Edgar Filing: STIFEL FINANCIAL CORP

formv10vQ

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-09305

_________________________

STIFEL FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


DELAWARE (State or other jurisdiction of		43-1273600 (IRS Employer Identification No.)
incorporation or organization)

501North Broadway
St. Louis, Missouri		63102
(Address of principal executive offices)		(Zip Code)

(314) 342-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer: þ	Accelerated filer: o	Non-accelerated filer: o	Smaller reporting company: o
		(Do not check if a smaller reporting company)

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

The number of shares outstanding of the registrant's common stock, $0.15 par value per share, as of the close of business on October 31, 2012, was 53,720,013.

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 June 30, 2012 (unaudited) and December 31, 2011	1
Consolidated Statements of Operations for the three and six months ended June 30, 2012 and June 30, 2011 (unaudited)	3
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and June 30, 2011 (unaudited)	4
Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and June 30, 2011 (unaudited)	5
Notes to Consolidated Financial Statements (unaudited)	7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3. Quantitative and Qualitative Disclosures About Market Risk	78
Item 4. Controls and Procedures	82

PART II - OTHER INFORMATION	83
Item 1. Legal Proceedings	83
Item 1A. Risk Factors	85
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	85
Item 6. Exhibits	86
Signatures	87

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition


(in thousands)	September 30, 2012		December 31, 2011
	(Unaudited)
Assets
Cash and cash equivalents	$	193,333	$	167,671
Restricted cash		6,589		6,883
Cash segregated for regulatory purposes		28		26
Receivables:
Brokerage clients, net		519,008		560,018
Brokers, dealers, and clearing organizations		212,747		252,636
Securities purchased under agreements to resell		141,964		75,455
Trading securities owned, at fair value (includes securities pledged of $352,283 and $393,888, respectively)		746,213		474,951
Available-for-sale securities, at fair value		1,476,681		1,214,141
Held-to-maturity securities, at amortized cost		657,933		190,484
Loans held for sale		209,358		131,754
Bank loans, net of allowance		746,567		632,140
Other real estate owned		449		708
Investments (includes $214,761 and $211,208 at fair value, respectively)		242,674		239,208
Fixed assets, net		96,388		104,740
Goodwill		361,735		358,988
Intangible assets, net		30,150		33,863
Loans and advances to financial advisors and other employees, net		183,141		172,717
Deferred tax assets, net		115,375		177,803
Other assets		199,197		157,714
Total Assets	$	6,139,530	$	4,951,900

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, 2012			December 31, 2011
	(Unaudited)
Liabilities and Shareholders' Equity
Short-term borrowings from banks	$	97,900		$	199,400
Payables:
Brokerage clients		329,926			245,886
Brokers, dealers, and clearing organizations		124,081			139,911
Drafts		63,397			75,901
Securities sold under agreements to repurchase		78,437			80,176
Bank deposits		2,923,671			2,071,738
Trading securities sold, but not yet purchased, at fair value		369,886			266,833
Securities sold, but not yet purchased, at fair value		22,194			19,223
Accrued compensation		198,026			204,076
Accounts payable and accrued expenses		242,070			257,194
Senior notes		175,000			-
Debenture to Stifel Financial Capital Trust II		35,000			35,000
Debenture to Stifel Financial Capital Trust III		35,000			35,000
Debenture to Stifel Financial Capital Trust IV		12,500			12,500
		4,707,088			3,642,838
Liabilities subordinated to claims of general creditors		5,318			6,957
Shareholders' Equity:
Preferred stock - $1 par value; authorized 3,000,000 shares; none issued		-			-
Exchangeable common stock - $0.15 par value; issued 0 and 172,242 shares, respectively		-			26
Common stock - $0.15 par value; authorized 97,000,000 shares; issued 53,720,013 and 53,547,774 shares, respectively		8,058			8,032
Additional paid-in-capital		1,067,196			1,078,743
Retained earnings		345,866			277,195
Accumulated other comprehensive income/(loss)		7,707			(7,938	)
		1,428,827			1,356,058
Treasury stock, at cost, 65,275 and 1,769,096 shares, respectively		(1,547	)		(53,640	)
Unearned employee stock ownership plan shares, at cost, 36,608 and 73,215 shares, respectively		(156	)		(313	)
		1,427,124			1,302,105
Total Liabilities and Shareholders' Equity	$	6,139,530		$	4,951,900

