Edgar Filing: STIFEL FINANCIAL CORP

Stifel Financial Corp. Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the Quarterly Period Ended September 30, 2009


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

For the transition period from to

Commission File No. 1-9305

_________________________

STIFEL FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


DELAWARE (State or other jurisdiction of		43-1273600 (IRS Employer Identification No.)
incorporation or organization)

501North Broadway
St. Louis, Missouri		63102
(Address of principal executive offices)		(Zip Code)

(314) 342-2000
(Registrant’s telephone number, including area code)

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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


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

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No þ

The number of shares outstanding of the registrant's common stock as of October 31, 2009 was 30,301,318.

STIFEL FINANCIAL CORP.

Form 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Statements of Financial Condition as of September 30, 2009 (unaudited) and December 31, 2008

Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2009 and September 30, 2008 (unaudited)

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and September 30, 2008 (unaudited)

Notes to Condensed Consolidated Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

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

Item 6. Exhibits

Signatures

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STIFEL FINANCIAL CORP.

Condensed Consolidated Statements of Financial Condition


	September 30, 2009		December 31, 2008
(in thousands)	(Unaudited)
Assets
Cash and cash equivalents	$	345,970	$	239,725
Cash segregated under federal and other regulations		19		40
Receivables:
Customers		367,363		280,143
Broker, dealers and clearing organizations		280,046		111,575
Securities purchased under agreements to resell		91,545		17,723
Trading securities owned, at fair value (includes securities pledged of $217,867 and $0, respectively)		449,408		122,576
Available-for-sale securities, at fair value		300,623		50,397
Held-to-maturity securities, at amortized cost		7,574		7,574
Mortgages held for sale		30,947		31,246
Bank loans, net of allowance for loan losses of $2,488 and $2,448, respectively		329,509		181,269
Bank foreclosed assets held for sale, net of estimated cost to sell		2,657		2,326
Investments		105,562		75,407
Fixed assets, at cost, net of accumulated depreciation and amortization of $66,225 and $54,075, respectively		60,296		47,765
Goodwill		159,191		128,278
Intangible assets, net of accumulated amortization of $10,350 and $8,290, respectively		15,600		15,984
Loans and advances to financial advisors and other employees, net		181,841		105,767
Deferred tax assets, net		49,350		47,337
Other assets		113,294		93,013
Total assets	$	2,890,795	$	1,558,145

See accompanying Notes to Condensed Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Condensed Consolidated Statements of Financial Condition (continued)


	September 30, 2009			December 31, 2008
(in thousands, except share amounts)	(Unaudited)
Liabilities and stockholders' equity
Short-term borrowings from banks	$	165,200		$	-
Payables:
Customers		196,368			156,495
Brokers, dealers and clearing organizations		133,321			29,691
Drafts		39,974			49,401
Securities sold under agreements to repurchase		43,949			2,216
Bank deposits		875,028			284,798
Federal Home Loan Bank advances and other secured financing		2,000			6,000
Trading securities sold, but not yet purchased, at fair value		278,629			98,934
Accrued compensation		133,150			130,037
Accounts payable and accrued expenses		87,603			100,528
Debenture to Stifel Financial Capital Trust II		35,000			35,000
Debenture to Stifel Financial Capital Trust III		35,000			35,000
Debenture to Stifel Financial Capital Trust IV		12,500			12,500
Other		9,398			19,998
		2,047,120			960,598
Liabilities subordinated to claims of general creditors		10,081			4,362
Stockholders' equity:
Preferred stock - $1 par value; authorized 3,000,000 shares; none issued		-			-
Common stock - $0.15 par value; authorized 97,000,000 shares; issued 30,295,624 and 26,300,135 shares, respectively		4,545			3,945
Additional paid-in-capital		608,263			427,480
Retained earnings		220,403			168,993
Accumulated other comprehensive income/(loss)		1,165			(6,295	)
		834,376			594,123
Unearned employee stock ownership plan shares, at cost, 122,019 and 146,421 shares, respectively		(782	)		(938	)
		833,594			593,185
Total liabilities and stockholders' equity	$	2,890,795		$	1,558,145

See accompanying Notes to Condensed Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except per share amounts)	2009		2008			2009		2008
Revenues:
Principal transactions	$	123,238	$	68,182		$	341,777	$	200,793
Commissions		90,905		88,727			246,236		257,491
Investment banking		35,056		25,156			75,262		67,935
Asset management and service fees		25,498		30,336			74,974		90,580
Interest		11,306		12,819			31,782		39,175
Other income/(loss)		6,586		(1,391	)		9,440		(883	)
Total revenues		292,589		223,829			779,471		655,091
Interest expense		2,906		4,906			8,302		15,740
Net revenues		289,683		218,923			771,169		639,351

Non-interest expenses:
Compensation and benefits		193,131		150,203			516,852		441,028
Occupancy and equipment rental		24,730		17,286			63,311		49,012
Communications and office supplies		14,429		11,192			39,403		32,887
Commissions and floor brokerage		6,486		4,348			17,167		8,315
Other operating expenses		20,071		14,800			55,336		42,940
Total non-interest expenses		258,847		197,829			692,069		574,182

Income before income tax expense		30,836		21,094			79,100		65,169
Provision for income taxes		8,698		8,317			27,970		25,713
Net income	$	22,138	$	12,777		$	51,130	$	39,456

Earnings per common share:
Basic	$	0.77	$	0.54		$	1.85	$	1.68
Diluted	$	0.67	$	0.46		$	1.62	$	1.44

Weighted average number of common shares outstanding:
Basic		28,708		23,830			27,652		23,520
Diluted		32,817		28,045			31,468		27,335

See accompanying Notes to Condensed Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended September 30,
(in thousands)	2009			2008
Operating Activities:
Net income	$	51,130		$	39,456
Adjustments to reconcile net income to net cash used in operating activities:
Stock-based compensation		22,666			29,960
Amortization of loans and advances to financial advisors and other employees		20,910			15,063
Depreciation and amortization		16,777			9,219
Loss on the sale of investments		16,576			6,836
Amortization of intangible assets		2,060			2,337
Provision for loan losses and allowance for loans and advances to financial advisors and other employees		861			1,025
Accretion of discounts on available-for-sale securities		(174	)		(589	)
Deferred income taxes		(4,925	)		(3,966	)
Other, net		506			253
Decrease/(increase) in operating assets, net of assets acquired:
Receivables:
Customers		(69,262	)		36,525
Brokers, dealers and clearing organizations		(168,471	)		(266,830	)
Securities purchased under agreements to resell		(73,822	)		(29,219	)
Loans originated as mortgages held for sale		(677,851	)		(226,714	)
Proceeds from mortgages held for sale		678,150			218,654
Trading securities owned, including those pledged		(326,832	)		(128,689	)
Loans and advances to financial advisors and other employees		(88,077	)		(34,176	)
Other assets		(10,685	)		(5,205	)
Increase/(decrease) in operating liabilities, net of liabilities assumed:
Payables:
Customers		39,873			60,661
Drafts		(9,427	)		(7,641	)
Brokers, dealers and clearing organizations		73,068			90,262
Trading securities sold, but not yet purchased		179,695			172,686
Other liabilities and accrued expenses		(35,569	)		(46,937	)
Net cash used in operating activities		(362,823	)		(67,029	)

