Edgar Filing: STIFEL FINANCIAL CORP

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Accelerated filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

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

For the transition period from to

Commission File Number: 001-09305

STIFEL FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Delaware

43-1273600

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices and zip code)

(314) 342-2000

(Registrant’s telephone number, including area code)

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

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

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

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

The number of shares outstanding of the registrant’s common stock, $0.15 par value per share, as of the close of business on July 31, 2013, was 63,573,335.

STIFEL FINANCIAL CORP.

Form 10-Q

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements			3
Consolidated Statements of Financial Condition as of June 30, 2013 (unaudited) and December 31, 2012			3
Consolidated Statements of Operations for the three and six months ended June 30, 2013 and June 30, 2012 (unaudited)			5
Consolidated Statements of Comprehensive Income/(Loss) for the six months ended June 30, 2013 and June 30, 2012 (unaudited)			6
Consolidated Statements of Cash Flows for the three and six months ended June 30, 2013 and June 30, 2012 (unaudited)			7
Notes to Consolidated Financial Statements (unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			50
Item 3. Quantitative and Qualitative Disclosures About Market Risk			85
Item 4. Controls and Procedures			88

PART II – OTHER INFORMATION
Item 1. Legal Proceedings			89
Item 1A. Risk Factors			91
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			91
Item 6. Exhibits			92
Signatures			93

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition


(in thousands)	June 30, 2013		December 31, 2012
	(Unaudited)
Assets
Cash and cash equivalents	$	366,926	$	403,941
Restricted cash		4,416		4,414
Cash segregated for regulatory purposes		32		128,031
Receivables:
Brokerage clients, net		552,252		487,761
Brokers, dealers, and clearing organizations		738,227		276,224
Securities purchased under agreements to resell		125,223		158,695
Trading securities owned, at fair value (includes securities pledged of $733,414 and $607,586, respectively)		741,420		763,608
Available-for-sale securities, at fair value		2,260,005		1,625,168
Held-to-maturity securities, at amortized cost		702,027		708,008
Loans held for sale		152,246		214,531
Bank loans, net of allowance		984,765		815,937
Other real estate owned		173		373
Investments, at fair value		255,202		236,434
Fixed assets, net		148,815		141,403
Goodwill		743,585		419,393
Intangible assets, net		29,396		28,967
Loans and advances to financial advisors and other employees, net		179,563		179,284
Deferred tax assets, net		206,190		124,576
Other assets		302,728		249,392

Total Assets	$	8,493,191	$	6,966,140

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition (continued)


(in thousands, except share and per share amounts)	June 30, 2013			December 31, 2012
	(Unaudited)
Liabilities and Shareholders’ Equity
Short-term borrowings from banks	$	506,700		$	304,700
Payables:
Brokerage clients		288,474			295,509
Brokers, dealers, and clearing organizations		134,003			33,211
Drafts		56,851			90,433
Securities sold under agreements to repurchase		160,285			140,346
Bank deposits		4,007,050			3,346,133
Trading securities sold, but not yet purchased, at fair value		480,907			319,742
Securities sold, but not yet purchased, at fair value		25,415			22,966
Accrued compensation		215,001			187,466
Accounts payable and accrued expenses		256,860			259,163
Corporate debt		378,024			383,992
Debentures to Stifel Financial Capital Trusts		82,500			82,500

		6,592,070			5,466,161
Liabilities subordinated to claims of general creditors		3,131			5,318
Shareholders’ Equity:
Preferred stock - $1 par value; authorized 3,000,000 shares; none issued		—			—
Common stock - $0.15 par value; authorized 97,000,000 shares; issued 63,573,335 and 54,967,858 shares, respectively		9,536			8,245
Additional paid-in-capital		1,505,443			1,100,137
Retained earnings		426,805			383,970
Accumulated other comprehensive income/(loss)		(31,409	)		4,918

		1,910,375			1,497,270
Treasury stock, at cost, 406,338 and 77,577 shares, respectively		(12,385	)		(2,505	)
Unearned employee stock ownership plan shares, at cost, 0 and 24,405 shares, respectively		—			(104	)

		1,897,990			1,494,661

Total Liabilities and Shareholders’ Equity	$	8,493,191		$	6,966,140

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except per share amounts)	2013		2012		2013		2012
Revenues:
Commissions	$	157,168	$	127,427	$	305,816	$	250,730
Principal transactions		111,448		91,564		218,692		207,797
Investment banking		122,114		67,363		200,493		137,801
Asset management and service fees		76,088		65,311		145,000		126,129
Interest		32,933		27,181		62,778		52,438
Other income		11,670		5,418		31,882		18,712

Total revenues		511,421		384,264		964,661		793,607
Interest expense		12,685		9,857		24,145		18,867

Net revenues		498,736		374,407		940,516		774,740

Non-interest expenses:
Compensation and benefits		321,331		239,374		637,058		494,078
Occupancy and equipment rental		41,821		32,320		75,869		63,111
Communications and office supplies		25,936		20,797		48,915		41,170
Commissions and floor brokerage		10,031		7,747		19,089		15,359
Other operating expenses		48,419		30,295		85,041		57,894

Total non-interest expenses		447,538		330,533		865,972		671,612

Income before income tax expense		51,198		43,874		74,544		103,128
Provision for income taxes		21,763		17,738		30,490		42,219

Net income	$	29,435	$	26,136	$	44,054	$	60,909

Earnings per common share:
Basic	$	0.46	$	0.49	$	0.71	$	1.14
Diluted	$	0.40	$	0.42	$	0.62	$	0.97
Weighted average number of common shares outstanding:
Basic		64,505		53,569		62,292		53,406
Diluted		74,090		62,678		71,627		62,700

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Comprehensive Income/(Loss)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012
Net income	$	29,435		$	26,136		$	44,054		$	60,909
Other comprehensive income/(loss):
Changes in unrealized gains/(losses) on available-for-sale securities, net of taxes of $22,055 and $306 for the three months ended June 30, 2013 and 2012, respectively, and $24,280 and $2,712 for the six months ended June 30, 2013 and 2012, respectively ⁽¹⁾		(35,412	)		(492	)		(39,998	)		4,358
Changes in unrealized gains/(losses) on cash flow hedging instruments, net of tax ⁽²⁾		3,428			(1,335	)		4,947			1,029
Foreign currency translation adjustment, net of tax		(207	)		(145	)		(1,276	)		390

		(32,191	)		(1,972	)		(36,327	)		5,777

Comprehensive income/(loss)	$	(2,756	)	$	24,164		$	7,727		$	66,686

⁽¹⁾

Amounts are net of reclassifications to earnings of realized gains of $0.5 million and $1.3 million for the three months ended June 30, 2013 and 2012, respectively. Amounts are net of reclassifications to earnings of realized gains of $0.9 million and $1.3 million for the six months ended June 30, 2013 and 2012, respectively.

⁽²⁾

Amounts are net of reclassifications to earnings of losses of $2.3 million and $3.0 million for the three months ended June 30, 2013 and 2012, respectively. Amounts are net of reclassifications to earnings of losses of $4.6 million and $6.2 million for the six months ended June 30, 2013 and 2012, respectively.

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
(in thousands)	2013			2012
Cash Flows from Operating Activities:
Net income	$	44,054		$	60,909
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization		16,610			14,565
Amortization of loans and advances to financial advisors and other employees		31,004			28,190
Amortization of premium on investment portfolio		1,568			6,665
Provision for loan losses and allowance for loans and advances to financial advisors and other employees		3,451			1,617
Amortization of intangible assets		2,827			2,521
Deferred income taxes		9,484			54,294
Excess tax benefits from stock-based compensation		(9,313	)		(13,357	)
Stock-based compensation		88,083			18,231
(Gains)/losses on investments		620			(6,630	)
Other, net		269			(47	)
Decrease/(increase) in operating assets, net of assets acquired:
Cash segregated for regulatory purposes and restricted cash		127,997			295
Receivables:
Brokerage clients		(64,477	)		(7,726	)
Brokers, dealers, and clearing organizations		(387,739	)		(58,925	)
Securities purchased under agreements to resell		33,472			(81,293	)
Loans originated as held for sale		(836,888	)		(670,178	)
Proceeds from mortgages held for sale		890,865			684,617
Trading securities owned, including those pledged		142,728			(275,996	)
Loans and advances to financial advisors and other employees		(31,974	)		(42,106	)
Other assets		(890	)		(44,201	)
Increase/(decrease) in operating liabilities, net of liabilities assumed:
Payables:
Brokerage clients		(7,035	)		3,737
Brokers, dealers, and clearing organizations		37,147			2,388
Drafts		(33,582	)		(16,414	)
Trading securities sold, but not yet purchased		110,235			146,481
Other liabilities and accrued expenses		(78,652	)		(110,467	)

Net cash provided by/(used in) operating activities	$	89,864		$	(302,830	)

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows (continued)


	Six Months Ended June 30,
(in thousands)	2013			2012
Cash Flows from Investing Activities:
Proceeds from:
Maturities, calls, sales, and principal paydowns of available-for-sale securities	$	307,424		$	188,748
Calls and principal paydowns of held-to-maturity securities		31,418			—
Sale or maturity of investments		49,135			59,233
Sale of other real estate owned		200			84
Increase in bank loans, net		(167,216	)		(77,715	)
Payments for:
Purchase of available-for-sale securities		(1,017,693	)		(295,953	)
Purchase of held-to-maturity securities		(16,438	)		(338,816	)
Purchase of investments		(68,523	)		(21,475	)
Purchase of fixed assets		(13,305	)		(8,380	)
Acquisitions, net of cash acquired		(165,104	)		—

Net cash used in investing activities		(1,060,102	)		(494,274	)

Cash Flows from Financing Activities:
Proceeds from short-term borrowings from banks		202,000			82,600
Proceeds from issuance of senior notes, net		—			170,291
Increase in securities sold under agreements to repurchase		19,939			73,108
Increase in bank deposits, net		660,917			704,946
Increase in securities loaned		63,645			26,789
Excess tax benefits from stock-based compensation		9,313			13,357
Issuance of common stock		15			—
Repurchase of common stock		(13,670	)		(6,350	)
Reissuance of treasury stock		509			7,639
Repayment of non-recourse debt		(5,968	)		—
Extinguishment of subordinated debt		(2,187	)		(1,639	)

Net cash provided by financing activities		934,513			1,070,741

Effect of exchange rate changes on cash		(1,290	)		391
Increase/(decrease) in cash and cash equivalents		(37,015	)		274,028
Cash and cash equivalents at beginning of period		403,941			167,671

Cash and cash equivalents at end of period	$	366,926		$	441,699

Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds	$	8,635		$	1,315
Cash paid for interest		22,326			13,527
Noncash investing and financing activities:
Stock units granted, net of forfeitures		160,386			82,206
Issuance of common stock for acquisitions		265,918			—

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – Nature of Operations and Basis of Presentation

Nature of Operations

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

Basis of Presentation

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

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise noted) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2012 on file with the SEC.

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

There have been no material changes in our significant accounting policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2012.

Consolidation Policies

The consolidated financial statements include the accounts of Stifel Financial Corp. and its subsidiaries. We also have investments or interests in other entities for which we must evaluate whether to consolidate by determining whether we have a controlling financial interest or are considered to be the primary beneficiary. In determining whether to consolidate these entities, we evaluate whether the entity is a voting interest entity or a variable interest entity (“VIE”).

Voting Interest Entity. Voting interest entities are entities that have (i) total equity investment at risk sufficient to fund expected future operations independently, and (ii) equity holders who have the obligation to absorb losses or receive residual returns and the right to make decisions about the entity’s activities. We consolidate voting interest entities when we determine that there is a controlling financial interest, usually ownership of all, or a majority of, the voting interest.

Variable Interest Entity. VIEs are entities that lack one or more of the characteristics of a voting interest entity. We are required to consolidate certain VIEs in which we have the power to direct the activities of the entity and the obligation to absorb significant losses or receive significant benefits. In other cases, we consolidate VIEs when we are deemed to be the primary beneficiary. The primary beneficiary is defined as the entity that has a variable interest, or a combination of variable interests, that maintains control and receives benefits or will absorb losses that are not pro rata with its ownership interests. See Note 27 for additional information on VIEs.

NOTE 2 – Recently Adopted Accounting Guidance

Indefinite-Lived Assets Impairment Testing

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

Disclosures about Offsetting Assets and Liabilities

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

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

Comprehensive Income

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

NOTE 3 – Acquisition of KBW, Inc.

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

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

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


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

Purchase price to be allocated	$	601,913

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805 (“Topic 805”), “Business Combinations.” Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. We recorded $310.7 million of goodwill as an asset in the consolidated statement of financial condition, which has been allocated to our company's Institutional Group segment. The allocation of the purchase price is preliminary and will be finalized upon completion of the analysis of the fair values of the net assets of KBW, Inc. on February 15, 2013 and the identified intangible assets. The final goodwill and intangible assets recorded on the consolidated statement of financial condition may differ from that reflected herein as a result of future measurement period adjustments. In management’s opinion, the goodwill represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of KBW, Inc.’s business and the reputation and expertise of KBW, Inc. in the financial services sector.

Under Topic 805, merger-related transaction costs (such as advisory, legal, valuation and other professional fees) are not included as components of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred. Transaction costs of $9.8 million were incurred during the six months ended June 30, 2013 and are included in other operating expenses in the consolidated statement of operations.

In addition, on February 15, 2013, certain employees were granted restricted stock or restricted stock units of our company as retention. The fair value of the awards issued as retention was $30.6 million. There are no continuing service requirements associated with these restricted stock units, and accordingly were expensed at date of grant. This charge is included in compensation and benefits in the consolidated statement of operations for the six months ended June 30, 2013.

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


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

Total assets acquired	$	415,939

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

Total liabilities assumed		121,951

Net assets acquired	$	293,988

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


	Three Months Ended		Six Months Ended June 30,
(000s, except per share amounts, unaudited)	June 30, 2012		2013			2012
Total net revenues	$	429,638	$	965,949		$	899,020
Net income/(loss)		20,943		(33,851	)		56,175
Earnings/(loss) per share:
Basic	$	0.34	$	(0.54	)	$	0.92
Diluted	$	0.29	$	(0.54	)	$	0.77

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

Amounts receivable from brokers, dealers, and clearing organizations at June 30, 2013 and December 31, 2012, included (in thousands):


	June 30, 2013		December 31, 2012
Deposits paid for securities borrowed	$	419,614	$	153,819
Receivable from clearing organizations		290,761		115,996
Securities failed to deliver		27,852		6,409

	$	738,227	$	276,224

Amounts payable to brokers, dealers, and clearing organizations at June 30, 2013 and December 31, 2012, included (in thousands):


	June 30, 2013		December 31, 2012
Deposits received from securities loaned	$	82,782	$	19,218
Securities failed to receive		51,221		4,747
Payable to clearing organizations		—		9,246

	$	134,003	$	33,211

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

NOTE 5 – Fair Value Measurements

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

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

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

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

Cash and Cash Equivalents

Cash equivalents include highly liquid investments with original maturities of three months or less. Due to their short-term nature, the carrying amount of these instruments approximates the estimated fair value. Actively traded money market funds are measured at their reported net asset value, which approximates fair value. As such, we classify the estimated fair value of these instruments as Level 1.

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

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

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

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

Investments

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

Investments in certain public companies, mutual funds and U.S. treasury securities are valued based on quoted prices in active markets and reported in Level 1.

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

Investments in partnerships and other investments include our general and limited partnership interests in investment partnerships and direct investments in non-public companies. The net assets of investment partnerships consist primarily of investments in non-marketable securities. The value of these investments is at risk to changes in equity markets, general economic conditions and a variety of other factors. We estimate fair value for private equity investments based on our percentage ownership in the net asset value of the entire fund, as reported by the fund or on behalf of the fund, after indication that the fund adheres to applicable fair value measurement guidance. For those funds where the net asset value is not reported by the fund, we derive the fair value of the fund by estimating the fair value of each underlying investment in the fund. In addition to using qualitative information about each underlying investment, as provided by the fund, we give consideration to information pertinent to the specific nature of the debt or equity investment, such as relevant market conditions, offering prices, operating results, financial conditions, exit strategy and other qualitative information, as available. The lack of an independent source to validate fair value estimates, including the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. Commitments to fund additional investments in nonmarketable equity securities recorded at fair value were $37.6 million and $3.0 million at June 30, 2013 and December 31, 2012, respectively.

Securities Sold, But Not Yet Purchased

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

Derivatives

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

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 are presented below:


	June 30, 2013
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	152,798		152,798		—		—
Trading securities owned:
U.S. government agency securities		154,241		—		154,241		—
U.S. government securities		14,695		14,695		—		—
Corporate securities:
Fixed income securities		358,447		66,707		286,683		5,057
Equity securities		111,549		96,377		2,571		12,601
State and municipal securities		102,488		—		102,488		—

Total trading securities owned		741,420		177,779		545,983		17,658
Available-for-sale securities:
U.S. government agency securities		1,212		—		1,212		—
State and municipal securities		168,868		—		86,938		81,930
Mortgage-backed securities:
Agency		1,230,661		—		1,230,661		—
Commercial		207,857		—		207,857		—
Non-agency		5,741		—		5,741		—
Corporate fixed income securities		526,777		358,884		167,893		—
Asset-backed securities		118,889		—		118,889		—

Total available-for-sale securities		2,260,005		358,884		1,819,191		81,930
Investments:
Corporate equity securities		67,858		67,858		—		—
Mutual funds		19,561		19,561		—		—
Auction rate securities:
Equity securities		62,109		—		—		62,109
Municipal securities		13,330		—		—		13,330
Other		92,344		522		4,828		86,994

Total investments		255,202		87,941		4,828		162,433

	$	3,409,425	$	777,402	$	2,370,002	$	262,021

Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities	$	148,888	$	148,888	$	—	$	—
U.S. government agency securities		9,599		—		9,599		—
Corporate securities:
Fixed income securities		230,046		76,439		153,607		—
Equity securities		92,157		91,670		487		—
State and municipal securities		217		—		217		—

Total trading securities sold, but not yet purchased		480,907		316,997		163,910		—
Securities sold, but not yet purchased		25,415		25,415		—		—
Derivative contracts ⁽¹⁾		11,884		—		11,884		—

	$	518,206	$	342,412	$	175,794	$	—

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


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

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

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

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

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

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

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

	$	362,642	$	237,837	$	124,805	$	—

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

The following table summarizes the changes in fair value carrying values associated with Level 3 financial instruments during the three and six months ended June 30, 2013 (in thousands):


	Three Months Ended June 30, 2013
	Trading Securities Owned									Investments
	Corporate Fixed Income Securities			Equity Securities			State & Municipal Securities ⁽¹⁾			Auction Rate Securities – Equity			Auction Rate Securities – Municipal			Other
Balance at March 31, 2013	$	7,474		$	12,534		$	94,958		$	63,401		$	13,999		$	82,258
Unrealized gains/(losses):
Included in changes in net assets⁽²⁾		247			165			—			(617	)		(69	)		2,070
Included in OCI ⁽³⁾					—			(1,934	)		—			—			—
Realized gains ⁽²⁾		180			—			506			—			—			711
Purchases		1,470			—			—			—			—			5,752
Sales		(3,924	)		(98	)		—			—			—			(2,913	)
Redemptions		(526	)		—			(11,600	)		(675	)		(600	)		(884	)
Transfers:
Into Level 3		137			—			—			—			—			—
Out of Level 3		(1	)		—			—			—			—			—

Net change		(2,417	)		67			(13,028	)		(1,292	)		(669	)		4,736

Balance at June 30, 2013	$	5,057		$	12,601		$	81,930		$	62,109		$	13,330		$	86,994


	Six Months Ended June 30, 2013
	Trading Securities Owned									Investments
	Corporate Fixed Income Securities			Equity Securities			State & Municipal Securities ⁽¹⁾			Auction Rate Securities – Equity			Auction Rate Securities – Municipal			Other
Balance at December 31, 2012	$	583		$	—		$	90,487		$	64,397		$	14,067		$	37,297
Unrealized gains/(losses):
Included in changes in net assets⁽²⁾		463			1,333			—			(313	)		(37	)		5,731
Included in OCI ⁽³⁾		—			—			(2,169	)		—			—			—
Realized gains ⁽²⁾		180			—			512			—			—			503
Purchases		8,964			11,476			5,000			75			—			48,677
Sales		(4,181	)		(208	)		—			—			—			(4,199	)
Redemptions		(1,088	)		—			(11,900	)		(2,050	)		(700	)		(1,015	)
Transfers:
Into Level 3		137			—			—			—			—			—
Out of Level 3		(1	)		—			—			—			—			—

Net change		4,474			12,601			(8,557	)		(2,288	)		(737	)		49,697

Balance at June 30, 2013	$	5,057		$	12,601		$	81,930		$	62,109		$	13,330		$	86,994

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

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

⁽³⁾	Unrealized losses related to available-for-sale securities are reported in accumulated other comprehensive income in the consolidated statements of financial condition.