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)	2012		2011		2012		2011
Revenues:
Commissions	$	127,966	$	143,243	$	378,696	$	437,344
Principal transactions		102,979		76,650		310,776		249,250
Investment banking		72,938		37,673		210,739		143,509
Asset management and service fees		62,881		58,253		189,010		172,914
Interest		27,306		24,161		79,744		64,246
Other income		31,922		540		50,634		11,352
Total revenues		425,992		340,520		1,219,599		1,078,615
Interest expense		5,912		6,306		24,779		18,931
Net revenues		420,080		334,214		1,194,820		1,059,684

Non-interest expenses:
Compensation and benefits		267,652		210,573		761,730		671,678
Occupancy and equipment rental		33,061		30,914		96,172		89,962
Communications and office supplies		19,976		18,838		61,146		56,198
Commissions and floor brokerage		8,031		7,400		23,390		20,943
Other operating expenses		29,683		27,466		87,577		127,321
Total non-interest expenses		358,403		295,191		1,030,015		966,102

Income before income tax expense		61,677		39,023		164,805		93,582
Provision for income taxes		23,967		16,719		66,186		36,464
Net income	$	37,710	$	22,304	$	98,619	$	57,118

Earnings per common share:
Basic	$	0.70	$	0.43	$	1.84	$	1.09
Diluted	$	0.60	$	0.35	$	1.57	$	0.90

Weighted average number of common shares outstanding:
Basic		53,601		52,367		53,471		52,610
Diluted		63,054		63,152		62,817		63,174

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)	2012		2011			2012		2011

Net income	$	37,710	$	22,304		$	98,619	$	57,118
Other comprehensive income:
Unrealized gains/(losses) on available-for-sale securities, net of tax		8,356		(3,393	)		12,714		3,245
Unrealized gains/(losses) in cash flow hedging instruments, net of tax		463		(8,513	)		1,492		(10,105	)
Foreign currency translation adjustment, net of tax		1,049		(2,283	)		1,439		(1,277	)
		9,868		(14,189	)		15,645		(8,137	)
Comprehensive income	$	47,578	$	8,115		$	114,264	$	48,981

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended September 30,
(in thousands)	2012			2011
Cash Flows from Operating Activities:
Net income	$	98,619		$	57,118
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		21,958			19,124
Amortization of loans and advances to financial advisors and other employees		42,687			42,262
Amortization of premium on available-for-sale securities		11,215			9,201
Provision for loan losses and allowance for loans and advances to financial advisors and other employees		1,685			986
Amortization of intangible assets		3,713			3,588
Deferred income taxes		53,872			23,777
Excess tax benefits from stock-based compensation		(14,510	)		(25,188	)
Stock-based compensation		29,213			19,562
Gains on investments		(29,272	)		(60	)
Other, net		143			931
Decrease/(increase) in operating assets:
Cash segregated for regulatory purposes and restricted cash		292			5,985
Receivables:
Brokerage clients		41,000			(49,174	)
Brokers, dealers, and clearing organizations		39,889			11,757
Securities purchased under agreements to resell		(66,509	)		2,613
Loans originated as held for sale		(1,156,692	)		(638,596	)
Proceeds from mortgages held for sale		1,075,487			608,853
Trading securities owned, including those pledged		(271,262	)		(82,274	)
Loans and advances to financial advisors and other employees		(53,351	)		(30,265	)
Other assets		(21,360	)		(37,058	)
Increase/(decrease) in operating liabilities:
Payables:
Brokerage clients		84,040			29,207
Brokers, dealers, and clearing organizations		19,272			(63,977	)
Drafts		(12,504	)		(27,871	)
Trading securities sold, but not yet purchased		106,024			72,050
Other liabilities and accrued expenses		(54,341	)		(82,110	)
Net cash used in operating activities	$	(50,692	)	$	(129,559	)

