Stifel Financial 8K Other Events | SF 20 Jun 18

Exhibit 99.1

Explanatory Note

Stifel Financial Corp. (the Company) is recasting certain financial information included in its Annual Report on Form 10-K, which was previously filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2018.

The Company adopted Financial Accounting Standards Board Accounting Standards Update No. 2016-18, “Statement of Cash Flows – Restricted Cash” (ASU 2016-18) on January 1, 2018, which adds or clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. The adoption of ASU 2016-18 is reflected in all periods presented of the recast consolidated statements of cash flows.

The Company has revised the following portions of its Annual Report on Form 10-K to reflect the adoption of ASU 2016-18:

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

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Item 8. Financial Statements and Supplementary Data

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Item 9A. Controls and Procedures

The revised portions of the Company’s Annual Report on Form 10-K described above are attached as Exhibit 99.1 hereto and incorporated herein by reference.

All other information in the Form 10-K remains unchanged. This Current Report on Form 8-K does not modify or update the disclosures contained in the Form 10-K in any way, nor does it reflect any subsequent information or events, other than as required to reflect the adoption of ASU 2016-18, as described above.

Without limitation to the foregoing, this Current Report on Form 8-K does not purport to update the MD&A for any information, uncertainties, risk, events or trends occurring, or known to management. Therefore, this Current Report on Form 8-K should be read in conjunction with the Form 10-K, and the registrant’s filings with the SEC subsequent to the filing of the Form 10-K, including its Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, as filed with the SEC on May 7, 2018. References to the exhibits attached hereto to the Form 10-K or parts thereof refer to the Form 10-K, except to the extent portions of such Form 10-K have been recast in Exhibit 99.1 to this Current Report on Form 8-K, in which case they refer to the applicable recast portion in Exhibit 99.1 to this Current Report on Form 8-K. The information contained in Exhibit 99.1 to this Current Report on Form 8-K is not an amendment to, or a restatement of, the Company’s Annual Report on Form 10-K.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Current Report on Form 8-K contains certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements in this report not dealing with historical results are forward-looking and are based on various assumptions. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among other things: statements regarding the Company’s goals, intentions, and expectations; business plans and growth strategies; the Company’s ability to integrate and manage its acquired businesses; estimates of the Company’s risks and future costs and benefits; forecasted demographic and economic trends relating to the Company’s industry; and other risk factors referred to from time to time in filings made by the Company with the SEC. Forward-looking statements speak only as to the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. The Company disclaims any intent or obligation to update these forward-looking statements.

ITEM 7. 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 for the year ended December 31, 2017 should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in this Current Report on Form 8-K.

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 nation’s leading wealth management and investment banking firms. 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 private client and institutional group businesses.

Stifel Financial Corp., through its wholly owned subsidiaries, is principally engaged in retail brokerage; securities trading; investment banking; investment advisory; retail, consumer, and commercial banking; and related financial services. Our major geographic area of concentration is throughout the United States, with a growing presence in the United Kingdom and Europe. Our principal customers are individual investors, corporations, municipalities, and institutions.

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 January 3, 2017, we completed the acquisition of City Financial Corporation and its wholly owned subsidiary, City Securities Corporation, (“City Securities”), an independent investment bank focused primarily on offering wealth management and public finance services across the Midwest. Purchase consideration consisted of cash and common stock.

On October 30, 2017, our company entered into a definitive agreement with B.C. Ziegler & Company to acquire its wealth management business, Ziegler Wealth Management, which has 57 private client advisors in 12 branches across five states that manage approximately $4.8 billion in client assets. The transaction is expected to close in the first quarter of 2018.

During the third quarter of 2017, we announced that our board of directors has authorized a dividend program under which the Company intends to pay a regular quarterly cash dividend to shareholders of its common stock. In connection with the dividend program, the board declared quarterly cash dividends on the Company’s common stock of $0.10 per share, payable September 15, 2017 and December 15, 2017, to shareholders of record at the close of business on September 1, 2017 and December 1, 2017, respectively. We recently announced our intention to increase our quarterly cash dividend to $0.12 per share starting in the first quarter of 2018.

Results for the year ended December 31, 2017

For the year ended December 31, 2017, net revenues increased 13.6% to a record $2.9 billion compared to $2.6 billion during the comparable period in 2016. This represents our 22^nd consecutive year of record net revenues. Net income available to common shareholders for the year ended December 31, 2017 increased 123.5% to $173.5 million, or $2.14 per diluted common share, compared to $77.6 million, or $1.00 per diluted common share, in 2016. For the year ended December 31, 2017, our Global Wealth Management and Institutional Group segments posted record net revenues and pre-tax income.

Net income for the year ended December 31, 2017 was impacted by 1) actions taken by the Company in response to the Tax Cuts and Jobs Act (“Tax Legislation”) that was enacted in the fourth quarter of 2017 to maximize tax savings; 2) merger-related charges; 3) litigation-related expenses associated with previously disclosed legal matters; 4) the revaluation of the Company’s deferred tax assets as a result of the enacted Tax Legislation; and 5) the favorable impact of the adoption of new accounting guidance during 2017 associated with stock-based compensation.

Our revenue growth for the year ended December 31, 2017 was primarily attributable to an increase in net interest income; higher asset management and service fees as a result of increased assets under management; and an increase in investment banking revenues. The increase in revenue growth over the comparable period in 2016 was offset by a decrease in brokerage revenues and other income. In addition, our revenue growth was positively impacted by the acquisitions of Eaton Partners and ISM during 2016 and City Securities in 2017.

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, 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 December 31, 2017, the key indicators of the markets’ performance, the NASDAQ, the S&P 500, and Dow Jones Industrial Average closed 28.2%, 19.4%, and 25.1% higher than their December 31, 2016, 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.

RESULTS OF OPERATIONS

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

	For the Year Ended December 31,						Percentage Change						As a Percentage of Net Revenues for the Year Ended December 31,
	2017		2016		2015		2017 vs. 2016			2016 vs. 2015			2017			2016			2015
Revenues:
Commissions	$	678,904	$	729,989	$	749,536		(7.0	)%		(2.6	)%		23.2	%		28.3	%		32.1	%
Principal transactions		396,826		475,428		389,319		(16.5	)		22.1			13.6			18.5			16.7
Investment banking		726,763		513,034		503,052		41.7			2.0			24.8			19.9			21.6
Asset management and service fees		702,064		582,789		493,761		20.5			18.0			24.0			22.7			21.2
Interest		454,381		294,332		179,101		54.4			64.3			15.5			11.4			7.7
Other income		37,524		46,798		62,224		(19.8	)		(24.8	)		1.3			1.8			2.6
Total revenues		2,996,462		2,642,370		2,376,993		13.4			11.2			102.4			102.6			101.9
Interest expense		70,030		66,874		45,399		4.7			47.3			2.4			2.6			1.9
Net revenues		2,926,432		2,575,496		2,331,594		13.6			10.5			100.0			100.0			100.0
Non-interest expenses:
Compensation and benefits		1,958,929		1,726,016		1,568,862		13.5			10.0			66.9			67.0			67.3
Occupancy and equipment rental		222,708		231,324		207,465		(3.7	)		11.5			7.6			9.0			8.9
Communication and office supplies		133,493		139,644		130,678		(4.4	)		6.9			4.6			5.4			5.6
Commissions and floor brokerage		44,132		44,315		42,518		(0.4	)		4.2			1.5			1.7			1.8
Other operating expenses		297,634		291,615		240,504		2.1			21.3			10.2			11.4			10.3
Total non-interest expenses		2,656,896		2,432,914		2,190,027		9.2			11.1			90.8			94.5			93.9
Income before income taxes		269,536		142,582		141,567		89.0			0.7			9.2			5.5			6.1
Provision for income taxes		86,665		61,062		49,231		41.9			24.0			3.0			2.3			2.1
Net income		182,871		81,520		92,336		124.3			(11.7	)		6.2			3.2			4.0
Preferred dividends		9,375		3,906		—		140.0		nm				0.3			0.2			—
Net Income available to common shareholders	$	173,496	$	77,614	$	92,336		123.5	%		(15.9	%)		5.9	%		3.0	%		4.0	%

NET REVENUES

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

	For the Year Ended December 31,						Percentage Change
	2017		2016		2015		2017 vs. 2016			2016 vs. 2015
Revenues:
Commissions	$	678,904	$	729,989	$	749,536		(7.0	)%		(2.6	)%
Principal transactions		396,826		475,428		389,319		(16.5	)		22.1
Brokerage revenues		1,075,730		1,205,417		1,138,855		(10.8	)		5.8
Investment banking:
Capital-raising		366,147		256,397		307,571		42.8			(16.6	)
Advisory		360,616		256,637		195,481		40.5			31.3
		726,763		513,034		503,052		41.7			2.0
Asset management and service fees		702,064		582,789		493,761		20.5			18.0
Net interest		384,351		227,458		133,702		69.0			70.1
Other income		37,524		46,798		62,224		(19.8	)		(24.8	)
Total net revenues	$	2,926,432	$	2,575,496	$	2,331,594		13.6	%		10.5	%

Year Ended December 31, 2017, Compared With Year Ended December 31, 2016

For the year ended December 31, 2017, net revenues increased 13.6% to a record $2.9 billion from $2.6 billion in 2016. This represents our 22^nd consecutive year of record net revenues. The primary factors impacting the growth in revenues were the strength of the investment banking franchise, the growth of our balance sheet that contributed to higher net interest income, and the increase in our fee-based accounts. The growth in our revenue was negatively impacted by the challenging environment for our brokerage business.

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 year ended December 31, 2017, commission revenues decreased 7.0% to $678.9 million from $730.0 million in 2016. The decrease is primarily attributable to lower volumes caused by the shift to fee-based accounts as a result of the Department of Labor’s fiduciary rule, lower volumes, and lower volatility experienced by our Institutional Group.

Principal transactions – For the year ended December 31, 2017, principal transactions revenues decreased 16.5% to $396.8 million from $475.4 million in 2016. The decrease is primarily attributable to a decline in trading volumes, low interest rates, a flattening yield curve, and low volatility.

Investment banking – Investment banking revenues include: (i) capital-raising revenues representing fees earned from the underwriting of debt and equity securities, and (ii) 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 year ended December 31, 2017, investment banking revenues increased 41.7%, to $726.8 million from $513.0 million in 2016. The increase is primarily attributable to an increase in capital raising revenues and advisory fees.

Capital-raising revenues increased 42.8% to $366.1 million for the year ended December 31, 2017, from $256.4 million in 2016. For the year ended December 31, 2017, equity capital-raising revenues increased 41.2% to $203.4 million from $144.1 million in 2016. For the year ended December 31, 2017, fixed income capital-raising revenues increased 44.9% to $162.7 million from $112.3 million in 2016.

Advisory fees increased 40.5% to $360.6 million for the year ended December 31, 2017, from $256.6 million in 2016. The increase is primarily attributable to an increase in the number of completed advisory transactions during 2017, as well as contributions made from Eaton fund placement franchise.

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 year ended December 31, 2017, asset management and service fee revenues increased 20.5% to $702.1 million from $582.8 million in 2016. The increase is primarily a result of an increase in the number and value of fee-based accounts and an increase of interest rates on fees earned on client cash. See “Asset management and service fees” in the Global Wealth Management segment discussion for information on the changes in asset management and service fees revenues.

Other income – For the year ended December 31, 2017, other income decreased 19.8% to $37.5 million from $46.8 million during 2016. The decrease is primarily a result of a decrease in loan origination fees from Stifel Bank, and lower investment gains.

Year Ended December 31, 2016, Compared With Year Ended December 31, 2015

Except as noted in the following discussion of variances, the underlying reasons for the increase in revenue can be attributed principally to the increase in asset management business and the growth of Stifel Bank in our Global Wealth Management segment and the increased number of revenue producers in our Institutional Group segment. The increase in revenues over 2015 is also attributed to the acquisitions of Barclays on December 4, 2015, Eaton Partners on January 4, 2016, and ISM on May 3, 2016, as well as the retained businesses from the Sterne Agee acquisition in 2015 (certain businesses were disposed of in July 2016). The results of operations of the acquired companies are included in our results prospectively from the date of their respective acquisition.

Commissions – For the year ended December 31, 2016, commission revenues decreased 2.6% to $730.0 million from $749.5 million in 2015. The decrease is primarily attributable to a decrease in mutual fund and equity transactions.

Principal transactions – For the year ended December 31, 2016, principal transactions revenues increased 22.1% to $475.4 million from $389.3 million in 2015. The increase from 2015 is primarily attributable to higher institutional fixed income brokerage revenues as a result of increased volumes.

Investment banking – For the year ended December 31, 2016, investment banking revenues increased 2.0%, to $513.0 million from $503.1 million in 2015. The increase is primarily attributable to an increase in advisory fees, which was positively impacted by the Eaton Partners acquisition, partially offset by a decrease in capital-raising revenues.

Capital-raising revenues decreased 16.6% to $256.4 million for the year ended December 31, 2016, from $307.6 million in 2015. For the year ended December 31, 2016, equity capital-raising revenues decreased 18.8% to $144.1 million from $177.5 million in 2015. For the year ended December 31, 2016, fixed income capital-raising revenues decreased 13.7% to $112.3 million from $130.1 million in 2015.

Advisory fees increased 31.3% to $256.6 million for the year ended December 31, 2016, from $195.5 million in 2015. The increase is primarily attributable to an increase in the number of completed advisory transactions during 2016.

Asset management and service fees – For the year ended December 31, 2016, asset management and service fee revenues increased 18.0% to $582.8 million from $493.8 million in 2015. The increase is primarily a result of an increase in the number and value of fee-based accounts. The growth of asset management and service fee revenues from the prior year were also attributable to the acquisition of Barclays in December 2015. See “Asset management and service fees” in the Global Wealth Management segment discussion for information on the changes in asset management and service fees revenues.

Other income – For the year ended December 31, 2016, other income decreased 24.8% to $46.8 million from $62.2 million in 2015. Other income primarily includes investment gains and losses and mortgage loan originations fees from Stifel Bank. The decrease in other income from 2015 is attributable to a gain recognized on the sale on a portion of an investment in 2015 that was not recurring. This was offset by a gain recognized on the extinguishment of $15.0 million of debentures during the third quarter of 2016.

