Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2011

Fair Value of Financial Instruments

Fair Value of Financial Instruments

NOTE 6 – Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010 are presented below:

	December 31, 2011
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	14,156	$	14,156	$	—	$	—
Trading securities owned:
U.S. government agency securities		66,424		—		66,424		—
U.S. government securities		32,845		32,845		—		—
Corporate securities:
Fixed income securities		244,535		31,398		209,395		3,742
Equity securities		38,551		38,198		353		—
State and municipal securities		111,288		—		111,288		—
Total trading securities owned		493,643		102,441		387,460		3,742
Available-for-sale securities:
U.S. government agency securities		1,103		—		1,103		—
State and municipal securities		86,932		—		20,036		66,896
Mortgage-backed securities:
Agency		404,662		—		404,662		—
Commercial		271,510		—		271,510		—
Non-agency		17,460		—		17,460		—
Corporate fixed income securities		405,985		153,855		240,130		12,000
Asset-backed securities		26,489		—		26,489		—
Total available-for-sale securities		1,214,141		153,855		981,390		78,896
Investments:
Corporate equity securities		5,229		5,229		—		—
Mutual funds		33,958		33,958		—		—
Auction rate securities:
Equity securities		103,176		—		—		103,176
Municipal securities		11,729		—		—		11,729
Other		38,424		1,055		336		37,033
Total investments		192,516		40,242		336		151,938
	$	1,914,456	$	310,694	$	1,369,186	$	234,576
Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities	$	109,776	$	109,776	$	—	$	—
U.S. government agency securities		954		—		954		—
Corporate securities:
Fixed income securities		149,460		74,719		74,741		—
Equity securities		6,060		6,019		41		—
State and municipal securities		583		—		583		—
Total trading securities sold, but not yet purchased		266,833		190,514		76,319		—
Securities sold, but not yet purchased		19,223		19,223		—		—
Derivative contracts (1)		24,877		—		24,877		—
	$	310,933	$	209,737	$	101,196	$	—
(1) Included in accounts payable and accrued expenses in the consolidated statements of financial condition.

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

	December 31, 2010
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	15,675	$	15,675	$	—	$	—
Trading securities owned:
U.S. government agency securities		86,882		—		86,882		—
U.S. government securities		9,038		9,038		—		—
Corporate securities:
Fixed income securities		221,145		47,001		133,901		40,243
Equity securities		46,877		46,395		482		—
State and municipal securities		80,228		—		80,228		—
Total trading securities owned		444,170		102,434		301,493		40,243
Available-for-sale securities:
U.S. government agency securities		25,030		—		25,030		—
State and municipal securities		26,343		—		14,907		11,436
Mortgage-backed securities:
Agency		697,163		—		697,163		—
Commercial		67,996		—		67,996		—
Non-agency		29,273		—		29,273		—
Corporate fixed income securities		154,901		34,897		120,004		—
Asset-backed securities		12,008		—		12,008		—
Total available-for-sale securities		1,012,714		34,897		966,381		11,436
Investments:
Corporate equity securities		3,335		3,335		—		—
Mutual funds		32,193		32,193		—		—
U.S. government securities		8,751		8,751		—		—
Auction rate securities:
Equity securities		76,826		—		—		76,826
Municipal securities		6,533		—		—		6,533
Other		51,298		10,489		2,307		38,502
Total investments		178,936		54,768		2,307		121,861
	$	1,651,495	$	207,774	$	1,270,181	$	173,540
Liabilities:
Trading securities sold, but not yet purchased:
U.S. government securities	$	131,561	$	131,561	$	—	$	—
U.S. government agency securities		664		—		664		—
Corporate securities:
Fixed income securities		61,026		18,815		37,526		4,685
Equity securities		6,800		6,780		20		—
State and municipal securities		89		—		89		—
Total trading securities sold, but not yet purchased		200,140		157,156		38,299		4,685
Securities sold, but not yet purchased		19,935		19,935		—		—
Derivative contracts (1)		9,259		—		9,259		—
	$	229,334	$	177,091	$	47,558	$	4,685
(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 years ended December 31, 2011 and 2010 (in thousands):

	Year Ended December 31, 2011
	Financial Assets																	Financial Liabilities
				Available-for-sale					Investments
	Corporate Fixed Income Securities (1)			State and Municipal Securities			Corporate Fixed Income Securities		Auction Rate Securities – Equity			Auction Rate Securities – Municipal			Other			Corporate Fixed Income Securities (2)
Balance at December 31, 2010	$	40,243		$	11,436		$	—	$	76,826		$	6,533		$	38,502		$	4,685
Unrealized gains/(losses):
Included in changes in net assets (3)		(288	)		—			—		(600	)		(189	)		4,078			—
Included in OCI (4)		—			3,085			—		—			—			—			—
Realized gains/(losses) (3)		371			881			—		—			—			(1,126	)		(52	)
Purchases		169,152			48,974			12,000		45,625			10,135			1,776			6,663
Sales		(198,636	)		(24,126	)		—		—			(2,900	)		—			(11,296	)
Redemptions		(871	)		(1,125	)		—		(18,675	)		(1,850	)		(6,437	)		—
Transfers:
Into Level 3		35			27,854			—		—			—			240			—
Out of Level 3		(6,264	)		(83	)		—		—			—			—			—
Net change		(36,501	)		55,460			12,000		26,350			5,196			(1,469	)		(4,685	)
Balance at December 31, 2011	$	3,742		$	66,896		$	12,000	$	103,176		$	11,729		$	37,033		$	—

