Edgar Filing: STIFEL FINANCIAL CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2013

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-09305

STIFEL FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Delaware

43-1273600

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

501 N. Broadway, St. Louis, Missouri 63102-2188

(Address of principal executive offices and 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 (“the Exchange Act”) 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 x No ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

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

The number of shares outstanding of the registrant’s common stock, $0.15 par value per share, as of the close of business on April 30, 2013, was 63,570,932.

STIFEL FINANCIAL CORP.

Form 10-Q

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements			3
Consolidated Statements of Financial Condition as of March 31, 2013 (unaudited) and December 31, 2012			3
Consolidated Statements of Operations for the three months ended March 31, 2013 and March 31, 2012 (unaudited)			5
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and March 31, 2012 (unaudited)			6
Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and March 31, 2012 (unaudited)			7
Notes to Consolidated Financial Statements (unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			49
Item 3. Quantitative and Qualitative Disclosures About Market Risk			76
Item 4. Controls and Procedures			79

PART II – OTHER INFORMATION
Item 1. Legal Proceedings			80
Item 1A. Risk Factors			82
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			82
Item 6. Exhibits			83
Signatures			84

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition


(in thousands)	March 31, 2013		December 31, 2012
	(Unaudited)
Assets
Cash and cash equivalents	$	573,664	$	403,941
Restricted cash		4,415		4,414
Cash segregated for regulatory purposes		32		128,031
Receivables:
Brokerage clients, net		543,316		487,761
Brokers, dealers, and clearing organizations		528,187		276,224
Securities purchased under agreements to resell		156,341		158,695
Trading securities owned, at fair value (includes securities pledged of $706,761 and $607,586, respectively)		923,452		763,608
Available-for-sale securities, at fair value		1,729,837		1,625,168
Held-to-maturity securities, at amortized cost		716,273		708,008
Loans held for sale		165,698		214,531
Bank loans, net of allowance		886,647		815,937
Other real estate owned		373		373
Investments, at fair value		268,082		236,434
Fixed assets, net		148,886		141,403
Goodwill		730,006		419,393
Intangible assets, net		31,085		28,967
Loans and advances to financial advisors and other employees, net		175,711		179,284
Deferred tax assets, net		181,885		124,576
Other assets		369,865		249,392

Total Assets	$	8,133,755	$	6,966,140

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition (continued)


(in thousands, except share and per share amounts)	March 31, 2013			December 31, 2012
	(Unaudited)
Liabilities and Shareholders’ Equity
Short-term borrowings from banks	$	569,800		$	304,700
Payables:
Brokerage clients		325,691			295,509
Brokers, dealers, and clearing organizations		109,947			33,211
Drafts		58,315			90,433
Securities sold under agreements to repurchase		108,529			140,346
Bank deposits		3,556,568			3,346,133
Trading securities sold, but not yet purchased, at fair value		588,922			319,742
Securities sold, but not yet purchased, at fair value		24,550			22,966
Accrued compensation		154,882			187,466
Accounts payable and accrued expenses		266,320			259,163
Corporate debt		380,934			383,992
Debentures to Stifel Financial Capital Trusts		82,500			82,500

		6,226,958			5,466,161
Liabilities subordinated to claims of general creditors		3,131			5,318
Shareholders’ Equity:
Preferred stock - $1 par value; authorized 3,000,000 shares; none issued		—			—
Common stock - $0.15 par value; authorized 97,000,000 shares; issued 63,246,221 and 54,967,858 shares, respectively		9,487			8,245
Additional paid-in-capital		1,496,909			1,100,137
Retained earnings		397,932			383,970
Accumulated other comprehensive income		782			4,918

		1,905,110			1,497,270
Treasury stock, at cost, 41,727 and 77,577 shares, respectively		(1,392	)		(2,505	)
Unearned employee stock ownership plan shares, at cost, 12,202 and 24,405 shares, respectively		(52	)		(104	)

		1,903,666			1,494,661

Total Liabilities and Shareholders’ Equity	$	8,133,755		$	6,966,140

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended March 31,
(in thousands, except per share amounts)	2013		2012
Revenues:
Commissions	$	148,648	$	123,303
Principal transactions		107,244		116,233
Investment banking		78,379		70,438
Asset management and service fees		68,912		60,818
Interest		29,845		25,257
Other income		20,212		13,294

Total revenues		453,240		409,343
Interest expense		11,460		9,010

Net revenues		441,780		400,333


Non-interest expenses:
Compensation and benefits		315,727		254,704
Occupancy and equipment rental		34,048		30,791
Communications and office supplies		22,979		20,373
Commissions and floor brokerage		9,058		7,612
Other operating expenses		36,622		27,599

Total non-interest expenses		418,434		341,079


Income before income tax expense		23,346		59,254
Provision for income taxes		8,727		24,481

Net income	$	14,619	$	34,773


Earnings per common share:
Basic	$	0.24	$	0.65
Diluted	$	0.21	$	0.55

Weighted average number of common shares outstanding:
Basic		60,054		53,243
Diluted		69,189		62,669

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended March 31,
(in thousands)	2013			2012

Net income	$	14,619		$	34,773
Other comprehensive income:
Changes in unrealized gains/(losses) on available-for-sale securities, net of tax⁽¹⁾		(4,586	)		4,850
Changes in unrealized gains on cash flow hedging instruments, net of tax⁽²⁾		1,519			2,364
Foreign currency translation adjustment, net of tax		(1,069	)		535

		(4,136	)		7,749

Comprehensive income	$	10,483		$	42,522

⁽¹⁾	Amounts are net of reclassifications to earnings of realized gains of $0.4 million for the three months ended March 31, 2013. We had no significant reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2012.

⁽²⁾	Amounts are net of reclassifications to earnings of losses of $2.3 million and $3.2 million for the three months ended March 31, 2013 and 2012, respectively.

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended March 31,
(in thousands)	2013			2012
Cash Flows from Operating Activities:
Net income	$	14,619		$	34,773
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization		7,876			7,189
Amortization of loans and advances to financial advisors and other employees		15,553			13,931
Amortization of premium/(accretion of discount) on investment portfolio		(2,989	)		2,886
Provision for loan losses and allowance for loans and advances to financial advisors and other employees		1,294			955
Amortization of intangible assets		1,138			1,329
Deferred income taxes		14,846			31,514
Excess tax benefits from stock-based compensation		(8,237	)		(12,438	)
Stock-based compensation		70,184			6,963
(Gains)/losses on investments		3,530			(7,952	)
Other, net		403			(308	)
Decrease/(increase) in operating assets, net of assets acquired:
Cash segregated for regulatory purposes and restricted cash		127,998			299
Receivables:
Brokerage clients		(55,519	)		(9,270	)
Brokers, dealers, and clearing organizations		(177,699	)		15,378
Securities purchased under agreements to resell		2,354			(28,503	)
Loans originated as held for sale		(437,539	)		(356,192	)
Proceeds from mortgages held for sale		476,999			346,809
Trading securities owned, including those pledged		(39,304	)		(100,773	)
Loans and advances to financial advisors and other employees		(12,049	)		(25,203	)
Other assets		(66,088	)		(35,119	)
Increase/(decrease) in operating liabilities, net of liabilities assumed:
Payables:
Brokerage clients		30,182			45,431
Brokers, dealers, and clearing organizations		30,056			13,590
Drafts		(32,118	)		(19,274	)
Trading securities sold, but not yet purchased		217,385			3,574
Other liabilities and accrued expenses		(126,444	)		(119,349	)

Net cash provided by/(used in) operating activities	$	56,431		$	(189,760	)

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows (continued)


	Three Months Ended March 31,
(in thousands)	2013			2012
Cash Flows from Investing Activities:
Proceeds from:
Maturities, calls, sales, and principal paydowns of available-for-sale securities	$	68,678		$	63,783
Calls and principal paydowns of held-to-maturity securities		16,289			—
Sale or maturity of investments		22,380			15,534
Sale of other real estate owned		—			75
Increase in bank loans, net		(67,585	)		(25,534	)
Payments for:
Purchase of available-for-sale securities		(185,892	)		(192,536	)
Purchase of held-to-maturity securities		(16,438	)		(136,854	)
Purchase of investments		(57,558	)		(12,480	)
Purchase of fixed assets		(4,931	)		(3,902	)
Acquisitions, net of cash acquired		(154,283	)		—

Net cash used in investing activities		(379,340	)		(291,914	)

Cash Flows from Financing Activities:
(Repayments of)/proceeds from short-term borrowings from banks		265,100			(12,000	)
Proceeds from issuance of senior notes, net		—			170,291
Increase/(decrease) in securities sold under agreements to repurchase		(31,817	)		61,943
Increase in bank deposits, net		210,435			286,174
Increase in securities loaned		46,680			15,936
Excess tax benefits from stock-based compensation		8,237			12,438
Issuance of common stock		15			—
Reissuance of treasury stock		297			6,783
Repayment of non-recourse debt		(3,058	)		—
Extinguishment of subordinated debt		(2,187	)		(1,639	)

Net cash provided by financing activities		493,702			539,926


Effect of exchange rate changes on cash		(1,070	)		535

Increase/(decrease) in cash and cash equivalents		169,723			58,787
Cash and cash equivalents at beginning of period		403,941			167,671

Cash and cash equivalents at end of period	$	573,664		$	226,458


Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds/(refunds, net of taxes paid)	$	15,264		$	(885	)
Cash paid for interest		10,407			6,712
Noncash investing and financing activities:
Stock units granted, net of forfeitures		137,694			68,159
Issuance of common stock for acquisitions		265,918			—

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – Nature of Operations and Basis of Presentation

Nature of Operations

Stifel Financial Corp. (the “Parent”), through its wholly owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated (“Stifel Nicolaus”), Stifel Bank & Trust (“Stifel Bank”), Stifel Nicolaus Europe Limited (“SNEL”), Century Securities Associates, Inc. (“CSA”), Keefe, Bruyette & Woods, Inc. (“KBW”), Keefe, Bruyette & Woods Limited (“KBW Limited”), Stifel Nicolaus Canada, Inc. (“SN Canada”) and Miller Buckfire & Co. LLC (“Miller Buckfire”), is principally engaged in retail brokerage; securities trading; investment banking; investment advisory; retail, consumer, and commercial banking; and related financial services. We have offices throughout the United States, two Canadian cities, and three European cities. Our major geographic area of concentration is the Midwest and Mid-Atlantic regions, with a growing presence in the Northeast, Southeast and Western United States. Our company’s principal customers are individual investors, corporations, municipalities, and institutions.

Basis of Presentation

The 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, 2012 on file with the SEC.

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

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, 2012.

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, we evaluate 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 certain VIEs in which we have the power to direct the activities of the entity and the obligation to absorb significant losses or receive significant benefits. In other cases, we consolidate VIEs when 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 receives benefits or will absorb losses that are not pro rata with its ownership interests. See Note 25 for additional information on VIEs.

NOTE 2 – Recently Adopted Accounting Guidance

Indefinite-Lived Assets Impairment Testing

In July 2012, the FASB issued Update No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” which permits entities to make a qualitative assessment of whether it is more likely than not that an indefinite-lived asset is impaired. If an entity concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it would not be required to perform a quantitative assessment. The update also allows an entity the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (January 1, 2013 for our company) with early adoption permitted. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB issued Update No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“Update No. 2011-11”), which enhance disclosures by requiring improved information about financial and derivative instruments that are either 1) offset (netting assets and liabilities) in accordance with Topic 210 “Balance Sheet,” and Topic 815, “Derivatives and Hedging or 2) subject to an enforceable master netting arrangement or similar agreement. This guidance is effective for interim and annual reporting periods beginning on or after January 1, 2013, and requires retrospective disclosures for comparative periods presented.

In January 2013, the FASB issued Update No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” which clarifies the scope of Update No. 2011-11 to include derivatives accounted for in accordance with Topic 815, “Derivatives and Hedging”, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. This guidance is effective for interim and annual reporting periods beginning on or after January 1, 2013, and requires retrospective disclosures for comparative periods presented. Other than requiring additional disclosures regarding offsetting assets and liabilities, the adoption of this new guidance did not have an impact on our consolidated financial statements. See Note 16 – Disclosures About Offsetting Assets and Liabilities.

