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STIFEL FINANCIAL CORP.

Form 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Condensed Consolidated Statements of Financial Condition as of June 30, 2010 (unaudited) and December 31, 2009	3
Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2010 and June 30, 2009 (unaudited)	5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and June 30, 2009 (unaudited)	6
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3. Quantitative and Qualitative Disclosures About Market Risk	81
Item 4. Controls and Procedures	86
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	87
Item 1A. Risk Factors	88
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	88
Item 6. Exhibits	89
Signatures	90

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PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition

See accompanying Notes to Consolidated Financial Statements.

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STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition (continued) 

See accompanying Notes to Consolidated Financial Statements.

4

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STIFEL FINANCIAL CORP.

Consolidated Statements of Operations

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

5

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STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows

(Unaudited) 

See accompanying Notes to Consolidated Financial Statements.

6

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STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows (continued)

(Unaudited) 

See accompanying Notes to Consolidated Financial Statements.

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STIFEL FINANCIAL CORP.

Notes to Consolidated Financial Statements

(in thousands, except share and per share amounts)

(Unaudited) 

NOTE 1 - Nature of Operations and Basis of Presentation

Nature of Operations

Stifel Financial Corp. (the "Parent"), through its wholly-owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus"), Century Securities Associates, Inc. ("CSA"), Stifel Nicolaus Limited ("SN Ltd"), and Stifel Bank & Trust ("Stifel Bank"), is principally engaged in retail brokerage, securities trading, investment banking, investment advisory, retail, consumer and commercial banking and related financial services throughout the United States. Although we have offices throughout the United States and three European cities, our major geographic area of concentration is in the Midwest and Mid-Atlantic regions, with a growing presence in the Northeast, Southeast and Western United States. Our company's principal customers are individual investors, corporations, municipalities, and institutions.

On April 26, 2010, Stifel Financial Corp. and Thomas Weisel Partners Group, Inc. ("TWPG") entered into a definitive agreement for our company to acquire 100% of the outstanding shares of TWPG common stock.  Under the terms of the agreement, TWPG shareholders would receive 0.1364 of Stifel Financial Corp.'s shares for each TWPG share they own. The merger closed on July 1, 2010. TWPG is an investment bank focused principally on the growth sectors of the economy, generates revenues from three principal sources: investment banking, brokerage and asset management. The investment banking group is comprised of two primary categories of services: corporate finance and strategic advisory. The brokerage group provides equity sales and trading services to institutional investors, and offers brokerage, advisory services to high-net-worth individuals and corporate clients. The asset management group consists of: private investment funds, public equity investment products and distribution management. See Note 24 - Subsequent Events for a discussion of the merger with TWPG.

Basis of Presentation

The consolidated financial statements include the accounts of Stifel Financial Corp. and its wholly-owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated. Intercompany balances and transactions have been eliminated. Unless otherwise indicated, the terms "we," "us," "our" or "our company" in this report refer to Stifel Financial Corp. and its wholly-owned subsidiaries.

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Pursuant to these rules and regulations, we have omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. In management's opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise noted) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2009 on file with the SEC.

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Certain amounts from prior periods have been reclassified to conform to the current period's presentation. The effect of these reclassifications on our company's previously reported consolidated financial statements 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, 2009.

Recently Adopted Accounting Guidance

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

Consolidation

In February 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("Update") No. 2010-10, "Consolidation (Topic 810): Amendments for Certain Investment Funds," which provides for a deferral of the consolidation requirements of Topic 810 resulting from the issuance of FASB Statement No. 167 ("Statement 167"), Amendments to FASB Interpretation No. 46R," for a reporting entity's interest in an entity that has all the attributes of an investment company; or for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies (the "deferral"). The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could potentially be significant to the entity. The deferral also does not apply to interests in securitization entities, asset-backed financing entities, or entities formerly considered qualifying special purpose entities. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities in Subtopic 810-10 (before the Statement 167 amendments) or other applicable consolidation guidance, such as the guidance for the consolidation of partnerships in Subtopic 810-20. This guidance does not defer the disclosure requirements of Topic 810, as amended. The amendments in this Update are effective as of the beginning of the first annual reporting period that begins after November 15, 2009 and for interim periods within the first annual reporting period (January 1, 2010 for our company). The adoption of this guidance permits us to defer the consolidation requirements of Topic 810 resulting from the issuance of Statement 167 for certain of these entities. See Note 23 - Variable Interest Entities.