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):

	For the Year Ended
	December 31, 2017							December 31, 2016							December 31, 2015
	Average Balance		Interest Income/ Expense		Average Interest Rate			Average Balance		Interest Income/ Expense		Average Interest Rate				Average Balance		Interest Income/ Expense		Average Interest Rate
Interest-earning assets:
Margin balances (Stifel)	$	1,251,324	$	37,218		2.97	%	$	1,280,791	$	32,147		2.51	%		$	540,889	$	22,421		4.15	%
Interest-earning assets (Stifel Bank) *		13,568,892		397,784		2.93	%		9,602,976		239,936		2.50	%			5,053,377		134,457		2.66	%
Financial instruments owned		1,060,272		17,563		1.66	%		1,047,264		18,965		1.81	%			829,866		17,757		2.14	%
Other (Stifel)				1,816							3,284								4,466
Total interest revenue	$	15,880,488	$	454,381		2.86	%	$	11,931,031	$	294,332		2.47	%		$	6,424,132	$	179,101		2.79	%
Interest-bearing liabilities:
Short-term borrowings (Stifel)	$	135,120	$	2,407		1.78	%	$	178,294	$	2,122		1.19	%		$	45,492	$	569		1.25	%
Interest-bearing liabilities (Stifel Bank) *		12,903,487		21,685		0.17	%		9,220,639		14,822		0.16	%			4,811,277		8,533		0.18	%
Stock loan (Stifel)		314,720		3,367		1.07	%		313,413		4,843		1.55	%			62,771		125		0.20	%
Senior notes (Stifel Financial Corp.)		850,759		35,338		4.15	%		775,000		36,217		4.67	%			482,671		25,695		5.32	%
Interest-bearing liabilities (Capital Trusts)		67,500		2,040		3.02	%		71,250		1,783		2.50	%			82,500		1,729		2.10	%
Other (Stifel)				5,193							7,087								8,748
Total interest expense	$	14,271,586		70,030		0.49	%	$	10,558,596		66,874		0.63	%		$	5,484,711		45,399		0.83	%
Net interest income/margin			$	384,351		2.42	%			$	227,458		1.91	%				$	133,702		2.08	%

*	See Distribution of Assets, Liabilities, and Shareholders’ Equity; Interest Rates and Interest Rate Differential table included in “Results of Operations – Global Wealth Management” for additional information on Stifel Bank’s average balances and interest income and expense.

Year Ended December 31, 2017, Compared With Year Ended December 31, 2016

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 year ended December 31, 2017, net interest income increased 69.0% to $384.4 million from $227.5 million in 2016.

For the year ended December 31, 2017, interest revenue increased 54.4% to $454.4 million from $294.3 million in 2016, principally as a result of a $157.8 million increase in interest revenue generated from the growth in interest-earning assets of Stifel Bank. The average interest-earning assets of Stifel Bank increased to $13.6 billion during the year ended December 31, 2017, compared to $9.6 billion during 2016 at average interest rates of 2.93% and 2.50%, respectively.

For the year ended December 31, 2017, interest expense increased 4.7% to $70.0 million from $66.9 million in 2016. The increase in interest expense is primarily attributable to an increase in interest expense paid on the interest-bearing liabilities of Stifel Bank.

Year Ended December 31, 2016, Compared With Year Ended December 31, 2015

Net interest income – For the year ended December 31, 2016, net interest income increased 70.1% to $227.5 million from $133.7 million in 2015.

For the year ended December 31, 2016, interest revenue increased 64.3% to $294.3 million from $179.1 million in 2015, principally as a result of a $105.5 million increase in interest revenue generated from the growth in interest-earning assets of Stifel Bank. The average interest-earning assets of Stifel Bank increased to $9.6 billion during the year ended December 31, 2016, compared to $5.1 billion in 2015 at average interest rates of 2.50% and 2.66%, respectively.

For the year ended December 31, 2016, interest expense increased 47.3% to $66.9 million from $45.4 million in 2015. The increase is primarily attributable to our July 2016 issuance of $200.0 million senior notes, the write-off of debt issuance costs as a result of the redemption of our company’s $150.0 million 5.375% senior notes in July 2016, and the December 2015 issuance of $300.0 million of 3.50% senior notes. The increase in interest expense is also attributable to an increase in interest expense paid on the interest-bearing liabilities of Stifel Bank.

NON-INTEREST EXPENSES

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

	For the Year Ended December 31,						Percentage Change
	2017		2016		2015		2017 vs. 2016			2016 vs. 2015
Non-interest expenses:
Compensation and benefits	$	1,958,929	$	1,726,016	$	1,568,862		13.5	%		10.0	%
Occupancy and equipment rental		222,708		231,324		207,465		(3.7	)		11.5
Communications and office supplies		133,493		139,644		130,678		(4.4	)		6.9
Commissions and floor brokerage		44,132		44,315		42,518		(0.4	)		4.2
Other operating expenses		297,634		291,615		240,504		2.1			21.3
Total non-interest expenses	$	2,656,896	$	2,432,914	$	2,190,027		9.2	%		11.1	%

Year Ended December 31, 2017, Compared With Year Ended December 31, 2016

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, 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 year ended December 31, 2017, compensation and benefits expense increased 13.5% to $2.0 billion from $1.7 billion in 2016. The increase is principally due to the following: 1) increased variable compensation as a result of increased revenue production, 2) an increase in fixed compensation for additional administrative support staff, and 3) an increase in deferred compensation expense as a result of the acceleration of the vesting of certain outstanding debenture awards and the modification of certain outstanding restricted stock units. These, and other actions described below, were taken by the Company in response to the Tax Cuts and Jobs Act (“Tax Legislation”) that was enacted in the fourth quarter of 2017 to maximize tax savings.

Compensation and benefits expense as a percentage of net revenues was 66.9% for the year ended December 31, 2017, compared to 67.0% for the year ended December 31, 2016.

Occupancy and equipment rental – For the year ended December 31, 2017, occupancy and equipment rental expense decreased 3.7% to $222.7 million from $231.3 million in 2016. The decrease is primarily due to lower equipment costs and rent expense.

Communications and office supplies – Communications expense includes costs for telecommunication and data transmission, primarily for obtaining third-party market data information. For the year ended December 31, 2017, communications and office

supplies expense decreased 4.4% to $133.5 million from $139.6 million in 2016. The decrease is primarily attributable to a decrease in quote equipment, telecommunication costs, and office supplies as a result of cost saving initiatives.

Commissions and floor brokerage – For the year ended December 31, 2017, commissions and floor brokerage expense decreased 0.4% to $44.1 million from $44.3 million in 2016. The decrease is primarily attributable to a decrease in trading volumes.

Other operating expenses – Other operating expenses primarily include license and registration fees, litigation-related expenses, which consist of amounts we reserve and/or payout for legal and regulatory matters, travel and entertainment, promotional, and professional service expenses.

For the year ended December 31, 2017, other operating expenses increased 2.1% to $297.6 million from $291.6 million in 2016. The increase is primarily attributable to an increase in the provision for loan losses, FDIC insurance expense, and license expense, offset partially by a decrease in legal, travel, and professional service expense.

Provision for income taxes – For the year ended December 31, 2017, our provision for income taxes was $86.7 million, representing an effective tax rate of 32.2%, compared to $61.1 million in 2016, representing an effective tax rate of 42.8%.

The provision for income taxes for the year ended December 31, 2017 was primarily impacted by 1) actions taken by the Company in response to the Tax Legislation that was enacted in the fourth quarter of 2017 to maximize tax savings; 2) the favorable impact of the adoption of new accounting guidance during 2017 associated with stock-based compensation; and 3) the revaluation of the Company’s deferred tax assets as a result of the enacted Tax Legislation.

Year Ended December 31, 2016, Compared With Year Ended December 31, 2015

Compensation and benefits – For the year ended December 31, 2016, compensation and benefits expense increased 10.0% to $1.7 billion from $1.6 billion in 2015. The increase is principally due to the following: 1) increased variable compensation as a result of increased revenue production, and 2) an increase in fixed compensation for additional administrative support staff.

Compensation and benefits expense for the year ended December 31, 2016, includes a non-cash charge of $58.6 million (pre-tax) related to the expensing of certain restricted stock awards granted to employees of Barclays. During 2016, the Company’s Board of Directors removed the continuing service requirements associated with restricted stock units that were granted to certain employees of Barclays in December 2015. As a result of the modification, the awards were expensed at date of modification. The fair value of the awards is based upon the closing price of our company’s common stock on the date of the grant of the awards.

Compensation and benefits expense as a percentage of net revenues was 67.0% for the year ended December 31, 2016, compared to 67.3% for the year ended December 31, 2015.

Occupancy and equipment rental – For the year ended December 31, 2016, occupancy and equipment rental expense increased 11.5% to $231.3 million from $207.5 million in 2015. The increase is primarily due to the increase in rent and depreciation expense.

Communications and office supplies – For the year ended December 31, 2016, communications and office supplies expense increased 6.9% to $139.6 million from $130.7 million in 2015. The increase is primarily attributable to an increase in quote and communication equipment expense.

Commissions and floor brokerage – For the year ended December 31, 2016, commissions and floor brokerage expense increased 4.2% to $44.3 million from $42.5 million in 2015. The increase is primarily attributable to an increase in trade execution costs.

Other operating expenses – For the year ended December 31, 2016, other operating expenses increased 21.3% to $291.6 million from $240.5 million in 2015. The increase is primarily attributable to an increase in legal and FDIC insurance expense, as well as the provision for loan losses at Stifel Bank. During the year ended December 31, 2016, we increased our legal reserves for previously disclosed legal matters. See Item 3, “Legal Proceedings,” in the Company’s Form 10-K for a discussion of our legal matters.

Provision for income taxes – For the year ended December 31, 2016, our provision for income taxes was $61.1 million, representing an effective tax rate of 42.8%, compared to $49.2 million in 2015, representing an effective tax rate of 34.8%.

Certain settlements or judgments associated with the Company’s disclosed matters are not deductible for tax purposes to the extent they constitute penalties. The previously disclosed settlement was not deductible and negatively impacted the Company’s provision for income taxes during 2016.

SEGMENT PERFORMANCE FROM CONTINUING OPERATIONS

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. 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 FDIC-insured deposit accounts to customers of our broker-dealer subsidiaries and to the general public.

The success of our Global Wealth Management segment is dependent upon the quality of our products, services, financial advisors, and support personnel, including our ability to attract, retain, and motivate a sufficient number of these associates. We face competition for qualified associates from major financial services companies, including other brokerage firms, insurance companies, banking institutions, and discount brokerage firms. Segment revenue growth, operating income, and segment pre-tax operating margin are used to evaluate and measure segment performance by our management team in deciding how to allocate resources and in assessing performance.

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 success of our Institutional Group segment is dependent upon the quality of our personnel, the quality and selection of our investment products and services, pricing (such as execution pricing and fee levels), and reputation. Segment operating income and segment pre-tax operating margin are used to evaluate and measure segment performance by our management team in deciding how to allocate resources and in assessing performance.

The Other segment includes interest income from stock borrow activities, unallocated interest expense, interest income and gains and losses from investments held, amortization of stock-based awards, compensation expense associated with the expensing of restricted stock awards with no continuing service requirements in conjunction with recent acquisitions and the actions taken by the Company in response to the Tax Regulation enacted in the fourth quarter of 2017, 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 and acquisition charges.

Results of Operations – Global Wealth Management

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

	For the Year Ended December 31,						Percentage Change						As a Percentage of Net Revenues for the Year Ended December 31,
		2017		2016		2015	2017 vs. 2016			2016 vs. 2015				2017		2016		2015
Revenues:
Commissions	$	474,623	$	491,214	$	504,206		(3.4	)%		(2.6	)%		26.0	%	31.4	%	36.6	%
Principal transactions		186,711		179,421		148,475		4.1			20.8			10.2		11.5		10.8
Asset management and service fees		701,756		581,862		492,814		20.6			18.1			38.5		37.2		35.8
Interest		444,507		279,631		164,793		59.0			69.7			24.4		17.9		12.0
Investment banking		40,466		42,187		43,687		(4.1	)		(3.4	)		2.2		2.7		3.2
Other income		18,248		19,942		33,742		(8.5	)		(40.9	)		1.1		1.3		2.4
Total revenues		1,866,311		1,594,257		1,387,717		17.1			14.9			102.4		102.0		100.8
Interest expense		44,093		30,847		10,404		42.9			196.5			2.4		2.0		0.8
Net revenues		1,822,218		1,563,410		1,377,313		16.6			13.5			100.0		100.0		100.0
Non-interest expenses:
Compensation and benefits		911,986		870,577		781,573		4.8			11.4			50.0		55.7		56.7
Occupancy and equipment rental		101,889		97,603		82,015		4.4			19.0			5.6		6.2		6.0
Communication and office supplies		58,650		55,344		46,825		6.0			18.2			3.2		3.5		3.4
Commissions and floor brokerage		20,153		19,347		17,431		4.2			11.0			1.1		1.2		1.3
Other operating expenses		102,634		90,221		67,343		13.8			34.0			5.7		5.9		4.9
Total non-interest expenses		1,195,312		1,133,092		995,187		5.5			13.9			65.6		72.5		72.3
Income before income taxes	$	626,906	$	430,318	$	382,126		45.7	%		12.6	%		34.4	%	27.5	%	27.7	%

	December 31,
		2017	2016	2015
Branch offices (actual)		355	360	361
Financial advisors (actual)		2,132	2,157	2,164
Independent contractors (actual) ⁽¹⁾		112	123	719

⁽¹⁾	On July 1, 2016, we sold the independent contractor business acquired with the Sterne Agee transaction in June 2015. As of December 31, 2015, there were 591 independent contractors included in the disposed business.

Year Ended December 31, 2017, Compared With Year Ended December 31, 2016

NET REVENUES

For the year ended December 31, 2017, Global Wealth Management net revenues increased 16.6% to a record $1.8 billion from $1.6 billion in 2016. The increase in net revenues for the year ended December 31, 2017, over 2016, is primarily attributable to an increase in net interest revenues, as a result of the growth of interest-earning assets at Stifel Bank; the growth in asset management and service fees; and an increase in principal transaction revenues. The increase in net revenues was partially offset by a decrease in commission revenues, investment banking revenues, and other income. Net revenues were also negatively impacted by the sale of the Sterne Agee independent contractor business during the third quarter of 2016.

Commissions – For the year ended December 31, 2017, commission revenues decreased 3.4% to $474.6 million from $491.2 million in 2016. The decrease is primarily attributable to a decrease in agency transactions in insurance products, OTC and listed equity securities, and mutual funds as a result of lower trading volumes impacting the environment for both us and the industry, as clients are migrating their assets to fee-based accounts.

Principal transactions – For the year ended December 31, 2017, principal transactions revenues increased 4.1% to $186.7 million from $179.4 million in 2016. The increase is primarily attributable to an increase in corporate debt products as a result of higher trading volumes and the current interest rate environment. The increase is partially offset by a decrease in corporate equity and municipal debt products and a decrease in trading profits from 2016.