See accompanying Notes to Condensed Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Condensed Consolidated Statements of Cash Flows (continued)

(Unaudited)


	Nine Months Ended September 30,
(in thousands)	2009			2008
Investing Activities:
Proceeds from:
Sale or maturity of investments	$	45,238		$	38,583
Maturities, calls and principal paydowns on available-for sale securities		24,526			34,445
Sale of property		-			766
Sale of bank foreclosed assets held for sale		3,108			1,000
Decrease/(increase) in bank loans, net		(7,437	)		(70,342	)
Payments for:
Purchase of available-for-sale securities		(264,285	)		(24,909	)
Acquisitions, net		(196,046	)		-
Purchase of investments		(91,922	)		(53,297	)
Purchase of fixed assets		(21,210	)		(14,643	)
Purchase of bank foreclosed loans held for sale		(3,854	)		(1,322	)
Net cash used in investing activities		(511,882	)		(89,719	)
Financing Activities:
Increase in bank deposits, net		590,230			68,537
Net proceeds from short-term borrowings from banks		165,200			137,450
Proceeds from offering of common stock		135,645			64,369
Securities sold under agreements to repurchase		41,733			-
Increase/(decrease) in securities loaned		30,562			(92,272	)
Excess tax benefits from stock-based compensation		12,788			9,133
Issuance of common stock		10,092			2,330
Reissuance of treasury stock		-			751
Proceeds from/(payments to) Federal Home Loan Bank advances and other secured financing		(4,000	)		10,250
Extinguishment of subordinated debt		(1,300	)		(914	)
Repurchase of common stock		-			(12,141	)
Net cash provided by financing activities		980,950			187,493

Increase in cash and cash equivalents		106,245			30,745
Cash and cash equivalents at beginning of period		239,725			47,963
Cash and cash equivalents at end of period	$	345,970		$	78,708

Supplemental disclosure of cash flow information:
Cash paid for interest	$	8,121		$	15,708
Cash paid for income taxes, net of refunds	$	4,692		$	20,673
Noncash investing and financing activities:
Units, net of forfeitures	$	67,383		$	53,447
Payment of Ryan Beck contingent earn-out	$	9,307		$	-

See accompanying Notes to Condensed Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

(Unaudited)

NOTE 1 - Nature of Operation and Basis of Presentation

Nature of Operations

Stifel Financial Corp. (the "Parent"), through its wholly-owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus"), Century Securities Associates, Inc. ("CSA"), Stifel Nicolaus Limited ("SN Ltd"), and Stifel Bank & Trust ("Stifel Bank"), is principally engaged in retail brokerage, securities trading, investment banking, investment advisory, retail, consumer and commercial banking and related financial services throughout the United States. Although we have offices throughout the United States and three European cities, our major geographic area of concentration is in the Midwest and Mid-Atlantic regions, with a growing presence in the Northeast, Southeast and Western United States. Our company's principal customers are individual investors, corporations, municipalities, and institutions.

Basis of Presentation

The condensed consolidated financial statements include the accounts of Stifel Financial Corp. and its wholly-owned subsidiaries, principally Stifel Nicolaus & Company, Incorporated. Intercompany balances and transactions have been eliminated. Unless otherwise indicated, the terms "we," "us" "our" or "our company" in this report refer to Stifel Financial Corp. and its wholly-owned subsidiaries.

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. In management's opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise noted) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2008 on file with the SEC.

Certain amounts from prior periods have been reclassified to conform to the current period's presentation. The effect of these reclassifications on our company's previously reported consolidated financial statements was not material.

Derivative Instruments and Hedging Activities

Stifel Bank recognizes all of its derivative instruments as either assets or liabilities in the condensed consolidated statements of financial condition at fair value. These instruments are recorded in other assets or accounts payable and accrued expenses in the condensed consolidated statements of financial condition and in the operating section of the condensed consolidated statement of cash flows as increases or decreases of other assets and accounts payable and accrued expenses. Our company's policy is not to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments recognized at fair value executed with the same counterparty under master netting arrangements. The accounting for changes in the fair value (i.e., gains and losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments under ASC 815, "Derivatives and Hedging," we must designate the hedging instrument, based upon the exposure being hedged.

For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income/(loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. See Note 11 for additional detail.

Other than those described above, there have been no material changes in our significant accounting policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2008.

Financial Accounting Standards Board ("FASB") Accounting Standards Codification

In June 2009, the FASB issued Accounting Standards Codification (the "Codification" or "ASC"), which will serve as the single source of authoritative non-governmental generally accepted accounting principles, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and related accounting literature. This guidance is effective for interim and annual reporting periods ending after September 15, 2009 (September 30, 2009 for our company) and has impacted our financial statement disclosures since all future references to authoritative accounting literature will be referenced in accordance with the Codification.

Recently Adopted Accounting Guidance

With the exception of those discussed in the notes to the condensed consolidated financial statements, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2009, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2008, that are of significance, or potential significance, to our company's consolidated financial statements.

NOTE 2 - Acquisitions

UBS Wealth Management Americas Branch Network

On March 23, 2009, we announced that Stifel Nicolaus had entered into a definitive agreement with UBS Financial Services Inc. ("UBS") to acquire certain specified branches from the UBS Wealth Management Americas branch network. As subsequently amended, we agreed to acquire 56 branches (the "Acquired Locations") from UBS in four separate closings pursuant to this agreement. We completed three of the closings on the following dates during the third quarter: August 14, 2009, September 11, 2009, and September 25, 2009. The final closing was completed on October 16, 2009. This acquisition further expands our private client footprint. Pro forma information is not presented because the acquisition is not considered to be material. The results of operations of the Acquired Locations have been included in our results prospectively from the respective acquisition dates.

The transaction was structured as an asset purchase for cash at a premium over certain balance sheet items, subject to adjustment. The payments to UBS in conjunction with all four closings of $248,487 were funded by available liquidity and included: (i) an upfront cash payment of $29,046 based on the actual number of branches and financial advisors acquired by Stifel Nicolaus; and (ii) aggregate payment of $15,037 for net fixed assets, employee forgivable loans and other assets, and (iii) Reg U and Reg T loans of $204,404 that were collateralized by securities included in customer accounts converted to the Stifel platform. In addition, a contingent earn-out payment is payable based on the performance of those UBS financial advisors who joined Stifel Nicolaus, over the two-year period following the closing.

