formv10vQ

 

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 001-09305

_________________________

STIFEL FINANCIAL CORP.

(Exact name of registrant as specified in its charter)
     
DELAWARE
(State or other jurisdiction of
  43-1273600
(IRS Employer Identification No.)
incorporation or organization)    
     
501North Broadway    
St. Louis, Missouri   63102
(Address of principal executive offices)   (Zip Code)
(314) 342-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer: þ   Accelerated filer: o   Non-accelerated filer: o   Smaller reporting company: o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No þ

The number of shares outstanding of the registrant's common stock, $0.15 par value per share, as of the close of business on November 1, 2011, was 53,720,016, which includes exchangeable shares of TWP Acquisition Company (Canada), Inc., a wholly owned subsidiary of the registrant. These shares are exchangeable at any time into an aggregate of 172,242 shares of common stock of the registrant; entitle the holder to dividend and other rights substantially economically equivalent to those of a share of common stock; and, through a voting trust, entitle the holder to a vote on matters presented to common shareholders.

 

 
 

 

 
STIFEL FINANCIAL CORP.
Form 10-Q
TABLE OF CONTENTS
 
 
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2011 (unaudited) and December 31, 2010
Consolidated Statements of Operations for the three months and nine months ended September 30, 2011 and September 30, 2010 (unaudited)
Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and September 30, 2010 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
 
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signatures

 
 

 

 
PART I – FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
 

STIFEL FINANCIAL CORP.
Consolidated Statements of Financial Condition

             
(in thousands)
 
September 30, 2011
   
December 31, 2010
 
   
(Unaudited)
       
Assets
           
Cash and cash equivalents
  $ 214,619     $ 253,529  
Restricted cash
    6,880       6,868  
Cash segregated for regulatory purposes
    26       6,023  
Receivables:
               
Brokerage clients, net
    526,774       477,514  
Brokers, dealers, and clearing organizations
    235,950       247,707  
Securities purchased under agreements to resell
    121,004       123,617  
Trading securities owned, at fair value (includes securities pledged of $354,997 and $272,172, respectively)
    526,444       444,170  
Available-for-sale securities, at fair value
    1,312,784       1,012,714  
Held-to-maturity securities, at amortized cost
    159,132       52,640  
Loans held for sale
    114,452       86,344  
Bank loans, net of allowance
    568,293       389,742  
Bank foreclosed assets held for sale
    550       1,577  
Investments
    176,550       178,936  
Fixed assets, net
    84,643       71,498  
Goodwill
    309,519       301,919  
Intangible assets, net
    30,566       34,595  
Loans and advances to financial advisors and other employees, net
    170,203       181,357  
Deferred tax assets, net
    179,410       197,139  
Other assets
    204,565       145,226  
Total Assets
  $ 4,942,364     $ 4,213,115  
                 
See accompanying Notes to Consolidated Financial Statements.

 
 

 

STIFEL FINANCIAL CORP.
Consolidated Statements of Financial Condition (continued)

             
(in thousands, except share and per share amounts)
 
September 30, 2011
   
December 31, 2010
 
   
(Unaudited)
       
Liabilities and Shareholders’ Equity
           
Short-term borrowings from banks
  $ 310,600     $ 109,600  
Payables:
               
Brokerage clients
    241,849       212,642  
Brokers, dealers, and clearing organizations
    143,410       114,869  
Drafts
    45,377       73,248  
Securities sold under agreements to repurchase
    52,805       109,595  
Bank deposits
    2,120,763       1,623,568  
Trading securities sold, but not yet purchased, at fair value
    272,190       200,140  
Accrued compensation
    159,112       234,512  
Accounts payable and accrued expenses
    228,235       170,382  
Debenture to Stifel Financial Capital Trust II
    35,000       35,000  
Debenture to Stifel Financial Capital Trust III
    35,000       35,000  
Debenture to Stifel Financial Capital Trust IV
    12,500       12,500  
Other
    16,815       19,935  
      3,673,656       2,950,991  
Liabilities subordinated to claims of general creditors
    6,957       8,241  
Shareholders’ Equity:
               