The results included in the table above are only a component of the overall investment strategies of our company. The table above does not present Level 1 or Level 2 valued assets or liabilities. The changes to our company’s Level 3 classified instruments were principally a result of: our acquisition of KBW, Inc, unrealized gains and losses, and redemptions of ARS at par during the three and six months ended June 30, 2013. During the six months ended June 30, 2013, trading securities owned and investments purchased as part of the KBW, Inc. acquisition that are classified as Level 3 totaled $54.1 million, of which $3.9 million were sold during the six months ended June 30, 2013. The changes in unrealized gains/(losses) recorded in earnings for the three and six months ended June 30, 2013 relating to Level 3 assets still held at June 30, 2013 were immaterial.

The following table summarizes quantitative information related to the significant unobservable inputs utilized in our company’s Level 3 recurring fair value measurements as of June 30, 2013.


	Valuation technique	Unobservable input	Range	Weighted average
Available-for-sale securities:
State and municipal securities	Discounted cash flow	Discount rate	5.8% of par – 11.3% of par	7.9% of par
		Workout period	3 – 4 years	4.0 years
Investments:
Auction rate securities:
Equity securities	Discounted cash flow	Discount rate	2.3% of par – 12.9% of par	7.9% of par
		Workout period	1 – 3 years	2.8 years
Municipal securities	Discounted cash flow	Discount rate	0.1% of par – 10.1% of par	6.3% of par
		Workout period	1 – 4 years	2.8 years
Other
Investments in partnerships	Market approach	Revenue multiple	1.5 – 3.9	2.5
		EBITDA multiple	6.6 – 8.7	7.7
Private equity investments	Market approach	Revenue multiple	0.5 – 3.3	2.2
		EBITDA multiple	4.3 – 17.6	10.0

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

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

General and limited partnership interests in investment partnerships totaled $55.8 million and $21.5 million at June 30, 2013 and December 31, 2012, respectively. The general and limited partnership interests in investment partnerships were primarily valued based upon NAVs received from third-party fund managers. The various partnerships are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally

require the funds to utilize pricing/valuation information, including independent appraisals, from third-party sources. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.

Direct investments in private equity companies totaled $13.3 million and $13.5 million at June 30, 2013 and December 31, 2012, respectively. Direct investments in private equity companies may be valued using the market approach or the income approach, or a combination thereof, and were valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies, market indices, assumptions relating to appropriate risk adjustments for nonperformance and legal restrictions on disposition, among other factors. The fair value derived from the methods used are evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Under the income approach, fair value may be determined by discounting the cash flows to a single present amount using current market expectations about those future amounts. Unobservable inputs used in a discounted cash flow model may include projections of operating performance generally covering a five-year period and a terminal value of the private equity direct investment. For securities utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could result in a significantly lower (higher) fair value measurement. For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement.

Transfers Within the Fair Value Hierarchy

We assess our financial instruments on a quarterly basis to determine the appropriate classification within the fair value hierarchy. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transfers of financial instruments among the levels are deemed to occur at the beginning of the reporting period. There were $5.1 million and $61.4 million of transfers of financial assets from Level 2 to Level 1 during the three and six months ended June 30, 2013, respectively, primarily related to corporate preferred securities that were converted to common stock, which is actively traded and fixed income and equity securities for which market trades were observed that provided transparency into the valuation of these assets. There were $4.7 million and $5.4 million of transfers of financial assets from Level 1 to Level 2 during the three and six months ended June 30, 2013, respectively, primarily related to corporate fixed income securities for which there were low volumes of recent trade activity observed. There were an immaterial amount of transfers into Level 3 during the three and six months ended June 30, 2013.

Fair Value of Financial Instruments

The following reflects the fair value of financial instruments, as of June 30, 2013 and December 31, 2012, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands).


	June 30, 2013				December 31, 2012
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
Financial assets:
Cash and cash equivalents	$	366,926	$	366,926	$	403,941	$	403,941
Restricted cash		4,416		4,416		4,414		4,414
Cash segregated for regulatory purposes		32		32		128,031		128,031
Securities purchased under agreements to resell		125,223		125,223		158,695		158,695
Trading securities owned		741,420		741,420		763,608		763,608
Available-for-sale securities		2,260,005		2,260,005		1,625,168		1,625,168
Held-to-maturity securities		702,027		704,056		708,008		715,274
Loans held for sale		152,246		152,246		214,531		214,531
Bank loans		984,765		996,346		815,937		834,188
Investments		255,202		255,202		236,434		236,434
Financial liabilities:
Securities sold under agreements to repurchase	$	160,285	$	160,285	$	140,346	$	140,346
Bank deposits		4,007,050		3,687,705		3,346,133		3,368,643
Trading securities sold, but not yet purchased		480,907		480,907		319,742		319,742
Securities sold, but not yet purchased		25,415		25,415		22,966		22,966
Derivative contracts ⁽¹⁾		11,884		11,884		19,934		19,934
Senior notes ⁽²⁾		325,000		337,037		325,000		338,475
Non-recourse debt ⁽²⁾		53,024		53,736		58,992		58,992
Debentures to Stifel Financial Capital Trusts		82,500		71,820		82,500		66,545
Liabilities subordinated to claims of general creditors		3,131		3,072		5,318		5,204

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

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

The following table presents the estimated fair values of financial instruments not measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 (in thousands):


	June 30, 2013
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash	$	214,128	$	214,128	$	—	$	—
Restricted cash		4,416		4,416		—		—
Cash segregated for regulatory purposes		32		32		—		—
Securities purchased under agreements to resell		125,223		110,322		14,901		—
Held-to-maturity securities		704,056		—		472,940		231,116
Loans held for sale		152,246		—		152,246		—
Bank loans		996,346		—		996,346		—
Financial liabilities:
Securities sold under agreements to repurchase	$	160,285	$	—	$	160,285	$	—
Bank deposits		3,687,705		—		3,687,705		—
Senior notes		337,037		337,037		—		—
Non-recourse debt		53,736		—		53,736		—
Debentures to Stifel Financial Capital Trusts		71,820		—		—		71,820
Liabilities subordinated to claims of general creditors		3,072		—		—		3,072

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

The following, as supplemented by the discussion above, describes the valuation techniques used in estimating the fair value of our financial instruments as of June 30, 2013 and December 31, 2012.

Financial Assets

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at June 30, 2013 and December 31, 2012 approximate fair value due to the short-term nature.

Held-to-Maturity Securities

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

Loans Held for Sale

Loans held for sale consist of fixed-rate and adjustable-rate residential real estate mortgage loans intended for sale. Loans held for sale are stated at lower of cost or fair value. Fair value is determined based on prevailing market prices for loans with similar characteristics or on sale contract prices.

Bank Loans

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

Financial Liabilities

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at June 30, 2013 and December 31, 2012 approximate fair value due to the short-term nature.

Bank Deposits

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

Senior Notes

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

Non-recourse debt

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

Debentures to Stifel Financial Capital Trusts

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

Liabilities Subordinated to Claims of General Creditors

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

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

NOTE 6 – Trading Securities Owned and Trading Securities Sold, But Not Yet Purchased

The components of trading securities owned and trading securities sold, but not yet purchased, at June 30, 2013 and December 31, 2012, are as follows (in thousands):


	June 30, 2013		December 31, 2012
Trading securities owned:
U.S. government agency securities	$	154,241	$	123,758
U.S. government securities		14,695		3,573
Corporate securities:
Fixed income securities		358,447		396,878
Equity securities		111,549		35,472
State and municipal securities		102,488		203,927

	$	741,420	$	763,608

Trading securities sold, but not yet purchased:
U.S. government securities	$	148,888	$	162,661
U.S. government agency securities		9,599		15
Corporate securities:
Fixed income securities		230,046		150,698
Equity securities		92,157		6,281
State and municipal securities		217		87

	$	480,907	$	319,742

At June 30, 2013 and December 31, 2012, trading securities owned in the amount of $733.4 million and $607.6 million, respectively, were pledged as collateral for our repurchase agreements and short-term borrowings.

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

NOTE 7 – Available-for-Sale and Held-to-Maturity Securities

The following tables provide a summary of the amortized cost and fair values of the available-for-sale securities and held-to-maturity securities at June 30, 2013 and December 31, 2012 (in thousands):


	June 30, 2013
	Amortized cost		Gross unrealized gains ⁽¹⁾		Gross unrealized losses ⁽¹⁾			Estimated fair value
Available-for-sale securities
U.S. government agency securities	$	1,215	$	1	$	(4	)	$	1,212
State and municipal securities		174,630		1,976		(7,738	)		168,868
Mortgage-backed securities:
Agency		1,267,811		2,845		(39,995	)		1,230,661
Commercial		204,670		3,194		(7	)		207,857
Non-agency		5,658		83		—			5,741
Corporate fixed income securities		527,740		5,182		(6,145	)		526,777
Asset-backed securities		119,079		272		(462	)		118,889

	$	2,300,803	$	13,553	$	(54,351	)	$	2,260,005

Held-to-maturity securities ⁽²⁾
Asset-backed securities	$	625,471	$	7,434	$	(3,442	)	$	629,463
Corporate fixed income securities		55,375		—		(2,953	)		52,422
Municipal auction rate securities		21,181		990		—			22,171

	$	702,027	$	8,424	$	(6,395	)	$	704,056


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

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

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

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

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

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

For the three and six months ended June 30, 2013, we received proceeds of $171.4 million and $189.6 million, respectively, from the sale of available-for-sale securities, which resulted in realized gains of $0.6 million and $1.3 million, respectively. For the three and six months ended June 30, 2012, we received proceeds of $91.4 million and $94.1 million, respectively, from the sale of available-for-sale securities, which resulted in realized gains of $2.1 million, respectively.

During the three months ended June 30, 2013 and 2012, unrealized losses, net of deferred tax benefits, of $35.4 million and $0.5 million, respectively, were recorded in accumulated other comprehensive income in the consolidated statements of financial condition. During the six months ended June 30, 2013, unrealized losses, net of deferred tax benefits, of $40.0 million were recorded in accumulated other comprehensive income in the consolidated statements of financial condition. During the six months ended June 30, 2012, unrealized gains, net of deferred taxes, of $4.9 million were recorded in accumulated other comprehensive income in the consolidated statements of financial condition.

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


	June 30, 2013
	Available-for-sale securities				Held-to-maturity securities
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
Debt securities
Within one year	$	150,766	$	152,124	$	6,761	$	6,750
After one year through three years		224,861		228,219		15,063		14,631
After three years through five years		119,698		117,202		42,711		40,210
After five years through ten years		54,212		51,255		262,764		264,244
After ten years		273,127		266,946		374,728		378,221
Mortgage-backed securities
After one year through three years		9,223		9,473		—		—
After three years through five years		768		784		—		—
After five years through ten years		122,748		119,880		—		—
After ten years		1,345,400		1,314,122		—		—

	$	2,300,803	$	2,260,005	$	702,027	$	704,056

At June 30, 2013 and December 31, 2012, securities of $573.8 million and $613.8 million, respectively, were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits.

The following table is a summary of the amount of gross unrealized losses and the estimated fair value by length of time that the available-for-sale securities have been in an unrealized loss position at June 30, 2013 (in thousands):


	Less than 12 months					12 months or more					Total
	Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value
Available-for-sale securities
U.S. government securities	$	(4	)	$	960	$	—		$	—	$	(4	)	$	960
State and municipal securities		(6,522	)		88,381		(1,216	)		32,014		(7,738	)		120,395
Mortgage-backed securities:
Agency		(39,995	)		1,163,676		—			—		(39,995	)		1,163,676
Commercial		(7	)		15,983		—			—		(7	)		15,983
Corporate fixed income securities		(5,861	)		143,487		(284	)		39,675		(6,145	)		183,162
Asset-backed securities		(462	)		80,842		—			—		(462	)		80,842

	$	(52,851	)	$	1,493,329	$	(1,500	)	$	71,689	$	(54,351	)	$	1,565,018

The gross unrealized losses on our available-for-sale securities of $54.3 million as of June 30, 2013 relate to 103 individual securities.

Certain investments in the available-for-sale portfolio at June 30, 2013, are reported in the consolidated statements of financial condition at an amount less than their amortized cost. The total fair value of these investments at June 30, 2013, was $1.5 billion, which was 68.5% of our available-for-sale investment portfolio. The amortized cost basis of these investments was $1.6 billion at June 30, 2013. As discussed in more detail below, we conduct periodic reviews of all securities with unrealized losses to assess whether the impairment is other-than-temporary.

Other-Than-Temporary Impairment

We evaluate all securities in an unrealized loss position quarterly to assess whether the impairment is other-than-temporary. Our other-than-temporary impairment (“OTTI”) assessment is a subjective process requiring the use of judgments and assumptions. Accordingly, we consider a number of qualitative and quantitative criteria in our assessment, including the extent and duration of the impairment; recent events specific to the issuer and/or industry to which the issuer belongs; the payment structure of the security; external credit ratings and the failure of the issuer to make scheduled interest or principal payments; the value of underlying collateral; and current market conditions.

If we determine that impairment on our debt securities is other-than-temporary and we have made the decision to sell the security or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, we recognize the entire portion of the impairment in earnings. If we have not made a decision to sell the security and we do not expect that we will be required to sell the security prior to recovery of the amortized cost basis, we recognize only the credit component of OTTI in earnings. The remaining unrealized loss due to factors other than credit, or the non-credit component, is recorded in accumulated other comprehensive loss. We determine the credit component based on the difference between the security’s amortized cost basis and the present value of its expected future cash flows, discounted based on the purchase yield. The non-credit component represents the difference between the security’s fair value and the present value of expected future cash flows. There were no credit-related OTTI charges during the three and six months ended June 30, 2013.

We estimate the portion of loss attributable to credit using a discounted cash flow model. Key assumptions used in estimating the expected cash flows include default rates, loss severity and prepayment rates. Assumptions used can vary widely based on the collateral underlying the securities and are influenced by factors such as collateral type, loan interest rate, geographical location of the borrower, and borrower characteristics.

We believe the gross unrealized losses related to all other securities of $54.3 million as of June 30, 2013 are attributable to issuer specific credit spreads and changes in market interest rates and asset spreads. We, therefore, do not expect to incur any credit losses related to these securities. In addition, we have no intent to sell these securities with unrealized losses and it is not more likely than not that we will be required to sell these securities prior to recovery of the amortized cost. Accordingly, we have concluded that the impairment on these securities is not other-than-temporary.

NOTE 8 – Bank Loans

The following table presents the balance and associated percentage of each major loan category in our loan portfolio at June 30, 2013 and December 31, 2012 (in thousands, except percentages):


	June 30, 2013						December 31, 2012
	Balance			Percent			Balance			Percent
Consumer ⁽¹⁾	$	465,799			46.8	%	$	425,382			51.6	%
Commercial and industrial		429,524			43.1			300,034			36.4
Residential real estate		70,580			7.1			65,657			8.0
Home equity lines of credit		17,326			1.7			19,531			2.4
Commercial real estate		12,586			1.2			12,805			1.5
Construction and land		510			0.1			510			0.1

		996,325			100.0	%		823,919			100.0	%
Unamortized loan fees, net of origination costs		(1,618	)					(1,207	)
Loans in process		977						1,370
Allowance for loan losses		(10,919	)					(8,145	)

	$	984,765					$	815,937

⁽¹⁾	Includes securities-based loans of $465.7 million and $425.3 million at June 30, 2013 and December 31, 2012, respectively.

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Allowance for loan losses, beginning of period	$	9,406		$	5,781		$	8,145		$	5,300

Provision for loan losses		1,520			596			3,240			1,139
Charge-offs:
Residential real estate		(17	)		(86	)		(501	)		(195	)
Recoveries		10			1			35			48

Allowance for loan losses, end of period	$	10,919		$	6,292		$	10,919		$	6,292

A loan is determined to be impaired, when principal or interest becomes 90 days past due or when collection becomes uncertain. At the time a loan is determined to be impaired, the accrual of interest and amortization of deferred loan origination fees is discontinued (“non-accrual status”), and any accrued and unpaid interest income is reversed. At June 30, 2013, we had $1.0 million of non-accrual loans, which included $0.4 million in troubled debt restructurings, for which there was a specific allowance of $0.3 million. At December 31, 2012, we had $1.8 million of non-accrual loans, which included $1.6 million in troubled debt restructurings, for which there was a specific allowance of $0.6 million. The gross interest income related to impaired loans, which would have been recorded had these loans been current in accordance with their original terms, and the interest income recognized on these loans during the three and six months ended June 30, 2013 and 2012 were insignificant to the consolidated financial statements.

Credit Quality

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency ratios are an indicator, among other considerations, of credit risk within our loan portfolios. The level of nonperforming assets represents another indicator of the potential for future credit losses. Accordingly, key metrics we track and use in evaluating the credit quality of our loan portfolio include delinquency and nonperforming asset rates, as well as charge-off rates and our internal risk ratings of the loan portfolio. In general, we are a secured lender. At June 30, 2013 and December 31, 2012, 95.7% and 96.1% of our loan portfolio was collateralized, respectively. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction.

The following is a breakdown of the allowance for loan losses by type for as of June 30, 2013 and December 31, 2012 (in thousands, except rates):


	June 30, 2013					December 31, 2012
	Balance		Percent⁽¹⁾			Balance		Percent⁽¹⁾
Commercial and industrial	$	8,256		43.1	%	$	5,450		36.4	%
Consumer		699		46.8			647		51.6
Residential real estate		399		7.1			408		8.0
Commercial real estate		335		1.2			691		1.5
Home equity lines of credit		224		1.7			195		2.4
Construction and land		13		0.1			13		0.1
Qualitative		993		—			741		—

	$	10,919		100.0	%	$	8,145		100.0	%

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

At June 30, 2013 and December 31, 2012, Stifel Bank had loans outstanding to its executive officers, directors, and their affiliates in the amount of $0.6 million and $0.6 million, respectively, and loans outstanding to other Stifel Financial Corp. executive officers, directors, and their affiliates in the amount of $5.6 million and $7.2 million, respectively. Such loans and other extensions of credit were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral requirements) as those prevailing at the time for comparable transactions with other persons.

At June 30, 2013 and December 31, 2012, we had mortgage loans held for sale of $152.2 million and $214.5 million, respectively. For the three months ended June 30, 2013 and 2012, we recognized gains of $3.3 million and $3.2 million, respectively, from the sale of originated loans, net of fees and costs. For the six months ended June 30, 2013 and 2012, we recognized gains of $7.9 million and $6.0 million, respectively, from the sale of originated loans, net of fees and costs.

NOTE 9 – Fixed Assets

The following is a summary of fixed assets as of June 30, 2013 and December 31, 2012 (in thousands):


	June 30, 2013			December 31, 2012
Furniture and equipment	$	166,080		$	157,974
Building and leasehold improvements		91,482			82,234
Property on operating leases		46,500			46,500

Total		304,062			286,708
Less accumulated depreciation and amortization		(155,247	)		(145,305	)

	$	148,815		$	141,403

For the three months ended June 30, 2013 and 2012, depreciation and amortization of furniture and equipment, and leasehold improvements totaled $8.7 million and $7.4 million, respectively. For the six months ended June 30, 2013 and 2012, depreciation and amortization of furniture and equipment, and leasehold improvements totaled $16.6 million and $14.6 million, respectively.

NOTE 10 – Goodwill and Intangible Assets

impairment is determined by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not deemed to be impaired. If the estimated fair value is below carrying value, however, further analysis is required to determine the amount of the impairment. Additionally, if the carrying value of a reporting unit is zero or a negative value and it is determined that it is more likely than not the goodwill is impaired, further analysis is required. The estimated fair values of the reporting units are derived based on valuation techniques we believe market participants would use for each of the reporting units. Our annual goodwill impairment testing was completed as of July 31, 2012, with no impairment identified.

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


	December 31, 2012		Net additions		Impairment losses		June 30, 2013
Goodwill
Global Wealth Management	$	144,377	$	10,822	$	—	$	155,199
Institutional Group		275,016		313,370		—		588,386

	$	419,393	$	324,192	$	—	$	743,585


	December 31, 2012		Net additions		Amortization			June 30, 2013
Intangible assets
Global Wealth Management	$	16,377	$	—	$	(1,135	)	$	15,242
Institutional Group		12,590		3,256		(1,692	)		14,154

	$	28,967	$	3,256	$	(2,827	)	$	29,396

The adjustments to goodwill and intangible assets during the six months ended June 30, 2013 are primarily attributable to our acquisitions of KBW, Inc. and Miller Buckfire. The allocation of the purchase price of KBW, Inc. is preliminary and will be finalized upon completion of the analysis of the fair values of the net assets of KBW, Inc. as of the acquisition date and the identified intangible assets. The final goodwill recorded on the consolidated statement of financial condition may differ from that reflected herein as a result of future measurement period adjustments and the recording of identified intangible assets. See Note 3 in the notes to our consolidated financial statements for additional information regarding the acquisition of KBW, Inc.

Amortizable intangible assets consist of acquired customer relationships, trade name, and investment banking backlog that are amortized over their contractual or determined useful lives. Intangible assets subject to amortization as of June 30, 2013 and December 31, 2012 were as follows (in thousands):


	June 30, 2013				December 31, 2012
	Gross carrying value		Accumulated amortization		Gross carrying value		Accumulated amortization
Customer relationships	$	40,166	$	20,320	$	40,166	$	18,648
Trade name		11,560		2,529		9,442		2,023
Investment banking backlog		3,388		2,869		2,250		2,220

	$	55,114	$	25,718	$	51,858	$	22,891

Amortization expense related to intangible assets was $1.7 million and $1.2 million for the three months ended June 30, 2013 and 2012, respectively. Amortization expense related to intangible assets was $2.8 million and $2.5 million for the six months ended June 30, 2013 and 2012, respectively.

