Edgar Filing: STIFEL FINANCIAL CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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 September 30, 2014

¨	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 October 31, 2014, was 66,010,498.

STIFEL FINANCIAL CORP.

Form 10-Q

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Consolidated Statements of Financial Condition as of September 30, 2014 (unaudited) and December 31, 2013			1
Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and September 30, 2013 (unaudited)			3
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and September 30, 2013 (unaudited)			4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and September 30, 2013 (unaudited)			5
Notes to Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			49
Item 3. Quantitative and Qualitative Disclosures About Market Risk			83
Item 4. Controls and Procedures			86

PART II – OTHER INFORMATION			87
Item 1. Legal Proceedings			87
Item 1A. Risk Factors			89
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			89
Item 6. Exhibits			90
Signatures			91

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition


(in thousands)	September 30, 2014		December 31, 2013
	(Unaudited)
Assets
Cash and cash equivalents	$	535,118	$	716,560
Restricted cash		—		4,268
Cash segregated for regulatory purposes		39		35
Receivables:
Brokerage clients, net		549,597		530,402
Brokers, dealers, and clearing organizations		651,428		381,122
Securities purchased under agreements to resell		125,513		225,075
Financial instruments owned, at fair value (includes securities pledged of $492,986 and $686,997, respectively)		951,854		801,494
Available-for-sale securities, at fair value		1,527,747		1,756,253
Held-to-maturity securities, at amortized cost		1,199,364		1,312,115
Loans held for sale		104,277		109,110
Bank loans, net of allowance		1,867,177		1,404,353
Investments, at fair value		209,131		217,228
Fixed assets, net		126,007		106,446
Goodwill		762,305		727,336
Intangible assets, net		41,797		49,889
Loans and advances to financial advisors and other employees, net		186,582		184,458
Deferred tax assets, net		234,173		243,554
Other assets		254,008		239,172

Total Assets	$	9,326,117	$	9,008,870

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition (continued)


(in thousands, except share and per share amounts)	September 30, 2014			December 31, 2013
	(Unaudited)
Liabilities and Shareholders’ Equity
Short-term borrowings from banks	$	49,800		$	55,700
Payables:
Brokerage clients		319,253			318,942
Brokers, dealers, and clearing organizations		79,111			58,135
Drafts		58,589			74,710
Securities sold under agreements to repurchase		143,814			263,809
Bank deposits		4,552,522			4,663,323
Financial instruments sold, but not yet purchased, at fair value		613,023			481,214
Accrued compensation		286,572			337,589
Accounts payable and accrued expenses		277,384			285,968
Senior notes		625,000			325,000
Debentures to Stifel Financial Capital Trusts		82,500			82,500

		7,087,568			6,946,890

Liabilities subordinated to claims of general creditors		—			3,131
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 65,994,630 and 63,744,074 shares, respectively		9,861			9,562
Additional paid-in-capital		1,593,721			1,544,143
Retained earnings		672,540			540,238
Accumulated other comprehensive income		(37,573	)		(35,030	)

		2,238,549			2,058,913
Treasury stock, at cost, 0 and 1,330 shares, respectively		—			(64	)

		2,238,549			2,058,849

Total Liabilities and Shareholders’ Equity	$	9,326,117		$	9,008,870

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2014			2013			2014			2013

Revenues:
Commissions	$	151,621		$	145,837		$	463,749		$	446,498
Principal transactions		109,378			122,583			361,515			341,153
Investment banking		120,147			92,851			393,966			289,199
Asset management and service fees		96,638			76,710			280,039			221,711
Interest		52,096			39,130			141,035			101,829
Other income		4,803			13,063			18,745			45,269

Total revenues		534,683			490,174			1,659,049			1,445,659
Interest expense		11,228			11,535			28,701			34,738

Net revenues		523,455			478,639			1,630,348			1,410,921


Non-interest expenses:
Compensation and benefits		331,440			326,020			1,033,478			958,179
Occupancy and equipment rental		41,611			41,288			125,110			116,090
Communications and office supplies		27,464			26,122			78,151			74,034
Commissions and floor brokerage		9,971			10,150			28,247			28,777
Other operating expenses		47,203			44,051			143,945			126,600

Total non-interest expenses		457,689			447,631			1,408,931			1,303,680


Income from continuing operations before income tax expense		65,766			31,008			221,417			107,241
Provision for income taxes		25,673			(43,921	)		87,774			(13,541	)

Income from continuing operations		40,093			74,929			133,643			120,782

Discontinued operations:
Loss from discontinued operations, net of tax		(190	)		(5,239	)		(2,757	)		(7,037	)

Net income	$	39,903		$	69,690		$	130,886		$	113,745


Earnings per basic common share:
Income from continuing operations	$	0.60		$	1.16		$	2.01		$	1.91
Loss from discontinued operations		—			(0.08	)		(0.04	)		(0.11	)

Earnings per basic common share	$	0.60		$	1.08		$	1.97		$	1.80

Earnings per diluted common share:
Income from continuing operations	$	0.52		$	1.00		$	1.76		$	1.66
Loss from discontinued operations		—			(0.07	)		(0.04	)		(0.10	)

Earnings per diluted common share	$	0.52		$	0.93		$	1.72		$	1.56

Weighted average number of common shares outstanding:
Basic		66,691			64,706			66,344			63,133
Diluted		76,681			75,191			76,011			72,851

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2014			2013			2014			2013
Net income	$	39,903		$	69,690		$	130,886		$	113,745
Other comprehensive income/(loss) ⁽¹⁾:
Changes in unrealized gains/(losses) on available-for-sale securities⁽²⁾		(3,884	)		(8,160	)		1,683			(48,158	)
Changes in unrealized gains on cash flow hedging instruments ⁽³⁾		1,108			473			2,094			5,420
Foreign currency translation adjustment		(8,388	)		2,669			(6,320	)		1,393

		(11,164	)		(5,018	)		(2,543	)		(41,345	)

Comprehensive income	$	28,739		$	64,672		$	128,343		$	72,400

⁽¹⁾	Net of taxes of $7.0 million and $3.1 million for the three months ended September 30, 2014 and 2013, respectively. Net of taxes of $1.6 million and $25.8 million for the nine months ended September 30, 2014 and 2013, respectively.

⁽²⁾

Amounts are net of reclassifications to earnings of realized gains of $0.7 million and $0.2 million for the three months ended September 30, 2014 and 2013, respectively. Amounts are net of reclassifications to earnings of realized gains of $1.9 million and $1.1 million for the nine months ended September 30, 2014 and 2013, respectively.

⁽³⁾

Amounts are net of reclassifications to earnings of losses of $1.5 million and $2.1 million for the three months ended September 30, 2014 and 2013, respectively. Amounts are net of reclassifications to earnings of losses of $4.7 million and $6.7 million for the nine months ended September 30, 2014 and 2013, respectively.

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended September 30,
(in thousands)	2014			2013
Cash Flows from Operating Activities:
Net income	$	130,886		$	113,745
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization		21,727			25,162
Amortization of loans and advances to financial advisors and other employees		49,285			48,368
Amortization of premium on investment portfolio		4,385			5,568
Provision for loan losses and allowance for loans and advances to financial advisors and other employees		6,832			6,395
Amortization of intangible assets		9,762			4,145
Deferred income taxes		17,111			(70,687	)
Excess tax benefits from stock-based compensation		(18,220	)		(10,446	)
Stock-based compensation		70,852			124,835
(Gains)/losses on investments		(894	)		11,636
Other, net		1,990			23,792
Decrease/(increase) in operating assets, net of assets acquired:
Cash segregated for regulatory purposes and restricted cash		4,264			127,993
Receivables:
Brokerage clients		(19,195	)		(35,741	)
Brokers, dealers, and clearing organizations		(263,745	)		(197,148	)
Securities purchased under agreements to resell		99,562			(9,487	)
Loans originated as held for sale		(811,711	)		(1,069,168	)
Proceeds from mortgages held for sale		808,882			1,197,539
Financial instruments owned, including those pledged		(139,012	)		23,895
Loans and advances to financial advisors and other employees		(51,492	)		(59,751	)
Other assets		42,768			37,855
Increase/(decrease) in operating liabilities, net of liabilities assumed:
Payables:
Brokerage clients		311			38,363
Brokers, dealers, and clearing organizations		35,297			23,379
Drafts		(16,121	)		(35,282	)
Financial instruments sold, but not yet purchased		131,809			128,169
Other liabilities and accrued expenses		(169,588	)		(20,012	)

Net cash provided by/(used in) operating activities	$	(54,255	)	$	433,117

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows (continued)


	Nine Months Ended September 30,
(in thousands)	2014			2013
Cash Flows from Investing Activities:
Proceeds from:
Maturities, calls, sales, and principal paydowns of available-for-sale securities	$	542,565		$	376,104
Calls and principal paydowns of held-to-maturity securities		74,405			60,385
Sale or maturity of investments		48,278			74,271
Sale of other real estate owned		131			373
Increase in bank loans, net		(468,329	)		(244,838	)
Payments for:
Purchase of available-for-sale securities		(271,548	)		(1,125,644	)
Purchase of held-to-maturity securities		(7,959	)		(16,438	)
Purchase of investments		(37,190	)		(70,650	)
Purchase of fixed assets		(22,384	)		(21,077	)
Acquisitions, net of cash acquired		(39,184	)		(165,300	)

Net cash used in investing activities		(181,215	)		(1,132,814	)

Cash Flows from Financing Activities:
Payments of short-term borrowings from banks		(5,900	)		(171,600	)
Proceeds from issuance of senior notes, net		295,638			—
Increase/(decrease) in securities sold under agreements to repurchase		(119,995	)		115,105
Increase/(decrease) in bank deposits, net		(110,801	)		882,272
Increase/(decrease) in securities loaned		(14,321	)		149,168
Excess tax benefits from stock-based compensation		18,220			10,446
Issuance of common stock for stock option exercises		135			15
Repurchase of treasury stock		—			(13,670	)
Reissuance of treasury stock		—			951
Repayment of non-recourse debt		—			(26,881	)
Extinguishment of subordinated debt		(3,131	)		(2,187	)

Net cash provided by financing activities		59,845			943,619


Effect of exchange rate changes on cash		(5,817	)		1,381

Increase/(decrease) in cash and cash equivalents		(181,442	)		245,303
Cash and cash equivalents at beginning of period		716,560			403,941

Cash and cash equivalents at end of period	$	535,118		$	649,244


Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds	$	59,434		$	8,594
Cash paid for interest		31,205			34,196

Noncash investing and financing activities:
Stock units granted, net of forfeitures		152,115			205,520
Issuance of common stock for acquisitions		11,741			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”), Oriel Securities (“Oriel”), 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 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.