Subsequent Events

In February 2010, the FASB issued Update No. 2010-09, "Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements," which amends certain provisions of the current guidance, including the elimination of the requirement for disclosure of  the date through which an evaluation of subsequent events was performed in issued and revised financial statements. This guidance was effective for the first interim and annual reporting periods beginning after issuance (March 31, 2010 for our company). The adoption of this new guidance did not have a material impact on our consolidated financial statements. See Note 24 - Subsequent Events.

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Fair Value of Financial Instruments

In January 2010, the FASB issued Update No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements," which amends the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a rollforward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for us with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for us with the reporting period beginning January 1, 2011. Other than requiring additional disclosures, the adoption of this new guidance did not have a material impact on our consolidated financial statements. See Note 4 - Fair Value of Financial Instruments.

Accounting for Transfers of Financial Assets

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

Recently Issued Accounting Guidance

Deterioration of Credit Quality for Acquired Loans

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

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Allowance for Credit Losses

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

NOTE 2 - Sale of Bank Branch

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

NOTE 3 - Receivables from and Payables to Brokers, Dealers and Clearing Organizations

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

		June 30,  2010			December 31,  2009
Deposits paid for securities borrowed		$	117,922		$	147,325
Securities failed to deliver			53,773			64,626
Receivable from clearing organizations			24,536			97,658
		$	196,231		$	309,609

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

		June 30,  2010			December 31,  2009
Deposits received from securities loaned		$	71,110		$	16,667
Securities failed to receive			36,415			73,793
Payable to clearing organizations			3,839			-
		$	111,364		$	90,460

Deposits paid for securities borrowed approximate the market value of the securities. Securities failed to deliver and receive represent the contract value of securities that have not been delivered or received on settlement date.

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NOTE 4 - Fair Value of Financial Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, trading securities owned, available-for-sale securities, investments, trading securities sold, but not yet purchased and derivative contracts.

The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.

The following is a description of the valuation techniques used to measure fair value.

Cash equivalents

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

Financial instruments (Trading securities and available-for-sale securities)

When available, the fair value of financial instruments are based on quoted prices in active markets and reported in Level 1. Level 1 financial instruments include highly liquid instruments with quoted prices such as certain U.S. treasury bonds, corporate bonds, certain municipal securities and equities listed in active markets.

If quoted prices are not available, fair values are obtained from pricing services, broker quotes, or other model-based valuation techniques with observable inputs such as the present value of estimated cash flows and reported as Level 2. The nature of these financial instruments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Level 2 financial instruments generally include certain U.S. government agency securities, certain corporate bonds, certain municipal securities, asset-backed securities, and mortgage-backed securities.

Level 3 financial instruments have little to no pricing observability. These financial instruments do not have active two-way markets and are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have identified Level 3 financial instruments to include certain asset-backed securities, consisting of collateral loan obligation securities, that have experienced low volumes of executed transactions; and certain corporate bonds where there was less frequent or nominal market activity or when we were able to obtain only a single broker quote. Our Level 3 asset-backed securities are valued using cash flow models that utilize unobservable inputs. Level 3 corporate bonds are valued using prices from comparable securities.

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Investments

Investments in public companies are valued based on quoted prices in active markets and reported in Level 1. Investments in certain equity securities with unobservable inputs and auction-rate securities for which the market has been dislocated and largely ceased to function are reported as Level 3 assets. Investments in certain equity securities with unobservable inputs are valued using management's best estimate of fair value, where the inputs require significant management judgment. Auction-rate securities are valued based upon our expectations of issuer redemptions and using internal models.

Trading securities sold but not yet purchased

Trading securities sold but not purchased are recorded at fair value based on quoted prices in active markets and other observable market data are reported as Level 1. Trading securities owned include highly liquid instruments with quoted prices such as certain U.S. Treasury bonds, corporate bonds, certain municipal securities and equities listed in active markets.

If quoted prices are not available, fair values are obtained from pricing services, broker quotes, or other model-based valuation techniques with observable inputs such as the present value of estimated cash flows and reported as Level 2. The nature of these financial instruments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level 3 financial instruments have little to no pricing observability. These financial instruments do not have active two-way markets and are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have identified Level 3 financial instruments to include certain corporate bonds where there was less frequent or nominal market activity or when we were able to obtain only a single broker quote. Our Level 3 corporate bonds are valued using prices from comparable securities.

