NOTE 4 – Fair Value Measurements

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

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.

Financial Instruments Owned and Available-For-Sale Securities

When available, the fair value of financial instruments is 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 equity securities listed in active markets, corporate fixed income securities, U.S. government securities, and U.S. government agency securities.

If quoted prices are not available for identical instruments, fair values are obtained from pricing services, broker quotes, or other model-based valuation techniques with observable inputs, such as the present value of estimated cash flows, and reported as Level 2. The nature of these financial instruments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value has 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 include U.S. government agency securities, mortgage-backed securities, corporate fixed income securities infrequently traded, state and municipal securities, and asset-backed securities, which primarily include collateralized loan obligations.

We have identified Level 3 financial instruments to include certain equity securities with unobservable pricing inputs and certain non-agency mortgage-backed securities. 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.

Investments

Investments carried at fair value primarily include corporate equity securities, auction-rate securities (“ARS”), and private company investments.

Corporate equity securities are valued based on quoted prices in active markets and reported in Level 1.

ARS are valued based upon our expectations of issuer redemptions and using internal discounted cash flow models that utilize unobservable inputs. ARS are reported as Level 3 assets. ARS for which recent market trades were observed that provided transparency into their valuation were classified as Level 2 at September 30, 2017.

Direct investments in private companies, reported as Level 3 assets, may be valued using the market approach 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. 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.

Investments in Funds That Are Measured at Net Asset Value Per Share

The Company’s investments in funds measured at NAV include private company investments, partnership interests, mutual funds, private equity funds, and money market funds. Private equity funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations, growth investments and distressed investments. The private equity funds are primarily closed-end funds in which the Company’s investments are generally not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated or distributed.

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.

The tables below present the fair value of our investments in, and unfunded commitments to, funds that are measured at NAV (in thousands):

	September 30, 2017
	Fair value of investments		Unfunded commitments
Partnership interests	$	5,415	$	1,348
Mutual funds		10,038		—
Private equity funds		8,663		1,865
Money market funds		16,528		—
Total	$	40,644	$	3,213

	December 31, 2016
	Fair value of investments		Unfunded commitments
Private company investments	$	18,763	$	8,526
Partnership interests		15,798		1,822
Mutual funds		11,301		—
Private equity funds		9,310		2,020
Money market funds		35,637		—
Total	$	90,809	$	12,368

Financial Instruments Sold, But Not Yet Purchased

Financial instruments sold, but not purchased, recorded at fair value based on quoted prices in active markets and other observable market data include highly liquid instruments with quoted prices, such as U.S. government securities, corporate fixed income securities, and equity securities listed in active markets, which are reported as Level 1.

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 has 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 include U.S. government agency securities, mortgage-backed securities not actively traded, corporate fixed income securities, and state and municipal securities.

Derivatives

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

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2017, are presented below (in thousands):

	September 30, 2017
	Total		Level 1		Level 2		Level 3
Financial instruments owned:
U.S. government securities	$	48,900	$	48,900	$	—	$	—
U.S. government agency securities		128,014		—		128,014		—
Mortgage-backed securities:
Agency		258,348		—		258,348		—
Non-agency		37,185		—		36,827		358
Corporate securities:
Fixed income securities		409,550		8,499		400,803		248
Equity securities		38,280		38,013		—		267
State and municipal securities		145,226		—		145,226		—
Total financial instruments owned		1,065,503		95,412		969,218		873
Available-for-sale securities:
U.S. government agency securities		4,686		199		4,487		—
State and municipal securities		71,961		—		71,961		—
Mortgage-backed securities:
Agency		311,888		—		311,888		—
Commercial		72,733		—		72,733		—
Non-agency		1,619		—		1,619		—
Corporate fixed income securities		1,072,376		—		1,072,376		—
Asset-backed securities		2,159,035		—		2,159,035		—
Total available-for-sale securities		3,694,298		199		3,694,099		—
Investments:
Corporate equity securities		51,475		51,235		—		240
Auction rate securities:
Equity securities		34,608		—		—		34,608
Municipal securities		840		—		—		840
Other		1,610		—		370		1,240
Investments in funds measured at NAV		24,116
Total investments		112,649		51,235		370		36,928
Cash equivalents measured at NAV		16,528
Derivative contracts ⁽¹⁾		5,669				5,669
	$	4,894,647	$	146,846	$	4,669,356	$	37,801

⁽¹⁾	Included in other assets in the consolidated statements of financial condition.

