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STIFEL FINANCIAL CORP.

Form 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Condensed Consolidated Statements of Financial Condition as of September 30, 2010 (unaudited) and December 31, 2009	3
Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2010 and September 30, 2009 (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and September 30, 2009 (unaudited)	6
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3. Quantitative and Qualitative Disclosures About Market Risk	79
Item 4. Controls and Procedures	82
PART II - OTHER INFORMATION	83
Item 1. Legal Proceedings	83
Item 1A. Risk Factors	84
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	84
Item 6. Exhibits	85
Signatures	86

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PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition

See accompanying Notes to Consolidated Financial Statements.

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STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition (continued) 

See accompanying Notes to Consolidated Financial Statements.

4

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STIFEL FINANCIAL CORP.

Consolidated Statements of Operations

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

5

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STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows

(Unaudited) 

See accompanying Notes to Consolidated Financial Statements.

6

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STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows (continued)

(Unaudited) 

See accompanying Notes to Consolidated Financial Statements.

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STIFEL FINANCIAL CORP.

Notes to Consolidated Financial Statements

(in thousands, except share and per share amounts)

(Unaudited) 

NOTE 1 - Nature of Operations 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.

On July 1, 2010, we acquired Thomas Weisel Partners Group, Inc. ("TWPG"), an investment bank focused principally on the growth sectors of the economy, which generates revenues from three principal sources: investment banking, brokerage and asset management. The investment banking group is comprised of two primary categories of services: corporate finance and strategic advisory. The brokerage group provides equity sales and trading services to institutional investors, and offers brokerage, advisory services to high-net-worth individuals and corporate clients. The asset management group consists of: private investment funds, public equity investment products and distribution management. The employees of the investment banking, research and institutional brokerage businesses of Thomas Weisel Partners, LLC ("TWP"), a wholly-owned subsidiary of TWPG, were merged into Stifel Nicolaus during the third quarter of 2010. TWP will remain a wholly-owned broker-dealer subsidiary of the Parent. See Note 3 - Acquisition of Thomas Weisel Partners Group, Inc. for a discussion of the merger with TWPG.

Basis of Presentation

The 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 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 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, 2009 on file with the SEC.

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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 were not material.

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, 2009.

Recently Adopted Accounting Guidance

With the exception of those described below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2010, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2009, that are of significance, or potential significance, to our company's consolidated financial statements.

Deterioration of Credit Quality for Acquired Loans

In April 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("Update") No. 2010-18, "Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That is Accounted for as a Single Asset," which clarifies the accounting for acquired loans that have evidence of a deterioration in credit quality since origination (referred to as "Subtopic 310-30 loans"). Under this guidance, an entity may not apply troubled debt restructuring ("TDR") accounting guidance to individual Subtopic 310-30 loans that are part of a pool, even if the modification of those loans would otherwise be considered a troubled debt restructuring. Once a pool is established, individual loans should not be removed from the pool unless the entity sells, forecloses, or writes off the loan. Entities would continue to consider whether the pool of loans is impaired if expected cash flows for the pool change. Subtopic 310-30 loans that are accounted for individually would continue to be subject to TDR accounting guidance. A one-time election to terminate accounting for loans as a pool, which may be made on a pool-by-pool basis, is provided upon adoption of the guidance. This guidance is effective for interim and annual reporting periods ending on or after July 15, 2010 (September 30, 2010 for our company). The adoption of this new guidance did not have a material impact on our consolidated financial statements.

Consolidation

In February 2010, the FASB issued Update No. 2010-10, "Consolidation (Topic 810): Amendments for Certain Investment Funds," which provides for a deferral of the consolidation requirements of Topic 810 resulting from the issuance of FASB Statement No. 167 ("Statement 167"), "Amendments to FASB Interpretation No. 46R," for a reporting entity's interest in an entity that has all the attributes of an investment company; or for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies (the "deferral"). The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could potentially be significant to the entity. The deferral also does not apply to interests in securitization entities, asset-backed financing entities, or entities formerly considered qualifying special purpose entities. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities in Subtopic 810-10 (before the Statement 167 amendments) or other applicable consolidation guidance, such as the guidance for the consolidation of partnerships in Subtopic 810-20. This guidance does not defer the disclosure requirements of Topic 810, as amended. The amendments in this Update are effective as of the beginning of the first annual reporting period that begins after November 15, 2009 and for interim periods within the first annual reporting period (January 1, 2010 for our company). The adoption of this guidance permits us to defer the consolidation requirements of Topic 810 resulting from the issuance of Statement 167 for certain of these entities. See Note 24 - Variable Interest Entities.