The weighted-average remaining lives of the following intangible assets at June 30, 2013 are: customer relationships, 5.6 years; and trade name, 6.8 years. The investment banking backlog will be amortized over its estimated life, which we expect to be within the next 12 months. As of June 30, 2013, we expect amortization expense in future periods to be as follows (in thousands):


Fiscal year
Remainder of 2013	$	3,356
2014		4,562
2015		3,835
2016		2,829
2017		2,447
Thereafter		12,367

	$	29,396

NOTE 11 – Short-Term Borrowings

Our short-term financing is generally obtained through short-term bank line financing on an uncommitted secured basis, committed short-term bank line financing on an unsecured basis and securities lending arrangements. We borrow from various banks on a demand basis with company-owned and customer securities pledged as collateral. The value of customer-owned securities used as collateral is not reflected in the consolidated statements of financial condition. Our uncommitted secured lines of credit at June 30, 2013 totaled $680.0 million with four banks and are dependent on having appropriate collateral, as determined by the bank agreements, to secure an advance under the line. The availability of our uncommitted lines are subject to approval by the individual banks each time an advance is requested and may be denied. Our peak daily borrowing was $561.2 million during the six months ended June 30, 2013. There are no compensating balance requirements under these arrangements.

Our committed short-term bank line financing at June 30, 2013 consisted of a $100.0 million revolving credit facility. The credit facility expires in December 2013. The applicable interest rate under the revolving credit facility is calculated as a per annum rate equal to the one-month Eurocurrency rate plus 1.00%, as defined in the revolving credit facility. At June 30, 2013, we had $100.0 million outstanding on our revolving credit facility, at an average rate of 2.70%, and were in compliance with all covenants.

At June 30, 2013, short-term borrowings from banks were $406.7 million at an average rate of 1.32%, which were collateralized by company-owned securities valued at $599.9 million. At December 31, 2012, short-term borrowings from banks were $304.7 million at an average rate of 1.14%, which were collateralized by company-owned securities valued at $530.7 million. The average bank borrowing was $414.7 million and $267.0 million for the three months ended June 30, 2013 and 2012, respectively, at average daily effective interest rates of 1.33% and 1.15%, respectively. The average bank borrowing was $312.6 million and $226.2 million for the six months ended June 30, 2013 and 2012, respectively, at average daily effective interest rates of 1.25% and 1.14%, respectively.

At June 30, 2013 and December 31, 2012, Stifel Nicolaus had a stock loan balance of $82.8 million and $19.2 million, respectively, at average daily interest rates of 0.16% and 0.24%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $81.0 million and $143.4 million during the three months ended June 30, 2013 and 2012, respectively, at average daily effective interest rates of 0.13% and 0.12%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $72.9 million and $149.7 million during the six months ended June 30, 2013 and 2012, respectively, at average daily effective interest rates of 0.13% and 0.13%, respectively. Customer-owned securities were utilized in these arrangements.

NOTE 12 – Corporate Debt

The following table summarizes our corporate debt as of June 30, 2013 and December 31, 2012 (in thousands):


	June 30, 2013		December 31, 2012
6.70% senior notes, due 2022 ⁽¹⁾	$	175,000	$	175,000
5.375% senior notes, due 2022 ⁽²⁾		150,000		150,000
Non-recourse debt, 6.75%, due 2016 ⁽³⁾		53,024		58,992

	$	378,024	$	383,992

(1)

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

(2)

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

(3)

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

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


	Non-recourse debt		Senior notes
2013	$	5,462		—
2014		16,414		—
2015		24,383		—
2016		6,765		—
2017		—		—
Thereafter		—		325,000

	$	53,024		325,000

NOTE 13 – Bank Deposits

Deposits consist of money market and savings accounts, certificates of deposit, and demand deposits. Deposits at June 30, 2013 and December 31, 2012 were as follows (in thousands):


	June 30, 2013		December 31, 2012
Money market and savings accounts	$	3,967,106	$	3,271,929
Demand deposits (interest-bearing)		27,504		64,926
Demand deposits (non-interest-bearing)		11,803		8,648
Certificates of deposit		637		630

	$	4,007,050	$	3,346,133

The weighted average interest rate on deposits was 0.1% and 0.1% at June 30, 2013 and December 31, 2012, respectively.

Scheduled maturities of certificates of deposit at June 30, 2013 and December 31, 2012 were as follows (in thousands):


	June 30, 2013		December 31, 2012
Certificates of deposit, less than $100:
Within one year	$	184	$	182
One to three years		206		203

	$	390	$	385

Certificates of deposit, $100 and greater:
Within one year	$	247	$	245
One to three years		—		—

		247		245

	$	637	$	630

At June 30, 2013 and December 31, 2012, the amount of deposits includes related party deposits, primarily brokerage customers’ deposits from Stifel Nicolaus of $4.0 billion and $3.3 billion, respectively, and interest-bearing and time deposits of executive officers, directors, and their affiliates of $0.1 million and $0.2 million, respectively. Such deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates) as those prevailing at the time for comparable transactions with other persons.

NOTE 14 – Derivative Instruments and Hedging Activities

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

The following table provides the notional values and fair values of our derivative instruments as of June 30, 2013 and December 31, 2012 (in thousands):

June 30, 2013

Asset derivatives

Liability derivatives

Notional value

Balance sheet
location

Positive
fair value

Balance sheet
location

Negative
fair value

Derivatives designated as hedging instruments under Topic 815:

Cash flow interest rate contracts

519,488

Other assets

—

Accounts
payable and
accrued expenses

(11,884

)

December 31, 2012

Asset derivatives

Liability derivatives

Notional value

Balance sheet
location

Positive
fair value

Balance sheet
location

Negative
fair value

Derivatives designated as hedging instruments under Topic 815:

Cash flow interest rate contracts

550,127

Other assets

—

Accounts
payable and
accrued expenses

(19,934

)

Cash Flow Hedges

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

Any unrealized gains or losses related to cash flow hedging instruments are reclassified from accumulated other comprehensive loss into earnings in the same period the hedged forecasted transaction affects earnings and are recorded in interest expense on the accompanying consolidated statements of operations. The ineffective portion of the cash flow hedging instruments is recorded in other income or other operating expense. There were no losses recognized during the three months ended June 30, 2013 related to ineffectiveness.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on our variable rate deposits. During the next twelve months, we estimate that $7.0 million will be reclassified as an increase to interest expense.

The following table shows the effect of our company’s derivative instruments in the consolidated statements of operations for the three and six months ended June 30, 2013 and 2012 (in thousands):


	Three Months Ended June 30, 2013
	(Gain)/Loss recognized in OCI (effectiveness)			Location of loss reclassified from OCI into income		Loss reclassified from OCI into income		Location of loss recognized in OCI (ineffectiveness)		Loss recognized due to ineffectiveness
Cash flow interest rate contracts	$	(3,274	)		Interest expense	$	2,289		None	$	—

	Three Months Ended June 30, 2012
	(Gain)/Loss recognized in OCI (effectiveness)			Location of loss reclassified from OCI into income		Loss reclassified from OCI into income		Location of loss recognized in OCI (ineffectiveness)		Loss recognized due to ineffectiveness
Cash flow interest rate contracts	$	5,130			Interest expense	$	2,963		None	$	—


	Six Months Ended June 30, 2013
	(Gain)/Loss recognized in OCI (effectiveness)			Location of loss reclassified from OCI into income		Loss reclassified from OCI into income		Location of loss recognized in OCI (ineffectiveness)		Loss recognized due to ineffectiveness
Cash flow interest rate contracts	$	(3,407	)		Interest expense	$	4,624		None	$	—

	Six Months Ended June 30, 2012
	(Gain)/Loss recognized in OCI (effectiveness)			Location of loss reclassified from OCI into income		Loss reclassified from OCI into income		Location of loss recognized in OCI (ineffectiveness)		Loss recognized due to ineffectiveness
Cash flow interest rate contracts	$	4,505			Interest expense	$	6,174		None	$	—

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

Credit Risk-Related Contingency Features

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

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

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

Regulatory Capital-Related Contingency Features

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

As of June 30, 2013, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $12.7 million (termination value). We have minimum collateral posting thresholds with certain of our derivative counterparties and have posted cash collateral of $27.8 million against our obligations under these agreements. If we had breached any of these provisions at June 30, 2013, we would have been required to settle our obligations under the agreements at the termination value.

Counterparty Risk

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

NOTE 15 – Debentures to Stifel Financial Capital Trusts

The following table summarizes our debentures to Stifel Financial Capital Trusts as of June 30, 2013 and December 31, 2012 (in thousands):


	June 30, 2013		December 31, 2012
Debenture to Stifel Financial Capital Trust II ⁽¹⁾	$	35,000	$	35,000
Debenture to Stifel Financial Capital Trust III ⁽²⁾		35,000		35,000
Debenture to Stifel Financial Capital Trust IV ⁽³⁾		12,500		12,500

	$	82,500	$	82,500

(1)

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

(2)

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

(3)

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

NOTE 16 – Disclosures About Offsetting Assets and Liabilities

The following table provides information about financial assets and derivative assets that are subject to offset as of June 30, 2013 and December 31, 2012 (in thousands):


							Gross amounts not offset in the Statement of Financial Condition
	Gross amounts of recognized assets		Gross amounts offset in the Statement of Financial Condition		Net amounts presented in the Statement of Financial Condition		Financial instruments		Collateral received			Net amount
As of June 30, 2013:
Securities borrowing ⁽¹⁾	$	419,614	$	—	$	419,614	$	—	$	(419,614	)	$	—
Reverse repurchase agreements ⁽²⁾		125,223	$	—		125,223		—		(125,223	)		—

	$	544,837	$	—	$	544,837	$	—	$	(544,837	)	$	—

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

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

(1)

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

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

The following table provides information about financial liabilities and derivative liabilities that are subject to offset as of June 30, 2013 and December 31, 2012:


							Gross amounts not offset in the Statement of Financial Condition
	Gross amounts of recognized liabilities		Gross amounts offset in the Statement of Financial Condition		Net amounts presented in the Statement of Financial Condition		Financial instruments		Collateral pledged			Net amount
As of June 30, 2013:
Securities lending ⁽³⁾	$	82,782	$	—	$	82,782	$	—	$	(82,782	)	$	—
Repurchase agreements ⁽⁴⁾		160,285		—		160,285		—		(160,285	)		—
Cash flow interest rate contracts		11,884		—		11,884		—		(11,884	)		—

	$	254,951	$	—	$	254,951	$	—	$	(254,951	)	$	—

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

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

(3)

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

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

NOTE 17 – Commitments, Guarantees, and Contingencies

Broker-Dealer Commitments and Guarantees

In the normal course of business, we enter into underwriting commitments. Settlement of transactions relating to such underwriting commitments, which were open at June 30, 2013, had no material effect on the consolidated financial statements.

In connection with margin deposit requirements of The Options Clearing Corporation, we pledged customer-owned securities valued at $124.4 million to satisfy the minimum margin deposit requirement of $13.8 million at June 30, 2013.

In connection with margin deposit requirements of the National Securities Clearing Corporation, we deposited $31.0 million in cash at June 30, 2013, which satisfied the minimum margin deposit requirements of $24.9 million.

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

Thomas Weisel Partners LLC (“TWP”) has entered into settlement and release agreements (“Settlement Agreements”) with certain customers, whereby it will purchase their ARS, at par, in exchange for a release from any future claims. At June 30, 2013, we estimate that TWP customers held $18.3 million par value of ARS, which may be repurchased over the next 3 years. The amount estimated for repurchase assumes no issuer redemptions.

Other Commitments

In the ordinary course of business, Stifel Bank has commitments to extend credit in the form of commitments to originate loans, standby letters of credit, and lines of credit. See Note 22 in the notes to our consolidated financial statements for further details.

Concentration of Credit Risk

We provide investment, capital-raising, and related services to a diverse group of domestic customers, including governments, corporations, and institutional and individual investors. Our exposure to credit risk associated with the non-performance of customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile securities markets, credit markets, and regulatory changes. This exposure is measured on an individual customer basis and on a group basis for customers that share similar attributes. To reduce the potential for risk concentrations, counterparty credit limits have been implemented for certain products and are continually monitored in light of changing customer and market conditions. As of June 30, 2013 and December 31, 2012, we did not have significant concentrations of credit risk with any one customer or counterparty, or any group of customers or counterparties.

NOTE 18 – Legal Proceedings

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

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

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

SEC/Wisconsin Lawsuit

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

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

EDC Bond Issuance Matter

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

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

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

between the Tribal Court and the Wisconsin state court that will be resolved by those courts. Meanwhile, on April 29, 2013, we filed a motion to dismiss all of the claims alleged against our company and Stifel Nicolaus brought by Saybrook in the state court action. That Motion is scheduled to be heard on August 16, 2013. On May 24, 2013 we, together with Saybrook, Wells Fargo and G&K, filed an action in a Wisconsin federal court (the “Federal Action” seeking to enjoin the Tribal Court action. The Tribe and EDC have filed a motion to dismiss the Federal Action. We have filed a memorandum in opposition to the motion to dismiss, and we are waiting for the court’s decision on our motion for a preliminary injunction to enjoin the Tribal Court action. While there can be no assurance that we will be successful, based upon currently available information and review with outside counsel, we believe that we have meritorious legal and factual defenses to the matter, and we intend to vigorously defend the substantive claims and the procedural attempt to move the litigation to the Lac du Flambeau Tribal Court.

Lac Courte Orielles Tribal lawsuit

On December 13, 2012, the Lac Courte Oreilles Band of Lake Superior Chippewa Indians of Wisconsin (the “Tribe”) filed a civil lawsuit against Stifel Nicolaus in the Tribe’s Tribal Court (the “Tribal Lawsuit”). In December 2006, the Tribe issued two series of taxable municipal bonds as a means of raising revenue to fund various projects (the “2006 Bond Transaction”), including the refinancing of two series of bonds the Tribe issued in 2003. The Complaint alleges that we undertook to advise the Tribe regarding its financing options in 2006 but failed to disclose certain information before the 2006 Bond Transaction. On February 19, 2013 we filed a declaratory judgment action in a Wisconsin federal court seeking to establish that the Tribal Court lacks jurisdiction over the Tribal Lawsuit (the “Federal Action”). On February 20, 2013, we filed a motion to dismiss the Tribal Lawsuit, challenging the jurisdiction of the Tribal Court, which motion was denied by the Tribal Court. Meanwhile, the Tribe filed a motion to dismiss the Federal Action. Shortly thereafter, the Tribe agreed to withdraw its motion to dismiss the Federal Action and agreed to stay the Tribal Lawsuit pending a determination by the Wisconsin federal court as to whether the Tribal Court has jurisdiction over the claims. Discovery is now beginning in the Federal Action, and a court trial is scheduled for February 2014. While there can be no assurance that we will be successful, based upon currently available information and review with outside counsel, we believe that we have meritorious defenses to the Tribe’s claims and we intend to vigorously defend the allegations.

Stetson Oil & Gas Ltd. Matter

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

NOTE 19 – Regulatory Capital Requirements

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

Our international subsidiaries, SNEL and KBW Limited, are subject to the regulatory supervision and requirements of the Financial Conduct Authority (“FCA”) in the United Kingdom. At June 30, 2013, SNEL’s and KBW Limited’s capital and reserves were in excess of the financial resources requirement under the rules of the FCA.

Our Canadian subsidiary, SN Canada, is subject to the regulatory supervision and requirements of the Investment Industry Regulatory Organization of Canada (“IIROC”). At June 30, 2013, SN Canada’s net capital and reserves were in excess of the financial resources requirement under the rules of the IIROC.

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

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

Stifel Financial Corp. – Federal Reserve Capital Amounts

June 30, 2013


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	1,090,492		20.7	%	$	421,335		8.0	%	$	526,668		10.0	%
Tier 1 capital to risk-weighted assets		1,079,391		20.5			210,667		4.0			316,001		6.0
Tier 1 capital to adjusted average total assets		1,079,391		14.5			298,509		4.0			373,136		5.0

Stifel Bank – Federal Reserve Capital Amounts

June 30, 2013


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets	$	311,489		13.0	%	$	191,429		8.0	%	$	239,286		10.0	%
Tier 1 capital to risk-weighted assets		300,570		12.6			95,715		4.0			143,572		6.0
Tier 1 capital to adjusted average total assets		300,570		7.5			160,613		4.0			200,767		5.0

NOTE 20 – Interest Income and Interest Expense

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Interest income:
Investment securities	$	14,161	$	11,247	$	26,532	$	21,939
Bank loans, net of unearned income		9,454		6,757		17,670		13,426
Margin balances		4,544		4,921		8,799		9,806
Other		4,774		4,256		9,777		7,267

	$	32,933	$	27,181	$	62,778	$	52,438

Interest expense:
Senior notes	$	4,947	$	3,047	$	9,897	$	5,340
Bank deposits		2,835		4,281		5,729		8,345
Other		4,903		2,529		8,519		5,182

	$	12,685	$	9,857	$	24,145	$	18,867

NOTE 21 – Employee Incentive, Deferred Compensation, and Retirement Plans

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

All stock-based compensation plans are administered by the Compensation Committee of the Board of Directors (“Compensation Committee”), which has the authority to interpret the plans, determine to whom awards may be granted under the plans, and determine the terms of each award. According to these plans, we are authorized to grant an additional 6.2 million shares at June 30, 2013.

Stock-based compensation expense included in compensation and benefits expense in the consolidated statements of operations for our company’s incentive stock award plans was $32.4 million and $11.0 million for the three months ended June 30, 2013 and 2012, respectively. The tax benefit related to stock-based compensation recognized in shareholders’ equity was $1.4 million and $1.0 million for the three months ended June 30, 2013 and 2012, respectively.

Stock-based compensation expense included in compensation and benefits expense in the consolidated statements of operations for our company’s incentive stock award plans was $83.4 million and $26.1 million for the six months ended June 30, 2013 and 2012, respectively. The tax benefit related to stock-based compensation recognized in shareholders’ equity was $9.6 million and $13.4 million for the six months ended June 30, 2013 and 2012, respectively.

On closing date of our acquisition of KBW, Inc., certain employees of KBW, Inc. and our company were granted restricted stock or restricted stock units of Stifel as retention. The fair value of the awards issued as retention was $30.6 million. There are no continuing service requirements associated with these restricted stock units, and accordingly were expensed at date of grant. This charge is included in compensation and benefits in the consolidated statement of operations for the six months ended June 30, 2013.

Stock Options

We have substantially eliminated the use of stock options as a form of compensation. During the three and six months ended June 30, 2013, no options were granted.

At June 30, 2013, all outstanding options were exercisable. Cash proceeds from the exercise of stock options were insignificant for the three months ended June 30, 2013. Tax benefits realized from the exercise of stock options for the three months ended June 30, 2013 were insignificant. Cash proceeds from the exercise of stock options were $0.1 million for the three months ended June 30, 2012. Tax benefits realized from the exercise of stock options for the three months ended June 30, 2012 were $0.3 million.

Cash proceeds from the exercise of stock options were $0.2 million and $1.3 million for the six months ended June 30, 2013 and 2012, respectively. Tax benefits realized from the exercise of stock options for the six months ended June 30, 2013 and 2012 were $0.3 million and $3.6 million, respectively.

Stock Units

A stock unit represents the right to receive a share of common stock from our company at a designated time in the future without cash payment by the employee and is issued in lieu of cash incentive, principally for deferred compensation and employee retention plans. The restricted stock units vest on an annual basis over the next three to eight years and are distributable, if vested, at future specified dates. At June 30, 2013, the total number of stock units outstanding was 17.2 million, of which 8.6 million were unvested.

At June 30, 2013, there was unrecognized compensation cost for stock units of $248.6 million, which is expected to be recognized over a weighted-average period of 2.9 years.

Deferred Compensation Plans

The Stifel Nicolaus Wealth Accumulation Plan (the “SWAP Plan”) is provided to certain revenue producers, officers, and key administrative employees, whereby a certain percentage of their incentive compensation is deferred as defined by the Plan into company stock units with a 25% matching contribution by our company. Participants may elect to defer up to an additional 15% of their incentive compensation with a 25% matching contribution. Units generally vest over a three- to seven-year period and are distributable upon vesting or at future specified dates. Deferred compensation costs are amortized on a straight-line basis over the vesting period. Elective deferrals are 100% vested. As of June 30, 2013, there were 16.2 million units outstanding under the SWAP Plan.