Our Canadian subsidiary, Stifel Nicolaus Canada, Inc. (“SN Canada”) ceased business operations as of September 30, 2013. The results of SN Canada, previously reported in the Institutional Group segment, are classified as discontinued operations for all periods presented. See Note 3 to our consolidated financial statements for further discussion of our discontinued operations.

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, 2013 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, 2013.

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 26 for additional information on VIEs.

NOTE 2 – Recently Issued Accounting Guidance

Repurchase Agreements

In June 2014, the Financial Accounting Standards Board (“FASB) issued Accounting Standards Update (“ASU”) No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures,” (“ASU 2014-11”) amending FASB Accounting Standards Codification Topic 860, “Transfers and Servicing.” The amended guidance changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. The guidance also requires new disclosures for certain transfers accounted for as sales and collateral supporting transactions that are accounted for as secured borrowings. ASU 2014-11 is effective for annual and interim periods beginning after December 15, 2014, except for the disclosures related to secured borrowings, which are effective for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The adoption of ASU 2014-11 is not expected to have a material impact on the Company’s results of operations or financial position, but may impact the Company’s disclosures.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”) which supersedes current revenue recognition guidance, including most industry-specific guidance. ASU 2014-09 requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The guidance also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue that is recognized. The guidance allows for either retrospective application to all periods presented or a modified retrospective approach where the guidance would only be applied to existing contracts in effect at the adoption date and new contracts going forward. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the impact the new guidance will have on our consolidated financial statements.

Discontinued Operations

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” (“ASU 2014-08”) amending FASB ASC Topic 205-20, “Discontinued Operations,” (“ASC 205-20”). The amended guidance changes the criteria for reporting discontinued operations and requires new disclosures. ASU 2014-08 is effective for annual and interim periods beginning on or after December 15, 2014, and will be applied prospectively. We are currently evaluating the impact the new guidance will have on our consolidated financial statements.

NOTE 3 – Discontinued Operations

SN Canada ceased business operations as of September 30, 2013. The results of SN Canada, previously reported in the Institutional Group segment, are classified as discontinued operations for all periods presented. The components of discontinued operations are as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net revenues	$	(44	)	$	4,696		$	(75	)	$	12,930
Restructuring expense		—			5,516			217			5,516
Operating expenses		110			4,418			3,664			14,341

Total non-interest expenses		110			9,934			3,881			19,857
Loss from discontinued operations before income tax expense		(154	)		(5,238	)		(3,956	)		(6,927	)
Income tax expense/(benefit)		36			1			(1,199	)		110

Loss from discontinued operations, net of tax	$	(190	)	$	(5,239	)	$	(2,757	)	$	(7,037	)

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

Amounts receivable from brokers, dealers, and clearing organizations at September 30, 2014 and December 31, 2013, included (in thousands):


	September 30, 2014		December 31, 2013
Deposits paid for securities borrowed	$	438,863	$	227,640
Receivable from clearing organizations		182,198		125,538
Securities failed to deliver		30,367		27,944

	$	651,428	$	381,122

Amounts payable to brokers, dealers, and clearing organizations at September 30, 2014 and December 31, 2013, included (in thousands):


	September 30, 2014		December 31, 2013
Securities failed to receive	$	43,507	$	7,411
Deposits received from securities loaned		25,765		40,101
Payable to clearing organizations		9,839		10,623

	$	79,111	$	58,135

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 financial assets and liabilities at fair value on a recurring basis, including cash equivalents, financial instruments owned, available-for-sale securities, investments, financial instruments 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 (Financial instruments owned and available-for-sale securities)

When available, the fair value of financial instruments are based on quoted prices in active markets for identical instruments and reported in Level 1. Level 1 financial instruments include highly liquid instruments with quoted prices, such as equity securities listed in active markets, certain fixed income securities, and U.S. government securities.

If quoted prices are not available for identical instruments, 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 agency securities, mortgage-backed securities, corporate fixed income securities infrequently traded, certain state 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 fixed income securities and state and municipal securities with unobservable pricing inputs 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 corporate equity securities, ARS, investments in mutual funds, U.S. government securities, and investments in public companies, private equity securities, and partnerships, which are classified as other in the following tables.

Corporate equity securities, mutual funds and U.S. government securities are valued based on quoted prices in active markets and reported in Level 1.

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 $11.6 million and $12.4 million at September 30, 2014 and December 31, 2013, respectively.

Derivatives

Derivatives are valued using quoted market prices for identical instruments 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 September 30, 2014 and December 31, 2013 are presented below:


	September 30, 2014
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	73,708		73,708		—		—
Financial instruments owned:
U.S. government securities		55,172		55,172		—		—
U.S. government agency securities		95,595		20		95,575		—
Mortgage-backed securities:
Agency		194,582		—		194,582		—
Non-agency		25,208		—		25,208		—
Corporate securities:
Fixed income securities		295,825		74,435		217,233		4,157
Equity securities		121,828		121,184		372		272
State and municipal securities		163,644		—		163,644		—

Total financial instruments owned		951,854		250,811		696,614		4,429
Available-for-sale securities:
U.S. government agency securities		1,713		—		1,713		—
State and municipal securities		74,113		—		74,113		—
Mortgage-backed securities:
Agency		206,211		—		206,211		—
Commercial		127,885		—		127,885		—
Non-agency		29,438		—		29,438		—
Corporate fixed income securities		360,214		43,834		316,380		—
Asset-backed securities		728,173		—		675,044		53,129

Total available-for-sale securities		1,527,747		43,834		1,430,784		53,129
Investments:
Corporate equity securities		62,825		33,835		28,990		—
Mutual funds		17,558		17,558		—		—
Auction rate securities:
Equity securities		47,208		—		—		47,208
Municipal securities		1,472		—		—		1,472
Other ⁽¹⁾		80,068		4,606		3,931		71,531

Total investments		209,131		55,999		32,921		120,211

	$	2,762,440	$	424,352		2,160,319	$	177,769

Liabilities:
Financial instruments sold, but not yet purchased:
U.S. government securities	$	99,447	$	99,447	$	—	$	—
U.S. government agency securities		21,981		—		21,981		—
Agency mortgage-backed securities		97,492		—		97,492		—
Corporate securities:
Fixed income securities		257,458		17,277		240,181		—
Equity securities		136,581		136,576		5		—
State and municipal securities		64		—		64		—

Total financial instruments sold, but not yet purchased		613,023		253,300		359,723		—
Derivative contracts ⁽²⁾		5,772		—		5,772		—

	$	618,795	$	253,300	$	365,495	$	—

⁽¹⁾	Includes $43.3 million of partnership interests, $13.8 million of private company investments, and $14.4 million of private equity and other investments.

⁽²⁾	Included in accounts payable and accrued expenses in the consolidated statements of financial condition.


	December 31, 2013
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	78,163	$	78,163	$	—	$	—
Financial instruments owned:
U.S. government securities		10,594		10,594		—		—
U.S. government agency securities		80,835		307		80,528		—
Mortgage-backed securities:
Agency		267,933		—		267,933		—
Non-agency		22,570		—		22,570		—
Corporate securities:
Fixed income securities		201,579		23,106		176,434		2,039
Equity securities		76,709		76,462		6		241
State and municipal securities		141,274		—		141,274		—

Total financial instruments owned		801,494		110,469		688,745		2,280
Available-for-sale securities:
U.S. government agency securities		1,072		—		1,072		—
State and municipal securities		90,677		—		84,477		6,200
Mortgage-backed securities:
Agency		183,987		—		183,987		—
Commercial		211,246		—		211,246		—
Non-agency		4,619		—		4,619		—
Corporate fixed income securities		498,316		83,655		414,661		—
Asset-backed securities		766,336		—		708,258		58,078

Total available-for-sale securities		1,756,253		83,655		1,608,320		64,278
Investments:
Corporate equity securities		32,402		32,402		—		—
Mutual funds		16,994		16,994		—		—
Auction rate securities:
Equity securities		56,693		—		—		56,693
Municipal securities		10,939		—		—		10,939
Other ⁽¹⁾		100,200		10		2,422		97,768

Total investments		217,228		49,406		2,422		165,400

	$	2,853,138	$	321,693	$	2,299,487	$	231,958
Liabilities:
Financial instruments sold, but not yet purchased:
U.S. government securities	$	253,221	$	253,221	$	—	$	—
Agency mortgage-backed securities		37,201		—		37,201		—
Corporate securities:
Fixed income securities		100,745		17,857		82,888		—
Equity securities		90,015		86,933		3,082		—
State and municipal securities		32		—		32		—

Total financial instruments sold, but not yet purchased		481.214		358,011		123,203		—
Derivative contracts ⁽²⁾		9,349		—		9,349		—

	$	490,563	$	358,011	$	132,552	$	—

¹	Includes $56.0 million of partnership interests, $22.5 million of private company investments, and $19.2 million of private equity and other investments.