Comprehensive Income

In February 2013, the FASB issued Update No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This guidance is effective for interim and annual reporting periods beginning after December 15, 2012 (January 1, 2013 for our company). Other than requiring additional disclosures regarding other comprehensive income, the adoption of this new guidance did not have an impact on our consolidated financial statements.

NOTE 3 – Acquisition of KBW, Inc.

On February 15, 2013, we completed the purchase of all of the outstanding shares of common stock of KBW, Inc. (“KBW, Inc.”), a full-service investment bank specializing in the financial services industry based in New York, New York. The purchase was completed pursuant to the merger agreement dated November 5, 2012. Under the terms of the merger agreement, each share of common stock, including certain restricted stock, of KBW, Inc. issued and outstanding immediately prior to the effective time of the merger was cancelled and converted into the right to receive a combination of (i) cash consideration of $8.00 ($10.00 less the extraordinary dividend amount of $2.00) and (ii) stock consideration of 0.2143 a share of our common stock.

In conjunction with the close of the merger, we issued 6.7 million shares of common stock to holders of KBW, Inc. common stock, issued 2.2 million restricted stock awards to KBW, Inc. employees, and paid $253.0 million in cash.

The following summarizes the aggregate merger consideration payable for all outstanding shares and restricted stock awards of KBW, Inc. (in thousands):


Cash paid to KBW, Inc. shareholders	$	253,039
Common stock issued to KBW, Inc. shareholders		262,653
Fair value of outstanding KBW, Inc. restricted stock awards exchanged for Stifel restricted stock awards		86,221

Purchase price to be allocated	$	601,913

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805 (“Topic 805”), “Business Combinations.” Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. We recorded $307.9 million of goodwill as an asset in the consolidated statement of financial condition, which has been allocated to our company’s Institutional Group segment. The allocation of the purchase price is preliminary and will be finalized upon completion of the analysis of the fair values of the net assets of KBW, Inc. on February 15, 2013 and the identified intangible assets. The final goodwill and intangible assets recorded on the consolidated statement of financial condition may differ from that reflected herein as a result of future measurement period adjustments. In management’s opinion, the goodwill represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of KBW, Inc.’s business and the reputation and expertise of KBW, Inc. in the financial services sector.

Under Topic 805, merger-related transaction costs (such as advisory, legal, valuation and other professional fees) are not included as components of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred. Transaction costs of $9.8 million were incurred during the three months ended March 31, 2013, respectively, and are included in other operating expenses in the consolidated statement of operations.

In addition, on February 15, 2013, certain employees were granted restricted stock or restricted stock units of our company as retention. The fair value of the awards issued as retention was $30.6 million. There are no continuing service requirements associated with these restricted stock units, and accordingly were expensed at date of grant. This charge is included in compensation and benefits in the consolidated statement of operations for the three months ended March 31, 2013.

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


Assets:
Cash and cash equivalents	$	98,756
Receivables from clearing organizations		74,264
Financial instruments owned, at fair value		120,540
Fixed assets, net		10,629
Deferred tax assets, net		76,763
Other assets		34,987

Total assets acquired	$	415,939


Liabilities:
Financial instruments sold, but not yet purchased, at fair value	$	53,379
Accrued compensation		18,468
Accounts payable and accrued expenses		50,104

Total liabilities assumed		121,951

Net assets acquired	$	293,988

The following unaudited pro forma financial information presents the combined results of operations as if the merger had occurred on January 1, 2012. The pro forma financial information does not reflect the costs of any integration activities. The pro forma results include estimates and assumptions, which management believes are reasonable. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had KBW, Inc. been combined with us as of the beginning of 2012.


	Three Months Ended March 31,
(000s, except per share amounts, unaudited)	2013			2012
Total net revenues	$	467,213		$	469,382
Net income/(loss)		(61,688	)		35,185
Earnings/(loss) per share:
Basic	$	(1.03	)	$	0.59
Diluted	$	(1.03	)	$	0.51

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

Amounts receivable from brokers, dealers, and clearing organizations at March 31, 2013 and December 31, 2012, included (in thousands):


	March 31, 2013		December 31, 2012

Deposits paid for securities borrowed	$	333,371	$	153,819
Receivable from clearing organizations		179,442		115,996
Securities failed to deliver		15,374		6,409

	$	528,187	$	276,224

Amounts payable to brokers, dealers, and clearing organizations at March 31, 2013 and December 31, 2012, included (in thousands):


	March 31, 2013		December 31, 2012

Deposits received from securities loaned	$	65,955	$	19,218
Securities failed to receive		29,600		4,747
Payable to clearing organizations		14,392		9,246

	$	109,947	$	33,211

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 Measurements

We measure certain 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, 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.

We generally utilize third-party pricing services to value Level 1 and Level 2 available-for-sale investment securities, as well as certain derivatives designated as cash flow hedges. We review the methodologies and assumptions used by the third-party pricing services and evaluate the values provided, principally by comparison with other available market quotes for similar instruments and/or analysis based on internal models using available third-party market data. We may occasionally adjust certain values provided by the third-party pricing service when we believe, as the result of our review, that the adjusted price most appropriately reflects the fair value of the particular security.

Following are descriptions of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value. The descriptions include an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.

Cash and Cash Equivalents

Cash equivalents include highly liquid investments with original maturities of three months or less. Due to their short-term nature, the carrying amount of these instruments approximates the estimated fair value. Actively traded money market funds are measured at their reported net asset value, which approximates fair value. As such, we classify the estimated fair value of these instruments 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.

Securities classified as Level 3, of which the substantial majority is auction rate securities (“ARS”), represent securities in less liquid markets requiring significant management assumptions when determining fair value. Due to the lack of a robust secondary auction-rate securities market with active fair value indicators, fair value for all periods presented was determined using an income approach based on an internally developed discounted cash flow model. In addition to ARS, we have classified certain corporate obligations with unobservable pricing inputs and airplane trust certificates as Level 3. The methods used to value these securities are the same as the methods used to value ARS, discussed above.

Investments

Investments carried at fair value primarily include ARS, investments in mutual funds, U.S. treasury securities, investments in public companies, private equity securities, and partnerships.

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. The methods used to value ARS are discussed above.

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 value of these investments is at risk to changes in equity markets, general economic conditions and a variety of other factors. We estimate fair value for private equity investments based on our percentage ownership in the net asset value of the entire fund, as reported by the fund or on behalf of the fund, after indication that the fund adheres to applicable fair value measurement guidance. For those funds where the net asset value is not reported by the fund, we derive the fair value of the fund by estimating the fair value of each underlying investment in the fund. In addition to using qualitative information about each underlying investment, as provided by the fund, we give consideration to information pertinent to the specific nature of the debt or equity investment, such as relevant market conditions, offering prices, operating results, financial conditions, exit strategy and other qualitative information, as available. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. Commitments to fund additional investments in nonmarketable equity securities recorded at fair value were $13.8 million and $3.0 million at March 31, 2013 and December 31, 2012, respectively.

Securities Sold, But Not Yet Purchased

Equity securities that are valued based on quoted prices in active markets and reported in Level 1.

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. We manage credit risk for our derivative positions on a counterparty-by-counterparty basis and calculate credit valuation adjustments, included in the fair value of these instruments, on the basis of our relationships at the counterparty portfolio/master netting agreement level. These credit valuation adjustments are determined by applying a credit spread for the counterparty to the total expected exposure of the derivative after considering collateral and other master netting arrangements. We have classified our interest rate swaps as Level 2.

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 are presented below:


	March 31, 2013
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	171,890		171,890		—		—
Trading securities owned:
U.S. government agency securities		204,162		—		204,162		—
U.S. government securities		27,703		27,703		—		—
Corporate securities:
Fixed income securities		426,046		49,761		368,811		7,474
Equity securities		123,044		106,333		4,177		12,534
State and municipal securities		142,497		—		142,497		—

Total trading securities owned		923,452		183,797		719,647		20,008
Available-for-sale securities:
U.S. government agency securities		1,217		—		1,217		—
State and municipal securities		186,777		—		91,819		94,958
Mortgage-backed securities:
Agency		726,796		—		726,796		—
Commercial		247,980		—		247,980		—
Non-agency		6,294		—		6,294		—
Corporate fixed income securities		500,609		313,327		187,282		—
Asset-backed securities		60,164		—		60,164		—

Total available-for-sale securities		1,729,837		313,327		1,321,552		94,958
Investments:
Corporate equity securities		70,995		70,995		—		—
Mutual funds		19,408		19,408		—		—
U.S. government securities		7,069		7,069		—		—
Auction rate securities:
Equity securities		63,401		—		—		63,401
Municipal securities		13,999		—		—		13,999
Other		93,210		5,953		4,999		82,258

Total investments		268,082		103,425		4,999		159,658

	$	3,092,261	$	772,439	$	2,046,198	$	274,624


Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities	$	187,253	$	187,253	$	—	$	—
U.S. government agency securities		5,256		—		5,256		—
Corporate securities:
Fixed income securities		313,191		132,239		180,952		—
Equity securities		83,135		78,376		4,759		—
State and municipal securities		87		—		87		—

Total trading securities sold, but not yet purchased		588,922		397,868		191,054		—
Securities sold, but not yet purchased		24,550		24,550		—		—
Derivative contracts ⁽¹⁾		17,459		—		17,459		—

	$	630,931	$	422,418	$	208,513	$	—

⁽¹⁾	Included in accounts payable and accrued expenses in the consolidated statements of financial condition.


	December 31, 2012
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	72,596	$	72,596	$	—	$	—
Trading securities owned:
U.S. government agency securities		123,758		—		123,758		—
U.S. government securities		3,573		3,573		—		—
Corporate securities:
Fixed income securities		396,878		66,795		329,500		583
Equity securities		35,472		33,650		1,822		—
State and municipal securities		203,927		—		203,927		—

Total trading securities owned		763,608		104,018		659,007		583
Available-for-sale securities:
U.S. government agency securities		1,113		—		1,113		—
State and municipal securities		157,420		—		66,933		90,487
Mortgage-backed securities:
Agency		684,848		—		684,848		—
Commercial		260,974		—		260,974		—
Non-agency		13,878		—		13,878		—
Corporate fixed income securities		480,182		263,017		217,165		—
Asset-backed securities		26,753		—		26,753		—

Total available-for-sale securities		1,625,168		263,017		1,271,664		90,487
Investments:
Corporate equity securities		32,162		32,162		—		—
Corporate preferred securities		56,970		—		56,970		—
Mutual funds		18,021		18,021		—		—
U.S. government securities		7,069		7,069		—		—
Auction rate securities:
Equity securities		64,397		—		—		64,397
Municipal securities		14,067		—		—		14,067
Other		43,748		1,620		4,831		37,297

Total investments		236,434		58,872		61,801		115,761

	$	2,697,806	$	498,503	$	1,992,472	$	206,831


Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities	$	162,661	$	162,661	$	—	$	—
U.S. government agency securities		15		—		15		—
Corporate securities:
Fixed income securities		150,698		46,274		104,424		—
Equity securities		6,281		5,936		345		—
State and municipal securities		87		—		87		—

Total trading securities sold, but not yet purchased		319,742		214,871		104,871		—
Securities sold, but not yet purchased		22,966		22,966		—		—
Derivative contracts ⁽¹⁾		19,934		—		19,934		—

	$	362,642	$	237,837	$	124,805	$	—

⁽¹⁾	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 months ended March 31, 2013 (in thousands):


	Three Months Ended March 31, 2013
	Trading Securities Owned									Investments
	Corporate Fixed Income Securities			Equity Securities			State & Municipal Securities ⁽¹⁾			Auction Rate Securities – Equity			Auction Rate Securities – Municipal			Other

Balance at December 31, 2012	$	583		$	—		$	90,487		$	64,397		$	14,067		$	37,297
Unrealized gains/(losses):
Included in changes in net assets⁽²⁾		216			1,168			—			304			32			3,661
Included in OCI ⁽³⁾		—			—			(235	)		—			—			—
Realized gains/(losses) ⁽²⁾		—			—			6			—			—			(208	)
Purchases		7,494			11,476			5,000			75			—			42,925
Sales		(257	)		(110	)		—			—			—			(1,286	)
Redemptions		(562	)		—			(300	)		(1,375	)		(100	)		(131	)
Transfers:
Into Level 3		—			—			—			—			—			—
Out of Level 3		—			—			—			—			—			—

Net change		6,891			12,534			4,471			(996	)		(68	)		44,961

Balance at March 31, 2013	$	7,474		$	12,534		$	94,958		$	63,401		$	13,999		$	82,258

⁽¹⁾	Included in available-for-sale securities in the consolidated statements of financial condition.