Additionally, the SWAP Plan allows Stifel Nicolaus’ financial advisors who achieve certain levels of production, the option to defer a certain percentage of their gross commissions. As stipulated by the SWAP Plan, the financial advisors have the option to: 1) defer 4% of their gross commissions into company stock units with a 25% matching contribution or 2) defer up to 2% in mutual funds, which earn a return based on the performance of index mutual funds as designated by our company or a fixed income option. The mutual fund deferral option does not include a company match. Financial advisors may elect to defer an additional 1% of gross commissions into company stock units with a 25% matching contribution. Financial advisors have no ownership in the mutual funds. Included in the investments in the consolidated statements of financial condition are investments in mutual funds of $19.6 million and $18.0 million at June 30, 2013 and December 31, 2012, respectively, that were purchased by our company to economically hedge, on an after-tax basis, its liability to the financial advisors who choose to base the performance of their return on the index mutual fund option. At June 30, 2013 and December 31, 2012, the deferred compensation liability related to the mutual fund option of $12.1 million and $16.6 million, respectively, is included in accrued compensation in the consolidated statements of financial condition.

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

NOTE 22 – Off-Balance Sheet Credit Risk

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

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

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

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

We have accepted collateral in connection with resale agreements, securities borrowed transactions, and customer margin loans. Under many agreements, we are permitted to sell or repledge these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions. At June 30, 2013, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $1.2 billion and the fair value of the collateral that had been sold or repledged was $160.3 million. At December 31, 2012, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $965.8 million and the fair value of the collateral that had been sold or repledged was $140.3 million.

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

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

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

In the ordinary course of business, Stifel Bank has commitments to originate loans, standby letters of credit, and lines of credit. Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established by the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash commitments. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if necessary, is based on the credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate, and residential real estate.

At June 30, 2013 and December 31, 2012, Stifel Bank had outstanding commitments to originate loans aggregating $137.8 million and $241.5 million, respectively. The commitments extended over varying periods of time, with all commitments at June 30, 2013 scheduled to be disbursed in the following three months.

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

Standby letters of credit are irrevocable conditional commitments issued by Stifel Bank to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should Stifel Bank be obligated to perform under the standby letters of credit, it may seek recourse from the customer for reimbursement of amounts paid. At June 30, 2013 and December 31, 2012, Stifel Bank had outstanding letters of credit totaling $4.1 million and $10.5 million, respectively. All of the standby letters of credit commitments at June 30, 2013 have expiration terms that are less than one year.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Stifel Bank uses the same credit policies in granting lines of credit as it does for on-balance sheet instruments. At June 30, 2013 and December 31, 2012, Stifel Bank had granted unused lines of credit to commercial and consumer borrowers aggregating $274.3 million and $220.1 million, respectively.

NOTE 23 – Income Taxes

Our effective rate for the three and six months ended June 30, 2013 was 42.5% and 40.9%, respectively, compared to 40.4% and 40.9% for the three and six months ended June 30, 2012, respectively. The effective rate for the three months ended June 30, 2013 was impacted by losses incurred at a lower tax rate in foreign jurisdictions.

NOTE 24 – Segment Reporting

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

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

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

The Other segment includes certain corporate activities of our company.

Information concerning operations in these segments of business for the three and six months ended June 30, 2013 and 2012 is as follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net revenues: ⁽¹⁾
Global Wealth Management	$	282,717		$	239,300		$	549,674		$	486,908
Institutional Group		220,476			136,026			396,913			285,270
Other		(4,457	)		(919	)		(6,071	)		2,562

	$	498,736		$	374,407		$	940,516		$	774,740

Income/(loss) before income taxes:
Global Wealth Management	$	78,924		$	61,036		$	148,423		$	129,914
Institutional Group		30,059			17,863			58,196			41,867
Other		(57,785	)		(35,025	)		(132,075	)		(68,653	)

	$	51,198		$	43,874		$	74,544		$	103,128

⁽¹⁾	No individual client accounted for more than 10 percent of total net revenues for the three and six months ended June 30, 2013 or 2012.

The following table presents our company’s total assets on a segment basis at June 30, 2013 and December 31, 2012 (in thousands):


	June 30, 2013		December 31, 2012
Global Wealth Management	$	5,940,667	$	5,116,487
Institutional Group		2,085,572		1,447,484
Other		466,952		402,169

	$	8,493,191	$	6,966,140

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

Revenues, classified by the major geographic areas in which they are earned for the three and six months ended June 30, 2013 and 2012, were as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
United States	$	480,916	$	365,265	$	910,109	$	757,103
United Kingdom		11,200		2,942		17,219		6,832
Canada		4,193		3,814		8,200		6,066
Other European		2,427		2,386		4,988		4,739

	$	498,736	$	374,407	$	940,516	$	774,740

NOTE 25 – Earnings Per Share (“EPS”)

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

The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2013 and 2012 (in thousands, except per share data):


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Net income	$	29,435	$	26,136	$	44,054	$	60,909
Shares for basic and diluted calculations:
Average shares used in basic computation		64,505		53,569		62,292		53,406
Dilutive effect of stock options and units ⁽¹⁾		9,585		9,109		9,335		9,294

Average shares used in diluted computation	$	74,090	$	62,678	$	71,627	$	62,700
Net income per share:
Basic	$	0.46	$	0.49	$	0.71	$	1.14
Diluted ⁽¹⁾	$	0.40	$	0.42	$	0.62	$	0.97

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

For the three and six months ended June 30, 2013 and 2012, the anti-dilutive effect from restricted stock units was immaterial.

NOTE 26 – Shareholders’ Equity

Share Repurchase Program

We have an ongoing authorization from the Board of Directors to repurchase our common stock in the open market or in negotiated transactions. At June 30, 2013, the maximum number of shares that may yet be purchased under this plan was 3.5 million. The repurchase program has no expiration date. These purchases may be made on the open market or in privately negotiated transactions, depending upon market conditions and other factors. Repurchased shares may be used to meet obligations under our employee benefit plans and for general corporate purposes. During the three and six months ended June 30, 2013, we repurchased $13.7 million, or 0.4 million shares, using existing Board authorizations at an average price of $31.75 per share to meet obligations under our company’s employee benefit plans and for general corporate purposes.

Issuance of Shares

During the six months ended June 30, 2013, we issued 6.7 million shares, related to the purchase of KBW, Inc. See Note 3 in the notes to our consolidated financial statements for additional information regarding the acquisition of KBW, Inc.

NOTE 27 – Variable Interest Entities

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

We have formed several non-consolidated investment funds with third-party investors that are typically organized as limited liability companies (“LLCs”) or limited partnerships. These partnerships and LLCs have net assets of $249.4 million at June 30, 2013. For those funds where we act as the general partner, our company’s economic interest is generally limited to management fee arrangements as stipulated by the fund operating agreements. We have generally provided the third-party investors with rights to terminate the funds or to remove us as the general partner. Management fee revenue earned by our company was insignificant during the three and six months ended June 30, 2013 and 2012. In addition, our direct investment interest in these entities is insignificant at June 30, 2013 and December 31, 2012.

Thomas Weisel Capital Management LLC, a subsidiary of our company, acts as the general partner of a series of investment funds in venture capital and fund of funds and manages investment funds that are active buyers of secondary interests in private equity funds, as well as portfolios of direct interests in venture-backed companies. These partnerships have combined net assets of $245.9 million at June 30, 2013. We hold variable interests in these funds as a result of our company’s rights to receive management fees. Our company’s investment in and additional capital commitments to the private equity funds are also considered variable interests. The additional capital commitments are subject to call at a later date and are limited in amount. Our exposure to loss is limited to our investments in, advances and commitments to, and receivables due from these funds, and that exposure is $1.9 million at June 30, 2013. Management fee revenue earned by our company was insignificant during the three and six months ended June 30, 2013 and 2012.

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

Debenture to Stifel Financial Capital Trusts

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

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

Interest in FSI Group, LLC (“FSI”)

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

Our company’s exposure to loss is limited to the carrying value of the note with FSI at June 30, 2013, of $18.0 million, which is included in other assets in the consolidated statements of financial condition. Our company had no liabilities related to this entity at June 30, 2013. We have the discretion to make additional capital contributions. We have not provided financial or other support to FSI that we were not previously contractually required to provide as of June 30, 2013. Our company’s involvement with FSI has not had a material effect on our consolidated financial position, operations, or cash flows.

NOTE 28 – Subsequent Events

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

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

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

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

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

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

Executive Summary

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

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

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

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

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

Results for the three and six months ended June 30, 2013

For the three months ended June 30, 2013, our net revenues increased 33.2% to a record $498.7 million compared to $374.4 million during the comparable period in 2012. Net income increased 12.6% to $29.4 million for the three months ended June 30, 2013 compared to $26.1 million during the comparable period in 2012.

For the six months ended June 30, 2013, our net revenues increased 21.4% to a record $940.5 million compared to $774.7 million during the comparable period in 2012. Net income decreased 27.7% to $44.1 million for the six months ended June 30, 2013 compared to $60.9 million during the comparable period in 2012.

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

The results for the three months ended June 30, 2013 were significantly impacted by certain non-recurring and merger-related expenses. The aggregate impact of these items was a reduction to net income of $14.9 million (after-tax) or $0.20 per diluted share. The results for the six months ended June 30, 2013 were significantly impacted by the expensing of stock awards issued as retention as part of the acquisition of KBW, Inc. and certain non-recurring and merger-related expenses. The aggregate impact of these items was a reduction to net income of $40.2 million (after-tax) or $0.56 per diluted share.

External Factors Impacting our Business

Performance in the financial services industry in which we operate is highly correlated to the overall strength of economic conditions and financial market activity. Overall market conditions are a product of many factors, which are beyond our control and mostly unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services as reflected by the number and size of equity and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, the level and shape of various yield curves, the volume and value of trading in securities, and the value of our customers’ assets under management. The municipal underwriting market is challenging as state and local governments reduce their debt levels. Investors are showing a lack of demand for longer-dated municipals and are reluctant to take on credit or liquidity risks. Investor confidence has been dampened by continued uncertainty surrounding the U.S. fiscal and debt ceiling, the debt concerns in Europe, and sluggish employment growth.

Our overall financial results continue to be highly and directly correlated to the direction and activity levels of the United States equity and fixed income markets. At June 30, 2013, the key indicators of the markets’ performance, the Dow Jones Industrial Average, S&P 500, and the NASDAQ closed 13.8%, 12.6%, and 12.7% higher than their December 31, 2012 closing prices, respectively.

As a participant in the financial services industry, we are subject to complicated and extensive regulation of our business. The recent economic and political environment has led to legislative and regulatory initiatives, both enacted and proposed, that could substantially intensify the regulation of the financial services industry and may significantly impact us. On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act will have a broad impact on the financial services industry and will impose significant new regulatory and compliance requirements, including the designation of certain financial companies as systemically significant, the imposition of increased capital, leverage, and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector. The expectation is that this new legislation will significantly restructure and increase regulation in the financial services industry, which could increase our cost of doing business, change certain business practices, and alter the competitive landscape.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

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


	For the Three Months Ended June 30,						As a Percentage of Net Revenues For the Three Months Ended June 30,
	2013		2012		% Change		2013			2012
Revenues:
Commissions	$	157,168	$	127,427		23.3		31.5	%		34.0	%
Principal transactions		111,448		91,564		21.7		22.3			24.5
Investment banking		122,114		67,363		81.3		24.5			18.0
Asset management and service fees		76,088		65,311		16.5		15.3			17.4
Interest		32,933		27,181		21.2		6.6			7.3
Other income		11,670		5,418		115.4		2.3			1.4

Total revenues		511,421		384,264		33.1		102.5			102.6
Interest expense		12,685		9,857		28.7		2.5			2.6

Net revenues		498,736		374,407		33.2		100.0			100.0

Non-interest expenses:
Compensation and benefits		321,331		239,374		34.2		64.4			63.9
Occupancy and equipment rental		41,821		32,320		29.4		8.4			8.6
Communication and office supplies		25,936		20,797		24.7		5.2			5.6
Commissions and floor brokerage		10,031		7,747		29.5		2.0			2.1
Other operating expenses		48,419		30,295		59.8		9.7			8.1

Total non-interest expenses		447,538		330,533		35.4		89.7			88.3

Income before income taxes		51,198		43,874		16.7		10.3			11.7
Provision for income taxes		21,763		17,738		22.7		4.4			4.7

Net income	$	29,435	$	26,136		12.6		5.9	%		7.0	%

Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012

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


	For the Six Months Ended June 30,							As a Percentage of Net Revenues For the Six Months Ended June 30,
	2013		2012		% Change			2013			2012
Revenues:
Commissions	$	305,816	$	250,730		22.0			32.5	%		32.3	%
Principal transactions		218,692		207,797		5.2			23.3			26.8
Investment banking		200,493		137,801		45.5			21.3			17.8
Asset management and service fees		145,000		126,129		15.0			15.4			16.3
Interest		62,778		52,438		19.7			6.7			6.8
Other income		31,882		18,712		70.4			3.4			2.4

Total revenues		964,661		793,607		21.6			102.6			102.4
Interest expense		24,145		18,867		28.0			2.6			2.4

Net revenues		940,516		774,740		21.4			100.0			100.0

Non-interest expenses:
Compensation and benefits		637,058		494,078		28.9			67.7			63.8
Occupancy and equipment rental		75,869		63,111		20.2			8.1			8.1
Communication and office supplies		48,915		41,170		18.8			5.2			5.3
Commissions and floor brokerage		19,089		15,359		24.3			2.0			2.0
Other operating expenses		85,041		57,894		46.9			9.1			7.5

Total non-interest expenses		865,972		671,612		28.9			92.1			86.7

Income before income taxes		74,544		103,128		(27.7	)		7.9			13.3
Provision for income taxes		30,490		42,219		(27.8	)		3.2			5.4

Net income	$	44,054	$	60,909		(27.7	)		4.7	%		7.9	%

NET REVENUES

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013		2012		% Change		2013		2012		% Change
Net revenues:
Commissions	$	157,168	$	127,427		23.3	$	305,816	$	250,730		22.0
Principal transactions		111,448		91,564		21.7		218,692		207,797		5.2
Investment banking:
Capital raising		74,146		40,733		82.0		125,345		95,566		31.2
Strategic advisory fees		47,968		26,630		80.1		75,148		42,235		77.9

		122,114		67,363		81.3		200,493		137,801		45.5
Asset management and service fees		76,088		65,311		16.5		145,000		126,129		15.0
Net interest		20,248		17,324		16.9		38,633		33,571		15.1
Other income		11,670		5,418		115.4		31,882		18,712		70.4

Total net revenues	$	498,736	$	374,407		33.2	$	940,516	$	774,740		21.4

Except as noted in the following discussion of variances, the underlying reasons for the increase in revenue can be attributed principally to the increased number of private client group offices and financial advisors in our Global Wealth Management segment and the increased number of revenue producers in our Institutional Group segment and the acquisitions of KBW, Inc. on February 15, 2013 and Miller Buckfire on December 20, 2012. The results of operations for the KBW, Inc. and Miller Buckfire are included in our results prospectively from the date of their respective acquisitions.

Commissions – Commission revenues are primarily generated from agency transactions in OTC and listed equity securities, insurance products and options. In addition, commission revenues also include distribution fees for promoting and distributing mutual funds.

For the three months ended June 30, 2013, commission revenues increased 23.3% to $157.2 million from $127.4 million in the comparable period in 2012. For the six months ended June 30, 2013, commission revenues increased 22.0% to $305.8 million from $250.7 million in the comparable period in 2012. The increase is primarily attributable to an increase in OTC transactions from the comparable period in 2012.

Principal transactions – For the three months ended June 30, 2013, principal transactions revenues increased 21.7% to $111.4 million from $91.6 million in the comparable period in 2012. For the six months ended June 30, 2013, principal transactions revenues increased 5.2% to $218.7 million from $207.8 million in the comparable period in 2012. The increase is primarily attributable to an increase in equity institutional brokerage revenues as a result of higher trading volumes.

Investment banking – Investment banking revenues include: (i) capital raising revenues representing fees earned from the underwriting of debt and equity securities, and (ii) strategic advisory fees related to corporate debt and equity offerings, municipal debt offerings, merger and acquisitions, private placements and other investment banking advisory fees.

For the three months ended June 30, 2013, investment banking revenues increased 81.3%, to $122.1 million from $67.4 million in the comparable period in 2012. For the six months ended June 30, 2013, investment banking revenues increased 45.5%, to $200.5 million from $137.8 million in the comparable period in 2012. The increase was primarily attributable to an increase in advisory fees offset by reduction in capital raising revenues. Our investment banking revenues were positively impacted by our acquisition of KBW, Inc. and Miller Buckfire, offset by sluggish equity capital market conditions during the quarter.

Capital raising revenues increased 82.0% to $74.1 million for the three months ended June 30, 2013 from $40.7 million in the comparable period in 2012. During the second quarter of 2013, equity capital raising revenues increased 109.5% to $50.9 million from $24.3 million in the comparable period in 2012. For the three months ended June 30, 2013, fixed income capital raising revenues decreased 0.1% to $14.6 million from $14.6 million in the

comparable period in 2012. Capital raising revenues increased 31.2% to $125.3 million for the six months ended June 30, 2013 from $95.6 million in the comparable period in 2012. During the six months ended June 30, 2013, equity capital raising revenues increased 29.1% to $82.4 million from $63.8 million in the comparable period in 2012. For the six months ended June 30, 2013, fixed income capital raising revenues increased 13.6% to $29.1 million from $25.6 million in the comparable period in 2012.

Strategic advisory fees increased 80.1% to $48.0 million for the three months ended June 30, 2013 from $26.6 million in the comparable period in 2012. Strategic advisory fees increased 77.9% to $75.1 million for the six months ended June 30, 2013 from $42.2 million in the comparable period in 2012. The increase is primarily attributable to an increase in the number of completed equity transactions over the comparable period in 2012.

Asset management and service fees – Asset management and service fees include fees for asset-based financial services provided to individuals and institutional clients. Investment advisory fees are charged based on the value of assets in fee-based accounts. Asset management and service fees are affected by changes in the balances of client assets due to market fluctuations and levels of net new client assets.

For the three months ended June 30, 2013, asset management and service fee revenues increased 16.5% to $76.1 million from $65.3 million in the comparable period of 2012. For the six months ended June 30, 2013, asset management and service fee revenues increased 15.0% to $145.0 million from $126.1 million in the comparable period of 2012. The increase is primarily a result of an increase in the value of fee-based accounts. See “Assets in fee-based accounts” included in the table in “Results of Operations – Global Wealth Management.”

Other income – For the three months ended June 30, 2013, other income increased 115.4% to $11.7 million from $5.4 million during the comparable period in 2012. For the six months ended June 30, 2013, other income increased 70.4% to $31.9 million from $18.7 million during the comparable period in 2012. Other income includes investment gains, including gains on our private equity investments, and loan originations fees from Stifel Bank.

NET INTEREST INCOME

The following tables present average balance data and operating interest revenue and expense data, as well as related interest yields for the periods indicated (in thousands, except rates):


	Three Months Ended
	June 30, 2013							June 30, 2012
	Average Balance		Interest Income/ Expense		Average Interest Rate			Average Balance		Interest Income/ Expense		Average Interest Rate
Interest-earning assets:
Margin balances (Stifel Nicolaus)	$	456,251	$	4,544		3.98	%	$	510,857	$	4,921		3.86	%
Interest-earning assets (Stifel Bank)		3,927,836		23,760		2.42			2,703,031		18,086		2.68
Other (Stifel Nicolaus)				4,629							4,174

Total interest revenue			$	32,933						$	27,181

Interest-bearing liabilities:
Short-term borrowings (Stifel Nicolaus)	$	414,697	$	1,139		1.33	%	$	266,963	$	768		1.15	%
Interest-bearing liabilities (Stifel Bank)		3,667,793		2,835		0.31			2,516,526		4,281		0.68
Stock loan (Stifel Nicolaus)		81,034		27		0.13			143,425		178		0.12
Senior notes (Stifel Financial)		325,000		4,947		6.09			175,000		3,047		6.96
Interest-bearing liabilities (Capital Trusts)		82,500		434		2.10			82,500		1,006		4.88
Other (Stifel Nicolaus)				3,303							577

Total interest expense				12,685							9,857

Net interest income			$	20,248						$	17,324


	Six Months Ended
	June 30, 2013							June 30, 2012
	Average Balance		Interest Income/ Expense		Average Interest Rate			Average Balance		Interest Income/ Expense		Average Interest Rate
Interest-earning assets:
Margin balances (Stifel Nicolaus)	$	449,415	$	8,799		3.92	%	$	507,422	$	9,806		3.86	%
Interest-earning assets (Stifel Bank)		3,840,421		44,585		2.32			2,544,359		35,562		2.80
Other (Stifel Nicolaus)				9,394							7,070

Total interest revenue			$	62,778						$	52,438

Interest-bearing liabilities:
Short-term borrowings (Stifel Nicolaus)	$	312,612	$	2,124		1.25	%	$	226,152	$	1,290		1.14	%
Interest-bearing liabilities (Stifel Bank)		3,585,800		5,729		0.32			2,365,187		8,345		0.71
Stock loan (Stifel Nicolaus)		72,885		92		0.13			149,705		192		0.13
Senior notes (Stifel Financial)		325,000		9,897		6.51			153,846		5,340		7.43
Interest-bearing liabilities (Capital Trusts)		82,500		867		2.10			82,500		2,011		4.87
Other (Stifel Nicolaus)				5,436							1,689

Total interest expense				24,145							18,867

Net interest income			$	38,633						$	33,571

Net interest income – Net interest income is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest income is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies. For the three months ended June 30, 2013, net interest income increased to $20.2 million from $17.3 million during the comparable period in 2012.