	September 30, 2017
	Total		Level 1		Level 2		Level 3
Liabilities:
Financial instruments sold, but not yet purchased:
U.S. government securities	$	297,690	$	297,690	$	—	$	—
U.S. government agency securities		22,140		—		22,140		—
Mortgage-backed securities
Agency		65,716		—		65,716		—
Corporate securities:
Fixed income securities		311,516		33,793		277,723		—
Equity securities		52,261		52,261		—		—
Total financial instruments sold, but not yet purchased	$	749,323	$	383,744	$	365,579	$	—

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2016, are presented below (in thousands):

	December 31, 2016
	Total		Level 1		Level 2		Level 3
Financial instruments owned:
U.S. government securities	$	9,951	$	9,951	$	—	$	—
U.S. government agency securities		89,833		—		89,833		—
Mortgage-backed securities:
Agency		305,774		—		305,774		—
Non-agency		28,402		—		27,320		1,082
Corporate securities:
Fixed income securities		299,946		1,944		297,729		273
Equity securities		32,044		31,444		—		600
State and municipal securities		159,095		—		159,095		—
Total financial instruments owned		925,045		43,339		879,751		1,955
Available-for-sale securities:
U.S. government agency securities		4,197		300		3,897		—
State and municipal securities		72,490		—		72,490		—
Mortgage-backed securities:
Agency		338,732		—		338,732		—
Commercial		72,773		—		72,773		—
Non-agency		1,892		—		1,892		—
Corporate fixed income securities		823,511		—		823,511		—
Asset-backed securities		1,867,718		—		1,867,718		—
Total available-for-sale securities		3,181,313		300		3,181,013		—
Investments:
Corporate equity securities		27,247		23,414		—		3,833
Auction rate securities:
Equity securities		48,689		—		—		48,689
Municipal securities		832		—		—		832
Other		1,623		—		383		1,240
Investments measured at NAV		55,172
Total investments		133,563		23,414		383		54,594
Cash equivalents measured at NAV		35,637
Derivative contracts ⁽¹⁾		10,390		—		10,390		—
	$	4,285,948	$	67,053	$	4,071,537	$	56,549

⁽¹⁾	Included in other assets in the consolidated statements of financial condition.

	December 31, 2016
	Total		Level 1		Level 2		Level 3
Liabilities:
Financial instruments sold, but not yet purchased:
U.S. government securities	$	362,536	$	362,536	$	—	$	—
U.S. government agency securities		20,549		—		20,549		—
Mortgage-backed securities
Agency		94,552		—		94,552		—
Non-agency		1		—		1		—
Corporate securities:
Fixed income securities		202,968		980		201,988		—
Equity securities		18,395		18,395		—		—
State and municipal securities		31		—		31		—
Total financial instruments sold, but not yet purchased		699,032		381,911		317,121		—
Derivative contracts ⁽²⁾		1,823		—		1,823		—
	$	700,855	$	381,911	$	318,944	$	—

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

The following table summarizes the changes in fair value associated with Level 3 financial instruments during the three months ended September 30, 2017 (in thousands):

	Three Months Ended September 30, 2017
	Financial instruments owned									Investments
	Mortgage- Backed Securities – Non-Agency			Fixed Income Securities			Equity Securities			Corporate Equity Securities		Auction Rate Securities – Equity			Auction Rate Securities – Municipal			Other
Balance at June 30, 2017	$	525		$	256		$	367		$	240	$	34,621		$	841		$	1,240
Unrealized gains/(losses):
Included in changes in net assets ⁽¹⁾		(160	)		—			159			—		(13	)		(1	)		—
Included in OCI ⁽²⁾		—			—			—			—		—			—			—
Realized gains/(losses) ⁽¹⁾		(7	)		—			(259	)		—		—			—			—
Purchases		—			—			—			—		—			—			—
Sales		—			—			—			—		—			—			—
Redemptions		—			(8	)		—			—		—			—			—
Transfers:
Into Level 3		—			—			—			—		—			—			—
Out of Level 3		—			—			—			—		—			—			—
Net change		(167	)		(8	)		(100	)		—		(13	)		(1	)		—
Balance at September 30, 2017	$	358		$	248		$	267		$	240	$	34,608		$	840		$	1,240

⁽¹⁾	Realized and unrealized gains/(losses) related to financial instruments owned and investments are reported in other income in the consolidated statements of operations.