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows (continued)


	Nine Months Ended September 30,
(in thousands)	2012			2011
Cash Flows from Investing Activities:
Proceeds from:
Maturities, calls, sales, and principal paydowns on available-for-sale securities	$	353,324		$	535,499
Calls of held-to-maturity securities		10,500			800
Sale or maturity of investments		84,718			74,437
Sale of other real estate owned		137			808
Increase in bank loans, net		(112,687	)		(178,275	)
Payments for:
Purchase of available-for-sale securities		(607,579	)		(868,769	)
Purchase of held-to-maturity securities		(477,117	)		(80,115	)
Purchase of investments		(58,912	)		(71,991	)
Purchase of fixed assets		(13,823	)		(32,561	)
Net cash used in investing activities		(821,439	)		(620,167	)
Cash Flows from Financing Activities:
(Repayments of)/proceeds from short-term borrowings from banks		(101,500	)		201,000
Proceeds from issuance of senior notes, net		170,291			-
Decrease in securities sold under agreements to repurchase		(1,739	)		(56,790	)
Increase in bank deposits, net		851,933			497,195
Increase/(decrease) in securities loaned		(35,102	)		92,518
Excess tax benefits from stock-based compensation		14,510			25,188
Repurchase of common stock		(9,163	)		(48,505	)
Reissuance of treasury stock		8,829			2,755
Extinguishment of subordinated debt		(1,639	)		(1,284	)
Net cash provided by financing activities		896,420			712,077

Effect of exchange rate changes on cash		1,373			(1,261	)

Increase/(decrease) in cash and cash equivalents		25,662			(38,910	)
Cash and cash equivalents at beginning of period		167,671			253,529
Cash and cash equivalents at end of period	$	193,333		$	214,619

Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds	$	2,940		$	5,618
Cash paid for interest		22,567			18,880
Noncash investing and financing activities:
Units, net of forfeitures		106,404			119,530

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"), and Stifel Nicolaus Canada, Inc. ("SN Canada"), is principally engaged in retail brokerage; securities trading; investment banking; investment advisory; retail, consumer, and commercial banking; and related financial services. Although we have offices throughout the United States, two Canadian cities, and three European cities, our major geographic area of concentration is the Midwest and Mid-Atlantic regions, with a growing presence in the Northeast, Southeast and Western United States. Our company's principal customers are individual investors, corporations, municipalities, and institutions.

Basis of Presentation

The consolidated financial statements include Stifel Financial Corp. and its wholly owned subsidiaries, principally Stifel Nicolaus and Stifel Bank. All material intercompany balances and transactions have been eliminated. Unless otherwise indicated, the terms "we," "us," "our," or "our company" in this report refer to Stifel Financial Corp. and its wholly owned subsidiaries.

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Pursuant to these rules and regulations, we have omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. In management's opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise noted) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2011 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, 2011.

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 VIEs in which we are deemed to be the primary beneficiary. The primary beneficiary is defined as the entity that has a variable interest, or a combination of variable interests, that maintains control and receives benefits or will absorb losses that are not pro rata with its ownership interests.

We determine whether we are the primary beneficiary of a VIE by first performing a qualitative analysis of the VIE's control structure, expected benefits and 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 benefits or losses, variability, related party relationships, and the design of the VIE. Where a qualitative analysis is not conclusive, we perform a quantitative analysis. We reassess our initial evaluation of an entity as a VIE and our initial determination of whether we are the primary beneficiary of a VIE upon the occurrence of certain reconsideration events. See Note 23 for additional information on variable interest entities.

NOTE 2 - Recently Adopted Accounting Guidance

Goodwill Impairment Testing

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

Comprehensive Income

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

In December 2011, the FASB issued Update No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05" ("Update No. 2011-12"), which deferred the requirement to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income while the FASB further deliberates this aspect of the proposal. The amendments contained in Update No. 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Update No. 2011-05, as amended by Update No. 2011-12, became effective for us on January 1, 2012. Although the adoption of this new guidance did not have a material impact on our accounting for comprehensive income, it did impact our presentation of the components of comprehensive income by eliminating the historical practice of showing these items within our consolidated financial statements.

