticipated risks.
Our risk management strategies and techniques may not be fully
effective in mitigating our risk exposure in all market
environments or against all types of risk. We are exposed to the
risk that third parties that owe us money, securities or other
assets will not perform their obligations. These parties may
default on their obligations to us due to bankruptcy, lack of
liquidity, operational failure, breach of contract or other
reasons. We are also subject to the risk that our rights against
third parties may not be enforceable in all circumstances. As an
introducing broker to clearing firms, we are responsible to the
clearing firm and could be held responsible for the defaults or
misconduct of our customers. Although we review credit exposures
to specific clients, customers and counterparties and to
specific industries and regions that we believe may present
credit
12
concerns, default risk may arise from events or circumstances
that are difficult to detect or foresee. In addition, concerns
about, or a default by, one institution could lead to
significant liquidity problems, losses or defaults by other
institutions, which in turn could adversely affect us. In
addition to our credit risks described above, we are subject to
various market, interest rate, inflation and operational risks,
including those described under
Uncertain economic conditions have
continued to adversely affect the financial services industry,
which is the industry on which we focus,
Committing our own capital in our
underwriting, trading and other businesses increases the
potential for significant losses, Our
operations and infrastructure may malfunction or fail, and
We may be adversely affected by changes in
services and products provided by third parties and increases in
related costs. While we attempt to mitigate these
risks through our risk management policies, if any of the
variety of instruments, processes and strategies we utilize to
manage our exposure to various types of risk are not effective,
we may incur significant losses. See Item 7A
Quantitative and Qualitative Disclosure About Market
Risk.
Committing
our own capital in our underwriting, trading and other
businesses increases the potential for significant
losses.
We have at times invested in our clients capital markets
transactions. In certain cases, there may be contractual
lock-up
periods limiting our ability to immediately liquidate our
investments. In addition, occasionally we have committed our
capital to bought deals, which involve the purchase
of large blocks of stock from publicly-traded issuers or their
significant stockholders with little or no advance marketing for
the sale of such securities, instead of the more traditional
marketed book building underwriting process, in
which marketing is typically completed before an investment bank
commits to purchase securities for resale. It is common for
financial institutions in Europe to use rights offerings in
order to raise capital. Rights offerings are also occasionally
used by U.S. financial institutions as well. We have acted
as a standby underwriter in such offerings and may do so in the
future, especially through Keefe, Bruyette & Woods
Limited in Europe, which requires a commitment over an extended
period of time during the rights period. The current
uncertainties for values of securities of financial service
companies makes such practices riskier than in more stable
periods. We may incur losses relating to these transactions.
We also enter into market making and principal investing
transactions in which we commit our capital. The number and size
of these transactions may materially affect our results of
operations in a given period. We may also incur significant
losses from our trading activities due to market fluctuations
and volatility from quarter to quarter. We maintain trading
positions in the fixed income and equity markets to facilitate
client trading activities and engage in principal trading for
our own account. To the extent that we own assets, i.e., have
long positions, in any of those markets, a downturn in the value
of those assets or in those markets could result in losses from
a decline in the value of those long positions. Conversely, to
the extent that we have sold assets we do not own, i.e., have
short positions, in any of those markets, an upturn in those
markets could expose us to potentially unlimited losses as we
attempt to cover our short positions by acquiring assets in a
rising market.
We have made and may continue to make principal investments in
private equity funds and other illiquid investments, which are
typically private limited partnership interests and securities
that are not publicly traded. There is a significant risk that
we may be unable to realize our investment objectives by sale or
other disposition at attractive prices or that we may otherwise
be unable to complete any exit strategy. In particular, these
risks could arise from changes in the financial condition or
prospects of the portfolio companies in which investments are
made, changes in national or international economic conditions
or changes in laws, regulations, fiscal policies or political
conditions of countries in which investments are made. It takes
a substantial period of time to identify attractive investment
opportunities and then to realize the cash value of such
investments through resale. Even if a private equity investment
proves to be profitable, it may be several years or longer
before any profits can be realized in cash.
13
Our
ability to retain our professionals is critical to the success
of our business, and our failure to do so may materially
adversely affect our reputation, business and results of
operations.
Our ability to obtain and successfully execute the business
mandates that generate a significant portion of our revenues
depends upon the personal reputation, judgment, business
generation capabilities and project execution skills of our
professionals. Although we do not believe that any one or small
number of professionals are critical to our business, our
business model is based on the building of long term
relationships and our professionals personal reputations
and relationships with our clients and customers are a critical
element in obtaining and executing our engagements.
Historically, the investment banking sector has been subject to
high employee turnover generally. We have historically
encountered intense competition for qualified employees from
other companies in the investment banking sector as well as from
businesses outside the investment banking industry, such as
hedge funds, private equity funds and venture capital funds.
From time to time, we have experienced losses of investment
banking, sales and trading, research and other professionals.
Losses of our professionals may occur in the future. The
departure or other loss of any professional who manages
substantial client or customer relationships and possesses
substantial experience and expertise could impair our ability to
secure or successfully complete engagements, which could
materially adversely affect our business and results of
operations.
We
face strong competition, including from entities with
significantly more financial and other resources.
The brokerage and investment banking industries are intensely
competitive, and we expect them to remain so. We compete on the
basis of a number of factors, including the ability of our
professionals, industry expertise, client relationships,
business reputation, market focus and quality and price of our
products and services. We have experienced intense price
competition in some of our businesses, in particular trading
commissions and underwriting spreads. In addition, pricing and
other competitive pressures in investment banking, including the
trends toward multiple book-runners, co-managers and multiple
financial advisors handling transactions, have continued and
could adversely affect our revenues, even as transaction volume
has increased in the U.S. market this year. We believe we
may experience competitive pressures in these and other areas in
the future as some of our competitors seek to obtain market
share by competing on the basis of price.
Our geographic diversity requires us to compete with regional
firms with strong localized relationships as well as other
national and European specialized firms with financial industry
focuses. In addition, we have faced competition from large
full-service firms as the scope of our practice has grown and as
such firms have sought revenues from our traditional client
base. Many of our competitors in the brokerage and investment
banking industries offer a broader range of products and
services, have greater financial and marketing resources, larger
customer bases, greater name recognition, larger numbers of
senior professionals to serve their clients needs and
greater global coverage than we have. These competitors may be
better able to respond to changes in the brokerage and
investment banking industries, to compete for skilled
professionals, to finance acquisitions, to fund internal growth,
to commit significant capital to clients needs, to access
additional capital under more advantageous conditions and to
compete for market share generally.
A number of large commercial banks, insurance companies and
other broad-based financial services firms have established or
acquired underwriting or financial advisory practices and
broker-dealers or have merged with other financial institutions.
These firms have the ability to offer a wider range of products
than we do, which may enhance their competitive position. They
also have the ability to support investment banking with
commercial banking, insurance and other financial services in an
effort to gain market share, which has resulted, and could
further result, in pricing pressure in our businesses. In
particular, historically, the ability to provide debt financing
has become an important advantage for some of our larger
competitors and, because we do not provide such financing, we
may be unable to compete as effectively for clients in a
significant part of the brokerage and investment banking market.
If we are unable to compete effectively with our competitors,
our business, financial condition and results of operations will
be adversely affected.
14
The
impact of the current market and regulatory environment on
trading customers may adversely affect our sales and trading
commission revenues.
A relatively small number of our institutional investor
customers generate a substantial portion of our sales
commissions. If any of our key customers departs or reduces its
business with us and we fail to attract new customers that are
capable of generating significant trading volumes, our business
and results of operations will be adversely affected. In the UK,
equity commissions have been adversely affect by decreases in
share prices because commissions are charged based on the value
of shares traded. Such UK commissions may continue to be
negatively impacted by low share prices.
A large number of our institutional investor sales and trading
customers are also financial institutions, including hedge
funds, banks, insurance companies and institutional money
managers. The majority of transactions conducted with us relate
to financial services companies. Many of our customers have
suffered declines in their assets under management and such
clients and others have reduced the amount of leverage used,
resulting in such clients holding smaller position sizes. The
current market environment may cause some of these companies to
curtail their investment activities or even cease to do
business, which may reduce our commissions.
Pricing
and other competitive pressures may impair the revenues and
profitability of our sales and trading business.
We derive a significant portion of our revenues from our sales
and trading business. Commissions accounted for approximately
36.7%, 79.6% and 38.8%, respectively, of our revenues in the
twelve months ended December 31, 2009, 2008 and 2007. Along
with other securities firms, we have experienced intense price
competition in this business in recent years. In particular, the
ability to execute trades electronically, through the Internet
and through other alternative trading systems, has increased the
pressure on trading commissions and spreads. We expect this
trend toward alternative trading systems and pricing pressures
in this business to continue. We believe we may experience
competitive pressures in these and other areas in the future as
some of our competitors seek to obtain market share by competing
on the basis of price. In addition, we face pressure from our
larger competitors, which may be better able to offer a broader
range of complementary products and services to customers in
order to win their trading business. If we are unable to compete
effectively with our competitors in these areas, the revenues
and profitability of our securities business may decline and our
business, financial condition and results of operations may be
adversely affected.
As we are committed to maintaining and improving our
comprehensive research coverage in the financial services sector
to support our sales and trading business, we may be required to
make substantial investments in our research capabilities. In
addition to other factors that may adversely affect our results
of operations in this area, such as the legal and regulatory
factors described under Risks Related to
Our Industry, certain recent changes in industry
practice are likely to affect our sales and trading business. A
continuing trend has been for certain fund managers to enter
into arrangements with securities firms under which the fund
managers agree to pay separately for trading and research
services, a process known as unbundling. Previously,
fund managers, like most customers, paid for research through
the commissions that they paid for trading services. As a result
of unbundling, securities firms charge lower commissions per
trade but receive separate compensation for research that they
provide to the fund managers.
We are a party to unbundling arrangements, and are likely to
enter into additional unbundling arrangements in the future. If
unbundling becomes prevalent, our sales and trading customers
may not pay us separately for our research, and if they do, our
revenues from these customers may not be the same as they are
currently. If our customers wish to purchase sales and trading
and research services separately, we may not be able to market
our services on that basis as effectively as some of our
competitors, in which case our business could be adversely
affected.
15
Our
capital markets and strategic advisory engagements are singular
in nature and do not generally provide for subsequent
engagements.
Our investment banking clients generally retain us on a
short-term,
engagement-by-engagement
basis in connection with specific capital markets or M&A
transactions, rather than on a recurring basis under long-term
contracts. Our business model is based on creating long-term
relationships that we hope will lead to repeat business
opportunities. However, our engagements for these transactions
are typically singular in nature and our engagements with these
clients may not recur. We must seek out new engagements when our
current engagements are successfully completed or are
terminated. As a result, high activity levels in any period are
not necessarily indicative of continued high levels of activity
in any subsequent period. If we are unable to generate a
substantial number of new engagements that generate fees from
the successful completion of transactions, our business and
results of operations would likely be adversely affected.
Our
operations and infrastructure may malfunction or
fail.
Our businesses are highly dependent on our ability to process,
on a daily basis, a large number of transactions across diverse
markets, and the transactions we process have become
increasingly complex. Our financial, accounting or other data
processing systems may fail to operate properly or become
disabled as a result of events that are wholly or partially
beyond our control, including a disruption of electrical or
communications services or our inability to occupy one or more
of our buildings. The inability of our systems to accommodate an
increasing volume of transactions could also constrain our
ability to expand our businesses. We are also dependent on the
systems and operations of our clearing brokers in the United
States and the United Kingdom. If any of our systems or the
systems of clearing brokers do not operate properly or are
disabled or if there are other shortcomings or failures in our
or their internal processes, people or systems, we could suffer
impairment to our liquidity, financial loss, a disruption of our
businesses, liability to clients, regulatory intervention or
reputational damage.
We also face the risk of operational failure or termination of
any of the clearing agents, exchanges, clearing houses or other
financial intermediaries we use to facilitate our securities
transactions. Any such failure or termination could adversely
affect our ability to effect transactions and to manage our
exposure to risk.
In addition, our ability to conduct business may be adversely
impacted by a disruption in the infrastructure that supports our
businesses and the communities in which we are located. This may
include a disruption involving electrical, communications,
transportation or other services used by us or third parties
with or through whom we conduct business, whether due to fire,
other natural disaster, power or communications failure, act of
terrorism or war or otherwise. Nearly all of our employees in
our primary locations work in close proximity to each other. If
a disruption occurs in one location and our employees in that
location are unable to communicate with or travel to other
locations, our ability to service and interact with our clients
and customers may suffer and we may not be able to implement
successfully contingency plans that depend on communication or
travel.
Our operations also rely on the secure processing, storage and
transmission of confidential and other information in our
computer systems and networks. Although we take protective
measures and endeavor to modify them as circumstances warrant,
our computer systems, software and networks may be vulnerable to
unauthorized access, computer viruses or other malicious events
that could have a security impact. If one or more of such events
occur, this could jeopardize confidential and other information
of us or our clients, customers or counterparties that is
processed and stored in, and transmitted through, our computer
systems and networks. Furthermore, such events could cause
interruptions or malfunctions in our operations or those of our
clients, customers, counterparties or other third parties. We
may be required to expend significant additional resources to
modify our protective measures or to investigate and remediate
vulnerabilities or other exposures, and we may be subject to
litigation and financial losses that are either not insured
against or not fully covered through any insurance maintained by
us.
16
We may
be adversely affected by changes in services and products
provided by third parties and increases in related
costs.
Many of our sales, trading and information systems are provided
pursuant to agreements with third party vendors. Although we
seek to negotiate agreements with these vendors to obtain such
services on reasonable terms, we cannot always negotiate terms
which will provide us such services for terms or at prices that
are not subject to significant change. The process of changing
to competing services or products can be time consuming, costly
and subject to implementation and operational risks. In certain
cases replacement products or services may not be available and
we may be forced to accept significant cost increases or seek
alternatives that do not provide substantially identical
functionality.
Our
financial results may fluctuate substantially from period to
period, which may impair our stock price.
We have experienced, and expect to experience in the future,
significant periodic variations in our investment banking
revenues. These variations may be attributed in part to the fact
that our investment banking revenues are typically earned upon
the successful completion of a transaction, the timing of which
is uncertain and beyond our control. In most cases we receive
little or no payment for investment banking engagements that do
not result in the successful completion of a transaction. As a
result, our business is highly dependent on market conditions as
well as the decisions and actions of our clients and interested
third parties. For example, a clients acquisition
transaction may be delayed or terminated because of a failure to
agree upon final terms with the counterparty, failure to obtain
necessary regulatory consents or approval, or board of director
or stockholder approvals, failure to secure necessary financing,
adverse market conditions or unexpected financial or other
problems in the clients or counterpartys business.
If the parties fail to complete a transaction on which we are
advising or an offering in which we are participating, we will
earn little or no revenue from the transaction. As a result, we
are unlikely to achieve steady and predictable earnings on a
quarterly basis, which could in turn adversely affect our stock
price.
Poor
investment performance may reduce revenues and profitability of
our asset management operations.
Our revenues in our asset management business are primarily
derived from management fees which are based on committed
capital
and/or
assets under management and incentive fees, which are earned if
the return of our managed accounts exceeds certain threshold
returns. Our ability to maintain or increase assets under
management is subject to a number of factors, including
investors perception of our past performance, market or
economic conditions, competition from other fund managers and
our ability to negotiate terms with major investors.
Investment performance is one of the most important factors in
retaining existing investors and competing for new asset
management business. Poor investment performance could reduce
our revenues and impair our growth. Even when market conditions
are generally favorable, our investment performance may be
adversely affected by our investment style and the particular
investments that we make. To the extent our future investment
performance is perceived to be poor in either relative or
absolute terms, the revenues of our asset management business
will likely be reduced and our ability to raise new funds will
likely be impaired.
Strategic
investments, acquisitions, entry into new businesses and joint
ventures may result in additional risks and uncertainties in our
business.
We have sought to grow our core businesses through internal
expansion, strategic investments and acquisitions, and entry
into new businesses or joint ventures. To the extent we make
strategic investments or acquisitions, or enter into new
businesses or joint ventures, we would face numerous risks and
uncertainties combining or integrating the relevant businesses
and systems, including the need to combine accounting and data
processing systems and management controls and to integrate
relationships with customers and business partners. In the case
of joint ventures, we would be subject to additional risks and
uncertainties in that we could be dependent upon, and subject to
liability, losses or reputational damage relating to, systems,
controls and personnel that are not under our control. In
addition, conflicts or disagreements between us and any joint
17
venture partners could negatively impact the success of that
joint venture as well as our overall business. We may also face
conflicts to the extent that we sponsor the development of other
business and commit to provide personnel, capital or benefits
from our business relationships to such other businesses.
New business activities that we may enter into will likely
involve significant start up costs and operational and staffing
challenges and may occupy a significant portion of management
time and resources, which would detract from their availability
for the management of our existing businesses. Future business
activities may require us to raise significant amounts of
capital or to obtain other lending sources, which efforts may be
subject to market conditions at the time. To the extent we
undertake new activities, they may not be successful and any
investments we make in these new activities may not retain their
value or achieve positive returns.
To the extent that we pursue business opportunities outside the
United States, we will be subject to political, economic, legal,
operational and other risks that are inherent in operating in a
foreign country, including risks of possible nationalization,
expropriation, price controls, capital controls, exchange
controls and other restrictive governmental actions, as well as
the outbreak of hostilities. In many countries, the laws and
regulations applicable to the securities and financial services
industries are uncertain and evolving, and it may be difficult
for us to determine the exact requirements of local laws in
every market. Our inability to remain in compliance with local
laws in a particular foreign market could have a significant and
negative effect not only on our businesses in that market but
also on our reputation generally. We are also subject to the
enhanced risk that transactions we structure might not be
legally enforceable in the relevant jurisdictions.
Growth
of our business could result in increased costs.
We may incur significant expenses in connection with any
expansion of our existing businesses or in connection with any
strategic acquisitions and investments, if and to the extent
they arise from time to time. Our overall profitability would be
negatively affected if investments and expenses associated with
such growth are not matched or exceeded by the revenues that are
derived from such growth.