⁽²⁾	Unrealized gains/(losses) related to available-for-sale securities are reported in accumulated other comprehensive loss in the consolidated statements of financial condition.

The following table summarizes the change in fair value associated with Level 3 financial instruments during the nine months ended September 30, 2017 (in thousands):

	Nine Months Ended September 30, 2017
	Financial instruments owned									Investments
	Mortgage- Backed Securities – Non-Agency			Fixed Income Securities			Equity Securities			Corporate Equity Securities			Auction Rate Securities – Equity			Auction Rate Securities – Municipal		Other
Balance at December 31, 2016	$	1,082		$	273		$	600		$	3,833		$	48,689		$	832	$	1,240
Unrealized gains/(losses):
Included in changes in net assets ⁽¹⁾		(260	)		—			(74	)		—			604			8		—
Included in OCI ⁽²⁾		—			—			—			—			—			—		—
Realized gains/(losses)⁽¹⁾		90			—			(259	)		—			—			—		—
Purchases		—			—			—			—			—			—		—
Sales		(324	)		—			—			—			—			—		—
Redemptions		(230	)		(25	)		—			—			—			—		—
Transfers:
Into Level 3		—			—			—			—			—			—		—
Out of Level 3		—			—			—			(3,593	)		(14,685	)		—		—
Net change		(724	)		(25	)		(333	)		(3,593	)		(14,081	)		8		—
Balance at September 30, 2017	$	358		$	248		$	267		$	240		$	34,608		$	840	$	1,240

⁽¹⁾	Realized and unrealized gains/(losses) related to financial instruments owned and investments are reported in other income in the consolidated statements of operations.

⁽²⁾	Unrealized gains/(losses) related to available-for-sale securities are reported in accumulated other comprehensive loss in the consolidated statements of financial.

The results included in the tables above are only a component of the overall investment strategies of our company. The tables above do not present Level 1 or Level 2 valued assets or liabilities. The changes to our company’s Level 3 classified instruments during the nine months ended September 30, 2017 were principally a result of transfers out of Level 3 due to market activity that provided transparency into the valuation of these assets. The changes in unrealized gains/(losses) recorded in earnings for the three and nine months ended September 30, 2017, relating to Level 3 assets still held at September 30, 2017, were immaterial.

The following table summarizes quantitative information related to the significant unobservable inputs utilized in our company’s Level 3 recurring fair value measurements as of September 30, 2017.

	Valuation technique	Unobservable input	Range	Weighted average
Investments:
Auction rate securities:
Equity securities	Discounted cash flow	Discount rate	1.2% - 11.7%		5.3%
		Workout period	1 - 3 years	2.2 years
Municipal securities	Discounted cash flow	Discount rate	1.9% - 9.2%		4.0%
		Workout period	1 - 4 years	1.9 years

The fair value of certain Level 3 assets was determined using various methodologies, as appropriate, including third-party pricing vendors and broker quotes. 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 ongoing basis, management verifies the fair value by reviewing the appropriateness of the discounted cash flow model and its significant inputs.

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. Transfers of financial assets from Level 2 to Level 1 during the three months ended September 30, 2017 were immaterial. There were $1.1 million of transfers of financial assets from Level 2 to Level 1 during the nine months ended September 30, 2017, respectively, primarily related to corporate fixed income securities for which market trades were observed that provided transparency into the valuation of these assets. There were $0.1 million and $4.5 million of transfers of financial assets from Level 1 to Level 2 during the three and nine months ended September 30, 2017, respectively, primarily related to corporate fixed income securities for which there were low volumes of recent trade activity observed. There were no transfers into Level 3 during the nine months ended September 30, 2017. There were no transfers of financial assets out of Level 3 during the three months ended September 30, 2017. There were $18.3 million of transfers of financial assets out of Level 3 during the nine months ended September 30, 2017, primarily related to ARS and corporate equity securities for which market trades were observed that provided transparency into the valuation of these assets.

Fair Value of Financial Instruments

The following reflects the fair value of financial instruments as of September 30, 2017 and December 31, 2016, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands).