Fair Value of Financial Instruments

In May 2011, the FASB issued Update No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs" (Update No. 2011-04), which generally aligns the principals of measuring fair value and for disclosing information about fair value measurements with International Financial Reporting Standards. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011 (January 1, 2012 for our company). Other than requiring additional disclosures regarding fair value measurements, the adoption of this new guidance did not have an impact on our consolidated financial statements. See Note 4 - Fair Value Measurements.

Reconsideration of Effective Control for Repurchase Agreements

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

Recently Issued Accounting Guidance

Indefinite-Lived Assets Impairment Testing

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

Disclosures about Offsetting Assets and Liabilities

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

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

Amounts receivable from brokers, dealers, and clearing organizations at September 30, 2012 and December 31, 2011, included (in thousands):


	September 30, 2012		December 31, 2011

Deposits paid for securities borrowed	$	173,434	$	193,509
Securities failed to deliver		31,329		15,485
Receivable from clearing organizations		7,984		43,642
	$	212,747	$	252,636

Amounts payable to brokers, dealers, and clearing organizations at September 30, 2012 and December 31, 2011, included (in thousands):

	September 30, 2012		December 31, 2011

Deposits received from securities loaned	$	89,634	$	124,711
Securities failed to receive		25,783		11,216
Payable to clearing organizations		8,664		3,984
	$	124,081	$	139,911

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 4 - Fair Value Measurements

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, securities sold, but not yet purchased, and derivatives.

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

We generally utilize third-party pricing services to value Level 1 and Level 2 available-for-sale investment securities, as well as certain derivatives designated as fair value 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 net asset value, which approximates fair value. As such, we classify the estimated fair value of these instruments as Level 1.

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

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

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

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

Investments

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

Investments in certain public companies, mutual funds and U.S. treasury securities are valued based on quoted prices in active markets and reported in Level 1. The fair value of our investment in the preferred stock of Knight Capital Corp. was 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 is classified as Level 2.

Investments in certain private equity securities and partnerships with unobservable inputs and ARS for which the market has been dislocated and largely ceased to function are reported as Level 3 assets. The methods used to value ARS are discussed above.

Investments in partnerships and other investments include our general and limited partnership interests in investment partnerships and direct investments in non-public companies. The net assets of investment partnerships consist primarily of investments in non-marketable securities. The value of these investments is at risk to changes in equity markets, general economic conditions and a variety of other factors. We estimate fair value for private equity investments based on our percentage ownership in the net asset value of the entire fund, as reported by the fund or on behalf of the fund, after indication that the fund adheres to applicable fair value measurement guidance. For those funds where the net asset value is not reported by the fund, we derive the fair value of the fund by estimating the fair value of each underlying investment in the fund. In addition to using qualitative information about each underlying investment, as provided by the fund, we give consideration to information pertinent to the specific nature of the debt or equity investment, such as relevant market conditions, offering prices, operating results, financial conditions, exit strategy and other qualitative information, as available. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. Commitments to fund additional investments in nonmarketable equity securities recorded at fair value were $3.3 million and $4.0 million at September 30, 2012 and December 31, 2011, respectively.

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

Securities Sold, But Not Yet Purchased

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

Derivatives

Derivatives are valued using quoted market prices when available or pricing models based on the net present value of estimated future cash flows. The valuation models used require market observable inputs, including contractual terms, market prices, yield curves, credit curves, and measures of volatility. We manage credit risk for our derivative positions on a counterparty-by-counterparty basis and calculate credit valuation adjustments, included in the fair value of these instruments, on the basis of our relationships at the counterparty portfolio/master netting agreement level. These credit valuation adjustments are determined by applying a credit spread for the counterparty to the total expected exposure of the derivative after considering collateral and other master netting arrangements. We have classified our interest rate swaps as Level 2.