In the investment banking industry, the entry into new service
lines or areas of business often involves the attraction and
retention of outside personnel deemed to be critical components
to the success of such expansion efforts. Such outside personnel
may be employed by competitors, and therefore the retention of
such individuals may require us to enter into guaranteed
compensation contracts for a period following commencement of
employment. The compensation terms provided for in such
contracts may be fixed in whole or in part. Any guaranteed
compensation expenses that cannot be adjusted based on the
success or profitability of either such area of growth or our
firm as a whole, could reduce our operating margins. Such fixed
compensation expenses may also materially impact the levels and
amounts of compensation for our employees without such
guaranteed contracts, which in turn could have a negative impact
on our retention efforts for such employees. See
Our ability to retain our professionals is
critical to the success of our business, and our failure to do
so may materially adversely affect our reputation, business and
results of operations.
Over the past several years, we have experienced significant
growth in our new business activities, including launching
European-focused operations and opening a London office. We have
also begun to implement our plan to launch operations in Hong
Kong and Tokyo, focused on an Asian securities business. These
expansion efforts have required and will continue to require
increased investment in management personnel, facilities and
financial and management systems and controls, all of which, in
the absence of sufficient corresponding revenue growth, would
cause our operating margins to decline from current levels.
Expansion also creates a need for additional compliance,
documentation, risk management and internal controls procedures,
and often involves the hiring of additional personnel to monitor
such procedures. To the extent such procedures are not adequate
to appropriately monitor any new or expanded business, we could
be exposed to a material loss or regulatory sanction.
18
Investments
by our directors, officers, employees and our employee profit
sharing retirement plan may conflict with the interests of our
stockholders.
Our executive officers, directors and employees and our employee
profit sharing retirement plan may from time to time invest in
or receive a profit interest in private or public companies in
which we or one of our affiliates is an investor or for which we
provide investment banking services, publish research or act as
a market maker. In addition, through KBW Asset Management, we
have organized hedge funds or similar investment vehicles in
which our employees are or may become investors and we expect to
continue to do so in the future. There is a risk that, as a
result of such investment or profit interest, a director,
officer or employee may take actions that conflict with the best
interests of our stockholders.
Our tax-qualified employee profit sharing retirement plan offers
employees the opportunity to choose among a number of investment
alternatives. One of these, the KBW Fund, has been managed by
certain employees and has invested in securities in which we and
our customers and employees may also invest. Substantially all
of our employees who have been employed by us for at least three
months are participants in the plan. A substantial portion of
the plan investments are currently invested in the KBW Fund.
Historically, the KBW Fund has invested in publicly traded
equity and fixed income securities of financial services
companies, and we expect that this policy will continue. Some or
all of the employees managing the KBW Fund are participants in
the plan investing in the KBW Fund, and are also holders of
shares of our common stock. It is our intention, after
satisfaction of customer interest in investments, to continue to
provide suitable investment opportunities to the KBW Fund
consistent with the management policies of the plan fiduciaries
and applicable law (including, without limitation, the fiduciary
responsibility requirements of the Employee Retirement Income
Security Act of 1974, as amended (ERISA)).
Accordingly, from time to time, there may be cases in which an
investment opportunity is made available to the employee profit
sharing retirement plan which is not also made available to us
(or in which availability is limited) as principal.
Our
policies and procedures may limit the investment opportunities
for our company.
We have in place compliance procedures and practices designed to
protect the confidentiality of client and customer information
and to ensure that inside information is not used for making our
investment decisions. These procedures and practices may from
time to time exceed minimum legal requirements and may limit the
freedom of our employees to make potentially profitable
investments for us. Moreover, certain rules, such as best
execution rules, and fiduciary obligations to customers and our
profit-sharing plan under ERISA and other applicable law, may
cause us to forego certain investment opportunities.
We are
a holding company and depend on our subsidiaries for dividends,
distributions and other payments.
As a holding company, we may require dividends, distributions
and other payments from our subsidiaries to fund payments on our
obligations, including debt obligations. As a result, regulatory
actions could impede access to funds that we need to make
payments on obligations or dividend payments. In addition,
because we hold equity interests in our subsidiaries, our rights
as an equity holder to the assets of these subsidiaries are
subordinated to any claims of the creditors of these
subsidiaries. None of our subsidiaries had any long term
indebtedness to any third party.
Our
broker-dealer subsidiaries are subject to regulatory net capital
requirements.
Keefe, Bruyette & Woods, Inc., our
U.S. broker-dealer subsidiary, is subject to the net
capital requirements of the SEC and various self-regulatory
organizations of which it is a member. These requirements
typically specify the minimum level of net capital a
broker-dealer must maintain and also mandate that a significant
part of its assets be kept in relatively liquid form. Any
failure to comply with these net capital requirements could
impair our ability to conduct our core business as a brokerage
firm. At this time we have significant capital in excess of
these requirements. There are similar financial requirements of
the Financial Services Authority (FSA) in the United
Kingdom related to the activities of Keefe, Bruyette &
Woods Limited. Similar requirements of the Hong Kong Securities
and Futures Commission will apply to Keefe,
19
Bruyette & Woods Asia Limited. Furthermore, the U.S.,
U.K. and Hong Kong broker-dealer subsidiaries are and will be
subject to laws that authorize regulatory bodies to block or
reduce the flow of funds from them to our holding company or to
our other subsidiaries.
Risks
Related to Our Industry
Risks
associated with regulatory impact on capital
markets.
In recent years the U.S. Congress, the SEC, the NYSE and
FINRA have significantly expanded corporate governance and
public disclosure requirements. To the extent that private
companies, in order to avoid becoming subject to these new
requirements, decide to forgo initial public offerings, our
equity underwriting business may be adversely affected. These
factors, in addition to adopted or proposed accounting,
capitalization, risk management, executive compensation,
disclosure and other potential rules and regulations that may be
enacted either as part of the implementation of various
government initiatives or otherwise, may also adversely affect
our business.
Financial
services firms have been subject to increased scrutiny over the
last several years, increasing the risk of financial liability
and reputational harm resulting from adverse regulatory
actions.
Firms in the financial services industry have experienced
increased scrutiny in recent years from a variety of regulators,
including the SEC, the Federal Reserve, the FDIC and other
federal regulatory agencies, and the NYSE and FINRA, state
securities commissions and state attorneys general. FINRA was
created in July 2007 through the consolidation of the NASD and
the member regulation, enforcement and arbitration functions of
the NYSE. The activities of our UK subsidiary, Keefe,
Bruyette & Woods Limited, are subject to regulation by
the FSA, which has continued to refine and expand the scope of
its regulations of the financial services industry. Our UK
business has experienced significant expansion over a relatively
short period, which requires us to devote increasing resources
to our compliance efforts and subjects us to additional
regulatory risks in the UK. Penalties and fines sought by
regulatory authorities have increased substantially over the
last several years. This regulatory and enforcement environment
has created uncertainty with respect to a number of transactions
that had historically been entered into by financial services
firms and that were generally believed to be permissible and
appropriate. We may be adversely affected by changes in the
interpretation or enforcement of existing laws and rules by
these governmental authorities and self-regulatory
organizations. We also may be adversely affected as a result of
new or revised legislation or regulations imposed by the SEC,
other U.S. or foreign governmental regulatory authorities
or self-regulatory organizations that supervise the financial
markets. Our failure to comply or have complied with applicable
laws or regulations could result in fines, suspensions of
personnel or other sanctions, including revocation of the
registration of us or any of our subsidiaries. Even if a
sanction imposed against us or our personnel is small in
monetary amount, the adverse publicity arising from the
imposition of sanctions against us by regulators could harm our
reputation and cause us to lose existing clients or fail to gain
new clients. Substantial legal liability or significant
regulatory action against us could have material adverse
financial effects or cause significant reputational harm to us,
which could seriously harm our business prospects.
In addition, financial services firms are subject to numerous
conflicts of interests or perceived conflicts. The SEC and other
federal and state regulators have increased their scrutiny of
potential conflicts of interest. We have adopted various
policies, controls and procedures to address or limit actual or
perceived conflicts and regularly seek to review and update our
policies, controls and procedures. However, appropriately
dealing with conflicts of interest is complex and difficult and
our reputation could be damaged if we fail, or appear to fail,
to deal appropriately with conflicts of interest. Our policies
and procedures to address or limit actual or perceived conflicts
may also result in increased costs, additional operational
personnel and increased regulatory risk. Failure to adhere to
these policies and procedures may result in regulatory sanctions
or client or customer litigation.
The effort to combat money laundering and terrorist financing is
a priority in governmental policy with respect to financial
institutions. The obligation of financial institutions,
including ourselves, to identify their customers, watch for and
report suspicious transactions, respond to requests for
information by regulatory
20
authorities and law enforcement agencies, and share information
with other financial institutions, has required the
implementation and maintenance of internal practices, procedures
and controls which have increased, and may continue to increase,
our costs. Any failure with respect to our programs in this area
could subject us to serious regulatory consequences, including
substantial fines, and potentially other liabilities.
Asset management businesses have experienced a number of highly
publicized regulatory inquiries concerning market timing, late
trading and other activities that focus on the mutual fund
industry. These inquiries have resulted in increased scrutiny
within the industry and new rules and regulations for mutual
funds, investment advisers and broker-dealers. Although we do
not act as an investment adviser to mutual funds, the regulatory
scrutiny and rulemaking initiatives may result in an increase in
operational and compliance costs or the assessment of
significant fines or penalties against our asset management
business, and may otherwise limit our ability to engage in
certain activities.
Our
exposure to legal liability is significant, and damages that we
may be required to pay and the reputational harm that could
result from legal or regulatory action against us could
materially adversely affect our businesses.
We face significant legal risks in our businesses and, in recent
years, the volume of claims and amount of damages sought in
litigation and regulatory proceedings against financial
institutions have been increasing. These risks include potential
liability under securities or other laws for materially false or
misleading statements made in connection with securities
offerings and other transactions, potential liability for
fairness opinions and other advice we provide to
participants in strategic transactions and disputes over the
terms and conditions of complex trading arrangements. We are
also potentially subject to claims arising from disputes with
employees. These risks often may be difficult to assess or
quantify and their existence and magnitude often remain unknown
for substantial periods of time. See Item 3
Legal Proceedings for a further discussion of
certain legal matters applicable to us.
We depend to a large extent on our reputation for integrity and
high-caliber professional services to attract and retain clients
and customers. As a result, if a client or customer is not
satisfied with our services, it may be more damaging in our
business than in other businesses. Moreover, our role as advisor
to our clients on important underwriting or M&A
transactions involves complex analysis and the exercise of
professional judgment, including rendering fairness
opinions in connection with mergers and other
transactions. Therefore, our activities may subject us to the
risk of significant legal liabilities to our clients and
aggrieved third parties, including shareholders of our clients
who could bring securities class actions against us. Our
investment banking engagements typically include broad
indemnities from our clients and provisions to limit our
exposure to legal claims relating to our services, but these
provisions may not protect us or may not be enforceable in all
cases. As a result, we may incur significant legal and other
expenses in defending against litigation and may be required to
pay substantial damages for settlements and adverse judgments.
Substantial legal liability or significant regulatory action
against us could have a material adverse effect on our results
of operations or cause significant reputational harm to us,
which could seriously harm our business and prospects.
Regulatory inquiries and subpoenas or other requests for
information or testimony in connection with litigation may
require incurrence of significant expenses, including fees for
legal representation and fees associated with document
production. These costs may be incurred even if we are not a
target of the inquiry or a party to litigation.
There have been a number of highly publicized cases involving
fraud or other misconduct by employees in the financial services
industry in recent years, and we run the risk that employee
misconduct could occur at our company. For example, misconduct
by employees could involve the improper use or disclosure of
confidential information, which could result in regulatory
sanctions and serious reputational or financial harm. It is not
always possible to deter employee misconduct and the precautions
we take to detect and prevent this activity may not be effective
in all cases, and we may suffer significant reputational harm
for any misconduct by our employees.
21
Risks
Related to Our Shares
We are
controlled by our employee stockholders whose interests may
differ from those of other stockholders.
Our employees collectively own a majority of the total shares of
common stock entitled to vote and our executive officers
collectively own approximately 7.2% of such shares of our
outstanding common stock as of December 31, 2009. The
percentage of employee holdings may increase as result of our
practice of paying a portion of annual bonuses to certain
employees in the form of restricted stock. Although the
Stockholders Agreement between the Company and certain
employee stockholders does not contain any provisions regarding
the voting of common stock owned by any of our employees, a
group of employees with a sufficient number of shares may be
able to elect our entire board of directors, control our
management and policies and, in general, determine the outcome
of any corporate transaction or other matter submitted to the
stockholders for approval, including mergers, consolidations and
the sale of all or substantially all of our assets. Such persons
may be able to prevent or cause a change in control of our
company even if other stockholders oppose them.
Provisions
of our organizational documents may discourage an acquisition of
our company.
Our organizational documents contain provisions that will impede
the removal of directors and may discourage a third party from
making a proposal to acquire our company. For example, our board
of directors may, without the consent of stockholders, issue
preferred stock with greater voting rights than the common
stock. In addition, our certificate of incorporation provides
for a classified board of directors divided into three classes,
which may impede the removal of existing directors following a
change of control. If a change of control or change in
management that stockholders might otherwise consider to be
favorable is prevented or delayed, the market price of our
common stock could decline. Other provisions of our
organizational documents and Delaware corporate law impose
various procedural and other requirements that could make it
more difficult for stockholders to effect certain corporate
actions.
Future
sales, or the possibility of future sales, of a substantial
amount of our common stock could cause our stock price to
decline.
Sales of substantial amounts of our common stock by our
employees and other stockholders, or the possibility of such
sales, may adversely affect the price of our common stock and
impede our ability to raise capital through the issuance of
additional equity securities.
At the time of the completion of our initial public offering in
November 2006 (the IPO), we entered into the
Stockholders Agreement with certain employees. The
Stockholders Agreement placed restrictions on the
disposition of shares owned by such employees through the fifth
anniversary of the IPO. Since the IPO, 50% of the shares owned
by each such employee have been freed from the restrictions of
the agreement. Of the remaining 50% of the shares that are still
subject to such restrictions, 25% will become freely tradeable
in November 2010, the fourth anniversary of the IPO, and the
final 25% will become freely tradeable in November 2011, the
fifth anniversary of the IPO. As of February 19, 2010,
8,394,360 shares were still subject to the sale
restrictions set forth in the Stockholders Agreement. The
restrictions set forth in the Stockholders Agreement may
be waived by our board of directors, at their discretion.
We have in the past granted restricted stock awards to certain
employees in connection with our IPO (the IPO
Awards), in connection with year-end bonus compensation
(the Year-End Stock Awards) and as part of our
hiring procedures. As of February 19, 2010,
4,054,973 shares pertaining to such awards remain unvested,
and therefore may not be traded or disposed of by the award
recipient. 40% of the IPO Awards currently remain unvested but
will vest in November 2010, the fourth anniversary of the IPO.
Year-End Stock Awards, which have been granted in February of
each year since the IPO, generally are freed from trading
restrictions in equal one-third installments on each of the
first, second and third anniversaries of their grant.
Under our Company trading policy, employees may trade our common
stock only during certain window periods throughout
the year, which generally open on the second trading day
following a quarterly
22
public earnings release and close immediately after completion
of the second month of a fiscal quarter. However, the time frame
of any such window period may be adjusted by senior management,
if in their discretion such adjustment is determined to be
advisable. Sales of shares of common stock by our officers and
employees upon the removal of any of the above-described trading
restrictions may result in a decrease in the trading price of
our common stock and restrict our ability to raise additional
capital through the issuance of equity securities.
We currently have on file with the SEC an effective
universal shelf registration statement on
form S-3,
which enables us or our stockholders to sell, from time to time,
our common stock and other securities covered by the
registration statement in one or more public offerings. Our
status under the securities laws as a well-known seasoned
issuer 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. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources.
We
have not historically paid any cash dividends.
We have historically retained any earnings to fund the operation
and expansion of our business and, therefore, we have not paid
any cash dividends since becoming a public company. There can be
no assurance that we will pay any dividends in the future.
Accordingly, you should only rely on sales of your shares of
common stock after price appreciation, which may never occur, as
the way to realize any future gains in your investment. Unless
the Company changes this policy, investors seeking cash
dividends should not purchase our common stock.
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Item 1B.
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Unresolved
Staff Comments.
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None.
Our offices, are located in New York, Atlanta, Boston, Chicago,
Hartford, Houston, Richmond (Virginia), San Francisco,
London, Hong Kong and Tokyo. Our headquarters are located at 787
Seventh Avenue, New York, New York, and comprise
approximately 155,772 square feet of leased space, pursuant
to a lease agreement expiring in 2016. All of the other offices
are in leased space or we have entered into new leases for
space, which we currently believe to be adequate for our needs.
Some of our leases contain options to extend the term of the
lease or lease additional space. We believe that all of our
properties and facilities are well maintained. We do not
anticipate a need for other material additional office space in
the near term.
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Item 3.
|
Legal
Proceedings.
|
We face significant legal risks in our businesses and, in recent
years, the volume of claims and amount of damages sought in
litigation and regulatory proceedings against financial
institutions have been increasing. These risks include potential
liability under federal securities and other laws in connection
with securities offerings and other transactions, as well as
advice and opinions we provide concerning strategic
transactions. In addition, like most financial institutions, we
are often the subject of claims made by current and former
employees arising out of their employment or termination of
employment with us. These claims often relate to dissatisfaction
with an employees bonus or separation payment, or involve
allegations that the employee was the subject of some form of
discrimination or other unlawful employment practice. See
Risk Factors Our exposure to legal liability
is significant, and damages that we may be required to pay and
the reputational harm that could result from legal or regulatory
action against us could materially adversely affect our
businesses.
We are involved in a number of judicial and regulatory matters
arising in connection with our business. We are also involved,
from time to time, in reviews, investigations and proceedings
(both formal and informal)
23
by governmental and self-regulatory agencies regarding our
business, certain of which may result in adverse judgments,
settlements, fines, penalties, injunctions or other relief. The
number of these reviews, investigations and proceedings has
increased in recent years for many firms in the financial
services industry, including our company.
In view of the inherent difficulty of predicting the outcome of
such matters, particularly in cases where claimants seek
substantial or indeterminate damages or where investigations and
proceedings are in the early stages, we cannot predict with
certainty the loss or range of loss, if any, related to such
matters, how such matters will be resolved, when they will
ultimately be resolved, or what the eventual settlement, fine,
penalty or other relief, if any, might be. We review the need
for any loss contingency reserves, and we have established
reserves that we believe are adequate where, in the opinion of
management, the likelihood of liability is probable and the
extent of such liability can be reasonably estimated.