Preferred stock - $1 par value; authorized 3,000,000 shares; none issued
           
Exchangeable common stock - $0.15 par value; issued 172,242 and 897,618 shares, respectively
    26       135  
Common stock - $0.15 par value; authorized 97,000,000 shares; issued 53,547,774 and 52,822,428 shares, respectively
    8,032       7,923  
Additional paid-in-capital
    1,065,018       1,082,788  
Retained earnings
    259,816       232,415  
Accumulated other comprehensive income/(loss)
    (7,756 )     381  
      1,325,136       1,323,642  
                 
Treasury stock, at cost, 2,099,972 and 2,235,473 shares, respectively
    (63,020 )     (69,238 )
Unearned employee stock ownership plan shares, at cost, 85,417 and 122,024 shares, respectively
    (365 )     (521 )
      1,261,751       1,253,883  
Total Liabilities and Shareholders’ Equity
  $ 4,942,364     $ 4,213,115  
                 
 
See accompanying Notes to Consolidated Financial Statements.

 
 

 
STIFEL FINANCIAL CORP.
Consolidated Statements of Operations
(Unaudited)

                         
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(in thousands, except per share amounts)
 
2011
   
2010
   
2011
   
2010
 
Revenues:
                       
Commissions
  $ 143,243     $ 96,986     $ 437,344     $ 305,655  
Principal transactions
    76,650       123,194       249,250       363,537  
Asset management and service fees
    58,253       50,876       172,914       136,117  
Investment banking
    37,673       51,656       143,509       127,129  
Interest
    24,161       17,718       64,246       47,019  
Other income
    540       3,656       11,352       9,358  
Total revenues
    340,520       344,086       1,078,615       988,815  
Interest expense
    6,306       3,698       18,931       8,388  
Net revenues
    334,214       340,388       1,059,684       980,427  
                                 
Non-interest expenses:
                               
Compensation and benefits
    210,573       395,936       671,678       819,085  
Occupancy and equipment rental
    30,914       29,559       89,962       81,012  
Communications and office supplies
    18,838       19,877       56,198       50,220  
Commissions and floor brokerage
    7,400       7,972       20,943       18,988  
Other operating expenses
    27,466       29,600       127,321       78,168  
Total non-interest expenses
    295,191       482,944       966,102       1,047,473  
                                 
Income/(loss) before income tax expense/(benefit)
    39,023       (142,556 )     93,582       (67,046
Provision for income taxes/(benefit)
    16,719       (58,220 )     36,464       (27,559
Net income/(loss)
  $ 22,304     $ (84,336 )   $ 57,118     $ (39,487 )
                                 
Earnings per common share:
                               
Basic
  $ 0.43     $ (1.65 )   $ 1.09     $ (0.82 )
Diluted (1)
  $ 0.35     $ (1.65 )   $ 0.90     $ (0.82 )
                                 
Weighted average number of common shares outstanding:
                               
Basic
    52,367       51,201       52,610       47,865  
Diluted
    63,152       61,834       63,174       55,593  
                                 
(1) In accordance with Topic 260, “Earnings Per Share,” earnings per diluted common share is calculated using the basic weighted average number of common shares outstanding in periods a loss is incurred.
         
                                 
 
See accompanying Notes to Consolidated Financial Statements.

 
 

 

STIFEL FINANCIAL CORP.
Consolidated Statements of Cash Flows
(Unaudited)
 

                 
   
Nine Months Ended September 30,
 
(in thousands) 
 
2011
   
2010
 
Operating Activities:
               
Net income/(loss)
 
$
57,118
   
$
(39,487)
 
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
               
Depreciation and amortization
   
19,124
     
17,965
 
Amortization of loans and advances to financial advisors and other employees
   
42,262
     
35,486
 
Amortization of premium on available-for-sale securities
   
9,201
     
5,349
 
Provision for loan losses and allowance for loans and advances to financial advisors and other employees
   
986
     
(916)
 
Amortization of intangible assets
   
3,588
     
3,480
 
Deferred income taxes
   
23,777
     
(60,586)
 
Stock-based compensation
   
19,562
     
183,602
 
Excess tax benefits from stock-based compensation
   
(25,188
)
   
(14,280)
 
Gain on the sale of investments
   
(60
)
   
(1,234)
 
Other, net
   
1,156
     
(5,881)
 
Decrease/(increase) in operating assets:
               
Cash segregated for regulatory purposes and restricted cash
   
5,985
     
 
Receivables:
               
Brokerage clients
   
(49,174
)
   
(120,389)
 