As a result of all four closings, we converted approximately $16.0 billion in customer assets, which included $1.8 billion in money market accounts and FDIC-insured balances to the Stifel Nicolaus platform.

This acquisition is being accounted for under the acquisition method of accounting in accordance with ASC 280, "Business Combinations." Accordingly, the purchase price was allocated to the acquired assets and liabilities based on their estimated fair values as of the respective acquisition dates. The preliminary allocation resulted in an excess of the fair value of the acquired net assets over the purchase price, as a result, we have allocated $28,541 to goodwill. The goodwill recognized represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of the hired financial advisors and the conversion of the customer accounts to the Stifel platform. The allocation of the purchase price is preliminary and will be finalized upon completion of the analysis of the fair values of the contingent earn-out liability, net assets of the Acquired Locations and any potential intangible assets.

Butler Wick & Company, Inc.

On December 31, 2008, we closed on the acquisition of Butler Wick & Company, Inc. ("Butler Wick"), a privately-held broker-dealer that provides financial advice to individuals, municipalities, and corporate clients. We acquired 100% of the voting interests of Butler Wick from United Community Financial Corp. This acquisition extends our company's geographic reach in the Ohio Valley region. The purchase price of $12,000 was funded from cash generated from operations. Under the purchase method of accounting, the assets and liabilities of Butler Wick are recorded as of the acquisition date, at their respective fair values and consolidated in our company's financial statements. Revisions to the allocation will be reported as changes to various assets and liabilities, including goodwill and other intangible assets. Pro forma information is not presented because the acquisition is not considered to be material. Butler Wick's results of operations have been included in our results prospectively from January 1, 2009.

Ryan Beck & Company, Inc. Earn-Out

On February 28, 2007, we completed the acquisition of Ryan Beck & Company, Inc. ("Ryan Beck"), a full-service brokerage and investment banking firm and wholly-owned subsidiary of BankAtlantic Bancorp, Inc. Pursuant to the stock purchase agreement, an additional earn-out payment was payable based on the achievement of defined revenues over the two year period following the closing. We paid the final earn-out payment of $9,307 related to the two-year private client contingent earn-out in 271,353 shares of our company's common stock at an average price of $34.30 per share in the first quarter of 2009, with partial shares paid in cash.

NOTE 3 - Receivables from and Payables to Brokers, Dealers and Clearing Organizations

Amounts receivable from brokers, dealers and clearing organizations at September 30, 2009 and December 31, 2008, included (in thousands):

	September 30, 2009		December 31, 2008
Deposits paid for securities borrowed	$	123,629	$	49,784
Securities failed to deliver		83,750		3,837
Receivable from clearing organization		72,667		57,954
	$	280,046	$	111,575

Amounts payable to brokers, dealers and clearing organizations at September 30, 2009, and December 31, 2008, included (in thousands):

	September 30, 2009		December 31, 2008
Securities failed to receive	$	85,484	$	8,811
Deposits received from securities loaned		47,837		16,987
Payable to clearing organizations		-		3,893
	$	133,321	$	29,691

Deposits paid for securities borrowed approximate the market value of the securities. Securities failed to deliver and receive represent the contract value of securities that have not been delivered or received on settlement date.

NOTE 4 - Fair Value of Financial Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, trading securities owned, available-for-sale securities, investments and trading securities sold, but not yet purchased.

The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.

The following is a description of the valuation techniques used to measure fair value.

Cash equivalents

Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value and classified as Level I.

Financial instruments (Trading securities and available-for-sale securities)

When available, the fair value of financial instruments are based on quoted prices in active markets and reported in Level I. Level I financial instruments include highly liquid instruments with quoted prices such as certain U.S. treasury bonds, corporate bonds, certain municipal securities and equities listed in active markets.

If quoted prices are not available, fair values are obtained from pricing services, broker quotes, or other model-based valuation techniques with observable inputs such as the present value of estimated cash flows and reported as Level II. The nature of these financial instruments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Level II financial instruments generally include certain U.S. government agency securities, certain corporate bonds, certain municipal securities, asset-backed securities, and mortgage-backed securities.

Level III financial instruments have little to no pricing observability as of the report date. These financial instruments do not have active two-way markets and are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have identified Level III financial instruments to include certain asset-backed securities, consisting of collateral loan obligation securities, that have experienced low volumes of executed transactions; and certain corporate bonds where there was less frequent or nominal market activity or when we were able to obtain only a single broker quote. Our Level III asset-backed securities are valued using cash flow models that utilize unobservable inputs. Level III corporate bonds are valued using prices from comparable securities.

Investments

Investments in public companies are valued based on quoted prices in active markets and reported in Level I. Investments in certain equity securities with unobservable inputs and auction-rate securities for which the market has been dislocated and largely ceased to function are reported as Level III assets. Investments in certain equity securities with unobservable inputs are valued using management's best estimate of fair value, where the inputs require significant management judgment. Auction-rate securities are valued based upon our expectations of issuer redemptions and using internal models.

Derivatives

Derivatives are valued using quoted market prices when available or pricing models based on the net present value of estimated future cash flows. The valuation models used require market observable inputs including contractual terms, market prices, yield curves, credit curves and measures of volatility. These measurements are classified as Level II within the fair value hierarchy and are used to value interest rate swaps.

The following table summarizes the valuation of our financial instruments by pricing observability levels as of September 30, 2009 (in thousands):

	September 30, 2009
	Total		Level I		Level II		Level III
Assets:
Cash equivalents	$	142,813	$	142,813	$	-	$	-
Trading securities owned:
U.S. government agency securities		97,280		-		97,280		-
U.S. government securities		8,648		8,648		-		-
Corporate securities:
Equity securities		16,731		16,731		-		-
Fixed income securities		267,235		125,717		140,751		767
State and municipal securities		59,514		-		59,514		-
Total trading securities owned		449,408		151,096		297,545		767
Available-for-sale securities:
U.S. government agency securities		1,021		-		1,021		-
State and municipal securities		996		-		996		-
Mortgage-backed securities:
Agency		173,205		-		173,205		-
Non-agency		26,330		-		26,330		-
Commercial		38,419		-		33,232		5,187
Corporate fixed income securities		42,444		32,160		10,284		-
Asset-backed securities		18,208		-		11,695		6,513
Total available-for-sale securities		300,623		32,160		256,763		11,700
Investments:
Corporate equity securities		2,953		2,953		-		-
Mutual funds		26,648		26,648		-		-
U.S. government securities		5,766		5,766		-		-
Auction rate securities:
Equity securities		45,843		-		-		45,843
Municipal securities		9,943		-		-		9,943
Other		6,204		674		437		5,093
Total investments		97,357		36,041		437		60,879
	$	990,201	$	362,110	$	554,745	$	73,346