We describe below our significant legal proceedings:
Sentinel
Litigation
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
$4.9 million and interrogatory responses from the Trustee
in discovery now contend that Sentinel lost $5.6 million;
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 million, 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 Keefes Motion to
Dismiss, though it dismissed the Illinois Consumer Fraud Act
claim and granted Keefes motion to sever the
Trustees case against Keefe from the case against Cohen.
On August 26, 2009, Keefe filed a Third-Party Complaint
against Eric A. Bloom, the former President and CEO of Sentinel,
and Charles K. Mosley, the former Senior Vice President and head
trader of Sentinel, alleging fraud and seeking contribution for
any damages for which Keefe is held liable to the Trustee. The
court stayed and severed this Third-Party Complaint on October,
7, 2009.
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 Sentinels 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 Trustees claims due to lack of
standing. The Trustee has appealed the courts dismissal of
Grede v. Bank of New York Mellon and, on August 19,
2009, the court stayed the Second Complaint while the
Trustees appeal in Grede v. Bank of New York Mellon
is pending.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None.
24
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Our common stock is traded on the NYSE under the symbol
KBW.
The following table sets forth, for the periods indicated, the
high and low closing prices per share of our common stock, as
quoted on the NYSE.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
Fourth Quarter
|
|
$
|
34.44
|
|
|
$
|
24.53
|
|
|
$
|
32.40
|
|
|
$
|
19.59
|
|
Third Quarter
|
|
|
33.63
|
|
|
|
26.37
|
|
|
|
37.50
|
|
|
|
19.76
|
|
Second Quarter
|
|
|
28.90
|
|
|
|
20.71
|
|
|
|
28.14
|
|
|
|
20.06
|
|
First Quarter
|
|
$
|
23.28
|
|
|
$
|
14.20
|
|
|
$
|
29.66
|
|
|
$
|
18.63
|
|
As of December 31, 2009, there were 711 holders of record
or our common stock. However, we believe the number of
beneficial owners of our common stock exceeds this number.
No dividends have been declared or paid on our common stock. We
do not anticipate that we will pay any cash dividends on our
common stock in the foreseeable future.
On February 25, 2010, the last reported sales price for our
common stock on the NYSE was $23.99 per share.
Information relating to compensation plans under which our
common stock is authorized for issuance will be set forth in our
definitive proxy statement for our annual meeting of
stockholders to be held on June 14, 2010 (to be filed
within 120 days after December 31, 2009) (the
Proxy Statement for the 2010 Annual Meeting of
Stockholders) and is incorporated by reference in
Part III, Item 12.
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 December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
Approximate Dollar
|
|
|
|
|
|
|
Shares Purchased
|
|
Value of Shares
|
|
|
Total Number
|
|
|
|
as Part of Publicly
|
|
that May Yet Be
|
|
|
of Shares
|
|
Average Price
|
|
Announced Plans
|
|
Purchased Under the
|
Period
|
|
Purchased(1)(2)
|
|
per Share
|
|
or Programs
|
|
Plans or Programs
|
|
October 1 October 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1 November 30, 2009
|
|
|
286,277
|
|
|
$
|
28.24
|
|
|
|
|
|
|
|
|
|
December 1 December 31, 2009
|
|
|
14,448
|
|
|
|
17.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
300,725
|
|
|
$
|
27.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All shares purchased were other than as part of a publicly
announced plan or program. |
|
(2) |
|
All shares were immediately retired upon purchase by us. |
25
|
|
Item 6.
|
Selected
Financial Data.
|
Set forth below is selected consolidated financial and other
data of KBW as of and for the five years ended December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(dollars in thousands, except per share information)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
160,450
|
|
|
$
|
163,664
|
|
|
$
|
226,464
|
|
|
$
|
210,026
|
|
|
$
|
149,332
|
|
Commissions
|
|
|
142,015
|
|
|
|
192,752
|
|
|
|
165,803
|
|
|
|
116,625
|
|
|
|
96,301
|
|
Principal transactions, net
|
|
|
63,611
|
|
|
|
(142,962
|
)
|
|
|
(7,520
|
)
|
|
|
45,773
|
(1)
|
|
|
36,568
|
|
Interest and dividend income
|
|
|
10,524
|
|
|
|
24,687
|
|
|
|
37,612
|
|
|
|
26,920
|
|
|
|
17,984
|
|
Investment advisory fees
|
|
|
2,826
|
|
|
|
1,197
|
|
|
|
1,751
|
|
|
|
5,036
|
|
|
|
3,843
|
|
Other
|
|
|
7,728
|
|
|
|
2,879
|
|
|
|
3,418
|
|
|
|
2,206
|
|
|
|
3,838
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
387,154
|
|
|
|
242,217
|
|
|
|
427,528
|
|
|
|
406,586
|
|
|
|
307,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
236,159
|
|
|
|
226,311
|
|
|
|
257,070
|
|
|
|
216,518
|
|
|
|
187,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy and equipment
|
|
|
21,639
|
|
|
|
19,831
|
|
|
|
18,722
|
|
|
|
17,728
|
|
|
|
16,877
|
|
Communications and data processing
|
|
|
28,464
|
|
|
|
27,743
|
|
|
|
24,283
|
|
|
|
19,465
|
|
|
|
18,526
|
|
Brokerage and clearance
|
|
|
17,203
|
|
|
|
24,244
|
|
|
|
22,967
|
|
|
|
19,728
|
|
|
|
17,390
|
|
Business development
|
|
|
14,328
|
|
|
|
16,115
|
|
|
|
16,601
|
|
|
|
13,218
|
|
|
|
13,141
|
|
Interest
|
|
|
1,151
|
|
|
|
4,603
|
|
|
|
14,732
|
|
|
|
11,023
|
|
|
|
8,105
|
|
Other
|
|
|
25,352
|
|
|
|
25,375
|
|
|
|
23,748
|
|
|
|
17,257
|
|
|
|
15,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-compensation expenses
|
|
|
108,137
|
|
|
|
117,911
|
|
|
|
121,053
|
|
|
|
98,419
|
|
|
|
89,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
344,296
|
|
|
|
344,222
|
|
|
|
378,123
|
|
|
|
314,937
|
|
|
|
276,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
42,858
|
|
|
|
(102,005
|
)
|
|
|
49,405
|
|
|
|
91,649
|
|
|
|
31,142
|
|
Income tax expense/(benefit)
|
|
|
19,251
|
|
|
|
(39,656
|
)
|
|
|
22,113
|
|
|
|
38,365
|
|
|
|
13,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)(3)
|
|
$
|
23,607
|
|
|
$
|
(62,349
|
)
|
|
$
|
27,292
|
|
|
$
|
53,284
|
|
|
$
|
17,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share(3)(4)(5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
(2.02
|
)
|
|
$
|
0.81
|
|
|
$
|
1.89
|
|
|
$
|
0.63
|
|
Diluted
|
|
$
|
0.66
|
|
|
$
|
(2.02
|
)
|
|
$
|
0.81
|
|
|
$
|
1.89
|
|
|
$
|
0.63
|
|
Weighted average number of common shares outstanding(4)(5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,448,074
|
|
|
|
30,838,361
|
|
|
|
30,654,058
|
|
|
|
27,512,023
|
|
|
|
27,194,404
|
|
Diluted
|
|
|
31,448,074
|
|
|
|
30,838,361
|
|
|
|
30,654,058
|
|
|
|
27,512,023
|
|
|
|
27,194,404
|
|
Consolidated Statements of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
631,368
|
|
|
$
|
571,466
|
|
|
$
|
864,450
|
|
|
$
|
804,865
|
|
|
$
|
661,161
|
|
Stockholders equity(3)
|
|
$
|
449,069
|
|
|
$
|
396,731
|
|
|
$
|
448,426
|
|
|
$
|
397,414
|
|
|
$
|
265,709
|
|
Other Data (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common share
|
|
$
|
14.60
|
|
|
$
|
13.30
|
|
|
$
|
15.31
|
|
|
$
|
13.59
|
|
|
$
|
10.13
|
|
26
|
|
|
(1) |
|
Principal transactions, net for the year ended December 31,
2006 included a gain of approximately $5.4 million with
respect to the exchange of our New York Stock Exchange seat for
cash and shares of the merged NYSE Group, Inc. |
|
(2) |
|
Other revenues in 2005 include approximately $0.4 million
in insurance recoveries and government grants relating to the
World Trade Center attacks in 2001. |
|
(3) |
|
Prior to the date of the IPO (November 2006) and the
termination of the 2005 amended and restated stockholders
agreement, common stock was classified as a liability. |
|
(4) |
|
In calculating shares of common stock outstanding, we give
retroactive effect to a 43 for 1 stock split that we effected on
November 1, 2006. |
|
(5) |
|
Basic and diluted common shares outstanding were equal in each
respective period under the two-class method. Accordingly, prior
years have been restated. |
27
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
our audited consolidated financial statements and the related
notes included elsewhere in this report. In addition to
historical information, this discussion includes forward-looking
information that involves risks and assumptions, which could
cause actual results to differ materially from managements
expectations. See Cautionary Statement Regarding
Forward-Looking Statements included in the beginning of
this report.
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.
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.
28
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. During 2009 there was a return of some market confidence
in the sector and, particularly in the U.S., strong activity in
capital markets transactions recapitalizing selected
companies. As a result, many institutions have positioned
themselves to take advantage of acquisition opportunities that
may develop, in some cases with government assistance. We
continued to be very active in capital markets transactions,
participating in 78 equity capital raises during 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 there are
continuing concerns in the credit quality of multiple asset
classes, especially commercial real estate. Securitization
markets have not broadly reopened. U.S. unemployment
remains high and lenders continue to lend only to the most
credit worthy borrowers, making credit tight across the broad
economy.
In the U.S., the financial services sector remains highly
fragmented. There are approximately 1,030 publicly traded banks
and thrifts and approximately 8,100 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. In 2009, there were 140 failed U.S. banks
with assets totaling $170 billion compared to 25 failed
banks in the U.S. with assets totaling $374 billion in
2008. 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.
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.
Recent concerns on sovereign debt in certain European countries
have stressed financial 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 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 wide-scale failures of large financial institutions
in the U.S., however, there have been several notable and large
bankruptcies in other sectors. There are proposals in the
U.S. to impose limitations on certain risk taking
activities by banking entities. 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.
Results
of Operations
Year
Ended December 31, 2009 Compared with Year Ended
December 31, 2008
Overview
Total revenues increased $144.9 million, or 59.8%, to
$387.2 million for the year ended December 31, 2009,
compared with $242.2 million for the year ended
December 31, 2008. This increase was primarily due to
principal transactions, net revenue of $63.6 million in
2009 compared to net losses of $143.0 million in 2008,
partially offset by a decrease in commissions revenue of
$50.7 million.
Total expenses remained relatively unchanged at
$344.3 million for the year ended December 31, 2009
compared with the year ended December 31, 2008.
We recorded net income of $23.6 million, or $0.66 per
diluted share, for the year ended December 31, 2009,
compared with a net loss of $62.3 million, or $2.02 per
diluted share, for the same period in 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
$29.1 million, or $0.81 per diluted share for the year
ended December 31, 2009, compared with net loss of
$55.3 million, or $1.79 per diluted share for the same
period in 2008. See 2009 and 2008
Non-GAAP Financial Measures for a reconciliation of
our non-GAAP measures to their corresponding GAAP amounts.
29
The following table provides a comparison of our revenues and
expenses for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Period to Period
|
|
|
|
2009
|
|
|
2008
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
160,450
|
|
|
$
|
163,664
|
|
|
$
|
(3,214
|
)
|
|
|
(2.0
|
)%
|
Commissions
|
|
|
142,015
|
|
|
|
192,752
|
|
|
|
(50,737
|
)
|
|
|
(26.3
|
)
|
Principal transactions, net
|
|
|
63,611
|
|
|
|
(142,962
|
)
|
|
|
206,573
|
|
|
|
N/M
|
|
Interest and dividend income
|
|
|
10,524
|
|
|
|
24,687
|
|
|
|
(14,163
|
)
|
|
|
(57.4
|
)
|
Investment advisory fees
|
|
|
2,826
|
|
|
|
1,197
|
|
|
|
1,629
|
|
|
|
136.1
|
|
Other
|
|
|
7,728
|
|
|
|
2,879
|
|
|
|
4,849
|
|
|
|
168.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
387,154
|
|
|
|
242,217
|
|
|
|
144,937
|
|
|
|
59.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
236,159
|
|
|
|
226,311
|
|
|
|
9,848
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy and equipment
|
|
|
21,639
|
|
|
|
19,831
|
|
|
|
1,808
|
|
|
|
9.1
|
|
Communications and data processing
|
|
|
28,464
|
|
|
|
27,743
|
|
|
|
721
|
|
|
|
2.6
|
|
Brokerage and clearance
|
|
|
17,203
|
|
|
|
24,244
|
|
|
|
(7,041
|
)
|
|
|
(29.0
|
)
|
Business development
|
|
|
14,328
|
|
|
|
16,115
|
|
|
|
(1,787
|
)
|
|
|
(11.1
|
)
|
Interest
|
|
|
1,151
|
|
|
|
4,603
|
|
|
|
(3,452
|
)
|
|
|
(75.0
|
)
|
Other
|
|
|
25,352
|
|
|
|
25,375
|
|
|
|
(23
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compensation expenses
|
|
|
108,137
|
|
|
|
117,911
|
|
|
|
(9,774
|
)
|
|
|
(8.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
344,296
|
|
|
|
344,222
|
|
|
|
74
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
42,858
|
|
|
|
(102,005
|
)
|
|
|
144,863
|
|
|
|
N/M
|
|
Income tax expense/(benefit)
|
|
|
19,251
|
|
|
|
(39,656
|
)
|
|
|
58,907
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
23,607
|
|
|
$
|
(62,349
|
)
|
|
$
|
85,956
|
|
|
|
N/M
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M Not Meaningful
2009 and
2008 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
year ended December 31, 2009 in our February 18, 2010
press release. The non-GAAP amounts exclude 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 two years ended December 31, 2009
and 2008. 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.
30
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 years ended December 31, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
|
|
|
|
|
|
|
GAAP
|
|
|
Amount
|
|
|
Non-GAAP
|
|
|
|
(dollars in thousands, except per share information)
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits expense
|
|
$
|
236,159
|
|
|
$
|
(10,022
|
)(a)
|
|
$
|
226,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
42,858
|
|
|
$
|
10,022
|
(a)
|
|
$
|
52,880
|
|
Income tax expense
|
|
$
|
19,251
|
|
|
$
|
4,502
|
(b)
|
|
$
|
23,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,607
|
|
|
$
|
5,520
|
(c)
|
|
$
|
29,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation ratio(d):
|
|
|
61.0
|
%
|
|
|
|
|
|
|
58.4
|
%
|
Earnings per share(e):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
0.15
|
|
|
$
|
0.81
|
|
Diluted
|
|
$
|
0.66
|
|
|
$
|
0.15
|
|
|
$
|
0.81
|
|
Weighted average number of common shares outstanding(e):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,448,074
|
|
|
|
|
(f)
|
|
|
31,448,074
|
|
Diluted
|
|
|
31,448,074
|
|
|
|
|
(f)
|
|
|
31,448,074
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits expense
|
|
$
|
226,311
|
|
|
$
|
(11,456
|
)(a)
|
|
$
|
214,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(102,005
|
)
|
|
|
11,456
|
(a)
|
|
$
|
(90,549
|
)
|
Income tax benefit
|
|
$
|
(39,656
|
)
|
|
$
|
4,454
|
(b)
|
|
$
|
(35,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(62,349
|
)
|
|
$
|
7,002
|
(c)
|
|
$
|
(55,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation ratio(d):
|
|
|
93.4
|
%
|
|
|
|
|
|
|
88.7
|
%
|
Earnings per share(e):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.02
|
)
|
|
$
|
0.23
|
|
|
$
|
(1.79
|
)
|
Diluted
|
|
$
|
(2.02
|
)
|
|
$
|
0.23
|
|
|
$
|
(1.79
|
)
|
Weighted average number of common shares outstanding(e):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,838,361
|
|
|
|
|
(f)
|
|
|
30,838,361
|
|
Diluted
|
|
|
30,838,361
|
|
|
|
|
(f)
|
|
|
30,838,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
For year ended 2009 and 2008 compensation ratios were calculated
by dividing compensation and benefits expense by total revenues
of $387,154 and $242,217, 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. |
31
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.
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 was $160.4 million for the year
ended December 31, 2009 compared with $163.7 million
for the same period in 2008, a decrease of $3.2 million, or
2.0%. Capital markets revenue increased $42.7 million, or
49.0%, to $130.1 million for the year ended
December 31, 2009 compared with $87.4 million for the
same period in 2008. The increase reflects the completion of a
record number of equity capital market transactions in 2009.
M&A and advisory revenue was $30.3 million for the
year ended December 31, 2009 compared with
$76.3 million for the same period in 2008, a decrease of
$46.0 million. This decrease was primarily due to a decline
in the number of mergers and acquisitions and smaller average
size transactions that closed in 2009 compared with 2008.
Commissions
Commissions revenue was $142.0 million for the year ended
December 31, 2009 compared with $192.8 million for the
same period in 2008, a decrease of $50.7 million, or 26.3%.
U.S. equity commissions were $103.5 million for the
year ended December 31, 2009 compared with
$129.3 million for the same 2008 period, a decrease of
$25.8 million, or 20.0%, reflecting lower trading volume
due to lower levels of market volatility and a less favorable
mix of order flow. European equity commissions were
$38.5 million for the year ended December 31, 2009
compared with $63.5 million for the same period in 2008, a
decrease of $25.0 million, or 39.4%, reflecting lower
trading volume 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
$63.6 million for the year ended December 31, 2009
compared to a net loss of $143.0 million for the same
period in 2008. The net gain in 2009 reflected the absence of
significant negative valuation adjustments on certain financial
instruments owned, primarily related to trust preferred backed
collateralized debt obligations and related securities, as well
as higher revenue from our fixed income customer business. Our
fixed income revenue was $47.6 million for the year ended
December 31, 2009 compared to $8.8 million for the
same period in 2008, reflecting strong client-driven activity as
credit markets improved. Our equity market making activity
resulted in a loss of $7.1 million for 2009 compared to a
loss of $6.1 million for the same period in 2008. Trading
for our own account, including firm investments, resulted in a
net gain of $20.1 million for 2009 compared to a net loss
of $26.8 million for the same period in 2008, reflecting an
improved trading environment. The realized gains and change in
the fair value of our trust preferred backed collateralized debt
obligations and related securities owned resulted in
32
a gain of $3.0 million for 2009 compared to a loss of
$118.9 million for the same period in 2008, reflecting
sales of trust preferred securities and improved market
conditions.