Subsequent Events

In February 2010, the FASB issued Update No. 2010-09, "Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements," which amends certain provisions of the current guidance, including the elimination of the requirement for disclosure of  the date through which an evaluation of subsequent events was performed in issued and revised financial statements. This guidance was effective for the first interim and annual reporting periods beginning after issuance (March 31, 2010 for our company). The adoption of this new guidance did not have a material impact on our consolidated financial statements. See Note 25 - Subsequent Events.

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Fair Value of Financial Instruments

In January 2010, the FASB issued Update No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements," which amends the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a rollforward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for us with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for us with the reporting period beginning January 1, 2011. Other than requiring additional disclosures, the adoption of this new guidance did not have a material impact on our consolidated financial statements. See Note 5 - Fair Value of Financial Instruments.

Accounting for Transfers of Financial Assets

In June 2009, the FASB issued and subsequently codified guidance amending Topic 860 designed to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. Additionally, the new guidance eliminates the qualifying special-purpose entity ("QSPE") concept. The guidance became effective for us with the reporting period beginning January 1, 2010. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Guidance

Allowance for Credit Losses

In July 2010, the FASB issued Update No. 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses," which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this guidance, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio's risk and performance. This guidance is effective for interim and annual reporting periods after December 15, 2010 (December 31, 2010 for our company). We are currently evaluating the impact the new standard will have on our consolidated financial statements.

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NOTE 2 - Sale of Bank Branch

On April 30, 2010, Stifel Bank completed the sale of certain assets and the transfer of certain liabilities of Stifel Bank's branch office to Anheuser-Busch Employees' Credit Union, which resulted in a pre-tax loss of $401. As a result of the transaction, Anheuser-Busch Employees' Credit Union purchased $31,429 of loans as well as certain other assets, including the building and office equipment of $661, and assumed $17,621 of deposits, for a premium of 5.0%, or $881.

NOTE 3 - Acquisition of Thomas Weisel Partners Group, Inc.

On July 1, 2010, we completed the purchase of all the outstanding shares of common stock of TWPG, an investment banking firm based in San Francisco, California. The purchase was completed pursuant to the merger agreement dated April 25, 2010. As consideration, at the close of the merger, we issued approximately 3,719,000 shares, including approximately 780,000 exchangeable shares to the holders of TWPG common stock and approximately 1,905,000 restricted stock units to employees of TWPG, which resulted in purchase consideration of approximately $274,000. The fair value of the common stock and restricted stock units was determined using the market price of our common stock on the date of the merger. The merger furthers our company's mission of building the premier middle-market investment bank with significantly enhanced investment banking, research, and wealth management capabilities.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805 ("Topic 805"), "Business Combinations." Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. We recorded $124,125 of goodwill as an asset in the consolidated statement of financial condition, which has been allocated to our company's Global Wealth Management and Institutional Group segments. The allocation of the purchase price is preliminary and will be finalized upon completion of the analysis of the fair values of the net assets of TWPG on July 1, 2010 and the identified intangible assets. The final goodwill and intangible assets recorded on the consolidated statement of financial condition may differ from that reflected herein as a result of future measurement period adjustments. In management's opinion, the goodwill represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of TWPG's business and the reputation and expertise of TWPG in the investment banking business.

We have preliminarily identified $24,580 of intangible assets, consisting of customer relationships, investment banking backlog and trade name. Under Topic 805, merger-related transaction costs (such as advisory, legal, valuation and other professional fees) are not included as components of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred. Transaction costs of approximately $500 and $2,400 were incurred during the three and nine months ended September 30, 2010, respectively, and are included in "other operating expenses" on the consolidated statement of operations.