Liabilities:
Trading securities sold, but not yet purchased:
U.S. government agency securities	$	1,248	$	-	$	1,248	$	-
U.S. government securities		101,531		101,531		-		-
Corporate securities:
Equity securities		23,188		23,188		-		-
Fixed income securities		151,927		69,319		82,608		-
State and municipal securities		735		-		735		-
Total trading securities sold, but not yet purchased		278,629		194,038		84,591		-
Derivative contracts		525		-		525		-
	$	279,154	$	194,038	$	85,116	$	-

The following table summarizes the valuation of our financial instruments by pricing observability levels as of December 31, 2008 (in thousands):

	December 31, 2008
	Total		Level I		Level II		Level III
Assets:
Cash equivalents	$	172,589	$	172,589	$	-	$	-
Trading securities owned:
U.S. government agency securities		26,525		-		26,525		-
U.S. government securities		13,876		13,876		-		-
Corporate securities:
Equity securities		14,094		14,094		-		-
Fixed income securities		43,131		11,820		27,150		4,161
State and municipal securities		24,950		4,397		20,553		-
Total trading securities owned		122,576		44,187		74,228		4,161
Available-for-sale securities:
U.S. government agency securities		8,591		-		8,591		-
State and municipal securities		1,531		-		1,531		-
Mortgage-backed securities:
Agency		12,430		-		12,430		-
Non-agency		17,422		-		17,422		-
Asset-backed securities		10,423		-		-		10,423
Total available-for-sale securities		50,397		-		39,974		10,423
Investments:
Corporate equity securities		2,668		2,668		-		-
Mutual funds		23,082		23,082		-		-
U.S. government securities		7,132		9		7,123		-
Auction rate securities:
Equity securities		11,470		-		-		11,470
Municipal securities		7,039		-		-		7,039
Other		5,678		90		419		5,169
Total investments		57,069		25,849		7,542		23,678
	$	402,631	$	242,625	$	121,744	$	38,262

Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities	$	33,279	$	33,279	$	-	$	-
Corporate securities:
Equity securities		3,489		3,489		-		-
Fixed income securities		62,012		24,081		37,931		-
State and municipal securities		154		-		154		-
	$	98,934	$	60,849	$	38,085	$	-

Our company's investment in a U.S. government security used to fund our venture capital activities in qualified Missouri businesses is classified as held-to-maturity and is not subject to fair value accounting and therefore is not included in the above analysis of fair value at September 30, 2009 and December 31, 2008. This investment is included in "Investments" in the condensed consolidated statements of financial condition at September 30, 2009.

The following table summarizes the changes in fair value carrying values associated with Level III financial instruments during the nine months ended September 30, 2009 (in thousands):

	Balance at December 31, 2008		Purchases/ (sales), net			Net transfers in/(out)			Realized gains/ (losses)		Unrealized gains/(losses)			Balance at September 30, 2009
Assets:
Trading securities owned: ⁽¹⁾
Corporate fixed income securities	$	4,161	$	(2,454	)	$	-		$	352	$	(1,292	)	$	767
Available-for-sale securities: ⁽²⁾
Mortgage-backed securities		-		5,187			-			-		-			5,187
Asset-backed securities		10,423		(3,326	)		-			-		(584	)		6,513
Total available-for-sale securities		10,423		1,861			-			-		(584	)		11,700
Investments: ⁽¹⁾
Auction rate securities:
Equity securities		11,470		37,515			-			-		(3,142	)		45,843
Municipal securities		7,039		3,050			-			-		(146	)		9,943
Other		5,169		321			(503	)		-		106			5,093
Total investments		23,678		40,886			(503	)		-		(3,182	)		60,879
	$	38,262	$	40,293		$	(503	)	$	352	$	(5,058	)	$	73,346

⁽¹⁾ Realized and unrealized gains/(losses) related to trading securities and investments are reported in other income on the consolidated statements of operations.

⁽²⁾ Unrealized gains/(losses) related to available-for-sale securities are reported in other comprehensive income.

The results included in the table above are only a component of the overall trading strategies of our company. The table above does not present Level I or Level II valued assets or liabilities. We did not have any Level III liabilities at September 30, 2009 or December 31, 2008. The changes to our company's Level III classified instruments were principally a result of: purchases of auction rate securities ("ARS") from our customers, principal pay-downs of our available-for-sale securities, unrealized gains and losses, and redemptions of ARS at par during the first nine months of 2009. There were no changes in unrealized gains/(losses) recorded in earnings for the nine months ended September 30, 2009 relating to Level III assets still held at September 30, 2009. Investment gains and losses of our investments are included in our condensed consolidated statements of operations as a component of other income.

The following is a summary of the carrying values and estimated fair values of certain financial instruments as of September 30, 2009 (in thousands):

	September 30, 2009
	Carrying Value		Estimated fair value
Financial assets:
Held-to-maturity securities	$	7,574	$	4,760
Bank loans (including loans held for sale), net of allowance		360,456		328,911
Financial liabilities:
Time deposits		19,118		19,574
Debentures to Stifel Financial Capital Trusts		82,500		39,436

This summary excludes financial assets and liabilities for which carrying value approximates fair value. For financial assets, these include cash and cash equivalents, cash segregated under federal and other regulations, our investment in a U.S. government security used to fund our venture capital activities in qualified Missouri business which is classified as held-to-maturity and included in "Investments," convertible notes and bank foreclosed assets held for sale. For financial liabilities, these include demand,

savings, and money market deposits, Federal Home Loan Bank advances and other secured financing, federal funds purchased, and security repurchase agreements. The estimated fair value of demand, savings, and money market deposits is the amount payable on demand at the reporting date. Carrying value approximates fair value because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately. Also excluded from the summary are financial instruments recorded at fair value on a recurring basis, as previously described.

The fair value of loans is estimated by discounting future cash flows on 'pass' grade loans using the LIBOR yield curve adjusted by a factor that reflects the credit and interest rate risk inherent in the loan. These future cash flows are then reduced by the estimated 'life-of-the-loan' aggregate credit losses in the loan portfolio. These adjustments for lifetime future credit losses are highly judgmental because we do not have a validated model to estimate lifetime losses on large portions of our loan portfolio. Loans accounted for under ASC 310, "Receivables" are not included in this credit adjustment as they are already considered to be held at fair value. Loans, other than those held for sale, are not normally purchased and sold by our company, and there are no active trading markets for most of this portfolio. The fair value of time deposits is estimated by discounting future cash flows using the LIBOR yield curve.

These fair value disclosures represent our best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected losses, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.