Interest
and Dividend Income
Interest and dividend income was $10.5 million for the year
ended December 31, 2009, a decrease of $14.2 million,
or 57.4%, compared with $24.7 million for the year ended
December 31, 2008. The decrease was primarily due to lower
average holdings of interest bearing assets and reduced interest
rates in 2009 relative to 2008.
Investment
Advisory Fees
Investment advisory fees increased $1.6 million to
$2.8 million in the year ended December 31, 2009
compared with $1.2 million in the same period of 2008. The
increase was primarily due to higher incentive fees earned in
2009 compared with 2008.
Other
Other revenues increased $4.8 million to $7.7 million
for the year ended December 31, 2009 compared with
$2.9 million for the year ended December 31, 2008. The
increase was primarily due to higher loan portfolio sales fees
compared with 2008.
Expenses
Compensation
and Benefits
Compensation and benefits expense was $236.2 million, an
increase of $9.8 million, or 4.4% for the year ended
December 31, 2009 compared with $226.3 million for the
same period in 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 58.4% in 2009. See 2009 and 2008
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 $7.0 million, or
29.0%, to $17.2 million for the year ended
December 31, 2009 compared with $24.2 million for the
year ended December 31, 2008. This decrease was primarily a
result of lower trading volume and favorable foreign exchange
rates for 2009 compared to 2008.
Business
Development
Business development expense decreased $1.8 million, or
11.1%, to $14.3 million for the year ended
December 31, 2009 compared with $16.1 million for the
same 2008 period. The decrease was primarily due to lower travel
and entertainment expenses in 2009 relative to 2008.
Interest
Interest expense decreased $3.5 million to
$1.2 million for the year ended December 31, 2009
compared with $4.6 million for the year ended
December 31, 2008. The decrease was primarily due to lower
average balances of securities sold under repurchased agreements
and short-term borrowings as well as lower interest rates in
2009 relative to 2008.
Income
Tax Expense / (Benefit)
Income tax expense was $19.3 million for the year ended
December 31, 2009, which resulted in an effective tax rate
of 44.9%, compared to an income tax benefit of
$39.7 million for the year ended December 31, 2008,
which resulted in an effective tax rate of 38.9%. The change in
the effective tax rate was primarily due to the increase in the
impact of permanent differences, which increased the effective
tax expense rate for 2009 and decreased the effective tax
benefit in 2008, and higher state and local income taxes net of
federal tax benefit.
33
Year
Ended December 31, 2008 Compared with Year Ended
December 31, 2007
Overview
Total revenues were $242.2 million for the year ended
December 31, 2008, a decrease of $185.3 million
compared with $427.5 million for the year ended
December 31, 2007. This decrease was primarily due to an
increase in net losses on principal transactions of
$135.4 million in 2008 over 2007 and a decrease in
investment banking revenue of $62.8 million, partially
offset by an increase in commissions revenues of
$27.0 million.
Total expenses were $344.2 million for the year ended
December 31, 2008 compared with $378.1 million for the
year ended December 31, 2007. This decrease was primarily
due to a decrease in compensation and benefits expense of
$30.8 million. Additionally, non-compensation expenses
decreased $3.1 million to $117.9 million for the year
ended December 31, 2008, primarily as a result of a
decrease in interest expense.
We recorded a net loss of $62.3 million, or $2.02 per
diluted share, for the year ended December 31, 2008,
compared with net income of $27.3 million, or $0.81 per
diluted share, for the same period in 2007. After adjusting for
the stock compensation expense with respect to the 2006 one-time
restricted stock awards granted to employees in connection with
our initial public offering (IPO), our non-GAAP
operating net loss was $55.3 million, or $1.79 per diluted
share for the year ended December 31, 2008, compared with
net income of $34.2 million, or $1.01 per diluted share for
the same period in 2007. See 2008 and 2007
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Period to Period
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
163,664
|
|
|
$
|
226,464
|
|
|
$
|
(62,800
|
)
|
|
|
(27.7
|
)%
|
Commissions
|
|
|
192,752
|
|
|
|
165,803
|
|
|
|
26,949
|
|
|
|
16.3
|
|
Principal transactions, net
|
|
|
(142,962
|
)
|
|
|
(7,520
|
)
|
|
|
(135,442
|
)
|
|
|
N/M
|
|
Interest and dividend income
|
|
|
24,687
|
|
|
|
37,612
|
|
|
|
(12,925
|
)
|
|
|
(34.4
|
)
|
Investment advisory fees
|
|
|
1,197
|
|
|
|
1,751
|
|
|
|
(554
|
)
|
|
|
(31.6
|
)
|
Other
|
|
|
2,879
|
|
|
|
3,418
|
|
|
|
(539
|
)
|
|
|
(15.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
242,217
|
|
|
|
427,528
|
|
|
|
(185,311
|
)
|
|
|
(43.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
226,311
|
|
|
|
257,070
|
|
|
|
(30,759
|
)
|
|
|
(12.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy and equipment
|
|
|
19,831
|
|
|
|
18,722
|
|
|
|
1,109
|
|
|
|
5.9
|
|
Communications and data processing
|
|
|
27,743
|
|
|
|
24,283
|
|
|
|
3,460
|
|
|
|
14.2
|
|
Brokerage and clearance
|
|
|
24,244
|
|
|
|
22,967
|
|
|
|
1,277
|
|
|
|
5.6
|
|
Business development
|
|
|
16,115
|
|
|
|
16,601
|
|
|
|
(486
|
)
|
|
|
(2.9
|
)
|
Interest
|
|
|
4,603
|
|
|
|
14,732
|
|
|
|
(10,129
|
)
|
|
|
(68.8
|
)
|
Other
|
|
|
25,375
|
|
|
|
23,748
|
|
|
|
1,627
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-compensation expenses
|
|
|
117,911
|
|
|
|
121,053
|
|
|
|
(3,142
|
)
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
344,222
|
|
|
|
378,123
|
|
|
|
(33,901
|
)
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
(102,005
|
)
|
|
|
49,405
|
|
|
|
(151,410
|
)
|
|
|
N/M
|
|
Income tax (benefit)/expense
|
|
|
(39,656
|
)
|
|
|
22,113
|
|
|
|
(61,769
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(62,349
|
)
|
|
$
|
27,292
|
|
|
$
|
(89,641
|
)
|
|
|
N/M
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M Not Meaningful
34
2008 and
2007 Non-GAAP Financial Measures
The following provides details with respect to reconciling
compensation and benefits expense, (loss)/income before income
taxes, income tax (benefit)/expense, net (loss) / income,
compensation ratio and basic and diluted earnings per share on a
GAAP basis for the years ended December 31, 2008 and 2007
to such items on a non-GAAP basis in the same period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
|
|
|
Reconciliation Amount
|
|
|
Non-GAAP
|
|
|
|
(dollars in thousands, except per share information)
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits expense
|
|
$
|
226,311
|
|
|
$
|
(11,456
|
)(a)
|
|
|
|
|
|
$
|
214,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(102,005
|
)
|
|
$
|
11,456
|
(a)
|
|
|
|
|
|
$
|
(90,549
|
)
|
Income tax benefit
|
|
$
|
(39,656
|
)
|
|
$
|
4,454
|
(b)
|
|
|
|
|
|
$
|
(35,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(62,349
|
)
|
|
$
|
7,002
|
(c)
|
|
|
|
|
|
$
|
(55,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation ratio(d):
|
|
|
93.4
|
%
|
|
|
|
|
|
|
|
|
|
|
88.7
|
%
|
Earnings per share(e):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.02
|
)
|
|
$
|
0.23
|
|
|
|
|
|
|
$
|
(1.79
|
)
|
Diluted
|
|
$
|
(2.02
|
)
|
|
$
|
0.23
|
|
|
|
|
|
|
$
|
(1.79
|
)
|
Weighted average number of common shares outstanding(e):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,838,361
|
|
|
|
|
(f)
|
|
|
|
|
|
|
30,838,361
|
|
Diluted
|
|
|
30,838,361
|
|
|
|
|
(f)
|
|
|
|
|
|
|
30,838,361
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits expense
|
|
$
|
257,070
|
|
|
$
|
(12,509
|
)(a)
|
|
|
|
|
|
$
|
244,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
49,405
|
|
|
$
|
12,509
|
(a)
|
|
|
|
|
|
$
|
61,914
|
|
Income tax expense
|
|
$
|
22,113
|
|
|
$
|
5,599
|
(b)
|
|
|
|
|
|
$
|
27,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27,292
|
|
|
$
|
6,910
|
(c)
|
|
|
|
|
|
$
|
34,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation ratio(d):
|
|
|
60.1
|
%
|
|
|
|
|
|
|
|
|
|
|
57.2
|
%
|
Earnings per share(e):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.81
|
|
|
$
|
0.20
|
|
|
|
|
|
|
$
|
1.01
|
|
Diluted
|
|
$
|
0.81
|
|
|
$
|
0.20
|
|
|
|
|
|
|
$
|
1.01
|
|
Weighted average number of common shares outstanding(e):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,654,058
|
|
|
|
|
(f)
|
|
|
|
|
|
|
30,654,058
|
|
Diluted
|
|
|
30,654,058
|
|
|
|
|
(f)
|
|
|
|
|
|
|
30,654,058
|
|
|
|
|
(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 to income tax (benefit)/expense
represents the elimination of the tax
(benefit)/expense
resulting from the amortization of the IPO restricted stock
awards in the period. |
|
(c) |
|
The non-GAAP adjustment to net (loss) / income was the after-tax
amortization of the IPO restricted stock awards in the
respective periods. |
|
(d) |
|
For year ended 2008 and 2007 compensation ratios were calculated
by dividing compensation and benefits expense by total revenues
of $242,217 and $427,528, 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 common shares
outstanding were not adjusted. |
35
See the section entitled 2009 and 2008
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.
Revenues
Investment
Banking
Investment banking revenue was $163.7 million for the year
ended December 31, 2008, a decrease of $62.8 million,
or 27.7%, compared with $226.5 million for the same period
in 2007. The decrease was primarily due to a $53.1 million
decrease in capital markets revenue to $87.4 million and a
$9.7 million decrease in M&A and advisory fees to
$76.3 million for the year ended December 31, 2008
compared with the same period in 2007. The decrease in capital
markets revenue was primarily due to the absence of
PreTSLtm
transactions during 2008 compared with two larger than average
PreTSLtm
transactions completed during the first half of 2007. Market
conditions for securitizations continued to deteriorate in 2008
and would need to improve before
PreTSLtm
structured finance transactions could approach transaction sizes
and levels of profitability that existed prior to the second
half of 2007. In addition, there was a decline in market
activity, particularly for initial public offerings, in 2008
which was partially offset by a significantly
larger-than-average
private placement transaction which closed during the third
quarter of 2008. The decrease in M&A and advisory fees was
primarily due to lower levels of activity due to the uncertain
financial condition of both potential buyers and sellers in the
economic environment in 2008 compared to the same period in 2007.
Commissions
Commissions revenue increased $27.0 million, or 16.3%, to
$192.8 million for the year ended December 31, 2008
compared with $165.8 million for the year ended
December 31, 2007. This increase was primarily due to a
$28.7 million, or 28.5%, increase in commissions revenue on
U.S. equity securities, partially offset by a
$1.7 million, or 2.6%, decrease in commissions revenue on
European equity securities. Commissions of U.S. equities
totaled $129.3 million for 2008 compared to
$100.6 million for the year ended December 31, 2007.
Commissions of European equity securities totaled
$63.5 million for 2008 compared to $65.2 million for
the year ended December 31, 2007. Our commissions revenue
increased in part as a result of the high volume of trading in
equity trading for customers as a result of the volatile market
for U.S. financial services stocks in 2008, partially
offset by a decline in commissions from European equity
securities. Commissions in Europe are determined based on the
value of securities traded, which dropped significantly during
the fourth quarter of 2008.
Principal
Transactions, Net
Principal transactions resulted in a net loss of
$143.0 million for the year ended December 31, 2008
compared to a net loss of $7.5 million for the year ended
December 31, 2007. The net loss on principal transactions
for 2008 was primarily a result of $119.5 million in losses
on trust preferred and other capital securities issued by
banking and insurance companies and collateralized
debt-obligation (CDOs) backed by such securities
compared to losses of $10.2 million on such securities for
2007. We also had net losses on other firm investments,
including private equity securities and limited partnership
interests, of $23.8 million and on equity market making and
securities held for our own account of $11.1 million
compared to net gains of $0.9 million and net losses of
$0.9 million, respectively, for 2007. Excluding the losses
on CDOs of $66.1 million mentioned above, our fixed income
trading resulted in net gains of $11.4 million for 2008
compared to net gains of $2.7 million for 2007.
The net loss on principal transactions in 2008 was predominantly
a result of valuation adjustments of $119.5 million on
PreTSLtm
related securities and reflects the unprecedented decline in the
market value of most financial services industry securities and
in particular the securities of U.S. banking companies
during the second half of 2008. Trust preferred and other
capital securities of banking and insurance companies, were
carried at an aggregate fair value of approximately
$31 million (or 38% of original par value) at
December 31,
36
2008. Trust preferred backed CDOs, including
PreTSLtm
securities, were carried at an aggregate fair value of
approximately $5 million (or 9% of original cost) at
December 31, 2008.
Adverse market conditions continued in 2008. Investor demand
continued to diminish for many classes of fixed income
securities as the deteriorating credit markets experienced
dislocation, illiquidity and wider credit spreads. As a result,
the fair value of our fixed income financial instruments was
impacted by these market fluctuations.
Interest
and Dividend Income
Interest and dividend income was $24.7 million for the year
ended December 31, 2008, a decrease of $12.9 million,
or 34.4%, compared with $37.6 million for the same period
in 2007. This decrease was primarily due to lower holdings of
fixed income financial instruments and securities purchased
under resale agreements for the year ended December 31,
2008 compared with the same period in 2007.
Investment
Advisory Fees
Investment advisory fees decreased to $1.2 million in the
year ended December 31, 2008 compared with
$1.8 million in the same period of 2007. The decrease was
primarily due to a decrease in assets under management in 2008
compared with the same period in 2007.
Other
Other revenues decreased $0.5 million, or 15.8%, to
$2.9 million for the year ended December 31, 2008
compared with $3.4 million for the year ended
December 31, 2007. The decrease was primarily due to a
decrease in miscellaneous fees.
Expenses
Compensation
and Benefits
Compensation and benefits expense was $226.3 million for
the year ended December 31, 2008, a decrease of
$30.8 million, or 12.0% compared with $257.1 million
for the same period in 2007. The decrease was primarily due to a
decrease in the 2008 discretionary cash bonus accrual of
approximately 33% compared with accrued discretionary cash
bonuses for 2007, partially offset by the approximately 49%
increase in the amortization to compensation expense of
restricted stock awards.
Occupancy
and Equipment
Occupancy and equipment expenses increased $1.1 million, or
5.9%, to $19.8 million for the year ended December 31,
2008 compared with $18.7 million for the year ended
December 31, 2007, primarily due to higher rent expense.
Communications
and Data Processing
Communications and data processing expense was
$27.7 million for the year ended December 31, 2008, an
increase of $3.4 million, or 14.2%, compared with
$24.3 million for the year ended December 31, 2007.
This increase was primarily due to higher market data costs.
Brokerage
and Clearance
Brokerage and clearance expense was $24.2 million for the
year ended December 31, 2008, an increase of
$1.2 million, or 5.6%, compared with $23.0 million for
the year ended December 31, 2007. The increase was
primarily a result of higher volume in equity trading for
customers as a result of volatility in the marketplace
particularly for financial services.
37
Interest
Interest expense decreased $10.1 million, or 68.8%, to
$4.6 million for the year ended December 31, 2008,
compared with $14.7 million for the year ended
December 31, 2007. The decrease was primarily due to lower
average balances of securities sold under repurchase agreements
and reduced interest rates in 2008 relative to the same 2007
period.
Business
Development
Business development expense decreased $0.5 million, or
2.9%, to $16.1 million for the year ended December 31,
2008 compared with $16.6 million for the year ended
December 31, 2007. The change was primarily due to a
decrease in travel and entertainment expenses.
Other
Other expense was $25.4 million for the year ended
December 31, 2008, an increase of $1.7 million, or
6.9%, compared with $23.7 million for the year ended
December 31, 2007. This increase was primarily due to
higher professional fees in 2008 relative to the same 2007
period.
Income
Tax Benefit/Expense
Income tax benefit was $39.7 million for the year ended
December 31, 2008, which equals an effective tax rate of
38.9%, compared with income tax expense of $22.1 million
for the year ended December 31, 2007, which equals an
effective tax rate of 44.8%. The change in rate is due to
permanent differences which reduce the tax benefit in a loss
period.
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 subsidiarys
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 principal activities, the overall size of total
assets and operating liabilities fluctuate from period to
period. Our assets generally consist of cash and cash
equivalents, financial instruments, 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
principal 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
December 31, 2009, we had liquid assets of
$365.0 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 our
U.S. clearing broker 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.
38
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.
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 December 31, 2009, Keefes net capital under the
SECs Uniform Net Capital Rule was $111.8 million, or
$103.1 million in excess of the minimum required net
capital.
KBWL is subject to the capital requirements of the U.K.
Financial Services Authority. KBWLs total capital
resources of $36.5 million exceeded the capital resources
requirement by approximately $27.0 million at
December 31, 2009.
Cash
Flows
Year ended December 31, 2009. Cash
increased $8.2 million for the year ended December 31,
2009, primarily due to positive cash flows from operating
activities.
Net income, after adjusting for non-cash expense and revenue
items of $46.7 million, provided cash of
$70.3 million. The non-cash items consisted of expenses of
$36.6 million resulting from the amortization of stock
based compensation expenses, $5.2 million related to
deferred income tax expense and $4.8 million related to
depreciation and amortization expense. Cash of
$55.8 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 $43.4 million
and receivables from clearing brokers of $30.8 million,
partially offset by a $32.2 million decline in income taxes
receivable. Cash of $5.9 million was provided by an
increase in operating liabilities, primarily attributable to
increases in financial instruments sold, not yet purchased, at
fair value and accounts payable, accrued expenses, and other
liabilities of $25.7 million and $11.0 million,
respectively, partially offset by a $31.5 million reduction
in short-term borrowings.