⁽²⁾	Realized and unrealized gains/(losses) related to trading securities and investments are reported in other income in the consolidated statements of operations.

⁽³⁾	Unrealized gains/(losses) related to available-for-sale securities are reported in accumulated other comprehensive income 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: our acquisition of KBW, Inc, unrealized gains and losses, and redemptions of ARS at par during the three months ended March 31, 2013. During the three months ended March 31, 2013, trading securities owned and investments purchased as part of the KBW, Inc. acquisition that are classified as Level 3 totaled $54.1 million, of which $0.9 million were sold during the three months ended March 31, 2013. The changes in unrealized gains/(losses) recorded in earnings for the three months ended March 31, 2013 relating to Level 3 assets still held at March 31, 2013 were immaterial.

The following table summarizes quantitative information related to the significant unobservable inputs utilized in our company’s Level 3 recurring fair value measurements as of March 31, 2013.


	Valuation technique	Unobservable input	Range	Weighted average

Available-for-sale securities:

State and municipal securities	Discounted cash flow	Discount rate	1.8% of par - 9.7% of par	5.5% of par
		Workout period	2 – 4 years	3.4 years

Investments:
Auction rate securities:

Equity securities	Discounted cash flow	Discount rate	2.0% of par – 11.7% of par	6.9% of par
		Workout period	1 – 3 years	2.8 years

Municipal securities	Discounted cash flow	Discount rate	0.0% of par – 10.0% of par	5.6% of par
		Workout period	1 – 4 years	2.6 years

Other
Investments in partnerships	Market approach	Revenue multiple	1.3 – 3.9	2.7
		EBITDA multiple	7.0 – 14.3	9.1

Private equity investments	Market approach	Revenue multiple	0.5 – 3.3	2.2
		EBITDA multiple	4.3 – 17.6	10.0

The fair value of certain Level 3 assets was determined using various methodologies as appropriate, including net asset values (“NAVs”) of underlying investments, third-party pricing vendors, broker quotes and market and income approaches. These inputs are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of current market environment and other analytical procedures.

The fair value for our auction-rate securities was determined using an income approach based on an internally developed discounted cash flow model. The discounted cash flow model utilizes two significant unobservable inputs: discount rate and workout period. The discount rate was calculated using credit spreads of the underlying collateral or similar securities. The workout period was based on an assessment of publicly available information on efforts to re-establish functioning markets for these securities and our company’s own redemption experience. Significant increases in any of these inputs in isolation would result in a significantly lower fair value. On an on-going basis, management verifies the fair value by reviewing the appropriateness of the discounted cash flow model and its significant inputs.

General and limited partnership interests in investment partnerships totaled $57.7 million at March 31, 2013. The general and limited partnership interests in investment partnerships were primarily valued based upon NAVs received from third-party fund managers. The various partnerships are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the funds to utilize pricing/valuation information, including independent appraisals, from third-party sources. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.

Direct investments in private equity companies totaled $13.5 million at March 31, 2013. Direct investments in private equity companies may be valued using the market approach or the income approach, or a combination thereof, and were valued based on an assessment of each underlying investment, incorporating evaluation of

additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies, market indices, assumptions relating to appropriate risk adjustments for nonperformance and legal restrictions on disposition, among other factors. The fair value derived from the methods used are evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Under the income approach, fair value may be determined by discounting the cash flows to a single present amount using current market expectations about those future amounts. Unobservable inputs used in a discounted cash flow model may include projections of operating performance generally covering a five-year period and a terminal value of the private equity direct investment. For securities utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could result in a significantly lower (higher) fair value measurement. For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement.

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. 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 $56.3 million of transfers of financial assets from Level 2 to Level 1 during the three months ended March 31, 2013 primarily related to corporate preferred securities that were converted to common stock, which is actively traded and fixed income and equity securities for which market trades were observed that provided transparency into the valuation of these assets. There were $0.7 million of transfers of financial assets from Level 1 to Level 2 during the three months ended March 31, 2013 primarily related to corporate fixed income 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 March 31, 2013 and December 31, 2012, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands).


	March 31, 2013				December 31, 2012
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
Financial assets:
Cash and cash equivalents	$	573,644	$	573,644	$	403,941	$	403,941
Restricted cash		4,415		4,415		4,414		4,414
Cash segregated for regulatory purposes		32		32		128,031		128,031
Securities purchased under agreements to resell		156,341		156,341		158,695		158,695
Trading securities owned		923,452		923,452		763,608		763,608
Available-for-sale securities		1,729,837		1,729,837		1,625,168		1,625,168
Held-to-maturity securities		716,273		725,843		708,008		715,274
Loans held for sale		165,698		165,698		214,531		214,531
Bank loans		886,647		909,115		815,937		834,188
Investments		268,082		268,082		236,434		236,434
Financial liabilities:
Securities sold under agreements to repurchase	$	108,529	$	108,529	$	140,346	$	140,346
Bank deposits		3,556,568		3,581,155		3,346,133		3,368,643
Trading securities sold, but not yet purchased		588,922		588,922		319,742		319,742
Securities sold, but not yet purchased		24,550		24,550		22,966		22,966
Derivative contracts ⁽¹⁾		17,459		17,459		19,934		19,934
Senior notes ⁽²⁾		325,000		349,242		325,000		338,475
Non-recourse debt ⁽²⁾		55,934		57,069		58,992		58,992
Debentures to Stifel Financial Capital Trusts		82,500		68,113		82,500		66,545
Liabilities subordinated to claims of general creditors		3,131		3,048		5,318		5,204

⁽¹⁾	Included in accounts payable and accrued expenses in the consolidated statements of financial condition.

⁽²⁾	Included in corporate debt in the consolidated statements of financial condition.

The following table presents the estimated fair values of financial instruments not measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 (in thousands):


	March 31, 2013
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash	$	401,774	$	401,774	$	—	$	—
Restricted cash		4,415		4,415		—		—
Cash segregated for regulatory purposes		32		32		—		—
Securities purchased under agreements to resell		156,341		155,927		414		—
Held-to-maturity securities		725,843		—		490,054		235,790
Loans held for sale		165,698		—		165,698		—
Bank loans		909,115		—		909,115		—
Financial liabilities:
Securities sold under agreements to repurchase	$	108,529	$	108,529	$	—	$	—
Bank deposits		3,581,155		—		3,581,155		—
Senior notes		349,242		349,242		—		—
Non-recourse debt		57,069		—		57,069		—
Debentures to Stifel Financial Capital Trusts		68,113		—		—		68,113
Liabilities subordinated to claims of general creditors		3,048		—		—		3,048

	December 31, 2012
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash	$	331,345	$	331,345	$	—	$	—
Restricted cash		4,414		4,414		—		—
Cash segregated for regulatory purposes		128,031		128,031		—		—
Securities purchased under agreements to resell		158,695		154,688		4,007		—
Held-to-maturity securities		715,274		—		487,775		227,499
Loans held for sale		214,531		—		214,531		—
Bank loans		834,188		—		834,188		—
Financial liabilities:
Securities sold under agreements to repurchase	$	140,346	$	140,346	$	—	$	—
Bank deposits		3,368,643		—		3,368,643		—
Senior notes		338,475		338,475		—		—
Non-recourse debt		58,992		—		58,992		—
Debentures to Stifel Financial Capital Trusts		66,545		—		—		66,545
Liabilities subordinated to claims of general creditors		5,204		—		—		5,204

The following, as supplemented by the discussion above, describes the valuation techniques used in estimating the fair value of our financial instruments as of March 31, 2013 and December 31, 2012.

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 March 31, 2013 and December 31, 2012 approximate fair value due to the short-term nature.

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.

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.

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 March 31, 2013 and December 31, 2012 approximate fair value due to the short-term nature.

Bank Deposits

The fair value for demand deposits is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money-market and savings accounts approximate their fair values at the reporting date as these are short-term in nature. 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.

Senior Notes

The fair value of our senior notes is estimated based upon quoted market prices.

Non-recourse debt

The fair value of our non-recourse debt is based on the discounted value of contractual cash flows. We have assumed a discount rate based on the coupon achieved in our 6.7% senior notes due 2022.

Debentures to Stifel Financial Capital Trusts

The fair value of our trust preferred securities is based on the discounted value of contractual cash flows. We have assumed a discount rate based on the coupon achieved in our 6.7% senior notes due 2022.

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 March 31, 2013 and December 31, 2012, are as follows (in thousands):


	March 31, 2013		December 31, 2012
Trading securities owned:
U.S. government agency securities	$	204,162	$	123,758
U.S. government securities		27,703		3,573
Corporate securities:
Fixed income securities		426,046		396,878
Equity securities		123,044		35,472
State and municipal securities		142,497		203,927

	$	923,452	$	763,608

Trading securities sold, but not yet purchased:
U.S. government securities	$	187,253	$	162,661
U.S. government agency securities		5,256		15
Corporate securities:
Fixed income securities		313,191		150,698
Equity securities		83,135		6,281
State and municipal securities		87		87

	$	588,922	$	319,742

At March 31, 2013 and December 31, 2012, trading securities owned in the amount of $706.8 million and $607.6 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 in future periods. We are obligated to acquire the securities sold short at prevailing market prices in future periods, 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 March 31, 2013 and December 31, 2012 (in thousands):


	March 31, 2013
	Amortized cost		Gross unrealized gains ⁽¹⁾		Gross unrealized losses ⁽¹⁾			Estimated fair value
Available-for-sale securities
U.S. government securities	$	1,217	$	1	$	(1	)	$	1,217
State and municipal securities		185,400		4,015		(2,638	)		186,777
Mortgage-backed securities:
Agency		723,399		5,833		(2,436	)		726,796
Commercial		243,192		4,817		(29	)		247,980
Non-agency		6,158		136		—			6,294
Corporate fixed income securities		493,887		7,453		(731	)		500,609
Asset-backed securities		59,934		298		(68	)		60,164

	$	1,713,187	$	22,553	$	(5,903	)	$	1,729,837

Held-to-maturity securities ⁽²⁾
Asset-backed securities	$	638,673	$	10,504	$	(2,191	)	$	646,986
Corporate fixed income securities		55,398		177		(295	)		55,280
Municipal auction rate securities		22,202		1,393		(18	)		23,577

	$	716,273	$	12,074	$	(2,504	)	$	725,843


	December 31, 2012
	Amortized cost		Gross unrealized gains ⁽¹⁾		Gross unrealized losses ⁽¹⁾			Estimated fair value
Available-for-sale securities
U.S. government securities	$	1,114	$	1	$	(2	)	$	1,113
State and municipal securities		153,885		4,648		(1,113	)		157,420
Mortgage-backed securities:
Agency		676,861		8,140		(153	)		684,848
Commercial		255,255		5,902		(183	)		260,974
Non-agency		13,077		801		—			13,878
Corporate fixed income securities		474,338		7,590		(1,746	)		480,182
Asset-backed securities		26,572		378		(197	)		26,753

	$	1,601,102	$	27,460	$	(3,394	)	$	1,625,168

Held-to-maturity securities ⁽²⁾
Asset-backed securities	$	630,279	$	9,364	$	(2,971	)	$	636,672
Corporate fixed income securities		55,420		36		(519	)		54,937
Municipal auction rate securities		22,309		1,376		(20	)		23,665

	$	708,008	$	10,776	$	(3,510	)	$	715,274

⁽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 months ended March 31, 2013, we received proceeds of $18.2 million from the sale of available-for-sale securities, which resulted in realized gains of $0.7 million. For the three months ended March 31, 2012, we received proceeds of $2.7 million from the sale of available-for-sale securities, which resulted in an immaterial amount of realized gains.

During the three months ended March 31, 2013, unrealized losses, net of deferred tax benefits, of $4.6 million were recorded in accumulated other comprehensive income in the consolidated statements of financial condition. During the three months ended March 31, 2012, unrealized gains, net of deferred taxes, of $4.9 million were recorded in accumulated other comprehensive income in the consolidated statements of financial condition.

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.