The following table summarizes the fair value of assets acquired and liabilities assumed at the date of the acquisition (in thousands):

Assets:
Cash and cash equivalents		$	80,642
Securities purchased under agreements to resell			14,005
Investments			45,395
Fixed assets			12,955
Goodwill			124,125
Intangible assets			24,580
Deferred tax asset, net			77,928
Other assets			39,702
Total assets acquired			419,332
Liabilities:
Notes payable			23,000
Accrued compensation			44,899
Accounts payable and accrued expenses			77,469
Total liabilities assumed			145,368
Net assets acquired		$	273,964

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TWPG's results of operations have been included in our financial statements prospectively from the date of acquisition. The operations of TWPG were integrated with Stifel Nicolaus immediately after the merger, therefore the results of the business, as acquired, does not exist as a discrete entity within our internal reporting structure. The following unaudited pro forma financial data assumes the acquisition had occurred at the beginning of each period presented. Pro forma results have been prepared by adjusting our historical results to include TWPG's results of operations adjusted for the following changes: amortization expense was adjusted as a result of acquisition-date fair value adjustments to intangible assets; interest expense was adjusted for revised debt structures; and the income tax effect of applying our statutory tax rates to TWPG's results. The unaudited pro forma results presented do not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable periods presented, nor does it indicate the results of operations in future periods. Additionally, the unaudited pro forma results do not include the impact of possible business model changes nor does it consider any potential impacts of current market conditions or revenues, reduction of expenses, asset dispositions, or other factors. The impact of these items could alter the following pro forma results:

		Three Months Ended				Nine Months Ended September 30,
(in thousands)		September 30, 2009				2010			2009
		(Unaudited)				(Unaudited)			(Unaudited)
Total net revenues		$	333,507			$	1,071,036		$	905,567
Net income/(loss)			11,604				(107,023	)		23,343
Earnings/(loss) per share:
Basic			0.34				(3.35	)		0.73
Diluted			0.28				(3.35	)		0.63

 NOTE 4 - Receivables from and Payables to Brokers, Dealers and Clearing Organizations

Amounts receivable from brokers, dealers and clearing organizations at September 30, 2010 and December 31, 2009, included (in thousands):

		September 30,  2010			December 31,  2009
Deposits paid for securities borrowed		$	164,833		$	147,325
Securities failed to deliver			68,916			64,626
Receivable from clearing organizations			3,763			97,658
		$	237,512		$	309,609

Amounts payable to brokers, dealers and clearing organizations at September 30, 2010, and December 31, 2009, included (in thousands):

		September 30,  2010			December 31,  2009
Securities failed to receive		$	108,803		$	73,793
Deposits received from securities loaned			101,907			16,667
Payable to clearing organizations			37,939			-
		$	248,649		$	90,460

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.

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NOTE 5 - 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, trading securities sold, but not yet purchased and derivative contracts.

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 money market funds and other highly liquid investments with original maturities of three months or less. Actively traded money market funds are measured at their net asset value and classified as Level 1.

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 1. Level 1 financial instruments include highly liquid instruments with quoted prices such as certain U.S. treasury bonds, corporate bonds, certain 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 2. 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 2 financial instruments generally include certain U.S. government agency securities, certain corporate bonds, certain municipal securities, asset-backed securities, and mortgage-backed securities.

Level 3 financial instruments have little to no pricing observability. 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 3 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 3 asset-backed securities are valued using cash flow models that utilize unobservable inputs.

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Investments

Assets included in this category generally include investments in public companies, general and limited partnership interests in private equity funds, and auction-rate securities ("ARS") for which the market has been dislocated and largely ceased to function. Investments in public companies are valued based on quoted prices in active markets and reported in Level 1. ARS with unobservable inputs are reported as Level 3 assets. Investments in such securities are valued using certain observable inputs and represent management's best estimate of fair value, where the inputs require significant management judgment.

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.

Trading securities sold but not yet purchased

Trading securities sold but not purchased are recorded at fair value based on quoted prices in active markets and other observable market data are reported as Level 1. Trading securities owned 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 2. 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 3 financial instruments have little to no pricing observability. 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 3 financial instruments to include certain corporate bonds where there was less frequent or nominal market activity or when we were able to obtain only a single broker quote.