We used $4.7 million in our investing activities for the
purchase of fixed assets. Cash used in financing activities was
$11.5 million primarily as a result of the cancellation of
restricted stock in satisfaction of withholding tax requirements.
39
Year ended December 31, 2008. Cash
increased $0.6 million for the year ended December 31,
2008, primarily due to positive cash flows from operating
activities offset by the effect of exchange rate changes on cash.
Our operating activities provided $25.7 million of cash due
to a net loss of $40.2 million, adjusted for non-cash
revenue and expense items of $22.2 million, and cash used
as a result of decreasing operating liabilities by
$238.1 million, offset by cash provided from operating
assets of $303.9 million. The non-cash items consisted of
amortization of stock-based compensation related to restricted
stock of $30.5 million, deferred income tax benefit of
$13.2 million and depreciation and amortization expense of
$4.8 million. The increase in cash provided by operating
assets was primarily attributable to decreases in financial
instruments owned, at fair value of $251.5 million and
receivables from clearing brokers of $59.8 million,
partially offset by an increase in income taxes receivable of
$33.3 million. Cash used as a result of decreases in
operating liabilities consisted primarily of decreases in
securities sold under repurchase agreements of
$94.8 million, financial instruments sold, not yet
purchased, at fair value of $65.7 million, accounts
payable, accrued expenses and other liabilities of
$47.0 million and short-term borrowings of
$33.6 million.
We used $3.7 million in our investing activities, in the
purchase of fixed assets. Cash used in financing activities was
$3.9 million primarily as a result of the cancellation of
restricted stock in satisfaction of withholding tax requirements
partially offset by repayment of loans we provided to certain
employees in connection with their purchase of our common stock.
The effect of exchange rate changes on cash was primarily a
result of the significant drop in the Great British Pound
relative the U.S. Dollar particularly in the fourth quarter
of 2008.
Year ended December 31, 2007. Cash
increased $28.7 million in the year ended December 31,
2007, primarily due to positive cash flows from operating
activities.
Our operating activities provided $28.1 million of cash due
to net income, adjusted for non-cash revenue and expense items
of $8.8 million, of $36.1 million, offset by cash used
by an increase in operating assets of $16.6 million less
cash provided by an increase in operating liabilities of
$8.6 million. The non-cash items consisted primarily of
amortization of stock-based compensation of $20.6 million,
deferred income tax benefit of $10.1 million, non-monetary
revenue of $6.5 million and depreciation and amortization
expense of $4.9 million. Cash provided from the increase in
operating liabilities consisted primarily of increases in
accounts payable, accrued expenses and other liabilities of
$5.6 million, securities sold under repurchase agreements
of $10.2 million and short-term borrowings of
$36.6 million, offset by a decreased in financial
instruments sold, not yet purchased, at fair value of
$34.1 million and income taxes payable of
$9.7 million. The decrease in cash from operating assets
was primarily attributable to increases in receivables from
clearing brokers of $5.5 million, other assets of
$9.0 million and financial instruments owned, at fair value
of $45.0 million offset by decreases in securities
purchased under resale agreements of $38.5 million and
accounts receivable of $4.5 million.
We used $2.5 million in our investing activities, for the
purchase of fixed assets. Cash from financing activities
increased $2.6 million primarily as a result of repayment
of loans to employees to purchase Company stock.
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
40
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
Codificationtm
(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
managements 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 managements 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
41
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,
options and warrants, 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 CDOs primarily collateralized
by banking and insurance company trust preferred and capital
securities, certain preferred stock and convertible debt.
Fair value of corporate debt, 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, 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.
42
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 $80.1 million as of
December 31, 2009, which represented approximately 13% of
total assets and approximately 46% 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 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, managements
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. 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.
43
Contractual
Obligations
Contractual obligations as of December 31, 2009 are as
follows (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
Total
|
|
2010
|
|
2011 - 2012
|
|
2013 - 2014
|
|
2015 and thereafter
|
|
Operating lease obligations
|
|
$
|
93,734
|
|
|
$
|
15,022
|
|
|
$
|
29,469
|
|
|
$
|
28,268
|
|
|
$
|
20,975
|
|
This excludes capital commitments that can be called at any time
on private limited partnership and other investments of
$30.5 million, including $9.6 million from an
affiliated fund, at December 31, 2009. In addition, the
table does not include reserves for income taxes that are not
contractual obligations by nature. We cannot determine with any
degree of certainty the amount that would be payable or the
period of cash settlement to the respective taxing jurisdictions.
Off-Balance
Sheet Arrangements
In the normal course of our principal trading activities, we may
enter into transactions in financial instruments with
off-balance-sheet risk. These financial instruments, such as
options, warrants, futures contracts and mortgage-backed
to-be-announced securities, 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 and warrants 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, warrants and 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.
Recently
Issued Accounting Standards, Not Yet Adopted
In January 2010, FASB issued Accounting Standards Update
(ASU)
No. 2010-06,
Improving Disclosures about Fair Value Measurements. ASU
No. 2010-06
provides amendments to ASC 820, Fair Value Measurements and
Disclosures, which would require additional fair value
measurement disclosure requirements and clarifies existing
disclosure requirements. The additional disclosures include
significant transfers in and out of Level 1 and
Level 2 fair value measurements, and reasons for the
transfers, and activity in Level 3 fair value measurements.
ASU
No. 2010-06
is effective for interim and annual periods beginning after
December 15, 2009, except for the disclosures on the
activity in Level 3 fair value measurements, which is
effective for interim and annual periods beginning after
December 15, 2010. We expect additional disclosure
requirements related to certain financial instruments as a
result of the implementation of ASU
No. 2010-06.
In December 2009, FASB issued ASU
No. 2009-17,
Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities (ASC 810). ASC
No. 2009-17
amends the Codification for the issuance of
SFAS No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in ASC
No. 2009-17
replace the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling
financial interest in a variable interest entity (VIE). This
calculation is replaced with an approach focused on identifying
that enterprise which has the power to direct those VIE
activities where such activities most significantly impact the
VIEs economic performance and that enterprise that has the
obligation to absorb
44
losses of the entity or the right to receive benefits from the
VIE. The amendments of ASC
No. 2009-17
also require additional disclosures about an enterprises
involvement in VIEs. ASU
No. 2009-17
is effective for fiscal years beginning after November 15,
2009. In January 2010, FASB concluded to defer the
implementation of the above consolidating requirement for
entities that have the attributes of an investment company; and,
the enterprise does not have an obligation to fund the losses of
the entity if those losses are significant to that entity; and
the entity is not a securitization entity, asset backed entity
or what once was a qualifying special-purpose
entity. As a result of this deferral, we do not expect the
implementation of this standard to have a material effect on the
consolidated financial statements.
In December 2009, FASB issued ASU
No. 2009-16,
Accounting for Transfers of Financial Assets
(ASC 860). ASU
No. 2009-16
amends the Codification for the issuance of
SFAS No. 166, Accounting for Transfers of Financial
Assets an amendment of FASB Statement No. 140.
ASU
No. 2009-16
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.
45
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Item 7A.
|
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 year ended
December 31, 2009:
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High
|
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Low
|
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Average
|
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(dollars in thousands)
|
|
Long Value:
|
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|
|
|
|
|
|
|
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|
Equities
|
|
$
|
79,738
|
|
|
$
|
31,691
|
|
|
$
|
47,402
|
|
Corporate and other debt
|
|
$
|
88,716
|
|
|
$
|
36,742
|
|
|
$
|
56,622
|
|
Mortgage-backed securities
|
|
$
|
29,545
|
|
|
$
|
|
|
|
$
|
4,032
|
|
Other investments
|
|
$
|
41,917
|
|
|
$
|
34,893
|
|
|
$
|
37,584
|
|
Short Value:
|
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|
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Equities
|
|
$
|
34,463
|
|
|
$
|
11,162
|
|
|
$
|
21,261
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|
Corporate debt
|
|
$
|
4,999
|
|
|
$
|
|
|
|
$
|
1,428
|
|
U.S. Government and agency securities
|
|
$
|
8,495
|
|
|
$
|
|
|
|
$
|
1,963
|
|
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 clients
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 counterpartys failure to satisfy its
contractual obligations. In these situations, we may be required
to purchase or sell financial instruments at
46
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.
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.
47
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
INDEX TO
FINANCIAL STATEMENTS
48
Managements
Report on Internal Control over Financial Reporting
Management of KBW, Inc. (the Company) is responsible
for establishing and maintaining adequate internal control over
financial reporting. The Companys internal control over
financial reporting is a process designed under the supervision
of the Companys principal executive and principal
financial officers to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the
Companys financial statements for external reporting
purposes in accordance with generally accepted accounting
principles in the United States of America.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
As of December 31, 2009, management conducted an assessment
of the effectiveness of the Companys internal control over
financial reporting based on the framework established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based upon this assessment, management has
determined that the Companys internal control over
financial reporting as of December 31, 2009 was effective.
The Companys internal control over financial reporting
includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or
disposition of the Companys assets that could have
material effect on the financial statements.
The Companys independent registered public accounting firm
has audited the Companys internal control over financial
reporting as of December 31, 2009, as stated in its report.
49
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
KBW, Inc.:
We have audited KBW, Inc.s internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). KBW,
Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report
on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, KBW, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statements of financial condition of KBW, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations, changes in
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2009, and our report dated February 26,
2010 expressed an unqualified opinion on those consolidated
financial statements.
New York, New York
February 26, 2010
50
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
KBW, Inc.:
We have audited the accompanying consolidated statements of
financial condition of KBW, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders equity
and comprehensive income, and cash flows for each of the years
in the three-year period ended December 31, 2009. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of KBW, Inc. and subsidiaries as of December 31,
2009 and 2008, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), KBW,
Inc.s internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 26, 2010
expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
New York, New York
February 26, 2010
51
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
203,180
|
|
|
$
|
194,981
|
|
Financial instruments owned, at fair value:
|
|
|
|
|
|
|
|
|
Equities
|
|
|
56,720
|
|
|
|
41,765
|
|
Corporate and other debt
|
|
|
75,754
|
|
|
|
53,879
|
|
Other investments
|
|
|
41,917
|
|
|
|
34,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,391
|
|
|
|
130,537
|
|
|
|
|
|
|
|
|
|
|
Receivables from clearing brokers
|
|
|
161,811
|
|
|
|
130,682
|
|
Accounts receivable
|
|
|
28,703
|
|
|
|
19,391
|
|
Income taxes receivable
|
|
|
1,129
|
|
|
|
33,270
|
|
Furniture, equipment and leasehold improvements, at cost, less
accumulated depreciation and amortization of $25,636 in 2009 and
$21,546 in 2008
|
|
|
18,800
|
|
|
|
18,895
|
|
Other assets
|
|
|
43,354
|
|
|
|
43,710
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
631,368
|
|
|
$
|
571,466
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Financial instruments sold, not yet purchased, at fair value:
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
31,288
|
|
|
$
|
11,162
|
|
Corporate debt
|
|
|
4,723
|
|
|
|
|
|
U.S. Government and agency securities
|
|
|
962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,973
|
|
|
|
11,162
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
|
|
|
|
31,547
|
|
Accounts payable, accrued expenses, and other liabilities
|
|
|
134,658
|
|
|
|
122,070
|
|
Income taxes payable
|
|
|
10,668
|
|
|
|
9,956
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
182,299
|
|
|
|
174,735
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
307
|
|
|
|
298
|
|
Paid-in capital
|
|
|
161,168
|
|
|
|
137,618
|
|
Retained earnings
|
|
|
298,626
|
|
|
|
275,019
|
|
Notes receivable from stockholders
|
|
|
(609
|
)
|
|
|
(2,225
|
)
|
Accumulated other comprehensive loss
|
|
|
(10,423
|
)
|
|
|
(13,979
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
449,069
|
|
|
|
396,731
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
631,368
|
|
|
$
|
571,466
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
KBW Inc.
and Subsidiaries
Consolidated
Statements of Operations
Years Ended December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
160,450
|
|
|
$
|
163,664
|
|
|
$
|
226,464
|
|
Commissions
|
|
|
142,015
|
|
|
|
192,752
|
|
|
|
165,803
|
|
Principal transactions, net
|
|
|
63,611
|
|
|
|
(142,962
|
)
|
|
|
(7,520
|
)
|
Interest and dividend income
|
|
|
10,524
|
|
|
|
24,687
|
|
|
|
37,612
|
|
Investment advisory fees
|
|
|
2,826
|
|
|
|
1,197
|
|
|
|
1,751
|
|
Other
|
|
|
7,728
|
|
|
|
2,879
|
|
|
|
3,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
387,154
|
|
|
|
242,217
|
|
|
|
427,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
236,159
|
|
|
|
226,311
|
|
|
|
257,070
|
|
Occupancy and equipment
|
|
|
21,639
|
|
|
|
19,831
|
|
|
|
18,722
|
|
Communications and data processing
|
|
|
28,464
|
|
|
|
27,743
|
|
|
|
24,283
|
|
Brokerage and clearance
|
|
|
17,203
|
|
|
|
24,244
|
|
|
|
22,967
|
|
Business development
|
|
|
14,328
|
|
|
|
16,115
|
|
|
|
16,601
|
|
Interest
|
|
|
1,151
|
|
|
|
4,603
|
|
|
|
14,732
|
|
Other
|
|
|
25,352
|
|
|
|
25,375
|
|
|
|
23,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
344,296
|
|
|
|
344,222
|
|
|
|
378,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income / (loss) before income taxes
|
|
|
42,858
|
|
|
|
(102,005
|
)
|
|
|
49,405
|
|
Income tax expense / (benefit)
|
|
|
19,251
|
|
|
|
(39,656
|
)
|
|
|
22,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income / (loss)
|
|
$
|
23,607
|
|
|
$
|
(62,349
|
)
|
|
$
|
27,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Note 12)
|
|
$
|
0.66
|
|
|
$
|
(2.02
|
)
|
|
$
|
0.81
|
|
Diluted (Note 12)
|
|
$
|
0.66
|
|
|
$
|
(2.02
|
)
|
|
$
|
0.81
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Note 12)
|
|
|
31,448,074
|
|
|
|
30,838,361
|
|
|
|
30,654,058
|
|
Diluted (Note 12)
|
|
|
31,448,074
|
|
|
|
30,838,361
|
|
|
|
30,654,058
|
|
See accompanying notes to consolidated financial statements.
53
KBW, INC.
AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders Equity and
Comprehensive Income
Years ended December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable
|
|
|
Other
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
from
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stockholders
|
|
|
Income (loss)
|
|
|
Equity
|
|
|
Balance at December 31, 2006
|
|
$
|
|
|
|
$
|
292
|
|
|
$
|
94,419
|
|
|
$
|
310,076
|
|
|
$
|
(8,843
|
)
|
|
$
|
1,470
|
|
|
$
|
397,414
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,292
|
|
|
|
|
|
|
|
|
|
|
|
27,292
|
|
Other comprehensive income, currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
535
|
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
20,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,564
|
|
Cancellation of 58,360 shares of restricted stock in
satisfaction of withholding tax requirements
|
|
|
|
|
|
|
|
|
|
|
(1,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,965
|
)
|
Purchase of 20,812 shares of common stock
|
|
|
|
|
|
|
|
|
|
|
(205
|
)
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
Issuance of 163,244 shares of common stock
|
|
|
|
|
|
|
1
|
|
|
|
2,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,642
|
|
Restricted stock units converted
|
|
|
|
|
|
|
|
|
|
|
(1,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,078
|
)
|
Stock-based awards vested
|
|
|
|
|
|
|
|
|
|
|
(1,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,564
|
)
|
Excess net tax benefit related to stock-based awards
|
|
|
|
|
|
|
|
|
|
|
1,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,202
|
|
Repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,384
|
|
|
|
|
|
|
|
3,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
|
293
|
|
|
|
114,014
|
|
|
|
337,368
|
|
|
|
(5,254
|
)
|
|
|
2,005
|
|
|
|
448,426
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,349
|
)
|
|
|
|
|
|
|
|
|
|
|
(62,349
|
)
|
Other comprehensive loss, currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,984
|
)
|
|
|
(15,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
30,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,540
|
|
Cancellation of 319,359 shares of restricted stock in
satisfaction of withholding tax requirements
|
|
|
|
|
|
|
(3
|
)
|
|
|
(7,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,895
|
)
|
Purchase of 5,875 shares of common stock
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
Issuance of 870,037 shares of common stock
|
|
|
|
|
|
|
8
|
|
|
|
19,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,308
|
|
Restricted stock units converted
|
|
|
|
|
|
|
|
|
|
|
(854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(854
|
)
|
Stock-based awards vested
|
|
|
|
|
|
|
|
|
|
|
(18,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,312
|
)
|
Excess net tax benefit related to stock-based awards
|
|
|
|
|
|
|
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
882
|
|
Repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,969
|
|
|
|
|
|
|
|
2,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
|
298
|
|
|
|
137,618
|
|
|
|
275,019
|
|
|
|
(2,225
|
)
|
|
|
(13,979
|
)
|
|
|
396,731
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,607
|
|
|
|
|
|
|
|
|
|
|
|
23,607
|
|
Other comprehensive income, currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,556
|
|
|
|
3,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
36,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,646
|
|
Cancellation of 590,841 shares of restricted stock in
satisfaction of withholding tax requirements
|
|
|
|
|
|
|
(6
|
)
|
|
|
(14,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,849
|
)
|
Purchase of 14,448 shares of common stock
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
Issuance of 1,521,170 shares of common stock
|
|
|
|
|
|
|
15
|
|
|
|
32,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,712
|
|
Restricted stock units converted
|
|
|
|
|
|
|
|
|
|
|
(2,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,939
|
)
|
Stock-based awards vested
|
|
|
|
|
|
|
|
|
|
|
(29,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,569
|
)
|
Excess net tax benefit related to stock-based awards
|
|
|
|
|
|
|
|
|
|
|
1,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,808
|
|
Repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,616
|
|
|
|
|
|
|
|
1,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
|
|
|
$
|
307
|
|
|
$
|
161,168
|
|
|
$
|
298,626
|
|
|
$
|
(609
|
)
|
|
$
|
(10,423
|
)
|
|
$
|
449,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of preferred stock and details:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
Par Value
|
|
December 31,
|
|
Authorized
|
|
Issued
|
|
Outstanding
|
|
$0.01
|
|
|
2009
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
$0.01
|
|
|
2008
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
$0.01
|
|
|
2007
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
Description of common stock and details:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
Par Value
|
|
December 31,
|
|
Authorized
|
|
Issued*
|
|
Outstanding*
|
|
$0.01
|
|
|
2009
|
|
|
|
140,000,000
|
|
|
|
30,749,697
|
|
|
|
30,749,697
|
|
$0.01
|
|
|
2008
|
|
|
|
140,000,000
|
|
|
|
29,833,816
|
|
|
|
29,833,816
|
|
$0.01
|
|
|
2007
|
|
|
|
140,000,000
|
|
|
|
29,289,013
|
|
|
|
29,289,013
|
|
|
|
|
(*) |
|
These share amounts exclude legally vested restricted stock
units. |
See accompanying notes to consolidated financial statements.