	September 30, 2017				December 31, 2016
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	588,916	$	588,916	$	912,932	$	912,932
Cash segregated for regulatory purposes		25,175		25,175		73,235		73,235
Securities purchased under agreements to resell		458,335		458,335		248,588		248,588
Financial instruments owned		1,065,503		1,065,503		925,045		925,045
Available-for-sale securities		3,694,298		3,694,298		3,181,313		3,181,313
Held-to-maturity securities		3,554,765		3,572,646		3,038,405		3,040,554
Loans held for sale		166,335		166,335		228,588		228,588
Bank loans		6,783,078		6,776,966		5,591,190		5,633,804
Investments		112,649		112,649		133,563		133,563
Derivative contracts ⁽¹⁾		5,669		5,669		10,390		10,390

Financial liabilities:
Securities sold under agreements to repurchase	$	155,396	$	155,396	$	268,546	$	268,546
Bank deposits		12,883,961		12,147,029		11,527,483		11,092,185
Financial instruments sold, but not yet purchased		749,323		749,323		699,032		699,032
Derivative contracts ⁽²⁾		—		—		1,823		1,823
Federal Home Loan Bank advances		790,000		790,000		500,000		500,000
Borrowings		78,000		78,000		377,000		377,000
Senior notes		796,609		810,052		795,891		799,632
Debentures to Stifel Financial Capital Trusts		67,500		50,830		67,500		52,525

⁽¹⁾	Included in other assets in the consolidated statements of financial condition.

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

The following table presents the estimated fair values of financial instruments not measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 (in thousands):

	September 30, 2017
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash	$	572,388	$	572,388	$	—	$	—
Cash segregated for regulatory purposes		25,175		25,175		—		—
Securities purchased under agreements to resell		458,335		458,335		—		—
Held-to-maturity securities		3,572,646		—		3,380,094		192,552
Loans held for sale		166,335		—		166,335		—
Bank loans		6,776,966		—		6,776,966		—
Financial liabilities:
Securities sold under agreements to repurchase	$	155,396	$	—	$	155,396	$	—
Bank deposits		12,147,029		—		12,147,029		—
Federal Home Loan Bank advances		790,000		790,000		—		—
Borrowings		78,000		78,000		—		—
Senior notes		810,052		810,052		—		—
Debentures to Stifel Financial Capital Trusts		50,830		—		—		50,830

	December 31, 2016
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash	$	877,295	$	877,295	$	—	$	—
Cash segregated for regulatory purposes		73,235		73,235		—		—
Securities purchased under agreements to resell		248,588		227,983		20,605		—
Held-to-maturity securities		3,040,554		—		2,830,869		209,685
Loans held for sale		228,588		—		228,588		—
Bank loans		5,633,804		—		5,633,804		—
Financial liabilities:
Securities sold under agreements to repurchase	$	268,546	$	149,881	$	118,665	$	—
Bank deposits		11,092,185		—		11,092,185		—
Federal Home Loan Bank advances		500,000		500,000		—		—
Borrowings		377,000		377,000		—		—
Senior notes		799,632		799,632		—		—
Debentures to Stifel Financial Capital Trusts		52,525		—		—		52,525

The following, as supplemented by the discussion above, describes the valuation techniques used in estimating the fair value of our financial instruments as of September 30, 2017 and December 31, 2016.

Financial Assets

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at September 30, 2017 and December 31, 2016 approximate fair value due to their 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 agency mortgage-backed securities, asset-backed securities, consisting of collateralized loan obligation securities and corporate fixed income securities. 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 market value. Market 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, with similar remaining maturities, would be made and considering liquidity spreads applicable to each loan portfolio based on the secondary market.

Financial Liabilities

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at September 30, 2017 and December 31, 2016 approximate fair value due to the short-term nature.

Bank Deposits

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

Borrowings

The carrying amount of borrowings approximates fair value due to the relative short-term nature of such borrowings. In addition, Stifel Bank’s FHLB advances reflect terms that approximate current market rates for similar borrowings.

Senior Notes

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

Debentures to Stifel Financial Capital Trusts

The fair value of our trust preferred securities is based on the discounted value of contractual cash flows. We have assumed a discount rate based on the coupon achieved in our 4.250% senior notes due 2024.

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.