²	Included in accounts payable and accrued expenses in the consolidated statements of financial condition.

The following table summarizes the changes in fair value carrying values associated with Level 3 financial instruments during the three and nine months ended September 30, 2014 (in thousands):


	Three Months Ended September 30, 2014
	Financial instruments owned					Available-for-sale securities
	Corporate Fixed Income Securities ⁽¹⁾			Equity Securities		State & Municipal Securities		Asset- Backed Securities
Balance at June 30, 2014	$	3,368		$	—	$	—	$	58,370
Unrealized gains/(losses):
Included in changes in net assets⁽³⁾		(3	)		—		—		—
Included in OCI ⁽⁴⁾		—			—		—		(589	)
Realized gains/(losses) ⁽³⁾		(59	)		—		—		173
Purchases		3,200			272		—		—
Sales		(2,293	)		—		—		(4,825	)
Redemptions		(56	)		—		—		—
Transfers:
Into Level 3		—			—		—		—
Out of Level 3		—			—		—		—

Net change		789			272		—		(5,241	)

Balance at September 30, 2014	$	4,157		$	272	$	—	$	53,129


	Three Months Ended September 30, 2014
	Investments
	Auction Rate Securities – Equity			Auction Rate Securities – Municipal			Other ⁽²⁾
Balance at June 30, 2014	$	52,184		$	1,930		$	80,344
Unrealized gains/(losses):
Included in changes in net assets⁽³⁾		(101	)		47			205
Included in OCI ⁽⁴⁾		—			—			—
Realized gains/(losses) ⁽³⁾		—			—			69
Purchases		25			—			49
Sales		—			—			(7,231	)
Redemptions		(4,900	)		(505	)		(1,905	)
Transfers:
Into Level 3		—			—			—
Out of Level 3		—			—			—

Net change		(4,976	)		(458	)		(8,813	)

Balance at September 30, 2014	$	47,208		$	1,472		$	71,531


	Nine Months Ended September 30, 2014
	Financial instruments owned						Available-for-sale securities
	Corporate Fixed Income Securities ⁽¹⁾			Equity Securities			State & Municipal Securities			Asset- Backed Securities
Balance at December 31, 2013	$	2,039		$	241		$	6,200		$	58,078
Unrealized gains/(losses):
Included in changes in net assets⁽³⁾		(444	)		—			—			—
Included in OCI ⁽⁴⁾		—			—			62			(297	)
Realized gains/(losses) ⁽³⁾		(1,354	)		4,964			—			173
Purchases		6,556			272			—			—
Sales		(2,552	)		(5,205	)		—			(4,825	)
Redemptions		(88	)		—			—			—
Transfers:
Into Level 3		—			—			—			—
Out of Level 3		—			—			(6,262	)		—

Net change		2,118			31			(6,200	)		(4,949	)

Balance at September 30, 2014	$	4,157		$	272		$	—		$	53,129


	Nine Months Ended September 30, 2014
	Investments
	Auction Rate Securities – Equity			Auction Rate Securities – Municipal			Other ⁽²⁾
Balance at December 31, 2013	$	56,693		$	10,939		$	97,768
Unrealized gains/(losses):
Included in changes in net assets⁽³⁾		615			684			(556	)
Included in OCI ⁽⁴⁾		—			—
Realized gains/(losses) ⁽³⁾		—			—			3,290
Purchases		25			1,650			1,263
Sales		(1,725	)		(10,324	)		(22,058	)
Redemptions		(8,400	)		(1,477	)		(4,294	)
Transfers:
Into Level 3		—			—			—
Out of Level 3		—			—			(3,882	)

Net change		(9,485	)		(9,467	)		(26,237	)

Balance at September 30, 2014	$	47,208		$	1,472		$	71,531

1	Included in financial instruments owned in the consolidated statements of financial condition.

2	Includes partnership interests, private company investments, and private equity investments.

3	Realized and unrealized gains/(losses) related to financial instruments owned and investments are reported in other income in the consolidated statements of operations.

4	Unrealized gains/(losses) related to available-for-sale securities are reported in accumulated other comprehensive loss in the consolidated statements of financial condition.

The results included in the table above are only a component of the overall investment strategies of our company. The table above does not present Level 1 or Level 2 valued assets or liabilities. The changes to our company’s Level 3 classified instruments were principally a result of: sales of certain investments, redemptions of ARS at par, and unrealized gains and losses during the three and nine months ended September 30, 2014. The changes in unrealized gains/(losses) recorded in earnings for the three and nine months ended September 30, 2014 relating to Level 3 assets still held at September 30, 2014 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 September 30, 2014.


	Valuation technique	Unobservable input	Range	Weighted average
Available-for-sale securities:
Auction rate securities:
Asset-backed securities	Discounted cash flow	Discount rate	6.0% –11.5%	8.4%
		Workout period	3 – 4 years	3.9 years
Investments:
Auction rate securities:
Equity securities	Discounted cash flow	Discount rate	2.1% –12.9%	7.3%
		Workout period	1 – 3 years	2.4 years
Municipal securities	Discounted cash flow	Discount rate	0.2% – 8.6%	6.6%
		Workout period	1 – 4 years	2.8 years
Other
Investments in partnerships	Market approach	Revenue multiple	1.3 – 4.2	3.3
		EBITDA multiple	4.1 – 15.3	8.7
Private equity investments	Market/Income approach	Revenue multiple	0.5 – 2.0	1.4
		EBITDA multiple	4.3 – 9.8	6.7

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 $43.3 million and $56.0 million at September 30, 2014 and December 31, 2013, respectively. 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 $18.6 million and $14.8 million at September 30, 2014 and December 31, 2013, respectively. 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 $5.9 million and $10.3 million of transfers of financial assets from Level 2 to Level 1 during the three and nine months ended September 30, 2014, respectively, primarily related to corporate fixed income securities for which market trades were observed that provided transparency into the valuation of these assets. There were $8.9 million and $9.3 million of transfers of financial assets from Level 1 to Level 2 during the three and nine months ended September 30, 2014, respectively, primarily related to corporate fixed income securities for which there were low volumes of recent trade activity observed. There were no transfers out of Level 3 during the three months ended September 30, 2014. There were $10.2 million of transfers out of Level 3 during the nine months ended September 30, 2014 primarily related to state and municipal securities and private company investments for which market trades were observed that provided transparency into the valuation of these assets and, in the case of the private company investments, have had an initial public offering of their securities.

Fair Value of Financial Instruments

The following reflects the fair value of financial instruments, as of September 30, 2014 and December 31, 2013, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands).


	September 30, 2014				December 31, 2013
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
Financial assets:
Cash and cash equivalents	$	535,118	$	535,118	$	716,560	$	716,560
Restricted cash		—		—		4,268		4,268
Cash segregated for regulatory purposes		39		39		35		35
Securities purchased under agreements to resell		125,513		125,513		225,075		225,075
Financial instruments owned		951,854		951,854		801,494		801,494
Available-for-sale securities		1,527,747		1,527,747		1,756,253		1,756,253
Held-to-maturity securities		1,199,364		1,221,555		1,312,115		1,305,959
Loans held for sale		104,277		104,277		109,110		109,110
Bank loans		1,867,177		1,890,834		1,404,353		1,420,068
Investments		209,131		209,131		217,228		217,228
Financial liabilities:
Securities sold under agreements to repurchase	$	143,814	$	143,814	$	263,809	$	263,809
Bank deposits		4,552,522		4,009,299		4,663,323		4,072,038
Financial instruments sold, but not yet purchased		613,023		613,023		481,214		481,214
Derivative contracts ⁽¹⁾		5,772		5,772		9,349		9,349
Senior notes		625,000		633,181		325,000		328,635
Debentures to Stifel Financial Capital Trusts		82,500		66,291		82,500		72,201
Liabilities subordinated to claims of general creditors		—		—		3,131		3,122

⁽¹⁾	Included in accounts payable and accrued expenses 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 September 30, 2014 and December 31, 2013 (in thousands):


	September 30, 2014
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash	$	461,410	$	461,410	$	—	$	—
Cash segregated for regulatory purposes		39		39		—		—
Securities purchased under agreements to resell		125,513		95,683		29,830		—
Held-to-maturity securities		1,221,555		—		978,400		243,155
Loans held for sale		104,277		—		104,277		—
Bank loans		1,890,834		—		1,890,834		—
Financial liabilities:
Securities sold under agreements to repurchase	$	143,814	$	46,999	$	96,815	$	—
Bank deposits		4,009,299		—		4,009,299		—
Senior notes		633,181		633,181		—		—
Debentures to Stifel Financial Capital Trusts		66,291		—		—		66,291


	December 31, 2013
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash	$	638,397	$	638,397	$	—	$	—
Restricted cash		4,268		4,268		—		—
Cash segregated for regulatory purposes		35		35		—		—
Securities purchased under agreements to resell		225,075		225,075		—		—
Held-to-maturity securities		1,305,959		—		1,073,953		232,006
Loans held for sale		109,110		—		109,110		—
Bank loans		1,420,068		—		1,420,068		—
Financial liabilities:
Securities sold under agreements to repurchase	$	263,809	$	747	$	263,062	$	—
Bank deposits		4,072,038		—		4,072,038		—
Senior notes		328,635		328,635		—		—
Debentures to Stifel Financial Capital Trusts		72,201		—		—		72,201
Liabilities subordinated to claims of general creditors		3,122		—		—		3,122

The following, as supplemented by the discussion above, describes the valuation techniques used in estimating the fair value of our financial instruments as of September 30, 2014 and December 31, 2013.