Brokers, dealers and clearing organizations
   
11,757
     
73,327
 
Securities purchased under agreements to resell
   
2,613
     
(11,221)
 
Trading securities owned, including those pledged
   
(82,274
)
   
(176,664)
 
Loans originated as mortgages held for sale
   
(638,596
)
   
(761,075)
 
Proceeds from mortgages held for sale
   
608,853
     
715,151
 
Loans and advances to financial advisors and other employees
   
(30,265
)
   
(29,362)
 
Other assets
   
(37,058
)
   
32,851
 
Increase/(decrease) in operating liabilities:
               
Payables:
               
Brokerage clients
   
29,207
     
3,656
 
Brokers, dealers and clearing organizations
   
(63,977
)
   
72,098
 
Drafts
   
(27,871
)
   
40,923
 
Trading securities sold, but not yet purchased
   
72,050
     
(5,983)
 
Other liabilities and accrued expenses
   
(82,110
)
   
(3,061)
 
Net cash used in operating activities
 
(129,334
)
 
$
(46,251)
 
                 
 
See accompanying Notes to Consolidated Financial Statements.

 
 

 

STIFEL FINANCIAL CORP.
Consolidated Statements of Cash Flows (continued)

                 
   
Nine Months Ended September 30,
 
(in thousands) 
 
2011
   
2010
 
Investing Activities:
               
Proceeds from:
               
Maturities, calls and principal paydowns on available-for sale securities
 
$
535,499
   
$
150,931
 
Maturities, calls and principal paydowns on held-to-maturity securities
   
800
     
 
Sale or maturity of investments
   
74,437
     
79,195
 
Sale of bank branch
   
     
13,905
 
Sale of bank foreclosed assets held for sale
   
808
     
2,096
 
Increase in bank loans, net
   
(178,275
)
   
(27,531)
 
Payments for:
               
Purchase of available-for-sale securities
   
(868,769
)
   
(395,646)
 
Purchase of held-to-maturity securities
   
(80,115
)
   
(42,931)
 
Purchase of investments
   
(71,991
)
   
(98,794)
 
Purchase of fixed assets
   
(32,561
)
   
(21,886)
 
Purchase of bank foreclosed assets held for sale
   
(225
)
   
 
Acquisitions
   
     
(500)
 
Net cash used in investing activities
   
(620,392
)
   
(341,161)
 
Financing Activities:
               
Net proceeds from short-term borrowings from banks
   
201,000
     
116,300
 
Decrease in securities sold under agreements to repurchase
   
(56,790
)
   
(23,588)
 
Increase in bank deposits, net
   
497,195
     
346,393
 
Increase in securities loaned
   
92,518
     
86,091
 
Excess tax benefits from stock-based compensation
   
25,188
     
14,280
 
Issuance of common stock
           
865
 
Repurchase of common stock
   
(48,505
)
   
(91,769)
 
Reissuance of treasury stock
   
2,755
     
2,055
 
Extinguishment of senior notes
   
     
(23,000)
 
Payment of Federal Home Loan Bank advances
   
     
(2,000)
 
Extinguishment of subordinated debt
   
(1,284
)
   
(1,840)
 
Net cash provided by financing activities
   
712,077
     
423,787
 
                 
Effect of exchange rate changes on cash
   
(1,261
)
   
8,689
 
                 
(Decrease)/increase in cash and cash equivalents
   
(38,910
)
   
45,064
 
Cash and cash equivalents at beginning of period
   
253,529
     
161,820
 
Cash and cash equivalents at end of period
 
$
214,619
   
$
206,884
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest
 
$
18,880
   
$
8,539
 
Cash paid for income taxes, net of refunds
 
$
5,618
   
$
51,896
 
Noncash investing and financing activities:
               
Units, net of forfeitures
 
$
119,530
   
$
137,158
 
Issuance of common stock for acquisition of Thomas Weisel Partners Group, Inc.
 
$
   
$
271,285
 
                 
 
See accompanying Notes to Consolidated Financial Statements.

 
 

 
 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.
 
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.
 
 
 
 

 
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). The adoption of this new guidance did not have a material impact on our consolidated financial statements.
 
Recently Issued Accounting Guidance
 
Goodwill Impairment Testing
 
In September 2011, the FASB issued Update No. 2011-08 “Testing Goodwill for Impairment,” which amends ASC 350 “Intangibles – Goodwill and Other.” This update permits entities to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (January 1, 2012 for our company), with early adoption permitted. We are currently evaluating the impact the new guidance will have on our goodwill impairment testing.
 
