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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 June 30, 2011 (unaudited) and December 31, 2010	3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and June 30, 2010 (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and June 30, 2011, 2010 (unaudited)	6
Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3. Quantitative and Qualitative Disclosures About Market Risk	67
Item 4. Controls and Procedures	70
PART II - OTHER INFORMATION	71
Item 1. Legal Proceedings	71
Item 1A. Risk Factors	71
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 6. Exhibits	73
Signatures	74

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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) 

See accompanying Notes to Consolidated Financial Statements.

7

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 STIFEL FINANCIAL CORP.

Notes to Consolidated Financial Statements 

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"), Stifel Bank & Trust ("Stifel Bank"), Stifel Nicolaus Limited ("SN Ltd"), Century Securities Associates, Inc. ("CSA"), Stifel Nicolaus Canada, Inc. ("SN Canada"), Thomas Weisel Partners LLC ("TWP"), and Thomas Weisel Partners International Limited ("TWPIL"),  is principally engaged in retail brokerage; securities trading; investment banking; investment advisory; retail, consumer, and commercial banking; and related financial services. Although we have offices throughout the United States, two Canadian cities, 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 and 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 TWP, a wholly owned subsidiary of TWPG, were transitioned into Stifel Nicolaus during the third quarter of 2010. TWP remains a wholly owned broker-dealer subsidiary of the Parent.

Basis of Presentation

The consolidated financial statements include Stifel Financial Corp. and its wholly owned subsidiaries, principally Stifel Nicolaus and Stifel Bank. All material 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, 2010 on file with the SEC.

On April 5, 2011, we effected a three-for-two stock split to shareholders of record as of March 22, 2011. All share and per share information has been retroactively adjusted to reflect the stock split.

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.

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, 2010.

Consolidation Policies

The consolidated financial statements include the accounts of Stifel Financial Corp. and its subsidiaries. We also have investments or interests in other entities for which we must evaluate whether to consolidate by determining whether we have a controlling financial interest or are considered to be the primary beneficiary. In determining whether to consolidate these entities or not, we determine whether the entity is a voting interest entity or a variable interest entity ("VIE").

Voting Interest Entity. Voting interest entities are entities that have (i) total equity investment at risk sufficient to fund expected future operations independently, and (ii) equity holders who have the obligation to absorb losses or receive residual returns and the right to make decisions about the entity's activities. We consolidate voting interest entities when we determine that there is a controlling financial interest, usually ownership of all, or a majority of, the voting interest.

Variable Interest Entity. VIEs are entities that lack one or more of the characteristics of a voting interest entity. We are required to consolidate VIEs in which we are deemed to be the primary beneficiary. The primary beneficiary is defined as the entity that has a variable interest, or a combination of variable interests, that maintains control and provides benefits or will either: (i) absorb a majority of the VIEs expected losses, (ii) receive a majority of the VIEs expected returns, or (iii) both.

We determine whether we are the primary beneficiary of a VIE by first performing a qualitative analysis of the VIE's control structure, expected losses and expected residual returns. This analysis includes a review of, among other factors, the VIE's capital structure, contractual terms, which interests create or absorb variability, related party relationships, and the design of the VIE. Where qualitative analysis is not conclusive, we perform a quantitative analysis. We reassess our initial evaluation of an entity as a VIE and our initial determination of whether we are the primary beneficiary of a VIE upon the occurrence of certain reconsideration events. See Note 25 for additional information on variable interest entities.

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NOTE 2 - Accounting Guidance

Recently Adopted Accounting Guidance

Allowance for Credit Losses

In July 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("Update") No. 2010-20, "Receivables (Topic 310): 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 are 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 ending on or after December 15, 2010 (December 31, 2010 for our company). In January 2011, the FASB issued Update 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures About Troubled Debt Restructurings in Update No. 2010-20," which temporarily delayed the effective date of the disclosures about troubled debt restructurings until interim and annual reporting periods beginning on or after June 15, 2011 (July 1, 2011 for our company). Other than requiring additional disclosures, the adoption of this new guidance did not have a material impact on our consolidated financial statements. See Note 8 - Bank Loans.

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 for the disclosure on the rollforward activities for Level 3 fair value measurements became 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.