Financial Assets

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at September 30, 2014 and December 31, 2013 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 September 30, 2014 and December 31, 2013 approximate fair value due to the short-term nature.

Bank Deposits

The fair value of interest-bearing deposits, including certificates of deposits, demand deposits, savings, and checking accounts, was calculated by discounting the future cash flows using discount rates based on the replacement cost of funding of similar structures and terms.

Senior Notes

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

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 – Financial Instruments Owned and Financial Instruments Sold, But Not Yet Purchased

The components of financial instruments owned and financial instruments sold, but not yet purchased, at September 30, 2014 and December 31, 2013, are as follows (in thousands):


	September 30, 2014		December 31, 2013
Financial instruments owned:
U.S. government securities	$	55,172	$	10,594
U.S. government agency securities		95,595		80,835
Mortgage-backed securities:
Agency		194,582		267,933
Non-agency		25,208		22,570
Corporate securities:
Fixed income securities		295,825		201,579
Equity securities		121,828		76,709
State and municipal securities		163,644		141,274

	$	951,854	$	801,494

Financial instruments sold, but not yet purchased:
U.S. government securities	$	99,447	$	253,221
U.S. government agency securities		21,981		—
Agency mortgage-backed securities		97,492		37,201
Corporate securities:
Fixed income securities		257,458		100,745
Equity securities		136,581		90,015
State and municipal securities		64		32

	$	613,023	$	481,214

At September 30, 2014 and December 31, 2013, financial instruments owned in the amount of $493.0 million and $687.0 million, respectively, were pledged as collateral for our repurchase agreements and short-term borrowings.

Financial instruments 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 September 30, 2014 and December 31, 2013 (in thousands):


	September 30, 2014
	Amortized cost		Gross unrealized gains ⁽¹⁾		Gross unrealized losses ⁽¹⁾			Estimated fair value
Available-for-sale securities
U.S. government agency securities	$	1,716	$	1	$	(4	)	$	1,713
State and municipal securities		76,660		81		(2,628	)		74,113
Mortgage-backed securities:
Agency		205,163		2,637		(1,589	)		206,211
Commercial		127,774		717		(606	)		127,885
Non-agency		29,247		191		—			29,438
Corporate fixed income securities		358,773		2,797		(1,356	)		360,214
Asset-backed securities		734,087		1,350		(7,264	)		728,173

	$	1,533,420	$	7,774	$	(13,447	)	$	1,527,747

Held-to-maturity securities ⁽²⁾
Mortgage-backed securities:
Agency	$	906,177	$	20,764	$	(18	)	$	926,923
Commercial		59,447		1,376		—			60,823
Non-agency		1,226		1		(13	)		1,214
Asset-backed securities		177,254		3,802		(2,319	)		178,737
Corporate fixed income securities		55,260		5		(1,407	)		53,858

	$	1,199,364	$	25,948	$	(3,757	)	$	1,221,555


	December 31, 2013
	Amortized cost		Gross unrealized gains ⁽¹⁾		Gross unrealized losses ⁽¹⁾			Estimated fair value
Available-for-sale securities
U.S. government agency securities	$	1,074	$	—	$	(2	)	$	1,072
State and municipal securities		96,475		739		(6,537	)		90,677
Mortgage-backed securities:
Agency		184,533		2,859		(3,405	)		183,987
Commercial		209,949		3,084		(1,787	)		211,246
Non-agency		4,547		72		—			4,619
Corporate fixed income securities		496,385		4,769		(2,838	)		498,316
Asset-backed securities		769,553		2,499		(5,716	)		766,336

	$	1,762,516	$	14,022	$	(20,285	)	$	1,756,253

Held-to-maturity securities ⁽²⁾
Mortgage-backed securities:
Agency	$	968,759	$	1,156	$	(7,915	)	$	962,000
Commercial		59,404		—		(186	)		59,218
Asset-backed securities		228,623		6,157		(2,774	)		232,006
Corporate fixed income securities		55,329		11		(2,605	)		52,735

	$	1,312,115	$	7,324	$	(13,480	)	$	1,305,959

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

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

For the three and nine months ended September 30, 2014, we received proceeds of $162.9 million and $229.7 million, respectively, from the sale of available-for-sale securities, which resulted in realized gains of $1.2 million and $3.2 million, respectively. For the three and nine months ended September 30, 2013, we received proceeds of $4.5 million and $194.1 million, respectively, from the sale of available-for-sale securities, which resulted in realized gains of $0.2 million and $1.7 million, respectively.

During the three months ended September 30, 2014, unrealized losses, net of deferred tax benefits, of $3.9 million were recorded in accumulated other comprehensive income in the consolidated statements of financial condition. During the nine months ended September 30, 2014, unrealized gains, net of deferred taxes, of $1.7 million were recorded in accumulated other comprehensive income in the consolidated statements of financial condition. During the three and nine months ended September 30, 2013, unrealized losses, net of deferred tax benefits, of $8.2 million and $48.2 million, respectively, 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.


	September 30, 2014
	Available-for-sale securities				Held-to-maturity securities
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
Debt securities
Within one year	$	118,969	$	120,197	$	—	$	—
After one year through three years		66,062		66,405		15,031		15,034
After three years through five years		142,771		143,348		40,229		38,824
After five years through ten years		348,396		347,259		—		—
After ten years		495,038		487,004		177,254		178,736
Mortgage-backed securities
After three years through five years		180		184		—		—
After five years through ten years		79,408		80,976		59,447		60,824
After ten years		282,596		282,374		907,403		928,137

	$	1,533,420	$	1,527,747	$	1,199,364	$	1,221,555

The maturities of our available-for-sale (fair value) and held-to-maturity (amortized cost) securities at September 30, 2014, are as follows (in thousands):


	Within 1 year		1-5 years		5-10 years		After 10 years		Total
Available-for-sale:¹
U.S. government agency securities	$	327	$	1,386	$	—	$	—	$	1,713
State and municipal securities		—		—		1,639		72,474		74,113
Mortgage-backed securities:
Agency		—		—		40,501		165,710		206,211
Commercial		—		—		40,474		87,411		127,885
Non-agency		—		184		—		29,254		29,438
Corporate fixed income securities		119,870		198,729		41,615		—		360,214
Asset-backed securities		—		9,638		304,006		414,529		728,173

	$	120,197	$	209,937	$	428,235	$	769,378	$	1,527,747


Held-to-maturity:
Mortgage-backed securities:
Agency	$	—	$	—	$	—	$	906,177	$	906,177
Commercial		—		—		59,447		—		59,447
Non-agency		—		—		—		1,226		1,226
Asset-backed securities		—		—		—		177,254		177,254
Corporate fixed income securities		—		55,260		—		—		55,260

	$	—	$	55,260	$	59,447	$	1,084,657	$	1,199,364

¹	Due to the immaterial amount of income recognized on tax-exempt securities, yields were not calculated on a tax equivalent basis.

At September 30, 2014 and December 31, 2013, securities of $1.2 billion and $505.5 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 and held-to-maturity securities have been in an unrealized loss position at September 30, 2014 and December 31, 2013 (in thousands):


	September 30, 2014
	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	$	(4	)	$	1,214	$	—		$	—	$	(4	)	$	1,,214
State and municipal securities		(1	)		426		(2,627	)		67,458		(2,628	)		67,884
Mortgage-backed securities:
Agency		(306	)		73,769		(1,283	)		47,285		(1,589	)		121,054
Commercial		(404	)		41,123		(202	)		9,996		(606	)		51,119
Corporate fixed income securities		(134	)		37,915		(1,222	)		64,541		(1,356	)		102,456
Asset-backed securities		(2,950	)		314,910		(4,314	)		182,303		(7,264	)		497,213

	$	(3,799	)	$	469,357	$	(9,648	)	$	371,583	$	(13,447	)	$	840,940

Held-to-maturity securities
Mortgage-backed securities
Agency		(18	)		3,221		—			—		(18	)		3,221
Non-agency		(13	)		524		—			—		(13	)		524
Asset-backed securities		(129	)		13,587		(2,190	)		55,817		(2,319	)		69,404
Corporate fixed income securities		—			—		(1,407	)		48,855		(1,407	)		48,855

	$	(160	)	$	17,332	$	(3,597	)	$	104,672	$	(3,757	)	$	122,004


	December 31, 2013
	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	$	(2	)	$	721	$	—		$	—	$	(2	)	$	721
State and municipal securities		(2,966	)		32,272		(3,571	)		41,182		(6,537	)		73,454
Mortgage-backed securities:
Agency		(3,260	)		89,395		(145	)		1,335		(3,405	)		90,730
Commercial		(1,787	)		46,970		—			—		(1,787	)		46,970
Corporate fixed income securities		(2,062	)		80,700		(776	)		39,421		(2,838	)		120,121
Asset-backed securities		(4,516	)		436,770		(1,200	)		31,938		(5,716	)		468,708

	$	(14,593	)	$	686,828	$	(5,692	)	$	113,876	$	(20,285	)	$	800,704

Held-to-maturity securities
Mortgage-backed securities:
Agency		(91	)		8,127		(7,824	)		838,295		(7,915	)		846,422
Commercial		—			—		(186	)		59,219		(186	)		59,219
Asset-backed securities		—			—		(2,774	)		92,806		(2,774	)		92,806
Corporate fixed income securities		—			—		(2,605	)		47,727		(2,605	)		47,727

	$	(91	)	$	8,127	$	(13,389	)	$	1,038,047	$	(13,480	)	$	1,046,174

At September 30, 2014, the amortized cost of 103 securities classified as available for sale exceeded their fair value by $13.4 million, of which $9.6 million related to investment securities that had been in a loss position for 12 months or longer. As of September 30, 2014, the carrying value of 20 securities held to maturity exceeded their fair value by $3.8 million, of which $3.6 million related to securities held to maturity that have been in a loss position for 12 months or longer. 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. There was no credit-related OTTI recognized during the three and nine months ended September 30, 2014.