54
KBW, INC.
AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years ended December 31, 2009, 2008 and 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income / (loss)
|
|
$
|
23,607
|
|
|
$
|
(62,349
|
)
|
|
$
|
27,292
|
|
Adjustments to reconcile net income / (loss) to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-monetary transaction
|
|
|
|
|
|
|
|
|
|
|
(6,518
|
)
|
Amortization of stock-based compensation
|
|
|
36,646
|
|
|
|
30,540
|
|
|
|
20,564
|
|
Depreciation and amortization
|
|
|
4,822
|
|
|
|
4,801
|
|
|
|
4,895
|
|
Deferred income tax (benefit) expense
|
|
|
5,237
|
|
|
|
(13,158
|
)
|
|
|
(10,125
|
)
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned, at fair value
|
|
|
(43,427
|
)
|
|
|
251,537
|
|
|
|
(45,038
|
)
|
Securities purchased under resale agreements
|
|
|
|
|
|
|
23,846
|
|
|
|
38,473
|
|
Receivables from clearing brokers
|
|
|
(30,833
|
)
|
|
|
59,828
|
|
|
|
(5,522
|
)
|
Accounts receivable
|
|
|
(8,943
|
)
|
|
|
969
|
|
|
|
4,544
|
|
Income taxes receivable
|
|
|
32,162
|
|
|
|
(33,270
|
)
|
|
|
|
|
Other assets
|
|
|
(4,744
|
)
|
|
|
972
|
|
|
|
(9,038
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold, not yet purchased, at fair value
|
|
|
25,734
|
|
|
|
(65,679
|
)
|
|
|
(34,131
|
)
|
Securities sold under repurchase agreements
|
|
|
|
|
|
|
(94,784
|
)
|
|
|
10,248
|
|
Short-term borrowings
|
|
|
(31,547
|
)
|
|
|
(33,552
|
)
|
|
|
36,599
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
11,024
|
|
|
|
(47,035
|
)
|
|
|
5,592
|
|
Income taxes payable
|
|
|
708
|
|
|
|
2,987
|
|
|
|
(9,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
20,446
|
|
|
|
25,653
|
|
|
|
28,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of furniture, equipment and leasehold improvements
|
|
|
(4,730
|
)
|
|
|
(3,719
|
)
|
|
|
(2,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,730
|
)
|
|
|
(3,719
|
)
|
|
|
(2,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock
|
|
|
205
|
|
|
|
142
|
|
|
|
|
|
Purchase of shares of common stock
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock in satisfaction of withholding
tax requirements
|
|
|
(14,849
|
)
|
|
|
(7,895
|
)
|
|
|
(1,965
|
)
|
Excess net tax benefit related to stock-based awards
|
|
|
1,808
|
|
|
|
882
|
|
|
|
1,202
|
|
Repayment of notes receivable from stockholders
|
|
|
1,616
|
|
|
|
2,969
|
|
|
|
3,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) / provided by financing activities
|
|
|
(11,470
|
)
|
|
|
(3,902
|
)
|
|
|
2,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
3,953
|
|
|
|
(17,409
|
)
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
8,199
|
|
|
|
623
|
|
|
|
28,711
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
194,981
|
|
|
|
194,358
|
|
|
|
165,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
$
|
203,180
|
|
|
$
|
194,981
|
|
|
$
|
194,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
17,412
|
|
|
$
|
1,419
|
|
|
$
|
47,546
|
|
Interest
|
|
$
|
1,245
|
|
|
$
|
6,075
|
|
|
$
|
14,800
|
|
See accompanying notes to consolidated financial statements.
55
KBW, INC.
and SUBSIDIARIES
(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), Keefe, Bruyette & Woods Asia
Limited (KBWAL), 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.
Keefes and KBWLs 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. KBWAL
was inactive at December 31, 2009.
|
|
(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
Codificationtm
and the Hierarchy of Generally Accepted Accounting Principles
(FASB Accounting Standards Codification 105). SFAS 168
establishes the FASB Accounting Standards
Codificationtm
(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
entitys expected losses, or expected residual returns, or
both. The Company had no variable interest entities that
required consolidation at December 31, 2009.
56
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
In addition, the Company evaluates its 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 December 31, 2009.
(c) Use
of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the Companys financial
statements and these footnotes including securities valuations,
compensation accruals and other matters. Management believes
that the estimates used in preparing the Companys
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. 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 may 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 financial instruments
have been
57
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
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. During the fourth quarter of 2009, the Company
elected to adopt the measurement amendments included in
Accounting Standards Update (ASU)
No. 2009-12,
Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent (ASC 820). The amendments
included in ASU
No. 2009-12
permit, as a practical expedient, the use of the net asset value
per share, or its equivalent, of an entity to estimate its fair
value. The Companys partnership interests are recorded at
fair value, determined by using net asset values or capital
statements provided by the general partner, updated for capital
contributions and distributions and changes in market conditions
up to the reporting date.
(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
December 31, 2009 and 2008.
(g) Receivables
From Clearing Brokers
Receivables from 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 generally 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.
58
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
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 Companys 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 Companys 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 Companys 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.
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
funds 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 and 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
59
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
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
is 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.
(m) Foreign
Currency Translation
The Company translates the statements of financial condition of
the Companys foreign subsidiaries 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 the Companys foreign subsidiaries are
recorded directly to accumulated other comprehensive income
(loss) in the consolidated statements of changes in
stockholders equity.
(n) Contributions
Contributions are recorded when the conditions on which they
depend are substantially met in accordance with ASC 720,
Other Expenses.
|
|
(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.
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
60
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
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,
options, warrants, 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, 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, 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, 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 classified as Level 3 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
61
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
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 classified as
Level 3 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 classified as
Level 3 was determined by using net asset values or capital
statements provided by the general partner, updated for capital
contributions and distributions and changes in market conditions
up to the reporting date. Private equity securities and limited
and general partnership interests generally trade infrequently.
The following table provides information related to financial
instruments where a practical expedient was used as the basis to
measure the fair value of certain entities that calculate a net
asset value per share (or equivalent) as of December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
|
|
|
|
|
|
Unfunded
|
|
|
Redemption
|
|
Notice
|
Type of Investment
|
|
Fair Value
|
|
|
Commitments
|
|
|
Frequency
|
|
Period
|
|
Long/short hedge funds(a)
|
|
$
|
12,115
|
|
|
$
|
|
|
|
Monthly
|
|
30 Days
|
Public/private equity funds(b)
|
|
|
29,802
|
|
|
|
22,941
|
|
|
n/a
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,917
|
|
|
$
|
22,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This category includes investments in hedge funds that invest
primarily in domestic long/short positions in equity securities
and various derivatives, including options on securities and
stock index options with respect to companies in the financial
services sector. Management of these funds also has the ability
to invest in foreign equities and fixed income securities. The
fair values of investments in this category have been estimated
using the net asset value per share, or equivalent, of the
investments. Investments in this category can be redeemed
monthly; however, the general partner may impose a
gate for any withdrawal over 20% of the total fund
net asset value. |
|
(b) |
|
This category includes several funds that invest primarily in
domestic public and private companies operating in the financial
services sector. Management of these funds also have the ability
to invest in foreign public and private equities, debt financial
instruments, warrants, hybrid securities and membership
interests in the financial services sector. The fair values of
investments in this category have been estimated using asset
values based on capital statements provided by the general
partner, updated, as necessary, for capital contributions and
distributions and changes in market conditions up to the
reporting date. These investments generally cannot be redeemed,
unless approved by the general partners. Upon liquidation of the
underlying investments prior to the life expectancy / maturity
of the funds, management of the funds can elect to make
distributions to the limited partners. The time horizon for such
distributions is at the discretion of the general partners but
should not exceed the time horizon of the funds life
expectancy. It is estimated that these investments would be
liquidated approximately ten years following the initial
investment date, some with options to extend for up to a two
year period, ranging from 2010 2020. Additional
expenses, such as legal and administrative associated with the
final liquidation can be incurred. Therefore, it is possible
that upon final liquidation of the investments, the final funds
distributed could be different from the estimated value of the
investment. However, these differences are not expected to be
material. |
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.
62
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
Assets at
Fair Value as of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Financial instruments owned, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
40,197
|
|
|
$
|
22
|
|
|
$
|
15,873
|
|
|
$
|
56,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
|
9,354
|
|
|
|
38,604
|
|
|
|
10,000
|
|
|
|
57,958
|
|
CDOs
|
|
|
|
|
|
|
5,448
|
|
|
|
1
|
|
|
|
5,449
|
|
Other debt
obligations(1)
|
|
|
|
|
|
|
|
|
|
|
12,347
|
|
|
|
12,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate and other debt
|
|
|
9,354
|
|
|
|
44,052
|
|
|
|
22,348
|
|
|
|
75,754
|
|
Other
investments(2)
|
|
|
|
|
|
|
|
|
|
|
41,917
|
|
|
|
41,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-derivative trading assets
|
|
|
49,551
|
|
|
|
44,074
|
|
|
|
80,138
|
|
|
|
173,763
|
|
Derivative financial instruments
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments owned
|
|
$
|
50,179
|
|
|
$
|
44,074
|
|
|
$
|
80,138
|
|
|
$
|
174,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of bank and insurance company trust preferred and
capital securities. |
|
(2) |
|
Consists of limited and general partnership interests. |
Liabilities
at Fair Value as of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Financial instruments sold, not yet purchased, at fair
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
31,191
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,191
|
|
Corporate debt
|
|
|
|
|
|
|
4,723
|
|
|
|
|
|
|
|
4,723
|
|
US Government and agency securities
|
|
|
962
|
|
|
|
|
|
|
|
|
|
|
|
962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-derivative trading liabilities
|
|
|
32,153
|
|
|
|
4,723
|
|
|
|
|
|
|
|
36,876
|
|
Derivative financial instruments
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments sold, not yet purchased
|
|
$
|
32,250
|
|
|
$
|
4,723
|
|
|
$
|
|
|
|
$
|
36,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
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 Companys consolidated statements of financial
condition.
The derivative financial instruments are reported on a gross
basis by level. The Companys derivative activities
included in financial instruments owned and financial
instruments sold, not yet purchased consist of writing and
purchasing listed equity options and warrants.
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 year ended December 31, 2009
and 2008:
Level 3
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Unrealized
|
|
|
|
|
|
|
Total Gains
|
|
|
|
|
|
|
|
|
|
|
|
Gains and (Losses)
|
|
|
|
Balance as of
|
|
|
and (Losses)
|
|
|
|
|
|
Transfers in
|
|
|
Balance As Of
|
|
|
Included in Earnings
|
|
|
|
December 31,
|
|
|
(Realized and
|
|
|
Purchases/
|
|
|
(out) of
|
|
|
December 31,
|
|
|
Related to Assets Still
|
|
|
|
2008
|
|
|
Unrealized)
|
|
|
(Sales), Net
|
|
|
Level 3
|
|
|
2009
|
|
|
Held at Reporting Date
|
|
|
Equities
|
|
$
|
14,722
|
|
|
$
|
(13
|
)
|
|
$
|
400
|
|
|
$
|
764
|
|
|
$
|
15,873
|
|
|
$
|
989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
|
1,581
|
|
|
|
(1,581
|
)
|
|
|
10,000
|
|
|
|
|
|
|
|
10,000
|
|
|
|
(1,581
|
)
|
CDOs
|
|
|
44
|
|
|
|
7
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
Other debt obligations
|
|
|
31,063
|
|
|
|
2,925
|
|
|
|
(21,641
|
)
|
|
|
|
|
|
|
12,347
|
|
|
|
16,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate and other debt
|
|
|
32,688
|
|
|
|
1,351
|
|
|
|
(11,691
|
)
|
|
|
|
|
|
|
22,348
|
|
|
|
15,161
|
|
Other investments
|
|
|
34,893
|
|
|
|
5,507
|
|
|
|
1,517
|
|
|
|
|
|
|
|
41,917
|
|
|
|
6,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 financial assets
|
|
$
|
82,303
|
|
|
$
|
6,845
|
|
|
$
|
(9,774
|
)
|
|
$
|
764
|
|
|
$
|
80,138
|
|
|
$
|
22,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes In Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and (Losses)
|
|
|
|
Balance as of
|
|
|
Total Gains and
|
|
|
|
|
|
Transfers
|
|
|
Balance as of
|
|
|
Included in Earnings
|
|
|
|
December 31,
|
|
|
(Losses) (Realized
|
|
|
Purchases/
|
|
|
In (out) of
|
|
|
December 31,
|
|
|
Related to Assets Still
|
|
|
|
2007
|
|
|
and Unrealized)
|
|
|
(Sales), Net
|
|
|
Level 3
|
|
|
2008
|
|
|
Held at Reporting Date
|
|
Non-derivative trading assets
|
|
$
|
171,816
|
|
|
$
|
(81,049
|
)
|
|
$
|
(2,363
|
)
|
|
$
|
(6,101
|
)
|
|
$
|
82,303
|
|
|
$
|
(69,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
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 December 31,
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.
|
|
(5)
|
Commitments
and Contingencies
|
(a) Leases
The Company leases its headquarters and other office locations
under non-cancelable lease agreements which expire between 2010
and 2016. Such agreements contain escalation clauses and provide
that certain operating costs be paid by the Company in addition
to the minimum rentals. As part of a lease agreement, the
Company provided a letter of credit in the amount of $3,363.
Future minimum lease payments as of December 31, 2009 are
as follows:
|
|
|
|
|
|
|
Lease Payments
|
|
|
Year:
|
|
|
|
|
2010
|
|
$
|
15,022
|
|
2011
|
|
|
14,945
|
|
2012
|
|
|
14,524
|
|
2013
|
|
|
14,320
|
|
2014
|
|
|
13,948
|
|
Thereafter
|
|
|
20,975
|
|
|
|
|
|
|
Total
|
|
$
|
93,734
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2009, 2008
and 2007 aggregated $13,812, $12,530 and $11,238, respectively.
65
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
(b) Litigation
In the ordinary course of business, the Company may be a
defendant or codefendant in legal proceedings. At
December 31, 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
Companys financial condition. The results of such
proceedings could be material to the Companys 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, and interrogatory responses from the Trustee in
discovery now contend that Sentinel lost $5,629; 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 Keefes Motion to Dismiss, though it
dismissed the Illinois Consumer Fraud Act claim and granted
Keefes motion to sever the Trustees case against
Keefe from the case against Cohen. On August 26, 2009,
Keefe filed a Third-Party Complaint against Eric A. Bloom, the
former President and CEO of Sentinel, and Charles K. Mosley, the
former Senior Vice President and head trader of Sentinel,
alleging fraud and seeking contribution for any damages for
which Keefe is held liable to the Trustee. The court stayed and
severed this Third-Party Complaint on October, 7, 2009.
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 Sentinels 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 Trustees claims due to lack of
standing. The Trustee has appealed the courts dismissal of
Grede v. Bank of New York Mellon and, on August 19,
2009, the court stayed the Second Complaint while the
Trustees appeal in Grede v. Bank of New York Mellon
is pending.
(c) Investment
Commitments
As of December 31, 2009, the Company had approximately
$30,507, including $9,588 to an affiliated fund, in outstanding
commitments for additional funding to limited partnership and
other investments.
66
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
|
|
(6)
|
Financial
Instruments with Off-Balance-Sheet Risk
|
In the normal course of its principal trading activities, the
Company enters into transactions in financial instruments with
off-balance-sheet risk. These financial instruments, such as
options, warrants and mortgage-backed to-be-announced
securities, 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.
Also, in connection with its principal 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 Companys derivative activities consist of writing and
purchasing listed equity options and warrants 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 Companys listed options, warrants and
futures contracts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
End of
|
|
|
Notional
|
|
Average Fair
|
|
Period Fair
|
|
|
Value
|
|
Value
|
|
Value
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased options/warrants
|
|
$
|
8,285
|
|
|
$
|
380
|
|
|
$
|
628
|
|
Written options/warrants
|
|
$
|
630
|
|
|
$
|
511
|
|
|
$
|
97
|
|
Short futures contracts
|
|
$
|
6,136
|
|
|
$
|
|
|
|
$
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased options
|
|
$
|
7,721
|
|
|
$
|
557
|
|
|
$
|
843
|
|
Written options
|
|
$
|
6,100
|
|
|
$
|
344
|
|
|
$
|
461
|
|
Short futures contracts
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
67
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
The following table summarizes the net gains from trading
activities included in principal transactions, net on the
consolidated statements of operations for the year ended
December 31, 2009:
|
|
|
|
|
|
|
Year Ended
|
|
Type of Instrument
|
|
December 31, 2009
|
|
|
Equities
|
|
$
|
10,730
|
|
Corporate and other debt
|
|
|
27,600
|
|
Mortgage-backed securities
|
|
|
18,807
|
|
Other investments
|
|
|
6,474
|
|
|
|
|
|
|
Total
|
|
$
|
63,611
|
|
|
|
|
|
|
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.
|
|
(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 Companys
transactions are executed with and on behalf of institutional
investors, including other brokers and dealers, commercial
banks, mutual funds, and other financial institutions. The
Companys 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 Companys 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 Companys book value stock purchase plan.
Loans are payable in annual installments and bear interest
between 4.2% and 5.0% per annum.
|
|
(9)
|
Non-Monetary
Transaction
|
In 2007, the Company received cash and warrants exercisable in
common stock as advisory fees in connection with the closing of
a private placement transaction. The warrants received were
measured at fair value on the closing date of the transaction.
The Company recorded investment banking revenues of $6,518 for
the year ended December 31, 2007 as a result of this
non-monetary transaction. Shortly after the closing of the
private placement transaction, the Company exercised these
warrants and received common stock.
|
|
(10)
|
Stock-Based
Compensation
|
2009 Incentive Compensation Plan: 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
Companys 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.
68
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
However, awards outstanding under the 2006 Plan will remain in
effect in accordance with the terms of such awards.