Asset management and service fees – For the year ended December 31, 2017, asset management and service fees increased 20.6% to $701.8 million from $581.9 million in 2016. The increase is primarily a result of an increase in assets under management in our fee-based accounts and, to a lesser extent, from the increase in fed funds rates that benefit our client cash deposits held at third-party banks. Fee-based account revenues are primarily billed based on values as of the prior period end.

The value of assets in fee-based accounts at December 31, 2017, increased 24.7% to $87.6 billion from $70.2 billion at December 31, 2016.

Interest revenue – For the year ended December 31, 2017, interest revenue increased 59.0% to $444.5 million from $279.6 million in 2016. The increase is primarily due to the growth of the interest-earning assets of Stifel Bank. See “Net Interest Income – Stifel Bank” below for a further discussion of the changes in net interest income.

Investment banking – Investment banking, which represents sales credits for investment banking underwritings, decreased 4.1% to $40.5 million for the year ended December 31, 2017, from $42.2 million in 2016. The decrease is primarily attributable to a decrease in corporate debt sales credits as compared to 2016. The decrease is partially offset by an increase in corporate equity sales credits from 2016.

Other income – For the year ended December 31, 2017, other income decreased 8.5% to $18.2 million from $19.9 million 2016. The decrease is primarily attributable to a decline in mortgage fee revenues from loan originations at Stifel Bank.

Interest expense – For the year ended December 31, 2017, interest expense increased 42.9% to $44.1 million from $30.8 million in 2016. The increase is primarily attributable to higher interest expense on the interest-bearing liabilities of Stifel Bank. See “Net Interest Income – Stifel Bank” below for a further discussion of the changes in net interest income.

NON-INTEREST EXPENSES

For the year ended December 31, 2017, Global Wealth Management non-interest expenses increased 5.5% to $1.2 billion from $1.1 billion in 2016.

Compensation and benefits – For the year ended December 31, 2017, compensation and benefits expense increased 4.8% to $912.0 million from $870.6 million in 2016. The increase is principally due to increased variable compensation as a result of increased production. Compensation and benefits expense as a percentage of net revenues was 50.0% for the year ended December 31, 2017, compared to 55.7% in 2016. The compensation and benefits ratio for the year ended December 31, 2017 was positively impacted by the sale of the Sterne Agee independent contractor business during the third quarter of 2016, which had a different pay structure than our legacy private client business.

Occupancy and equipment rental – For the year ended December 31, 2017, occupancy and equipment rental expense increased 4.4% to $101.9 million from $97.6 million in 2016. The increase is primarily attributable to higher occupancy costs and an increase in maintenance expense, partially offset by a decrease in data processing expenses.

Communications and office supplies – For the year ended December 31, 2017, communications and office supplies expense increased 6.0% to $58.7 million from $55.3 million in 2016. The increase is primarily attributable to higher communication and quote equipment, partially offset by a decline in telecommunications expenses.

Commissions and floor brokerage – For the year ended December 31, 2017, commissions and floor brokerage expense increased 4.2% to $20.2 million from $19.3 million in 2016.

Other operating expenses – For the year ended December 31, 2017, other operating expenses increased 13.8% to $102.6 million from $90.2 million in 2016. The increase in other operating expenses is primarily attributable to an increase in the provision for loan losses and FDIC insurance at Stifel Bank, partially offset by a decrease in travel costs.

INCOME BEFORE INCOME TAXES

For the year ended December 31, 2017, income before income taxes increased 45.7% to $626.9 million from $430.3 million in 2016. Profit margins (income before income taxes as a percent of net revenues) have increased to 34.4% for the year ended December 31, 2017 from 27.5% in 2016. The improvement in profit margin from 2016 is a result of an increase in revenues, as well as our focus on expense management.

Year Ended December 31, 2016, Compared With Year Ended December 31, 2015

NET REVENUES

For the year ended December 31, 2016, Global Wealth Management net revenues increased 13.5% to $1.6 billion from $1.4 billion in 2015. The increase in net revenues for the year ended December 31, 2016, over 2015, is primarily attributable to an increase in net interest revenues, as a result of the growth of interest-earning assets at Stifel Bank; the growth in asset management and service fees, as a result of the acquisitions of Sterne Agee in June 2015 and Barclays in December 2015; and an increase in principal transaction revenues. The increase in net revenues was partially offset by a decrease in other income and commission revenues.

Commissions – For the year ended December 31, 2016, commission revenues decreased 2.6% to $491.2 million from $504.2 million in 2015. The decrease is primarily attributable to a decrease in agency transactions in mutual funds and insurance products as a result of lower trading volumes impacting the environment for both us and the industry, as clients are migrating their assets to fee-based accounts.

Principal transactions – For the year ended December 31, 2016, principal transactions revenues increased 20.8% to $179.4 million from $148.5 million in 2015. The increase is primarily attributable to an increase in fixed income products as a result of higher trading volumes and the current interest rate environment.

Asset management and service fees – For the year ended December 31, 2016, asset management and service fees increased 18.1% to $581.9 million from $492.8 million in 2015. The increase is primarily a result of an increase in assets under management in our fee-based accounts. Fee-based account revenues are billed based on values as of the prior period end.

The value of assets in fee-based accounts at December 31, 2016, increased 12.0% to $70.2 billion from $62.7 billion at December 31, 2015. Asset management and service fee revenues were positively impacted by the acquisition of Barclays in December 2015.

Interest revenue– For the year ended December 31, 2016, interest revenue increased 69.7% to $279.6 million from $164.8 million in 2015. The increase is primarily due to the growth of the interest-earning assets of Stifel Bank. See “Net Interest Income – Stifel Bank” below for a further discussion of the changes in net revenues.

Investment banking – Investment banking decreased 3.4% to $42.2 million for the year ended December 31, 2016, from $43.7 million in 2015. The decrease is primarily attributable to a decrease in corporate equity sales credits from 2015.

Other income – For the year ended December 31, 2016, other income decreased 40.9% to $19.9 million from $33.7 million in 2015. The decrease is primarily attributable to the recognition of a gain on the sale on a portion of an investment in 2015 that was not recurring, offset by an increase in mortgage fees from loan originations at Stifel Bank.

Interest expense – For the year ended December 31, 2016, interest expense increased 196.5% to $30.8 million from $10.4 million in 2015. The increase is primarily attributable to higher interest expense on the interest-bearing liabilities of Stifel Bank, which is driven by an increase in Federal Home Loan Bank advances during 2016.

NON-INTEREST EXPENSES

For the year ended December 31, 2016, Global Wealth Management non-interest expenses increased 13.9% to $1.1 billion from $995.2 million in 2015.

Compensation and benefits – For the year ended December 31, 2016, compensation and benefits expense increased 11.4% to $870.6 million from $781.6 million in 2015. The increase is principally due to increased variable compensation as a result of increased production and fixed compensation for the additional administrative support staff. Compensation and benefits expense as a percentage of net revenues was 55.7% for the year ended December 31, 2016, compared to 56.7% in 2015.

Occupancy and equipment rental – For the year ended December 31, 2016, occupancy and equipment rental expense increased 19.0% to $97.6 million from $82.0 million in 2015. The increase is primarily due to an increase in rent expense as a result of our acquisition of Barclays in 2015.

Communications and office supplies – For the year ended December 31, 2016, communications and office supplies expense increased 18.2% to $55.3 million from $46.8 million in 2015. The increase is primarily attributable to higher communication and quote equipment and internet expenses as a result of the continued expansion of the segment.

Commissions and floor brokerage – For the year ended December 31, 2016, commissions and floor brokerage expense increased 11.0% to $19.3 million from $17.4 million in 2015. The increase is primarily attributable to an increase in clearing fees.

Other operating expenses – For the year ended December 31, 2016, other operating expenses increased 34.0% to $90.2 million from $67.3 million in 2015. The increase in other operating expenses is primarily attributable to an increase in FDIC insurance, the provision for loan losses as a result of a growth in the loan portfolio at Stifel Bank, higher travel expenses, and an increase in legal expenses and professional service fees.

INCOME BEFORE INCOME TAXES

For the year ended December 31, 2016, income before income taxes increased 12.6% to $430.3 million from $382.1 million in 2015. Profit margins (income before income taxes as a percent of net revenues) were impacted by an increase in revenues offset by higher operating expenses..

The information required by Securities Act Guide 3 – Statistical Disclosure By Bank Holding Company is presented below:

I.	Distribution of Assets, Liabilities, and Shareholders’ Equity; Interest Rates and Interest Rate Differential

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):

	For the Year Ended
	December 31, 2017							December 31, 2016
	Average Balance		Interest Income/ Expense		Average Interest Rate			Average Balance		Interest Income/ Expense		Average Interest Rate
Assets:
Interest-bearing cash and federal funds sold	$	217,329	$	2,228		1.03	%	$	583,564	$	3,021		0.52	%
State and municipal securities (tax-exempt) ⁽¹⁾		75,022		2,212		2.95			75,692		2,704		3.57
Mortgage-backed securities		1,914,896		41,657		2.18			1,912,867		37,459		1.96
Corporate fixed income securities		1,001,723		23,141		2.31			677,215		15,092		2.23
Asset-backed securities		3,786,464		120,721		3.19			1,942,999		52,199		2.69
Federal Home Loan Bank (“FHLB”) and other capital stock		60,663		1,741		2.87			43,376		1,538		3.55
Loans ⁽²⁾
Securities-based loans		1,747,544		51,316		2.94			1,430,625		35,028		2.45
Commercial and industrial		2,106,480		81,361		3.86			1,419,911		50,714		3.57
Consumer		39,062		1,667		4.27			53,325		1,582		2.97
Residential real estate		2,348,137		62,492		2.66			1,179,024		31,783		2.70
Commercial real estate		80,393		3,036		3.78			82,370		2,375		2.88
Home equity lines of credit		14,873		566		3.81			14,690		420		2.86
Construction and land		15,366		619		4.03			8,209		280		3.41
Loans held for sale		160,940		5,027		3.12			179,109		5,741		3.21
Total interest-earning assets ⁽³⁾	$	13,568,892	$	397,784		2.93	%	$	9,602,976	$	239,936		2.50	%
Cash and due from banks		12,217							5,843
Other non-interest-earning assets		324,199							255,052
Total assets	$	13,905,308						$	9,863,871
Liabilities and stockholders’ equity:
Deposits:
Money market	$	11,904,772	$	12,409		0.10	%	$	8,438,339	$	6,898		0.08	%
Time deposits		2,678		59		2.20			8,775		153		1.75
Demand deposits		205,240		193		0.09			168,549		280		0.17
Savings		4		—		—			18		—		—
FHLB advances		774,564		8,305		1.07			588,573		6,777		1.15
Other borrowings		16,229		719		4.43			16,385		714		4.36
Total interest-bearing liabilities ⁽³⁾	$	12,903,487	$	21,685		0.17	%	$	9,220,639	$	14,822		0.16	%
Non-interest-bearing deposits		15,463							14,355
Other non-interest-bearing liabilities		5,149							27,569
Total liabilities	$	12,924,099						$	9,262,563
Stockholders’ equity		981,209							601,308
Total liabilities and stockholders’ equity	$	13,905,308						$	9,863,871
Net interest income/spread			$	376,099		2.76	%			$	225,114		2.34	%
Net interest margin						2.77	%						2.34	%

⁽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.

	For the Year Ended December 31, 2015
	Average Balance		Interest Income/ Expense		Average Interest Rate
Assets:
Interest-bearing cash and federal funds sold	$	65,827	$	163		0.25	%
State and municipal securities (tax-exempt) ⁽¹⁾		76,257		2,706		3.55
Mortgage-backed securities		1,093,898		25,206		2.30
Corporate fixed income securities		307,047		6,694		2.18
Asset-backed securities		863,137		19,181		2.22
Federal Home Loan Bank (“FHLB”) and other capital stock		20,776		722		3.48
Loans ⁽²⁾
Securities-based loans		948,840		21,063		2.22
Commercial and industrial		1,048,703		34,783		3.32
Consumer		23,158		378		1.63
Residential real estate		395,775		16,869		4.26
Commercial real estate		24,091		1,046		4.34
Home equity lines of credit		12,233		334		2.73
Construction and land		803		26		3.24
Loans held for sale		172,832		5,286		3.06
Total interest-earning assets ⁽³⁾	$	5,053,377	$	134,457		2.66	%
Cash and due from banks		2,985
Other non-interest-earning assets		190,239
Total assets	$	5,246,601
Liabilities and stockholders’ equity:
Deposits:
Money market	$	4,500,268	$	6,360		0.14	%
Time deposits		39,278		860		2.19
Demand deposits		76,262		42		0.06
Savings		17		—		0.05
FHLB advances		178,925		551		0.31
Other borrowings		16,527		720		4.36
Total interest-bearing liabilities ⁽³⁾	$	4,811,277	$	8,533		0.18	%
Non-interest-bearing deposits		19,004
Other non-interest-bearing liabilities		14,628
Total liabilities	$	4,844,909
Stockholders’ equity		401,692
Total liabilities and stockholders’ equity	$	5,246,601
Net interest income/spread			$	125,924		2.48	%
Net interest margin						2.49	%

⁽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.

For the year ended December 31, 2017, interest revenue for Stifel Bank of $397.8 million was generated from weighted-average interest-earning assets of $13.6 billion at a weighted-average interest rate of 2.93%. For the year ended December 31, 2016, interest revenue for Stifel Bank of $239.9 million was generated from weighted-average interest-earning assets of $9.6 billion at a weighted-average interest rate of 2.50%. For the year ended December 31, 2015, interest revenue for Stifel Bank of $134.5 million was generated from weighted-average interest-earning assets of $5.1 billion at a weighted-average interest rate of 2.66%. 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, time deposits, FHLB advances, and other borrowings. The average balance of interest-bearing liabilities at Stifel Bank during the year ended December 31, 2017, was $12.9 billion at a weighted-average interest rate of 0.17%. The average balance of interest-bearing liabilities at Stifel Bank during the year ended December 31, 2016, was $9.2 billion at a weighted-average interest rate of 0.16%. The average balance of interest-bearing liabilities at Stifel Bank during the year ended December 31, 2015, was $4.8 billion at a weighted-average interest rate of 0.18%.

The growth in Stifel Bank has been primarily funded by the growth in deposits associated with brokerage customers of Stifel and, to a lesser extent, with FHLB advances. At December 31, 2017, the balance of Stifel brokerage customer deposits at Stifel Bank was $13.4 billion compared to $11.5 billion at December 31, 2016.