Securities sold but not yet purchased

Securities sold but not purchased are recorded at fair value based on quoted prices in active markets and other observable market data are reported as Level 1. Securities owned include corporate equity securities listed in active markets.

Derivative contracts

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 2 within the fair value hierarchy and are used to value interest rate swaps.

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The following table summarizes the valuation of our financial instruments by pricing observability levels as of September 30, 2010 and December 31, 2009 (in thousands):

		September 30, 2010
		Total			Level 1			Level 2			Level 3
Assets:
Cash equivalents		$	27,217		$	27,217		$	-		$	-
Trading securities owned:
U.S. government agency securities			100,495			-			100,495			-
U.S. government securities			15,369			15,369			-			-
Corporate securities:
Fixed income securities			372,980			142,945			215,065			14,970
Equity securities			42,144			41,997			147			-
State and municipal securities			114,572			-			114,572			-
Total trading securities owned			645,560			200,311			430,279			14,970
Available-for-sale securities:
U.S. government agency securities			115,165			-			115,165			-
State and municipal securities			14,223			-			14,223			-
Mortgage-backed securities:
Agency			530,151			-			530,151			-
Non-agency			32,698			-			32,698			-
Commercial			47,892			-			47,892			-
Corporate fixed income securities			77,973			67,414			10,559			-
Asset-backed securities			12,025			-			12,025			-
Total available-for-sale securities			830,127			67,414			762,713			-
Investments:
Corporate equity securities			3,492			3,492			-			-
Mutual funds			30,344			30,344			-			-
U.S. government securities			7,016			7,016			-			-
Auction rate securities:
Equity securities			62,044			-			-			62,044
Municipal securities			23,499			-			-			23,499
Other			40,394			1,788			2,047			36,559
Total investments			166,789			42,640			2,047			122,102
		$	1,669,693		$	337,582		$	1,195,039		$	137,072
Liabilities:
Trading securities sold, but not yet purchased:
U.S. government agency securities		$	1,291		$	-		$	1,291		$	-
U.S. government securities			150,260			150,260			-			-
Corporate securities:
Fixed income securities			144,894			75,473			69,421			-
Equity securities			21,533			21,533			-			-
State and municipal securities			315			-			315			-
Total trading securities sold, but not yet purchased			318,293			247,266			71,027			-
Securities sold, but not yet purchased (1)			17,086			17,086			-			-
Derivative contracts (1)			14,251			-			14,251			-
		$	349,630		$	264,352		$	85,278		$	-
(1) Included in "Accounts payable and accrued expenses" on the consolidated statements of financial condition.

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		December 31, 2009
		Total			Level 1			Level 2			Level 3
Assets:
Cash equivalents		$	3,824		$	3,824		$	-		$	-
Trading securities owned:
U.S. government agency securities			158,724			-			158,724			-
U.S. government securities			20,254			20,254			-			-
Corporate securities:
Fixed income securities			209,950			36,541			172,166			1,243
Equity securities			18,505			18,505			-			-
State and municipal securities			47,458			-			47,458			-
Total trading securities owned			454,891			75,300			378,348			1,243
Available-for-sale securities:
U.S. government agency securities			1,011			-			1,011			-
State and municipal securities			992			-			992			-
Mortgage-backed securities:
Agency			433,019			-			433,019			-
Non-agency			38,466			-			38,466			-
Commercial			47,640			-			47,640			-
Corporate fixed income securities			42,890			32,204			10,686			-
Asset-backed securities			14,470			-			11,777			2,693
Total available-for-sale securities			578,488			32,204			543,591			2,693
Investments:
Corporate equity securities			2,671			2,671			-			-
Mutual funds			28,597			28,597			-			-
U.S. government securities			7,266			7,266			-			-
Auction rate securities:
Equity securities			46,297			-			-			46,297
Municipal securities			9,706			-			-			9,706
Other			6,536			672			438			5,426
Total investments			101,073			39,206			438			61,429
		$	1,138,276		$	150,534		$	922,377		$	65,365
Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities		$	127,953		$	127,953		$	-		$	-
U.S. government agency securities			1,537			-			1,537			-
Corporate securities:
Fixed income securities			122,491			11,744			110,747			-
Equity securities			25,057			25,057			-			-
State and municipal securities			332			-			332			-
Total trading securities sold, but not yet purchased			277,370			164,754			112,616			-
Derivative contracts*			78			-			78			-
		$	277,448		$	164,754		$	112,694		$	-
* Included in "Accounts payable and accrued expenses" on the consolidated statements of financial condition.