Recently Issued Accounting Guidance

Comprehensive Income

In June 2011, the FASB issued Update No. 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income," which allows for the presentation of  total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, the guidance eliminates the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011 (January 1, 2012 for our company). While the adoption will impact where we disclose the components of other comprehensive income in our consolidated financial statements, we do not expect the adoption to have a material impact on those consolidated financial statements.

Fair Value of Financial Instruments

In May 2011, the FASB issued Update No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," which generally aligns the principals of measuring fair value and for disclosing information about fair value measurements with International Financial Reporting Standards. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011 (January 1, 2012 for our company). We are currently evaluating the impact the new guidance will have on our consolidated financial statements.

Reconsideration of Effective Control for Repurchase Agreements

In April 2011, the FASB issued Update No. 2011-03, "Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements," which removes the requirement to consider whether sufficient collateral is held when determining whether to account for repurchase agreements and other agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before their maturity as sales or as secured financings. This guidance is effective for interim and annual reporting periods beginning on or after December 15, 2011 (January 1, 2012 for our company). We do not expect the adoption to have a material impact on our consolidated financial statements.

Troubled Debt Restructurings

In April 2011, the FASB issued Update No. 2011-02, "Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring," which clarifies existing guidance to provide assistance in determining whether a modification of the terms of a receivable meets the definition of a troubled debt restructuring. This guidance is effective for interim and annual reporting periods beginning on or after June 15, 2011 (July 1, 2011 for our company) and should be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption (January 1, 2011 for our company). While the adoption may require additional disclosures related to troubled debt restructurings, we do not expect the adoption to have a material impact on our consolidated financial statements.

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NOTE 3 - Acquisitions

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. We issued shares of common stock, including exchangeable shares, to holders of TWPG common stock and restricted stock units to employees of TWPG as consideration for the merger. 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.

TWPG's results of operations have been included in our consolidated financial statements prospectively from the date of acquisition. The investment banking, research, and institutional brokerage businesses of TWPG were integrated with Stifel Nicolaus immediately after the merger; therefore, the revenues, expenses, and net income of the integrated businesses are not distinguishable within the results of our company. 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 adjusted as a result of acquisition-date fair value adjustments to intangible assets; interest expense 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 June 30,  2010			Six Months Ended June 30,  2010
(in thousands)		(Unaudited)			(Unaudited)
Total net revenues		$	366,471		$	730,667
Net loss			(101,312	)		(51,738	)
Loss per share:
Basic		$	(1.91	)	$	(0.98	)
Diluted		$	(1.91	)	$	(0.98	)

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

Amounts receivable from brokers, dealers, and clearing organizations at June 30, 2011 and December 31, 2010, included (in thousands):

		June 30,  2011			December 31,  2010
Deposits paid for securities borrowed		$	219,465		$	94,709
Securities failed to deliver			82,121			74,991
Receivable from clearing organizations			9,214			78,007
		$	310,800		$	247,707

Amounts payable to brokers, dealers, and clearing organizations at June 30, 2011 and December 31, 2010, included (in thousands):

		June 30,  2011			December 31,  2010
Deposits received from securities loaned		$	114,965		$	27,907
Securities failed to receive			99,668			78,499
Payable to clearing organizations			7,620			8,463
		$	222,253		$	114,869

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 derivatives.

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 on a recurring basis:

Cash Equivalents

Cash equivalents include highly liquid investments with original maturities of three months or less. Actively traded money market funds are measured at their net asset value, which approximates fair 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 equities listed in active markets, certain corporate obligations, and U.S. treasury securities.

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 mortgage-backed securities, corporate obligations infrequently traded, certain government and municipal obligations, asset-backed securities, and certain equity securities not actively traded.

Level 3 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 3 financial instruments to include certain corporate obligations with unobservable pricing inputs, airplane trust certificates, and certain municipal obligations, which include ARS. Investments in certain corporate obligations, airplane trust certificates and municipal obligations with unobservable inputs are valued using management's best estimate of fair value, where the inputs require significant management judgment. ARS are valued based upon our expectations of issuer redemptions and using internal discounted cash flow models that utilize unobservable inputs.

Investments

Investments valued at fair value include ARS, investments in mutual funds, U.S. treasury securities, investments in public companies, private equity securities, partnerships, and warrants of public or private companies.

Investments in certain public companies, mutual funds and U.S. treasury securities are valued based on quoted prices in active markets and reported in Level 1. Investments in certain private equity securities and partnerships with unobservable inputs and ARS for which the market has been dislocated and largely ceased to function are reported as Level 3 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. ARS are valued based upon our expectations of issuer redemptions and using internal discounted cash flow models.