The following tables set forth activity and related weighted
average grant date fair value of the Companys RSAs awarded
under the Plan as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Year Ended
|
|
Average Grant Date
|
|
|
December 31, 2009
|
|
Fair Value
|
|
Restricted stock awards:
|
|
|
|
|
|
|
|
|
Share balance, beginning of year
|
|
|
3,127,852
|
|
|
$
|
24.59
|
|
Grants
|
|
|
2,229,232
|
|
|
$
|
19.83
|
|
Forfeited
|
|
|
(282,565
|
)
|
|
$
|
22.27
|
|
Vested
|
|
|
(1,218,427
|
)
|
|
$
|
24.27
|
|
|
|
|
|
|
|
|
|
|
Share balance, end of year
|
|
|
3,856,092
|
|
|
$
|
22.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Restricted stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share balance, beginning of year
|
|
|
3,127,852
|
|
|
|
3,023,825
|
|
|
|
2,592,100
|
|
Grants
|
|
|
2,229,232
|
|
|
|
1,137,111
|
|
|
|
626,393
|
|
Forfeited
|
|
|
(282,565
|
)
|
|
|
(263,807
|
)
|
|
|
(144,643
|
)
|
Vested
|
|
|
(1,218,427
|
)
|
|
|
(769,277
|
)
|
|
|
(50,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share balance, end of year
|
|
|
3,856,092
|
|
|
|
3,127,852
|
|
|
|
3,023,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company granted 2,229,232 RSAs during 2009, 1,137,111 RSAs
during 2008 and 626,393 RSAs during 2007 at a total grant date
fair value of $44,215, $32,324 and $19,481, respectively. The
total grant date fair value of RSAs vested in 2009, 2008 and
2007 was $29,569, $18,312 and $1,564, respectively.
Compensation expense equivalent to the grant date fair value per
share is recognized by the Company over the requisite service
period, which is generally the vesting period. Compensation
expense recognized related to the granting of RSAs for the years
ended December 31, 2009, 2008, and 2007 was $36,646,
$30,530 and $20,135, respectively.
At December 31, 2009, the compensation cost related to the
unvested RSAs was $45,506, which will be recognized in future
years, primarily 2010, 2011, and 2012. The weighted average
period related to these stock compensation expenses yet to be
recognized was 1.3 years for RSAs.
Restricted Stock Units: Prior to the adoption
of the 2009 Plan and the 2006 Plan, RSUs were authorized and
granted pursuant to commitments made in connection with
employment of certain employees. Each RSU represents the right
to receive one share of common stock at no cost to the employee
and generally vests ratably over a three-year period from the
grant date. Vesting would accelerate on a change in control,
death or permanent disability. Upon vesting, RSUs can be
converted into common stock unless conversion is deferred by the
employee. All RSUs vested prior to December 31, 2008 and no
RSUs were granted in 2009, 2008 and 2007.
69
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
1,340,998
|
|
|
|
1,436,329
|
|
|
|
1,549,548
|
|
Grants
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted and redeemed
|
|
|
(294,550
|
)
|
|
|
(95,331
|
)
|
|
|
(113,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
1,046,448
|
|
|
|
1,340,998
|
|
|
|
1,436,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of RSUs converted and redeemed in 2009 was
$2,939. Compensation expense equivalent to the grant date fair
value is recognized by the Company over the requisite service
period, which is generally the vesting period. Associated
compensation expense recognized was nil, $10 and $429 for the
years ended December 31, 2009, 2008 and 2007, respectively.
In order to satisfy the redemption of RSUs and the delivery of
RSAs, the Company may issue shares from previously un-issued
shares.
|
|
(11)
|
Employee
Profit-Sharing and Retirement Plan
|
The Company has a defined contribution profit-sharing and
retirement plan (the Retirement Plan) covering
employees who meet certain eligibility requirements.
Contributions are generally funded annually. The Companys
profit sharing contribution to the Retirement Plan, which is
voluntary, was nil, $195 and $2,941, in 2009, 2008 and 2007,
respectively, and was included in compensation and benefits
expense in the accompanying consolidated statements of
operations. The Retirement Plan also contains a 401(k) portion
covering substantially all employees. Employees are permitted
within limitations imposed by tax law to make pre-tax
contributions to the 401(k) portion. The Companys
contribution to the 401(k) portion of the Retirement Plan is
determined based on three percent of employees total
compensation. The 401(k) portion expense, which is included in
employee compensation and benefits expense in the accompanying
consolidated statements of operations, was $2,351, $2,405 and
$2,196, for the years ended December 31, 2009, 2008 and
2007, respectively.
70
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
The computations of basic and diluted earnings per share are set
forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net income / (loss)
|
|
$
|
23,607
|
|
|
$
|
(62,349
|
)
|
|
$
|
27,292
|
|
Less: Allocation of earnings to participating securities
|
|
|
2,890
|
|
|
|
|
|
|
|
2,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income / (loss) applicable to common shareholders
|
|
$
|
20,717
|
|
|
$
|
(62,349
|
)
|
|
$
|
24,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common share outstanding
(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,448,074
|
|
|
|
30,838,361
|
|
|
|
30,654,058
|
|
Effect of dilutive securities restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
31,448,074
|
|
|
|
30,838,361
|
|
|
|
30,654,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common
share(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
(2.02
|
)
|
|
$
|
0.81
|
|
Diluted
|
|
$
|
0.66
|
|
|
$
|
(2.02
|
)
|
|
$
|
0.81
|
|
|
|
|
(1) |
|
Participating securities in the form of unvested share based
payment awards amounted to weighted average shares of 4,386,772,
3,640,270, and 3,075,834 for the years ended December 31,
2009, 2008 and 2007, respectively. |
|
(2) |
|
Basic and diluted common shares outstanding were equal for the
periods presented under the two-class method. All prior periods
have been restated. |
(13) Income
Taxes
Income tax included in the consolidated statements of operations
represent the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
12,460
|
|
|
$
|
166
|
|
|
$
|
12,626
|
|
State and Local
|
|
|
1,940
|
|
|
|
4,897
|
|
|
|
6,837
|
|
Non-U.S.
|
|
|
(386
|
)
|
|
|
174
|
|
|
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,014
|
|
|
$
|
5,237
|
|
|
$
|
19,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
(27,798
|
)
|
|
$
|
(2,388
|
)
|
|
$
|
(30,186
|
)
|
State and Local
|
|
|
131
|
|
|
|
(10,086
|
)
|
|
|
(9,955
|
)
|
Non-U.S.
|
|
|
1,169
|
|
|
|
(684
|
)
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(26,498
|
)
|
|
$
|
(13,158
|
)
|
|
$
|
(39,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
22,359
|
|
|
$
|
(6,909
|
)
|
|
$
|
15,450
|
|
State and Local
|
|
|
8,475
|
|
|
|
(2,505
|
)
|
|
|
5,970
|
|
Non-U.S.
|
|
|
1,404
|
|
|
|
(711
|
)
|
|
|
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,238
|
|
|
$
|
(10,125
|
)
|
|
$
|
22,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
The difference between the statutory federal tax rate of 35% and
the effective tax rate is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
of Pretax
|
|
|
|
|
|
of Pretax
|
|
|
|
|
|
of Pretax
|
|
|
|
Amount
|
|
|
Earnings
|
|
|
Amount
|
|
|
Earnings
|
|
|
Amount
|
|
|
Earnings
|
|
|
Computed expected tax provision
|
|
$
|
15,000
|
|
|
|
35.0
|
%
|
|
$
|
(35,702
|
)
|
|
|
(35.0
|
)%
|
|
$
|
17,292
|
|
|
|
35.0
|
%
|
Non-U.S. tax
rate differential
|
|
|
(1,141
|
)
|
|
|
(2.7
|
)
|
|
|
(99
|
)
|
|
|
(0.1
|
)
|
|
|
(70
|
)
|
|
|
(0.1
|
)
|
State and local taxes, net of related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax benefit
|
|
|
4,849
|
|
|
|
11.3
|
|
|
|
(6,471
|
)
|
|
|
(6.3
|
)
|
|
|
3,881
|
|
|
|
7.9
|
|
Permanent differences
|
|
|
543
|
|
|
|
1.3
|
|
|
|
2,616
|
|
|
|
2.5
|
|
|
|
1,010
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,251
|
|
|
|
44.9
|
%
|
|
$
|
(39,656
|
)
|
|
|
(38.9
|
)%
|
|
$
|
22,113
|
|
|
|
44.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision / (benefit) for income taxes resulted in
effective rates of 44.9%, (38.9%) and 44.8% for 2009, 2008 and
2007, respectively. The change in the effective rate in 2009
compared to 2008 was primarily due to the increase in the impact
of permanent differences, which increased the effective tax
expense rate for 2009 and decreased the effective tax benefit in
2008, and higher state and local income taxes net of federal tax
benefit. The decrease in the effective rate from 2008 compared
to 2007 was due primarily to a reduction in the level of pre-tax
earnings which increased the impact of certain permanent
differences.
Excess net tax benefits related to employee stock compensation
plans of $1,808, $882 and $1,202 in 2009, 2008 and 2007,
respectively, were allocated to additional paid-in capital.
Deferred income taxes are provided for the differences between
the tax basis of assets and liabilities and their reported
amounts in the consolidated financial statements. Net deferred
tax assets are included in other assets in the consolidated
statements of financial condition.
The effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities as of December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
$
|
17,940
|
|
|
$
|
15,815
|
|
Legal contingencies
|
|
|
543
|
|
|
|
688
|
|
Financial instruments owned, at fair value
|
|
|
|
|
|
|
5,062
|
|
State NOL carryover
|
|
|
2,921
|
|
|
|
5,437
|
|
Benefit from uncertain tax positions
|
|
|
2,326
|
|
|
|
2,390
|
|
Other
|
|
|
1,140
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
24,870
|
|
|
|
29,986
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization of
|
|
|
|
|
|
|
|
|
furniture, equipment and leasehold improvements
|
|
|
(879
|
)
|
|
|
(1,297
|
)
|
Financial instruments owned, at fair value
|
|
|
(788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,667
|
)
|
|
|
(1,297
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
23,203
|
|
|
$
|
28,689
|
|
|
|
|
|
|
|
|
|
|
72
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
The Company has permanently reinvested earnings in its foreign
subsidiary. At December 31, 2009, $4,216 of accumulated
earnings were permanently reinvested. At current tax rates,
additional Federal income taxes (net of available tax credits)
of approximately $410 would become payable if such income were
to be repatriated.
At December 31, 2009, the Company has net operating loss
carryovers for state and local purposes of approximately $43,000
which are available to offset future state and local income and
which expire over varying periods from 2013 through 2028.
Management believes that realization of the deferred tax assets
is more likely than not based upon prior years taxable
income, the reversal of taxable temporary differences and
anticipated future taxable income. No valuation allowances were
recorded against deferred tax assets at December 31, 2009
and 2008.
The Company had net unrecognized tax benefits, including
interest, of approximately $7,790, $7,493 and $6,492 as of
December 31, 2009, 2008 and 2007, respectively, all of
which, if recognized, would affect the rate. The gross
unrecognized tax benefits, excluding interest and penalties,
consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1
|
|
$
|
7,627
|
|
|
$
|
7,251
|
|
|
$
|
6,899
|
|
Additions based upon current year tax positions
|
|
|
1,046
|
|
|
|
356
|
|
|
|
794
|
|
Additions for prior years tax positions
|
|
|
1,777
|
|
|
|
20
|
|
|
|
100
|
|
Reduction for prior years tax positions
|
|
|
(1,595
|
)
|
|
|
|
|
|
|
(17
|
)
|
Settlements
|
|
|
(130
|
)
|
|
|
|
|
|
|
(325
|
)
|
Lapse of statute
|
|
|
(1,350
|
)
|
|
|
|
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
7,375
|
|
|
$
|
7,627
|
|
|
$
|
7,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys historical accounting policy with respect to
interest and penalties related to tax uncertainties has been to
classify these amounts as income taxes, and the Company
continued this classification in accordance with ASC 740.
The total amount of interest and penalties related to tax
uncertainties recognized in the statements of operations for the
years ended December 31, 2009, 2008 and 2007 was $487, $962
and $512 before federal and state benefits of $52, $336 and
$179, respectively.
The total amount of accrued interest and penalties related to
uncertain tax positions was $2,742 and $2,255 before federal and
state benefits of $842 and $789 as of December 31, 2009 and
2008, respectively.
The Company and its subsidiaries file income tax returns in the
U.S. federal jurisdiction and various state, local and
foreign jurisdictions.
For federal tax purposes, years beginning after 2005 are still
open to examination. The federal return is currently under
examination for the
2006-2008
tax years. For state and local tax purposes, years beginning
after 2004 are still open to examination in all state and local
jurisdictions, except New York State and New York City. The
New York State returns are currently under examination for
the
2002-2007
tax years. The New York City returns are currently under
examination for the
2004-2007
tax years. Further, it is not anticipated that the unrecognized
tax benefits will significantly change over the next twelve
months.
73
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
|
|
(14)
|
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.
|
|
(15)
|
Recent
Accounting Developments
|
In January 2010, FASB issued ASU
No. 2010-06,
Improving Disclosures about Fair Value Measurements. ASU
No. 2010-06
provides amendments to ASC 820, Fair Value Measurements and
Disclosures, which would require additional fair value
measurement disclosure requirements and clarifies existing
disclosure requirements. The additional disclosures include
significant transfers in and out of Level 1 and
Level 2 fair value measurements, and reasons for the
transfers, and activity in Level 3 fair value measurements.
ASU
No. 2010-06
is effective for interim and annual periods beginning after
December 15, 2009, except for the disclosures on the
activity in Level 3 fair value measurements, which is
effective for interim and annual periods beginning after
December 15, 2010. The Company expects additional
disclosure requirements related to certain financial instruments
as a result of the implementation of ASU
No. 2010-06.
In December 2009, FASB issued ASU
No. 2009-17,
Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities (ASC 810). ASC
No. 2009-17
amends the Codification for the issuance of
SFAS No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in ASC
No. 2009-17
replace the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling
financial interest in a variable interest entity (VIE). This
calculation is replaced with an approach focused on identifying
that enterprise which has the power to direct those VIE
activities where such activities most significantly impact the
VIEs economic performance and that enterprise that has the
obligation to absorb losses of the entity or the right to
receive benefits from the VIE. The amendments of ASC
No. 2009-17
also require additional disclosures about an enterprises
involvement in VIEs. ASU
No. 2009-17
is effective for fiscal years beginning after November 15,
2009. In January 2010, FASB concluded to defer the
implementation of the above consolidating requirement for
entities that have the attributes of an investment company; and,
the enterprise does not have an obligation to fund the losses of
the entity if those losses are significant to that entity; and
the entity is not a securitization entity, asset backed entity
or what once was a qualifying special-purpose
entity. As a result of this deferral, the Company does not
expect the implementation of this standard to have a material
effect on its consolidated financial statements.
In December 2009, FASB issued ASU
No. 2009-16,
Accounting for Transfers of Financial Assets (ASC 860).
ASU
No. 2009-16
amends the Codification for the issuance of
SFAS No. 166, Accounting for Transfers of
Financial Assets an amendment of FASB Statement
No. 140. ASU
No. 2009-16
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.
|
|
(16)
|
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
74
KBW, INC.
and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except per share information)
Rule, which requires Keefe to maintain minimum net capital, as
defined, of $8,702 as of December 31, 2009. These rules
also require Keefe to notify and sometimes obtain approval from
FINRA for significant withdrawals of capital.
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
Net Capital
|
|
$
|
111,804
|
|
Excess
|
|
$
|
103,103
|
|
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 December 31, 2009, KBWL was in compliance
with its local capital adequacy requirements. At
December 31, 2009, KBWLs capital resources of
approximately $36,454 exceeded the capital resources requirement
by approximately $27,035.
|
|
(17)
|
Selected
Quarterly Financial Information (Unaudited)
|
The following tables summarize the quarterly statements of
operations for the years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Revenues
|
|
$
|
72,276
|
|
|
$
|
105,096
|
|
|
$
|
122,639
|
|
|
$
|
87,144
|
|
Net income
|
|
$
|
730
|
|
|
$
|
7,213
|
|
|
$
|
11,894
|
|
|
$
|
3,771
|
|
Earnings per share*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.20
|
|
|
$
|
0.33
|
|
|
$
|
0.11
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.20
|
|
|
$
|
0.33
|
|
|
$
|
0.11
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,354,507
|
|
|
|
31,405,229
|
|
|
|
31,410,337
|
|
|
|
31,619,722
|
|
Diluted
|
|
|
31,354,507
|
|
|
|
31,405,229
|
|
|
|
31,410,337
|
|
|
|
31,619,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Revenues
|
|
$
|
74,852
|
|
|
$
|
71,171
|
|
|
$
|
53,635
|
|
|
$
|
42,559
|
|
Net loss
|
|
$
|
(7,499
|
)
|
|
$
|
(9,738
|
)
|
|
$
|
(23,000
|
)
|
|
$
|
(22,112
|
)
|
Earnings per share*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.24
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(0.71
|
)
|
Diluted
|
|
$
|
(0.24
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(0.71
|
)
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,735,039
|
|
|
|
30,800,637
|
|
|
|
30,794,738
|
|
|
|
31,021,496
|
|
Diluted
|
|
|
30,735,039
|
|
|
|
30,800,637
|
|
|
|
30,794,738
|
|
|
|
31,021,496
|
|
|
|
|
* |
|
Summation of the quarters revenues, net income and
earnings per share may not equal the annual amounts due to
rounding or the averaging effect of the number of shares
outstanding throughout each respective year. |
75
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
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 pursuant to
Rule 13a-15
under the Exchange Act 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
period covered by this report, our disclosure controls and
procedures (as defined in
Rule 13a-15(e)
under the Exchange Act) 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 SECs
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 (as defined in
Rule 13a-15(f)
under the Exchange Act) 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.
Managements annual report on internal control over
financial reporting (as defined in
Rules 13a-15(f)
and
15d-15(f) of
the Exchange Act) and the related attestation report of our
independent registered public accounting firm are contained in
Part II, Item 8 of this report and are incorporated
herein by reference.
|
|
Item 9B.
|
Other
Information.
|
On February 25, 2010, the compensation committee of our
board of directors (the Compensation Committee)
approved certain actions affecting compensation for
Messrs. Duffy, Michaud, Senchak, Giambrone and Kleinman
(collectively, the Named Executive Officers).