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.
 


 
 

 

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.
         
   
Nine Months Ended
September 30, 2010
 
(in thousands)
 
(Unaudited)
 
Total net revenues
 
$
1,071,055
 
Net loss
   
(107,174
)
Loss per share:
       
Basic
 
$
(2.24
)
Diluted
 
$
(2.24
)
         
 
NOTE 4 – Receivables From and Payables to Brokers, Dealers and Clearing Organizations
 
Amounts receivable from brokers, dealers, and clearing organizations at September 30, 2011 and December 31, 2010, included (in thousands):
             
   
September 30, 2011
   
December 31, 2010
 
             
Deposits paid for securities borrowed
  $ 171,033     $ 94,709  
Securities failed to deliver
    56,304       74,991  
Receivable from clearing organizations
    8,613       78,007  
    $ 235,950     $ 247,707  
                 


 
 

 

Amounts payable to brokers, dealers, and clearing organizations at September 30, 2011 and December 31, 2010, included (in thousands):
 
   
September 30, 2011
   
December 31, 2010
 
             
Deposits received from securities loaned
  $ 119,533     $ 27,907  
Securities failed to receive
    19,355       78,499  
Payable to clearing organizations
    4,522       8,463  
    $ 143,410     $ 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.
 
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 U.S. government securities, 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 auction rate securities (“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. 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 and are used to value interest rate swaps.

 
 

 

     The following table summarizes the valuation of our financial instruments by pricing observability levels as of September 30, 2011 and December 31, 2010 (in thousands):
   
September 30, 2011
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Cash equivalents
  $ 16,152     $ 16,152     $     $  
Trading securities owned:
                               
U.S. government agency securities
    71,333             71,333        
U.S. government securities
    12,202       12,202              
Corporate securities:
                               
Fixed income securities
    264,623       61,151       202,271       1,201  
Equity securities
    40,886       40,515       371        
State and municipal securities
    137,400             137,400        
Total trading securities owned
    526,444       113,868       411,375       1,201  
Available-for-sale securities:
                               
U.S. government securities
    904             904        
State and municipal securities
    84,012             17,388       66,624  
Mortgage-backed securities:
                               
Agency
    506,767             506,767        
Commercial
    265,925             265,925        
Non-agency
    18,257             18,257        
Corporate fixed income securities
    409,817       301,871       95,946       12,000  
Asset-backed securities
    27,102             27,102        
Total available-for-sale securities
    1,312,784       301,871       932,289       78,624  
Investments:
                               
Corporate equity securities
    4,676       4,283       393        
Mutual funds
    33,811       33,811              
Auction rate securities:
                               
Equity securities
    64,203                   64,203  
Municipal securities
    7,044                   7,044  
Other
    38,816       436       777       37,603  
Total investments
    148,550       38,530       1,170       108,850  
    $ 2,003,930     $ 470,421     $ 1,344,834     $ 188,675  
                                 
 

The Company's investment in a senior preferred interest in Miller Buckfire & Co. LLC, which is included in investments in the consolidated statements of financial condition, is carried at cost and therefore not included in the above analysis of fair value at September 30, 2011.

 
 

 


 
 
September 30, 2011
 
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Liabilities:
                       
Trading securities sold, but not yet purchased:
                       
U.S. government securities
  $ 109,568     $ 109,568     $     $  
Corporate securities:
                               
Fixed income securities
    129,226       55,375       73,851        
Equity securities
    33,071       33,032       39        
State and municipal securities
    325             325        
Total trading securities sold, but not yet purchased
    272,190       197,975       74,215        
Securities sold, but not yet purchased (1)
    16,815       16,815              
Derivative contracts (2)
    25,672             25,672        
    $ 314,677     $ 214,790     $ 99,887     $  
                                 
(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.
         

 
 

 


 
   
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.
         