For the six months ended June 30, 2013, net interest income increased to $38.6 million from $33.6 million during the comparable period in 2012.

For the three months ended June 30, 2013, interest revenue increased 21.2% to $32.9 million from $27.2 million in the comparable period in 2012, principally as a result of a $5.7 million increase in interest revenue generated from the interest-earning assets of Stifel Bank. The average interest-earning assets of Stifel Bank increased to $3.9 billion during the three months ended June 30, 2013 compared to $2.7 billion during the comparable period in 2012 at average interest rates of 2.42% and 2.68%, respectively.

For the six months ended June 30, 2013, interest revenue increased 19.7% to $62.8 million from $52.4 million in the comparable period in 2012, principally as a result of a $9.0 million increase in interest revenue generated from the interest-earning assets of Stifel Bank. The average interest-earning assets of Stifel Bank increased to $3.8 billion during the six months ended June 30, 2013 compared to $2.5 billion during the comparable period in 2012 at average interest rates of 2.32% and 2.80%, respectively.

For the three months ended June 30, 2013, interest expense increased 28.7% to $12.7 million from $9.9 million during the comparable period in 2012. For the six months ended June 30, 2013, interest expense increased 28.0% to $24.1 million from $18.9 million during the comparable period in 2012. The increase is primarily attributable to the interest expense associated with our December 2012 issuance of $150.0 million of 5.375% senior notes.

NON-INTEREST EXPENSES

The following table presents consolidated non-interest expenses for the periods indicated (in thousands, except percentages):


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013		2012		% Change		2013		2012		% Change
Non-interest expenses:
Compensation and benefits	$	321,331	$	239,374		34.2	$	637,058	$	494,078		28.9
Occupancy and equipment rental		41,821		32,320		29.4		75,869		63,111		20.2
Communications and office supplies		25,936		20,797		24.7		48,915		41,170		18.8
Commissions and floor brokerage		10,031		7,747		29.5		19,089		15,359		24.3
Other operating expenses		48,419		30,295		59.8		85,041		57,894		46.9

Total non-interest expenses	$	447,538	$	330,533		35.4	$	865,972	$	671,612		28.9

Except as noted in the following discussion of variances, the underlying reasons for the increase in non-interest expenses can be attributed principally to our continued expansion, both organically and through our acquisitions of KBW, Inc. on February 15, 2013 and Miller Buckfire on December 20, 2012, and increased administrative overhead to support the growth in our segments.

Compensation and benefits – Compensation and benefits expenses, which are the largest component of our expenses, include salaries, bonuses, transition pay, benefits, amortization of stock-based compensation, employment taxes and other employee-related costs. A significant portion of compensation expense is comprised of production-based variable compensation, including discretionary bonuses, which fluctuates in proportion to the level of business activity, increasing with higher revenues and operating profits. Other compensation costs, including base salaries, stock-based compensation amortization, and benefits, are more fixed in nature.

For the three months ended June 30, 2013, compensation and benefits expense increased 34.2%, or $81.9 million, to $321.3 million from $239.4 million during the comparable period in 2012. For the six months ended June 30, 2013, compensation and benefits expense increased 28.9%, or $143.0 million, to $637.1 million from $494.1 million during the comparable period in 2012. The increase is principally due to the following: 1) the expensing of stock awards issued as retention as part of the acquisition of KBW, Inc.; 2) increased variable compensation as a result of increased revenue production and profitability; and 3) an increase in fixed compensation for the additional administrative support staff.

Compensation and benefits expense as a percentage of net revenues was 64.4% and 67.7% for the three and six months ended June 30, 2013, respectively, compared to 63.9% and 63.8% for the three and six months ended June 30, 2012, respectively. Excluding the expensing of the awards and merger-related expenses, compensation and benefits expense as a percentage of net revenues was 63.4% for the six months ended June 30, 2013.

Compensation and benefits expenses includes transition pay, principally in the form of upfront notes, signing bonuses and retention awards in connection with our continuing expansion efforts, of $21.7 million (4.3% of net revenues) and $43.3 million (4.4% of net revenues) for the three and six months ended June 30, 2013, respectively, compared to $18.6 million (5.0% of net revenues) and $34.9 million (4.5% of net revenues) for the comparable periods in 2012, respectively. The upfront notes are amortized over a five to ten year period.

Occupancy and equipment rental – For the three months ended June 30, 2013, occupancy and equipment rental expense increased 29.4% to $41.8 million from $32.3 million during the comparable period in 2012. For the six months ended June 30, 2013, occupancy and equipment rental expense increased 20.2% to $75.9 million from $63.1 million during the comparable period in 2012. The increase is primarily due to an increase in office locations. As of June 30, 2013, we have 357 locations compared to 332 at June 30, 2012.

Communications and office supplies – Communications expense includes costs for telecommunication and data communication, primarily for obtaining third-party market data information. For the three months ended June 30, 2013, communications and office supplies expense increased 24.7% to $25.9 million from $20.8 million during the second quarter of 2012. For the six months ended June 30, 2013, communications and office supplies expense increased 18.8% to $48.9 million from $41.2 million during the comparable period in 2012. The increase is primarily attributable to our continued expansion through our acquisitions and the addition of revenue producers and support staff.

Commissions and floor brokerage – For the three months ended June 30, 2013, commissions and floor brokerage expense increased 29.5% to $10.0 million from $7.7 million during the comparable period in 2012. For the six months ended June 30, 2013, commissions and floor brokerage expense increased 24.3% to $19.1 million from $15.4 million during the comparable period in 2012. The increase is primarily attributable to 1) an increase in clearing fees as a result of an increase in commission revenues; and 2) an increase in trading activity.

Other operating expenses – Other operating expenses primarily include license and registration fees, litigation-related expenses, which consist of charges for legal and regulatory matters, travel and entertainment, promotional expenses and expenses for professional services.

For the three months ended June 30, 2013, other operating expenses increased 59.8% to $48.4 million from $30.3 million during the comparable period in 2012. For the six months ended June 30, 2013, other operating expenses increased 46.9% to $85.0 million from $57.9 million during the comparable period in 2012. The increase is primarily attributable to an increase in legal expenses, travel and promotion, professional service fees in connection with our acquisitions and subscriptions expenses.

Provision for income taxes – For the three months ended June 30, 2013, our provision for income taxes was $21.8 million, representing an effective tax rate of 42.5%, compared to expense of $17.7 million for the comparable period in 2012, representing an effective tax rate of 40.4%. For the six months ended June 30, 2013, our provision for income taxes was $30.5 million, representing an effective tax rate of 40.9%, compared to expense of $42.2 million for the comparable period in 2012, representing an effective tax rate of 40.9%. The effective rate for the three months ended June 30, 2013 was impacted by losses incurred at a lower tax rate in foreign jurisdictions.

SEGMENT ANALYSIS

Our reportable segments include Global Wealth Management, Institutional Group, and Other.

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

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

The Other segment includes interest income from stock borrow activities, unallocated interest expense, interest income and gains and losses from investments held, and all unallocated overhead cost associated with the execution of orders; processing of securities transactions; custody of client securities; receipt, identification, and delivery of funds and securities; compliance with regulatory and legal requirements; internal financial accounting and controls; and general administration.

We evaluate the performance of our segments and allocate resources to them based on various factors, including prospects for growth, return on investment, and return on revenues.

Results of Operations – Global Wealth Management

Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

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


	For the Three Months Ended June 30,							As a Percentage of Net Revenues For the Three Months Ended June 30,
	2013		2012		% Change			2013			2012
Revenues:
Commissions	$	104,576	$	88,417		18.3			37.0	%		36.9	%
Principal transactions		56,313		55,058		2.3			19.9			23.1
Asset management and service fees		75,976		65,169		16.6			26.9			27.2
Investment banking		15,334		8,384		82.9			5.4			3.5
Interest		29,036		23,881		21.6			10.3			10.0
Other income		6,013		4,045		48.6			2.1			1.7

Total revenues		287,248		244,954		17.3			101.6			102.4
Interest expense		4,531		5,654		(19.9	)		1.6			2.4

Net revenues		282,717		239,300		18.1			100.0			100.0

Non-interest expenses:
Compensation and benefits		163,156		140,629		16.0			57.7			58.8
Occupancy and equipment rental		15,689		16,064		(2.3	)		5.5			6.7
Communication and office supplies		9,193		8,969		2.5			3.3			3.7
Commissions and floor brokerage		3,847		3,535		8.8			1.4			1.5
Other operating expenses		11,908		9,067		31.3			4.2			3.8

Total non-interest expenses		203,793		178,264		14.3			72.1			74.5

Income before income taxes	$	78,924	$	61,036		29.3			27.9	%		25.5	%


	June 30, 2013		June 30, 2012
Branch offices		316		301
Financial advisors		1,924		1,872
Independent contractors		145		156
Assets in fee-based accounts:
Value (in thousands) ⁽¹⁾	$	21,594,072	$	20,220,582
Number of accounts		83,141		74,053

⁽¹⁾	Fee based account revenues for the three months ended June 30, 2013 and 2012 are billed in arrears based on values as of March 31, 2013 and March 31, 2012, respectively.

Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012

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


	For the Six Months Ended June 30,							As a Percentage of Net Revenues For the Six Months Ended June 30,
	2013		2012		% Change			2013			2012
Revenues:
Commissions	$	206,662	$	179,437		15.2			37.6	%		36.9	%
Principal transactions		112,620		113,439		(0.7	)		20.4			23.3
Asset management and service fees		144,910		125,755		15.2			26.4			25.8
Investment banking		26,437		20,786		27.2			4.8			4.3
Interest		54,791		46,973		16.6			10.0			9.6
Other income		13,054		11,622		12.3			2.4			2.4

Total revenues		558,474		498,012		12.1			101.6			102.3
Interest expense		8,800		11,104		(20.8	)		1.6			2.3

Net revenues		549,674		486,908		12.9			100.0			100.0

Non-interest expenses:
Compensation and benefits		320,752		283,980		12.9			58.4			58.3
Occupancy and equipment rental		31,695		31,846		(0.5	)		5.7			6.5
Communication and office supplies		18,221		17,811		2.3			3.3			3.7
Commissions and floor brokerage		7,674		6,955		10.3			1.4			1.4
Other operating expenses		22,909		16,402		39.7			4.2			3.4

Total non-interest expenses		401,251		356,994		12.4			73.0			73.3

Income before income taxes	$	148,423	$	129,914		14.2			27.0	%		26.7	%

NET REVENUES

For the three months ended June 30, 2013, Global Wealth Management net revenues increased 18.1% to $282.7 million from $239.3 million for the comparable period in 2012. For the six months ended June 30, 2013, Global Wealth Management net revenues increased 12.9% to $549.7 million from $486.9 million for the comparable period in 2012. The increase in net revenues for the three and six months ended June 30, 2013 over the comparable periods in 2012 is attributable to an increase in commission revenues; growth in asset management and service fees as a result of an increase in assets under management through market performance; increased net interest revenues as a result of the growth of net interest-earning assets at Stifel Bank.

Commissions – For the three months ended June 30, 2013, commission revenues increased 18.3% to $104.6 million from $88.4 million in the comparable period in 2012. For the six months ended June 30, 2013, commission revenues increased 15.2% to $206.7 million from $179.4 million in the comparable period in 2012. The increase is primarily attributable to an increase in agency transactions in mutual funds, equities and insurance products.

Principal transactions – For the three months ended June 30, 2013, principal transactions revenues increased 2.3% to $56.3 million from $55.1 million in the comparable period in 2012. For the six months ended June 30, 2013, principal transactions revenues decreased 0.7% to $112.6 million from $113.4 million in the comparable period in 2012. The increase from the second quarter of 2012 is primarily attributable to higher trading volumes.

Asset management and service fees – For the three months ended June 30, 2013, asset management and service fees increased 16.6% to $76.0 million from $65.2 million in the comparable period in 2012. For the six months ended June 30, 2013, asset management and service fees increased 15.2% to $144.9 million from $125.8 million in the comparable period in 2012. The increase is primarily a result of an increase in investment advisory revenues, offset by a reduction in fees for money-fund balances due to the waiving of fees by certain fund managers. The value of assets in fee-based accounts increased 6.8% from June 30, 2012, of which 49.9% is attributable to net inflows and 50.1% is attributable to market appreciation. See “Assets in fee-based accounts” included in the table above for further details.

Investment banking – Investment banking, which represents sales credits for investment banking underwritings, increased 82.9% to $15.3 million for the three months ended June 30, 2013 from $8.4 million during the comparable period in 2012. For the six months ended June 30, 2013, investment banking revenues increased 27.2% to $26.4 million from $20.8 million during the comparable period in 2012. See “Investment banking” in the Institutional Group segment discussion for information on the changes in net revenues.

Interest revenue – For the three months ended June 30, 2013, interest revenue increased 21.6% to $29.0 million from $23.9 million in the comparable period in 2012. For the six months ended June 30, 2013, interest revenue increased 16.6% to $54.8 million from $47.0 million in the comparable period in 2012. The increase is primarily due to the growth of the interest-earning assets of Stifel Bank and increased interest rates on our investment portfolio. See “Net Interest Income – Stifel Bank” below for a further discussion of the changes in net revenues.

Other income – For the three months ended June 30, 2013, other income increased 48.6% to $6.0 million from $4.0 million during the comparable period in 2012. For the six months ended June 30, 2013, other income increased 12.3% to $13.1 million from $11.6 million during the comparable period in 2012. The increase is primarily attributable to an increase in investment gains on our private equity investments and an increase in mortgage fees due to the increase in loan originations at Stifel Bank.

Interest expense – For the three months ended June 30, 2013, interest expense decreased 19.9% to $4.5 million from $5.7 million during the comparable period in 2012. For the six months ended June 30, 2013, interest expense decreased 20.8% to $8.8 million from $11.1 million during the comparable period in 2012. See “Net Interest Income – Stifel Bank” below for a further discussion of the changes in net revenues.

NET INTEREST INCOME – STIFEL BANK

The following tables present average balance data and operating interest revenue and expense data for Stifel Bank, as well as related interest yields for the periods indicated (in thousands, except rates):


	Three Months Ended June 30, 2013							Three Months Ended June 30, 2012
	Average Balance		Interest Income/ Expense		Average Interest Rate			Average Balance		Interest Income/ Expense		Average Interest Rate
Assets:
Federal funds sold	$	227,922	$	139		0.24	%	$	135,254	$	80		0.24	%
State and political subdivisions:
Taxable		124,492		1,066		3.43			118,020		1,139		3.86
Non-taxable ⁽¹⁾		79,351		465		2.34			2,442		19		3.10
Mortgage-backed securities		1,126,254		5,993		2.13			738,169		5,250		2.84
Corporate bonds		534,378		2,951		2.21			524,508		3,155		2.41
Asset-backed securities		701,577		3,686		2.10			351,855		1,684		1.91
Federal Home Loan Bank (“FHLB”) and other capital stock		4,826		6		0.50			3,025		2		0.16
Loans ⁽²⁾		1,026,724		8,539		3.33			709,282		5,693		3.21
Loans held for sale		102,312		915		3.58			120,476		1,064		3.54

Total interest-earning assets ⁽³⁾	$	3,927,836	$	23,760		2.42	%	$	2,703,031	$	18,086		2.68	%
Cash and due from banks		17,220							4,506
Other non interest-earning assets		61,548							70,620

Total assets	$	4,006,604						$	2,778,157

Liabilities and stockholders’ equity:
Deposits:
Money market	$	3,586,384	$	2,808		0.31	%	$	2,457,686	$	4,243		0.69	%
Demand deposits		64,350		9		0.06			41,303		22		0.21
Time deposits		635		4		2.28			1,583		11		2.99
Savings		50		—		0.05			11,624		1		0.05
FHLB advances		16,374		14		0.34			4,330		4		0.35

Total interest-bearing liabilities ⁽³⁾	$	3,667,793	$	2,835		0.31	%	$	2,516,526		4,281		0.68	%
Non interest-bearing deposits		12,232							18,896
Other non interest-bearing liabilities		34,045							40,082

Total liabilities		3,714,070							2,575,504
Stockholders’ equity		292,534							202,653

Total liabilities and stockholders’ equity	$	4,006,604						$	2,778,157


Net interest margin			$	20,925		2.13	%			$	13,805		2.04	%

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

⁽²⁾	Loans on non-accrual status are included in average balances.

⁽³⁾	See Net Interest Income table included in “Results of Operations” for additional information on our company’s average balances and operating interest and expenses.


	Six Months Ended June 30, 2013							Six Months Ended June 30, 2012
	Average Balance		Interest Income/ Expense		Average Interest Rate			Average Balance		Interest Income/ Expense		Average Interest Rate
Assets:
Federal funds sold	$	297,435	$	371		0.25	%	$	144,875	$	169		0.23	%
State and political subdivisions:
Taxable		125,945		2,449		3.89			104,462		2,277		4.36
Non-taxable ⁽¹⁾		71,126		817		2.30			2,566		41		3.17
Mortgage-backed securities		1,031,042		10,222		1.98			714,473		10,831		3.03
Corporate bonds		538,718		5,947		2.21			501,219		6,093		2.43
Asset-backed securities		679,913		7,097		2.09			274,255		2,697		1.97
Federal Home Loan Bank (“FHLB”) and other capital stock		3,854		12		0.62			2,651		28		2.13
Loans ⁽²⁾		974,096		15,734		3.23			677,813		11,323		3.34
Loans held for sale		118,292		1,936		3.27			122,045		2,103		3.45

Total interest-earning assets ⁽³⁾	$	3,840,421	$	44,585		2.32	%	$	2,544,359	$	35,562		2.80	%
Cash and due from banks		12,706							6,343
Other non interest-earning assets		66,649							69,495

Total assets	$	3,919,776						$	2,620,197

Liabilities and stockholders’ equity:
Deposits:
Money market	$	3,515,268	$	5,689		0.32	%	$	2,315,924	$	8,280		0.71	%
Demand deposits		61,620		18		0.06			39,527		36		0.18
Time deposits		633		8		2.27			1,738		24		2.80
Savings		47		—		0.05			5,833		1		0.05
FHLB advances		8,232		14		0.34			2,165		4		0.35

Total interest-bearing liabilities ⁽³⁾	$	3,585,800	$	5,729		0.32	%	$	2,365,187		8,345		0.71	%
Non interest-bearing deposits		14,592							21,001
Other non interest-bearing liabilities		37,005							41,225

Total liabilities		3,637,397							2,427,413
Stockholders’ equity		279,379							192,784

Total liabilities and stockholders’ equity	$	3,919,776						$	2,620,197


Net interest margin			$	38,856		2.02	%			$	27,217		2.14	%

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

⁽²⁾	Loans on non-accrual status are included in average balances.

⁽³⁾	See Net Interest Income table included in “Results of Operations” for additional information on our company’s average balances and operating interest and expenses.

The following table sets forth an analysis of the effect on net interest income of volume and rate changes for the three and six month periods ended June 30, 2013 compared to the three and six month periods ended June 30, 2012 (in thousands):


	Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012									Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012
	Increase (decrease) due to:									Increase (decrease) due to:
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Federal funds sold	$	57		$	2		$	59		$	187		$	15		$	202
State and political subdivisions:
Taxable		67			(140	)		(73	)		362			(190	)		172
Non-taxable		449			(3	)		446			784			(8	)		776
Mortgage-backed securities		7,618			(6,875	)		743			8,064			(8,673	)		(609	)
Corporate bonds		59			(263	)		(204	)		657			(803	)		(146	)
Asset-backed securities		1,818			184			2,002			4,229			171			4,400
FHLB and other capital stock		5			(1	)		4			25			(41	)		(16	)
Loans		1,298			1,548			2,846			5,484			(1,073	)		4,411
Loans held for sale		(226	)		77			(149	)		(92	)		(75	)		(167	)

	$	11,145		$	(5,471	)	$	5,674		$	19,700		$	(10,677	)	$	9,023

Interest expense:
Deposits:
Money market	$	7,785		$	(9,220	)	$	(1,435	)	$	7,463		$	(10,054	)	$	(2,591	)
Demand deposits		47			(60	)		(13	)		35			(53	)		(18	)
Time deposits		(3	)		(4	)		(7	)		(13	)		(3	)		(16	)
Savings		(1	)		—			(1	)		(1	)		—			(1	)
FHLB advances		26			(16	)		10			16			(6	)		10

	$	7,854		$	(9,300	)	$	(1,446	)	$	7,500		$	(10,116	)	$	(2,616	)

Increases and decreases in interest revenue and interest expense result from changes in average balances (volume) of interest-earning bank assets and liabilities, as well as changes in average interest rates. The effect of changes in volume is determined by multiplying the change in volume by the previous year’s average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year’s volume. Changes applicable to both volume and rate have been allocated proportionately.

For the three months ended June 30, 2013, interest revenue of $23.8 million was generated from average interest-earning assets of $3.9 billion at an average interest rate of 2.42%. Interest revenue of $18.1 million for the comparable period in 2012 was generated from average interest-earning assets of $2.7 billion at an average interest rate of 2.68%.