Derivative contracts

Derivatives are valued using quoted market prices when available or pricing models based on the net present value of estimated future cash flows. The valuation models used require market observable inputs including contractual terms, market prices, yield curves, credit curves and measures of volatility. These measurements are classified as Level 2 within the fair value hierarchy and are used to value interest rate swaps.

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

		June 30, 2010
		Total			Level I			Level II			Level III
Assets:
Cash equivalents		$	63,838		$	63,838		$	-		$	-
Trading securities owned:
U.S. government agency securities			116,197			-			116,197			-
U.S. government securities			15,044			15,044			-			-
Corporate securities:
Fixed income securities			255,263			128,387			117,752			9,124
Equity securities			15,536			15,160			376			-
State and municipal securities			74,458			-			74,458			-
Total trading securities owned			476,498			158,591			308,763			9,124
Available-for-sale securities:
U.S. government agency securities			98,970			-			98,970			-
State and municipal securities			13,990			-			13,990			-
Mortgage-backed securities:
Agency			491,641			-			491,641			-
Non-agency			34,683			-			34,683			-
Commercial			47,841			-			47,841			-
Corporate fixed income securities			41,003			30,347			10,656			-
Asset-backed securities			11,993			-			11,993			-
Total available-for-sale securities			740,121			30,347			709,744			-
Investments:
Corporate equity securities			7,727			7,727			-			-
Mutual funds			28,256			28,256			-			-
U.S. government securities			9,237			9,237			-			-
Auction rate securities:
Equity securities			62,846			-			-			62,846
Municipal securities			10,788			-			-			10,788
Other			7,351			70			346			6,935
Total investments			126,205			45,290			346			80,569
		$	1,406,662		$	298,066		$	1,018,903		$	89,693
Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities		$	133,911		$	133,911		$	-		$	-
Corporate securities:
Fixed income securities			109,115			74,476			31,284			2,355
Equity securities			10,130			9,631			499			-
State and municipal securities			307			-			307			-
Total trading securities sold, but not yet purchased			253,463			219,018			32,090			2,355
Derivative contracts			10,521			-			10,521			-
		$	263,984		$	219,018		$	42,611		$	2,355

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

 

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

	Three Months Ended June 30, 2010
	Financial Assets															Financial Liabilities**
						Investments
	Corporate Fixed Income Securities*			Asset-backed Securities			Auction Rate Securities - Equity			Auction Rate Securities - Municipal			Other			Corporate Fixed Income Securities
Balance at March 31, 2010	$	7,042		$	-		$	64,735		$	10,956		$	5,418		$	4,255
Unrealized gains/(losses):
Included in changes in net assets		112			-			111			2			183			-
Included in OCI		-			-			-			-			-			-
Realized gains/(losses)		808			-			-			5			-			83
Purchases, issuances, settlements, net		1,137			-			(2,000	)		(175	)		1,334			(1,983	)
Level III transfers:
Into level III		26			-			-			-			-			-
Out of level III		(1	)		-			-			-			-			-
Net change		2,082			-			(1,889	)		(168	)		1,517			(1,900	)
Balance at June 30, 2010	$	9,124		$	-		$	62,846		$	10,788		$	6,935		$	2,355
*  Included in "Trading securities owned" on the consolidated statements of financial condition.
** Included in "Trading securities sold, but not yet purchased" on the consolidated statements of financial condition.

	Six Months Ended June 30, 2010
	Financial Assets															Financial Liabilities**
						Investments
	Corporate Fixed Income Securities*			Asset-backed Securities			Auction Rate Securities - Equity			Auction Rate Securities - Municipal			Other			Corporate Fixed Income Securities
Balance at December 31, 2009	$	1,243		$	2,693		$	46,297		$	9,706		$	5,426		$	-
Unrealized gains/(losses):
Included in changes in net assets		94			-			(976	)		(73	)		1			50
Included in OCI		-			887			-			-			-			-
Realized gains/(losses)		1,038			-			-			5			-			83
Purchases, issuances, settlements, net		6,615			(3,580	)		17,525			1,150			1,508			1,332
Level III transfers:
Into level III		135			-			-			-			-			890
Out of level III		(1	)		-			-			-			-			-
Net change		7,881			(2,693	)		16,549			1,082			1,509			2,355
Balance at June 30, 2010	$	9,124		$	-		$	62,846		$	10,788		$	6,935		$	2,355
*  Included in "Trading securities owned" on the consolidated statements of financial condition.
** Included in "Trading securities sold, but not yet purchased" on the consolidated statements of financial condition.