 


 
 

 

 
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, 2011 (in thousands):
   
Three Months Ended September 30, 2011
 
   
Financial Assets
   
Financial Liabilities
 
         
Available-for-sale
   
Investments
       
   
Corporate Fixed Income Securities (1)
   
State and Municipal Securities
   
Corporate Fixed Income Securities
   
Auction Rate Securities – Equity
   
Auction Rate Securities – Municipal
   
Other
   
Corporate Fixed Income Securities (2)
 
                                           
Balance at June 30, 2011
  $ 18,342     $ 44,678     $     $ 66,616     $ 7,117     $ 38,958     $ 2,435  
Unrealized gains/(losses):
                                                       
Included in changes in net assets (3)
    37                   162       52       (692 )      
Included in OCI (4)
          316                                
Realized gains/(losses) (3)
    (380 )     43                               (94 )     (16 )
Purchases
    66       21,987       12,000       1,650             170        
Sales
    (16,500 )                                   (2,419 )
Redemptions
    (112 )     (400 )           (4,225 )     (125 )     (739 )      
Transfers:
                                                       
Into Level 3
                                         
Out of Level 3
    (252 )                                    
Net change
    (17,141 )     21,946       12,000       (2,413 )     (73 )     (1,355 )     (2,435 )
Balance at September 30, 2011
  $ 1,201     $ 66,624     $ 12,000     $ 64,203     $ 7,044     $ 37,603     $  
                                                         
 
 
 


   
Nine Months Ended September 30, 2011
 
   
Financial Assets
   
Financial Liabilities
 
         
Available-for-sale
   
Investments
       
   
Corporate Fixed Income Securities (1)
   
State and Municipal Securities
   
Corporate Fixed Income Securities
   
Auction Rate Securities – Equity
   
Auction Rate Securities – Municipal
   
Other
   
Corporate Fixed Income Securities (2)
 
                                           
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 (3)
    (283 )                 452       (44 )     2,872        
Included in OCI (4)
          2,403                                
Realized gains/(losses) (3)
    356       858                           (681 )     (52 )
Purchases
    166,549       48,974       12,000       3,725       4,105       994       6,663  
Sales
    (198,572 )     (24,126 )                 (2,900 )             (11,296 )
Redemptions
    (828 )     (775 )           (16,800 )     (650 )     (4,324 )      
Transfers:
                                                       
Into Level 3
            27,854                         240        
Out of Level 3
    (6,264 )                                    
Net change
    (39,042 )     55,188       12,000       (12,623 )     511       (899 )     (4,685 )
Balance at September 30, 2011
  $ 1,201     $ 66,624     $ 12,000     $ 64,203     $ 7,044     $ 37,603     $  
                                                         
(1) Included in trading securities owned in the consolidated statements of financial condition.
                 
(2) Included in trading securities sold, but not yet purchased in the consolidated statements of financial condition.
         
(3) Realized and unrealized gains/(losses) related to trading securities and investments are reported in other income in the consolidated statements of operations.
 
(4) Unrealized gains related to available-for-sale securities are reported in accumulated other comprehensive income/(loss) in the consolidated statements of financial condition.
 
 
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 nine months ended September 30, 2011. There were $0.2 million and $6.2 million of transfers from Level 3 to Level 2 during the three and nine months ended September 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 nine months ended September 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 nine months ended September 30, 2011 relating to Level 3 assets still held at September 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 $4.8 million and $29.3 million of transfers of financial assets from Level 2 to Level 1 during the three and nine months ended September 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 $5.1 million and $22.3 million of transfers of financial assets from Level 1 to Level 2 during the three and nine months ended September 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 September 30, 2011 and December 31, 2010, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands).
                         
   
September 30, 2011
   
December 31, 2010
 
   
Carrying value
   
Estimated fair value
   
Carrying value
   
Estimated fair value
 
Financial assets:
                       
Cash and cash equivalents
  $ 214,619     $ 214,619     $ 253,529     $ 253,529  
Restricted cash
    6,880       6,880       6,868       6,868  
Cash segregated for regulatory purposes
    26       26       6,023       6,023  
Securities purchased under agreements to resell
    121,004       121,004       123,617       123,617  
Trading securities owned
    526,444       526,444       444,170       444,170  
Available-for-sale securities
    1,312,784       1,312,784       1,012,714       1,012,714  
Held-to-maturity securities
    159,132       157,085       52,640       52,984  
Loans held for sale
    114,452       114,452       86,344       86,344  
Bank loans
    568,293       571,716       389,742       376,176  
Investments
    176,550       176,550       178,936       178,936  
Financial liabilities:
                               
Securities sold under agreements to repurchase
  $ 52,805     $ 52,805     $ 109,595     $ 109,595  
Non-interest-bearing deposits
    21,405       21,398       8,197       7,980  
Interest-bearing deposits
    2,099,358       2,072,029       1,615,371       1,565,199  
Trading securities sold, but not yet purchased
    272,190       272,190       200,140       200,140  
Securities sold, but not yet purchased (1)
    16,815       16,815       19,935       19,935  
Derivative contracts (2)
    25,672       25,672       9,259       9,259  
Liabilities subordinated to the claims of general creditors
    6,957       6,617       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.
         