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 are presented below:


	September 30, 2012
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	26,675	$	26,675	$	-	$	-
Trading securities owned:
U.S. government agency securities		144,286		-		144,286		-
U.S. government securities		8,059		8,059		-		-
Corporate securities:
Fixed income securities		391,981		68,005		320,505		3,471
Equity securities		39,829		37,482		2,347		-
State and municipal securities		162,058		-		162,058		-
Total trading securities owned		746,213		113,546		629,196		3,471
Available-for-sale securities:
U.S. government agency securities		1,115		-		1,115		-
State and municipal securities		142,586		-		58,490		84,096
Mortgage-backed securities:
Agency		520,332		-		520,332		-
Commercial		269,808		-		269,808		-
Non-agency		14,765		-		14,765		-
Corporate fixed income securities		500,982		331,244		158,209		11,529
Asset-backed securities		27,093		-		27,093		-
Total available-for-sale securities		1,476,681		331,244		1,049,812		95,625
Investments:
Corporate equity securities		26,111		25,413		698		-
Corporate preferred securities		46,558		-		46,558		-
Mutual funds		17,750		17,750		-		-
U.S. government securities		7,068		7,068		-		-
Auction rate securities:
Equity securities		67,887		-		-		67,887
Municipal securities		10,778		-		-		10,778
Other		38,609		1,551		341		36,717
Total investments		214,761		51,782		47,597		115,382
	$	2,464,330	$	523,247	$	1,726,605	$	214,478
Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities	$	148,876	$	148,876	$	-	$	-
U.S. government agency securities		8,464		-		8,464		-
Corporate securities:
Fixed income securities		173,157		45,814		127,343		-
Equity securities		39,284		37,928		1,356		-
State and municipal securities		105		-		105		-
Total trading securities sold, but not yet purchased		369,886		232,618		137,268		-
Securities sold, but not yet purchased		22,194		22,194		-		-
Derivative contracts (1)		22,455		-		22,455		-
	$	414,535	$	254,812	$	159,723	$	-

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


	December 31, 2011
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	14,156	$	14,156	$	-	$	-
Trading securities owned:
U.S. government agency securities		66,424		-		66,424		-
U.S. government securities		32,845		32,845		-		-
Corporate securities:
Fixed income securities		244,535		31,398		209,395		3,742
Equity securities		19,859		19,506		353		-
State and municipal securities		111,288		-		111,288		-
Total trading securities owned		474,951		83,749		387,460		3,742
Available-for-sale securities:
U.S. government agency securities		1,103		-		1,103		-
State and municipal securities		86,932		-		20,036		66,896
Mortgage-backed securities:
Agency		404,662		-		404,662		-
Commercial		271,510		-		271,510		-
Non-agency		17,460		-		17,460		-
Corporate fixed income securities		405,985		153,855		240,130		12,000
Asset-backed securities		26,489		-		26,489		-
Total available-for-sale securities		1,214,141		153,855		981,390		78,896
Investments:
Corporate equity securities		23,921		23,921		-		-
Mutual funds		33,958		33,958		-		-
Auction rate securities:
Equity securities		103,176		-		-		103,176
Municipal securities		11,729		-		-		11,729
Other		38,424		1,055		336		37,033
Total investments		211,208		58,934		336		151,938
	$	1,914,456	$	310,694	$	1,369,186	$	234,576

Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities	$	109,776	$	109,776	$	-	$	-
U.S. government agency securities		954		-		954		-
Corporate securities:
Fixed income securities		149,460		74,719		74,741		-
Equity securities		6,060		6,019		41		-
State and municipal securities		583		-		583		-
Total trading securities sold, but not yet purchased		266,833		190,514		76,319		-
Securities sold, but not yet purchased		19,223		19,223		-		-
Derivative contracts (1)		24,877		-		24,877		-
	$	310,933	$	209,737	$	101,196	$	-

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

Our investment in a senior preferred interest in Miller Buckfire & Co. LLC ("Miller Buckfire"), which is included in investments in the consolidated statements of financial condition, is carried at cost and therefore not included in the above analysis of fair value at September 30, 2012 and December 31, 2011.