For the six months ended June 30, 2013, interest revenue of $44.6 million was generated from average interest-earning assets of $3.8 billion at an average interest rate of 2.32%. Interest revenue of $35.6 million for the comparable period in 2012 was generated from average interest-earning assets of $2.5 billion at a average interest rate of 2.80%. Interest-earning assets principally consist of residential, consumer, and commercial loans, securities, and federal funds sold.

Interest expense represents interest on customer money market accounts, interest on time deposits and other interest expense. The average balance of interest-bearing liabilities during the three months ended June 30, 2013 was $3.7 billion at a average interest rate of 0.31%. The average balance of interest-bearing liabilities for the comparable period in 2012 was $2.5 billion at a average interest rate of 0.68%. The weighted average balance of interest-bearing liabilities during the six months ended June 30, 2013 was $3.6 billion at a weighted average interest rate of 0.32%. The weighted average balance of interest-bearing liabilities for the comparable period in 2012 was $2.4 billion at a weighted average interest rate of 0.71%.

The growth in Stifel Bank has been primarily driven by the growth in deposits associated with brokerage customers of Stifel Nicolaus. At June 30, 2013, the balance of Stifel Nicolaus brokerage customer deposits at Stifel Bank was $4.0 billion compared to $2.7 billion at June 30, 2012.

See “Net Interest Income – Stifel Bank” above for more information regarding average balances, interest income and expense, and average interest rate yields.

NON-INTEREST EXPENSES

For the three months ended June 30, 2013, Global Wealth Management non-interest expenses increased 14.3% to $203.8 million from $178.3 million for the comparable period in 2012. For the six months ended June 30, 2013, Global Wealth Management non-interest expenses increased 12.4% to $401.3 million from $357.0 million for the comparable period in 2012.

The fluctuations in non-interest expenses, discussed below, were primarily attributable to the continued growth of our Private Client Group. As of June 30, 2013, we have 316 branch offices compared to 301 at June 30, 2012. In addition, since June 30, 2012, we have added 356 revenue producers and support staff.

Compensation and benefits – For the three months ended June 30, 2013, compensation and benefits expense increased 16.0% to $163.2 million from $140.6 million during the comparable period in 2012. For the six months ended June 30, 2013, compensation and benefits expense increased 12.9% to $320.8 million from $284.0 million during the comparable period in 2012. The increase is principally due to increased variable compensation as a result of increased production due to the growth in financial advisors and fixed compensation for the additional administrative support staff.

Compensation and benefits expense as a percentage of net revenues was 57.7% and 58.4% for the three and six months ended June 30, 2013, respectively, compared to 58.8% and 58.3% for the three and six months ended June 30, 2012, respectively.

Compensation and benefits expenses includes transition pay, principally in the form of upfront notes, signing bonuses and retention awards in connection with our continuing expansion efforts, of $16.2 million (5.7% of net revenues) and $32.3 million (5.9% of net revenues) for the three and six months ended June 30, 2013, compared to $16.2 million (6.8% of net revenues) and $30.6 million (6.3% of net revenues) for the three and six months ended June 30, 2012. The upfront notes are amortized over a five to ten year period.

Occupancy and equipment rental – For the three months ended June 30, 2013, occupancy and equipment rental expense decreased 2.3% to $15.7 million from $16.1 million during the comparable period in 2012. For the six months ended June 30, 2013, occupancy and equipment rental expense decreased 0.5% to $31.7 million from $31.8 million during the comparable period in 2012.

Communications and office supplies – For the three months ended June 30, 2013, communications and office supplies expense increased 2.5% to $9.2 million from $9.0 million during the comparable period in 2012. For the six months ended June 30, 2013, communications and office supplies expense increased 2.3% to $18.2 million from $17.8 million during the comparable period in 2012. The increase is attributable to an increase in financial advisors.

Commissions and floor brokerage – For the three months ended June 30, 2013, commissions and floor brokerage expense increased 8.8% to $3.8 million from $3.5 million during the comparable period in 2012. For the six months ended June 30, 2013, commissions and floor brokerage expense increased 10.3% to $7.7 million from $7.0 million during the comparable period in 2012. The increase is primarily attributable to an increase in commission revenues.

Other operating expenses – For the three months ended June 30, 2013, other operating expenses increased 31.3% to $11.9 million from $9.1 million during the comparable period in 2012. For the six months ended June 30, 2013, other operating expenses increased 39.7% to $22.9 million from $16.4 million during the comparable period in 2012. The increase in other operating expenses is primarily attributable to an increase in legal expenses and the provision for loan losses.

INCOME BEFORE INCOME TAXES

For the three months ended June 30, 2013, income before income taxes increased 29.3% to $78.9 million from $61.0 million during the comparable period in 2012. For the six months ended June 30, 2013, income before income taxes increased 14.2% to $148.4 million from $129.9 million during the comparable period in 2012. Profit margins (income before income taxes as a percentage of net revenues) were positively impacted by revenue growth.

Results of Operations – Institutional Group

Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

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


	For the Three Months Ended June 30,						As a Percentage of Net Revenues For the Three Months Ended June 30,
	2013		2012		% Change		2013			2012
Revenues:
Commissions	$	52,592	$	39,010		34.8		23.9	%		28.7	%
Principal transactions		55,135		36,506		51.0		24.9			26.8
Capital raising		58,813		32,349		81.8		26.6			23.8
Advisory		47,967		26,630		80.1		21.8			19.6

Investment banking		106,780		58,979		81.0		48.4			43.4
Interest		3,880		2,869		35.2		1.8			2.1
Other income		5,457		93		*		2.5			0.1

Total revenues		223,884		137,457		62.8		101.5			101.1
Interest expense		3,368		1,431		135.4		1.5			1.1

Net revenues		220,476		136,026		62.1		100.0			100.0

Non-interest expenses:
Compensation and benefits		136,481		85,109		60.4		61.9			62.6
Occupancy and equipment rental		13,931		6,945		100.6		6.3			5.1
Communication and office supplies		13,624		8,699		56.6		6.2			6.4
Commissions and floor brokerage		6,185		4,212		46.8		2.8			3.1
Other operating expenses		20,196		13,198		53.0		9.2			9.7

Total non-interest expenses		190,417		118,163		61.1		86.4			86.9

Income before income taxes	$	30,059	$	17,863		68.3		13.6	%		13.1	%

*	Percentage not meaningful.

Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012

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


	For the Six Months Ended June 30,						As a Percentage of Net Revenues For the Six Months Ended June 30,
	2013		2012		% Change		2013			2012
Revenues:
Commissions	$	99,154	$	71,293		39.1		25.0	%		25.0	%
Principal transactions		106,073		94,358		12.4		26.7			33.1
Capital raising		98,908		74,780		32.3		24.9			26.2
Advisory		75,147		42,235		77.9		19.0			14.8

Investment banking		174,055		117,015		48.7		43.9			41.0
Interest		8,060		4,721		70.7		2.0			1.7
Other income		16,180		491		*		4.1			0.1

Total revenues		403,522		287,878		39.7		101.7			100.9
Interest expense		6,609		2,608		153.4		1.7			0.9

Net revenues		396,913		285,270		39.1		100.0			100.0

Non-interest expenses:
Compensation and benefits		244,117		179,539		36.0		61.5			62.9
Occupancy and equipment rental		22,601		13,678		65.2		5.7			4.8
Communication and office supplies		23,606		16,987		39.0		5.9			6.0
Commissions and floor brokerage		11,415		8,403		35.8		2.9			2.9
Other operating expenses		36,978		24,796		49.1		9.3			8.7

Total non-interest expenses		338,717		243,403		39.2		85.3			85.3

Income before income taxes	$	58,196	$	41,867		39.0		14.7	%		14.7	%

*	Percentage not meaningful.

NET REVENUES

For the three months ended June 30, 2013, Institutional Group net revenues increased 62.1% to $220.5 million from $136.0 million for the comparable period in 2012. For the six months ended June 30, 2013, Institutional Group net revenues increased 39.1% to $396.9 million from $285.3 million for the comparable period in 2012. The increase in net revenues for the three and six months ended June 30, 2012 over the comparable periods in 2012 is primarily attributable to an increase in advisory fees; higher equity institutional brokerage revenues; an increase in equity capital raising revenues; and higher fixed income institutional brokerage revenues. The increase for the six months ended June 30, 2013 over the comparable period in 2012 is also attributable to the gains recognized on our investment in Knight Capital Group. The increases are also attributable to our acquisitions of KBW, Inc., which was completed on February 15, 2013, and Miller Buckfire, which was completed on December 20, 2012.

Commissions – For the three months ended June 30, 2013, commission revenues increased 34.8% to $52.6 million from $39.0 million in the comparable period in 2012. For the six months ended June 30, 2013, commission revenues increased 39.1% to $99.2 million from $71.3 million in the comparable period in 2012.

Principal transactions – For the three months ended June 30, 2013, principal transactions revenues increased 51.0% to $55.1 million from $36.5 million in the comparable period in 2012. For the six months ended June 30, 2013, principal transactions revenues increased 12.4% to $106.1 million from $94.4 million in the comparable period in 2012.

For the three months ended June 30, 2013, equity institutional brokerage revenues increased 73.6% to $66.8 million from $38.5 million during the comparable period in 2012. For the six months ended June 30, 2013, equity institutional brokerage revenues increased 43.7% to $118.8 million from $82.6 million during the comparable period in 2012. The increase is primarily attributable to an increase in market volatility.

For the three months ended June 30, 2013, fixed income institutional brokerage revenues increased 10.5% to $40.9 million from $37.1 million during the comparable period in 2012. For the six months ended June 30, 2013, fixed income institutional brokerage revenues increased 4.1% to $86.4 million from $83.0 million during the comparable period in 2012. The increase is primarily attributable to an increase in fixed income trading volumes over the comparable period in 2012.

Investment banking – For the three months ended June 30, 2013, investment banking revenues increased 81.0% to $106.8 million from $59.0 million during the comparable period in 2012. For the six months ended June 30, 2013, investment banking revenues increased 48.7% to $174.1 million from $117.0 million during the comparable period in 2012. The increase is attributable to an increase in advisory fee revenues over the comparable period in 2012. Our investment banking revenues were positively impacted by our acquisition of KBW, Inc. and Miller Buckfire, offset by sluggish equity capital market conditions during the latter half of the first quarter.

For the three months ended June 30, 2013, capital raising revenues increased 81.8% to $58.8 million from $32.3 million during the comparable period in 2012. For the six months ended June 30, 2013, capital raising revenues increased 32.3% to $98.9 million from $74.8 million during the comparable period in 2012.

For the three months ended June 30, 2013, equity capital raising revenues increased 152.9% to $44.6 million from $17.7 million during the comparable period in 2012. For the six months ended June 30, 2013, equity capital raising revenues increased 40.3% to $69.0 million from $49.2 million during the comparable period in 2012. The increase was primarily attributable to an increase in the number of transactions over the comparable period in 2012. During the three and six months ended June 30, 2013, we were involved, as manager or co-manager, in 79 and 129 equity underwritings, respectively, compared to 50 and 109 equity underwritings, respectively, during the comparable period in 2012.

For the three months ended June 30, 2013, fixed income capital raising revenues decreased 3.6% to $14.2 million from $14.7 million during the comparable period in 2012. For the six months ended June 30, 2013, fixed income capital raising revenues increased 16.8% to $29.9 million from $25.6 million during the comparable period in 2012. The increase for the six months ended June 30, 2013 over the comparable period in 2012 is primarily attributable to an increase in the municipal bond origination business. For the three and six months ended June 30, 2013, we were involved, as manager or co-manager, in 243 and 494 tax-exempt issues, respectively, compared to 238 and 472 issues, respectively, during the comparable periods in 2012.

For the three months ended June 30, 2013, strategic advisory fees increased 80.1% to $48.0 million from $26.6 million in the comparable period in 2012. For the six months ended June 30, 2013, strategic advisory fees increased 77.9% to $75.1 million from $42.2 million in the comparable period in 2012. The increase is primarily attributable to an increase in the number of completed equity transactions and the aggregate transaction value over the comparable period in 2012.

Other income – For the three months ended June 30, 2013, other income increased $5.4 million to $5.5 million from $0.1 million in the comparable period in 2012. For the six months ended June 30, 2013, other income increased $15.7 million to $16.2 million from $0.5 million in the comparable period in 2012. The increase in other income is primarily attributable to gains recognized on our investment in Knight Capital Group, Inc. and lease revenue from the operations of East Shore Aircraft LLC.

NON-INTEREST EXPENSES

For the three months ended June 30, 2013, Institutional Group non-interest expenses increased 61.1% to $190.4 million from $118.2 million during the comparable period in 2012. For the six months ended June 30, 2013, Institutional Group non-interest expenses increased 39.2% to $338.7 million from $243.4 million during the comparable period in 2012.

Unless specifically discussed below, the fluctuations in non-interest expenses were primarily attributable to the continued growth of our Institutional Group segment. We have added 518 revenue producers and support staff since June 30, 2012, including 398 from our acquisitions of KBW, Inc. and Miller Buckfire.

Compensation and benefits – For the three months ended June 30, 2013, compensation and benefits expense increased 60.4% to $136.5 million from $85.1 million during the comparable period in 2012. For the six months ended June 30, 2013, compensation and benefits expense increased 36.0% to $244.1 million from $179.5 million during the comparable period in 2012. The increase is principally due to increased compensation as a result of the growth of the business and fixed compensation for the additional administrative support staff.

Compensation and benefits expense as a percentage of net revenues was 61.9% and 61.5% for the three and six months ended June 30, 2013, respectively, compared to 62.6% and 62.9% for the three and six months ended June 30, 2012, respectively.

Occupancy and equipment rental – For the three months ended June 30, 2013, occupancy and equipment rental expense increased 100.6% to $13.9 million from $6.9 million during the comparable period in 2012. For the six months ended June 30, 2013, occupancy and equipment rental expense increased 65.2% to $22.6 million from $13.7 million during the comparable period in 2012. The increase is primarily due to the increase in office locations.

Communications and office supplies – For the three months ended June 30, 2013, communications and office supplies expense increased 56.6% to $13.6 million from $8.7 million during the comparable period in 2012. For the six months ended June 30, 2013, communications and office supplies expense increased 39.0% to $23.6 million from $17.0 million during the comparable period in 2012. The increase is primarily attributable to an increase in communication and quote equipment as a result of the growth of the business.

Commissions and floor brokerage – For the three months ended June 30, 2013, commissions and floor brokerage expense increased 46.8% to $6.2 million from $4.2 million during the comparable period in 2012. For the six months ended June 30, 2013, commissions and floor brokerage expense increased 35.8% to $11.4 million from $8.4 million during the comparable period in 2012. The increase is primarily attributable to an increase in trading activity.

Other operating expenses – For the three months ended June 30, 2013, other operating expenses increased 53.0% to $20.2 million from $13.2 million during the comparable period in 2012. For the six months ended June 30, 2013, other operating expenses increased 49.1% to $37.0 million from $24.8 million during the comparable period in 2012. The increase is primarily attributable to an increase in travel and promotion expenses, professional service fees, subscriptions and dues and legal expenses.

INCOME BEFORE INCOME TAXES

For the three months ended June 30, 2013, income before income taxes for the Institutional Group segment increased 68.3% to $30.1 million from $17.9 million during the comparable period in 2012. For the six months ended June 30, 2013, income before income taxes for the Institutional Group segment increased 39.0% to $58.2 million from $41.9 million during the comparable period in 2012. Profit margins (income before income taxes as a percentage of net revenues) for the three months ended June 30, 2013 were positively impacted by revenue growth.

Results of Operations – Other Segment

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


	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2013			2012			% Change		2013			2012			% Change
Net revenues	$	(4,457	)	$	(919	)		*	$	(6,071	)	$	2,562			*
Non-interest expenses:
Compensation and benefits		21,696			13,636			59.1		72,190			30,559			136.2
Other operating expenses		31,632			20,470			54.5		53,814			40,656			32.4

Total non-interest expenses		53,328			34,106			56.4		126,004			71,215			76.9

Loss before income taxes	$	(57,785	)	$	(35,025	)		65.0	$	(132,075	)	$	(68,653	)		92.4

*	Percentage not meaningful.

Net revenues – For the three month period ended June 30, 2013, net revenues decreased $3.5 million from the comparable period in 2012. For the six month period ended June 30, 2013, net revenues decreased $8.6 million from the comparable period in 2012. Net revenues for the three and six months ended June 30, 2013 was negatively impacted by the interest expense associated with our December 2012 issuance of $150.0 million of 5.375% senior notes, offset by an increase in investment gains over the comparable periods in 2013.

Compensation and benefits – For the three months ended June 30, 2013, compensation and benefits expense increased 59.1% to $21.7 million from $13.6 million during the comparable period in 2012. For the six months ended June 30, 2013, compensation and benefits expense increased 136.2% to $72.2 million from $30.6 million during the comparable period in 2012. The increase is principally due to the following: 1) acceleration of deferred compensation associated with our acquisition of KBW, Inc.; 2) an increase in fixed compensation for the additional administrative support staff.

Other operating expenses – For the three months ended June 30, 2013, other operating expenses increased 54.5% to $31.6 million from $20.5 million during the comparable period in 2012. For the six months ended June 30, 2013, other operating expenses increased 32.4% to $53.8 million from $40.7 million during the comparable period in 2012. The increase is primarily attributable to non-recurring non-compensation operating expenses (including merger-related expenses) associated with our acquisitions of KBW, Inc. and Miller Buckfire.

Analysis of Financial Condition

Our company’s consolidated statements of financial condition consist primarily of cash and cash equivalents, receivables, trading inventory, bank loans, investments, goodwill, loans and advances to financial advisors, bank deposits, and payables. As of June 30, 2013, our total assets increased 21.9% to $8.5 billion from $7.0 billion at December 31, 2012. The increase is primarily attributable to (1) the recognition of goodwill associated with our acquisition of KBW, Inc.: and increases in (2) our investment portfolio, which consists of available-for-sale and held-to-maturity securities, and (3) bank loans. Our broker-dealer subsidiary’s gross assets and liabilities, including trading inventory, stock loan/borrow, receivables and payables from/to brokers, dealers, and clearing organizations and clients, fluctuate with our business levels and overall market conditions.

As of June 30, 2013, our liabilities were comprised primarily of short-term borrowings of $506.7 million, senior notes of $325.0 million, non-recourse debt of $53.0 million, trust preferred securities of $82.5 million, deposits of $4.0 billion at Stifel Bank, and payables to customers of $288.5 million at our broker-dealer subsidiaries, as well as accounts payable and accrued expenses, and accrued employee compensation of $471.9 million. To meet our obligations to clients and operating needs, we had $366.9 million in cash and cash equivalents at June 30, 2013. We also had client brokerage receivables of $552.3 million at Stifel Nicolaus and $1.1 billion in loans at Stifel Bank.

Cash Flow

Cash and cash equivalents decreased $37.0 million to $366.9 million at June 30, 2013, from $403.9 million at December 31, 2012. Operating activities provided $89.9 million of cash primarily due to an increase in operating assets, offset by the net effect of non-cash items, net income recognized during the first six months of 2013, and an increase in operating liabilities. Investing activities used cash of $1.1 billion due to purchases of available-for-sale and held-to-maturity securities as part of our investment strategy at Stifel Bank, the acquisition of KBW, Inc., and fixed asset purchases, offset by proceeds from the maturity of available-for-sale securities, and sale of investments. Financing activities provided cash of $934.5 million principally due to proceeds received from our short-term borrowings, and the increase in affiliated deposits, offset by repurchases of our common stock.

Liquidity and Capital Resources

The Company’s senior management establishes the liquidity and capital policies of the Company. The Company’s senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity and interest rate sensitivity of the Company’s asset and liability position.

Our assets, consisting mainly of cash or assets readily convertible into cash, are our principal source of liquidity. The liquid nature of these assets provides for flexibility in managing and financing the projected operating needs of the business. These assets are financed primarily by our equity capital, corporate debt, debentures to trusts, client credit balances, short-term bank loans, proceeds from securities lending, and other payables. We currently finance our client accounts and firm trading positions through ordinary course borrowings at floating interest rates from various banks on a demand basis, securities lending, and repurchase agreements, with company-owned and client securities pledged as collateral. Changes in securities market volumes, related client borrowing demands, underwriting activity, and levels of securities inventory affect the amount of our financing requirements.

Our bank assets consist principally of available-for-sale and held-to-maturity securities, retained loans, and cash and cash equivalents. Stifel Bank’s current liquidity needs are generally met through deposits from bank clients and equity capital. We monitor the liquidity of Stifel Bank daily to ensure its ability to meet customer deposit withdrawals, maintain reserve requirements, and support asset growth.