The following table sets forth an analysis of the effect on net interest income of volume and rate changes for the periods indicated (in thousands):

	Year Ended December 31, 2017 Compared to Year Ended December 31, 2016									Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
	Increase (decrease) due to:									Increase (decrease) due to:
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Federal funds sold	$	(2,621	)	$	1,828		$	(793	)	$	2,510		$	348		$	2,858
State and municipal securities:
Tax-exempt		(24	)		(468	)		(492	)		(22	)		20			(2	)
Mortgage-backed securities		40			4,158			4,198			15,327			(3,074	)		12,253
Corporate fixed income securities		7,478			571			8,049			8,246			152			8,398
Asset-backed securities		57,253			11,269			68,522			28,293			4,725			33,018
FHLB and other capital stock		389			(186	)		203			801			15			816
Loans
Securities-based loans		8,574			7,714			16,288			11,610			2,355			13,965
Commercial and industrial		26,230			4,417			30,647			13,089			2,842			15,931
Consumer		(133	)		218			85			740			464			1,204
Residential real estate		31,109			(400	)		30,709			18,316			(3,402	)		14,914
Commercial real estate		(56	)		717			661			1,543			(214	)		1,329
Home equity lines of credit		5			141			146			70			16			86
Construction and land		281			58			339			254			—			254
Loans held for sale		(571	)		(143	)		(714	)		163			292			455
	$	127,954		$	29,894		$	157,848		$	100,940		$	4,539		$	105,479
Interest expense:
Deposits:
Money market	$	3,301		$	2,210		$	5,511		$	3,982		$	(3,444	)	$	538
Time deposits		(148	)		54			(94	)		(561	)		(146	)		(707	)
Demand deposits		88			(175	)		(87	)		89			149			238
FHLB advances		1,953			(425	)		1,528		��	2,835			3,391			6,226
Other borrowings		(7	)		12			5			(6	)		—			(6	)
	$	5,187		$	1,676		$	6,863		$	6,339		$	(50	)	$	6,289

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.

II.	Investment Portfolio

The following tables provide a summary of the amortized cost and fair values of the available-for-sale and held-to-maturity securities for the periods indicated (in thousands):

	December 31, 2017
	Amortized Cost		Gross Unrealized Gains ⁽¹⁾		Gross Unrealized Losses ⁽¹⁾			Estimated Fair Value
Available-for-sale securities
U.S. government agency securities	$	5,022	$	—	$	(39	)	$	4,983
State and municipal securities		74,691		—		(4,132	)		70,559
Mortgage-backed securities:
Agency		308,409		102		(2,981	)		305,530
Commercial		75,548		28		(3,088	)		72,488
Non-agency		1,568		—		—			1,568
Corporate fixed income securities		1,213,262		3,832		(5,652	)		1,211,442
Asset-backed securities		2,098,958		12,877		(4,897	)		2,106,938
	$	3,777,458	$	16,839	$	(20,789	)	$	3,773,508
Held-to-maturity securities ⁽²⁾
Mortgage-backed securities:
Agency	$	1,334,833	$	13,621	$	(16,208	)	$	1,332,246
Commercial		58,971		1,313		—			60,284
Asset-backed securities		2,264,283		15,526		(1,862	)		2,277,947
Corporate fixed income securities		40,011		27		(37	)		40,001
	$	3,698,098	$	30,487	$	(18,107	)	$	3,710,478

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains ⁽¹⁾		Gross Unrealized Losses ⁽¹⁾			Estimated Fair Value
Available-for-sale securities
U.S. government agency securities	$	4,213	$	2	$	(18	)	$	4,197
State and municipal securities		76,066		—		(3,576	)		72,490
Mortgage-backed securities:
Agency		340,738		298		(2,304	)		338,732
Commercial		77,417		59		(4,703	)		72,773
Non-agency		2,032		—		(140	)		1,892
Corporate fixed income securities		830,695		1,418		(8,602	)		823,511
Asset-backed securities		1,858,929		9,857		(1,068	)		1,867,718
	$	3,190,090	$	11,634	$	(20,411	)	$	3,181,313
Held-to-maturity securities ⁽²⁾
Mortgage-backed securities:
Agency	$	1,567,758	$	14,537	$	(17,037	)	$	1,565,258
Commercial		59,581		1,786		—			61,367
Non-agency		688		—		(13	)		675
Asset-backed securities		1,370,300		6,242		(3,396	)		1,373,146
Corporate fixed income securities		40,078		30		—			40,108
	$	3,038,405	$	22,595	$	(20,446	)	$	3,040,554

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

⁽²⁾	Held-to-maturity securities are carried on 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.

	December 31, 2015
	Amortized Cost		Gross Unrealized Gains ⁽¹⁾		Gross Unrealized Losses ⁽¹⁾			Estimated Fair Value
Available-for-sale securities
U.S. government agency securities	$	1,700	$	1	$	(3	)	$	1,698
State and municipal securities		75,953		28		(1,814	)		74,167
Mortgage-backed securities:
Agency		306,309		125		(1,541	)		304,893
Commercial		11,177		134		(1	)		11,310
Non-agency		2,679		2		(163	)		2,518
Corporate fixed income securities		321,017		743		(2,352	)		319,408
Asset-backed securities		922,563		774		(7,424	)		915,913
	$	1,641,398	$	1,807	$	(13,298	)	$	1,629,907
Held-to-maturity securities ⁽²⁾
Mortgage-backed securities:
Agency	$	1,257,808	$	23,346	$	(3,105	)	$	1,278,049
Commercial		59,521		1,832		—			61,353
Non-agency		929		—		(15	)		914
Asset-backed securities		496,996		2,076		(4,139	)		494,933
Corporate fixed income securities		40,145		—		(396	)		39,749
	$	1,855,399	$	27,254	$	(7,655	)	$	1,874,998

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

⁽²⁾	Held-to-maturity securities are carried on 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.

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; current market conditions; and our company’s ability and intent to hold the investment until its value recovers or the securities mature.

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. Based on the evaluation, we did not recognize any credit-related OTTI during the years ended December 31, 2017, 2016, and 2015, respectively.

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 of $38.9 million related to our investment portfolio, as of December 31, 2017, are attributable to changes in market interest rates. 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.

The maturities and related weighted-average yields of available-for-sale and held-to-maturity securities at December 31, 2017, are as follows (in thousands, except rates):

	Within 1 Year			1-5 Years			5-10 Years			After 10 Years			Total
Available-for-sale: ⁽¹⁾
U.S. government agency securities	$	1,722		$	3,261		$	—		$	—		$	4,983
State and municipal securities		274			84			18,745			51,456			70,559
Mortgage-backed securities:
Agency		—			—			338			305,192			305,530
Commercial		—			—			55,486			17,002			72,488
Non-agency		—			—			—			1,568			1,568
Corporate fixed income securities		182,025			542,480			486,937			—			1,211,442
Asset-backed securities		—			—			417,081			1,689,857			2,106,938
	$	184,021		$	545,825		$	978,587		$	2,065,075		$	3,773,508
Held-to-maturity:
Mortgage-backed securities:
Agency	$	—		$	—		$	143,715		$	1,191,118		$	1,334,833
Commercial		—			58,971			—			—			58,971
Asset-backed securities		—			—			403,840			1,860,443			2,264,283
Corporate fixed income securities		40,011			—			—			—			40,011
	$	40,011		$	58,971		$	547,555		$	3,051,561		$	3,698,098
Weighted-average yield ⁽²⁾		2.20	%		1.98	%		2.92	%		2.87	%		2.82	%

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

⁽²⁾	The weighted-average yield is computed using the expected maturity of each security weighted based on the amortized cost of each security.

We did not hold securities from any single issuer that exceeded ten percent of our shareholders’ equity at December 31, 2017.

III.	Loan Portfolio

The following table presents the balance and associated percentage of each major loan category in Stifel Bank’s loan portfolio held for investment for the periods indicated (in thousands):

				As of December 31,
	2017			2016			2015			2014			2013
Residential real estate	$	2,593,576		$	2,161,400		$	429,132		$	432,646		$	372,789
Commercial and industrial		2,437,938			1,710,399			1,216,656			896,853			552,333
Securities-based loans		1,819,206			1,614,033			1,388,953			732,799			508,866
Commercial real estate		116,258			78,711			92,623			15,902			12,284
Consumer		24,508			45,391			36,846			25,489			618
Home equity lines of credit		15,039			15,008			12,475			12,945			16,327
Construction and land		7,896			12,623			3,899			—			490
Total gross loans		7,014,421			5,637,565			3,180,584			2,116,634			1,463,707
Unamortized loan premium/(discount), net		788			858			(5,296	)		(30,533	)		(45,100	)
Loans in process		(856	)		(49	)		(419	)		1,681			334
Unamortized loan origination costs, net		872			(2,021	)		(1,567	)		(1,631	)		(1,920	)
Allowance for loan losses		(67,466	)		(45,163	)		(29,787	)		(20,731	)		(12,668	)
	$	6,947,759		$	5,591,190		$	3,143,515		$	2,065,420		$	1,404,353

The maturities of the loan portfolio at December 31, 2017, are as follows (in thousands):

		Within 1 Year				1-5 Years				Over 5 Years				Total
		$	2,023,037			$	1,710,765			$	3,280,619			$	7,014,421

The sensitivity of loans with maturities in excess of one year at December 31, 2017, is as follows (in thousands):

	1-5 Years		Over 5 Years		Total
Variable or adjustable rate loans	$	1,637,995	$	3,170,703	$	4,808,698
Fixed rate loans		72,770		109,916		182,686
	$	1,710,765	$	3,280,619	$	4,991,384

Changes in the allowance for loan losses at Stifel Bank were as follows (in thousands):

	Year Ended December 31,
		2017			2016			2015			2014			2013
Allowance for loan losses, beginning of period	$	45,163		$	29,787		$	20,731		$	12,668		$	8,145
Provision for loan losses		25,320			15,659			9,069			8,531			8,842
Charge-offs:
Commercial and industrial		(355	)		(267	)		—			(510	)		(3,864	)
Residential real estate		—			(13	)		(144	)		—			(501	)
Consumer		—			(16	)		—			(16	)		—
Commercial real estate		(2,703	)		—			—			—			—
Other		—			—			—			(5	)		(7	)
Total charge-offs		(3,058	)		(296	)		(144	)		(531	)		(4,372	)
Recoveries		41			13			131			63			53
Allowance for loan losses, end of period	$	67,466		$	45,163		$	29,787		$	20,731		$	12,668
Net charge-offs to average bank loans outstanding, net		0.00	%		0.01	%		0.05	%		0.03	%		0.40	%

The following is a breakdown of the allowance for loan losses by type for the periods indicated (in thousands, except rates):

	December 31, 2017					December 31, 2016
	Balance		Percent ⁽¹⁾			Balance		Percent ⁽¹⁾
Commercial and industrial	$	54,474		34.8	%	$	35,127		30.3	%
Securities-based loans		2,088		25.9			3,094		28.6
Residential real estate		8,430		37.0			2,660		38.4
Commercial real estate		1,520		1.7			1,363		1.4
Home equity lines of credit		162		0.2			371		0.3
Construction and land		100		0.1			232		0.2
Consumer		16		0.3			129		0.8
Qualitative		676		—			2,187		—
	$	67,466		100.0	%	$	45,163		100.0	%

	December 31, 2015					December 31, 2014
	Balance		Percent ⁽¹⁾			Balance		Percent ⁽¹⁾
Commercial and industrial	$	24,748		38.2	%	$	16,609		42.4	%
Securities-based loans		1,607		43.7			1,099		34.6
Residential real estate		1,241		13.5			787		20.4
Home equity lines of credit		290		0.4			267		0.6
Commercial real estate		264		2.9			232		0.8
Consumer		105		1.2			156		1.2
Construction and land		78		0.1			—		—
Qualitative		1,454		—			1,581		—
	$	29,787		100.0	%	$	20,731		100.0	%

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

	December 31, 2013
	Balance		Percent ⁽¹⁾
Commercial and industrial	$	9,832		37.7	%
Securities-based loans		892		34.9
Residential real estate		408		25.5
Commercial real estate		198		0.8
Home equity lines of credit		174		1.1
Construction and land		12		—
Qualitative		1,152		—
	$	12,668		100.0	%

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

A loan is determined to be impaired usually 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 December 31, 2017, we had $29.2 million of impaired loans, net of discounts, which included $9.1 million in troubled debt restructurings. At December 31, 2016, 2015, 2014, and 2013, we had $26.9 million, $0.9 million, $4.9 million, and $1.5 million of impaired loans, respectively, which included $9.7 million, $0.2 million, $1.0 million, and $0.4 million of trouble debt restructurings, respectively. The specific allowance on impaired loans at December 31, 2017, 2016, 2015, 2014, and 2013 was $9.1 million, $3.4 million, $0.2 million, $0.3 million, and $0.2 million, respectively.

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 years ended December 31, 2017, 2016, 2015, 2014, and 2013, were insignificant to the consolidated financial statements.

See the section entitled “Critical Accounting Policies and Estimates” herein regarding our policies for establishing loan loss reserves, including placing loans on non-accrual status.

IV.

Deposits

Deposits consist of money market and savings accounts, certificates of deposit, and demand deposits. The average balances of deposits and the associated weighted-average interest rates for the periods indicated are as follows (in thousands, except percentages):

	Year Ended December 31,
	2017					2016					2015
	Average Balance		Average Interest Rate			Average Balance		Average Interest Rate			Average Balance		Average Interest Rate
Demand deposits (interest-bearing)	$	12,110,012		0.10	%	$	8,606,888		0.08	%	$	4,576,530		0.14	%
Certificates of deposit (time deposits)		2,678		2.20			8,775		1.75			39,278		2.19
Demand deposits (non-interest-bearing)		15,463	*				14,355	*				19,004	*
Savings accounts		4		—			18		—			17		—

*	Not applicable.

Scheduled maturities of certificates of deposit greater than $100,000 at December 31, 2017, were as follows (in thousands):

0-3 Months

3-6 Months

6-12 Months

Over

12 Months

Total

—

139

512

338

989

V.	Return on Equity and Assets

	Year Ended December 31,
		2017			2016			2015
Return on assets (net income as a percentage of average total assets)		0.91	%		0.54	%		0.88	%
Return on equity (net income as a percentage of average shareholders’ equity)		6.41			3.47			3.74
Dividend payout ratio⁽¹⁾		13.42		—			—
Equity to assets ratio (average shareholders’ equity as a percentage of average total assets)		14.23			15.75			23.43

⁽¹⁾	We did not declare or pay any dividends on our common stock during 2016 or 2015.