NOTE 5 - Trading Securities Owned and Trading Securities Sold, But Not Yet Purchased

The components of trading securities owned and trading securities sold, but not yet purchased at September 30, 2009 and December 31, 2008, are as follows (in thousands):

	September 30, 2009		December 31, 2008
Trading securities owned:
U.S. government agency securities	$	97,280	$	26,525
U.S. government securities		8,648		13,876
Corporate securities:
Equity securities		16,731		14,094
Fixed income securities		267,235		43,131
State and municipal securities		59,514		24,950
	$	449,408	$	122,576
Trading securities sold, but not yet purchased:
U.S. government agency securities	$	1,248	$	-
U.S. government securities		101,531		33,279
Corporate securities:
Equity securities		23,188		3,489
Fixed income securities		151,927		62,012
State and municipal securities		735		154
	$	278,629	$	98,934

At September 30, 2009 and December 31, 2008, trading securities owned in the amount of $217,867 and $0, respectively, were pledged as collateral for our Repurchase Agreements and short-term borrowings from banks.

Trading securities sold, but not yet purchased represent obligations of our company to deliver the specified security at the contracted price, thereby creating a liability to purchase the security in the market at prevailing prices. We are obligated to acquire the securities sold short at prevailing market prices, which may exceed the amount reflected on the consolidated statements of financial condition.

NOTE 6 - Available-for-Sale Securities and Held-to-Maturity Securities

The following tables provide a summary of the amortized cost and fair values of the available-for-sale securities and held-to-maturity securities at September 30, 2009 and December 31, 2008 (in thousands):

	September 30, 2009
	Amortized cost		Gross unrealized gains ⁽¹⁾		Gross unrealized losses ⁽¹⁾			Estimated fair value
Available-for-sale
U.S. government securities	$	997	$	24	$	-		$	1,021
State and municipal securities		960		36		-			996
Mortgage-backed securities:
Agency		171,390		2,027		(212	)		173,205
Non-agency		28,382		188		(2,240	)		26,330
Commercial		37,990		667		(238	)		38,419
Corporate fixed income securities		40,728		1,716		-			42,444
Asset-backed securities		16,679		1,567		(38	)		18,208
	$	297,126	$	6,225	$	(2,728	)	$	300,623

⁽¹⁾ Unrealized gains/(losses) related to available-for-sale securities are reported in other comprehensive income.

	December 31, 2008
	Amortized cost		Gross unrealized gains ⁽¹⁾		Gross unrealized losses ⁽¹⁾			Estimated fair value
Available-for-sale
U.S. government securities	$	8,447	$	144	$	-		$	8,591
State and municipal securities		1,513		19		(1	)		1,531
Mortgage-backed securities:
Agency		12,821		-		(391	)		12,430
Non-agency		23,091		-		(5,669	)		17,422
Asset-backed securities		11,400		-		(977	)		10,423
	$	57,272	$	163	$	(7,038	)	$	50,397

⁽¹⁾ Unrealized gains/(losses) related to available-for-sale securities are reported in other comprehensive income.

	September 30, 2009			December 31, 2008
Held-to-maturity:
Amortized cost	$	10,069		$	10,069
Gross unrealized gains ⁽¹⁾		-			-
Gross unrealized losses ⁽¹⁾		(2,495	)		(2,495	)
Carrying value		7,574			7,574
Gross unrealized gains ⁽²⁾	$	-		$	-
Gross unrealized losses ⁽²⁾		(2,814	)		(1,324	)
Estimated fair value	$	4,760		$	6,250

⁽¹⁾ Unrealized gains/(losses) recognized in other comprehensive income.

⁽²⁾ Unrealized gains/(losses) not recognized in other comprehensive income.

During the three and nine months ended September 30, 2009, available-for-sale securities with an aggregate par value of $1,000 and $8,050, respectively, were called by the issuing agencies or matured resulting in no gains or losses recorded through the condensed consolidated statement of operations. Additionally, during the three and nine months ended September 30, 2009, Stifel Bank received principal payments on asset-backed and mortgage-backed securities of $10,877 and $16,476, respectively. During the three months ended September 30, 2009, unrealized gains, net of deferred taxes, of $5,859 were recorded in accumulated other comprehensive income. During the three months ended September 30, 2008, unrealized losses, net of deferred tax benefits, of $1,387 were recorded in accumulated other comprehensive income. During the nine months ended September 30, 2009, unrealized gains, net of deferred taxes, of $7,859 were recorded in accumulated other comprehensive income. During the nine months ended September 30, 2008, unrealized losses, net of deferred tax benefits, of $3,312 were recorded in accumulated other comprehensive income.

On June 30, 2008, we transferred a $10,000 par value asset backed security, consisting of investment-grade trust preferred securities related primarily to banks, with an amortized cost basis of $10,069 from our available-for-sale securities portfolio to our held-to-maturity portfolio. This security was transferred at the estimated fair value of $7,574. The gross unrealized loss of $2,495 included in accumulated other comprehensive income is being amortized as an adjustment of yield over the remaining life of the security. The estimated fair value of the held-to-maturity security at September 30, 2009 was $4,760. The estimated fair value was determined using several factors; however, primary weight was given to discounted cash flow modeling techniques that incorporated an estimated discount rate based upon recent observable debt security issuances with similar characteristics. Based upon the results of this analysis and our intent and ability to hold this investment to maturity, we do not consider this security to be other-than-temporarily impaired as of September 30, 2009.

The table below summarizes the amortized cost and fair values of debt securities, by contractual maturity (in thousands). Expected maturities may differ significantly from contractual maturities, as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2009
	Available-for-sale				Held-to-maturity
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
Debt securities
Within one year	$	6,160	$	6,180	$	-	$	-
After one year through three years		33,409		34,627		-		-
After three years through five years		9,880		11,304		-		-
After five years through ten years		9,915		10,558		-		-
After ten years		-		-		7,574		4,760

Mortgage-backed securities
After five years through ten years		26,102		25,748		-		-
After ten years		211,660		212,206		-		-
	$	297,126	$	300,623	$	7,574	$	4,760

The carrying value of securities pledged as collateral to secure public deposits and other purposes was $82,226 and $39,570 at September 30, 2009 and December 31, 2008, respectively.

Certain investments in the available-for-sale portfolio at September 30, 2009 are reported in the condensed consolidated statements of financial condition at an amount less than their amortized cost. The total fair value of these investments at September 30, 2009 was $42,965, which was 14.3% of our company's available-for-sale investment portfolio. The amortized cost basis of these investments was $45,693 at September 30, 2009. The declines in the available-for-sale portfolio primarily resulted from changes in interest rates, the widening of credit spreads and liquidity issues that have had a pervasive impact on the market.

Our investment in a held-to-maturity asset-backed security consists of pools of trust preferred securities related to banks. Unrealized losses were caused primarily by: 1) widening of credit spreads; 2) illiquid markets for collateralized debt obligations; 3) global disruptions in the credit markets; 4) increased supply of collateralized debt obligation secondary market securities from distressed sellers; and 5) difficult times in the banking sector, which has lead to a significant amount of bank failures. There have been no adverse changes to the estimated cash flows of these securities.