	March 31, 2013
	Available-for-sale securities				Held-to-maturity securities
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
Debt securities
Within one year	$	130,020	$	130,899	$	—	$	—
After one year through three years		290,906		296,597		16,154		16,251
After three years through five years		31,259		31,718		46,934		46,775
After five years through ten years		53,451		53,480		251,641		253,556
After ten years		234,802		236,073		401,544		409,261
Mortgage-backed securities
After three years through five years		349		359		—		—
After five years through ten years		16,736		17,452		—		—
After ten years		955,664		963,259		—		—

	$	1,713,187	$	1,729,837	$	716,273	$	725,843

At March 31, 2013 and December 31, 2012, securities of $563.1 million and $613.8 million, respectively, were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits.

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 March 31, 2013 (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 securities
U.S. government securities	$	(1	)	$	509	$	—		$	—	$	(1	)	$	509
State and municipal securities		(1,977	)		78,533		(661	)		32,554		(2,638	)		111,087
Mortgage-backed securities:
Agency		(2,436	)		373,671		—			—		(2,436	)		373,671
Commercial		(1	)		12,933		(28	)		17,378		(29	)		30,311
Corporate fixed income securities		(479	)		41,688		(252	)		39,705		(731	)		81,393
Asset-backed securities		(9	)		13,063		(59	)		13,576		(68	)		26,639

	$	(4,903	)	$	520,397	$	(1,000	)	$	103,213	$	(5,903	)	$	623,610

The gross unrealized losses on our available-for-sale securities of $5.9 million as of March 31, 2013 relate to 58 individual securities.

Certain investments in the available-for-sale portfolio at March 31, 2013, 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 March 31, 2013, was $623.1 million, which was 36.0% of our available-for-sale investment portfolio. The amortized cost basis of these investments was $629.0 million at March 31, 2013. As discussed in more detail below, we conduct periodic reviews of all securities with unrealized losses to assess whether the impairment is other-than-temporary.

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 loss. 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. There were no credit-related OTTI charges during the three months ended March 31, 2013.

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 $5.9 million as of March 31, 2013 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.

NOTE 8 – Bank Loans

The following table presents the balance and associated percentage of each major loan category in our loan portfolio at March 31, 2013 and December 31, 2012 (in thousands, except percentages):


	March 31, 2013						December 31, 2012
	Balance			Percent			Balance			Percent

Consumer ⁽¹⁾	$	426,015			47.5	%	$	425,382			51.6	%
Commercial and industrial		370,817			41.3			300,034			36.4
Residential real estate		69,481			7.7			65,657			8.0
Home equity lines of credit		18,114			2.0			19,531			2.4
Commercial real estate		12,720			1.4			12,805			1.5
Construction and land		510			0.1			510			0.1

		897,657			100.0	%		823,919			100.0	%
Unamortized loan fees, net of origination costs		(1,654	)					(1,207	)
Loans in process		50						1,370
Allowance for loan losses		(9,406	)					(8,145	)

	$	886,647					$	815,937

⁽¹⁾	Includes securities-based loans of $425.9 million and $425.3 million at March 31, 2013 and December 31, 2012, respectively.

Changes in the allowance for loan losses for the periods presented were as follows (in thousands):


	Three Months Ended March 31,
	2013			2012


Allowance for loan losses, beginning of period	$	8,145		$	5,300

Provision for loan losses		1,720			543
Charge-offs:
Residential real estate		(484	)		(109	)
Recoveries		25			47

Allowance for loan losses, end of period	$	9,406		$	5,781

A loan is determined to be impaired, when principal or interest becomes 90 days past due or when collection becomes uncertain. At the time a loan is determined to be impaired, the accrual of interest and amortization of deferred loan origination fees is discontinued (“non-accrual status”), and any accrued and unpaid interest income is reversed. At March 31, 2013, we had $1.1 million of non-accrual loans, which included $0.4 million in troubled debt restructurings, for which there was a specific allowance of $0.3 million. At December 31, 2012, we had $1.8 million of non-accrual loans, which included $1.6 million in troubled debt restructurings, for which there was a specific allowance of $0.6 million. The gross interest income related to impaired loans, which would have been recorded had these loans been current in accordance with their original terms, and the interest income recognized on these loans during the three months ended March 31, 2013 and 2012 were insignificant to the consolidated financial statements.

Credit Quality

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency ratios are an indicator, among other considerations, of credit risk within our loan portfolios. The level of nonperforming assets represents another indicator of the potential for future credit losses. Accordingly, key metrics we track and use in evaluating the credit quality of our loan portfolio include delinquency and nonperforming asset rates, as well as charge-off rates and our internal risk ratings of the loan portfolio. In general, we are a secured lender. At March 31, 2013 and December 31, 2012, approximately 90% and 96% of our loan portfolio was collateralized, respectively. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction.

The following is a breakdown of the allowance for loan losses by type for as of March 31, 2013 and December 31, 2012 (in thousands, except rates):


	March 31, 2013					December 31, 2012
	Balance		Percent⁽¹⁾			Balance		Percent⁽¹⁾

Commercial and industrial	$	6,890		41.3	%	$	5,450		36.4	%
Consumer		639		47.5			647		51.6
Residential real estate		423		7.7			408		8.0
Commercial real estate		356		1.4			691		1.5
Home equity lines of credit		212		2.0			195		2.4
Construction and land		13		0.1			13		0.1
Qualitative		873		—			741		—

	$	9,406		100.0	%	$	8,145		100.0	%

⁽¹⁾	Loan category as a percentage of total loan portfolio.

At March 31, 2013 and December 31, 2012, Stifel Bank had loans outstanding to its executive officers, directors, and their affiliates in the amount of $0.6 million and $0.6 million, respectively, and loans outstanding to other Stifel Financial Corp. executive officers, directors, and their affiliates in the amount of $5.2 million and $7.2 million, respectively. Such loans and other extensions of credit were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral requirements) as those prevailing at the time for comparable transactions with other persons.

At March 31, 2013 and December 31, 2012, we had mortgage loans held for sale of $165.7 million and $214.5 million, respectively. For the three months ended March 31, 2013 and 2012, we recognized gains of $4.6 million and $2.8 million, respectively, from the sale of originated loans, net of fees and costs.

NOTE 9 – Fixed Assets

The following is a summary of fixed assets as of March 31, 2013 and December 31, 2012 (in thousands):


	March 31, 2013			December 31, 2012

Furniture and equipment	$	163,279		$	157,974
Building and leasehold improvements		91,793			82,234
Property on operating leases		46,500			46,500

Total		301,572			286,708
Less accumulated depreciation and amortization		(152,686	)		(145,305	)

	$	148,886		$	141,403

For the three months ended March 31, 2013 and 2012, depreciation and amortization of furniture and equipment, and leasehold improvements totaled $7.9 million and $7.2 million, respectively.

NOTE 10 – Goodwill and Intangible Assets

We test goodwill for impairment on an annual basis and on an interim basis when certain events or circumstances exist. We test for impairment at the reporting unit level, which is generally at the level of or one level below our company’s business segments. For both the annual and interim tests, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment test is not required. However, if we conclude otherwise, we are then required to perform the first step of the two-step impairment test. Goodwill impairment is determined by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not deemed to be impaired. If the estimated fair value is below carrying value, however, further analysis is required to determine the amount of the impairment. Additionally, if the carrying value of a reporting unit is zero or a negative value and it is

determined that it is more likely than not the goodwill is impaired, further analysis is required. The estimated fair values of the reporting units are derived based on valuation techniques we believe market participants would use for each of the reporting units. Our annual goodwill impairment testing was completed as of July 31, 2012, with no impairment identified.

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


	December 31, 2012		Net additions		Impairment losses		March 31, 2013
Goodwill
Global Wealth Management	$	144,377	$	—	$	—	$	144,377
Institutional Group		275,016		310,613		—		585,629

	$	419,393	$	310,613	$	—	$	730,006


	December 31, 2012		Net additions		Amortization			March 31, 2013
Intangible assets
Global Wealth Management	$	16,377	$	—	$	(574	)	$	15,803
Institutional Group		12,590		3,256		(564	)		15,282

	$	28,967	$	3,256	$	(1,138	)	$	31,085

The adjustments to goodwill and intangible assets during the three months ended March 31, 2013 are attributable to our acquisitions of KBW, Inc. and Miller Buckfire. The allocation of the purchase price of KBW, Inc. is preliminary and will be finalized upon completion of the analysis of the fair values of the net assets of KBW, Inc. as of the acquisition date and the identified intangible assets. The final goodwill recorded on the consolidated statement of financial condition may differ from that reflected herein as a result of future measurement period adjustments and the recording of identified intangible assets. See Note 3 in the notes to our consolidated financial statements for additional information regarding the acquisition of KBW, Inc.

Amortizable intangible assets consist of acquired customer relationships, trade name, and investment banking backlog that are amortized over their contractual or determined useful lives. Intangible assets subject to amortization as of March 31, 2013 and December 31, 2012 were as follows (in thousands):


	March 31, 2013				December 31, 2012
	Gross carrying value		Accumulated amortization		Gross carrying value		Accumulated amortization

Customer relationships	$	40,166	$	19,503	$	40,166	$	18,648
Trade name		11,560		2,276		9,442		2,023
Investment banking backlog		3,388		2,250		2,250		2,220

	$	55,114	$	24,029	$	51,858	$	22,891

Amortization expense related to intangible assets was $1.1 million and $1.3 million for the three months ended March 31, 2013 and 2012, respectively.

The weighted-average remaining lives of the following intangible assets at March 31, 2013 are: customer relationships, 5.8 years; and trade name, 7.1 years. The investment banking backlog will be amortized over its estimated life, which we expect to be within the next 18 months. As of March 31, 2013, we expect amortization expense in future periods to be as follows (in thousands):


Fiscal year
Remainder of 2013	$	5,045
2014		4,562
2015		3,835
2016		2,829
2017		2,447
Thereafter		12,367

	$	31,085

NOTE 11 – Short-Term Borrowings

Our short-term financing is generally obtained through short-term bank line financing on an uncommitted, secured basis, committed short-term bank line financing on an unsecured basis and securities lending arrangements. We borrow from various banks on a demand basis with company-owned and customer securities pledged as collateral. The value of customer-owned securities used as collateral is not reflected in the consolidated statements of financial condition. Our uncommitted secured lines of credit at March 31, 2013 totaled $680.0 million with four banks and are dependent on having appropriate collateral, as determined by the bank agreements, to secure an advance under the line. The availability of our uncommitted lines are subject to approval by the individual banks each time an advance is requested and may be denied. Our peak daily borrowing was $486.7 million during the three months ended March 31, 2013. There are no compensating balance requirements under these arrangements.

Our committed short-term bank line financing at March 31, 2013 consisted of a $100.0 million revolving credit facility. The credit facility expires in December 2013. The applicable interest rate under the revolving credit facility is calculated as a per annum rate equal to the one-month Eurocurrency rate plus 1.00%, as defined in the revolving credit facility. At March 31, 2013, we had $100.0 million outstanding on our revolving credit facility, at a rate of 2.7%, and were in compliance with all covenants.

At March 31, 2013, short-term borrowings from banks were $569.8 million at an average rate of 1.18%, which were collateralized by company-owned securities valued at $623.1 million. At December 31, 2012, short-term borrowings from banks were $304.7 million at an average rate of 1.14%, which were collateralized by company-owned securities valued at $530.7 million. The average bank borrowing was $209.4 million and $185.3 million for the three months ended March 31, 2013 and 2012, respectively, at average daily interest rates of 1.17% and 1.13%, respectively.

At March 31, 2013 and December 31, 2012, Stifel Nicolaus had a stock loan balance of $66.0 million and $19.2 million, respectively, at average daily interest rates of 0.14% and 0.24%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $64.6 million and $156.0 million during the three months ended March 31, 2013 and 2012, respectively, at average daily effective interest rates of 0.10% and 0.13%, respectively. Customer-owned securities were utilized in these arrangements.

NOTE 12 – Corporate Debt

The following table summarizes our corporate debt as of March 31, 2013 and December 31, 2012 (in thousands):


	March 31, 2013		December 31, 2012

6.70% senior notes, due 2022 ⁽¹⁾	$	175,000	$	175,000
5.375% senior notes, due 2022 ⁽²⁾		150,000		150,000
Non-recourse debt, 6.75%, due 2016 ⁽³⁾		55,934		58,992

	$	380,934	$	383,992

(1)

In January 2012, we sold in a registered underwritten public offering, $175.0 million in aggregate principal amount of 6.70% senior notes due January 2022. Interest on these senior notes is payable quarterly in arrears. On or after January 15, 2015, we may redeem some or all of the senior notes at any time at a redemption price equal to 100% of the principal amount of the notes being redeemed plus accrued interest thereon to the redemption date.