 

 
The following, as supplemented by the discussion above, describes the valuation techniques used in estimating the fair value of our financial instruments as of September 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 September 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 estimated fair value, included in the above table, 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 estimated fair value below the carrying amount of our asset-backed security at September 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.
 
 
 

 
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 September 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 September 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.
 
 
 

 
 
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, 2011 and December 31, 2010, are as follows (in thousands):
 
             
   
September 30, 2011
   
December 31, 2010
 
Trading securities owned:
           
U.S. government agency securities
  $ 71,333     $ 86,882  
U.S. government securities
    12,202       9,038  
Corporate securities:
               
Fixed income securities
    264,623       221,145  
Equity securities
    40,886       46,877  
State and municipal securities
    137,400       80,228  
    $ 526,444     $ 444,170  
Trading securities sold, but not yet purchased:
               
U.S. government securities
  $ 109,568     $ 131,561  
U.S. government agency securities
          664  
Corporate securities:
               
Fixed income securities
    129,226       61,026  
Equity securities
    33,071       6,800  
State and municipal securities
    325       89  
    $ 272,190     $ 200,140  
                 
 
At September 30, 2011 and December 31, 2010, trading securities owned in the amount of $355.0 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.

 
 

 

 
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 September 30, 2011 and December 31, 2010 (in thousands):
 
 
September 30, 2011
 
 
Amortized cost
 
Gross unrealized gains (1)
 
Gross unrealized losses (1)
 
Estimated fair value
 
Available-for-sale
                       
U.S. government securities
  $ 905     $     $ (1 )   $ 904  
State and municipal securities
    79,714       4,490       (192 )     84,012  
Mortgage-backed securities:
                               
Agency
    495,524       12,021       (778 )     506,767  
Commercial
    266,643       1,102       (1,820 )     265,925  
Non-agency
    19,125       117       (985 )     18,257  
Corporate fixed income securities
    412,433       1,834       (4,450 )     409,817  
Asset-backed securities
    26,677       553       (128 )     27,102  
    $ 1,301,021     $ 20,117     $ (8,354 )   $ 1,312,784  
Held-to-maturity (2)
                               
Corporate fixed income securities
  $ 55,569     $ 55     $ (2,206 )   $ 53,418  
Asset-backed securities
    82,224       2,734       (3,235 )     81,723  
Municipal auction rate securities
    21,339       955       (350 )     21,944  
    $ 159,132     $ 3,744     $ (5,791 )   $ 157,085  
                                 
 
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/(loss).
 
(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 nine months ended September 30, 2011, available-for-sale securities with an aggregate par value of $22.0 million and $65.1 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 nine months ended September 30, 2011, Stifel Bank received principal payments on mortgage-backed securities of $43.0 million and $164.2 million, respectively. During the three months ended September 30, 2011 unrealized losses, net of deferred tax benefits, of $3.3 million were recorded in accumulated other comprehensive income/(loss) in the consolidated statements of financial condition. During the three months ended September 30, 2010, unrealized gains, net of deferred taxes, of $0.1 million were recorded in accumulated other comprehensive income/(loss) in the consolidated statements of financial condition. During the nine months ended September 30, 2011 and 2010, unrealized gains, net of deferred taxes, of $3.3 million and $7.6 million, respectively, were recorded in accumulated other comprehensive income/(loss) 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/(loss), 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.
 
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, 2011
 
   
Available-for-sale
   
Held-to-maturity
 
   
Amortized
cost
   
Estimated
fair value
   
Amortized
cost
   
Estimated
fair value
 
Debt securities
                       
Within one year
  $ 30,183     $ 30,579     $     $  
After one year through three years
    233,280       232,661              
After three years through five years
    153,110       150,672       15,118       14,301  
After five years through ten years
    10,52