As of June 30, 2013, we had $8.5 billion in assets, $5.1 billion of which consisted of cash or assets readily convertible into cash as follows (in thousands, except average days to conversion):


	June 30, 2013		December 31, 2012		Avg. Conversion
Cash and cash equivalents	$	366,926	$	403,941
Receivables from brokers, dealers, and clearing organizations		738,227		276,224	3 days
Securities purchased under agreements to resell		125,223		158,695	1 day
Trading securities owned at fair value		723,762		763,025	5 days
Available-for-sale securities at fair value		2,260,005		1,625,168	3 days
Held-to-maturity securities at amortized cost		702,027		708,008	10 days
Investments		162,858		192,686	5 days

Total cash and assets readily convertible to cash	$	5,079,028	$	4,127,747

As of June 30, 2013 and December 31, 2012, the amount of collateral by asset class is as follows (in thousands):


	June 30, 2013				December 31, 2012
	Contractual		Contingent		Contractual		Contingent
Cash and cash equivalents	$	58,704	$	—	$	45,929	$	—
Trading securities owned at fair value		160,285		733,414		140,346		607,586
Available-for-sale securities at fair value		—		573,804		—		613,795
Investments		—		55,630		—		63,430

	$	218,989	$	1,362,848	$	186,275	$	1,284,811

Capital Management

Liquidity Risk Management

Our businesses are diverse, and our liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment. During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change. We manage liquidity risk by diversifying our funding sources across products and among individual counterparties within those products.

As a holding company, whereby all of our operations are conducted through our subsidiaries, our cash flow and our ability to service our debt, including the notes, depend upon the earnings of our subsidiaries. Our subsidiaries are separate and distinct legal entities. Our subsidiaries have no obligation to pay any amounts due on the notes or to provide us with funds to pay our obligations, whether by dividends, distributions, loans or other payments.

Our liquidity requirements may change in the event we need to raise more funds than anticipated to increase inventory positions, support more rapid expansion, develop new or enhanced services and products, acquire technologies, or respond to other unanticipated liquidity requirements. We primarily rely on financing activities and distributions from our subsidiaries for funds to implement our business and growth strategies, and repurchase our shares. Net capital rules, restrictions under our borrowing arrangements of our subsidiaries, as well as the earnings, financial condition, and cash requirements of our subsidiaries, may each limit distributions to us from our subsidiaries.

The availability of outside financing, including access to the capital markets and bank lending, depends on a variety of factors, such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services sector and our credit rating. Our cost and availability of funding may be adversely affected by illiquid credit markets and wider credit spreads. As a result of any future concerns about the stability of the markets generally and the strength of counterparties specifically, lenders may from time to time curtail, or even cease, to provide funding to borrowers.

Our liquidity management policies are designed to mitigate the potential risk that we may be unable to access adequate financing to service our financial obligations without material business impact. The principal elements of our liquidity management framework are: (a) daily monitoring of our liquidity needs at the holding company and significant subsidiary level; (b) stress testing the liquidity position at Stifel Bank; and (c) diversification of our funding sources.

Monitoring of liquidity

Senior management establishes our liquidity and capital policies. These policies include senior management’s review of short and long-term cash flow forecasts, review of monthly capital expenditures, the monitoring of the availability of alternative sources of financing, and the daily monitoring of liquidity in our significant subsidiaries. Our decisions on the allocation of capital to our business units consider, among other factors, projected profitability and cash flow, risk and impact on future liquidity needs. Our treasury department assists in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure as well as maintains our relationships with various lenders. The objectives of these policies are to support the successful execution of our business strategies while ensuring ongoing and sufficient liquidity.

Liquidity stress testing (Stifel Bank)

Stifel Bank performs two primary stress tests on its liquidity position. These stress tests are based on the following company-specific stresses: (1) the amount of deposit run-off that Stifel Bank could withstand over a one month period of time based on its on-balance sheet liquidity and available credit; and (2) Stifel Bank’s ability to fund operations if all available credit were to be drawn immediately, with no additional available credit. The goal of these stress tests is determine Stifel Bank’s ability to fund continuing operations under significant pressures on both assets and liabilities.

Under both stress tests, Stifel Bank considers cash and highly liquid investments as available to meet liquidity needs. In its analysis, Stifel Bank considers Agency MBS, Corporate Bonds, and CMBS as highly liquid. In addition to being able to be readily financed at modest haircut levels, Stifel Bank estimates that each of the individual securities within each of the asset classes described above could be sold into the market and converted into cash within three business days under normal market conditions, assuming that the entire portfolio of a given asset class was not simultaneously liquidated. At June 30, 2013, available cash and highly liquid investments comprised approximately 50% of Stifel Bank’s assets, which was well in excess of its internal target.

In addition to these stress tests, Stifel Bank management performs a daily liquidity review. The daily analysis provides Stifel Bank management with all major fluctuations in liquidity. The analysis also tracks the proportion of deposits that Stifel Bank is sweeping from its affiliated broker-dealer, Stifel Nicolaus. On a monthly basis, liquidity key performance indicators and compliance with liquidity policy limits are reported to the Board of Directors. Stifel Bank has not violated any internal liquidity policy limits.

Funding Sources

The Company pursues a strategy of diversification of secured and unsecured funding sources (by product and by investor) and attempts to ensure that the tenor of the Company’s liabilities equals or exceeds the expected holding period of the assets being financed. The Company funds its balance sheet through diverse sources. These sources may include the Company’s equity capital, long-term debt, repurchase agreements, securities lending, deposits, committed and uncommitted credit facilities, FHLB advances, and federal funds agreements. At June 30, 2013, we have $152.0 million of ARS. Any redemptions by issuers of the ARS will create liquidity during the period in which the redemption occurs. ARS redemptions have been at par, and we believe will continue to be at par.

Cash and Cash Equivalents. We held $366.9 million of cash and cash equivalents at June 30, 2013, compared to $403.9 million at December 31, 2012. Cash and cash equivalents provide immediate sources of funds to meet our liquidity needs.

Securities Available-for-Sale. We held $2.3 billion in available-for-sale investment securities at June 30, 2013, compared to $1.6 billion at December 31, 2012. As of June 30, 2013, the weighted average life of the investment securities portfolio was 4.0 years. These investment securities provide increased liquidity and flexibility to support our company’s funding requirements.

We monitor the available-for-sale investment portfolio for other-than-temporary impairment based on a number of criteria, including the size of the unrealized loss position, the duration for which the security has been in a loss position, credit rating, the nature of the investments, and current market conditions. For debt securities, we also consider any intent to sell the security and the likelihood we will be required to sell the security before its anticipated recovery. We continually monitor the ratings of our security holdings and conduct regular reviews of our credit sensitive assets.

Deposits. Deposits have become one of our largest funding sources. Deposits provide a stable, low-cost source of funds that we utilize to fund loan and asset growth and to diversify funding sources. We have continued to expand our deposit-gathering efforts through our existing private client network and through expansion. These channels offer a broad set of deposit products that include demand deposits, money market deposits, and certificates of deposit (“CDs”).

As of June 30, 2013, we had $4.0 billion in deposits compared to $3.3 billion at December 31, 2012. The growth in deposits is primarily attributable to the increase in brokerage deposits held by the bank. Our core deposits are comprised of non-interest-bearing deposits, money market deposit accounts, savings accounts, and CDs.

Short-term borrowings. Our short-term financing is generally obtained through short-term bank line financing on an uncommitted secured basis, committed short-term bank line financing on an unsecured basis and securities lending arrangements. We borrow from various banks on a demand basis with company-owned and customer securities pledged as collateral. The value of customer-owned securities used as collateral is not reflected in the consolidated statements of financial condition. Our uncommitted secured lines of credit at June 30, 2013 totaled $680.0 million with four banks and are dependent on having appropriate collateral, as determined by the bank agreements, to secure an advance under the line. The availability of our uncommitted lines are subject to approval by the individual banks each time an advance is requested and may be denied. Our peak daily borrowing was $561.2 million during the six months ended June 30, 2013. There are no compensating balance requirements under these arrangements.

At June 30, 2013, short-term borrowings from banks were $406.7 million at an average rate of 1.32%, which were collateralized by company-owned securities valued at $599.9 million. At December 31, 2012, short-term borrowings from banks were $304.7 million at an average rate of 1.14%, which were collateralized by company-owned securities valued at $530.7 million. The average bank borrowing was $414.7 million and $267.0 million for the three months ended June 30, 2013 and 2012, respectively, at average daily effective interest rates of 1.33%, and 1.15%, respectively. The average bank borrowing was $312.6 million and $226.2 million for the six months ended June 30, 2013 and 2012, respectively, at average daily effective interest rates of 1.25%, and 1.14%, respectively.

Unsecured short-term borrowings. Our committed short-term bank line financing at June 30, 2013 consisted of a $100.0 million committed revolving credit facility. The credit facility expires in December 2013. The applicable interest rate under the revolving credit facility is calculated as a per annum rate equal to the one-month Eurocurrency rate plus 1.00%, as defined in the revolving credit facility.

We can draw upon this line, as long as certain restrictive covenants are maintained. Under our revolving credit facility, we are also required to maintain compliance with a minimum consolidated tangible net worth covenant under which we are required to have at all times a consolidated tangible net worth, as defined in the revolving credit facility, of not less than the greater of (x) $625.0 million or (y) 80% of the consolidated tangible net worth as of the last day of the previous fiscal year and a maximum consolidated total capitalization ratio covenant under which we are required to have at all times a consolidated total capitalization ratio, as defined in the revolving credit facility, of not more than 25%. In addition, Stifel Nicolaus, our broker-dealer subsidiary, is required to maintain compliance with a minimum regulatory net capital covenant of not less than 10% of aggregate debits, as defined in the revolving credit facility.

At June 30, 2013, we had $100.0 million outstanding on our revolving credit facility and were in compliance with all covenants. Our revolving credit facility contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency and judgment defaults.

Federal Home Loan Bank Advances and other secured financing. Stifel Bank has borrowing capacity with the Federal Home Loan Bank of $569.6 million at June 30, 2013, all of which was unused, and a $25.0 million federal funds agreement for the purpose of purchasing short-term funds should additional liquidity be needed. Stifel Bank receives overnight funds from excess cash held in Stifel Nicolaus brokerage accounts, which are deposited into a money market account. These balances totaled $4.0 billion at June 30, 2013.

Public Offering of Senior Notes. On January 18, 2012, we issued $175.0 million principal amount of 6.70% Senior Notes due 2022 (the “notes”). Interest on the notes accrue from January 23, 2012 and will be paid quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on April 15, 2012. The notes will mature on January 15, 2022. We may redeem the notes in whole or in part on or after January 15, 2015 at our option at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest to the date of redemption. Proceeds from the notes issuance of $169.3 million, after discounts, commissions and expenses, will be used for general corporate purposes. In January 2012, we received an initial credit rating from Standard & Poor’s Financial Services LLC of BBB-, along with a BBB- rating on the notes.

On December 18, 2012, we issued $150.0 million principal amount of 5.375% Senior Notes due 2022 (the “December 2012 Notes”). Interest on the December 2012 Notes accrue from December 21, 2012 and will be paid quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on April 15, 2013. The December 2012 Notes will mature on December 31, 2022. We may redeem the December 2012 Notes in whole or in part on or after December 31, 2015 at our option at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest to the date of redemption. Proceeds from the December 2012 Notes issuance of $146.1 million, after discounts, commissions and expenses, will be used for general corporate purposes. In January 2013, we received a BBB- rating on the December 2012 Notes.

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

Credit Rating

We believe our current rating depends upon a number of factors including industry dynamics, operating and economic environment, operating results, operating margins, earnings trends and volatility, balance sheet composition, liquidity and liquidity management, our capital structure, our overall risk management, business diversification and our market share and competitive position in the markets in which we operate. Deteriorations in any of these factors could impact our credit rating. A reduction in our credit rating could adversely affect our liquidity and competitive position, increase our incremental borrowing costs, limit our access to the capital markets or trigger our obligations under certain financial agreements. As such, we may not be able to successfully obtain additional outside financing to fund our operations on favorable terms, or at all.

We believe our existing assets, most of which are liquid in nature, together with the funds from operations, available informal short-term credit arrangements, and our ability to raise additional capital will provide sufficient resources to meet our present and anticipated financing needs.

Use of Capital Resources

TWP has entered into settlement and release agreements (“Settlement Agreements”) with certain customers, whereby it will purchase their ARS, at par, in exchange for a release from any future claims. At June 30, 2013, we estimate that TWP customers held $18.3 million par value of ARS, which may be repurchased over the next 3 years. The amount estimated for repurchase assumes no issuer redemptions.

We have paid $31.9 million in the form of upfront notes to financial advisors for transition pay during the period from January 1, 2013 through July 31, 2013. As we continue to take advantage of the opportunities created by market displacement and as competition for skilled professionals in the industry increases, we may decide to devote more significant resources to attracting and retaining qualified personnel.

We utilize transition pay, principally in the form of upfront demand notes, to aid financial advisors, who have elected to join our firm, to supplement their lost compensation while transitioning their customers’ accounts to the Stifel platform. The initial value of the notes is determined primarily by the financial advisors trailing production and assets under management. These notes are generally forgiven over a five to ten year period based on production. The future estimated amortization expense of the upfront notes, assuming current year production levels and static growth for the remaining six months of 2013 and the years ended December 31, 2014, 2015, 2016, 2017, and thereafter are $27.8 million, $44.9 million, $34.3 million, $23.2 million, $14.2 million and $29.0 million, respectively. These estimates could change if we continue to grow our business through expansion or experience increased production levels.

We maintain several incentive stock award plans that provide for the granting of stock options, stock appreciation rights, restricted stock, performance awards, and stock units to our employees. Historically, we have granted stock units to our employees as part of our retention program. A stock unit represents the right to receive a share of common stock from our company at a designated time in the future without cash payment by the employee and is issued in lieu of cash incentive, principally for deferred compensation and employee retention plans. The restricted stock units vest on an annual basis over the next three to eight years and are distributable, if vested, at future specified dates. At June 30, 2013, the total number of stock units outstanding was 17.2 million, of which 8.6 million were unvested. At June 30, 2013, there was unrecognized compensation cost for stock units of $248.6 million, which is expected to be recognized over a weighted-average period of 2.9 years.

The future estimated compensation expense of the unvested units, assuming current year forfeiture levels and static growth for the remaining six months of 2013 and the years ended December 31, 2014, 2015, 2016, 2017, and thereafter are $30.0 million, $55.8 million, $54.4 million, $42.3 million, $30.4 million and $35.7 million, respectively. These estimates could change if our forfeitures change from historical levels.

Net Capital Requirements

We operate in a highly regulated environment and are subject to capital requirements, which may limit distributions to our company from our subsidiaries. Distributions from our broker-dealer subsidiaries are subject to net capital rules. These subsidiaries have historically operated in excess of minimum net capital requirements. However, if distributions were to be limited in the future due to the failure of our subsidiaries to comply with the net capital rules or a change in the net capital rules, it could have a material and adverse affect to our company by limiting our operations that require intensive use of capital, such as underwriting or trading activities, or limit our ability to implement our business and growth strategies, pay interest on and repay the principal of our debt, and/or repurchase our common stock. Our non broker-dealer subsidiary, Stifel Bank is also subject to various regulatory capital requirements administered by the federal banking agencies. Our broker-dealer subsidiaries and Stifel Bank have consistently operated in excess of their capital adequacy requirements.

At June 30, 2013, Stifel Nicolaus had net capital of $424.9 million, which was 64.6% of aggregate debit items and $411.7 million in excess of its minimum required net capital. At June 30, 2013, KBW’s and CSA’s net capital exceeded the minimum net capital required under the SEC rule. At June 30, 2013, SNEL’s and KBW Limited’s net capital and reserves were in excess of the financial resources requirement under the rules of the FCA. At June 30, 2013, SN Canada’s net capital and reserves was in excess of the financial resources requirement under the rules of the IIROC. At June 30, 2013, Stifel Bank was considered well capitalized under the regulatory framework for prompt corrective action. See Note 19 of the Notes to Consolidated Financial Statements for details of our regulatory capital requirements.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the SEC, we make assumptions, judgments, and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments, and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

We believe that the assumptions, judgments, and estimates involved in the accounting policies described below have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules that require us to make assumptions, judgments, and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments, and estimates relative to our critical accounting policies and estimates have not differed materially from actual results.

For a full description of these and other accounting policies, see Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Valuation of Financial Instruments

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

Trading securities owned and pledged and trading securities sold, but not yet purchased, are carried at fair value on the consolidated statements of financial condition, with unrealized gains and losses reflected on the consolidated statements of operations.

The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted have less pricing observability and are measured at fair value using valuation models that require more judgment. 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, the characteristics specific to the transaction, and overall market conditions generally.

When available, we use observable market prices, observable market parameters, or broker or dealer quotes (bid and ask prices) to derive the fair value of financial instruments. In the case of financial instruments transacted on recognized exchanges, the observable market prices represent quotations for completed transactions from the exchange on which the financial instrument is principally traded.

A substantial percentage of the fair value of our trading securities and other investments owned, trading securities pledged as collateral, and trading securities sold, but not yet purchased, are based on observable market prices, observable market parameters, or derived from broker or dealer prices. The availability of observable market prices and pricing parameters can vary from product to product. Where available, observable market prices and pricing or market parameters in a product may be used to derive a price without requiring significant judgment. In certain markets, observable market prices or market parameters are not available for all products, and fair value is determined using techniques appropriate for each particular product. These techniques involve some degree of judgment.

For investments in illiquid or privately held securities that do not have readily determinable fair values, the determination of fair value requires us to estimate the value of the securities using the best information available. Among the factors we consider in determining the fair value of investments are the cost of the investment, terms and liquidity, developments since the acquisition of the investment, the sales price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. In instances where a security is subject to transfer restrictions, the value of the security is based primarily on the quoted price of a similar security without restriction but may be reduced by an amount estimated to reflect such restrictions. The fair value of these investments is subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term, and the differences could be material.

We have categorized our financial instruments measured at fair value into a three-level classification in accordance with Topic 820, “Fair Value Measurement and Disclosures.” Fair value measurements of financial instruments that use quoted prices in active markets for identical assets or liabilities are generally categorized as Level 1, and fair value measurements of financial instruments that have no direct observable levels are generally categorized as Level 3. All other fair value measurements of financial instruments that do not fall within the Level 1 or Level 3 classification are considered Level 2. The lowest level input that is significant to the fair value measurement of a financial instrument is used to categorize the instrument and reflects the judgment of management.

Level 3 financial instruments have little to no pricing observability as of the report date. These financial instruments do not have active two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have identified Level 3 financial instruments to include certain asset-backed securities, consisting of collateral loan obligation securities, that have experienced low volumes of executed transactions, certain corporate bonds and equity securities where there was less frequent or nominal market activity, investments in private equity funds, and auction rate securities for which the market has been dislocated and largely ceased to function. 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. 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.

At June 30, 2013, Level 3 assets for which we bear economic exposure were $262.0 million or 7.7% of the total assets measured at fair value. During the three months ended June 30, 2013, we recorded purchases of $7.2 million and sales and redemptions of $21.2 million of Level 3 assets. Our valuation adjustments (realized and unrealized) increased the value of our Level 3 assets by $1.3 million. During the six months ended June 30, 2013, we recorded purchases of $74.2 million and sales and redemptions of $25.3 million of Level 3 assets. Our valuation adjustments (realized and unrealized) increased the value of our Level 3 assets by $6.2 million.

At June 30, 2013, Level 3 assets included the following: $152.0 million of auction rate securities and $110.0 million of private equity, municipal securities, and other fixed income securities.

Investments in Partnerships

Investments in partnerships and other investments include our general and limited partnership interests in investment partnerships and direct investments in non-public companies. These interests are carried at estimated fair value. The net assets of investment partnerships consist primarily of investments in non-marketable securities. The underlying investments held by such partnerships and direct investments in non-public companies are valued based on estimated fair value ultimately determined by us in our capacity as general partner or investor and, in the case of an investment in an unaffiliated investment partnership, are based on financial statements prepared by an unaffiliated general partner. Due to the inherent uncertainty of valuation, fair values of these non-marketable investments may differ from the values that would have been used had a ready market existed for these investments, and the differences could be material. Increases and decreases in estimated fair value are recorded based on underlying information of these non-public company investments, including third-party transactions evidencing a change in value, market comparables, operating cash flows and financial performance of the companies, trends within sectors and/or regions, underlying business models, expected exit timing and strategy, and specific rights or terms associated with the investment, such as conversion features and liquidation preferences. In cases where an estimate of fair value is determined based on financial statements prepared by an unaffiliated general partner, such financial statements are generally unaudited other than audited year-end financial statements. Upon receipt of audited financial statements from an investment partnership, we adjust the fair value of the investments to reflect the audited partnership results if they differ from initial estimates. We also perform procedures to evaluate fair value estimates provided by unaffiliated general partners. At June 30, 2013, we had commitments to invest in affiliated and unaffiliated investment partnerships of $37.6 million. These commitments are generally called as investment opportunities are identified by the underlying partnerships. These commitments may be called in full at any time.

The investment partnerships in which we are general partner may allocate carried interest and make carried interest distributions, which represent an additional allocation of net realized and unrealized gains to the general partner if the partnerships’ investment performance reaches a threshold as defined in the respective partnership agreements. These allocations are recognized in revenue as realized and unrealized gains and losses on investments in partnerships. Our recognition of allocations of carried interest gains and losses from the investment partnerships in revenue is not adjusted to reflect expectations about future performance of the partnerships.

As the investment partnerships realize proceeds from the sale of their investments, they may make cash distributions as provided for in the partnership agreements. Distributions that result from carried interest may subsequently become subject to claw back if the fair value of private equity partnership assets subsequently decreases in fair value. To the extent these decreases in fair value and allocated losses exceed our capital account balance, a liability is recorded by us. These liabilities for claw back obligations are not required to be paid to the investment partnerships until the dissolution of such partnerships, and are only required to be paid if the cumulative amounts actually distributed exceed the amount due based on the cumulative operating results of the partnerships.