 

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 The following table summarizes the changes in fair value carrying values associated with Level 3 financial instruments during the three and nine months ended September 30, 2010 (in thousands):

	Three Months Ended September 30, 2010
	Financial Assets															Financial Liabilities**
						Investments
	Corporate Fixed Income Securities*			Asset-backed Securities			Auction Rate Securities - Equity			Auction Rate Securities - Municipal			Other			Corporate Fixed Income Securities
Balance at June 30, 2010	$	9,124		$	-		$	62,846		$	10,788		$	6,935		$	2,355
Unrealized gains/(losses):
Included in changes in net assets		158			-			48			273			(1,648	)		-
Included in OCI		-			-			-			-			-			-
Realized gains/(losses)		502						-			6			2,892			(15	)
Purchases, issuances, settlements, net		5,186			-			(850	)		12,432			28,380			(2,340	)
Level III transfers:
Into level III		-			-			-			-			-			-
Out of level III		-			-			-			-			-			-
Net change		5,846			-			(802	)		12,711			29,624			(2,355	)
Balance at September 30, 2010	$	14,970		$	-		$	62,044		$	23,499		$	36,559		$	-
* Included in "Trading securities owned" on the consolidated statements of financial condition.
** Included in "Trading securities sold, but not yet purchased" on the consolidated statements of financial condition.

 

	Nine Months Ended September 30, 2010
	Financial Assets															Financial Liabilities**
						Investments
	Corporate Fixed Income Securities*			Asset-backed Securities			Auction Rate Securities - Equity			Auction Rate Securities - Municipal			Other			Corporate Fixed Income Securities
Balance at December 31, 2009	$	1,243		$	2,693		$	46,297		$	9,706		$	5,426		$	-
Unrealized gains/(losses):
Included in changes in net assets		252			-			(928	)		200			(1,647	)		50
Included in OCI		-			887			-			-			-			-
Realized gains/(losses)		1,540			-			-			11			2,892			68
Purchases, issuances, settlements, net		11,801			(3,580	)		16,675			13,582			29,888			(1,008	)
Level III transfers:
Into level III		135			-			-			-			-			890
Out of level III		(1	)		-			-			-			-			-
Net change		13,727			(2,693	)		15,747			13,793			31,133			-
Balance at September 30, 2010	$	14,970		$	-		$	62,044		$	23,499		$	36,559		$	-
* Included in "Trading securities owned" on the consolidated statements of financial condition.
** Included in "Trading securities sold, but not yet purchased" on the consolidated statements of financial condition.

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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 1 or Level 2 valued assets or liabilities. The changes to our company's Level 3 classified instruments were principally a result of: purchases of ARS from our customers, principal pay-downs of our available-for-sale securities, realized and unrealized gains and losses, and redemptions of ARS at par during the three and nine months ended September 30, 2010. There were no changes in unrealized gains/(losses) recorded in earnings for the three and nine months ended September 30, 2010 relating to Level 3 assets still held at September 30, 2010. Investment gains and losses of our investments are included in our consolidated statements of operations as a component of other income.

Transfers within the Fair Value Hierarchy

We assess our financial instruments on a quarterly basis to determine the appropriate classification within the fair value hierarchy, as defined by Topic 820. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transfers of financial instruments among the levels are deemed to occur at the end of the reporting period. There were no material transfers between our Level 1 and Level 2 classified instruments during the three and nine months ended September 30, 2010.