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The results included in the table above are only a component of the overall trading strategies of our company. The table above does not present Level 1 or Level 2 valued assets or liabilities. The changes to our company's Level 3 classified instruments were principally a result of: purchases of auction rate securities ("ARS") from our customers, principal pay-downs of our available-for-sale securities, unrealized gains and losses, and redemptions of ARS at par during the three and six months ended June 30, 2010. There were no changes in unrealized gains/(losses) recorded in earnings for the three and six months ended June 30, 2010 relating to Level 3 assets still held at June 30, 2010. Investment gains and losses of our investments are included in our consolidated statements of operations as a component of other income.

Transfers within the Fair Value Hierarchy

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

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

		June 30, 2010						December 31, 2009
		Carrying value			Estimated fair value			Carrying value			Estimated fair value
Financial assets:
Cash and cash equivalents		$	262,702		$	262,702		$	161,820		$	161,820
Cash segregated for regulatory purposes *			19			19			19			19
Securities purchased under agreements to resell *			88,668			88,668			124,854			124,854
Trading securities owned			476,498			476,498			454,891			454,891
Available-for-sale securities			740,121			740,121			578,488			578,488
Held-to-maturity securities			7,574			4,015			7,574			4,276
Loans held for sale *			60,154			60,154			91,117			91,117
Bank loans			367,819			356,442			335,157			332,437
Investments			126,205			126,205			109,403			109,403
Financial liabilities:
Non-interest-bearing deposits		$	15,631		$	15,824		$	19,521		$	19,013
Interest-bearing deposits			1,239,661			1,261,472			1,027,690			1,027,403
Securities sold under agreements to repurchase *			58,584			58,584			122,533			122,533
Federal Home Loan Bank advances *			-			-			2,000			2,000
Trading securities sold but not yet purchased			253,463			253,463			277,370			277,370
Derivative contracts**			10,521			10,521			78			78
Liabilities subordinated to the claims of general creditors			8,241			7,614			10,081			9,299
*  Carrying value approximates fair value.
** Included in "Accounts payable and accrued expenses" on the consolidated statements of financial condition.

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

Financial Assets

Securities purchased under agreements to resell

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

Held-to-maturity securities

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

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

Loans held for sale

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

Bank Loans

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

Financial liabilities

Non-interest bearing deposits

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

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Interest bearing deposits

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

Securities sold under agreements to repurchase

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

Liabilities subordinated to claims of general creditors

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

These fair value disclosures represent our best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected losses, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.

NOTE 5 - Trading Securities Owned and Trading Securities Sold, But Not Yet Purchased

The components of trading securities owned and trading securities sold, but not yet purchased at June 30, 2010 and December 31, 2009, are as follows (in thousands):

		June 30, 2010			December 31, 2009
Trading securities owned:
U.S. government agency securities		$	116,197		$	158,724
U.S. government securities			15,044			20,254
Corporate securities:
Fixed income securities			255,263			209,950
Equity securities			15,536			18,505
State and municipal securities			74,458			47,458
		$	476,498		$	454,891
Trading securities sold, but not yet purchased:
U.S. government securities		$	133,911		$	127,953
U.S. government agency securities			-			1,537
Corporate securities:
Fixed income securities			109,115			122,491
Equity securities			10,130			25,057
State and municipal securities			307			332
		$	253,463		$	277,370

At June 30, 2010 and December 31, 2009, trading securities owned in the amount of $253,835 and $287,683, respectively, were pledged as collateral for our repurchase agreements and short-term borrowings from banks.

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Trading securities sold, but not yet purchased represent obligations of our company to deliver the specified security at the contracted price, thereby creating a liability to purchase the security in the market at prevailing prices. We are obligated to acquire the securities sold short at prevailing market prices, which may exceed the amount reflected on the consolidated statements of financial condition.

NOTE 6 - Available-for-Sale Securities and Held-to-Maturity Securities

The following tables provide a summary of the amortized cost and fair values of the available-for-sale securities and held-to-maturity securities at June 30, 2010 and December 31, 2009 (in thousands):

		June 30, 2010
		Amortized cost			Gross unrealized gains (1)			Gross unrealized losses (1)			Estimated fair value
Available-for-sale
U.S. government securities		$	98,942		$	28		$	-		$	98,970
State and municipal securities			13,959			31			-			13,990
Mortgage-backed securities:
Agency			481,048			10,638			(45	)		491,641
Non-agency			35,623			810			(1,750	)		34,683
Commercial			46,489			1,352			-			47,841
Corporate fixed income securities			38,943			2,060			-			41,003
Asset-backed securities			11,213			780			-			11,993
		$	726,217		$	15,699		$	(1,795	)	$	740,121
Held-to-maturity
Asset-backed securities		$	7,574			-			(3,559	)	$	4,015