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, 2012 (in thousands):

	Three Months Ended September 30, 2012
				Available-for-sale securities						Investments
	Corporate Fixed Income Securities (1)			State & Municipal Securities			Corporate Fixed Income Securities			Auction Rate Securities - Equity			Auction Rate Securities - Municipal			Other

Balance at June 30, 2012	$	12,808		$	100,730		$	12,000		$	80,037		$	11,503		$	39,091
Unrealized gains/(losses):
Included in changes in net assets (2)		-			-			-			(350	)		25			(172	)
Included in OCI (3)		-			366			-			-			-			-
Realized gains/(losses) (2)		233			-			-			-			-			(132	)
Purchases		2,786			-			-			50			-			117
Sales		(8,798	)		-			-			-			-			(2,187	)
Redemptions		(434	)		(17,000	)		(471	)		(11,850	)		(750	)		-
Transfers:
Into Level 3		-			-			-			-			-			-
Out of Level 3		(3,124	)		-			-			-			-			-
Net change		(9,337	)		(16,634	)		(471	)		(12,150	)		(725	)		(2,374	)
Balance at September 30, 2012	$	3,471		$	84,096		$	11,529		$	67,887		$	10,778		$	36,717

	Nine Months Ended September 30, 2012
				Available-for-sale securities						Investments
	Corporate Fixed Income Securities (1)			State & Municipal Securities			Corporate Fixed Income Securities			Auction Rate Securities - Equity			Auction Rate Securities - Municipal			Other

Balance at December 31, 2011	$	3,742		$	66,896		$	12,000		$	103,176		$	11,729		$	37,033
Unrealized gains/(losses):
Included in changes in net assets (2)		47			-			-			86			94			2,659
Included in OCI (3)		-			(918	)		-			-			-			-
Realized gains (2)		361			118			-			-			-			521
Purchases		24,694			37,000			-			2,850			2,255			1,361
Sales		(20,225	)		-			-			-			-			(4,857	)
Redemptions		(434	)		(19,000	)		(471	)		(38,225	)		(3,300	)		-
Transfers:
Into Level 3		2,686			-			-			-			-			-
Out of Level 3		(7,400	)		-			-			-			-			-
Net change		(271	)		17,200			(471	)		(35,289	)		(951	)		(316	)
Balance at September 30, 2012	$	3,471		$	84,096		$	11,529		$	67,887		$	10,778		$	36,717

(1) Included in trading securities owned in the consolidated statements of financial condition.
(2) Realized and unrealized gains/(losses) related to trading securities and investments are reported in other income in the consolidated statements of operations.
(3) Unrealized gains/(losses) related to available-for-sale securities are reported in accumulated other comprehensive 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: unrealized gains and losses, and redemptions of ARS at par during the three and nine months ended September 30, 2012. The changes in unrealized gains/(losses) recorded in earnings for the three and nine months ended September 30, 2012 relating to Level 3 assets still held at September 30, 2012 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, 2012.

	Valuation technique	Unobservable input	Range	Weighted average

Available-for-sale securities:
State and municipal securities	Discounted cash flow	Discount rate	1.8% - 9.6%	4.9%
		Workout period	2 - 4 years	3.1 years

Investments:
Auction rate securities:
Equity securities	Discounted cash flow	Discount rate	1.5% - 11.7%	6.8%
		Workout period	1 - 3 years	2.7 years

Municipal securities	Discounted cash flow	Discount rate	0.4% - 10.0%	5.0%
		Workout period	1 - 4 years	2.5 years

Other
Investments in partnerships	Market approach	Revenue multiple	1.5 - 3.7	2.8
		EBITDA multiple	6.3 - 14.6	10.4

Private equity investments	Market approach	Revenue multiple	1.4 - 3.2	2.8
		EBITDA multiple	7.8 - 17.4	12.5

The fair value of certain Level 3 assets was determined using various methodologies as appropriate, including 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.

Stifel Bank's investment in a senior preferred interest in Miller Buckfire, which is included in the available for sale portfolio as a Level 3 asset, is carried at the transaction price until significant transactions or development indicate that a change in the fair value is appropriate.