(2)

In December 2012, we sold in a registered underwritten public offering, $150.0 million in aggregate principal amount of 5.375% senior notes due December 2022. Interest on these senior notes is payable quarterly in arrears. On or after December 31, 2015, we may redeem some or all of the senior notes at any time at a redemption price equal to 100% of the principal amount of the notes being redeemed plus accrued interest thereon to the redemption date.

(3)

On December 17, 2012, we issued $60.0 million principal in non-recourse debt for the purpose of acquiring East Shore Aircraft LLC. Interest on the non-recourse debt is payable monthly. We are required to redeem some of the non-recourse debt as each aircraft is sold at the various lease expiration dates. We will collect 100% of the monthly lease payments with approximately 65% allocated to pay interest first then principal on non-recourse debt. In addition, as each aircraft is sold at the various lease expiration dates a portion of the proceeds will be applied to the principal balance of the non-recourse debt.

Our corporate debt matures as follows, based upon its contractual terms:


	Non-recourse debt		Senior notes
2013	$	8,372		—
2014		16,414		—
2015		24,383		—
2016		6,765		—
2017		—		—
Thereafter		—		325,000

	$	55,934		325,000

NOTE 13 – Bank Deposits

Deposits consist of money market and savings accounts, certificates of deposit, and demand deposits. Deposits at March 31, 2013 and December 31, 2012 were as follows (in thousands):


	March 31, 2013		December 31, 2012

Money market and savings accounts	$	3,492,637	$	3,271,929
Demand deposits (interest-bearing)		50,940		64,926
Demand deposits (non-interest-bearing)		12,358		8,648
Certificates of deposit		633		630

	$	3,556,568	$	3,346,133

The weighted average interest rate on deposits was 0.1% and 0.1% at March 31, 2013 and December 31, 2012, respectively.

Scheduled maturities of certificates of deposit at March 31, 2013 and December 31, 2012 were as follows (in thousands):


	March 31, 2013		December 31, 2012
Certificates of deposit, less than $100:
Within one year	$	183	$	182
One to three years		204		203

	$	387	$	385


Certificates of deposit, $100 and greater:
Within one year	$	246	$	245
One to three years		—		—

		246		245

	$	633	$	630

At March 31, 2013 and December 31, 2012, the amount of deposits includes related party deposits, primarily brokerage customers’ deposits from Stifel Nicolaus of $3.5 billion and $3.3 billion, respectively, and interest-bearing and time deposits of executive officers, directors, and their affiliates of $0.1 million and $0.2 million, respectively. Such deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates) as those prevailing at the time for comparable transactions with other persons.

NOTE 14 – Derivative Instruments and Hedging Activities

We use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our company making fixed payments. Our policy is not to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments recognized at fair value executed with the same counterparty under master netting arrangements.

The following table provides the notional values and fair values of our derivative instruments as of March 31, 2013 and December 31, 2012 (in thousands):

March 31, 2013

Asset derivatives

Liability derivatives

Notional value

Balance sheet
location

Positive
fair value

Balance sheet
location

Negative
fair value

Derivatives designated as hedging instruments under Topic 815:

Cash flow interest rate contracts

536,002

Other assets

—

Accounts payable and accrued expenses

(17,459

)

December 31, 2012

Asset derivatives

Liability derivatives

Notional value

Balance sheet
location

Positive
fair value

Balance sheet
location

Negative
fair value

Derivatives designated as hedging instruments under Topic 815:

Cash flow interest rate contracts

550,127

Other assets

—

Accounts payable and accrued expenses

(19,934

)

Cash Flow Hedges

We have entered into interest rate swap agreements that effectively modify our exposure to interest rate risk by converting floating rate debt to a fixed rate debt over the next ten years.

Any unrealized gains or losses related to cash flow hedging instruments are reclassified from accumulated other comprehensive loss into earnings in the same period the hedged forecasted transaction affects earnings and are recorded in interest expense on the accompanying consolidated statements of operations. The ineffective portion of the cash flow hedging instruments is recorded in other income or other operating expense. There was an immaterial loss recognized during the three months ended March 31, 2013 related to ineffectiveness.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on our variable rate deposits. During the next twelve months, we estimate that $7.8 million will be reclassified as an increase to interest expense.

The following table shows the effect of our company’s derivative instruments in the consolidated statements of operations for the three months ended March 31, 2013 and 2012 (in thousands):


	Three Months Ended March 31, 2013
	(Gain)/Loss recognized in OCI (effectiveness)			Location of loss reclassified from OCI into income	Loss reclassified from OCI into income		Location of loss recognized in OCI (ineffectiveness)	Loss recognized due to ineffectiveness

Cash flow interest rate contracts	$	(133	)	Interest expense	$	2,335	None	$	—

	Three Months Ended March 31, 2012
	(Gain)/Loss recognized in OCI (effectiveness)			Location of loss reclassified from OCI into income	Loss reclassified from OCI into income		Location of loss recognized in OCI (ineffectiveness)	Loss recognized due to ineffectiveness

Cash flow interest rate contracts	$	(625	)	Interest expense	$	3,211	None	$	—

We maintain a risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate volatility. Our goal is to manage sensitivity to changes in rates by hedging the maturity characteristics of variable rate affiliated deposits, thereby limiting the impact on earnings. By using derivative instruments, we are exposed to credit and market risk on those derivative positions. We manage the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. Credit risk is equal to the extent of the fair value gain in a derivative if the counterparty fails to perform. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes our company and, therefore, creates a repayment risk for our company. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, have no repayment risk. See Note 5 in the notes to our consolidated financial statements for further discussion on how we determine the fair value of our financial instruments. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by senior management.

Credit Risk-Related Contingency Features

We have agreements with our derivative counterparties containing provisions where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations.

We have agreements with certain of our derivative counterparties that contain provisions where if our shareholders’ equity declines below a specified threshold or if we fail to maintain a specified minimum shareholders’ equity, then we could be declared in default on our derivative obligations.

Certain of our agreements with our derivative counterparties contain provisions where if a specified event or condition occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.

Regulatory Capital-Related Contingency Features

Certain of our derivative instruments contain provisions that require us to maintain our capital adequacy requirements. If we were to lose our status as “adequately capitalized,” we would be in violation of those provisions, and the counterparties of the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions.

As of March 31, 2013, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $18.3 million (termination value). We have minimum collateral posting thresholds with certain of our derivative counterparties and have posted cash collateral of $28.9 million against our obligations under these agreements. If we had breached any of these provisions at March 31, 2013, we would have been required to settle our obligations under the agreements at the termination value.

Counterparty Risk

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

NOTE 15 – Debentures to Stifel Financial Capital Trusts

The following table summarizes our debentures to Stifel Financial Capital Trusts as of March 31, 2013 and December 31, 2012 (in thousands):


	March 31, 2013		December 31, 2012

Debenture to Stifel Financial Capital Trust II ⁽¹⁾	$	35,000	$	35,000
Debenture to Stifel Financial Capital Trust III ⁽²⁾		35,000		35,000
Debenture to Stifel Financial Capital Trust IV ⁽³⁾		12,500		12,500

	$	82,500	$	82,500

(1)

On August 12, 2005, we completed a private placement of $35.0 million of 6.38% Cumulative Trust Preferred Securities. The trust preferred securities were offered by Stifel Financial Capital Trust II (the “Trust II”), a non-consolidated wholly owned subsidiary of our company. The trust preferred securities mature on September 30, 2035, but may be redeemed by our company, and in turn, the Trust II would call the debenture beginning September 30, 2010. The Trust II requires quarterly distributions of interest to the holders of the trust preferred securities. Distributions will be payable at a floating interest rate equal to three-month London Interbank Offered Rate (“LIBOR”) plus 1.70% per annum.

(2)

On March 30, 2007, we completed a private placement of $35.0 million of 6.79% Cumulative Trust Preferred Securities. The trust preferred securities were offered by Stifel Financial Capital Trust III (the “Trust III”), a non-consolidated wholly owned subsidiary of our company. The trust preferred securities mature on June 6, 2037, but may be redeemed by our company, and in turn, Trust III would call the debenture beginning June 6, 2012. Trust III requires quarterly distributions of interest to the holders of the trust preferred securities. Distributions will be payable at a floating interest rate equal to three-month LIBOR plus 1.85% per annum.

(3)

On June 28, 2007, we completed a private placement of $35.0 million of 6.78% Cumulative Trust Preferred Securities. The trust preferred securities were offered by Stifel Financial Capital Trust IV (the “Trust IV”), a non-consolidated wholly owned subsidiary of our company. The trust preferred securities mature on September 6, 2037, but may be redeemed by our company, and in turn, Trust IV would call the debenture beginning September 6, 2012. Trust IV requires quarterly distributions of interest to the holders of the trust preferred securities. Distributions will be payable at a floating interest rate equal to three-month LIBOR plus 1.85% per annum.

NOTE 16 – Disclosures About Offsetting Assets and Liabilities

The following table provides information about financial assets and derivative assets that are subject to offset as of March 31, 2013 and December 31, 2012 (in thousands):


							Gross amounts not offset in the Statement of Financial Condition
	Gross amounts of recognized assets		Gross amounts offset in the Statement of Financial Condition		Net amounts presented in the Statement of Financial Condition		Financial instruments		Collateral received			Net amount
As of March 31, 2013:
Securities borrowing ⁽¹⁾	$	333,371	$	—	$	333,371	$	—	$	(333,371	)	$	—
Reverse repurchase agreements		156,341	$	—		156,341		—		(156,341	)		—
Cash flow interest rate contracts		—		—		—		—		—			—

	$	489,712	$	—	$	489,712	$	—	$	(489,712	)	$	—


As of December 31, 2012:
Securities borrowing ⁽¹⁾	$	153,819	$	—	$	153,819	$	—	$	(153,819	)	$	—
Reverse repurchase agreements ⁽²⁾		158,695		—		158,695		—		(158,695	)		—
Cash flow interest rate contracts		—		—		—		—		—			—

	$	312,514	$	—	$	312,514	$	—	$	(312,514	)	$	—

⁽¹⁾

Securities borrowing transactions are included in receivables from brokers, dealers, and clearing organizations on the consolidated statements of financial condition. See Note 4 in the notes to our consolidated financial statements for additional information on receivables from brokers, dealers, and clearing organizations.

⁽²⁾	Collateral received includes securities received by our company from the counterparty. These securities are not included on the consolidated statements of financial condition unless there is an event of default.

The following table provides information about financial liabilities and derivative liabilities that are subject to offset as of March 31, 2013 and December 31, 2012:


							Gross amounts not offset in the Statement of Financial Condition
	Gross amounts of recognized liabilities		Gross amounts offset in the Statement of Financial Condition		Net amounts presented in the Statement of Financial Condition		Financial instruments		Collateral pledged			Net amount
As of March 31, 2013:
Securities lending ⁽³⁾	$	65,955	$	—	$	65,955	$	—	$	(65,955	)	$	—
Repurchase agreements ⁽⁴⁾		108,529		—		108,529		—		(108,529	)		—
Cash flow interest rate contracts		17,459		—		17,459		—		(17,459	)		—

	$	191,943	$	—	$	191,943	$	—	$	(191,943	)	$	—


As of December 31, 2012:
Securities lending ⁽³⁾	$	19,218	$	—	$	19,218	$	—	$	(19,218	)	$	—
Repurchase agreements ⁽⁴⁾		140,346	$	—		140,346		—		(140,346	)		—
Cash flow interest rate contracts		19,934		—		19,934		—		(19,934	)		—

	$	179,498	$	—	$	179,498	$	—	$	(179,498	)	$	—

⁽³⁾

Securities lending transactions are included in payables to from brokers, dealers, and clearing organizations on the consolidated statements of financial condition. See Note 4 in the notes to our consolidated financial statements for additional information on payables to brokers, dealers, and clearing organizations.