Investments in partnerships and other investments include our general and limited partnership interests in investment partnerships and direct investments in non-public companies. These interests are carried at estimated fair value. The net assets of investment partnerships consist primarily of investments in non-marketable securities. The underlying investments held by such partnerships and direct investments in non-public companies are valued based on the estimated fair value ultimately determined by us in our capacity as general partner or investor and, in the case of an investment in an unaffiliated investment partnership, are based on financial statements prepared by an unaffiliated general partner.

Warrants are valued based upon the Black-Scholes option-pricing model that uses discount rates and stock volatility factors of comparable companies as inputs. These inputs are subject to management judgment to account for differences between the measured investment and comparable companies and are reported as Level 3 assets.

The valuation of these investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity, and long-term nature of these assets. As a result, these values cannot be determined with precision and the calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument.

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 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 June 30, 2011 and December 31, 2010 (in thousands):

		June 30, 2011
		Total			Level 1			Level 2			Level 3
Assets:
Cash equivalents		$	7,992		$	7,992		$	-		$	-
Trading securities owned:
U.S. government agency securities			141,510			-			141,510			-
U.S. government securities			25,975			25,975			-			-
Corporate securities:
Fixed income securities			290,673			70,694			201,637			18,342
Equity securities			40,789			40,467			322			-
State and municipal securities			105,017			-			105,017			-
Total trading securities owned			603,964			137,136			448,486			18,342
Available-for-sale securities:
State and municipal securities			60,225			-			15,547			44,678
Mortgage-backed securities:
Agency			572,650			-			572,650			-
Commercial			150,147			-			150,147			-
Non-agency			24,308			-			24,308			-
Corporate fixed income securities			238,995			128,812			110,183			-
Asset-backed securities			27,789			-			27,789			-
Total available-for-sale securities			1,074,114			128,812			900,624			44,678
Investments:
Corporate equity securities			5,313			4,896			417			-
Mutual funds			35.195			35.195			-			-
U.S. government securities			5,810			5,810			-			-
Auction rate securities:
Equity securities			66,616			-			-			66,616
Municipal securities			7,117			-			-			7,117
Other			47,444			6,826			1,660			38,958
Total investments			167,495			52,727			2,077			112,691
Total trading securities owned		$	1,853,565		$	326,667		$	1,351,187		$	175,711

  

		June 30, 2011
		Total			Level 1			Level 2			Level 3
Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities		$	106,666		$	106,666		$	-		$	-
U.S. government agency securities			6,380			-			6,380			-
Corporate securities:
Fixed income securities			156,969			72,933			81,601			2,435
Equity securities			21,187			21,147			40			-
State and municipal securities			263			-			263			-
Total trading securities sold, but not yet purchased			291,465			200,746			88,284			2,435
Securities sold, but not yet purchased (1)			21,641			21,641			-			-
Derivative contracts (2)			11,857			-			11,857			-
		$	324,963		$	222,387		$	100,141		$	2,435
(1) Included in other liabilities in the consolidated statements of financial condition.
(2) Included in accounts payable and accrued expenses in the consolidated statements of financial condition.

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		December 31, 2010
		Total			Level 1			Level 2			Level 3
Assets:
Cash equivalents		$	15,675		$	15,675		$	-		$	-
Trading securities owned:
U.S. government agency securities			86,882			-			86,882			-
U.S. government securities			9,038			9,038			-			-
Corporate securities:
Fixed income securities			221,145			47,001			133,901			40,243
Equity securities			46,877			46,395			482			-
State and municipal securities			80,228			-			80,228			-
Total trading securities owned			444,170			102,434			301,493			40,243
Available-for-sale securities:
U.S. government agency securities			25,030			-			25,030			-
State and municipal securities			26,343			-			14,907			11,436
Mortgage-backed securities:
Agency			697,163			-			697,163			-
Commercial			67,996			-			67,996			-
Non-agency			29,273			-			29,273			-
Corporate fixed income securities			154,901			34,897			120,004			-
Asset-backed securities			12,008			-			12,008			-
Total available-for-sale securities			1,012,714			34,897			966,381			11,436
Investments:
Corporate equity securities			3,335			3,335			-			-
Mutual funds			32,193			32,193			-			-
U.S. government securities			8,751			8,751			-			-
Auction rate securities:
Equity securities			76,826			-			-			76,826
Municipal securities			6,533			-			-			6,533
Other			51,298			10,489			2,307			38,502
Total investments			178,936			54,768			2,307			121,861
		$	1,651,495		$	207,774		$	1,270,181		$	173,540
Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities		$	131,561		$	131,561		$	-		$	-
U.S. government agency securities			664			-			664			-
Corporate securities:
Fixed income securities			61,026			18,815			37,526			4,685
Equity securities			6,800			6,780			20			-
State and municipal securities			89			-			89			-
Total trading securities sold, but not yet purchased			200,140			157,156			38,299			4,685
Securities sold, but not yet purchased (1)			19,935			19,935			-			-
Derivative contracts (2)			9,259			-			9,259			-
		$	229,334		$	177,091		$	47,558		$	4,685
(1) Included in other liabilities in the consolidated statements of financial condition.
(2) Included in accounts payable and accrued expenses in 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 six months ended June 30, 2011 (in thousands):