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 $21.4 million at September 30, 2012. The general and limited partnership interests in investment partnerships were primarily valued based upon NAVs received from third-party fund managers. The various partnerships are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the funds to utilize pricing/valuation information, including independent appraisals, from third-party sources. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.

Direct investments in private equity companies totaled $13.1 million at September 30, 2012. 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 $6.2 million and $10.2 million of transfers of financial assets from Level 2 to Level 1 during the three and nine months ended September 30, 2012, respectively, primarily related to tax-exempt securities for which market trades were observed that provided transparency into the valuation of these assets. There were $3.0 million and $17.1 million of transfers of financial assets from Level 1 to Level 2 during the three and nine months ended September 30, 2012, respectively, primarily related to tax-exempt securities for which there were low volumes of recent trade activity observed. There were $3.1 million and $7.4 million of transfers of financial assets from Level 3 to Level 2 during the three and nine months ended September 30, 2012, respectively, related to corporate fixed income securities for which market trades were observed that provided transparency into the valuation of these assets. There were no transfers of financial assets into Level 3 during the three months ended September 30, 2012. There were $2.7 million of transfers of financial assets into Level 3 during the nine months ended September 30, 2012 related to corporate fixed income securities for which there were low volumes of recent trade activity observed.

Fair Value of Financial Instruments

The following reflects the fair value of financial instruments, as of September 30, 2012 and December 31, 2011, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands).


	September 30, 2012				December 31, 2011
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
Financial assets:
Cash and cash equivalents	$	193,333	$	193,333	$	167,671	$	167,671
Restricted cash		6,589		6,589		6,883		6,883
Cash segregated for regulatory purposes		28		28		26		26
Securities purchased under agreements to resell		141,964		141,964		75,455		75,455
Trading securities owned		746,213		746,213		474,951		474,951
Available-for-sale securities		1,476,681		1,476,681		1,214,141		1,214,141
Held-to-maturity securities		657,933		664,593		190,484		189,071
Loans held for sale		209,358		209,358		131,754		131,754
Bank loans		746,567		765,467		632,140		639,341
Investments		242,674		242,674		239,208		239,208
Financial liabilities:
Securities sold under agreements to repurchase	$	78,437	$	78,437	$	80,176	$	80,176
Bank deposits		2,923,671		2,924,394		2,071,738		2,067,324
Trading securities sold, but not yet purchased		369,886		369,886		266,833		266,833
Securities sold, but not yet purchased		22,194		22,194		19,223		19,223
Derivative contracts (1)		22,455		22,455		24,877		24,877
Senior notes		175,000		185,034		-		-
Debentures to Stifel Financial Capital Trusts		82,500		53,517		82,500		67,594
Liabilities subordinated to claims of general creditors		5,318		5,162		6,957		6,671

(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 (in thousands):


	September 30, 2012 (1)
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash	$	166,658	$	166,658	$	-	$	-
Restricted cash		6,589		6,589		-		-
Cash segregated for regulatory purposes		28		28		-		-
Securities purchased under agreements to resell		141,964		141,964		-		-
Held-to-maturity securities		664,593		14,796		39,672		610,125
Loans held for sale		209,358		-		209,358		-
Bank loans		765,467		-		765,467		-
Investments		27,913		-		-		27,913
Financial liabilities:
Securities sold under agreements to repurchase	$	78,437	$	32,841	$	45,596	$	-
Bank deposits		2,924,394		-		2,924,394		-
Senior notes		185,034		185,034		-		-
Debentures to Stifel Financial Capital Trusts		53,517		-		-		53,517
Liabilities subordinated to claims of general creditors		5,162		-		-		5,162

(1) We adopted the provisions of Update No. 2011-04 in the first quarter of 2012 on a prospective basis. Accordingly, disclosures for prior periods are not presented.

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, 2012 and December 31, 2011.

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, 2012 and December 31, 2011 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, 2012 and December 31, 2011 approximate fair value due to the short-term nature.