The following is a summary of the carrying values and estimated fair values of certain financial instruments as of September 30, 2010 and December 31, 2009 (in thousands):

		September 30, 2010						December 31, 2009
		Carrying value			Estimated fair value			Carrying value			Estimated fair value
Financial assets:
Cash and cash equivalents		$	213,752		$	213,752		$	161,820		$	161,820
Cash segregated for regulatory purposes (1)			20			20			19			19
Securities purchased under agreements to resell (1)			136,075			136,075			124,854			124,854
Trading securities owned			645,560			645,560			454,891			454,891
Available-for-sale securities			830,127			830,127			578,488			578,488
Held-to-maturity securities			50,176			43,626			7,574			4,276
Loans held for sale (1)			106,788			106,788			91,117			91,117
Bank loans			362,567			356,227			335,157			332,437
Investments			166,789			166,789			109,403			109,403
Financial liabilities:
Securities sold under agreements to repurchase (1)		$	98,945		$	98,945		$	122,533		$	122,533
Non-interest-bearing deposits			19,909			20,183			19,521			19,013
Interest-bearing deposits			1,356,075			1,355,704			1,027,690			1,027,403
Federal Home Loan Bank advances (1)			-			-			2,000			2,000
Trading securities sold but not yet purchased			318,293			318,293			277,370			277,370
Securities sold but not yet purchased (2)			17,086			17,086			-			-
Derivative contracts (2)			14,251			14,251			78			78
Liabilities subordinated to the claims of general creditors			8,241			7,676			10,081			9,299
(1) Carrying value approximates fair value.
(2) Included in "Accounts payable and accrued expenses" on the consolidated statements of financial condition.

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The following describes the valuation techniques used in estimating the fair value of those financial instruments, not previously described above, as of September 30, 2010 and December 31, 2009.

Financial Assets

Securities purchased under agreements to resell

Securities purchased under agreements to resell are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at September 30, 2010 and December 31, 2009 approximate fair value.

Held-to-maturity securities

Securities held to maturity are recorded at amortized cost based on our company's positive intent and ability to hold these securities to maturity. Securities held to maturity include asset-backed securities, consisting of collateralized debt obligation securities and ARS. The fair value is determined using several factors; however, primary weight is given to discounted cash flow modeling techniques that incorporated an estimated discount rate based upon recent observable debt security issuances with similar characteristics.

The decrease in fair value below the carrying amount at September 30, 2010 and December 31, 2009 is primarily due to unrealized losses in our asset-backed security that were caused by: illiquid markets for collateralized debt obligations; global disruptions in the credit markets; increased supply of collateralized debt obligation secondary market securities from distressed sellers; and difficult times in the banking sector, which has lead to a significant amount of bank failures.

Loans held for sale

Loans held for sale consist of fixed-rate and adjustable-rate residential real estate mortgage loans intended for sale. Loans held for sale are stated at lower of cost or fair value. Fair value is determined based on prevailing market prices for loans with similar characteristics or on sale contract prices. The carrying value as of September 30, 2010 and December 31, 2009 approximates fair value.

Bank Loans

The fair values of mortgage loans and commercial loans were estimated using a discounted cash flow method, a form of the income approach. Discount rates were determined considering rates at which similar portfolios of loans would be made under current conditions and considering liquidity spreads applicable to each loan portfolio based on the secondary market.

Financial liabilities

Non-interest bearing deposits

The fair value of non interest-bearing deposits was estimated using a discounted cash flow method.

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Interest bearing deposits

The fair values of money market and savings accounts were the amounts payable on demand at September 30, 2010 and December 31, 2009, and therefore carrying value approximates fair value. The fair value of other interest-bearing deposits, including certificates of deposit, was calculated by discounting the future cash flows using discount rates based on the expected current market rates for similar products with similar remaining terms.

Securities sold under agreements to repurchase

Securities sold under agreements to repurchase are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at September 30, 2010 and December 31, 2009 approximate fair value.

Liabilities subordinated to claims of general creditors

The fair value of subordinated debt was measured using the interest rates commensurate with borrowings of similar terms.