The following table is a summary of the amount of gross unrealized losses and the estimated fair value by length of time that the securities have been in an unrealized loss position at September 30, 2009 (in thousands):

	September 30, 2009
	Less than 12 months					12 months or more					Total
	Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value
Available-for-sale
Mortgage-backed securities:
Agency	$	-		$	-	$	(212	)	$	10,925	$	(212	)	$	10,925
Non-agency		(332	)		10,684		(1,908	)		9,783		(2,240	)		20,467
Commercial		-			-		(238	)		9,733		(238	)		9,733
Asset-backed securities		-			-		(38	)		1,840		(38	)		1,840
	$	(332	)	$	10,684	$	(2,396	)	$	32,281	$	(2,728	)	$	42,965

Our company's available-for-sale securities and held-to-maturity security are reviewed quarterly in accordance with its accounting policy for other-than-temporary impairment. Since the decline in fair value of the securities presented in the table above is not attributable to credit quality but to changes in interest rates, the widening of credit spreads, and the liquidity issues that have had a pervasive impact on the market and because we have the ability and intent to hold these investments until a fair value recovery or maturity, we do not consider these securities to be other-than-temporarily impaired as of September 30, 2009.

NOTE 7 - Bank Loans

The following table presents the balance and associated percentage of each major loan category in Stifel Bank's loan portfolio at September 30, 2009 and December 31, 2008 (in thousands, except percentages):

	September 30, 2009						December 31, 2008
	Balance			Percent			Balance			Percent
Consumer ⁽¹⁾	$	186,861			56.3	%	$	19,662			10.5	%
Residential real estate		53,395			16.1			58,778			31.4
Commercial real estate		37,603			11.3			38,446			20.6
Home equity lines of credit		33,279			10.0			28,612			15.3
Commercial		19,409			5.8			27,538			14.7
Construction and land		1,541			0.5			13,968			7.5
		332,088			100.0	%		187,004			100.0	%
Unamortized loan origination costs, net of loan fees		756						591
Loans in process		(847	)					(3,878	)
Allowance for loan losses		(2,488	)					(2,448	)
	$	329,509					$	181,269

⁽¹⁾ Includes stock-secured loans of $185,605 and $18,861 at September 30, 2009 and December 31, 2008, respectively.

Changes in the allowance for loan losses at Stifel Bank were as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008
Allowance for loan losses, beginning of period	$	3,060		$	2,009		$	2,448		$	1,685
Provision for loan losses		482			552			1,389			1,622
Charge-offs:
Construction and land		(829)			-			(859)			(493)
Commercial real estate		(188)			-			(294)			(253)
Real estate construction loans		(37)			(60)			(171)			(60)
Other		-			-			(25)			-
Total charge-offs		(1,054)			(60)			(1,349)			(806)
Recoveries		-			-			-			-
Allowance for loan losses, end of period	$	2,488		$	2,501		$	2,488		$	2,501

Net charge-offs to average bank loans outstanding, net		0.42	%		0.03	%		0.58	%		0.47	%

At September 30, 2009, Stifel Bank had $30,947 in mortgage loans held for sale. For the three months ended September 30, 2009 and 2008, Stifel Bank recognized a gain of $809 and $502, respectively, from the sale of loans originated for sale, net of fees and costs to originate these loans. For the nine months ended September 30, 2009 and 2008, Stifel Bank recognized a gain of $3,044 and $1,558, respectively, from the sale of loans originated for sale, net of fees and costs to originate these loans.

A loan is impaired when it is probable that interest and principal payments will not be made in accordance with the contractual terms of the loan agreement. At September 30, 2009, Stifel Bank had $1,907 of non-accrual loans that were more than 90 days past due, for which there was a specific allowance of $107. Further, Stifel Bank had $464 in troubled debt restructurings at September 30, 2009. At December 31, 2008, Stifel Bank had $573 in non-accrual loans, for which there was a specific reserve of $189. In addition, there were no accrual loans delinquent 90 days or more or troubled debt restructurings at December 31, 2008. Stifel Bank has no exposure to sub-prime mortgages. The gross interest income related to impaired loans, which would have been recorded had these loans been current in accordance with their original terms, and the interest income recognized on these loans during the year, were immaterial to the condensed consolidated financial statements.

At September 30, 2009 and December 31, 2008, Stifel Bank had loans outstanding to its executive officers, directors and significant stockholders and their affiliates in the amount of $0 and $1,578, respectively, and loans outstanding to other Stifel Financial Corp. executive officers, directors and significant stockholders and their affiliates in the amount of $42 and $48, respectively. Such loans and other extensions of credit were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral requirements) as those prevailing at the time for comparable transactions with other persons.

NOTE 8 - Goodwill and Intangible Assets

During the third quarter of 2009, we acquired 40 branches from the UBS Wealth Management Americas branch network, which created $26,512 of goodwill. The allocation of the purchase price is still preliminary and will be finalized upon completion of the analysis of the fair values of the UBS branches' assets and liabilities. The goodwill associated with the acquisition of these branches is reported in our Global Wealth Management segment at September 30, 2009. See Note 2 for additional information regarding our acquisition of the UBS branches.

Goodwill impairment is tested at the reporting unit level, which is an operating segment or one level below an operating segment on an annual basis. Our reporting units are Private Client Group, Fixed Income Capital Markets, Equity Capital Markets, and Stifel Bank. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit's fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment. No indicators of impairment were identified during our annual impairment testing as of July 31, 2009.

The carrying amount of goodwill and intangible assets attributable to each of our reporting units is presented in the following table (in thousands):

	December 31, 2008		Net additions		Impairment losses		September 30, 2009
Goodwill
Global Wealth Management
Private Client Group	$	58,373	$	29,828	$	-	$	88,201
Stifel Bank		16,685		-		-		16,685
	$	75,058	$	29,828	$	-	$	104,886

Capital Markets
Equity Capital Markets	$	41,868	$	868	$	-	$	42,736
Fixed Income Capital Markets		11,352		217		-		11,569
		53,220		1,085		-		54,305
	$	128,278	$	30,913	$	-	$	159,191

	December 31, 2008		Net additions		Amortization			September 30, 2009
Intangible assets
Global Wealth Management
Private Client Group	$	10,888	$	1,676	$	(1,472	)	$	11,092
Stifel Bank		1,354		-		(245	)		1,109
	$	12,242	$	1,676	$	(1,717	)	$	12,201

Capital Markets
Equity Capital Markets	$	2,657	$	-	$	(247	)	$	2,410
Fixed Income Capital Markets		1,085		-		(96	)		989
		3,742		-		(343	)		3,399
	$	15,984	$	1,676	$	(2,060	)	$	15,600

In addition to the goodwill recorded from our acquisition of the UBS branches during the third quarter of 2009, the changes in goodwill during the nine months ended September 30, 2009 primarily consist of payments for the contingent earn-out of $4,338 for the Ryan Beck acquisition. The change in intangible assets during the nine months ended September 30, 2009 primarily consist of purchase price adjustments related to our acquisition of Butler Wick on December 31, 2008.