We believe the gross unrealized losses of $13.4 million related to our available-for-sale portfolio as of September 30, 2014, 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 September 30, 2014 and December 31, 2013 (in thousands, except percentages):


	September 30, 2014						December 31, 2013
	Balance			Percent			Balance			Percent
Commercial and industrial	$	833,988			43.5	%	$	552,333			37.7	%
Consumer ⁽¹⁾		638,811			33.2			509,484			34.8
Residential real estate		418,806			21.8			372,789			25.5
Commercial real estate		15,970			0.8			12,284			0.8
Home equity lines of credit		13,776			0.7			16,327			1.1
Construction and land		—			—			490			0.1

		1,921,351			100.0	%		1,463,707			100.0	%
Unamortized loan discount		(32,772	)					(45,100	)
Unamortized loan fees, net of origination costs		(1,251	)					(1,920	)
Loans in process		(1,155	)					334
Allowance for loan losses		(18,996	)					(12,668	)

	$	1,867,177					$	1,404,353

⁽¹⁾	Includes securities-based loans of $628.3 million and $508.9 million at September 30, 2014 and December 31, 2013, respectively.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014			2013
Allowance for loan losses, beginning of period	$	17,104	$	10,919	$	12,668		$	8,145
Provision for loan losses		1,871		2,297		6,749			5,537
Charge-offs:
Commercial and industrial		—		—		(468	)		—
Residential real estate		—		—		—			(501	)
Other		—		—		(4	)		—

Total charge-offs		—		—		(472	)		(501	)
Recoveries		21		17		51			52

Allowance for loan losses, end of period	$	18,996	$	13,233	$	18,996		$	13,233

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 September 30, 2014, we had $3.6 million of non-accrual loans, net of discount, which included $0.4 million in troubled debt restructurings, for which there was a specific allowance of $0.3 million. At December 31, 2013, we had $1.5 million of non-accrual loans, which included $0.4 million in troubled debt restructurings, for which there was a specific allowance of $0.2 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 and nine months ended September 30, 2014 and 2013 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 September 30, 2014 and December 31, 2013, approximately 96.3% and 96.8% 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 September 30, 2014 and December 31, 2013 (in thousands, except rates):


	September 30, 2014					December 31, 2013
	Balance		Percent⁽¹⁾			Balance		Percent⁽¹⁾
Commercial and industrial	$	15,545		43.5	%	$	9,538		37.7	%
Consumer		1,001		33.2			892		34.8
Residential real estate		674		21.8			408		25.5
Home equity lines of credit		274		0.7			174		1.1
Commercial real estate		239		0.8			198		0.8
Construction and land		—		—			12		0.1
Qualitative		1,263		—			1,446		—

	$	18,996		100.0	%	$	12,668		100.0	%

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

At September 30, 2014 and December 31, 2013, 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 $5.6 million and $6.4 million, respectively.

At September 30, 2014 and December 31, 2013, we had loans held for sale of $104.3 million and $109.1 million, respectively. For the three months ended September 30, 2014 and 2013, we recognized gains of $2.2 million and $1.9 million, respectively, from the sale of originated and purchased loans, net of fees and costs. For the nine months ended September 30, 2014 and 2013, we recognized gains of $5.8 million and $9.8 million, respectively, from the sale of originated and purchased loans, net of fees and costs.

NOTE 9 – Fixed Assets

The following is a summary of fixed assets as of September 30, 2014 and December 31, 2013 (in thousands):


	September 30, 2014			December 31, 2013
Furniture and equipment	$	191,630		$	174,976
Building and leasehold improvements		122,202			101,840

Total		313,832			276,816
Less accumulated depreciation and amortization		(187,825	)		(170,370	)

	$	126,007		$	106,446

For the three months ended September 30, 2014 and 2013, depreciation and amortization of furniture and equipment, and leasehold improvements totaled $7.4 million and $8.6 million, respectively. For the nine months ended September 30, 2014 and 2013, depreciation and amortization of furniture and equipment, and leasehold improvements totaled $21.7 million and $25.2 million, respectively.

NOTE 10 – Goodwill and Intangible Assets

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, 2013		Net additions		Impairment losses		September 30, 2014
Goodwill
Global Wealth Management	$	161,358	$	2,293	$	—	$	163,651
Institutional Group		565,978		32,676		—		598,654

	$	727,336	$	34,969	$	—	$	762,305


	December 31, 2013		Net additions		Amortization			September 30, 2014
Intangible assets
Global Wealth Management	$	19,394	$	1,670	$	(6,324	)	$	14,740
Institutional Group		30,495		—		(3,438	)		27,057

	$	49,889	$	1,670	$	(9,762	)	$	41,797

The adjustments to goodwill and intangible assets during the nine months ended September 30, 2014 are primarily attributable to our acquisition of De La Rosa & Co (“DLR”), which closed on April 3, 2014 and Oriel Securities, which closed on July 31, 2014. The allocation of the purchase price of DLR and Oriel are preliminary and will be finalized upon completion of the analysis of the fair values of the net assets of DLR and Oriel as of the respective acquisition dates 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.

Amortizable intangible assets consist of acquired customer relationships, trade name, investment banking backlog, and core deposits that are amortized over their contractual or determined useful lives. Intangible assets subject to amortization as of September 30, 2014 and December 31, 2013 were as follows (in thousands):


	September 30, 2014				December 31, 2013
	Gross carrying value		Accumulated amortization		Gross carrying value		Accumulated amortization
Customer relationships	$	51,866	$	27,681	$	51,166	$	24,034
Trade name		19,342		4,930		18,442		3,585
Investment banking backlog		7,388		7,348		7,388		6,871
Core deposits		5,447		4,587		5,447		182
Non-compete agreements		2,511		2,494		—		—

	$	86,554	$	47,040	$	82,443	$	34,672

Amortization expense related to intangible assets was $1.6 million and $1.3 million for the three months ended September 30, 2014 and 2013, respectively. Amortization expense related to intangible assets was $9.8 million and $4.1 million for the nine months ended September 30, 2014 and 2013, respectively.

The weighted-average remaining lives of the following intangible assets at September 30, 2014 are: customer relationships, 5.1 years; trade name, 8.5 years; core deposits, 0.8 years; and non-compete agreements, 0.5 year. The investment banking backlog will be amortized over its estimated life, which we expect to be within the next 12 months. As of September 30, 2014, we expect amortization expense in future periods to be as follows (in thousands):


Fiscal year
Remainder of 2014	$	2,380
2015		5,257
2016		4,701
2017		4,129
2018		3,642
Thereafter		19,405

	$	39,514

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 September 30, 2014 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 $414.9 million during the nine months ended September 30, 2014. There are no compensating balance requirements under these arrangements.

Our committed short-term bank line financing at September 30, 2014 consisted of a $100.0 million revolving credit facility. The credit facility expires in December 2014. The applicable interest rate under the revolving credit facility is calculated as a per annum rate equal to the London Interbank Offered Rate (“LIBOR”) plus 2.25%. At September 30, 2014, we had no advances on our revolving credit facility and were in compliance with all covenants.

At September 30, 2014, short-term borrowings from banks were $49.8 million at an average rate of 1.00%, which were collateralized by company-owned securities valued at $366.5 million. At December 31, 2013, short-term borrowings from banks were $55.7 million at an average rate of 1.22%, which were collateralized by company-owned securities valued at $440.8 million. The average bank borrowing was $29.2 million and $246.8 million for the three months ended September 30, 2014 and 2013, respectively, at average daily effective interest rates of 1.10% and 1.33%, respectively. The average bank borrowing was $126.1 million and $290.4 million for the nine months ended September 30, 2014 and 2013, respectively, at average daily effective interest rates of 1.12% and 1.25%, respectively.

At September 30, 2014 and December 31, 2013, Stifel had a stock loan balance of $25.8 million and $40.1 million, respectively, at average daily interest rates of 0.20% and 0.16%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $31.3 million and $120.7 million during the three months ended September 30, 2014 and 2013, respectively, at average daily effective interest rates of 0.22% and 0.23%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $57.4 million and $89.0 million during the nine months ended September 30, 2014 and 2013, respectively, at average daily effective interest rates of 0.18% and 0.16%, respectively. Customer-owned securities were utilized in these arrangements.

NOTE 12 – Senior Notes

The following table summarizes our senior notes as of September 30, 2014 and December 31, 2013 (in thousands):


	September 30, 2014		December 31, 2013
6.70% senior notes, due 2022 ⁽¹⁾	$	175,000	$	175,000
5.375% senior notes, due 2022 ⁽²⁾		150,000		150,000
4.250% senior notes, due 2024 ⁽³⁾		300,000		—

	$	625,000	$	325,000

(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)

In July 2014, we sold in a registered underwritten public offering, $300.0 million in aggregate principal amount of 4.250% senior notes due July 2024. Interest on these senior notes is payable semi-annually in arrears. We may redeem the Notes in whole or in part at our option at a redemption price equal to 100% of their principal amount, plus a “make-whole” premium and accrued and unpaid interest, if any, to the date of redemption.