⁽⁴⁾	Collateral pledged includes the fair value of securities pledged by our company to the counter party. These securities are included on the consolidated statements of financial condition unless we default

NOTE 17 – Commitments, Guarantees, and Contingencies

Broker-Dealer Commitments and Guarantees

In the normal course of business, we enter into underwriting commitments. Settlement of transactions relating to such underwriting commitments, which were open at March 31, 2013, had no material effect on the consolidated financial statements.

In connection with margin deposit requirements of The Options Clearing Corporation, we pledged customer-owned securities valued at $93.4 million to satisfy the minimum margin deposit requirement of $28.7 million at March 31, 2013.

In connection with margin deposit requirements of the National Securities Clearing Corporation, we deposited $46.7 million in cash at March 31, 2013, which satisfied the minimum margin deposit requirements of $37.4 million.

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

Thomas Weisel Partners LLC (“TWP”) has entered into settlement and release agreements (“Settlement Agreements”) with certain customers, whereby it will purchase their ARS, at par, in exchange for a release from any future claims. At March 31, 2013, we estimate that TWP customers held $18.3 million par value of ARS, which may be repurchased over the next 3 years. The amount estimated for repurchase assumes no issuer redemptions.

Other Commitments

In the ordinary course of business, Stifel Bank has commitments to extend credit in the form of commitments to originate loans, standby letters of credit, and lines of credit. See Note 21 in the notes to our consolidated financial statements for further details.

Concentration of Credit Risk

We provide investment, capital-raising, and related services to a diverse group of domestic customers, including governments, corporations, and institutional and individual investors. Our exposure to credit risk associated with the non-performance of customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile securities markets, credit markets, and regulatory changes. This exposure is measured on an individual customer basis and on a group basis for customers that share similar attributes. To reduce the potential for risk concentrations, counterparty credit limits have been implemented for certain products and are continually monitored in light of changing customer and market conditions. As of March 31, 2013 and December 31, 2012, we did not have significant concentrations of credit risk with any one customer or counterparty, or any group of customers or counterparties.

NOTE 18 – Legal Proceedings

Our company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from our securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive, or indeterminate damages. Our company and its subsidiaries are also involved in other reviews, investigations, and proceedings by governmental and self-regulatory organizations regarding our business, which may result in adverse judgments, settlements, fines, penalties, injunctions, and other relief. We are contesting the allegations in these claims, and we believe that there are meritorious defenses in each of these lawsuits, arbitrations, and regulatory investigations. In view of the number and diversity of claims against the company, the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigation and other claims, we cannot state with certainty what the eventual outcome of pending litigation or other claims will be.

We have established reserves for potential losses that are probable and reasonably estimable that may result from pending and potential legal actions, investigations and regulatory proceedings. In many cases, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount or range of any potential loss, particularly where proceedings may be in relatively early stages or where plaintiffs are seeking substantial or indeterminate damages. Matters frequently need to be more developed before a loss or range of loss can reasonably be estimated.

In our opinion, based on currently available information, review with outside legal counsel, and consideration of amounts provided for in our consolidated financial statements with respect to these matters, including the matters described below, the ultimate resolution of these matters will not have a material adverse impact on our financial position and results of operations. However, resolution of one or more of these matters may have a material effect on the results of operations in any future period, depending upon the ultimate resolution of those matters and depending upon the level of income for such period. For matters where a reserve has not been established and for which we believe a loss is reasonably possible, as well as for matters where a reserve has been recorded but for which an exposure to loss in excess of the amount accrued is reasonably possible, based on currently available information, we believe that such losses will not have a material effect on our consolidated financial statements.

SEC/Wisconsin Lawsuit

The SEC filed a civil lawsuit against our company in U.S. District Court for the Eastern District of Wisconsin on August 10, 2011. The action arises out of our role in investments made by five Southeastern Wisconsin school districts (the “school districts”) in transactions involving collateralized debt obligations (“CDOs”). These transactions are described in more detail below in connection with the civil lawsuit filed by the school districts. The SEC has asserted claims under Section 15c(1)(A), Section 10b and Rule 10b-5 of the Exchange Act and Sections 17a(1), 17a(2) and 17a(3) of the Securities Act. The claims are based upon both alleged misrepresentations and omissions in connection with the sale of the CDOs to the school districts, as well as the allegedly unsuitable nature of the CDOs. On October 31, 2011, we filed a motion to dismiss the action for failure to state a claim. The District Court granted in part and denied in part our motion to dismiss, and as a result the SEC has amended its complaint. We answered, denied the substantive allegations of the amended complaint and asserted various affirmative defenses. We believe, based upon currently available information and review with outside counsel, that we have meritorious defenses to the SEC’s lawsuit and intend to vigorously defend the SEC’s claims.

We were named in a civil lawsuit filed in the Circuit Court of Milwaukee, Wisconsin (the “Wisconsin State Court”) on September 29, 2008. The lawsuit was filed against our company, Stifel Nicolaus, as well as Royal Bank of Canada Europe Ltd. (“RBC”), and certain other RBC entities (collectively the “RBC entities”) by the school districts and the individual trustees for other post-employment benefit (“OPEB”) trusts established by those school districts (collectively the “Plaintiffs”). This lawsuit relates to the same transactions that are the subject of the SEC action noted above. As we previously disclosed, we entered into a settlement of the Plaintiffs’ lawsuit against our company in March, 2012. The settlement provides the potential for the Plaintiffs to obtain significant additional damages from the RBC entities. The school districts are continuing their lawsuit against RBC, and we are pursuing claims against the RBC entities to recover payments we have made to the school districts and for amounts owed to the OPEB trusts. Subsequent to the settlement, RBC asserted claims against the school districts, and our company for fraud, negligent misrepresentation, strict liability misrepresentation and information negligently provided for the guidance of others based upon our role in connection with the school districts’ purchase of the CDOs. RBC has also asserted claims against our company for civil conspiracy and conspiracy to injure its business based upon our company’s settlement with the school districts and pursuit of claims against the RBC entities. We have moved to dismiss these latter claims against us, and a hearing is scheduled in the trial court on our motion to dismiss RBC’s claims that are based on the company’s settlement agreement with the school districts. We believe we have meritorious legal and factual defenses to the claims asserted by RBC and we intend to vigorously defend those claims.

EDC Bond Issuance Matter

In January 2008, our company was the initial purchaser of a $50.0 million bond offering under Rule 144A. The bonds were issued by the Lake of the Torches Economic Development Corporation (“EDC”) in connection with certain new financing for the construction of a proposed new casino, as well as refinancing of indebtedness involving Lac Du Flambeau Band of Lake Superior Chippewa Indians (the “Tribe”). In 2009, Saybrook Tax Exempt Investors LLC, a qualified institutional buyer and the sole bondholder through its special purpose vehicle LDF Acquisition LLC (collectively, “Saybrook”), and Wells Fargo Bank, NA (“Wells Fargo”), indenture trustee for the bonds, brought an action in a Wisconsin federal court against EDC and the Tribe to enforce the bonds after a default by EDC. Our company was not named as a party in that action. In the 2009 action, EDC was successful in its assertion that the bond indenture was void as an unapproved “management contract” under National Indian Gaming Commission regulations, and that accordingly the Tribe’s waiver of sovereign immunity contained in the indenture was void. Although the Wisconsin federal court dismissed the entire 2009 action, the Seventh Circuit Court of Appeals modified the judgment and remanded the case for further proceedings as to enforceability of the bond documents other than the bond indenture against EDC.

On January 16, 2012, after the remand from the Seventh Circuit Court of Appeals, Saybrook filed a new action in Wisconsin state court naming our company and Stifel Nicolaus as defendants with respect to Stifel Nicolaus’ role as initial purchaser. Saybrook also named as defendants: the Tribe, EDC, and the law firm of Godfrey & Kahn, S.C. (“G&K”) which served as both issuer’s counsel and bond counsel in the transaction. The Wisconsin state-court action seeks to enforce the bonds against EDC and the Tribe and also asserts claims against the defendants based on alleged misrepresentations about the enforceability of the indenture and the bonds and the waiver of sovereign immunity by EDC and the Tribe. In April 2012 Saybrook dismissed the 2009 federal action and filed a new action in Wisconsin federal court alleging nearly identical claims against the same defendants named in the Wisconsin state court action. The parties agreed to stay the state court action until the federal court ruled on whether it had jurisdiction over the 2012 federal action, and in April 2013 the federal court determined it did not have jurisdiction over the action. That decision by the federal court reactivated the Wisconsin state court action filed in 2012.

As plaintiff in the state court action, Saybrook alleges that G&K represented in various legal opinions issued in the transaction, as well as in other documents associated with the transaction, that (i) the bonds and indenture were legally enforceable obligations of EDC and (ii) EDC’s waivers of sovereign immunity were valid. The claims asserted against us are for breaches of implied warranties of validity and title, securities fraud and statutory misrepresentation under Wisconsin state law, and intentional and negligent misrepresentations relating to the validity of the bond documents and the Tribe’s waiver of its sovereign immunity. To the extent EDC does not fully perform its obligations to Saybrook pursuant to the bonds, Saybrook seeks a judgment for rescission, restitutionary damages, including the amounts paid by Saybrook for the bonds, and costs; alternatively, Saybrook seeks to recover damages, costs and attorneys’ fees from us.

After the federal court declined to exercise jurisdiction over the 2012 federal court action and with the state court action reactivated, on April 25, 2013 the Tribe and EDC filed a new lawsuit against Saybrook, our company, Stifel Nicolaus, G&K, and Wells Fargo in the Lac du Flambeau Tribal Court. The Tribal Court action seeks a declaratory judgment that all of the bond documents are void. This new lawsuit created a jurisdictional conflict between the Tribal Court and the Wisconsin state court that will be resolved by those courts. Meanwhile, on April 29, 2013, we filed a motion to dismiss all of the claims alleged against our company and Stifel Nicolaus brought by Saybrook in the state court action. While there can be no assurance that we will be successful, based upon currently available information and review with outside counsel, we believe that we have meritorious legal and factual defenses to the matter, and we intend to vigorously defend the substantive claims and the procedural attempt to move the litigation to the Lac du Flambeau Tribal Court.

Lac Courte Orielles Tribal lawsuit

On December 13, 2012, the Lac Courte Oreilles Band of Lake Superior Chippewa Indians of Wisconsin (the “Tribe”) filed a civil lawsuit against Stifel Nicolaus in the Tribe’s Tribal Court (the “Tribal Lawsuit”). In December 2006, the Tribe issued two series of taxable municipal bonds as a means of raising revenue to fund various projects (the “2006 Bond Transaction”), including the refinancing of two series of bonds the Tribe issued in 2003. The Complaint alleges that we undertook to advise the Tribe regarding its financing options in 2006 but failed to disclose certain information before the 2006 Bond Transaction. On February 19, 2013 we filed a declaratory judgment action seeking to establish that the Tribal Court lacks jurisdiction over the Tribal Lawsuit. On February 20, 2013, we filed a motion to dismiss the Tribal Lawsuit, challenging the jurisdiction of the Tribal Court. While there can be no assurance that we will be successful, based upon currently available information and review with outside counsel, we believe that we have meritorious defenses to the Tribe’s claims and we intend to vigorously defend the allegations.

Stetson Oil & Gas Ltd. Matter

In October 2008, Stetson Oil & Gas Ltd. named Thomas Weisel Partners Canada, Inc. (n/k/a Stifel Nicolaus Canada, Inc.) as a defendant in a statement of claim filed in the Ontario Superior Court of Justice. On March 1, 2013, Stifel Nicolaus Canada received an adverse decision from the Ontario Superior Court of Justice that it had breached an engagement letter with Stetson, dated July 13, 2008. The decision awarded Stetson approximately $16.0 million plus interest and costs incurred by Stetson in connection with the litigation. Stifel Nicolaus Canada disagrees with the Court’s decision and is appealing that decision. Stifel Nicolaus Canada believes it has adequate reserves for what it believes will be the ultimate resolution of this matter.

NOTE 19 – Regulatory Capital Requirements

We operate in a highly regulated environment and are subject to capital requirements, which may limit distributions to our company from its subsidiaries. Distributions from our broker-dealer subsidiaries are subject to net capital rules. A broker-dealer that fails to comply with the SEC’s Uniform Net Capital Rule (Rule 15c3-1) may be subject to disciplinary actions by the SEC and self-regulatory organizations, such as FINRA, including censures, fines, suspension, or expulsion. Stifel Nicolaus has chosen to calculate its net capital under the alternative method, which prescribes that their net capital shall not be less than the greater of $1.0 million or two percent of aggregate debit balances (primarily receivables from customers) computed in accordance with the SEC’s Customer Protection Rule (Rule 15c3-3). KBW and CSA calculate their net capital under the aggregate indebtedness method, whereby their aggregate indebtedness may not be greater than fifteen times their net capital (as defined).