VI. Short-Term Borrowings

The following is a summary of our short-term borrowings for the periods indicated (in thousands, except rates):

	Short-Term Borrowings			FHLB Advances			Stock Loan
Year Ended December 31, 2017:
Amount outstanding at December 31, 2017	$	256,000		$	745,000		$	219,782
Weighted-average interest rate thereon		2.26	%		1.51	%		1.36	%
Maximum amount outstanding at any month-end	$	444,400		$	1,175,000		$	397,527
Average amount outstanding during the year	$	135,120		$	774,564		$	314,720
Weighted-average interest rate thereon		1.78	%		1.07	%		1.07	%
Year Ended December 31, 2016:
Amount outstanding at December 31, 2016	$	377,000		$	500,000		$	478,814
Weighted-average interest rate thereon		1.46	%		0.88	%		0.75	%
Maximum amount outstanding at any month-end	$	377,000		$	1,160,000		$	488,384
Average amount outstanding during the year	$	178,294		$	588,573		$	313,413
Weighted-average interest rate thereon		1.19	%		1.15	%		0.46	%
Year Ended December 31, 2015:
Amount outstanding at December 31, 2015	$	30,000		$	148,000		$	329,670
Weighted-average interest rate thereon		1.13	%		0.36	%		0.65	%
Maximum amount outstanding at any month-end	$	465,648		$	579,000		$	329,670
Average amount outstanding during the year	$	45,492		$	178,925		$	62,771
Weighted-average interest rate thereon		1.25	%		0.31	%		0.65	%

Results of Operations – Institutional Group

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

	For the Year Ended December 31,						Percentage Change						As a Percentage of Net Revenues for the Year Ended December 31,
	2017		2016		2015		2017 vs. 2016			2016 vs. 2015			2017			2016			2015
Revenues:
Commissions	$	204,281	$	238,775	$	241,528		(14.4	)%		(1.1	)%		18.4	%		23.5	%		24.8	%
Principal transactions		210,115		296,008		244,646		(29.0	)		21.0			18.9			29.2			25.1

Capital raising		325,691		214,209		264,858		52.0			(19.1	)		29.3			21.1			27.1
Advisory fees		360,606		256,638		192,584		40.5			33.3			32.5			25.3			19.7
Investment banking		686,297		470,847		457,442		45.8			2.9			61.8			46.4			46.8
Interest		15,208		16,609		15,053		(8.4	)		10.3			1.4			1.6			1.5
Other income ⁽¹⁾		10,408		7,087		26,594		46.9			(73.4	)		0.9			0.8			2.8
Total revenues		1,126,309		1,029,326		985,263		9.4			4.5			101.4			101.5			101.0
Interest expense		15,541		15,162		9,669		2.5			56.8			1.4			1.5			1.0
Net revenues		1,110,768		1,014,164		975,594		9.5			4.0			100.0			100.0			100.0
Non-interest expenses:
Compensation and benefits		665,514		608,171		596,561		9.4			1.9			59.9			60.0			61.1
Occupancy and equipment rental		48,197		51,179		49,808		(5.8	)		2.8			4.3			5.0			5.1
Communication and office supplies		60,549		64,049		64,168		(5.5	)		(0.2	)		5.5			6.3			6.6
Commissions and floor brokerage		23,974		24,968		25,087		(4.0	)		(0.5	)		2.2			2.5			2.6
Other operating expenses		94,553		101,654		98,928		(7.0	)		2.8			8.5			10.0			10.1
Total non-interest expenses		892,787		850,021		834,552		5.0			1.9			80.4			83.8			85.5
Income before income taxes	$	217,981	$	164,143	$	141,042		32.8	%		16.4	%		19.6	%		16.2	%		14.5	%

⁽¹⁾

Includes asset management and service fees.

Year Ended December 31, 2017, Compared With Year Ended December 31, 2016

NET REVENUES

For the year ended December 31, 2017, Institutional Group net revenues increased 9.5% to a record $1.1 billion from $1.0 billion in 2016. The increase in net revenues for the year ended December 31, 2017, was primarily attributable to an increase in fixed income and equity capital raising revenues and advisory fees, partially offset by a decrease in fixed income and equity brokerage revenues.

Commissions – For the year ended December 31, 2017, commission revenues decreased 14.4% to $204.3 million from $238.8 million in 2016.

Principal transactions – For the year ended December 31, 2017, principal transactions revenues decreased 29.0% to $210.1 million from $296.0 million in 2016.

For the year ended December 31, 2017, fixed income brokerage revenues decreased 29.0% to $214.9 million from $302.5 million in 2016.

For the year ended December 31, 2017, equity brokerage revenues decreased 14.1% to $199.5 million from $232.3 million in 2016. The decrease in brokerage revenues (commissions and principal transactions) is primarily attributable to low volatility, flat yield curve, and a decline in volumes.

Investment banking – For the year ended December 31, 2017, investment banking revenues increased 45.8% to $686.3 million from $470.8 million in 2016. The increase is attributable to higher capital raising and advisory fees.

For the year ended December 31, 2017, capital-raising revenues increased 52.0% to $325.7 million from $214.2 million in 2016.

For the year ended December 31, 2017, equity capital markets capital-raising revenues increased 76.6% to $182.7 million from $103.4 million in 2016. The increase was primarily attributable to an increase in the number of transactions over 2016, as a result of improving economic growth.

For the year ended December 31, 2017, fixed income capital markets capital-raising revenues increased 29.1% to $143.0 million from $110.8 million in 2016. The increase is primarily attributable to an increase in the public finance activity from 2016.

For the year ended December 31, 2017, advisory fees increased 40.5% to $360.6 million from $256.6 million in 2016. The increase is primarily attributable to an increase in the number of advisory transactions over the comparable periods in 2016, as well as the contributions made from the Eaton fund placement franchise.

Interest income – For the year ended December 31, 2017, interest income decreased 8.4% to $15.2 million from $16.6 million in 2016. The decrease in interest income is primarily attributable to lower interest on our inventory positions.

Other income – For the year ended December 31, 2017, other income increased 46.9% to $10.4 million from $7.1 million in 2016. The increase is primarily attributable to an increase in investment gains from 2016.

Interest expense – For the year ended December 31, 2017, interest expense increased 2.5% to $15.5 million from $15.2 million in 2016. The increase is primarily attributable to an increase in inventory interest expense from 2016.

NON-INTEREST EXPENSES

For the year ended December 31, 2017, Institutional Group non-interest expenses increased 5.0% to $892.8 million from $850.0 million in 2016.

Compensation and benefits – For the year ended December 31, 2017, compensation and benefits expense increased 9.4% to $665.5 million from $608.2 million in 2016. The increase is principally due to an increase in variable compensation as a result of higher production, partially offset by a decrease in fixed compensation. Compensation and benefits expense as a percentage of net revenues was 59.9% for the year ended December 31, 2017, compared to 60.0% in 2016.

Occupancy and equipment rental – For the year ended December 31, 2017, occupancy and equipment rental expense decreased 5.8% to $48.2 million from $51.2 million in 2016. The decrease is primarily attributable to equipment costs and rent expense.

Communications and office supplies – For the year ended December 31, 2017, communications and office supplies expense decreased 5.5% to $60.5 million from $64.0 million in 2016. The decrease is primarily attributable to a decline in telecommunication expenses and lower quote equipment expenses.

Commissions and floor brokerage – For the year ended December 31, 2017, commissions and floor brokerage expense decreased 4.0% to $24.0 million from $25.0 million in 2016. The decrease is primarily attributable to lower clearing expenses given the decline in fixed income trading volumes.

Other operating expenses – For the year ended December 31, 2017, other operating expenses decreased 7.0% to $94.6 million from $101.7 million in 2016. The decrease is primarily attributable to a decline in legal expenses, subscription costs, and professional service fees from 2016.

INCOME BEFORE INCOME TAXES

For the year ended December 31, 2017, income before income taxes for the Institutional Group segment increased 32.8% to $218.0 million from $164.1 million in 2016. Profit margins (income before income taxes as a percentage of net revenues) have increased to 19.6% for the year ended December 31, 2017, from 16.2% in 2016. The improvement in profit margin from 2016 is a result of an increase in revenues, as well as our focus on expense management.

Year Ended December 31, 2016, Compared With Year Ended December 31, 2015

NET REVENUES

For the year ended December 31, 2016, Institutional Group net revenues increased 4.0% to $1.0 billion from $975.6 million in 2015. The increase in net revenues for the year ended December 31, 2016, was primarily attributable to an increase in advisory fees and fixed income brokerage revenues. The increase was offset by a decrease in capital-raising revenues and lower equity brokerage revenues. Net revenues during 2016 were positively impacted by the acquisitions of Eaton Partners in January 2016 and ISM in May 2016.

Commissions – For the year ended December 31, 2016, commission revenues decreased 1.1% to $238.8 million from $241.5 million in 2015.

Principal transactions – For the year ended December 31, 2016, principal transactions revenues increased 21.0% to $296.0 million from $244.6 million in 2015.

For the year ended December 31, 2016, equity brokerage revenues decreased 1.2% to $232.3 million from $235.2 million in 2015. The decrease is a result of declines in volume.

For the year ended December 31, 2016, fixed income institutional brokerage revenues increased 20.5% to $302.5 million from $251.0 million in 2015. The increase is primarily attributable to an improvement in fixed income trading volumes, as a result of the acquisition of the Sterne fixed income business in June 2015.

Investment banking – For the year ended December 31, 2016, investment banking revenues increased 2.9% to $470.8 million from $457.4 million in 2015. The increase is attributable to higher advisory fees, which was positively impacted by the acquisition of Eaton Partners in January 2016, offset by lower capital-raising revenues in 2016.

For the year ended December 31, 2016, advisory fees increased 33.3% to $256.6 million from $192.6 million in 2015. The increase is primarily attributable to an increase in the number of advisory transactions over the comparable periods in 2015.

For the year ended December 31, 2016, capital-raising revenues decreased 19.1% to $214.2 million from $264.9 million in 2015.

For the year ended December 31, 2016, equity capital markets capital-raising revenues decreased 31.6% to $103.4 million from $151.2 million in 2015. The decrease was primarily attributable to a decrease in the number of transactions over 2015.

For the year ended December 31, 2016, fixed income capital markets capital-raising revenues decreased 2.6% to $110.8 million from $113.7 million in 2015.

Interest income – For the year ended December 31, 2016, interest income increased 10.3% to $16.6 million from $15.1 million in 2015. The increase is primarily attributable to an increase in dividend payments on our inventory positions.

Other income – For the year ended December 31, 2016, other income decreased 73.4% to $7.1 million from $26.6 million in 2015. The decrease in other income is primarily attributed to lower investment gains in 2016. During 2015, we recognized a gain on the sale of certain assets that didn’t recur in 2016.

Interest expense – For the year ended December 31, 2016, interest expense increased 56.8% to $15.2 million from $9.7 million in 2015. The increase is primarily attributable to higher inventory levels during 2016.

NON-INTEREST EXPENSES

For the year ended December 31, 2016, Institutional Group non-interest expenses increased 1.9% to $850.0 million from $834.6 million in 2015.

Compensation and benefits – For the year ended December 31, 2016, compensation and benefits expense increased 1.9% to $608.2 million from $596.6 million in 2015. The increase is principally due to 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 60.0% for the year ended December 31, 2016, compared to 61.1% in 2015.

Occupancy and equipment rental – For the year ended December 31, 2016, occupancy and equipment rental expense increased 2.8% to $51.2 million from $49.8 million in 2015. The increase is primarily due to an increase in rent expense.

Communications and office supplies – For the year ended December 31, 2016, communications and office supplies expense decreased 0.2% to $64.0 million from $64.2 million in 2015. The decrease is primarily attributable to lower supply expense, offset by higher communication expense.

Commissions and floor brokerage – For the year ended December 31, 2016, commissions and floor brokerage expense decreased 0.5% to $25.0 million from $25.1 million in 2015. The decrease is primarily attributable to lower clearing expenses.

Other operating expenses – For the year ended December 31, 2016, other operating expenses increased 2.8% to $101.7 million from $98.9 million in 2015. The increase is primarily attributable to an increase in legal expenses, offset by lower travel expenses.

INCOME BEFORE INCOME TAXES

For the year ended December 31, 2016, income before income taxes for the Institutional Group segment increased 16.4% to $164.1 million from $141.0 million in 2015. Profit margins (income before income taxes as a percentage of net revenues) have increased to 16.2% for the year ended December 31, 2016, from 14.5% in 2015 as a result of an increase in revenues offset by a slight increase in operating expenses.

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 Year Ended December 31,									Percentage Change
	2017			2016			2015			2017 vs. 2016			2016 vs. 2015
Net revenues	$	(6,554	)	$	(2,078	)	$	(21,313	)		(215.4	)%		90.3	%
Non-interest expenses:
Compensation and benefits		381,429			247,267			190,730			54.3			29.6
Other operating expenses		187,368			202,534			169,558			(7.5	)		19.4
Total non-interest expenses		568,797			449,801			360,288			26.5			24.8
Loss before income taxes	$	(575,351	)	$	(451,879	)	$	(381,601	)		27.3	%		18.4	%

The other segment includes expenses related to the Company’s acquisition strategy, litigation-related expenses associated with previously disclosed matters, the investments made in the Company’s infrastructure and control environment, and actions taken by the Company in response to the Tax Cuts and Jobs Act (“Tax Legislation”) that was enacted in the fourth quarter of 2017 to maximize tax savings. The expenses relating to the Company’s acquisition strategy, which are included in the other segment, consists of stock-based compensation and costs directly related to acquisitions and dispositions of certain businesses that are not representative of the costs of running our company’s ongoing business.

The following table shows the expenses that are part of the other segment related to 1) the actions taken by the Company in response to the Tax Legislation that was enacted in the fourth quarter of 2017; 2) anticipated merger-related charges; and 3) litigation-related expenses associated with previously disclosed legal matters.

	For the Year Ended December 31,						Percentage Change
	2017		2016		2015		2017 vs. 2016			2016 vs. 2015
Non-interest expenses:
Compensation and benefits	$	167,848	$	105,518	$	96,772		59.1	%		9.0	%
Other operating expenses		61,785		82,209		60,831		(24.8	)		35.1
Total non-interest expenses	$	229,633	$	187,727	$	157,603		22.3	%		19.1	%

For the year ended December 31, 2017, compensation and benefits expense increased 59.1% to $167.8 million from $105.5 million in 2016. The increase is primarily attributable to the acceleration of the vesting of certain outstanding debenture awards and the modification of certain outstanding restricted stock units. These, and other actions described below, were taken by the Company in response to the Tax Legislation.

For the year ended December 31, 2017, other operating expenses decreased 24.8% to $61.8 million from $82.2 million in 2016. The decrease is principally due to lower acquisition-related expenses as a result of fully integrating our acquired businesses onto our platform.