Amortizable intangible assets consist of acquired customer lists, non-compete agreements, and core deposits that are amortized to expense over their contractual or determined useful lives. Intangible assets subject to amortization as of September 30, 2009 and December 31, 2008 were as follows (in thousands):

	September 30, 2009				December 31, 2008
	Gross carrying value		Accumulated Amortization		Gross carrying value		Accumulated Amortization
Customer lists	$	21,004	$	6,985	$	19,533	$	5,371
Non-compete agreement		2,789		2,317		2,584		2,115
Core deposits		2,157		1,048		2,157		804
	$	25,950	$	10,350	$	24,274	$	8,290

Amortization expense related to intangible assets was $661 and $743 for the three months ended September 30, 2009 and 2008, respectively. Amortization expense related to intangible assets was $2,060 and $2,337 for the nine months ended September 30, 2009 and 2008, respectively.

The weighted-average remaining lives of the following intangible assets at September 30, 2009 are: customer lists 6.6 years; core deposits 5.5 years; and non-compete agreements 2.2 years. As of September 30, 2009, we expect amortization expense in future periods to be as follows (in thousands):

Fiscal year
Remainder of 2009	$	658
2010		2,317
2011		2,104
2012		1,743
2013		1,575
Thereafter		7,203
	$	15,600

NOTE 9 - Short-Term Borrowings from Banks

Our short-term financing is generally obtained through the use of bank loans and securities lending arrangements. We borrow from various banks on a demand basis with company-owned and customer securities pledged as collateral. The value of the customer-owned securities used as collateral is not reflected in the condensed consolidated statements of financial condition. We maintain available ongoing credit arrangements with banks that provided a peak daily borrowing of $379,300 during the nine months ended September 30, 2009. There are no compensating balance requirements under these arrangements. At September 30, 2009, short-term borrowings from banks were $165,200 at an average rate of 1.02%, which were collateralized by company-owned securities valued at $216,631. At December 31, 2008, there were no short-term borrowings from banks. The average bank borrowing was $107,826 and $162,732 during the three months ended September 30, 2009 and 2008, respectively, at weighted average daily interest rates of 1.07%, and 2.41%, respectively. The average bank borrowing was $119,381 and $153,053 during the nine months ended September 30, 2009 and 2008, respectively, at weighted average daily interest rates of 0.97%, and 2.31%, respectively. At September 30, 2009 and December 31, 2008, Stifel Nicolaus had a stock loan balance of $47,837 and $16,987, respectively, at weighted average daily interest rates of 0.69% and 0.52%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $78,898 and $105,273 during the three months ended September 30, 2009 and 2008, respectively, at weighted average daily effective interest rates of 1.12%, and 2.05%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $54,820 and $131,562 during the nine months ended September 30, 2009 and 2008, respectively, at weighted average daily effective interest rates of 1.01%, and 2.58%, respectively. Customer-owned securities were utilized in these arrangements.

NOTE 10 - Bank Deposits

Deposits consist of money market and savings accounts, certificates of deposit and demand deposits. Deposits at September 30, 2009 and December 31, 2008 were as follows (in thousands):

	September 30, 2009		December 31, 2008
Money market and savings accounts	$	826,881	$	233,276
Certificates of deposit		19,118		24,102
Demand deposits (non-interest bearing)		15,647		23,162
Demand deposits (interest bearing)		13,382		4,258
	$	875,028	$	284,798

The weighted average interest rate on deposits was 0.4% and 0.4% at September 30, 2009 and December 31, 2008, respectively.

Scheduled maturities of certificates of deposit at September 30, 2009 and December 31, 2008 were as follows (in thousands):

	September 30, 2009		December 31, 2008
Certificates of deposit, less than $100:
Within one year	$	6,625	$	8,525
One to three years		1,956		3,562
Over three years		2,119		1,349
		10,700		13,436

Certificates of deposit, $100 and greater:
Within one year	$	5,713	$	7,455
One to three years		1,045		1,949
Over three years		1,660		1,262
		8,418		10,666

	$	19,118	$	24,102

At September 30, 2009 and December 31, 2008, the amount of deposits includes deposits of related parties, including $834,835 and $228,653, respectively, of brokerage customer's deposits from Stifel Nicolaus, and interest-bearing and time deposits of executive officers, directors and significant stockholders and their affiliates of $483 and $750, respectively. Such deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates) as those prevailing at the time for comparable transactions with other persons.

NOTE 11 - Derivative Instruments and Hedging Activities

We maintain a risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate volatility. Our goal is to manage sensitivity to changes in rates by hedging the maturity characteristics of Fed-funds based affiliated deposits, thereby limiting the impact on earnings. By using derivative instruments, we are exposed to credit and market risk on those derivative positions. We manage the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. Credit risk is equal to the extent of the fair value gain in a derivative, if the counterparty fails to perform. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes our company and, therefore, creates a repayment risk for our company. When the fair value of a derivative contract is negative, we owe the counterparty and therefore, have no repayment risk. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by senior management.

Stifel Bank uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts. As a result of interest rate fluctuations, hedged liabilities will appreciate or depreciate in market value. To the extent that there is a high degree of correlation between the hedged liability and the derivative instrument, the income or loss generated will generally offset the effect of this unrealized appreciation or depreciation.

The following table provides the notional values and fair values of Stifel Bank's derivative instruments as of September 30, 2009 (in thousands):

	As of September 30, 2009
			Asset derivatives			Liability derivatives
	Notional Value		Balance sheet location		Positive fair value	Balance sheet location		Negative fair value
Derivatives designated as hedging instruments under ASC 815:
Cash flow interest rate contracts	$	219,837	Other assets	$	-	*	$	(526	)
* Included in Accounts payable and accrued expenses.

Cash Flow Hedges

Stifel Bank has entered into interest rate swap agreements that effectively modify its exposure to interest rate risk by converting floating rate debt to a fixed rate debt over the next ten years. The agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of underlying principal amounts.

Any unrealized gains or losses related to cash flow hedging instruments are reclassified from other comprehensive loss into earnings in the same period or periods during which the hedged forecasted transaction affects earnings and are recorded in interest income or interest expense. Adjustments related to the ineffective portion of the cash flow hedging instruments are recorded in other income or other expense. There was no ineffectiveness recognized during the three and nine months ended September 30, 2009.

At September 30, 2009, we expect to reclassify $2,981 of net gains, after tax, on derivative instruments from cumulative other comprehensive income/(loss) to earnings during the next 12 months as terminated swaps are amortized and as interest payments and receipts on derivative instruments occur.