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

 

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

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

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During the three and six months ended June 30, 2010, available-for-sale securities with an aggregate par value of $2,915 and $5,868, respectively, were called by the issuing agencies or matured resulting in no gains or losses recorded through the consolidated statement of operations. Additionally, during the three and six months ended June 30, 2010, Stifel Bank received principal payments on mortgage-backed securities of $28,695 and $57,210, respectively. During the three months ended June 30, 2010 and 2009, unrealized gains, net of deferred taxes, of $4,150 and $629, respectively, were recorded in "Accumulated other comprehensive income." During the six months ended June 30, 2010 and 2009, unrealized gains, net of deferred taxes, of $7,532 and $2,001, respectively, were recorded in "Accumulated other comprehensive income."

The table below summarizes the amortized cost and fair values of debt securities, by contractual maturity (in thousands). Expected maturities may differ significantly from contractual maturities, as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

		June 30, 2010
		Available-for-sale						Held-to-maturity
		Amortized cost			Estimated fair value			Amortized cost			Estimated fair value
Debt securities
Within one year		$	25,864		$	26,115		$	-		$	-
After one year through three years			108,013			109,079			-			-
After three years through five years			10,802			11,665			-			-
After five years through ten years			5,378			6,097			-			-
After ten years			13,000			13,000			7,574			4,015
Mortgage-backed securities
After three years through five years			9,924			10,204			-			-
After five years through ten years			23,241			23,450			-			-
After ten years			529,995			540,511			-			-
		$	726,217		$	740,121		$	7,574		$	4,015

The carrying value of securities pledged as collateral to secure public deposits and other purposes was $67,491 and $76,502 at June 30, 2010 and December 31, 2009, respectively.

Certain investments in the available-for-sale portfolio at June 30, 2010 are reported in the consolidated statements of financial condition at an amount less than their amortized cost. The total fair value of these investments at June 30, 2010 was $33,235, which was 4.5% of our company's available-for-sale investment portfolio. The amortized cost basis of these investments was $35,030 at June 30, 2010. The declines in the available-for-sale portfolio primarily resulted from changes in interest rates and liquidity issues that have had a pervasive impact on the market.

Our investment in a held-to-maturity asset-backed security consists of pools of trust preferred securities related to banks. Unrealized losses were caused primarily by: 1) illiquid markets for collateralized debt obligations; 2) global disruptions in the credit markets; 3) increased supply of collateralized debt obligation secondary market securities from distressed sellers; and 4) difficult times in the banking sector, which has led to a significant amount of bank failures.

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The following table is a summary of the amount of gross unrealized losses and the estimated fair value by length of time that the securities have been in an unrealized loss position at June 30, 2010 (in thousands):

		Less than 12 months						12 months or more						Total
		Gross unrealized losses			Estimated fair value			Gross unrealized losses			Estimated fair value			Gross unrealized losses			Estimated fair value
Available-for-sale
Mortgage-backed securities:
Agency		$	-		$	-		$	(45	)	$	9,847		$	(45	)	$	9,847
Non-agency			(86	)		11,651			(1,664	)		11,737			(1,750	)		23,388
		$	(86	)	$	11,651		$	(1,709	)	$	21,584		$	(1,795	)	$	33,235

Other-Than-Temporary Impairment

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

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

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

Based on the evaluation, we recognized other-than-temporary impairment of $0 and $166 related to credit through earnings for the three and six months ended June 30, 2010, respectively. For the impaired security, unrealized losses not related to credit and therefore recognized in other comprehensive income was $1,267 ($769 net of tax) as of June 30, 2010.

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

Since the decline in fair value of the securities presented in the table above is not attributable to credit quality but to changes in interest rates and the liquidity issues that have had a pervasive impact on the market and because we do not have the intent to sell these securities and it is not likely we would be required to sell these securities until a fair value recovery or maturity, we do not consider these securities to be other-than-temporarily impaired as of June 30, 2010.