The expenses not associated with the activities described above in the other segment are as follows:

	For the Year Ended December 31,						Percentage Change
	2017		2016		2015		2017 vs. 2016			2016 vs. 2015
Non-interest expenses:
Compensation and benefits	$	213,581	$	141,749	$	93,958		50.7	%		50.9	%
Other operating expenses		125,583		120,325		108,727		4.4			10.7
Total non-interest expenses	$	339,164	$	262,074	$	202,685		29.4	%		29.3	%

For the year ended December 31, 2017, compensation and benefits expense increased 50.7% to $213.6 million from $141.7 million in 2016. The increase is primarily attributable to an increase direct compensation and deferred compensation expense of our administrative and back-office personnel.

For the year ended December 31, 2017, other operating expenses increased 4.4% to $125.6 million from $120.3 million in 2016. The increase is primarily due to our continued efforts in building out our infrastructure.

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. Total assets of $21.4 billion at December 31, 2017, were up 11.8% over December 31, 2016. The increase is primarily attributable to the growth of our investment portfolio, which consists of available-for-sale and held-to-maturity securities, and increases in bank loans as a result of our continued focus to grow the balance sheet at Stifel Bank. 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 December 31, 2017, our liabilities were comprised primarily of senior notes of $1.0 billion, Federal Home Loan Bank advances of $745.0 million, borrowings of $256.0 million, deposits of $13.4 billion at Stifel Bank, and payables to customers of $828.2 million at our broker-dealer subsidiaries, as well as accounts payable and accrued expenses of $308.9 million, and accrued employee compensation of $494.0 million. To meet our obligations to clients and operating needs, we had $696.3 million in cash and cash equivalents at December 31, 2017. We also had client brokerage receivables of $1.4 billion at Stifel and $6.9 billion in loans at Stifel Bank.

Cash Flow

Cash, cash equivalents, and cash segregated for regulatory purposes decreased $199.1 million to $787.1 million at December 31, 2017, from $986.2 million at December 31, 2016. Operating activities provided cash of $679.9 million primarily due to net income recognized in 2017 adjusted for non-cash activities and an increase in operating liabilities, offset by an increase in operating assets. Investing activities used cash of $2.6 billion due to the growth of our investment portfolio, growth of the loan portfolio, fixed asset purchases, and business acquisitions, partially offset by proceeds from the sale and maturity of securities in our investment portfolio and the sale of investments. Financing activities provided cash of $1.8 billion primarily due to an increase in bank deposits, proceeds received from FHLB advances, and proceeds from the issuance of senior notes, partially offset by repayments of our short-term borrowings, a decrease in securities loaned, share repurchases, and dividends paid on our common and preferred stock. In addition, new accounting guidance associated with stock-based compensation requires cash payments to taxing authorities when withholding shares from an employee's award for tax-withholding purposes to be classified as a financing activity on the consolidated statement of cash flows.

On January 1, 2018, we adopted Financial Accounting Standards Board Accounting Standards Update No. 2016-18, “Statement of Cash Flows – Restricted Cash,” which adds or clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. All prior periods have been restated to reflect the presentation requirements of the new accounting standard.

Liquidity and Capital Resources

The Company’s senior management establishes the liquidity and capital policies of our 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 our 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 brokerage 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 December 31, 2017, we had $21.4 billion in assets, $10.4 billion of which consisted of cash or assets readily convertible into cash as follows (in thousands, except average days to conversion):

	December 31,				Average
	2017		2016		Conversion
Cash and cash equivalents	$	696,283	$	912,932
Receivables from brokers, dealers, and clearing organizations		459,107		1,024,752	5 days
Securities purchased under agreements to resell		512,220		248,588	1 day
Financial instruments owned at fair value		1,142,831		923,090	3 days
Available-for-sale securities at fair value		3,773,508		3,181,313	4 days
Held-to-maturity securities at amortized cost		3,698,098		3,038,405	3 days
Investments		85,613		76,768	10 days
Total cash and assets readily convertible to cash	$	10,367,660	$	9,405,848

As of December 31, 2017 and 2016, the amount of collateral by asset class is as follows (in thousands):

	December 31, 2017				December 31, 2016
	Contractual		Contingent		Contractual		Contingent
Cash and cash equivalents	$	44,883	$	—	$	67,672	$	—
Financial instruments owned at fair value		233,704		529,425		268,546		753,897
Available-for-sale securities at fair value		—		4,259,700		—		3,725,972
Investments		—		—		—		40,000
	$	278,587	$	4,789,125	$	336,218	$	4,519,869

Liquidity Available From Subsidiaries

Liquidity is principally available to our company from Stifel and Stifel Bank.

Stifel is required to maintain net capital equal to the greater of $1 million or two percent of aggregate debit items arising from client transactions. Covenants in the Company’s committed financing facilities require the excess net capital of Stifel, our principal broker-dealer subsidiary, to be above a defined amount. At December 31, 2017, Stifel’s excess net capital exceeded the minimum requirement, as defined. There are also limitations on the amount of dividends that may be declared by a broker-dealer without FINRA approval. See Note 19 of the Notes to Consolidated Financial Statements for more information on the capital restrictions placed on our broker-dealer subsidiaries.

Stifel Bank may pay dividends to the parent company without prior approval by its regulator as long as the dividend does not exceed the sum of Stifel Bank’s current calendar year and the previous two calendar years’ retained net income and Stifel Bank maintains its targeted capital to risk-weighted assets ratios.

Although we have liquidity available to us from our other subsidiaries, the available amounts are not as significant as the amounts described above and, in certain instances, may be subject to regulatory requirements.

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. 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 positions of Stifel and 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 (Firmwide) – A liquidity stress test model is maintained by the Company that measures liquidity outflows across multiple scenarios at the major operating subsidiaries and details the corresponding impact to our holding company and the overall consolidated firm. Liquidity stress tests are utilized to ensure that current exposures are consistent with the Company’s

established liquidity risk tolerance and, more specifically, to identify and quantify sources of potential liquidity strain. Further, the stress tests are utilized to analyze possible impacts on the Company’s cash flows, liquidity position, profitability, and solvency. The outflows are modeled over a 30-day liquidity stress timeframe and include the impact of idiosyncratic and macro-economic stress events.

The assumptions utilized in the Company’s liquidity stress tests include, but are not limited to, the following:

•

No government support

•

No access to equity and unsecured debt markets within the stress horizon

•

Higher haircuts and significantly lower availability of secured funding

•

Additional collateral that would be required by trading counter-parties, certain exchanges, and clearing organizations related to credit rating downgrades

•

Additional collateral that would be required due to collateral substitution, collateral disputes, and uncalled collateral

•

Drawdowns on unfunded commitments provided to third parties

•

Client cash withdrawals and reduction in customer short positions that fund long positions

•

Return of securities borrowed on an uncollateralized basis

•

Maturity roll-off of outstanding letters of credit with no further issuance

At December 31, 2017, the Company maintained sufficient liquidity to meet current and contingent funding obligations as modeled in its liquidity stress test model.

Liquidity stress testing (Stifel Bank) – Stifel Bank performs three 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, (2) Stifel Bank’s ability to fund operations if all available credit were to be drawn immediately, with no additional available credit, and (3) Stifel Bank’s ability to fund operations under a regulatory prompt corrective action. The goal of these stress tests is to determine Stifel Bank’s ability to fund continuing operations under significant pressures on both assets and liabilities.

Under all stress tests, Stifel Bank considers cash and highly liquid investments as available to meet liquidity needs. In its analysis, Stifel Bank considers agency mortgage-backed securities, corporate bonds, and commercial mortgage-backed securities 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 December 31, 2017, available cash and highly liquid investments comprised approximately 20% 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. 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.

Cash and Cash Equivalents – We held $696.3 million of cash and cash equivalents at December 31, 2017, compared to $912.9 million at December 31, 2016. Cash and cash equivalents provide immediate sources of funds to meet our liquidity needs.

Securities Available-for-Sale – We held $3.8 billion in available-for-sale investment securities at December 31, 2017, compared to $3.2 billion at December 31, 2016. As of December 31, 2017, the weighted-average life of the investment securities portfolio was approximately 1.7 years. These investment securities provide increased liquidity and flexibility to support our company’s funding requirements.

We monitor our 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 our largest funding source. Deposits provide a stable, low-cost source of funds that we utilize to fund 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 December 31, 2017, we had $13.4 billion in deposits compared to $11.5 billion at December 31, 2016. 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 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. We also have an unsecured, committed bank line available.

Our uncommitted secured lines of credit at December 31, 2017, totaled $1.0 billion with six 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 is subject to approval by the individual banks each time an advance is requested and may be denied. Our peak daily borrowing on our uncommitted secured lines was $444.4 million during the year ended December 31, 2017. There are no compensating balance requirements under these arrangements. Any borrowings on secured lines of credit are day-to-day and are generally utilized to finance certain fixed income securities. At December 31, 2017, our uncommitted secured lines of credit of $256.0 million were collateralized by company-owned securities valued at $292.7 million.

The Federal Home Loan advances of $745.0 million as of December 31, 2017, are floating-rate advances. The weighted average interest rates during the year ended December 31, 2017, on these advances is 1.07%. The advances are secured by Stifel Bank’s residential mortgage loan portfolio and investment portfolio. The interest rates reset on a daily basis. Stifel Bank has the option to prepay these advances without penalty on the interest reset date.

Unsecured short-term borrowings – On April 26, 2017, we amended our existing Credit Agreement, whereby increasing our revolving credit facility to $200.0 million. The credit facility expires in March 2020. The applicable interest rate under the revolving credit facility is calculated as a per annum rate equal to LIBOR plus 2.00%, as defined.

We can draw upon this line as long as certain restrictive covenants are maintained. Under our amended and restatement Credit Agreement, we are required to maintain compliance with a minimum consolidated tangible net worth covenant, as defined, and a maximum consolidated total capitalization ratio covenant, as defined. In addition, Stifel, our broker-dealer subsidiary, is required to maintain compliance with a minimum regulatory excess net capital covenant, as defined, and Stifel Bank, our bank subsidiary, is required to maintain its status as well-capitalized, as defined.

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. At December 31, 2017, we had no advances on our revolving credit facility and were in compliance with all covenants.

Federal Home Loan Bank Advances and other secured financing – Stifel Bank has borrowing capacity with the Federal Home Loan Bank of $4.1 billion at December 31, 2017, and a $25.0 million federal funds agreement for the purpose of purchasing short-term funds should additional liquidity be needed. At December 31, 2017, outstanding FHLB advances were $745.0 million. Stifel Bank is eligible to participate in the Federal Reserve’s discount window program; however, Stifel Bank does not view borrowings from the Federal Reserve as a primary means of funding. The credit available in this program is subject to periodic review, may be terminated or reduced at the discretion of the Federal Reserve, and is secured by securities. Stifel Bank has borrowing capacity of $2.0 billion with the Federal Reserve’s discount window at December 31, 2017. Stifel Bank receives overnight funds from excess cash held in Stifel brokerage accounts, which are deposited into a money market account. These balances totaled $13.4 billion at December 31, 2017. At December 31, 2017, there was $17.3 billion in client money market and FDIC-insured product balances.

Public Offering of Senior Notes – On July 15, 2014, we sold in a registered underwritten public offering, $300.0 million in aggregate principal amount of 4.250% senior notes due July 2024 (the “2014 Notes”). Interest on the 2014 Notes is payable semi-annually in arrears. We may redeem the 2014 Notes in whole or in part, at our option, at a redemption price equal to 100% of their principal amount, plus a “make-whole” premium and accrued and unpaid interest, if any, to the date of redemption. Proceeds from the 2014 Notes issuance of $295.6 million, after discounts, commissions, and expenses, were used for general corporate purposes. In July 2016, we issued an additional $200.0 million in aggregate principal amount of 4.25% senior notes due 2024. In July 2014, we received a BBB- rating on the 2014 Notes.

On December 1, 2015, we sold in a registered underwritten public offering, $300.0 million in aggregate principal amount of 3.50% senior notes due December 2020 (the “2015 Notes”). Interest on the 2015 Notes is payable semi-annually in arrears. We may redeem

the 2015 Notes in whole or in part, at our option, at a redemption price equal to 100% of their principal amount, plus a “make-whole” premium and accrued and unpaid interest, if any, to the date of redemption. Proceeds from the 2015 Notes issuance of $297.0 million, after discounts, commissions, and expenses, were used for general corporate purposes. In December 2015, we received a BBB- rating on the 2015 Notes.

On October 4, 2017, we completed the pricing of a registered underwritten public offering of $200.0 million in aggregate principal amount of 5.20% senior notes due October 2047. Interest on the senior notes is payable quarterly in arrears on January 15, April 15, July 15, and October 15. On or after October 15, 2022, 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. On October 27, 2017, we completed the sale of an additional $25.0 million aggregate principal amount of Notes pursuant to the over-allotment option. In October 2017, we received a BBB- rating on the 2017 Notes.

Public Offering of Preferred Stock – On July 11, 2016, we completed an underwritten registered public offering of $150 million perpetual 6.25% Non-Cumulative Perpetual Preferred Stock, Series A. Proceeds from the issuance were used for general corporate purposes.

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, a significant portion 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 – On January 3, 2017, we completed the acquisition of City Financial Corporation and its wholly owned subsidiary, City Securities, an independent investment bank focused primarily on offering wealth management and public finance services across the Midwest. Purchase consideration consisted of cash and common stock.

During the third quarter of 2017, we announced that our board of directors has authorized a dividend program under which the Company intends to pay a regular quarterly cash dividend to shareholders of its common stock. In connection with the dividend program, the board declared quarterly cash dividends on the Company’s common stock of $0.10 per share, September 15, 2017 and December 15, 2017, to shareholders of record at the close of business on September 1, 2017 and December 1, 2017, respectively. We recently announced its intention to increase our quarterly cash dividend to $0.12 per share starting in the first quarter of 2018.

During the year ended December 31, 2017, we repurchased $13.0 million, or 0.3 million shares, at an average price of $43.83 per share.

The following table summarizes the activity related to our company’s note receivable from January 1, 2016 to December 31, 2017 (in thousands):

	2017			2016
Beginning balance – January 1	$	396,318		$	401,293
Notes issued – organic growth		54,857			93,667
Notes issued – acquisitions ⁽¹⁾		6,900			1,250
Amortization		(91,594	)		(94,754	)
Other		11,643			(5,138	)
Ending balance – December 31	$	378,124		$	396,318

⁽¹⁾

Notes issued in conjunction with the acquisitions of ISM in 2016 and City Securities in 2017.