	Three Months Ended June 30, 2011
	Financial Assets															Financial Liabilities
							Investments
	Corporate Fixed Income Securities (1)			State and Municipal Securities (2)			Auction Rate Securities - Equity			Auction Rate Securities - Municipal			Other			Corporate Fixed Income Securities (3)
Balance at March 31, 2011	$	14,555		$	24,297		$	72,204		$	8,471		$	38,606		$	-
Unrealized gains:
Included in changes in net assets (4)		102			2,087			437			71			1,418			-
Included in OCI (5)		-			879			-			-			-			-
Realized gains/(losses) (4)		26			-			-			-			(399	)		-
Purchases		27,061			13,987			1,875			1,675			131			2,435
Sales		(22,709	)		(24,126	)		-			(2,900	)		-			-
Redemptions		(523	)		(300	)		(7,900	)		(200	)		(1,038	)		-
Transfers:
Into Level 3		-			27,854			-			-			240			-
Out of Level 3		(170	)		-			-			-			-			-
Net change		3,787			20,381			(5,588	)		(1,354	)		352			2,435
Balance at June 30, 2011	$	18,342		$	44,678		$	66,616		$	7,117		$	38,958		$	2,435

 

	Six Months Ended June 30, 2011
	Financial Assets															Financial Liabilities
							Investments
	Corporate Fixed Income Securities (1)			State and Municipal Securities (2)			Auction Rate Securities - Equity			Auction Rate Securities - Municipal			Other			Corporate Fixed Income Securities (3)
Balance at December 31, 2010	$	40,243		$	11,436		$	76,826		$	6,533		$	38,502		$	4,685
Unrealized gains/(losses):
Included in changes in net assets (4)		(320	)		2,087			290			(96	)		3,564			-
Included in OCI (5)		-			815			-			-			-			-
Realized gains/(losses) (4)		736			-			-			-			(587	)		(36	)
Purchases		166,483			26,987			2,075			4,105			824			6,663
Sales		(182,072	)		(24,126	)		-			(2,900	)		-			(8,877	)
Redemptions		(716	)		(375	)		(12,575	)		(525	)		(3,585	)		-
Transfers:
Into Level 3		-			27,854			-			-			240			-
Out of Level 3		(6,012	)		-			-			-			-			-
Net change		(21,901	)		33,242			(10,210	)		584			456			(2,250	)
Balance at June 30, 2011	$	18,342		$	44,678		$	66,616		$	7,117		$	38,958		$	2,435
(1) Included in trading securities owned in the consolidated statements of financial condition.
(2) Included in available-for-sale securities in the consolidated statements of financial condition.
(3) Included in trading securities sold, but not yet purchased in the consolidated statements of financial condition.
(4) Realized and unrealized gains/(losses) related to trading securities and investments are reported in other income in the consolidated statements of operations.
(5) Unrealized gains related to available-for-sale securities are reported in accumulated other comprehensive income in the consolidated statements of financial condition.

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The results included in the table above are only a component of the overall investment 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, unrealized gains and losses, and redemptions of ARS at par during the three and six months ended June 30, 2011. There were $0.2 million and $6.0 million of transfers from Level 3 to Level 2 during the three and six months ended June 30, 2011, respectively, related to securities for which market trades were observed that provided transparency into the valuation of these assets. There were $28.1 million of transfers of financial assets into Level 3 during the three and six months ended June 30, 2011 primarily related to municipal ARS, which we transferred from held-to-maturity to available-for-sale during the second quarter of 2011. Given that there has been no recent trade activity observed, we transferred them into available-for-sale as Level 3 assets. There were no changes in unrealized gains/(losses) recorded in earnings for the three and six months ended June 30, 2011 relating to Level 3 assets still held at June 30, 2011.