	Year Ended December 31, 2010
	Financial Assets																Financial Liabilities
				Available-for-sale					Investments
	Corporate Fixed Income Securities (1)			State and Municipal Securities		Asset-backed Securities			Auction Rate Securities – Equity			Auction Rate Securities – Municipal			Other		Corporate Fixed Income Securities (2)
Balance at December 31, 2009	$	1,243		$	—	$	2,693		$	46,297		$	9,706		$	5,426	$	—
Unrealized gains/(losses):
Included in changes in net assets (3)		509			—		—			(1,671	)		938			1,534		50
Included in OCI (4)		—			998		887			—			—			—		—
Realized gains/(losses) (3)		2,056			219		—			—			(629	)		2,165		68
Purchases		36,337			10,219		(3,580	)		32,200			(3,482	)		29,377		3,677
Sales
Redemptions
Transfers:
Into Level 3		156			—		—			—			—			—		890
Out of Level 3		(58	)		—		—			—			—			—		—
Net change		39,000			11,436		(2,693	)		30,529			(3,173	)		33,076		4,685
Balance at December 31, 2010	$	40,243		$	11,436	$	—		$	76,826		$	6,533		$	38,502	$	4,685
(1) Included in trading securities owned in the consolidated statements of financial condition.
(2) Included in trading securities sold, but not yet purchased in the consolidated statements of financial condition.
(3) Realized and unrealized gains/(losses) related to trading securities and investments are reported in other income in the consolidated statements of operations.
(4) Unrealized gains related to available-for-sale securities are reported in accumulated other comprehensive income/(loss) in the consolidated statements of financial condition.

The results included in the table above are only a component of the overall investment strategies of our company. The table above does not present Level 1 or Level 2 valued assets or liabilities. The changes to our company's Level 3 classified instruments were principally a result of: purchases of ARS from our customers, unrealized gains and losses, and redemptions of ARS at par during the year ended December 30, 2011. There were $6.3 million of transfers from Level 3 to Level 2 during the year ended December 31, 2011 related to securities for which market trades were observed that provided transparency into the valuation of these assets. There were $28.1 million of transfers of financial assets into Level 3 during the year ended December 31, 2011 primarily related to municipal ARS, which we transferred from held-to-maturity to available-for-sale during the second quarter of 2011. Given that there has been no recent trade activity observed, we transferred them into available-for-sale as Level 3 assets. There were no changes in unrealized gains/(losses) recorded in earnings for the year ended December 31, 2011 relating to Level 3 assets still held at December 31, 2011.

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 $30.3 million of transfers of financial assets from Level 2 to Level 1 during the year ended December 31, 2011 primarily related to tax-exempt securities and equity securities for which market trades were observed that provided transparency into the valuation of these assets. There were $33.6 million of transfers of financial assets from Level 1 to Level 2 during the year ended December 31, 2011 primarily related to tax-exempt securities for which there were low volumes of recent trade activity observed.

Fair Value of Financial Instruments

The following reflects the fair value of financial instruments, as of December 31, 2011 and 2010, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands).

	December 31, 2011				December 31, 2010
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
Financial assets:
Cash and cash equivalents	$	167,671	$	167,671	$	253,529	$	253,529
Restricted cash		6,883		6,883		6,868		6,868
Cash segregated for regulatory purposes		26		26		6,023		6,023
Securities purchased under agreements to resell		75,455		75,455		123,617		123,617
Trading securities owned		493,643		493,643		444,170		444,170
Available-for-sale securities		1,214,141		1,214,141		1,012,714		1,012,714
Held-to-maturity securities		190,484		189,071		52,640		52,984
Loans held for sale		131,754		131,754		86,344		86,344
Bank loans		632,140		639,341		389,742		376,176
Investments		220,516		220,516		178,936		178,936
Financial liabilities:
Securities sold under agreements to repurchase	$	80,176	$	80,176	$	109,595	$	109,595
Bank deposits		2,071,738		2,067,324		1,623,568		1,573,179
Trading securities sold, but not yet purchased		266,833		266,833		200,140		200,140
Securities sold, but not yet purchased		19,223		19,223		19,935		19,935
Derivative contracts (1)		24,877		24,877		9,259		9,259
Debentures to Stifel Financial Capital Trusts		82,500		67,594		82,500		75,445
Liabilities subordinated to the claims of general creditors		6,957		6,671		8,241		7,739
(1) Included in accounts payable and accrued expenses in the consolidated statements of financial condition.

The following, as supplemented by the discussion in Note 2, describes the valuation techniques used in estimating the fair value of our financial instruments as of December 31, 2011 and 2010.

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 December 31, 2011 and 2010 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.

The decrease in estimated fair value below the carrying amount of our asset-backed securities at December 31, 2011 and 2010 are primarily due to unrealized losses that were caused by: illiquid markets for collateralized debt obligations, global disruptions in the credit markets, increased supply of collateralized debt obligation secondary market securities from distressed sellers, and challenging times in the banking sector.

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 December 31, 2011 and 2010 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.

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 recently issued 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.