Our senior notes mature as follows, based upon its contractual terms:


2014	$	—
2015		—
2016		—
2017		—
2018		—
Thereafter		625,000

	$	625,000

NOTE 13 – Bank Deposits

Deposits consist of money market and savings accounts, certificates of deposit, and demand deposits. Deposits at September 30, 2014 and December 31, 2013 were as follows (in thousands):


	September 30, 2014		December 31, 2013
Money market and savings accounts	$	4,410,904	$	4,310,223
Certificates of deposit		101,051		241,481
Demand deposits (interest-bearing)		30,071		93,684
Demand deposits (non-interest-bearing)		10,496		17,935

	$	4,552,522	$	4,663,323

The weighted average interest rate on deposits was 0.18% and 0.07% at September 30, 2014 and December 31, 2013, respectively.

Scheduled maturities of certificates of deposit at September 30, 2014 and December 31, 2013 were as follows (in thousands):


	September 30, 2014		December 31, 2013
Certificates of deposit, less than $100:
Within one year	$	37,820	$	82,115
One to three years		10,266		34,694
Three to five years		1,529		3,701
Over five years		—		66

	$	49,615	$	120,576


Certificates of deposit, $100 and greater:
Within one year	$	36,677	$	75,577
One to three years		13,723		41,756
Three to five years		783		3,336
Over five years		253		236

		51,436		120,905

	$	101,051	$	241,481

At September 30, 2014 and December 31, 2013, the amount of deposits includes related party deposits, primarily brokerage customers’ deposits from Stifel Nicolaus of $4.4 billion and $4.3 billion, respectively, and interest-bearing and time deposits of executive officers, directors, and their affiliates of $0.3 million and $0.4 million, respectively.

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 September 30, 2014 and December 31, 2013 (in thousands):

September 30, 2014

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

296,722

Other assets

—

Accounts payable and accrued expenses

(5,772

)

December 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

386,212

Other assets

—

Accounts payable and accrued expenses

(9,349

)

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 and nine months ended September 30, 2014 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 $4.4 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 and nine months ended September 30, 2014 and 2013 (in thousands):


	Three Months Ended September 30, 2014
	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	$	340		Interest expense	$	1,461		None	$	—


	Three Months Ended September 30, 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	$	(1,320	)		Interest expense	$	2,092		None	$	—


	Nine Months Ended September 30, 2014
	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	$	(1,319	)		Interest expense	$	4,728		None	$	—


	Nine Months Ended September 30, 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	$	2,087		Interest expense	$	6,716		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 September 30, 2014, 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 $5.8 million (termination value). We have minimum collateral posting thresholds with certain of our derivative counterparties and have posted cash collateral of $13.6 million against our obligations under these agreements. If we had breached any of these provisions at September 30, 2014, 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 September 30, 2014 and December 31, 2013 (in thousands):


	September 30, 2014		December 31, 2013
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 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 September 30, 2014 and December 31, 2013 (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 September 30, 2014:
Securities borrowing ⁽¹⁾	$	438,863	$	—	$	438,863	$	—	$	(438,863	)	$	—
Reverse repurchase agreements ⁽²⁾		125,513	$	—		125,513		—		(125,513	)		—

	$	564,376	$	—	$	564,376	$	—	$	(564,376	)	$	—

As of December 31, 2013:
Securities borrowing ⁽¹⁾	$	227,640	$	—	$	227,640	$	—	$	(227,640	)	$	—
Reverse repurchase agreements ⁽²⁾		225,075		—		225,075		—		(225,075	)		—

	$	452,715	$	—	$	452,715	$	—	$	(452,715	)	$	—

(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 September 30, 2014 and December 31, 2013:


							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 September 30, 2014:
Securities lending ⁽³⁾	$	25,765	$	—	$	25,765	$	—	$	(25,765	)	$	—
Repurchase agreements ⁽⁴⁾		143,814		—		143,814		—		(143,814	)		—
Cash flow interest rate contracts		5,772		—		5,772		—		(5,772	)		—

	$	175,351	$	—	$	175,351	$	—	$	(175,351	)	$	—

As of December 31, 2013:
Securities lending ⁽³⁾	$	40,101	$	—	$	40,101	$	—	$	(40,101	)	$	—
Repurchase agreements ⁽⁴⁾		263,809	$	—		263,809		—		(263,809	)		—
Cash flow interest rate contracts		9,349		—		9,349		—		(9,349	)		—

	$	313,259	$	—	$	313,259	$	—	$	(313,259	)	$	—

(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 September 30, 2014, 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 $58.6 million to satisfy the minimum margin deposit requirement at September 30, 2014.

In connection with margin deposit requirements of the National Securities Clearing Corporation, we deposited $37.0 million in cash at September 30, 2014 to satisfy the minimum margin deposit requirement at September 30, 2014.

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”) 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 September 30, 2014, we estimate that TWP customers held $16.3 million par value of ARS, which may be repurchased over the next 2 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 22 in the notes to our consolidated financial statements for further details.

We have committed capital to certain entities and these commitments generally have no specified call dates. We had $34.5 million of commitments outstanding at September 30, 2014, of which $22.9 million relate to commitments to certain strategic relationships with Business Development Corporations.

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 September 30, 2014 and December 31, 2013, 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”). This lawsuit relates to the same transactions that are the subject of the civil lawsuit filed by the school districts noted below. 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. We have denied the substantive allegations of the SEC complaint, as amended, and asserted various

affirmative defenses. The parties are currently taking written discovery and depositions, with all discovery scheduled to close in April 2015. After close of discovery, we anticipate the District Court will set the case for trial. 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.

Wisconsin School Districts/RBC OPEB lawsuit

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, as well as Royal Bank of Canada Europe Ltd. and certain of its affiliates (“RBC”) 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. We entered into a settlement of the Plaintiffs’ lawsuit against our company and Stifel in March 2012. The school districts are continuing their lawsuit against RBC, and we are pursuing claims against RBC 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, our company and Stifel 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 Stifel for civil conspiracy and conspiracy to injure its business based upon the settlement by Stifel with the school districts and pursuit of claims against RBC. We have filed our Answer, denying RBC’s claims, and discovery continues in the case. 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 by the Lake of the Torches Economic Development Corporation (“EDC”) which is associated with Lac Du Flambeau Band of Lake Superior Chippewa Indians (together with EDC, the “Tribe”). We then sold all of the bonds to LDF Acquisition LLC, a special purpose vehicle created by Saybrook Tax Exempt Investors LLC (collectively, “Saybrook”), with Wells Fargo Bank, NA (“Wells Fargo”) as the indenture trustee for the bonds. In 2009 Saybrook and Wells Fargo brought an action in a Wisconsin federal court against the Tribe to enforce the bonds (the “2009 federal action”). The Wisconsin federal court declared, in relevant part, the Bond Indenture to be void ab initio, and the Seventh Circuit Court of Appeals affirmed but remanded the case for further proceedings as to enforceability of the other bond documents. In April 2012 Saybrook dismissed the 2009 federal action.

On January 16, 2012, Saybrook filed a new action in Wisconsin state court (the “State Action”), naming as defendants our company, Stifel, the Tribe, and the law firm of Godfrey & Kahn, S.C. (“G&K”), which served as both issuer’s and bond counsel. Saybrook seeks enforcement of the obligations under the bonds, a judgment for rescission, restitution (including the amounts paid by Saybrook for the bonds), and costs. Alternatively, if Saybrook fails to recover from the Tribe, Saybrook seeks to recover damages, costs and attorneys’ fees from us and/or G&K. In the State Action, Saybrook asserts a claim against our company for fraud under the Wisconsin Uniform Securities Law, and with respect to Stifel, claims 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 their sovereign immunity waivers. Saybrook also asserts claims against Stifel for rescission based on alleged misrepresentation or mutual mistake.

We have answered the Complaint in the State Action, denying the claims, and filed cross claims against the Tribe and G&K. The Tribe also moved to dismiss our cross claim, but on November 6, 2014 the court denied that motion. The Tribe moved to dismiss Saybrook’s claims against them on the grounds that the state court does not have jurisdiction over them due to assertions that they have sovereign immunity from suit. On October 23, 2014 the state court denied the Tribe’s motion to dismiss Saybrook’s claims against the Tribe, thereby allowing the case to move forward against the Tribe in state court – subject to the Tribe’s anticipated appeal of that ruling to the Wisconsin intermediate court of appeals. Additionally, G&K filed a cross-claim against us seeking contribution and alleging that if G&K is found negligent then we too must have been negligent. We have answered G&K’s cross-claim, denying those allegations. Additionally, G&K filed a third party complaint against Dentons US LLP. Written discovery is on-going between the non-Tribal Parties.

Additionally, on April 25, 2013, the Tribe filed a suit against Saybrook, our company, Stifel, G&K, and Wells Fargo in the Lac du Flambeau Tribal Court, seeking a declaration that all of the bond documents are void (the “Tribal Action”). Our motion to dismiss the Tribal Action was denied, and on August 27, 2013 we filed an Answer, denying the claims.

In response to the Tribal Action, on May 24, 2013 we, together with Saybrook, Wells Fargo and G&K, also filed an action in a Wisconsin federal court (the “Federal Action”) seeking to enjoin the Tribal Action. On May 16, 2014 the Wisconsin federal court preliminarily enjoined the Tribal Parties from litigating the Tribal Action. The Tribal Parties have appealed the preliminary injunction to the Seventh Circuit Court of Appeals. In light of the Tribal Parties’ appeal, the Tribal Action is stayed pending the resolution of the appeal.

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 as well as the procedural attempt to move the litigation to the Lac du Flambeau Tribal Court.