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 beginning of the reporting period. There were $12.7 million and $24.7 million of transfers of financial assets from Level 2 to Level 1 during the three and six months ended June 30, 2011, respectively, primarily related to tax-exempt securities and equity securities for which market trades were observed that provided transparency into the valuation of these assets. There were $14.2 million and $17.1 million of transfers of financial assets from Level 1 to Level 2 during the three and six months ended June 30, 2011, respectively, primarily related to tax-exempt securities for which there were low volumes of recent trade activity observed.

Fair Value of Financial Instruments

The following reflects the fair value of financial instruments, as of June 30, 2011 and December 31, 2010, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands).

		June 30, 2011						December 31, 2010
		Carrying value			Estimated fair value			Carrying value			Estimated fair value
Financial assets:
Cash and cash equivalents		$	150,964		$	150,964		$	253,529		$	253,529
Restricted cash			6,876			6,876			6,868			6,868
Cash segregated for regulatory purposes			25			25			6,023			6,023
Securities purchased under agreements to resell			97,685			97,685			123,617			123,617
Trading securities owned			603,964			603,964			444,170			444,170
Available-for-sale securities			1,074,114			1,074,114			1,012,714			1,012,714
Held-to-maturity securities			103,736			102,632			52,640			52,984
Loans held for sale			55,110			55,110			86,344			86,344
Bank loans			478,006			480,554			389,742			376,176
Investments			167,495			167,495			178,936			178,936
Financial liabilities:
Securities sold under agreements to repurchase		$	42,464		$	42,464		$	109,595		$	109,595
Non-interest-bearing deposits			11,017			10,904			8,197			7,980
Interest-bearing deposits			1,630,062			1,588,314			1,615,371			1,565,199
Trading securities sold, but not yet purchased			291,465			291,465			200,140			200,140
Securities sold, but not yet purchased (1)			21,641			21,641			19,935			19,935
Derivative contracts (2)			11,857			11,857			9,259			9,259
Liabilities subordinated to the claims of general creditors			6,957			6,563			8,241			7,739
(1) Included in other liabilities in the consolidated statements of financial condition.
(2) Included in accounts payable and accrued expenses in the consolidated statements of financial condition.

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The following, as supplemented by the discussion above, describes the valuation techniques used in estimating the fair value of our financial instruments as of June 30, 2011 and December 31, 2010.

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 June 30, 2011 and December 31, 2010 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 corporate obligations, 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 of our asset-backed security at June 30, 2011 and December 31, 2010 is primarily due to unrealized losses 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. The decrease in fair value below the carrying amount of our asset-backed security as of June 30, 2011 was offset by unrealized gains on our ARS.

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 values at June 30, 2011 and December 31, 2010 approximate 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

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 June 30, 2011 and December 31, 2010 approximate fair value.

Non-Interest-Bearing Demand Deposits

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

Interest-Bearing Deposits

The fair value of money market and savings accounts represents the amounts payable on demand. 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.

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.

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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 June 30, 2011 and December 31, 2010, are as follows (in thousands):

		June 30, 2011			December 31, 2010
Trading securities owned:
U.S. government agency securities		$	141,510		$	86,882
U.S. government securities			25,975			9,038
Corporate securities:
Fixed income securities			290,673			221,145
Equity securities			40,789			46,877
State and municipal securities			105,017			80,228
		$	603,964		$	444,170
Trading securities sold, but not yet purchased:
U.S. government securities		$	106,666		$	131,561
U.S. government agency securities			6,380			664
Corporate securities:
Fixed income securities			156,969			61,026
Equity securities			21,187			6,800
State and municipal securities			263			89
		$	291,465		$	200,140

At June 30, 2011 and December 31, 2010, trading securities owned in the amount of $330.2 million and $272.2 million, respectively, were pledged as collateral for our repurchase agreements and short-term borrowings.

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 in the consolidated statements of financial condition.