At March 31, 2013, Stifel Nicolaus had net capital of $320.5 million, which was 52.9% of aggregate debit items and $308.3 million in excess of its minimum required net capital. At March 31, 2013, KBW’s and CSA’s net capital exceeded the minimum net capital required under the SEC rule.

Our international subsidiaries, SNEL and KBW Limited, are subject to the regulatory supervision and requirements of the Financial Conduct Authority (“FCA”) in the United Kingdom. At March 31, 2013, SNEL’s and KBW Limited’s capital and reserves were in excess of the financial resources requirement under the rules of the FCA.

Our Canadian subsidiary, SN Canada, is subject to the regulatory supervision and requirements of the Investment Industry Regulatory Organization of Canada (“IIROC”). At March 31, 2013, SN Canada’s net capital and reserves were in excess of the financial resources requirement under the rules of the IIROC.

Our company, as a bank holding company, and Stifel Bank are subject to various regulatory capital requirements administered by the Federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our company’s and Stifel Bank’s financial results. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, our company and Stifel Bank must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our company’s and Stifel Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require our company, as a bank holding company, and Stifel Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital to average assets (as defined). To be categorized as “well capitalized,” our company and Stifel Bank must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the tables below (in thousands, except ratios).

Stifel Financial Corp. – Federal Reserve Capital Amounts

March 31, 2013


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital to risk-weighted assets	$	1,090,864		23.3	%	$	375,003		8.0	%	$	408,754		10.0	%
Tier 1 capital to risk-weighted assets		1,081,298		23.1			187,502		4.0			281,252		6.0
Tier 1 capital to adjusted average total assets		1,081,298		16.3			265,874		4.0			332,343		5.0

Stifel Bank – Federal Reserve Capital Amounts

March 31, 2013


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total capital to risk-weighted assets	$	283,130		13.0	%	$	174,888		8.0	%	$	218,610		10.0	%
Tier 1 capital to risk-weighted assets		273,724		12.5			87,444		4.0			131,166		6.0
Tier 1 capital to adjusted average total assets		273,724		7.1			153,408		4.0			191,761		5.0

NOTE 20 – Employee Incentive, Deferred Compensation, and Retirement Plans

We maintain several incentive stock award plans that provide for the granting of stock options, stock appreciation rights, restricted stock, performance awards, and stock units to our employees. We are permitted to issue new shares under all stock award plans approved by shareholders or to reissue our treasury shares. Awards under our company’s incentive stock award plans are granted at market value at the date of grant. The awards generally vest ratably over a three- to eight-year vesting period. Options expire ten years from the date of grant.

All stock-based compensation plans are administered by the Compensation Committee of the Board of Directors (“Compensation Committee”), which has the authority to interpret the plans, determine to whom awards may be granted under the plans, and determine the terms of each award. According to these plans, we are authorized to grant an additional 6.6 million shares at March 31, 2013.

Stock-based compensation expense included in compensation and benefits expense in the consolidated statements of operations for our company’s incentive stock award plans was $51.0 million and $15.1 million for the three months ended March 31, 2013 and 2012, respectively. The tax benefit related to stock-based compensation recognized in shareholders’ equity was $8.2 million and $12.4 million for the three months ended March 31, 2013 and 2012, respectively.

On closing date of our acquisition of KBW, Inc., certain employees of KBW, Inc. and our company were granted restricted stock or restricted stock units of Stifel as retention. The fair value of the awards issued as retention was $30.6 million. There are no continuing service requirements associated with these restricted stock units, and accordingly were expensed at date of grant. This charge is included in compensation and benefits in the consolidated statement of operations for the three months ended March 31, 2013.

Stock Options

We have substantially eliminated the use of stock options as a form of compensation. During the three months ended March 31, 2013, no options were granted.

At March 31, 2013, all outstanding options were exercisable. Cash proceeds from the exercise of stock options were $0.2 million and $1.2 million for the three months ended March 31, 2013 and 2012, respectively. Tax benefits realized from the exercise of stock options for the three months ended March 31, 2013 and 2012 were $0.3 million and $3.3 million, respectively.

Stock Units

A stock unit represents the right to receive a share of common stock from our company at a designated time in the future without cash payment by the employee and is issued in lieu of cash incentive, principally for deferred compensation and employee retention plans. The restricted stock units vest on an annual basis over the next three to eight years and are distributable, if vested, at future specified dates. At March 31, 2013, the total number of stock units outstanding was 17.1 million, of which 8.0 million were unvested.

At March 31, 2013, there was unrecognized compensation cost for stock units of $248.5 million, which is expected to be recognized over a weighted-average period of 3.1 years.

Deferred Compensation Plans

The Stifel Nicolaus Wealth Accumulation Plan (the “SWAP Plan”) is provided to certain revenue producers, officers, and key administrative employees, whereby a certain percentage of their incentive compensation is deferred as defined by the Plan into company stock units with a 25% matching contribution by our company. Participants may elect to defer up to an additional 15% of their incentive compensation with a 25% matching contribution. Units generally vest over a three- to seven-year period and are distributable upon vesting or at future specified dates. Deferred compensation costs are amortized on a straight-line basis over the vesting period. Elective deferrals are 100% vested. As of March 31, 2013, there were 16.1 million units outstanding under the SWAP Plan.

Additionally, the SWAP Plan allows Stifel Nicolaus’ financial advisors who achieve certain levels of production, the option to defer a certain percentage of their gross commissions. As stipulated by the SWAP Plan, the financial advisors have the option to: 1) defer 4% of their gross commissions into company stock units with a 25% matching contribution or 2) defer up to 2% in mutual funds, which earn a return based on the performance of index mutual funds as designated by our company or a fixed income option. The mutual fund deferral option does not include a company match. Financial advisors may elect to defer an additional 1% of gross commissions into company stock units with a 25% matching contribution. Financial advisors have no ownership in the mutual funds. Included in the investments in the consolidated statements of financial condition are investments in mutual funds of

$19.4 million and $18.0 million at March 31, 2013 and December 31, 2012, respectively, that were purchased by our company to economically hedge, on an after-tax basis, its liability to the financial advisors who choose to base the performance of their return on the index mutual fund option. At March 31, 2013 and December 31, 2012, the deferred compensation liability related to the mutual fund option of $11.8 million and $16.6 million, respectively, is included in accrued compensation in the consolidated statements of financial condition.

In addition, certain financial advisors, upon joining our company, may receive company stock units in lieu of transition cash payments. Deferred compensation related to these awards generally vests over a five- to eight-year period. Deferred compensation costs are amortized on a straight-line basis over the deferral period.

NOTE 21 – Off-Balance Sheet Credit Risk

In the normal course of business, we execute, settle, and finance customer and proprietary securities transactions. These activities expose our company to off-balance sheet risk in the event that customers or other parties fail to satisfy their obligations.

In accordance with industry practice, securities transactions generally settle within three business days after trade date. Should a customer or broker fail to deliver cash or securities as agreed, we may be required to purchase or sell securities at unfavorable market prices.

We borrow and lend securities to facilitate the settlement process and finance transactions, utilizing customer margin securities held as collateral. We monitor the adequacy of collateral levels on a daily basis. We periodically borrow from banks on a collateralized basis, utilizing firm and customer margin securities in compliance with SEC rules. Should the counterparty fail to return customer securities pledged, we are subject to the risk of acquiring the securities at prevailing market prices in order to satisfy our customer obligations. We control our exposure to credit risk by continually monitoring our counterparties’ positions, and where deemed necessary, we may require a deposit of additional collateral and/or a reduction or diversification of positions. Our company sells securities it does not currently own (short sales) and is obligated to subsequently purchase such securities at prevailing market prices. We are exposed to risk of loss if securities prices increase prior to closing the transactions. We control our exposure to price risk from short sales through daily review and setting position and trading limits.

We manage our risks associated with the aforementioned transactions through position and credit limits and the continuous monitoring of collateral. Additional collateral is required from customers and other counterparties when appropriate.

We have accepted collateral in connection with resale agreements, securities borrowed transactions, and customer margin loans. Under many agreements, we are permitted to sell or repledge these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions. At March 31, 2013, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $1.2 billion, and the fair value of the collateral that had been sold or repledged was $108.5 million. At December 31, 2012, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $965.8 million, and the fair value of the collateral that had been sold or repledged was $140.3 million.

We enter into interest rate derivative contracts to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are principally used to manage differences in the amount, timing, and duration of our known or expected cash payments related to certain variable-rate affiliated deposits. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments. Our interest rate hedging strategies may not work in all market environments and, as a result, may not be effective in mitigating interest rate risk.

Derivatives’ notional contract amounts are not reflected as assets or liabilities in the consolidated statements of financial condition. Rather, the market, or fair value, of the derivative transactions are reported in the consolidated statements of financial condition as other assets or accounts payable and accrued expenses, as applicable.

For a complete discussion of our activities related to derivative instruments, see Note 14 in the notes to our consolidated financial statements.

In the ordinary course of business, Stifel Bank has commitments to originate loans, standby letters of credit, and lines of credit. Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established by the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being

drawn upon, the total commitment amounts do not necessarily represent future cash commitments. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if necessary, is based on the credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate, and residential real estate.

At March 31, 2013 and December 31, 2012, Stifel Bank had outstanding commitments to originate loans aggregating $196.0 million and $241.5 million, respectively. The commitments extended over varying periods of time, with all commitments at March 31, 2013 scheduled to be disbursed in the following three months.

Through Stifel Bank, in the normal course of business, we originate residential mortgage loans and sell them to investors. We may be required to repurchase mortgage loans that have been sold to investors in the event there are breaches of certain representations and warranties contained within the sales agreements. We may be required to repurchase mortgage loans that were sold to investors in the event that there was inadequate underwriting or fraud, or in the event that the loans become delinquent shortly after they are originated. We also may be required to indemnify certain purchasers and others against losses they incur in the event of breaches of representations and warranties and in various other circumstances, and the amount of such losses could exceed the repurchase amount of the related loans. Consequently, we may be exposed to credit risk associated with sold loans.

Standby letters of credit are irrevocable conditional commitments issued by Stifel Bank to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should Stifel Bank be obligated to perform under the standby letters of credit, it may seek recourse from the customer for reimbursement of amounts paid. At March 31, 2013 and December 31, 2012, Stifel Bank had outstanding letters of credit totaling $10.5 million and $10.5 million, respectively. All of the standby letters of credit commitments at March 31, 2013 have expiration terms that are less than one year.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Stifel Bank uses the same credit policies in granting lines of credit as it does for on-balance sheet instruments. At March 31, 2013 and December 31, 2012, Stifel Bank had granted unused lines of credit to commercial and consumer borrowers aggregating $244.5 million and $220.1 million, respectively.

NOTE 22 – Income Taxes

Our effective rate for the three months ended March 31, 2013 was 37.4% compared to 41.3% for the three months ended March 31, 2012. The effective rate for the three months ended March 31, 2013 was impacted by adjustments to the provision as a result of the Miller Buckfire acquisition. The provision for income taxes for the three months ended March 31, 2012 was impacted by an increase in our state tax rate and losses incurred at a lower tax rate in foreign jurisdictions.

NOTE 23 – Segment Reporting

We currently operate through the following three business segments: Global Wealth Management, Institutional Group, and various corporate activities combined in the Other segment.

Our Global Wealth Management segment consists of two businesses, the Private Client Group and Stifel Bank. The Private Client Group includes branch offices and independent contractor offices of our broker-dealer subsidiaries located throughout the United States, primarily in the Midwest and Mid-Atlantic regions with a growing presence in the Northeast, Southeast, and Western United States. These branches provide securities brokerage services, including the sale of equities, mutual funds, fixed income products, and insurance, as well as offering banking products to their clients through Stifel Bank. Stifel Bank segment provides residential, consumer, and commercial lending, as well as FDIC-insured deposit accounts to customers of our broker-dealer subsidiaries and to the general public.