Bank Deposits

The fair value for demand deposits is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money-market and savings accounts approximate their fair values at the reporting date as these are short-term in nature. The fair value of other interest-bearing deposits, including certificates of deposit, was calculated by discounting the future cash flows using discount rates based on the expected current market rates for similar products with similar remaining terms.

Senior Notes

The fair value of our 6.70% 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 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 September 30, 2012 and December 31, 2011, are as follows (in thousands):


	September 30, 2012		December 31, 2011
Trading securities owned:
U.S. government agency securities	$	144,286	$	66,424
U.S. government securities		8,059		32,845
Corporate securities:
Fixed income securities		391,981		244,535
Equity securities		39,829		19,859
State and municipal securities		162,058		111,288
	$	746,213	$	474,951
Trading securities sold, but not yet purchased:
U.S. government securities	$	148,876	$	109,776
U.S. government agency securities		8,464		954
Corporate securities:
Fixed income securities		173,157		149,460
Equity securities		39,284		6,060
State and municipal securities		105		583
	$	369,886	$	266,833

At September 30, 2012 and December 31, 2011, trading securities owned in the amount of $352.3 million and $393.9 million, respectively, were pledged as collateral for our repurchase agreements and short-term borrowings.

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

NOTE 6 - 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, 2012 and December 31, 2011 (in thousands):

	September 30, 2012
	Amortized cost		Gross unrealized gains (1)		Gross unrealized losses (1)			Estimated fair value
Available-for-sale securities
U.S. government securities	$	1,115	$	-	$	-		$	1,115
State and municipal securities		137,257		5,912		(583	)		142,586
Mortgage-backed securities:
Agency		507,897		12,435		-			520,332
Commercial		264,417		5,878		(487	)		269,808
Non-agency		14,093		672		-			14,765
Corporate fixed income securities		494,451		8,031		(1,500	)		500,982
Asset-backed securities		26,867		460		(234	)		27,093
	$	1,446,097	$	33,388	$	(2,804	)	$	1,476,681
Held-to-maturity securities (2)
Asset-backed securities	$	580,165	$	9,449	$	(3,290	)	$	586,324
Corporate fixed income securities		55,443		174		(1,150	)		54,467
Municipal auction rate securities		22,325		1,493		(16	)		23,802
	$	657,933	$	11,116	$	(4,456	)	$	664,593

	December 31, 2011
	Amortized cost		Gross unrealized gains (1)		Gross unrealized losses (1)			Estimated fair value
Available-for-sale securities
U.S. government securities	$	1,105	$	-	$	(2	)	$	1,103
State and municipal securities		82,256		4,979		(303	)		86,932
Mortgage-backed securities:
Agency		396,952		8,469		(759	)		404,662
Commercial		270,677		1,811		(978	)		271,510
Non-agency		17,701		135		(376	)		17,460
Corporate fixed income securities		409,503		2,108		(5,626	)		405,985
Asset-backed securities		26,011		548		(70	)		26,489
	$	1,204,205	$	18,050	$	(8,114	)	$	1,214,141
Held-to-maturity securities (2)
Asset-backed securities	$	122,148	$	2,953	$	(3,138	)	$	121,963
Corporate fixed income securities		55,544		56		(2,016	)		53,584
Municipal auction rate securities		12,792		733		(1	)		13,524
	$	190,484	$	3,742	$	(5,155	)	$	189,071

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

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

For the three and nine months ended September 30, 2012, we received proceeds of $92.4 million and $186.5 million, respectively, from the sale of available-for-sale securities, which resulted in realized gains of $1.0 million and $3.1 million, respectively. During the three months ended September 30, 2012, unrealized gains, net of deferred taxes, of $8.4 million were recorded in accumulated other comprehensive income in the consolidated statements of financial condition. During the three months ended September 30, 2011, unrealized losses, net of deferred tax benefits, of $3.3 million were recorded in accumulated other comprehensive income in the consolidated statements of financial condition. During the nine months ended September 30, 2012 and 2011, unrealized gains, net of deferred taxes, of $12.8 million and $3.3 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.