Lac Courte Oreilles 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 in the Tribe’s Tribal Court (the “Tribal Lawsuit”) regarding Stifel’s participation in the Tribe’s offering of two series of taxable municipal bonds as a means of raising revenue to fund various projects (the “2006 Bond Transaction”). The Complaint alleges that we failed to disclose certain information before the 2006 Bond Transaction. On February 19, 2013 we filed a declaratory judgment action in a Wisconsin federal court seeking to establish that the Tribal Court lacks jurisdiction over the Tribal Lawsuit (the “Federal Action”). On February 20, 2013, we filed a motion to dismiss the Tribal Lawsuit, challenging the jurisdiction of the Tribal Court, which motion was denied by the Tribal Court. The Tribe filed a motion to dismiss the Federal Action. Shortly thereafter, the Tribe agreed to withdraw its motion to dismiss the Federal Action and agreed to stay the Tribal Lawsuit pending a determination by the Wisconsin federal court as to whether the Tribal Court has jurisdiction over the claims. Basic discovery was taken in the Federal Action, and we filed a summary judgment motion with the U.S. District Court, asking the court for a determination that the Tribal Court does not have jurisdiction over the claims brought by the Tribe. On June 19, 2014, the District Court issued a conditional Order finding the Tribal Court has jurisdiction over the dispute. The conditional Order was issued subject to additional briefing of the issues by Stifel, which briefing has been filed with the District Court. We are currently waiting for a final decision from the District Court, which is expected in December 2014. If the District Court issues a final Order finding the Tribal Court has jurisdiction over the dispute, we intend to appeal the decision to the Seventh Circuit Court of Appeals. In the event of an appeal, the stay of proceedings in Tribal Court will remain in effect during the pendency of the appeal. 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.

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, CSA, and Miller Buckfire 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 September 30, 2014, Stifel Nicolaus had net capital of $339.4 million, which was 52.3% of aggregate debit items and $326.4 million in excess of its minimum required net capital. At September 30, 2014, KBW’s, CSA’s, and Miller Buckfire’s net capital exceeded the minimum net capital required under the SEC rule.

Our international subsidiaries, SNEL, Oriel, and KBW Limited, are subject to the regulatory supervision and requirements of the Financial Conduct Authority (“FCA”) in the United Kingdom. At September 30, 2014, SNEL’s, Oriel’s, and KBW Limited’s capital and reserves were in excess of the financial resources requirement under the rules of the FCA.

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

September 30, 2014


	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	$	1,373,999		28.3	%	$	388,960		8.0	%	$	486,200		10.0	%
Tier 1 capital to risk-weighted assets		1,354,869		27.9			194,480		4.0			291,720		6.0
Tier 1 capital to adjusted average total assets		1,354,869		16.0			339,540		4.0			424,425		5.0

Stifel Bank – Federal Reserve Capital Amounts

September 30, 2014


	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	$	425,358		13.9	%	$	244,883		8.0	%	$	306,104		10.0	%
Tier 1 capital to risk-weighted assets		406,362		13.3			122,442		4.0			183,662		6.0
Tier 1 capital to adjusted average total assets		406,362		8.0			204,490		4.0			255,612		5.0

NOTE 20 – Interest Income and Interest Expense

The components of interest income and interest expense are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Interest income:
Investment securities	$	16,976	$	17,514	$	54,500	$	44,046
Bank loans, net of unearned income		23,475		8,819		52,377		26,489
Margin balances		4,873		4,722		14,382		13,521
Other		6,772		8,075		19,776		17,773

	$	52,096	$	39,130	$	141,035	$	101,829

Interest expense:
Senior notes	$	7,831	$	5,164	$	18,158	$	15,484
Bank deposits		1,743		2,636		5,438		8,365
Other		1,654		3,735		5,105		10,889

	$	11,228	$	11,535	$	28,701	$	34,738

NOTE 21 – 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.

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 3.8 million shares at September 30, 2014.

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 $30.7 million and $39.2 million for the three months ended September 30, 2014 and 2013, respectively. The tax benefit related to stock-based compensation recognized in shareholders’ equity was $1.0 million and $0.8 million for the three months ended September 30, 2014 and 2013, respectively.

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 $79.2 million and $109.5 million for the nine months ended September 30, 2014 and 2013, respectively. The tax benefit related to stock-based compensation recognized in shareholders’ equity was $18.2 million and $10.4 million for the nine months ended September 30, 2014 and 2013, respectively.

On closing date of our acquisition of Oriel Securities, certain employees of Oriel Securities were granted restricted stock units of Stifel as retention. The fair value of the awards issued as retention was $11.6 million. Certain awards issued as retention had no continuing service requirements, and accordingly were expensed at date of grant. This charge of $6.8 million is included in compensation and benefits in the consolidated statement of operations for the three and nine months ended September 30, 2014.

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 nine months ended September 30, 2013.

Stock Options

We have substantially eliminated the use of stock options as a form of compensation. During the three and nine months ended September 30, 2014, no options were granted.

At September 30, 2014, all outstanding options were exercisable. Cash proceeds from the exercise of stock options, including the tax benefits realized from the exercise of stock options, were immaterial for the three and nine months ended September 30, 2014 and 2013.

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 September 30, 2014, the total number of stock units outstanding was 18.4 million, of which 11.8 million were unvested.

At September 30, 2014, there was unrecognized compensation cost for stock units of $305.5 million, which is expected to be recognized over a weighted-average period of 2.6 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.

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 $17.6 million and $17.0 million at September 30, 2014 and December 31, 2013, 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 September 30, 2014 and December 31, 2013, the deferred compensation liability related to the mutual fund option of $14.7 million and $14.3 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 22 – 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 September 30, 2014 and December 31, 2013, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $1.24 billion and $1.16 billion, respectively, and the fair value of the collateral that had been sold or repledged was $143.8 million and $263.8 million, respectively.

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. 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 September 30, 2014 and December 31, 2013, Stifel Bank had outstanding commitments to originate loans aggregating $101.6 million and $66.8 million, respectively. The commitments extended over varying periods of time, with all commitments at September 30, 2014 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 September 30, 2014 and December 31, 2013, Stifel Bank had outstanding letters of credit totaling $11.1 million and $5.1 million, respectively. One of the standby letters of credit has an expiration of December 31, 2015. All of the remaining standby letters of credit commitments at September 30, 2014 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 September 30, 2014 and December 31, 2013, Stifel Bank had granted unused lines of credit to commercial and consumer borrowers aggregating $478.5 million and $282.0 million, respectively.

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 interest income from stock borrow activities, unallocated interest expense, interest income and gains and losses from investments held, compensation expense associated with the expensing of restricted stock awards with no continuing service requirements in conjunction with recent acquisitions, and all unallocated overhead cost associated with the execution of orders; processing of securities transactions; custody of client securities; receipt, identification, and delivery of funds and securities; compliance with regulatory and legal requirements; internal financial accounting and controls; and general administration and acquisition charges.

Information concerning operations in these segments of business for the three and nine months ended September 30, 2014 and 2013 is as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net revenues: ⁽¹⁾
Global Wealth Management	$	317,241		$	274,669		$	921,671		$	824,344
Institutional Group		215,160			205,132			720,849			593,875
Other		(8,946	)		(1,162	)		(12,172	)		(7,298	)

	$	523,455		$	478,639		$	1,630,348		$	1,410,921

Income/(loss) from continuing operations before income taxes:
Global Wealth Management	$	94,026		$	72,128		$	262,800		$	220,551
Institutional Group		29,500			34,986			117,812			94,298
Other		(57,760	)		(76,106	)		(159,195	)		(207,608	)

	$	65,766		$	31,008		$	221,417		$	107,241

⁽¹⁾	No individual client accounted for more than 10 percent of total net revenues for the three and nine months ended September 30, 2014 or 2013.

The following table presents our company’s total assets on a segment basis at September 30, 2014 and December 31, 2013 (in thousands):


	September 30, 2014		December 31, 2013
Global Wealth Management	$	5,698,937	$	5,505,076
Institutional Group		3,406,450		3,290,573
Other		220,730		213,221

	$	9,326,117	$	9,008,870

We have operations in the United States, United Kingdom, and Europe. Our company’s foreign operations are conducted through its wholly owned subsidiaries, SNEL, Oriel, and KBW Limited. 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 and nine months ended September 30, 2014 and 2013, were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
United States	$	491,860	$	453,381	$	1,532,196	$	1,357,938
United Kingdom		29,073		22,697		89,665		45.120
Other European		2,522		2,561		8,487		7,863

	$	523,455	$	478,639	$	1,630,348	$	1,410,921

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 and nine months ended September 30, 2014 and 2013 (in thousands, except per share data):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Income from continuing operations	$	40,093		$	74,929		$	133,643		$	120,782
Loss from discontinued operations, net of tax		(190	)		(5,239	)		(2,757	)		(7,037	)

Net income	$	39,903		$	69,690		$	130,886		$	113,745

Shares for basic and diluted calculation:
Average shares used in basic computation		66,691			64,706			66,344			63,133
Dilutive effect of stock options and units ⁽¹⁾		9,990			10,485			9,667			9,718

Average shares used in diluted computation		76,681			75,191			76,011			72,851
Earnings per basic common share:
Income from continuing operations	$	0.60		$	1.16		$	2.01		$	1.91
Loss from discontinued operations		—			(0.08	)		(0.04	)		(0.11	)

Earnings per basic common share	$	0.60		$	1.08		$	1.97		$	1.80

Earnings per diluted common share:
Income from continuing operations	$	0.52		$	1.00		$	1.76		$	1.66
Loss from discontinued operations		—			(0.07	)		(0.04	)		(0.10	)

Earnings per diluted common share	$	0.52		$	0.93		$	1.72		$	1.56

⁽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 and nine months ended September 30, 2014 and 2013, 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 September 30, 2014, the maximum number of shares that may yet be purchased under this plan was 3.5 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.