Adoption
of Long Term Incentive Program
The Compensation Committee adopted a Long Term Incentive Program
(the LTIP) under the KBW, Inc. 2009 Incentive
Compensation Plan (the Plan). The LTIP allows us to
make awards of Performance Units under the Plan to selected
employees, which awards will provide for payments of such
amounts pursuant to such terms and conditions as the
Compensation Committee shall determine, which will be set forth
in a related award letter or agreement entered into by and
between the Company and the award recipient (each such letter or
agreement, an Award Letter). The LTIP provides that
amounts specified or calculated pursuant to awards may be earned
during a performance cycle established for such an award upon
the achievement of specified performance goals.
Grant of
Long Term Incentive Awards to Messrs. Duffy, Senchak and
Michaud
The Compensation Committee approved the award of Performance
Units (each, an LTIP Award) to each of John G.
Duffy, Chairman and Chief Executive Officer, Andrew M. Senchak,
Vice Chairman and President, and Thomas B. Michaud, Vice
Chairman and Chief Operating Officer. The terms of each LTIP
Award are set forth in a related Award Letter entered into by
and between KBW, Inc. and each LTIP Award recipient.
Each of these LTIP Awards established performance cycles and
amounts payable based on the achievement of certain levels of
cumulative growth in adjusted earnings per share
(Cumulative Adjusted EPS) during the performance
cycle. Under the LTIP, the percentage of the LTIP Awards earned
for each
76
performance cycle is determined in accordance with the following
schedule, subject to any adjustment by the Committee in its
discretion in the case of any or all participants:
|
|
|
|
|
Percentage of
|
Actual Cumulative Adjusted EPS for Performance Cycle
|
|
LTIP Awards Earned
|
|
Maximum or above
|
|
200%
|
Target
|
|
100%
|
Threshold or Below Threshold
|
|
0%
|
In granting the LTIP Award, the Compensation Committee
established the Threshold, Target and Maximum Cumulative EPS
growth levels for the 2010 performance cycle of $0.85, $0.95 and
$1.05, respectively and for subsequent performance cycles to be
3%, 9% and 12% growth, respectively, above the 2010 levels. If
Actual Cumulative EPS for a performance cycle is between
Threshold and Target or between Target and Maximum, the
percentage of LTIP Awards earned between 0% and 100% or between
100% and 200%, respectively, shall be determined by linear
interpolation.
The following table provides the terms of the LTIP Awards for
Each of Messrs Duffy, Senchak and Michaud for each performance
cycle.
LTIP
Awards for Each of Messrs. Duffy, Senchak and Michaud
for Each Performance Cycle
|
|
|
|
|
|
|
LTIP Award Amount at
|
|
|
|
|
Attainment of Target
|
|
Year of Potential
|
Performance Cycle
|
|
Cumulative Adjusted EPS
|
|
Payout
|
|
2010
|
|
$333,333
|
|
2011
|
2010-2011
|
|
$666,667
|
|
2012
|
2010-2012
|
|
$1,000,000
|
|
2013
|
For purposes of the LTIP Awards, Cumulative Adjusted
EPS is defined as earnings per share, as reported in the
consolidated financial statements of the Company prepared in
conformity with United States generally accepted accounting
principles as codified in the FASB Accounting Standards
Codification (GAAP) as applied to SEC registrants
(or any other governing accounting standards as may from time to
time in the future be applicable for SEC registrants) as
adjusted to eliminate:
|
|
|
|
|
the impact of all performance based awards during the relevant
performance cycle, including awards under the LTIP, for any
Named Executive Officer;
|
|
|
|
the effect of any tax, assessment or similar charge enacted or
implemented by a government or governmental agency which is not
of general application to corporate taxpayers in the relevant
jurisdiction; and
|
|
|
|
any quantifiable Non-GAAP (or other applicable accounting
standard) adjustment to net income for the relevant performance
cycle reported in a public filing with the SEC prior to the
determination of the percentage of LTIP Award earned for such
performance cycle.
|
The foregoing descriptions of each of the LTIP and the Award
Letters related to the LTIP Awards is qualified by reference to
the terms of the LTIP and the form of Award Letter,
respectively, a copy of each of which is filed as an exhibit to
this Annual Report on
Form 10-K.
Establishment
of Annual Performance Goals Applied to 2009 Restricted Stock
Bonus Awards
Previously Granted to Named Executive Officers
As previously reported in a
Form 8-K
filed by us on February 5, 2010 and Form 8K/A filed by
us on February 10, 2010, we granted to each Named Executive
Officer on February 5, 2010 a 2009 year-end restricted
stock award as part of their 2009 year-end bonus. The award
agreement for each such restricted stock award provides that, in
order for the Named Executive Officer to receive shares on the
specified vesting dates, the Adjusted Pre Tax Net
Income for the performance period related to such vesting
determination
77
must be positive. The award agreement required that the
Compensation Committee establish the definition of Adjusted Pre
Tax Net Income within the first 90 days of the 2010
calendar year.
On February 25, 2010, the Compensation Committee
established the definition of Adjusted Pre Tax Net Income for
purposes of the 2009 year-end restricted stock awards to
the Named Executive Officers. Adjusted Pre Tax Net Income for
any performance period or cycle is defined to mean the pre tax
consolidated income of the Company for such period or cycle
determined in conformity with GAAP as applied to SEC registrants
(or any other governing accounting standards as may from time to
time in the future be applicable for SEC registrants) adjusted
to eliminate:
|
|
|
|
|
the impact of all performance based awards during the relevant
performance period or cycle for any Named Executive Officer;
|
|
|
|
the effect of any tax, assessment or similar charge enacted or
implemented by a government or governmental agency which is not
of general application to corporate taxpayers in the relevant
jurisdiction; and
|
|
|
|
any quantifiable Non-GAAP (or other applicable governing
accounting standard) adjustment to income for the relevant
performance period or cycle reported in a public filing with the
SEC prior to the determination of the achievement of the
performance criteria for such performance period or cycle.
|
Determination
of 2010 Cash Bonus and Related Performance Goals for Named
Executive Officers
The Compensation Committee adopted resolutions providing that
the 2010 year-end cash bonus (the 2010 Cash
Bonus) for Named Executive Officers would be performance
based compensation. The resolutions provided that each of the
Named Executive Officers would receive a 2010 Cash Bonus at the
time that 2010 year-end bonuses were generally paid to
employees, subject to the requirement that, for calendar year
2010, the Companys Adjusted Net Pre Tax Income, as defined
in such resolutions, must be positive. The Compensation
Committee provided that the amount of the 2010 Cash Bonus for
each Named Executive Officer would be determined by applying a
designated percentage to the amount of consolidated revenues for
calendar year 2010 as reported by the Company in a public filing
with the SEC prior to the determination of the 2010 Cash Bonus
amount. The Compensation Committee retained discretion to reduce
the amount of any or all of the Named Executive Officers
2010 Cash Bonus as part of any determination by the Compensation
Committee to limit overall compensation expenses of the Company,
in order that the Operating Compensation and Benefits Ratio (as
defined) of the Company for 2010 does not exceed established
thresholds.
For purposes of determining eligibility of Named Executive
Officers to receive 2010 Cash Bonuses, the Compensation
Committee defined Adjusted Pre Tax Net Income to
mean the pre tax consolidated income of the Company for calendar
year 2010 determined in conformity with GAAP as applied to SEC
registrants (or any other governing accounting standards as may
from time to time in the future be applicable for SEC
registrants) adjusted to eliminate:
|
|
|
|
|
the impact of all performance based awards during the relevant
performance period or cycle for any Named Executive Officer;
|
|
|
|
the effect of any tax, assessment or similar charge enacted or
implemented by a government or governmental agency which is not
of general application to corporate taxpayers in the relevant
jurisdiction; and
|
|
|
|
any quantifiable Non-GAAP (or other applicable governing
accounting standard) adjustment to income for the relevant
performance period or cycle reported in a public filing with the
SEC prior to the determination of the achievement of the
performance criteria for such performance cycle.
|
The Operating Compensation and Benefits Ratio for 2010 means the
2010 Operating Compensation and Benefits Expense expressed as a
percentage of the Companys 2010 consolidated revenues. The
2010 Operating Compensation and Benefits Expense means the
Companys compensation and benefits expense for 2010,
calculated in conformity with GAAP, as adjusted to eliminate the
amortization of the Companys 2006 IPO restricted stock
awards, or any other quantifiable Non-GAAP adjustment to GAAP
compensation and benefits expense for 2010 that may be reported
in a public filing with the SEC prior to the determination of
the achievement of the performance criteria for 2010.
78
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
Information with respect to this item will be contained in the
Proxy Statement for the 2010 Annual Meeting of Stockholders,
which is incorporated herein by reference.
|
|
Item 11.
|
Executive
Compensation.
|
Information with respect to this item will be contained in the
Proxy Statement for the 2010 Annual Meeting of Stockholders,
which is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
Information with respect to this item will be contained in the
Proxy Statement for the 2010 Annual Meeting of Stockholders,
which is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence.
|
Information with respect to this item will be contained in the
Proxy Statement for the 2010 Annual Meeting of Stockholders,
which is incorporated herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
Information with respect to this item will be contained in the
Proxy Statement for the 2010 Annual Meeting of Stockholders,
which is incorporated herein by reference.
79
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
|
|
|
|
(a)
|
Documents filed as part of this
Form 10-K:
|
|
|
|
|
1.
|
Consolidated Financial Statements
|
The consolidated financial statements required to be filed in
the
Form 10-K
are listed on the pages below. The required financial statements
appear on pages 52 through 80 herein.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
2.
|
Financial Statement Schedules
|
Separate financial statement schedules have been omitted either
because they are not applicable or because the required
information is included in the consolidated financial statements.
See the Exhibit Index beginning on
page E-1
for a list of the exhibits being filed or furnished with or
incorporated by reference into this Annual Report on
Form 10-K.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 26, 2010
KBW, INC.
Name: John G. Duffy
Title: Chairman and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the date
indicated.
Date: February 26, 2010
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
|
|
|
|
/s/ John
G. Duffy
John
G. Duffy
|
|
Director, Chairman and Chief Executive Officer (principal
executive officer)
|
|
|
|
|
|
|
|
/s/ Robert
Giambrone
Robert
Giambrone
|
|
Chief Financial Officer (principal financial and accounting
officer)
|
|
|
|
|
|
|
|
/s/ Andrew
M. Senchak
Andrew
M. Senchak
|
|
Director
|
|
|
|
|
|
|
|
/s/ Thomas
B. Michaud
Thomas
B. Michaud
|
|
Director
|
|
|
|
|
|
|
|
/s/ Daniel
M. Healy
Daniel
M. Healy
|
|
Director
|
|
|
|
|
|
|
|
/s/ Christopher
M. Condron
Christopher
M. Condron
|
|
Director
|
|
|
|
|
|
|
|
/s/ James
K. Schmidt
James
K. Schmidt
|
|
Director
|
|
|
|
|
|
|
|
/s/ Michael
J. Zimmerman
Michael
J. Zimmerman
|
|
Director
|
|
|
81
EXHIBIT INDEX
|
|
|
|
|
|
3
|
.1
|
|
Second Amended and Restated Certificate of Incorporation of KBW,
Inc. (incorporated by reference to Exhibit 3.1 to the
Registrants quarterly report on
Form 10-Q
with respect to the quarter ended September 30, 2007 filed
on November 13, 2007).
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws of KBW, Inc. (incorporated by
reference to Exhibit 3.2 to the Registrants current
report on
Form 8-K
filed October 22, 2008).
|
|
4
|
.1
|
|
Specimen Common Stock Certificate of KBW, Inc. (incorporated by
reference to Exhibit 4.1 to the Registrants
registration statement on
Form S-1/A
(No. 333-136509)
filed on September 28, 2006).
|
|
4
|
.2
|
|
Second Amended and Restated Stockholders Agreement
(incorporated by reference to Exhibit 4.1 to the
Registrants quarterly report on
Form 10-Q
with respect to the quarter ended September 30, 2006 filed
on December 15, 2006).
|
|
10
|
.1
|
|
KBW, Inc. 2006 Equity Incentive Plan (incorporated by reference
to Exhibit 10.4 to the Registrants quarterly report
on
Form 10-Q
with respect to the quarter ended September 30, 2006 filed
on December 15, 2006).
|
|
10
|
.2
|
|
Fully Disclosed Clearing Agreement, dated as of October 22,
1992, between Pershing LLC and Keefe, Bruyette &
Woods, Inc., as amended (incorporated by reference to
Exhibit 10.3 to the Registrants registration
statement on
Form S-1/A
(No. 333-136509)
filed on September 28, 2006).
|
|
10
|
.3
|
|
Agreement of Lease, dated November 12, 2002, between the
Equitable Life Assurance Society of the United States, ELAS
Securities Acquisition Corp. and Keefe, Bruyette &
Woods, Inc. (incorporated by reference to Exhibit 10.5 to
the Registrants registration statement on
Form S-1/A
(No. 333-136509)
filed on September 28, 2006).
|
|
10
|
.4
|
|
First Amendment to Lease, dated September 6, 2003, between
the Equitable Life Assurance Society of the United States, ELAS
Securities Acquisition Corp. and Keefe, Bruyette &
Woods, Inc. (incorporated by reference to Exhibit 10.6 to
the Registrants registration statement on
Form S-1/A
(No. 333-136509)
filed on September 28, 2006).
|
|
10
|
.5
|
|
Second Amendment to Lease, dated September 6, 2004, between
the Equitable Life Assurance Society of the United States, ELAS
Securities Acquisition Corp. and Keefe, Bruyette &
Woods, Inc. (incorporated by reference to Exhibit 10.7 to
the Registrants registration statement on
Form S-1/A
(No. 333-136509)
filed on September 28, 2006).
|
|
10
|
.6
|
|
Sublease between Keefe, Bruyette & Woods, Inc. and
National Financial Partners Corp., dated as of August 31,
2007 (incorporated by reference to Exhibit 10.1 to the
Registrants current report on
Form 8-K,
filed on September 7, 2007).
|
|
10
|
.7
|
|
KBW, Inc. Annual Incentive Plan (incorporated by reference to
Exhibit 10.5 to the Registrants quarterly report on
Form 10-Q
with respect to the quarter ended September 30, 2006 filed
on December 15, 2006).
|
|
10
|
.8
|
|
KBW, Inc. 2008 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.1 to the Registrants current
report on
Form 8-K
filed June 9, 2008).
|
|
10
|
.9
|
|
Form of Restricted Stock Award Agreement for Awards under the
2006 Equity Incentive Plan in connection with the IPO
(incorporated by reference to Exhibit 10.8 to the
Registrants annual report on
Form 10-K
with respect to the year ended December 31, 2006, filed on
March 30, 2007).
|
|
10
|
.10
|
|
Form of Restricted Stock Award Agreement for February 2008
awards to employees under the 2006 Equity Incentive Plan
(incorporated by reference to Exhibit 10.10 to the
Registrants annual report on
Form 10-K
with respect to the year ended December 31, 2007, filed on
February 28, 2008).
|
|
10
|
.11
|
|
Form of Restricted Stock Award Agreement for February 2009
awards to employees under the 2006 Equity Incentive Plan
(incorporated by reference to Exhibit 10.13 to the
Registrants annual report on
Form 10-K
with respect to the year ended December 31, 2008, filed on
February 27, 2009).
|
|
10
|
.12
|
|
KBW, Inc. 2009 Incentive Compensation Plan (incorporated by
reference to Exhibit 10.1 to the Registrants current
report on
Form 8-K
filed on June 10, 2009).
|
|
10
|
.13
|
|
Form of Restricted Stock Award Agreement for February 2010
awards to Messrs. Duffy, Michaud, Senchak, Kleinman and
Giambrone (the Named Executive Officers) under the
2009 Incentive Compensation Plan (incorporated by reference to
Exhibit 10.1 to the Registrants current report on
Form 8-K/A
filed on February 10, 2010).
|
|
10
|
.14*
|
|
Form of Restricted Stock Award Agreement for February 2010
awards to employees other than the Named Executive Officers
under the 2009 Incentive Compensation Plan.
|
E-1
|
|
|
|
|
|
10
|
.15*
|
|
Long Term Incentive Plan (LTIP) under the KBW, Inc.
2009 Incentive Compensation Plan, effective as of
February 25, 2010.
|
|
10
|
.16*
|
|
Form of LTIP Award Letter by and between KBW, Inc. and each of
Messrs. Duffy, Senchak and Michaud, dated as of
February 25, 2010.
|
|
10
|
.17
|
|
Employment Agreement by and between John G. Duffy and KBW, Inc.,
dated as of February 1, 2010 (incorporated by reference to
Exhibit 10.2 to the Registrants current report on
Form 8-K/A
filed on February 10, 2010).
|
|
10
|
.18
|
|
Employment Agreement by and between Thomas B. Michaud and KBW,
Inc., dated as of February 1, 2010 (incorporated by
reference to Exhibit 10.3 to the Registrants current
report on
Form 8-K/A
filed on February 10, 2010).
|
|
10
|
.19
|
|
Employment Agreement by and between Andrew M. Senchak and KBW,
Inc., dated as of February 1, 2010 (incorporated by
reference to Exhibit 10.4 to the Registrants current
report on
Form 8-K/A
filed on February 10, 2010).
|
|
10
|
.20
|
|
Amended and Restated Change of Control Agreement by and between
Robert Giambrone and KBW, Inc., dated as of December 31,
2008 (incorporated by reference to Exhibit 10.17 to the
Registrants annual report on
Form 10-K
with respect to the year ended December 31, 2008, filed on
February 27, 2009).
|
|
10
|
.21
|
|
Amended and Restated Change of Control Agreement by and between
Mitchell B. Kleinman and KBW, Inc., dated as of
December 31, 2008 (incorporated by reference to
Exhibit 10.17 to the Registrants annual report on
Form 10-K
with respect to the year ended December 31, 2008, filed on
February 27, 2009).
|
|
11
|
|
|
Statement regarding computation of per share earnings. (The
calculation of per share earnings is in Part II,
Item 8, Note 14 to the Consolidated Financial
Statements (Earnings Per Share) and is omitted here in
accordance with Section(b)(11) of Item 601 of
Regulation S-K).
|
|
21
|
.1*
|
|
List of Subsidiaries of KBW, Inc.
|
|
23
|
.1*
|
|
Consent of KPMG LLP.
|
|
31
|
.1*
|
|
Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2*
|
|
Certification of the Chief Financial Officer 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 contract or compensatory arrangement |
|
* |
|
Filed herewith |
E-2