The Institutional Group segment includes institutional sales and trading. It provides securities brokerage, trading, and research services to institutions, with an emphasis on the sale of equity and fixed income products. This segment also includes the management of and participation in underwritings for both corporate and public finance (exclusive of sales credits generated through the private client group, which are included in the Global Wealth Management segment), merger and acquisition, and financial advisory services.

The Other segment includes certain corporate activities of our company.

Information concerning operations in these segments of business for the three months ended March 31, 2013 and 2012 is as follows (in thousands):


	Three Months Ended March 31,
	2013			2012
Net revenues: ⁽¹⁾
Global Wealth Management	$	266,957		$	247,608
Institutional Group		176,437			149,244
Other		(1,614	)		3,481

	$	441,780		$	400,333


Income/(loss) before income taxes:
Global Wealth Management	$	69,499		$	68,878
Institutional Group		28,137			24,004
Other		(74,290	)		(33,628	)

	$	23,346		$	59,254

⁽¹⁾	No individual client accounted for more than 10 percent of total net revenues for the three months ended March 31, 2013 or 2012.

The following table presents our company’s total assets on a segment basis at March 31, 2013 and December 31, 2012 (in thousands):


	March 31, 2013		December 31, 2012

Global Wealth Management	$	5,689,255	$	5,116,487
Institutional Group		1,997,310		1,447,484
Other		447,190		402,169

	$	8,133,755	$	6,966,140

We have operations in the United States, Canada, United Kingdom, and Europe. Our company’s foreign operations are conducted through its wholly owned subsidiaries, SNEL, KBW Limited, and SN Canada. Substantially all long-lived assets are located in the United States.

Revenues, classified by the major geographic areas in which they are earned for the three months ended March 31, 2013 and 2012, were as follows (in thousands):


	Three Months Ended March 31,
	2013		2012

United States	$	429,193	$	391,838
United Kingdom		6,019		3,890
Canada		4,007		2,252
Other European		2,561		2,353

	$	441,780	$	400,333

NOTE 24 – Earnings Per Share (“EPS”)

Basic EPS is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted earnings per share include dilutive stock options and stock units under the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2013 and 2012 (in thousands, except per share data):


	Three Months Ended March 31,
	2013		2012

Net income	$	14,619	$	34,773
Shares for basic and diluted calculations:
Average shares used in basic computation		60,054		53,243
Dilutive effect of stock options and units ⁽¹⁾		9,135		9,426

Average shares used in diluted computation	$	69,189	$	62,669
Net income per share:
Basic	$	0.24	$	0.65
Diluted ⁽¹⁾	$	0.21	$	0.55

⁽¹⁾	Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Diluted earnings per share include stock options and units.

For the three months ended March 31, 2013 and 2012, the anti-dilutive effect from restricted stock units was immaterial.

NOTE 25 – Shareholders’ Equity

Share Repurchase Program

We have an ongoing authorization from the Board of Directors to repurchase our common stock in the open market or in negotiated transactions. At March 31, 2013, the maximum number of shares that may yet be purchased under this plan was 4.0 million. The repurchase program has no expiration date. These purchases may be made on the open market or in privately negotiated transactions, depending upon market conditions and other factors. Repurchased shares may be used to meet obligations under our employee benefit plans and for general corporate purposes.

Issuance of Shares

During the three months ended March 31, 2013, we issued 6.7 million shares related to the purchase of KBW, Inc.. See Note 3 in the notes to our consolidated financial statements for additional information regarding the acquisition of KBW, Inc.

NOTE 26 – Variable Interest Entities

The determination as to whether an entity is a VIE is based on the structure and nature of the entity. We also consider other characteristics, such as the ability to influence the decision-making relative to the entity’s activities and how the entity is financed. The determination as to whether we must consolidate a VIE is based on whether we are the primary beneficiary for certain entities. The primary beneficiary determination is based on a qualitative analysis of the VIE’s 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. For other entities, the determination as to whether we must consolidate the VIE is based on an analysis of the power to direct the activities of the VIE as well as the obligation to absorb losses or benefits that could potentially be significant to the entity. Where qualitative analyses are not conclusive, we perform a quantitative analysis. Our company’s involvement with VIEs is limited to entities used as investment vehicles and private equity funds, the establishment of Stifel Financial Capital Trusts, and our issuance of a convertible promissory note.

We have formed several non-consolidated investment funds with third-party investors that are typically organized as limited liability companies (“LLCs”) or limited partnerships. These partnerships and LLCs have assets of $255.7 million at March 31, 2013. For those funds where we act as the general partner, our company’s economic interest is generally limited to management fee arrangements as stipulated by the fund operating agreements. We have generally provided the third-party investors with rights to terminate the funds or to remove us as the general partner. Management fee revenue earned by our company was insignificant during the three months ended March 31, 2013 and 2012. In addition, our direct investment interest in these entities is insignificant at March 31, 2013 and December 31, 2012.

Thomas Weisel Capital Management LLC, a subsidiary of our company, acts as the general partner of a series of investment funds in venture capital and fund of funds and manages investment funds that are active buyers of secondary interests in private equity funds, as well as portfolios of direct interests in venture-backed companies. These partnerships have combined assets of $246.3 million at March 31, 2013. We hold variable interests in these funds as a result of our company’s rights to receive management fees. Our company’s investment in and additional capital commitments to the private equity funds are also considered variable interests. The additional capital commitments are subject to call at a later date and are limited in amount. Our exposure to loss is limited to our investments in, advances and commitments to, and receivables due from these funds, and that exposure is $1.9 million at March 31, 2013. Management fee revenue earned by our company was insignificant during the three months ended March 31, 2013 and 2012.

For the entities noted above that were determined to be VIEs, we have concluded that we are not the primary beneficiary and therefore we are not required to consolidate these entities. Additionally, for certain other entities we reviewed other relevant accounting guidance, which states the general partner in a limited partnership is presumed to control that limited partnership. The presumption may be overcome if the limited partners have either: (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause, or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s business and thereby preclude the general partner from exercising unilateral control over the partnership. If the criteria are not met, the consolidation of the partnership or limited liability company is required. Based on our evaluation of these entities, we determined that these entities do not require consolidation.

Debenture to Stifel Financial Capital Trusts

We have completed private placements of cumulative trust preferred securities through Stifel Financial Capital Trust II, Stifel Financial Capital Trust III, and Stifel Financial Capital Trust IV (collectively, the “Trusts”). The Trusts are non-consolidated wholly owned business trust subsidiaries of our company and were established for the limited purpose of issuing trust securities to third parties and lending the proceeds to our company.

The trust preferred securities represent an indirect interest in junior subordinated debentures purchased from our company by the Trusts, and we effectively provide for the full and unconditional guarantee of the securities issued by the Trusts. We make timely payments of interest to the Trusts as required by contractual obligations, which are sufficient to cover payments due on the securities issued by the Trusts, and believe that it is unlikely that any circumstances would occur that would make it necessary for our company to make payments related to these Trusts other than those required under the terms of the debenture agreements and the trust preferred securities agreements. The Trusts were determined to be VIEs because the holders of the equity investment at risk do not have adequate decision-making ability over the Trust’s activities. Our investment in the Trusts is not a variable interest, because equity interests are variable interests only to the extent that the investment is considered to be at risk. Because our investment was funded by the Trusts, it is not considered to be at risk.

Interest in FSI Group, LLC (“FSI”)

We have provided financing of $18.0 million in the form of a convertible promissory note to FSI, a limited liability company specializing in investing in banks, thrifts, insurance companies, and other financial services firms. In February 2013, the convertible promissory note was amended and restated. The convertible promissory note matures in April 2018, however, FSI has three 5 year extension options. The note is convertible at our election into a 49.9% interest in FSI only after the last extension option. The convertible promissory note has a minimum coupon rate equal to 8% per annum plus additional interest related to certain defined cash flows of the business, not to exceed 18% per annum. As we do not hold the power to direct the activities of FSI nor to absorb a majority of the expected losses, or receive a majority of the expected benefits, it was determined that we are not required to consolidate this entity.

Our company’s exposure to loss is limited to the carrying value of the note with FSI at March 31, 2013, of $18.0 million, which is included in other assets in the consolidated statements of financial condition. Our company

had no liabilities related to this entity at March 31, 2013. We have the discretion to make additional capital contributions. We have not provided financial or other support to FSI that we were not previously contractually required to provide as of March 31, 2013. Our company’s involvement with FSI has not had a material effect on our consolidated financial position, operations, or cash flows.

NOTE 27 – Subsequent Events

We evaluate subsequent events that have occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Based on the evaluation, we did not identify any recognized subsequent events that would have required adjustment to the consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of our company should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012, and the accompanying consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q.

Certain statements in this report may be considered forward-looking. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements cover, among other things, statements made about general economic and market conditions, the investment banking industry, our objectives and results, and also may include our belief regarding the effect of various legal proceedings, management expectations, our liquidity and funding sources, counterparty credit risk, or other similar matters. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including those factors discussed below under “External Factors Impacting Our Business” as well as the factors identified under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, as updated in our subsequent reports filed with the SEC. These reports are available at our web site at www.stifel.com and at the SEC web site at www.sec.gov.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events, unless we are obligated to do so under federal securities laws.

Unless otherwise indicated, the terms “we,” “us,” “our” or “our company” in this report refer to Stifel Financial Corp. and its wholly owned subsidiaries.

Executive Summary

We operate as a financial services and bank holding company. We have built a diversified business serving private clients, institutional investors, and investment banking clients located across the country. Our principal activities are: (i) private client services, including securities transaction and financial planning services; (ii) institutional equity and fixed income sales, trading and research, and municipal finance; (iii) investment banking services, including mergers and acquisitions, public offerings, and private placements; and (iv) retail and commercial banking, including personal and commercial lending programs.

Our core philosophy is based upon a tradition of trust, understanding, and studied advice. We attract and retain experienced professionals by fostering a culture of entrepreneurial, long-term thinking. We provide our private, institutional and corporate clients quality, personalized service, with the theory that if we place clients’ needs first, both our clients and our company will prosper. Our unwavering client and employee focus have earned us a reputation as one of the leading brokerage and investment banking firms off Wall Street. We have grown our business both organically and through opportunistic acquisitions.

We plan to maintain our focus on revenue growth with a continued appreciation for the development of quality client relationships. Within our private client business, our efforts will be focused on recruiting experienced financial advisors with established client relationships. Within our capital markets business, our focus continues to be on providing quality client management and product diversification. In executing our growth strategy, we will continue to seek out opportunities that allow us to take advantage of the consolidation among middle-market firms, whereby allowing us to increase market share in our Global Wealth Management and Institutional Group businesses.

Our ability to attract and retain highly skilled and productive employees is critical to the success of our business. Accordingly, compensation and benefits comprise the largest component of our expenses, and our performance is dependent upon our ability to attract, develop and retain highly skilled employees who are motivated and committed to providing the highest quality of service and guidance to our clients.

On the closing date of the acquisition of KBW, Inc., we granted restricted stock or restricted stock units to certain employees of KBW, Inc and our company as retention. There are no continuing service requirements associated with these restricted stock awards, and accordingly were expensed on the date of grant.

Results for the three months ended March 31, 2013

For the three months ended March 31, 2013, our net revenues increased 10.4% to $441.8 million compared to $400.3 million during the comparable period in 2012. Net income decreased 58.0% to $14.6 million for the three months ended March 31, 2013 compared to $34.8 million during the comparable period in 2012.

Our revenue growth was primarily attributable to an increase in commission revenue; growth in asset management and service fees as a result of an increase in investment advisory revenues; higher investment banking revenues as a result of improved M&A revenues; gains recognized on our investment in Knight Capital Group, Inc.; and increased net interest revenues as a result of the growth of net interest-earning assets at Stifel Bank. Our revenue growth was impacted by our recent acquisitions of KBW, Inc. and Miller Buckfire. The increase in revenue growth was offset by a decline in principal transaction revenues.

The results for the three months ended March 31, 2013 were significantly impacted by the expensing of stock awards issued as retention as part of the acquisition of KBW, Inc. and certain non-recurring and merger-related expenses. The aggregate impact of these items was a reduction to net income of $25.3 million (after-tax) or $0.37 per diluted share.

External Factors Impacting our Business

Performance in the financial services industry in which we operate is highly correlated to the overall strength of economic conditions and financial market activity. Overall market conditions are a product of many factors, which are beyond our control and mostly unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services as reflected by the number and size of equity a