We have paid $61.8 million in the form of upfront notes to financial advisors for transition pay during the year ended December 31, 2017. 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 years ended December 31, 2018, 2019, 2020, 2021, 2022, and thereafter, is $81.7 million, $67.4 million, $51.9 million, $41.7 million, $35.8 million, and $75.5 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, stock units, and debentures to our employees. Historically, we have granted stock units to our employees as part of our retention program. In response to the Tax Legislation that was enacted in December 2017, the Company offered certain employees the opportunity to participate in the conversion of certain restricted stock units into restricted stock pursuant to a Modification Award Agreement. A restricted stock unit or restricted stock award 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 or restricted stock awards generally vest over the next one to ten years after issuance and are distributed at predetermined future payable dates once vesting occurs. At December 31, 2017, the total number of restricted stock units and restricted stock outstanding was 16.5 million, of which 12.3 million were unvested. At December 31, 2017, there was approximately $251.3 million of unrecognized compensation cost for restricted stock units and restricted stock, which is expected to be recognized over a weighted-average period of 3.1 years.

The future estimated compensation expense of the unvested restricted stock units and restricted stock, assuming current year forfeiture levels and static growth for the years ended December 31, 2018, 2019, 2020, 2021, 2022, and thereafter, is $50.8 million, $56.9 million, $55.5 million, $39.2 million, $24.0 million, and $24.9 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 effect 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 December 31, 2017, Stifel had net capital of $273.0 million, which was 18.6% of aggregate debit items and $243.6 million in excess of its minimum required net capital. At December 31, 2017, all of our broker-dealer subsidiaries’ net capital exceeded the minimum net capital required under the SEC rule. At December 31, 2017, SNEL’s capital and reserves were in excess of the financial resources requirement under the rules of the FCA. At December 31, 2017, 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.

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.

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 comparable, 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 December 31, 2017, we had commitments to invest in affiliated and unaffiliated investment partnerships of $3.2 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 the Company’s Form 10-K 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 collectability of future principal and interest payments is reasonably assured. Loan losses are

charged against the allowance when we believe the uncollectability 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

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.

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.

Goodwill for certain acquisitions is deductible for tax purposes. The amortization of goodwill for tax purposes creates a cash tax savings due to a reduction in the current taxes payable. We have recorded cash tax savings for the year ending December 31, 2017, of $9.1 million and anticipate cumulative future cash savings of $54.0 million as of result of the tax amortization of goodwill.

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 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. During 2017, the Company decided that it would change its annual impairment test date from July 31^st to October 1^st. The Company performed impairment testing on both July 31, 2017 and October 1, 2017 with no impairment charges resulting from the annual impairment tests.

The Company believes that changing its annual impairment test date to the beginning of the fourth fiscal quarter will allow it to have carrying amounts that are more readily available as of the last day of the prior fiscal quarter and give the Company a full quarter to assess if it has a potential impairment (qualitative assessment and/or Step 1) and complete the measurement (Step 2), if required.

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 23 of the Notes to Consolidated Financial Statements. Such information is hereby incorporated by reference.

Dilution

As of December 31, 2017, there were 11,934 shares of our common stock issuable on outstanding options, with an average-weighted exercise price of $29.33, and 16,458,098 outstanding restricted stock unit and restricted stock grants. A restricted 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 one to ten years and are distributable, if vested, at future specified dates. Restricted stock awards are restricted as to sale or disposition. These restrictions lapse over the next one to five years. Of the outstanding restricted stock units and restricted stock awards, 4,178,802 shares are currently vested and 12,279,206 are unvested. Assuming vesting requirements are met, the Company anticipates that 2,157,255 shares under these awards will be distributed in 2018, 2,505,628 will vest in 2019, 2,255,616 will vest in 2020, and the balance of 9,539,599 will be distributed thereafter.

An employee will realize income as a result of an award of stock units at the time shares are distributed in an amount equal to the fair market value of the shares at that time, and we are entitled to a corresponding tax deduction in the year of issuance. Unless an employee elects to satisfy the withholding in another manner, either by paying the amount in cash or by delivering shares of Stifel Financial Corp. common stock already owned by the individual for at least six months, we may satisfy tax withholding obligations on income associated with the grants by reducing the number of shares otherwise deliverable in connection with the awards. The reduction will be calculated based on a current market price of our common stock. Based on current tax law, we anticipate that the shares issued when the awards are paid to the employees will be reduced by approximately 35% to satisfy the maximum withholding obligations, so that approximately 65% of the total restricted stock units that are distributable in any particular year will be converted into issued and outstanding shares.

It has been our practice historically to satisfy almost all tax withholding obligations on income associated with the grants by reducing the number of shares otherwise deliverable in connection with the awards. We anticipate that practice will continue, as recently our Compensation Committee made a determination to satisfy tax withholding obligations through the cancellation of shares subject to an

award. In addition, the plan pursuant to which we issue restricted stock units and restricted stock awards permits us to elect to settle certain awards entirely in cash, and we may elect to do so as those awards vest and become deliverable.

Contractual Obligations

The following table sets forth our contractual obligations to make future payments as of December 31, 2017 (in thousands):

	Total		2018		2019		2020		2021		2022		Thereafter
Senior notes ⁽¹⁾	$	1,025,000	$	—	$	—	$	300,000	$	—	$	—	$	725,000
Interest on senior notes		530,071		43,450		43,450		43,450		42,575		32,950		324,196
Debenture to Stifel Financial Capital Trusts ⁽²⁾		67,500		—		—		—		—		—		67,500
Interest on debenture		32,218		1,691		1,691		1,691		1,691		1,691		23,763
Operating leases		528,517		96,009		90,763		77,186		60,279		52,732		151,548
Commitments to extend credit – Stifel Bank ⁽³⁾		833,133		362,510		42,881		74,241		204,400		135,694		13,407
Earn-out payments ⁽⁴⁾		85,000		48,383		13,101		11,758		11,758		—		—
Commitments to fund partnership interests		3,155		3,155		—		—		—		—		—
Certificates of deposit		1,575		1,089		486		—		—		—		—
	$	3,106,169	$	556,287	$	192,372	$	508,326	$	320,703	$	223,067	$	1,305,414

⁽¹⁾	See Note 12 of the Notes to the Consolidated Financial Statements for further discussion of our Senior Notes.

⁽²⁾	See Note 15 of the Notes to the Consolidated Financial Statements for further discussion of our Capital Trusts.

⁽³⁾	Commitments to extend credit include commitments to originate loans, outstanding standby letters of credit, and lines of credit which may expire without being funded and, as such, do not represent estimates of future cash flow.

⁽⁴⁾	Information concerning our acquisitions is included in Note 3 of the Notes to the Consolidated Financial Statements. Such information is hereby incorporated by reference.

The amounts presented in the table above may not necessarily reflect our actual future cash funding requirements, because the actual timing of the future payments made may vary from the stated contractual obligation. In addition, due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits as of December 31, 2017, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $2.6 million of unrecognized tax benefits have been excluded from the contractual obligation table above. See Note 23 to the consolidated financial statements for a discussion of income taxes.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	40
Consolidated Statements of Financial Condition	41
Consolidated Statements of Operations	43
Consolidated Statements of Comprehensive Income	44
Consolidated Statements of Changes in Shareholders’ Equity	45
Consolidated Statements of Cash Flows	46
Notes to Consolidated Financial Statements	49
Note 1 Nature of Operations and Basis of Presentation	49
Note 2 Summary of Significant Accounting Policies	50
Note 3 Acquisitions	57
Note 4 Receivables From and Payables to Brokers, Dealers, and Clearing Organizations	60
Note 5 Fair Value Measurements	60
Note 6 Financial Instruments Owned and Financial Instruments Sold, But Not Yet Purchased	69
Note 7 Available-for-Sale and Held-to-Maturity Securities	70
Note 8 Bank Loans	72
Note 9 Fixed Assets	77
Note 10 Goodwill and Intangible Assets	78
Note 11 Borrowings and Federal Home Loan Bank Advances	78
Note 12 Senior Notes	79
Note 13 Bank Deposits	80
Note 14 Derivative Instruments and Hedging Activities	80
Note 15 Debentures to Stifel Financial Capital Trusts	82
Note 16 Disclosures About Offsetting Assets and Liabilities	83
Note 17 Commitments, Guarantees, and Contingencies	84
Note 18 Legal Proceedings	85
Note 19 Regulatory Capital Requirements	85
Note 20 Interest Income and Interest Expense	87
Note 21 Employee Incentive, Deferred Compensation, and Retirement Plans	87
Note 22 Off-Balance Sheet Credit Risk	89
Note 23 Income Taxes	90
Note 24 Segment Reporting	92
Note 25 Earnings Per Share	93
Note 26 Shareholders’ Equity	94
Note 27 Variable Interest Entities	95
Note 28 Subsequent Events	95
Note 29 Quarterly Financial Information (Unaudited)	96

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Stifel Financial Corp.

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of Stifel Financial Corp. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2018 expressed an unqualified opinion thereon.

Adoption of ASU 2016-09

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for excess tax benefits and deficiencies from share based payments in 2017 due to the adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.

Adoption of ASU 2016-18

As discussed in Note 2 to the consolidated financial statements, on January 1, 2018, the Company retrospectively changed its method of presenting restricted cash in the consolidated statements of cash flows due to the adoption of ASU No. 2016-18, Statement of Cash Flow - Restricted Cash.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2008.

St. Louis, Missouri

February 23, 2018

Except for the effects of the adoption of ASU No. 2016-18, as discussed in Note 2 as to which the date is

June 19, 2018

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition

(in thousands)	December 31,
		2017		2016
Assets
Cash and cash equivalents	$	696,283	$	912,932
Cash segregated for regulatory purposes		90,802		73,235
Receivables:
Brokerage clients, net		1,384,096		1,415,936
Brokers, dealers, and clearing organizations		459,107		1,024,752
Securities purchased under agreements to resell		512,220		248,588
Financial instruments owned, at fair value		1,143,684		925,045
Available-for-sale securities, at fair value		3,773,508		3,181,313
Held-to-maturity securities, at amortized cost		3,698,098		3,038,405
Loans held for sale, at lower of cost or market		226,068		228,588
Bank loans, net		6,947,759		5,591,190
Investments, at fair value		111,379		133,563
Fixed assets, net		155,120		172,828
Goodwill		968,834		962,282
Intangible assets, net		109,627		116,304
Loans and advances to financial advisors and other employees, net		378,124		396,318
Deferred tax assets, net		105,152		225,453
Other assets		624,092		482,624
Total Assets	$	21,383,953	$	19,129,356

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition (continued)

(in thousands, except share and per share amounts)	December 31,
	2017				2016
Liabilities and Shareholders’ Equity
Payables:
Brokerage clients	$	828,206		$	842,014
Brokers, dealers, and clearing organizations		276,302			523,107
Drafts		107,043			94,451
Securities sold under agreements to repurchase		233,704			268,546
Bank deposits		13,411,935			11,527,483
Financial instruments sold, but not yet purchased, at fair value		778,863			699,032
Accrued compensation		493,973			295,354
Accounts payable and accrued expenses		308,911			400,570
Federal Home Loan Bank advances		745,000			500,000
Borrowings		256,000			377,000
Senior notes		1,014,940			795,891
Debentures to Stifel Financial Capital Trusts		67,500			67,500
Total liabilities		18,522,377			16,390,948
Shareholders’ Equity:
Preferred stock − $1 par value; authorized 3,000,000 shares; 6,000 issued		150,000			150,000
Common stock − $0.15 par value; authorized 97,000,000 shares; issued 71,636,986 and 69,507,842 shares, respectively		10,746			10,426
Additional paid-in-capital		1,733,348			1,840,551
Retained earnings		1,033,526			876,958
Accumulated other comprehensive loss		(26,736	)		(39,042	)
		2,900,884			2,838,893
Treasury stock, at cost, 772,302 and 2,866,492 shares, respectively		(39,308	)		(100,485	)
Total Shareholders’ Equity		2,861,576			2,738,408
Total Liabilities and Shareholders’ Equity	$	21,383,953		$	19,129,356

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Operations

	Year Ended December 31,
(in thousands, except per share amounts)	2017		2016		2015
Revenues:
Commissions	$	678,904	$	729,989	$	749,536
Principal transactions		396,826		475,428		389,319
Investment banking		726,763		513,034		503,052
Asset management and service fees		702,064		582,789		493,761
Interest		454,381		294,332		179,101
Other income		37,524		46,798		62,224
Total revenues		2,996,462		2,642,370		2,376,993
Interest expense		70,030		66,874		45,399
Net revenues		2,926,432		2,575,496		2,331,594
Non-interest expenses:
Compensation and benefits		1,958,929		1,726,016		1,568,862
Occupancy and equipment rental		222,708		231,324		207,465
Communications and office supplies		133,493		139,644		130,678
Commissions and floor brokerage		44,132		44,315		42,518
Other operating expenses		297,634		291,615		240,504
Total non-interest expenses		2,656,896		2,432,914		2,190,027
Income before income tax expense		269,536		142,582		141,567
Provision for income taxes		86,665		61,062		49,231
Net income		182,871		81,520		92,336
Preferred dividends		9,375		3,906		—
Net Income available to common shareholders	$	173,496	$	77,614	$	92,336
Earnings per common share:
Basic	$	2.53	$	1.16	$	1.35
Diluted	$	2.14	$	1.00	$	1.18
Weighted-average number of common shares outstanding:
Basic		68,562		66,871		68,543
Diluted		81,035		77,563		78,554

Cash dividends declared per common share	$	0.20	$	—	$	—

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Comprehensive Income

	Year Ended December 31,
(in thousands)	2017			2016			2015
Net income	$	182,871		$	81,520		$	92,336
Other comprehensive income: ⁽¹⁾
Changes in unrealized gains/(losses) on available-for-sale securities, net of tax⁽²⁾		4,730			5,803			1,389
Changes in unrealized gains on cash flow hedging instruments, net of tax ⁽³⁾		(320	)		7,288			1,088
Foreign currency translation adjustment, net of tax		7,896			(12,600	)		(3,679	)
		12,306			491			(1,202	)
Comprehensive income	$	195,177		$	82,011		$	91,134

⁽¹⁾	Net of taxes of $3.3 million, $0.3 million, and $0.7 million for the years ended December 31, 2017, 2016, and 2015, respectively.

⁽²⁾	There were no reclassifications to earnings of realized gains for the years ended December 31, 2017 and 2016. Amounts are net of reclassifications to earnings of realized gains of $2.1 million for the year ended December 31, 2015.

⁽³⁾	Amounts are net of reclassifications to earnings of losses of $0.6 million, $5.4 million, and $3.8 million for the years ended December 31, 2017, 2016, and 2015, respectively.

