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

6 Months Ended

Jun. 30, 2011

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

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

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, 2011 and December 31, 2010 (in thousands):

	June 30, 2011
	Amortizedcost		Gross unrealizedgains (1)		Gross unrealized losses (1)			Estimatedfair value
Available-for-sale
State and municipal securities	$	57,750	$	3,029	$	(554	)	$	60,225
Mortgage-backed securities:
Agency		560,400		12,887		(637	)		572,650
Commercial		149,497		1,318		(668	)		150,147
Non-agency		24,539		591		(822	)		24,308
Corporate fixed income securities		237,340		2,425		(770	)		238,995
Asset-backed securities		27,341		628		(180	)		27,789
	$	1,056,867	$	20,878	$	(3,631	)	$	1,074,114
Held-to-maturity (2)
Corporate fixed income securities	$	55,593	$	0	$	0		$	55,593
Asset-backed securities		29,501		648		(2,775	)		27,374
Municipal auction rate securities		18,642		1,023		0			19,665
	$	103,736	$	1,671	$	(2,775	)	$	102,632
	December 31, 2010
	Amortizedcost		Gross unrealizedgains (1)		Gross unrealized losses (1)			Estimatedfair value
Available-for-sale
U.S. government securities	$	24,972	$	58	$	0		$	25,030
State and municipal securities		26,678		727		(1,062	)		26,343
Mortgage-backed securities:
Agency		692,922		6,938		(2,697	)		697,163
Commercial		66,912		1,212		(128	)		67,996
Non-agency		29,319		744		(790	)		29,273
Corporate fixed income securities		153,523		1,705		(327	)		154,901
Asset-backed securities		11,331		677		0			12,008
	$	1,005,657	$	12,061	$	(5,004	)	$	1,012,714
Held-to-maturity (2)
Municipal auction rate securities	$	43,719	$	3,803	$	(171	)	$	47,351
Asset-backed securities		8,921		198		(3,486	)		5,633
	$	52,640	$	4,001	$	(3,657	)	$	52,984

⁽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, 2011, available-for-sale securities with an aggregate par value of $30.0 million and $43.0 million, respectively, were called by the issuing agencies or matured, resulting in no gains or losses recorded in the consolidated statement of operations. Additionally, for the three and six months ended June 30, 2011, Stifel Bank received principal payments on mortgage-backed securities of $62.8 million and $121.2 million, respectively. During the three months ended June 30, 2011 and 2010, unrealized gains, net of deferred taxes, of $5.4 million and $4.2 million, respectively, were recorded in accumulated other comprehensive income in the consolidated statements of financial condition. During the six months ended June 30, 2011 and 2010, unrealized gains, net of deferred taxes, of $6.6 million and $7.5 million, respectively, were recorded in accumulated other comprehensive income in the consolidated statements of financial condition.

During the second quarter of 2011, we determined that we no longer had the intent to hold $32.9 million of held-to-maturity securities to maturity. As a result, we reclassified $27.8 million carrying value of municipal auction rate securities from held-to-maturity to available-for-sale.

During the second quarter of 2011, we reclassified $64.6 million of securities available for sale to securities held to maturity. Management determined that it has both the positive intent and ability to hold these securities to maturity. The reclassification of these securities was accounted for at fair value. On the date of transfer, the difference between the par value and the fair value of these securities resulted in a premium or discount that, under amortized cost accounting, will be amortized as a yield adjustment to interest income using the interest method. The unrealized holding gains or losses at the date of transfer will continue to be reported as a separate component of shareholders' equity in accumulated other comprehensive income, and will also be amortized over the remaining life of the securities as a yield adjustment to interest income using the interest method. There were no gains or losses recognized as a result of this transfer. 

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, 2011
	Available-for-sale				Held-to-maturity
	Amortizedcost		Estimatedfair value		Amortizedcost		Estimatedfair value
Debt securities
Within one year	$	20,956	$	21,529	$	0	$	0
After one year through three years		147,047		148,503		0		0
After three years through five years		73,238		72,788		15,126		15,126
After five years through ten years		10,485		11,204		50,068		50,068
After ten years		70,705		72,985		38,542		37,438
Mortgage-backed securities
After three years through five years		9,698		10,051		0		0
After five years through ten years		75,658		76,098		0		0
After ten years		649,080		660,956		0		0
	$	1,056,867	$	1,074,114	$	103,736	$	102,632

The carrying value of securities pledged as collateral to secure public deposits and other purposes was $121.0 million and $111.6 million at June 30, 2011 and December 31, 2010, respectively.

Certain investments in the available-for-sale portfolio at June 30, 2011, 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, 2011, was $190.2 million, which was 17.7% of our available-for-sale investment portfolio. The amortized cost basis of these investments was $193.8 million at June 30, 2011. The declines in the available-for-sale portfolio primarily resulted from changes in interest rates and liquidity issues that have had a pervasive impact on the market.

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, 2011 (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
State and municipal securities	$	(554	)	$	17,196	$	0		$	0	$	(554	)	$	17,196
Mortgage-backed securities:
Agency		(637	)		42,659		0			0		(637	)		42,659
Commercial		(668	)		48,933		0			0		(668	)		48,933
Non-agency		(216	)		6,795		(606	)		8,396		(822	)		15,191
Corporate fixed income securities		(770	)		54,745		0			0		(770	)		54,745
Asset-backed securities		(180	)		11,461		0			0		(180	)		11,461
	$	(3,025	)	$	181,789	$	(606	)	$	8,396	$	(3,631	)	$	190,185

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 income. 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.

Based on the evaluation, we recognized a credit-related OTTI of $1.5 million and $1.9 million in earnings for the three and six months ended June 30, 2011, respectively. If certain loss thresholds are exceeded, this bond would experience an event of default that would allow the senior class to liquidate the collateral securing this investment, which could adversely impact our valuation.

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 $3.6 million as of June 30, 2011 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.