We earn fees from the investment partnerships that we manage or of which we are a general partner. Such management fees are generally based on the net assets or committed capital of the underlying partnerships. We have agreed, in certain cases, to waive management fees, in lieu of making a cash contribution, in satisfaction of our general partner investment commitments to the investment partnerships. In these cases, we generally recognize our management fee revenues at the time when we are allocated a special profit interest in realized gains from these partnerships.

Contingencies

We are involved in various pending and potential legal proceedings related to our business, including litigation, arbitration, and regulatory proceedings. Some of these matters involve claims for substantial amounts, including claims for punitive damages. We have, after consultation with outside legal counsel and consideration of facts currently known by management, recorded estimated losses in accordance with Topic 450 (“Topic 450”), “Contingencies,” to the extent that claims are probable of loss and the amount of the loss can be reasonably estimated. The determination of these reserve amounts requires us to use significant judgment, and our final liabilities may ultimately be materially different. This determination is inherently subjective, as it requires estimates that are subject to potentially significant revision as more information becomes available and due to subsequent events. In making these determinations, we consider many factors, including, but not limited to, the loss and damages sought by the plaintiff or claimant, the basis and validity of the claim, the likelihood of a successful defense against the claim, and the potential for, and magnitude of, damages or settlements from such pending and potential litigation and arbitration proceedings, and fines and penalties or orders from regulatory agencies. See Item 3, “Legal Proceedings,” in Part I of this report for information on our legal, regulatory, and arbitration proceedings.

Allowance for Loan Losses

We regularly review the loan portfolio and have established an allowance for loan losses for inherent losses estimated to have occurred in the loan portfolio through a provision for loan losses charged to income. In providing for the allowance for loan losses, we consider historical loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement will not be collectible. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Once a loan is determined to be impaired, when principal or interest becomes 90 days past due or when collection becomes uncertain, the accrual of interest and amortization of deferred loan origination fees is discontinued (“non-accrual status”), and any accrued and unpaid interest income is reversed. Loans placed on non-accrual status are returned to accrual status when all delinquent principal and interest payments are collected and the collectibility of future principal and interest payments is reasonably assured. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is certain. Subsequent recoveries, if any, are credited to the allowance for loan loss

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment measurements. Impairment is measured on a loan-by-loan basis for non-homogeneous loans and a specific allowance is established for individual loans determined to be impaired. Impairment is measured by comparing the carrying value of the impaired loan to the present value of its expected cash flow discounted at the loan's effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

Derivative Instruments and Hedging Activities

Our derivative instruments are carried on the consolidated statement of financial condition at fair value. We utilize these derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate volatility. Our company’s goal is to manage sensitivity to changes in rates by offsetting the repricing or maturity characteristics of certain assets and liabilities, thereby limiting the impact on earnings. The use of derivative instruments does expose our company to credit and market risk. We manage credit risk through strict counterparty credit risk limits and/or collateralization agreements. At inception, we determine if a derivative instrument meets the criteria for hedge accounting under Topic 815, “Derivatives and Hedging.” Ongoing effectiveness evaluations are made for instruments that are designated and qualify as hedges. If the derivative does not qualify for hedge accounting, no assessment of effectiveness is needed.

Income Taxes

The provision for income taxes and related tax reserves is based on our consideration of known liabilities and tax contingencies for multiple taxing authorities. Known liabilities are amounts that will appear on current tax returns, amounts that have been agreed to in revenue agent revisions as the result of examinations by the taxing authorities, and amounts that will follow from such examinations but affect years other than those being examined. Tax contingencies are liabilities that might arise from a successful challenge by the taxing authorities taking a contrary position or interpretation regarding the application of tax law to our tax return filings. Factors considered in estimating our liability are results of tax audits, historical experience, and consultation with tax attorneys and other experts.

Topic 740 (“Topic 740”), “Income Taxes,” clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribed recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, Topic 740 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Goodwill and Intangible Assets

Under the provisions of Topic 805, “Business Combinations,” we record all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value. Determining the fair value of assets and liabilities requires certain estimates. At June 30, 2013, we had goodwill of $743.6 million and intangible assets of $29.4 million.

In accordance with Topic 350, “Intangibles – Goodwill and Other,” indefinite-life intangible assets and goodwill are not amortized. Rather, they are subject to impairment testing on an annual basis, or more often if events or circumstances indicate there may be impairment. This test involves assigning tangible assets and liabilities as well as identified intangible assets and goodwill to reporting units and comparing the fair value of each reporting unit to its carrying amount. If the fair value is less than the carrying amount, a further test is required to measure the amount of the impairment. We have elected to test for goodwill impairment in the third quarter of each calendar year.

We test goodwill for impairment on an annual basis and on an interim basis when certain events or circumstances exist. We test for impairment at the reporting unit level, which is generally at the level of or one level below our company’s business segments. For both the annual and interim tests, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment test is not required. However, if we conclude otherwise, we are then required to perform the first step of the two-step impairment test. Goodwill impairment is determined by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not deemed to be impaired. If the estimated fair value is below carrying value, however, further analysis is required to determine the amount of the impairment. Additionally, if the carrying value of a reporting unit is zero or a negative value and it is determined that it is more likely than not the goodwill is impaired, further analysis is required. The estimated fair values of the reporting units are derived based on valuation techniques we believe market participants would use for each of the reporting units. Our annual goodwill impairment testing was completed as of July 31, 2012, with no impairment identified.

The goodwill impairment test requires us to make judgments in determining what assumptions to use in the calculation. Assumptions, judgments, and estimates about future cash flows and discount rates are complex and often subjective. They can be affected by a variety of factors, including, among others, economic trends and market conditions, changes in revenue growth trends or business strategies, unanticipated competition, discount rates, technology, or government regulations. In assessing the fair value of our reporting units, the volatile nature of the securities markets and industry requires us to consider the business and market cycle and assess the stage of the cycle in estimating the timing and extent of future cash flows. In addition to discounted cash flows, we consider other information, such as public market comparables and multiples of recent mergers and acquisitions of similar businesses. Although we believe the assumptions, judgments, and estimates we have made in the past have been reasonable and appropriate, different assumptions, judgments, and estimates could materially affect our reported financial results.

Identifiable intangible assets, which are amortized over their estimated useful lives, are tested for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset or asset group may not be fully recoverable.

Recent Accounting Pronouncements

See Note 2 of the Notes to Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our consolidated financial statements.

Off-Balance Sheet Arrangements

Information concerning our off-balance sheet arrangements is included in Note 22 of the Notes to Consolidated Financial Statements. Such information is hereby incorporated by reference.

Contractual Obligations

Our contractual obligations have not materially changed from those reported in our Annual Report on Form 10-K for the year ended December 31, 2012.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

Risks are an inherent part of our business and activities. Management of these risks is critical to our soundness and profitability. Risk management at our company is a multi-faceted process that requires communication, judgment, and knowledge of financial products and markets. Our senior management group takes an active role in the risk management process and requires specific administrative and business functions to assist in the identification, assessment, monitoring, and control of various risks. The principal risks involved in our business activities are: market (interest rates and equity prices), credit, operational, and regulatory and legal. We have adopted policies and procedures concerning risk management, and our Board of Directors, in exercising its oversight of management’s activities, conducts periodic reviews and discussions with management regarding the guidelines and policies governing the processes by which risk assessment and risk management are handled.

Market Risk

The potential for changes in the value of financial instruments owned by our company resulting from changes in interest rates and equity prices is referred to as “market risk.” Market risk is inherent to financial instruments, and accordingly, the scope of our market risk management procedures includes all market risk-sensitive financial instruments.

We trade tax-exempt and taxable debt obligations, including U.S. treasury bills, notes, and bonds; U.S. government agency and municipal notes and bonds; bank certificates of deposit; mortgage-backed securities; and corporate obligations. We are also an active market maker in over-the-counter equity securities. In connection with these activities, we may maintain inventories in order to ensure availability and to facilitate customer transactions.

Changes in value of our financial instruments may result from fluctuations in interest rates, credit ratings, equity prices, and the correlation among these factors, along with the level of volatility.

We manage our trading businesses by product and have established trading departments that have responsibility for each product. The trading inventories are managed with a view toward facilitating client transactions, considering the risk and profitability of each inventory position. Position limits in trading inventory accounts are established and monitored on a daily basis. We monitor inventory levels and results of the trading departments, as well as inventory aging, pricing, concentration, and securities ratings.

We are also exposed to market risk based on our other investing activities. These investments consist of investments in private equity partnerships, start-up companies, venture capital investments, and zero coupon U.S. government securities and are included under the caption “Investments” on the consolidated statements of financial condition.

Interest Rate Risk

We are exposed to interest rate risk as a result of maintaining inventories of interest rate-sensitive financial instruments and from changes in the interest rates on our interest-earning assets (including client loans, stock borrow activities, investments, inventories, and resale agreements) and our funding sources (including client cash balances, stock lending activities, bank borrowings, and repurchase agreements), which finance these assets. The collateral underlying financial instruments at the broker-dealer is repriced daily, thus requiring collateral to be delivered as necessary. Interest rates on client balances and stock borrow and lending produce a positive spread to our company, with the rates generally fluctuating in parallel.

We manage our inventory exposure to interest rate risk by setting and monitoring limits and, where feasible, hedging with offsetting positions in securities with similar interest rate risk characteristics. While a significant portion of our securities inventories have contractual maturities in excess of five years, these inventories, on average, turn over several times per year.

Additionally, we monitor, on a daily basis, the Value-at-Risk (“VaR”) in our trading portfolios using a ten-day horizon and report VaR at a 99% confidence level. VaR is a statistical technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatility. This model assumes that historical changes in market conditions are representative of future changes, and trading losses on any given day could exceed the reported VaR by significant amounts in unusually volatile markets. Further, the model involves a number of assumptions and inputs. While we believe that the assumptions and inputs we use in our risk model are reasonable, different assumptions and inputs could produce materially different VaR estimates.

The following table sets forth the high, low, and daily average VaR for our trading portfolios during the six months ended June 30, 2013, and the daily VaR at June 30, 2013 and December 31, 2012 (in thousands):


	Six Months Ended June 30, 2013						VAR Calculation at
	High		Low		Daily Average		June 30, 2013		December 31, 2012
Daily VaR	$	11,863	$	2,941	$	6,157	$	6,850	$	4,653

Stifel Bank’s interest rate risk is principally associated with changes in market interest rates related to residential, consumer, and commercial lending activities, as well as FDIC-insured deposit accounts to customers of our broker-dealer subsidiaries and to the general public.

Our primary emphasis in interest rate risk management for Stifel Bank is the matching of assets and liabilities of similar cash flow and repricing time frames. This matching of assets and liabilities reduces exposure to interest rate movements and aids in stabilizing positive interest spreads. Stifel Bank has established limits for acceptable interest rate risk and acceptable portfolio value risk. To ensure that Stifel Bank is within the limits established for net interest margin, an analysis of net interest margin based on various shifts in interest rates is prepared each quarter and presented to Stifel Bank’s Board of Directors. Stifel Bank utilizes a third-party model to analyze the available data.

The following table illustrates the estimated change in net interest margin at June 30, 2013, based on shifts in interest rates of up to positive 200 basis points and negative 200 basis points:


Hypothetical change in interest rates	Projected change in net interest margin
+200		8.6	%
+100		1.7	%
0		0.00	%
-100		n/a
-200		n/a

The following GAP Analysis table indicates Stifel Bank’s interest rate sensitivity position at June 30, 2013 (in thousands):


	Repricing Opportunities
	0-6 Months		7-12 Months			1-5 Years			5+ Years
Interest-earning assets:
Loans	$	1,004,603	$	20,721		$	132,721		$	19,190
Securities		1,115,629		185,906			955,212			696,346
Interest-bearing cash		112,089		—			—			—

	$	2,232,321	$	206,627		$	1,087,933		$	715,536

Interest-bearing liabilities:
Transaction accounts and savings	$	457,621	$	307,653		$	1,857,756		$	1,375,711
Certificates of deposit		337		110			191			—
Borrowings		—		—			—			16,792

	$	457,958	$	307,763		$	1,857,947		$	1,392,503

GAP		1,774,363		(101,136	)		(770,014	)		(676,967	)

Cumulative GAP	$	1,774,363	$	1,673,227		$	903,213		$	226,246

Equity Price Risk

We are exposed to equity price risk as a consequence of making markets in equity securities. We attempt to reduce the risk of loss inherent in our inventory of equity securities by monitoring those security positions constantly throughout each day.

Our equity securities inventories are repriced on a regular basis, and there are no unrecorded gains or losses. Our activities as a dealer are client-driven, with the objective of meeting clients’ needs while earning a positive spread.

Credit Risk

We are engaged in various trading and brokerage activities, with the counterparties primarily being broker-dealers. In the event counterparties do not fulfill their obligations, we may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. We manage this risk by imposing and monitoring position limits for each counterparty, monitoring trading counterparties, conducting regular credit reviews of financial counterparties, reviewing security concentrations, holding and marking to market collateral on certain transactions, and conducting business through clearing organizations, which guarantee performance.

Our client activities involve the execution, settlement, and financing of various transactions on behalf of our clients. Client activities are transacted on either a cash or margin basis. Credit exposure associated with our private client business consists primarily of customer margin accounts, which are monitored daily and are collateralized. We monitor exposure to industry sectors and individual securities and perform analyses on a regular basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.

By using derivative instruments, we are exposed to credit and market risk on those derivative positions. Credit risk is equal to the fair value gain in a derivative, if the counterparty fails to perform. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes our company and, therefore, creates a repayment risk for our company. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, have no repayment risk. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by senior management.

Stifel Bank extends credit to individual and commercial borrowers through a variety of loan products, including residential and commercial mortgage loans, home equity loans, construction loans, and non-real-estate commercial and consumer loans. Bank loans are generally collateralized by real estate, real property, or other assets of the borrower. Stifel Bank’s loan policy includes criteria to adequately underwrite, document, monitor, and manage credit risk. Underwriting requires reviewing and documenting the fundamental characteristics of credit, including character, capacity to service the debt, capital, conditions, and collateral. Benchmark capital and coverage ratios are utilized, which include liquidity, debt service coverage, credit, working capital, and capital to asset ratios. Lending limits are established to include individual, collective, committee, and board authority. Monitoring credit risk is accomplished through defined loan review procedures, including frequency and scope.

We are subject to concentration risk if we hold large positions, extend large loans to, or have large commitments with a single counterparty, borrower, or group of similar counterparties or borrowers (i.e., in the same industry). Securities purchased under agreements to resell consist of securities issued by the U.S. government or its agencies. Receivables from and payables to clients and stock borrow and lending activities, both with a large number of clients and counterparties, and any potential concentration is carefully monitored. Stock borrow and lending activities are executed under master netting agreements, which gives our company right of offset in the event of counterparty default. Inventory and investment positions taken and commitments made, including underwritings, may involve exposure to individual issuers and businesses. We seek to limit this risk through careful review of counterparties and borrowers and the use of limits established by our senior management group, taking into consideration factors including the financial strength of the counterparty, the size of the position or commitment, the expected duration of the position or commitment, and other positions or commitments outstanding.

Operational Risk

Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems, and inadequacies or breaches in our control processes. We operate different businesses in diverse markets and are reliant on the ability of our employees and systems to process a large number of transactions. These risks are less direct than credit and market risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes. In the event of a breakdown or improper operation of systems or improper action by employees, we could suffer financial loss, regulatory sanctions, and damage to our reputation. In order to mitigate and control operational risk, we have developed and continue to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization and within such departments as Accounting, Operations, Information Technology, Legal, Compliance, and Internal Audit. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our various businesses are operating within established corporate policies and limits. Business continuity plans exist for critical systems, and redundancies are built into the systems as deemed appropriate.

Regulatory and Legal Risk

Legal risk includes the risk of large numbers of private client group customer claims for sales practice violations. While these claims may not be the result of any wrongdoing, we do, at a minimum, incur costs associated with investigating and defending against such claims. See further discussion on our legal reserves policy under “Critical Accounting Policies and Estimates” in Item 7, Part II and “Legal Proceedings” in Item 3, Part I of this report. In addition, we are subject to potentially sizable adverse legal judgments or arbitration awards, and fines, penalties, and other sanctions for non-compliance with applicable legal and regulatory requirements. We are generally subject to extensive regulation by the SEC, FINRA, and state securities regulators in the different jurisdictions in which we conduct business. As a bank holding company, we are subject to regulation by the Federal Reserve. Stifel Bank is subject to regulation by the FDIC. As a result, we are subject to a risk of loss resulting from failure to comply with banking laws. We have comprehensive procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, the extension of credit, including margin loans, collection activities, money laundering, and record keeping. We act as an underwriter or selling group member in both equity and fixed income product offerings. Particularly when acting as lead or co-lead manager, we have potential legal exposure to claims relating to these securities offerings. To manage this exposure, a committee of senior executives review proposed underwriting commitments to assess the quality of the offering and the adequacy of due diligence investigation.

Our company, as a bank and financial holding company, is subject to regulation, including capital requirements, by the Federal Reserve. Stifel Bank is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation (“FDIC”) and state banking authorities. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our company's and Stifel Bank's financial statements.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was carried out by Stifel Financial Corp.’s management with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The following supplements and amends our discussion set forth under Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2012.

SEC/Wisconsin Lawsuit

guidance of others based upon our role in connection with the school districts’ purchase of the CDOs. RBC has also asserted claims against our company for civil conspiracy and conspiracy to injure its business based upon our company’s settlement with the school districts and pursuit of claims against the RBC entities. We have moved to dismiss RBC’s claims against us that are based on the company’s settlement agreement with the school districts. The Motion to Dismiss has been argued and is pending before the court. We believe we have meritorious legal and factual defenses to the claims asserted by RBC and we intend to vigorously defend those claims.

EDC Bond Issuance Matter

After the federal court declined to exercise jurisdiction over the 2012 federal court action and with the state court action reactivated, on April 25, 2013 the Tribe and EDC filed a new lawsuit against Saybrook, our company, Stifel Nicolaus, G&K, and Wells Fargo in the Lac du Flambeau Tribal Court. The Tribal Court action seeks a declaratory judgment that all of the bond documents are void. This new lawsuit created a jurisdictional conflict between the Tribal Court and the Wisconsin state court that will be resolved by those courts. Meanwhile, on April 29, 2013, we filed a motion to dismiss all of the claims alleged against our company and Stifel Nicolaus brought by Saybrook in the state court action. That Motion is scheduled to be heard on August 16, 2013. On May 24, 2013 we, together with Saybrook, Wells Fargo and G&K, filed an action in a Wisconsin federal court (the “Federal Action” seeking to enjoin the Tribal Court action. The Tribe and EDC have filed a motion to dismiss the Federal Action. We have filed a memorandum in opposition to the motion to dismiss, and we are waiting for the court’s decision on our motion for a preliminary injunction to enjoin the Tribal Court action. While there can be no assurance that we will be successful, based upon currently available information and review with outside counsel, we believe that we have meritorious legal and factual defenses to the matter, and we intend to vigorously defend the substantive claims and the procedural attempt to move the litigation to the Lac du Flambeau Tribal Court.

Lac Courte Orielles Tribal lawsuit

Stetson Oil & Gas Ltd. Matter

ITEM 1A. RISK FACTORS

The discussion of our business and operations should be read together with the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC. These risk factors describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information with respect to purchases made by or on behalf of Stifel Financial Corp. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended), of our common stock during the quarter ended June 30, 2013.


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publically Announced Plans		Maximum Number of Shares That May Yet be Purchased Under the Plan or Program
April 1 – 30, 2013		330,619	$	31.75		330,619		3,627,235
May 1 – 31, 2013		100,000		31.72		100,000		3,527,235
June 1 – 30, 2013		—		—		—		3,527,235

		430,619	$	31.75		430,619

ITEM 6. EXHIBITS


Exhibit No.		Description

11.1		Statement Re: Computation of per Share Earnings (The calculation of per share earnings is included in Part I, Item 1 in the Notes to Consolidated Financial Statements (Earnings Per Share) and is omitted here in accordance with Section (b)(11) of Item 601 of Regulation S-K).

31.1		Rule 13a-14(a) Certification of Chief Executive Officer.

31.2		Rule 13a-14(a) Certification of Chief Financial Officer.

32.1		Section 1350 Certification of Chief Executive Officer.*

32.2		Section 1350 Certification of Chief Financial Officer.*

101.INS		Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Statements of Financial Condition as of June 30, 2013 and December 31, 2012; (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012; and (vi) Notes to Consolidated Financial Statements. *

The certifications attached as Exhibits 32.1 and 32.2 and the interactive data files attached as Exhibits 101 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Stifel Financial Corp. under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


STIFEL FINANCIAL CORP.

		/s/ Ronald J. Kruszewski
		Ronald J. Kruszewski Chairman of the Board, President, and Chief Executive Officer

/s/ James M. Zemlyak

James M. Zemlyak

Senior Vice President and Chief Financial Officer

Date: August 9, 2013