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 6 - 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, 2010 and December 31, 2009, are as follows (in thousands):

		September 30, 2010			December 31, 2009
Trading securities owned:
U.S. government agency securities		$	100,495		$	158,724
U.S. government securities			15,369			20,254
Corporate securities:
Fixed income securities			372,980			209,950
Equity securities			42,144			18,505
State and municipal securities			114,572			47,458
		$	645,560		$	454,891
Trading securities sold, but not yet purchased:
U.S. government agency securities		$	1,291		$	1,537
U.S. government securities			150,260			127,953
Corporate securities:
Fixed income securities			144,894			122,491
Equity securities			21,533			25,057
State and municipal securities			315			332
		$	318,293		$	277,370

At September 30, 2010 and December 31, 2009, trading securities owned in the amount of $406,930 and $287,683, respectively, were pledged as collateral for our repurchase agreements, and short-term borrowings from banks.

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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 7 - 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, 2010 and December 31, 2009 (in thousands):

		September 30, 2010
		Amortized cost			Gross unrealized gains (1)			Gross unrealized losses (1)			Estimated fair value
Available-for-sale
U.S. government securities		$	114,970		$	195		$	-		$	115,165
State and municipal securities			13,959			264			-			14,223
Mortgage-backed securities:
Agency			521,204			9,464			(517	)		530,151
Non-agency			32,853			886			(1,041	)		32,698
Commercial			46,072			1,820			-			47,892
Corporate fixed income securities			75,714			2,259			-			77,973
Asset-backed securities			11,267			758			-			12,025
		$	816,039		$	15,646		$	(1,558	)	$	830,127
Held-to-maturity
Asset-backed securities		$	7,245			-			(3,932	)	$	3,313
Municipal auction rate securities			42,931			-			-			42,931
		$	50,176			-			(3,932	)	$	46,244

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

 

		December 31, 2009
		Amortized cost			Gross unrealized gains (1)			Gross unrealized losses (1)			Estimated fair value
Available-for-sale
U.S. government securities		$	998		$	13		$	-		$	1,011
State and municipal securities			960			32			-			992
Mortgage-backed securities:
Agency			432,820			1,880			(1,681	)		433,019
Non-agency			39,905			683			(2,122	)		38,466
Commercial			47,274			683			(317	)		47,640
Corporate fixed income securities			40,788			2,102			-			42,890
Asset-backed securities			13,235			1,235			-			14,470
		$	575,980		$	6,628		$	(4,120	)	$	578,488
Held-to-maturity
Asset-backed securities		$	7,574			-			(3,298	)	$	4,276

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

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During the three and nine months ended September 30, 2010, available-for-sale securities with an aggregate par value of $50,052 and $55,920, respectively, were called by the issuing agencies or matured resulting in no gains or losses recorded through the consolidated statement of operations. Additionally, during the three and nine months ended September 30, 2010, Stifel Bank received principal payments on mortgage-backed securities of $37,801 and $95,011, respectively. During the three months ended September 30, 2010 and 2009, unrealized gains, net of deferred taxes, of $109 and $5,859, respectively, were recorded in "Accumulated other comprehensive income." During the nine months ended September 30, 2010 and 2009, unrealized gains, net of deferred taxes, of $7,641 and $7,859, respectively, were recorded in "Accumulated other comprehensive income."

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, 2010
		Available-for-sale						Held-to-maturity
		Amortized cost			Estimated fair value			Amortized cost			Estimated fair value
Debt securities
Within one year		$	15,921		$	16,068		$	-		$	-
After one year through three years			134,749			135,990			-			-
After three years through five years			46,831			47,947			-			-
After five years through ten years			5,409			6,150			-			-
After ten years			13,000			13,231			50,176			46,244
Mortgage-backed securities
After three years through five years			9,868			10,424			-			-
After five years through ten years			22,184			22,648			-			-
After ten years			568,077			577,669			-			-
		$	816,039		$	830,127		$	50,176		$	46,244

The carrying value of securities pledged as collateral to secure public deposits and other purposes was $60,572 and $76,502 at September 30, 2010 and December 31, 2009, respectively.