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NOTE 7 - Available-for-Sale 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 June 30, 2011 and December 31, 2010 (in thousands):

		June 30, 2011
		Amortized cost			Gross unrealized gains (1)			Gross unrealized losses (1)			Estimated fair value
Available-for-sale
State and municipal securities		$	57,750		$	3,029		$	(554	)	$	60,225
Mortgage-backed securities:
Agency			560,400			12,887			(637	)		572,650
Commercial			149,497			1,318			(668	)		150,147
Non-agency			24,539			591			(822	)		24,308
Corporate fixed income securities			237,340			2,425			(770	)		238,995
Asset-backed securities			27,341			628			(180	)		27,789
		$	1,056,867		$	20,878		$	(3,631	)	$	1,074,114
Held-to-maturity (2)
Corporate fixed income securities		$	55,593		$	-		$	-		$	55,593
Asset-backed securities			29,501			648			(2,775	)		27,374
Municipal auction rate securities			18,642			1,023			-			19,665
		$	103,736		$	1,671		$	(2,775	)	$	102,632
		December 31, 2010
		Amortized cost			Gross unrealized gains (1)			Gross unrealized losses (1)			Estimated fair value
Available-for-sale
U.S. government securities		$	24,972		$	58		$	-		$	25,030
State and municipal securities			26,678			727			(1,062	)		26,343
Mortgage-backed securities:
Agency			692,922			6,938			(2,697	)		697,163
Commercial			66,912			1,212			(128	)		67,996
Non-agency			29,319			744			(790	)		29,273
Corporate fixed income securities			153,523			1,705			(327	)		154,901
Asset-backed securities			11,331			677			-			12,008
		$	1,005,657		$	12,061		$	(5,004	)	$	1,012,714
Held-to-maturity (2)
Municipal auction rate securities		$	43,719		$	3,803		$	(171	)	$	47,351
Asset-backed securities			8,921			198			(3,486	)		5,633
		$	52,640		$	4,001		$	(3,657	)	$	52,984

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

⁽²⁾  Held-to-maturity securities are carried in the consolidated statements of financial condition at amortized cost, and the changes in the value of these securities, other than impairment charges, are not reported on the consolidated financial statements.

For the three and six months ended June 30, 2011, available-for-sale securities with an aggregate par value of $30.0 million and $43.0 million, respectively, were called by the issuing agencies or matured, resulting in no gains or losses recorded in the consolidated statement of operations. Additionally, for the three and six months ended June 30, 2011, Stifel Bank received principal payments on mortgage-backed securities of $62.8 million and $121.2 million, respectively. During the three months ended June 30, 2011 and 2010, unrealized gains, net of deferred taxes, of $5.4 million and $4.2 million, respectively, were recorded in accumulated other comprehensive income in the consolidated statements of financial condition. During the six months ended June 30, 2011 and 2010, unrealized gains, net of deferred taxes, of $6.6 million and $7.5 million, respectively, were recorded in accumulated other comprehensive income in the consolidated statements of financial condition.

During the second quarter of 2011, we determined that we no longer had the intent to hold $32.9 million of held-to-maturity securities to maturity. As a result, we reclassified $27.8 million carrying value of municipal auction rate securities from held-to-maturity to available-for-sale.

During the second quarter of 2011, we reclassified $64.6 million of securities available for sale to securities held to maturity. Management determined that it has both the positive intent and ability to hold these securities to maturity. The reclassification of these securities was accounted for at fair value. On the date of transfer, the difference between the par value and the fair value of these securities resulted in a premium or discount that, under amortized cost accounting, will be amortized as a yield adjustment to interest income using the interest method. The unrealized holding gains or losses at the date of transfer will continue to be reported as a separate component of shareholders' equity in accumulated other comprehensive income, and will also be amortized over the remaining life of the securities as a yield adjustment to interest income using the interest method. There were no gains or losses recognized as a result of this transfer. 

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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.

		June 30, 2011
		Available-for-sale						Held-to-maturity
		Amortized cost			Estimated fair value			Amortized cost			Estimated fair value
Debt securities
Within one year		$	20,956		$	21,529		$	-		$	-
After one year through three years			147,047			148,503			-			-
After three years through five years			73,238			72,788			15,126			15,126
After five years through ten years			10,485			11,204			50,068			50,068
After ten years			70,705			72,985			38,542			37,438
Mortgage-backed securities
After three years through five years			9,698			10,051			-			-
After five years through ten years			75,658			76,098			-			-
After ten years			649,080			660,956			-			-
		$	1,056,867		$	1,074,114		$	103,736		$	102,632

The carrying value of securities pledged as collateral to secure public deposits and other purposes was $121.0 million and $111.6 million at June 30, 2011 and December 31, 2010, respectively.