On July 31, 2014, we acquired Oriel Securities. As part of the purchase consideration, at the close of the acquisition, we issued 0.3 million shares of our common stock.

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 $255.2 million at September 30, 2014. 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 and nine months ended September 30, 2014 and 2013. In addition, our direct investment interest in these entities is insignificant at September 30, 2014 and December 31, 2013.

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 $272.8 million at September 30, 2014. 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 insignificant at September 30, 2014. Management fee revenue earned by our company was insignificant during the three and nine months ended September 30, 2014 and 2013.

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 September 30, 2014, 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 September 30, 2014. 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 September 30, 2014. 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 identified the following as a non-recognized event.

Acquisition of Legg Mason Investment Counsel & Trust Co., N.A. (“LMIC”)

On November 7, 2014 we completed the acquisition of Legg Mason Investment Counsel & Trust Co., N.A. (“LMIC”). LMIC provides customized investment advisory and trust services, on a discretionary basis, to individuals, families, and institutions throughout the country.

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, 2013, 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, 2013, 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. These acquisitions have positively impacted our results.

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.

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”), Oriel Securities, 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, 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.

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 April 3, 2014, we completed the acquisition of De La Rosa & Co. (“De La Rosa”), a California-based public finance investment banking boutique. The addition of the De La Rosa team is expected to further strengthen our company’s position in a number of key underwriting markets in California.

On July 31, 2014 we completed the acquisition of Oriel Securities (“Oriel”), a London-based stockbroking and investment banking firm. The combination of our company and Oriel brought together more than 250 professionals, which created a significant middle-market investment banking group in London, with broad research coverage across most sectors of the economy, equity and debt sales and trading, and investment banking services.

Results for the three and nine months ended September 30, 2014

For the three months ended September 30, 2014, net revenues from continuing operations increased 9.4% to $523.5 million compared to $478.6 million during the comparable period in 2013. Net income, including continuing and discontinued operations, decreased 42.7% to $39.9 million, or $0.52 per diluted common share for the three months ended September 30, 2014, compared to $69.7 million, or $0.93 per diluted common share during the comparable period in 2013. Net income from continuing operations decreased 46.5% to $40.1 million, or $0.52 per diluted common share for the three months ended September 30, 2014 compared to $74.9 million, or $1.00 per diluted common share during the comparable period in 2013.

For the nine months ended September 30, 2014, net revenues from continuing operations increased 15.6% to a record $1.63 billion compared to $1.41 billion during the comparable period in 2013. Net income, including continuing and discontinued operations, increased 15.1% to $130.9 million, or $1.72 per diluted common share for the nine months ended September 30, 2014, compared to $113.7 million, or $1.56 per diluted common share during the comparable period in 2013. Net income from continuing operations increased 10.6% to $133.6 million, or $1.76 per diluted common share for the nine months ended September 30, 2014 compared to $120.8 million, or $1.66 per diluted common share during the comparable period in 2013.

Our revenue growth for the three months ended September 30, 2014 was primarily attributable to higher investment banking revenues as a result of increased capital raising revenues and improved M&A activity; growth in asset management and service fees as a result of increased assets under management; and increased net interest revenues as a result of the growth of net interest-earning assets at Stifel Bank. The increase in revenue growth over the comparable quarter in 2013 was offset by a decline in other revenues and lower brokerage revenues.

Our revenue growth for the nine months ended September 30, 2014 was primarily attributable to higher investment banking revenues as a result of improved M&A activity and increased capital raising revenues; growth in asset management and service fees as a result of increased assets under management; increased net interest revenues as a result of the growth of net interest-earning assets at Stifel Bank; and an increase in brokerage revenues. The increase in revenue growth over the comparable period in 2013 was offset by a decline in other revenues.

The results for the three and nine months ended September 30, 2014 were impacted by certain non-recurring and merger-related expenses primarily related to the acquisition of Oriel Securities. The aggregate impact of these items was a reduction to net income from continuing operations of $8.6 million (after-tax) or $0.12 per diluted common share and $18.3 million (after-tax) or $0.24 per diluted common share, respectively.

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 and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, the level and shape of various yield curves, the volume and value of trading in securities, and the value of our customers’ assets under management. The municipal underwriting market is challenging as state and local governments reduce their debt levels. Investors are showing a lack of demand for longer-dated municipals and are reluctant to take on credit or liquidity risks.

Our overall financial results continue to be highly and directly correlated to the direction and activity levels of the United States equity and fixed income markets. At September 30, 2014, the key indicators of the markets’ performance, the Dow Jones Industrial Average, S&P 500, and the NASDAQ closed 2.8%, 6.7%, and 7.6% higher than their December 31, 2013 closing prices, respectively.

As a participant in the financial services industry, we are subject to complicated and extensive regulation of our business. The recent economic and political environment has led to legislative and regulatory initiatives, both enacted and proposed, that could substantially intensify the regulation of the financial services industry and may significantly impact us.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2014 Compared with Three Months Ended September 30, 2013

The following table presents consolidated financial information for the periods indicated (in thousands, except percentages):


	For the Three Months Ended September 30,									As a Percentage of Net Revenues For the Three Months Ended September 30,
	2014			2013			% Change			2014			2013
Revenues:
Commissions	$	151,621		$	145,837			4.0			29.0	%		30.5	%
Principal transactions		109,378			122,583			(10.8	)		20.7			25.6
Investment banking		120,147			92,851			29.4			23.0			19.4
Asset management and service fees		96,638			76,710			26.0			18.5			16.0
Interest		52,096			39,130			33.1			10.0			8.2
Other income		4,803			13,063			(63.2	)		0.9			2.7

Total revenues		534,683			490,174			9.1			102.1			102.4
Interest expense		11,228			11,535			(2.7	)		2.1			2.4

Net revenues		523,455			478,639			9.4			100.0			100.0


Non-interest expenses:
Compensation and benefits		331,440			326,020			1.7			63.3			68.1
Occupancy and equipment rental		41,611			41,288			0.8			7.9			8.6
Communication and office supplies		27,464			26,122			5.1			5.2			5.5
Commissions and floor brokerage		9,971			10,150			(1.8	)		1.9			2.1
Other operating expenses		47,203			44,051			7.2			9.1			9.2

Total non-interest expenses		457,689			447,631			2.2			87.4			93.5


Income before from continuing operations income taxes		65,766			31,008			112.1			12.6			6.5
Provision for income taxes		25,673			(43,921	)		*			4.9			(9.2	)

Net income from continuing operations		40,093			74,929			(46.5	)		7.7			15.7

Discontinued operations:
Loss from discontinued operations, net of tax		(190	)		(5,239	)		(96.4	)		—			(1.1	)

Net income	$	39,903		$	69,690			(42.7	)		7.7	%		14.6	%

*	Percentage not meaningful.

Nine Months Ended September 30, 2014 Compared with Nine Months Ended September 30, 2013

The following table presents consolidated financial information for the periods indicated (in thousands, except percentages):


	For the Nine Months Ended September 30,									As a Percentage of Net Revenues For the Nine Months Ended September 30,
	2014			2013			% Change			2014			2013
Revenues:
Commissions	$	463,749		$	446,498			3.9			28,4	%		31.7	%
Principal transactions		361,515			341,153			6.0			22.1			24.2
Investment banking		393,966			289,199			36.2			24.2			20.5
Asset management and service fees		280,039			221,711			26.3			17.2			15.7
Interest		141,035			101,829			38.5			8.7			7.2
Other income		18,745			45,269			(58.6	)		1.2			3.2

Total revenues		1,659,049			1,445,659			14.8			101.8			102.5
Interest expense		28,701			34,738			(17.4	)		1.8			2.5

Net revenues		1,630,348			1,410,921			15.6			100.0			100.0


Non-interest expenses:
Compensation and benefits		1,033,478			958,179			7.9			63.4			67.9
Occupancy and equipment rental		125,110			116,090			7.8			7.7			8.2
Communication and office supplies		78,151			74,034			5.6			4.8			5.3
Commissions and floor brokerage		28,247			28,777			(1.8	)		1.7			2.0
Other operating expenses		143,945			126,600			13.7			8.8			9.0

Total non-interest expenses		1,408,931			1,303,680			8.1			86.4			92.4


Income before from continuing operations income taxes		221,417			107,241			106.5			13.6			7.6
Provision for income taxes		87,774			(13,541	)		*			5.4			(1.0	)

Net income from continuing operations		133,643			120,782			10.6			8.2			8.6

Discontinued operations:
Loss from discontinued operations, net of tax		(2,757	)		(7,037	)		(60.8	)		(0.2	)		(0.5	)

Net income	$	130,886		$	113,745			15.1			8.0	%		8.1	%

*	Percentage not meaningful.

NET REVENUES

The following table presents consolidated net revenues for the periods indicated (in thousands, except percentages):


	Three Months Ended September 30,							Nine Months Ended September 30,
	2014		2013		% Change			2014		2013		% Change
Net revenues:
Commissions	$	151,621	$	145,837		4.0		$	463,749	$	446,498		3.9
Principal transactions		109,378		122,583		(13.0	)		361,515		341,153		6.0
Investment banking:
Capital raising		69,208		53,885		28.4			223,898		175,037		27.9
Strategic advisory fees		50,939		38,966		30.7			170,068		114,162		49.0

		120,147		92,851		29.4			393,966		289,199		36.2
Asset management and service fees		96,638		76,710		26.0			280,039		221,711		26.3
Net interest		40,868		27,595		48.1			112,334		67,091		67.4
Other income		4,803		13,063		(63.2	)		18,745		45,269		(58.6	)