Certain investments in the available-for-sale portfolio at September 30, 2010 are reported in the consolidated statements of financial condition at an amount less than their amortized cost. The total fair value of these investments at September 30, 2010 was $61,743, which was 7.4% of our company's available-for-sale investment portfolio. The amortized cost basis of these investments was $63,301 at September 30, 2010. The declines in the available-for-sale portfolio primarily resulted from changes in interest rates 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 and ARS. Unrealized losses in our asset-backed security was caused primarily by: 1) illiquid markets for collateralized debt obligations; 2) global disruptions in the credit markets; 3) increased supply of collateralized debt obligation secondary market securities from distressed sellers; and 4) difficult times in the banking sector, which has led to a significant amount of bank failures.

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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, 2010 (in thousands):

		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		$	(517	)	$	50,235		$	-		$	-		$	(517	)	$	50,235
Non-agency			-			-			(1,041	)		11,508			(1,041	)		11,508
		$	(517	)	$	50,235		$	(1,041	)	$	11,508		$	(1,558	)	$	61,743

Other-Than-Temporary Impairment

We evaluate our investment securities portfolio on a quarterly basis for other-than-temporary impairment ("OTTI"). We assess whether OTTI has occurred when the fair value of a debt security is less than the amortized cost basis at the balance sheet date. Under these circumstances, OTTI is considered to have occurred (1) if we intend to sell the security; (2) if it is more likely than not we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. For securities that we do not expect to sell or it is not more likely than not to be required to sell, credit-related OTTI, represented by the expected loss in principal, is recognized in earnings, while noncredit-related OTTI is recognized in other comprehensive income. For securities which we expect to sell, all OTTI is recognized in earnings.

Non-credit-related OTTI results from other factors, including increased liquidity spreads and extension of the security. Presentation of OTTI is made in the income statement on a gross basis with a reduction for the amount of OTTI recognized in OCI. We applied the related OTTI guidance on the debt security types listed below.

Pooled-trust-preferred securities represent collateralized debt obligations (CDOs) backed by a pool of debt securities issued by financial institutions. The collateral generally consisted of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full cash flow analysis was used to estimate fair values and assess impairment for each security within this portfolio. We utilized an internal resource with industry experience in pooled trust preferred securities valuations to provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. Relying on cash flows was necessary because there was a lack of observable transactions in the market and many of the original sponsors or dealers for these securities were no longer able to provide a fair value that was compliant with Topic 820.

Based on the evaluation, we recognized a credit-related other-than-temporary impairment of $773 and $939 through earnings for the three and nine months ended September 30, 2010, respectively. During the quarter ended September 30, 2010, the remaining balance of other comprehensive income related to the CDO was written off and consequently we reduced the amortized cost of the security.

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As of September 30, 2010, management has evaluated all other investment securities with unrealized losses and all non-marketable securities for impairment. The unrealized losses were primarily the result of wider liquidity spreads on asset-backed securities and, additionally, increased market volatility on non-agency mortgage and asset-backed securities that are backed by certain mortgage loans. The fair values of these assets have been impacted by various market conditions. In addition, the expected average lives of the asset-backed securities backed by trust preferred securities have been extended, due to changes in the expectations of when the underlying securities would be repaid. The contractual terms and/or cash flows of the investments do not permit the issuer to settle the securities at a price less than the amortized cost. We have reviewed our asset-backed portfolio and do not believe there is additional OTTI from these securities other than what has already been recorded.

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 and the liquidity issues that have had a pervasive impact on the market and because we do not have the intent to sell these securities and it is not likely we would be required to sell these securities until a fair value recovery or maturity, we do not consider these securities to be other-than-temporarily impaired as of September 30, 2010.

NOTE 8 - 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, 2010 and December 31, 2009 (in thousands, except percentages):

		September 30, 2010							December 31, 2009
		Balance			Percent				Balance			Percent
Consumer (1)		$	245,239			66.8	%		$	227,436			67.8	%
Residential real estate			52,290			14.2				52,086			15.5
Commercial			34,405			9.4				11,294			3.4
Home equity lines of credit			32,638			8.9				33,369			10.0
Commercial real estate			2,075			0.6				10,152			3.0
Construction and land			524			0.1				952			0.3
			367,171			100.0	%			335,289			100.0	%
Unamortized loan origination costs, net of loan fees			775							1,556
Loans in process			(3,556	)						14
Allowance for loan losses			(1,823	)						(1,702	)