Certain investments in the available-for-sale portfolio at June 30, 2011, 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 June 30, 2011, was $190.2 million, which was 17.7% of our available-for-sale investment portfolio. The amortized cost basis of these investments was $193.8 million at June 30, 2011. 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.

The following table is a summary of the amount of gross unrealized losses and the estimated fair value by length of time that the available-for-sale securities have been in an unrealized loss position at June 30, 2011 (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
State and municipal securities		$	(554	)	$	17,196		$	-		$	-		$	(554	)	$	17,196
Mortgage-backed securities:
Agency			(637	)		42,659			-			-			(637	)		42,659
Commercial			(668	)		48,933			-			-			(668	)		48,933
Non-agency			(216	)		6,795			(606	)		8,396			(822	)		15,191
Corporate fixed income securities			(770	)		54,745			-			-			(770	)		54,745
Asset-backed securities			(180	)		11,461			-			-			(180	)		11,461
		$	(3,025	)	$	181,789		$	(606	)	$	8,396		$	(3,631	)	$	190,185

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Other-Than-Temporary Impairment

We evaluate all securities in an unrealized loss position quarterly to assess whether the impairment is other-than-temporary. Our other-than-temporary impairment ("OTTI") assessment is a subjective process requiring the use of judgments and assumptions. Accordingly, we consider a number of qualitative and quantitative criteria in our assessment, including the extent and duration of the impairment; recent events specific to the issuer and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings and the failure of the issuer to make scheduled interest or principal payments; the value of underlying collateral; and current market conditions.

If we determine that impairment on our debt securities is other-than-temporary and we have made the decision to sell the security or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, we recognize the entire portion of the impairment in earnings. If we have not made a decision to sell the security and we do not expect that we will be required to sell the security prior to recovery of the amortized cost basis, we recognize only the credit component of OTTI in earnings. The remaining unrealized loss due to factors other than credit, or the non-credit component, is recorded in accumulated other comprehensive income. We determine the credit component based on the difference between the security's amortized cost basis and the present value of its expected future cash flows, discounted based on the purchase yield. The non-credit component represents the difference between the security's fair value and the present value of expected future cash flows.

Based on the evaluation, we recognized a credit-related OTTI of $1.5 million and $1.9 million in earnings for the three and six months ended June 30, 2011, respectively. If certain loss thresholds are exceeded, this bond would experience an event of default that would allow the senior class to liquidate the collateral securing this investment, which could adversely impact our valuation.

We estimate the portion of loss attributable to credit using a discounted cash flow model. Key assumptions used in estimating the expected cash flows include default rates, loss severity and prepayment rates. Assumptions used can vary widely based on the collateral underlying the securities and are influenced by factors such as collateral type, loan interest rate, geographical location of the borrower, and borrower characteristics.

We believe the gross unrealized losses related to all other securities of $3.6 million as of June 30, 2011 are attributable to issuer specific credit spreads and changes in market interest rates and asset spreads. We therefore do not expect to incur any credit losses related to these securities. In addition, we have no intent to sell these securities with unrealized losses and it is not more likely than not that we will be required to sell these securities prior to recovery of the amortized cost. Accordingly, we have concluded that the impairment on these securities is not other-than-temporary.

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NOTE 8 - Bank Loans

The following table presents the balance and associated percentage of each major loan category in our loan portfolio at June 30, 2011 and December 31, 2010 (in thousands, except percentages):

		June 30, 2011							December 31, 2010
		Balance			Percent				Balance			Percent
Consumer (1)		$	292,234			60.8	%		$	266,806			68.2	%
Commercial and industrial			102,783			21.4				41,965			10.7
Residential real estate			55,096			11.4				49,550			12.7
Home equity lines of credit			26,872			5.6				30,966			7.9
Commercial real estate			3,399			0.7				1,637			0.4
Construction and land			524			0.1				524			0.1
			480,908			100.0	%			391,448			100.0	%
Unamortized loan origination costs, net of loan fees			159							392
Loans in process			190							233
Allowance for loan losses			(3,251	)						(2,331	)
		$	478,006						$