The following table shows the effect of our company's derivative instruments on the condensed consolidated statement of operations for the three and nine months ended September 30, 2009 (in thousands):

	Gain/(loss) recognized in OCI (effectiveness)			Location of gain/(loss) reclassified from OCI into income		Gain/(loss) reclassified from OCI into income		Location of gain/(loss) recognized in OCI (ineffectiveness)		Gain/(loss) recognized due to ineffectiveness
For the three months ended September 30, 2009:
Cash flow interest rate contracts	$	(684	)	Interest expense	$	(158	)	None	$	-

For the nine months ended September 30, 2009:
Cash flow interest rate contracts	$	(684	)	Interest expense	$	(158	)	None	$	-

Regulatory Capital-Related Contingency Features

Certain of Stifel Bank's derivative instruments contain provisions that require it to maintain its capital adequacy requirements. If Stifel Bank were to lose its status as "adequately capitalized," it would be in violation of those provisions, and the counterparties of the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with regulatory capital-related contingent features that are in a liability position on September 30, 2009, is $526. We have minimum collateral posting thresholds with certain of our counterparties; however, at September 30, 2009, we were not required to post collateral against our obligations under these agreements.

Counterparty Risk

In the event of counterparty default, our economic loss may be higher than the uncollateralized exposure of our derivatives if we were not able to replace the defaulted derivatives in a timely fashion. We monitor the risk that our uncollateralized exposure to each of our counterparties for interest-rate swaps will increase under certain adverse market conditions by performing periodic market stress tests. These tests evaluate the potential additional uncollateralized exposure we would have to each of these derivative counterparties assuming changes in the level of market rates over a brief time period.

NOTE 12 - Commitments and Contingencies

Concentration of Credit Risk

We provide investment, capital-raising and related services to a diverse group of domestic customers, including governments, corporations, and institutional and individual investors. Our company's exposure to credit risk associated with the non-performance of customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile securities markets, credit markets and regulatory changes. This exposure is measured on an individual customer basis and on a group basis for customers that share similar attributes. To alleviate the potential for risk concentrations, counterparty credit limits have been implemented for certain products and are continually monitored in light of changing customer and market conditions. As of September 30, 2009 and December 31, 2008, we did not have significant concentrations of credit risk with any one customer or counterparty, or any group of customers or counterparties.

Other Commitments

In the normal course of business, we enter into underwriting commitments. Settlement of transactions relating to such underwriting commitments, which were open at September 30, 2009, had no material effect on the condensed consolidated financial statements.

In connection with margin deposit requirements of The Options Clearing Corporation, we pledged customer-owned securities valued at $126,060 to satisfy the minimum margin deposit requirement of $106,674 at September 30, 2009.

In connection with margin deposit requirements of the National Securities Clearing Corporation, we deposited $28,600 in cash at September 30, 2009, which satisfied the minimum margin deposit requirements of $24,618.

We also provide guarantees to securities clearinghouses and exchanges under their standard membership agreement, which requires members to guarantee the performance of other members. Under the agreement, if another member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. Our company's liability under these agreements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the potential requirement for our company to make payments under these arrangements is considered remote. Accordingly, no liability has been recognized for these arrangements.

On June 23, 2009, we announced that Stifel Nicolaus had received acceptance from approximately 95 percent of its clients that are eligible to participate in its voluntary plan to repurchase 100 percent of their ARS. The eligible ARS were purchased by our retail clients before the collapse of the ARS market in February 2008. At September 30, 2009, we estimate that our retail clients held $114,795 of eligible ARS after issuer redemptions of $24,550 and Stifel repurchases of $40,575. The repurchased ARS are included in "Investments" in our consolidated statements of financial condition at September 30, 2009.

As part of the first phase of the voluntary repurchase plan, we repurchased at par the greater of ten percent or twenty-five thousand dollars of eligible ARS. After the initial repurchases, the voluntary plan provides for additional repurchases from eligible investors during each of the next three years. During phases two, three and four, we estimate that we will repurchase ARS of $21,150, $15,250 and $78,395, which will be completed by each June 30, of 2010, 2011 and 2012, respectively.

We have recorded a liability for our estimated exposure to the voluntary repurchase plan based upon a net present value calculation, which is subject to change and future events, including redemptions. ARS redemptions have been at par and we believe will continue to be at par over the voluntary repurchase period. Future periods' results may be affected by changes in estimated redemption rates or changes in the fair value of ARS.

In the ordinary course of business, Stifel Bank has commitments to extend credit in the form of commitments to originate loans, standby letters of credit, and lines of credit. See Note 16 for further details.

Note 13 - Legal Proceedings

Our company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from our securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive, or indeterminate damages. Our company and its subsidiaries are also involved in other reviews, investigations and proceedings by governmental and self-regulatory organizations regarding our business which may result in adverse judgments, settlements, fines, penalties, injunctions and other relief. We are contesting the allegations in these claims, and we believe that there are meritorious defenses in each of these lawsuits, arbitrations and regulatory investigations. In view of the number and diversity of claims against the company, the number of jurisdictions in which litigation is pending and the inherent difficulty of predicting the outcome of litigation and other claims, we cannot state with certainty what the eventual outcome of pending litigation or other claims will be. In our opinion, based on currently available information, review with outside legal counsel, and consideration of amounts provided for in our consolidated financial statements with respect to these matters, the ultimate resolution of these matters will not have a material adverse impact on our financial position. However, resolution of one or more of these matters may have a material effect on the results of operations in any future period, depending upon the ultimate resolution of those matters and depending upon the level of income for such period.

The regulatory investigations include inquiries from the SEC, FINRA and several state regulatory authorities requesting information concerning our activities with respect to auction rate securities ("ARS"), and inquiries from the SEC and a state regulatory authority requesting information relating to our role in investments made by five Southeastern Wisconsin school districts (the "school districts") in transactions involving collateralized debt obligations ("CDOs"). We intend to cooperate fully with the SEC, FINRA and the several states in these investigations.

Current claims include a civil lawsuit filed in the United States District Court for the Eastern District of Missouri (the "Missouri Federal Court") on August 8, 2008 seeking class action status for investors who purchased and continue to hold ARS offered for sale between June 11, 2003 and February 13, 2008, the date when most auctions began to fail and the auction market froze, which alleges misrepresentation about the investment characteristics of ARS and the auction markets (the "ARS Class Action"). We believe that, based upon currently available information and review with outside counsel, we have meritorious defenses to this lawsuit, and intend to vigorously defend all claims asserted therein.

We are also named in an action filed in the Circuit Court of Franklin County, Missouri, on March 12, 2009, by the Missouri Secretary of State concerning sales of ARS to our customers. The Secretary of State seeks relief, which includes requiring us to pay restitution with interest to those customers who purchased ARS from Stifel Nicolaus and continue to hold ARS, disgorgement of commissions and fees earned on the ARS