KBW, INC.

(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 fund’s 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 2013 — 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.

Commencing in the third quarter of 2011, the Company undertook steps to reduce its workforce and certain other costs to better align its resources to the current business environment.  As a result of the workforce reduction, the Company has also consolidated office workspace in New York City and terminated several market data contracts.  These actions resulted in restructuring charges to earnings relating to severance, lease obligation accruals for vacant office space and contract termination costs.  These efforts continued through the third quarter of 2012 with further headcount reductions resulting in additional severance costs.  During the third quarter of 2012, the lease obligation accrual was adjusted to reflect changes resulting from revisions to estimates.  The cumulative amount of restructuring charges incurred since the restructure initiative began in 2011 was $21,237.  The accrual related to severance was included in accrued compensation and benefits and the accruals related to the consolidation of space in our New York office and the termination of several market data services contracts were included in accounts payable, accrued expenses and other liabilities on the accompanying statements of financial condition.

The Company and Stifel Financial Corp. (SF) announced on November 5, 2012 that they have entered into a definitive merger agreement.   Under the terms of the agreement, the Company’s shareholders will receive $17.50 per share, comprised of $10.00 per share in cash and $7.50 in SF common stock.  The merger is subject to the approval by the Company’s and SF’s shareholders and customary regulatory approvals and is expected to close in the first quarter of 2013.

The Company also announced on November 5, 2012 the exit from operations in Asia by closing the Hong Kong and Tokyo offices by December 31, 2012.  The net loss for the nine months ended September 30, 2012 for our Asia operations was approximately $5 million.  Estimated costs associated with exiting the business in Asia are approximately $4 million, primarily for employee severance, and are expected to be recognized in the fourth quarter of 2012.

Our dividend policy currently contemplates the payment of a quarterly cash dividend.  On February 22, 2012, our board of directors declared a cash dividend of $0.05 per share of common stock equaling an aggregate payment of $1.8 million, which cash dividend was paid on March 15, 2012 to stockholders of record as of the close of business on March 3, 2012.  On April 25, 2012, our board of directors declared a cash dividend of $0.05 per share of common stock equaling an aggregate payment of $1.7 million, which cash dividend was paid on June 15, 2012 to stockholders of record as of the close of business on June 1, 2012.  On August 1, 2012, our board of directors declared a cash dividend of $0.05 per share of common stock equaling an aggregate payment of $1.7 million, which cash dividend was paid on September 14, 2012 to stockholders of record as of the close of business on September 4, 2012.  On November 2, 2012, our board of directors declared a cash dividend of $0.05 per share of common stock (equaling an aggregate payment of approximately $1.7 million based on approximately 35.0 million total shares outstanding on October 31, 2012, including shares underlying vested restricted stock units), which cash dividend will be paid on December 14, 2012 to stockholders of record as of the close of business on December 5, 2012.