NOTE 7 - Bank Loans

The following table presents the balance and associated percentage of each major loan category in Stifel Bank's loan portfolio at June 30, 2010 and December 31, 2009 (in thousands, except percentages):

		June 30, 2010							December 31, 2009
		Balance			Percent				Balance			Percent
Consumer (1)		$	236,509			64.1	%		$	227,436			67.8	%
Residential real estate			52,566			14.3				52,086			15.5
Commercial			34,720			9.4				11,294			3.4
Home equity lines of credit			34,105			9.2				33,369			10.0
Commercial real estate			10,395			2.8				10,152			3.0
Construction and land			574			0.2				952			0.3
			368,869			100.0	%			335,289			100.0	%
Unamortized loan origination costs, net of loan fees			886							1,556
Loans in process			-							14
Allowance for loan losses			(1,936	)						(1,702	)
		$	367,819						$	335,157

⁽¹⁾       Includes stock-secured loans of $235,666 and $226,527 at June 30, 2010 and December 31, 2009, respectively.

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Changes in the allowance for loan losses at Stifel Bank were as follows (in thousands):

		Three Months Ended						Six Months Ended
		June 30, 2010			June 30, 2009			June 30, 2010			June 30, 2009
Allowance for loan losses, beginning of period		$	1,669		$	2,710		$	1,702		$	2,448
Provision for loan losses			154			374			267			907
Charge-offs:
Residential real estate			-			-			(149	)		-
Construction and land			-			-			-			(31	)
Commercial real estate			-			-			-			(106	)
Real estate construction loans			-			-			-			(134	)
Other			(2	)		(24	)		(2	)		(24	)
Total charge-offs			(2	)		(24	)		(151	)		(295	)
Recoveries			115			-			118			-
Allowance for loan losses, end of period		$	1,936		$	3,060		$	1,936		$	3,060

At June 30, 2010 and December 31, 2009, Stifel Bank had mortgage loans held for sale of $60,154 and $91,117, respectively. For the three months ended June 30, 2010 and 2009, Stifel Bank recognized a gain of $1,397 and $1,302, respectively, from the sale of loans originated for sale, net of fees and costs to originate these loans. For the six months ended June 30, 2010 and 2009, Stifel Bank recognized a gain of $2,471 and $2,235, respectively, from the sale of loans originated for sale, net of fees and costs to originate these loans.

A loan is impaired when it is probable that interest and principal payments will not be made in accordance with the contractual terms of the loan agreement. At June 30, 2010, Stifel Bank had $913 of nonaccrual loans that were more than 90 days past due, for which there was a specific allowance of $170. Further, Stifel Bank had $392 in troubled debt restructurings at June 30, 2010.  At December 31, 2009, Stifel Bank had $1,368 of nonaccrual loans that were more than 90 days past due, for which there was a specific reserve of $47. In addition, there were $533 in troubled debt restructurings at December 31, 2009. 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 year, were immaterial to the consolidated financial statements.

At June 30, 2010 and December 31, 2009, Stifel Bank had loans outstanding to its executive officers, directors and significant stockholders and their affiliates in the amount of $794 and $590, respectively, and loans outstanding to other Stifel Financial Corp. executive officers, directors and significant stockholders and their affiliates in the amount of $3,573 and $994, respectively. Such loans and other extensions of credit were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral requirements) as those prevailing at the time for comparable transactions with other persons.

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NOTE 8 - Goodwill and Intangible Assets

Goodwill impairment is tested at the reporting unit level, which is an operating segment or one level below an operating segment on an annual basis. Our reporting units are Private Client Group, Fixed Income Capital Markets, Equity Capital Markets, and Stifel Bank. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit's fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment. No indicators of impairment were identified during our annual impairment testing as of July 31, 2009.

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

		December 31, 2009			Net additions			Impairment losses			June 30, 2010
Goodwill
Global Wealth Management		$	112,420		$	-		$	-		$	112,420
Institutional Group			54,305			-			-			54,305
		$	166,725		$	-		$	-		$	166,725

 

		December 31, 2009			Net additions			Net deductions			Amortization			June 30, 2010
Intangible assets
Global Wealth Management		$	21,356		$	-		$	(1,060	)	$	(1,220	)	$	19,076
Institutional Group			3,292			391			-			(251	)		3,432
		$	24,648		$	391		$	(1,060	)	$	(1,471	)	$	22,508

Amortizable intangible assets consist of acquired customer lists and non-compete agreements that are amortized to expense over their contractual or determined useful lives. Intangible assets subject to amortization as of June 30, 2010 and December 31, 2009 were as follows (in thousands):

June 30, 2010

December 31, 2009

Gross carrying value

Accumulated Amortization

Gross carrying value

Accumulated Amortization

Customer lists

$

31,145