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Changes in Shareholders’ Equity

	Year ended December 31,
	2017			2016			2015
Preferred stock, par value $1.00 per share:
Balance, beginning of year	$	150,000		$	—		$	—
Issuance of preferred stock		—			150,000			—
Balance, end of year		150,000			150,000			—
Common stock, par value $0.15 per share:
Balance, beginning of year		10,426			10,426			9,950
Common stock issued under employee plans		292			—			266
Common stock issued for acquisitions		28			—			210
Balance, end of year		10,746			10,426			10,426
Additional paid-in-capital:
Balance, beginning of year		1,840,551			1,820,772			1,634,114
Unit amortization, net of forfeitures		167,908			189,746			167,848
Issuance of common stock for acquisitions		9,324			(723	)		79,537
Dividends declared to equity-award holders		3,758			—			—
Common stock issued under employee plans and related tax benefits		(288,152	)		(159,391	)		(75,468	)
Excess tax benefit/(tax deficit) from stock-based compensation⁽¹⁾		—			(4,904	)		14,741
Issuance of preferred stock		—			(4,949	)		—
Other		(41	)		—			—
Balance, end of year		1,733,348			1,840,551			1,820,772
Retained earnings:
Balance, beginning of year		876,958			805,685			716,305
Net income		182,871			81,520			92,336
Dividends declared:
Common		(17,446	)		—			—
Preferred		(9,375	)		(3,906	)		—
Common stock issued under employee plans and related tax benefits		—			(6,341	)		(2,956	)
Other		518			—			—
Balance, end of year		1,033,526			876,958			805,685
Accumulated other comprehensive loss:
Balance, beginning of year		(39,042	)		(39,533	)		(38,331	)
Unrealized gains on securities, net of tax		4,730			5,803			1,389
Unrealized gains/(losses) on cash flow hedging activities, net of tax		(320	)		7,288			1,088
Foreign currency translation adjustment, net of tax		7,896			(12,600	)		(3,679	)
Balance, end of year		(26,736	)		(39,042	)		(39,533	)
Treasury stock, at cost:
Balance, beginning of year		(100,485	)		(104,934	)		—
Common stock issued under employee plans		74,175			104,375			12,818
Common stock repurchased		(12,998	)		(113,462	)		(117,752	)
Common stock issued for acquisitions		—			13,536			—
Balance, end of year		(39,308	)		(100,485	)		(104,934	)
Total shareholders' equity	$	2,861,576		$	2,738,408		$	2,492,416

⁽¹⁾ During the year ended December 31, 2017, we adopted new stock-based compensation guidance. See Note 2 of the Notes to Consolidated Financial Statements for additional information.

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows

	Year Ended December 31,
(in thousands)	2017			2016			2015
Cash Flows From Operating Activities:
Net income	$	182,871		$	81,520		$	92,336
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization		32,495			43,147			36,715
Amortization of loans and advances to financial advisors and other employees		91,594			94,754			53,913
Amortization of premium on investment portfolio		15,837			12,258			2,750
Provision for loan losses and allowance for loans and advances to financial advisors and other employees		25,985			17,793			14,694
Amortization of intangible assets		12,135			14,427			10,423
Deferred income taxes		118,129			46,062			(5,732	)
Tax deficit/(excess tax benefits) from stock-based compensation		—			4,904			(14,741	)
Stock-based compensation		140,461			186,303			165,641
(Gain)/losses on sale of investments		(2,359	)		5,563			9,255
Gain on extinguishment of Stifel Financial Capital Trust		—			(5,607	)		—
Other, net		3,037			4,676			(13,159	)
Decrease/(increase) in operating assets, net of assets acquired:
Receivables:
Brokerage clients, net		31,840			177,300			(1,003,257	)
Brokers, dealers, and clearing organizations		566,454			(439,601	)		82,960
Securities purchased under agreements to resell		(263,632	)		(88,165	)		(105,345	)
Financial instruments owned, including those pledged		(217,386	)		(175,602	)		90,716
Loans originated as held for sale		(1,564,386	)		(2,658,254	)		(1,855,714	)
Proceeds from mortgages held for sale		1,558,327			2,624,950			1,814,168
Loans and advances to financial advisors and other employees		(72,215	)		(92,830	)		(187,234	)
Other assets		(113,875	)		(158,875	)		100,670
Increase/(decrease) in operating liabilities, net of liabilities assumed:
Payables:
Brokerage clients		(13,808	)		(158,408	)		678,926
Brokers, dealers, and clearing organizations		(79,905	)		(62,105	)		98,301
Drafts		12,592			(89,406	)		108,659
Financial instruments sold, but not yet purchased		79,831			177,288			(65,521	)
Other liabilities and accrued expenses		135,894			(3,500	)		(193,151	)
Net cash provided by/(used in) operating activities	$	679,916		$	(441,408	)	$	(83,727	)

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows (continued)

	Year Ended December 31,
(in thousands)	2017			2016			2015
Cash Flows From Investing Activities:
Proceeds from:
Maturities, calls, sales, and principal paydowns of available-for-sale securities	$	985,520		$	403,951		$	866,899
Calls and principal paydowns of held-to-maturity securities		370,019			251,439			126,258
Sale or maturity of investments		28,839			40,175			65,320
Sale of bank foreclosed assets		—			—			75
Disposition of business, net		—			20,682			—
Increase in bank loans, net		(1,374,959	)		(2,462,405	)		(517,563	)
Payments for:
Purchase of available-for-sale securities		(1,583,369	)		(1,961,419	)		(991,954	)
Purchase of held-to-maturity securities		(1,033,700	)		(1,437,725	)		(802,668	)
Purchase of investments		(4,296	)		(9,278	)		(45,151	)
Purchase of fixed assets		(28,217	)		(28,211	)		(69,822	)
Acquisitions, net of cash acquired		(7,220	)		(72,383	)		(604,659	)
Net cash used in investing activities		(2,647,383	)		(5,255,174	)		(1,973,265	)
Cash Flows from Financing Activities:
Proceeds from/(repayments of) short-term borrowings, net		(121,000	)		287,916			(126,637	)
Proceeds from issuance of senior notes, net		217,913			201,632			297,042
Proceeds from advances from the Federal Home Loan Bank, net		245,000			352,000			148,000
Issuance of preferred stock, net of issuance costs		—			145,051			—
Increase/(decrease) in securities sold under agreements to repurchase		(34,842	)		(10,128	)		239,494
Increase in bank deposits, net		1,884,452			4,889,127			1,848,275
Increase/(decrease) in securities loaned		(166,900	)		146,838			325,707
(Tax deficit)/excess tax benefits from stock-based compensation		—			(4,904	)		14,741
Tax payments related to shares withheld for stock-based compensation plans		(214,744	)		(61,601	)		(65,021	)
Proceeds from stock option exercises		—			543			660
Repurchase of common stock		(12,998	)		(113,462	)		(117,752	)
Cash dividends on preferred stock		(9,375	)		(3,906	)		—
Cash dividends paid to common stock and equity-award holders		(13,688	)		—			—
Extinguishment of Stifel Financial Capital Trust		—			(9,393	)		—
Repayment of Senior Notes		—			(150,000	)		(175,000	)
Contingent consideration		(13,328	)		(13,110	)		(29,598	)
Net cash provided by financing activities		1,760,490			5,656,603			2,359,911
Effect of exchange rate changes on cash		7,895			(12,600	)		(3,601	)
Increase/(decrease) in cash and cash equivalents		(199,082	)		(52,579	)		299,318
Cash and cash equivalents at beginning of year		986,167			1,038,746			739,428
Cash and cash equivalents at end of year	$	787,085		$	986,167		$	1,038,746

The following presents cash, cash equivalents, and cash restricted for regulatory purposes for the periods presented (in thousands):
	Year Ended December 31,
	2017		2016		2015
Cash and cash equivalents	$	696,283	$	912,932	$	811,019
Cash segregated for regulatory purposes		90,802		73,235		227,727
Total cash, cash equivalents, and cash segregated for regulatory purposes	$	787,085	$	986,167	$	1,038,746

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows (continued)

	Year Ended December 31,
(in thousands)	2017		2016		2015
Supplemental disclosure of cash flow information:
Cash paid for interest	$	69,781	$	62,145	$	41,801
Cash paid for income taxes, net of refunds		21,516		22,946		59,356
Noncash investing and financing activities:
Unit grants, net of forfeitures	$	71,300	$	190,211	$	267,769
Issuance of common stock for acquisitions		9,352		12,813		79,747
Shares surrendered into treasury		—		—		223

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Notes to Consolidated Financial Statements

NOTE 1 – Nature of Operations and Basis of Presentation

Nature of Operations

Stifel Financial Corp. (the “Company”), through its wholly owned subsidiaries, 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, with a growing presence in Europe. Our major geographic area of concentration is throughout the United States, with a growing presence in the United Kingdom and Europe. 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 & Company, Incorporated (“Stifel”), Keefe Bruyette & Woods (“KBW”), and Stifel Bank & Trust (“Stifel Bank”). Unless otherwise indicated, the terms “we,” “us,” “our,” or “our company” in this report refer to Stifel Financial Corp. and its wholly owned subsidiaries.

The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, which require management to make certain estimates and assumptions that affect the reported amounts. We consider significant estimates, which are most susceptible to change and impacted significantly by judgments, assumptions, and estimates, to be: valuation of financial instruments and investments in partnerships, accrual for contingencies, allowance for loan losses, derivative instruments and hedging activities, fair value of goodwill and intangible assets, provision for income taxes and related tax reserves, and forfeitures associated with stock-based compensation. Actual results could differ from those estimates.

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.

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”). When we do not have a controlling interest in an entity, but we exert significant influence over the entity, we apply the equity method of accounting. All material intercompany balances and transactions have been eliminated in consolidation.

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.

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. With the exception of entities eligible for the deferral codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2010-10, “Consolidation: Amendments for Certain Investment Funds” (“ASU 2010-10”) (generally asset managers and investment companies), ASC 810 states that a controlling financial interest in an entity is present when an enterprise has a variable interest, or combination of variable interests, that have both the power to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the rights to receive benefits from the entity that could potentially be significant to the entity.

Entities meeting the deferral provision defined by ASU 2010-10 are evaluated under the historical VIE guidance. Under the historical guidance, a controlling financial interest in an entity is present when an enterprise has a variable interest, or combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE.

We determine whether we are the primary beneficiary of a VIE by first performing a qualitative analysis of the VIE’s control structure, expected benefits and losses, and expected residual returns. This analysis includes a review of, among other factors, the VIE’s capital structure, contractual terms, which interests create or absorb benefits or losses, variability, related party relationships, and the design of the VIE. Where a qualitative analysis is not conclusive, we perform a quantitative analysis. We reassess our initial evaluation of an entity as a VIE and our initial determination of whether we are the primary beneficiary of a VIE upon the occurrence of certain reconsideration events. See Note 27 for additional information on VIEs.

NOTE 2 – Summary of Significant Accounting Policies

Cash and Cash Equivalents

We consider money market mutual funds and highly liquid investments with original maturities of three months or less that are not restricted or segregated to be cash equivalents. Cash and cash equivalents include deposits with banks, federal funds sold, money market mutual funds, and certificates of deposit. Cash and cash equivalents also include balances that Stifel Bank maintains at the Federal Reserve Bank.

Cash Segregated for Regulatory Purposes

Our broker-dealer subsidiaries are subject to Rule 15c3-3 under the Securities Exchange Act of 1934, which requires our company to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of its clients. In accordance with Rule 15c3-3, our company has portions of its cash segregated for the exclusive benefit of clients at December 31, 2017.

Brokerage Client Receivables, Net

Brokerage client receivables include receivables of our company’s broker-dealer subsidiaries, which represent amounts due on cash and margin transactions and are generally collateralized by securities owned by clients. Brokerage client receivables, primarily consisting of floating-rate loans collateralized by customer-owned securities, are charged interest at rates similar to other such loans made throughout the industry. The receivables are reported at their outstanding principal balance net of allowance for doubtful accounts. When a brokerage client receivable is considered to be impaired, the amount of the impairment is generally measured based on the fair value of the securities acting as collateral, which is measured based on current prices from independent sources, such as listed market prices or broker-dealer price quotations. Securities owned by customers, including those that collateralize margin or other similar transactions, are not reflected in the consolidated statements of financial condition.

Securities Borrowed and Securities Loaned

Securities borrowed require our company to deliver cash to the lender in exchange for securities and are included in receivables from brokers, dealers, and clearing organizations in the consolidated statements of financial condition. For securities loaned, we generally receive collateral in the form of cash in an amount in excess of the market value of securities loaned. Securities loaned are included in payables to brokers, dealers, and clearing organizations in the consolidated statements of financial condition. We monitor the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary. Fees received or paid are recorded in interest revenue or interest expense in the consolidated statements of operations.

Substantially all of these transactions are executed under master netting agreements, which gives us right of offset in the event of counterparty default; however, such receivables and payables with the same counterparty are not set off in the consolidated statements of financial condition.

Securities Purchased Under Agreements to Resell and Repurchase Agreements

Securities purchased under agreements to resell (“resale agreements”) are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. We obtain control of collateral with a market value equal to or in excess of the principal amount loaned and accrued interest under resale agreements. These agreements are short-term in nature and are generally collateralized by U.S. government securities, U.S. government agency securities, and corporate bonds. We value collateral on a daily basis, with additional collateral obtained when necessary to minimize the risk associated with this activity.

Securities sold under agreements to repurchase (“repurchase agreements”) are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. We make delivery of securities sold under agreements to repurchase and monitor the value of collateral on a daily basis. When necessary, we will deliver additional collateral.

Financial Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, financial instruments owned, available-for-sale securities, investments, financial instruments sold, but not yet purchased, and derivatives. Other than those separately discussed in the notes to the consolidated financial statements, the remaining financial instruments are generally short-term in nature, and their carrying values approximate fair value.

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 (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. We have categorized our financial instruments measured at fair value into a three-level classification in accordance with Topic 820, “Fair Value Measurement,” which established a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the transparency of inputs as follows:

Level 1 – Quoted prices (unadjusted) are available in active markets for identical assets or liabilities as of the measurement date. A quoted price for an identical asset or liability in an active market provides the most reliable fair value measurement, because it is directly observable to the market.

Level 2 – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the measurement date. The nature of these financial instruments includes instruments for which quoted prices are available but traded less frequently, derivative 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 3 – Instruments that have little to no pricing observability as of the measurement date. These financial instruments do not have 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.

Valuation of Financial Instruments

When available, we use observable market prices, observable market parameters, or broker or dealer prices (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 financial instruments owned, available-for-sale securities, investments, and financial instruments 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.

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. See Note 5 for additional information on how we value our financial instruments.

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

Securities available for sale, which are carried at fair value, include U.S. government agency securities; state and municipal securities; agency, non-agency, and commercial mortgage-backed securities; corporate fixed income securities; and asset-backed securities, which primarily includes collateralized loan obligations.

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, current market conditions, and our company’s ability and intent to hold the investment until its value recovers or the securities mature. We may determine that the decline in fair value of an investment is other-than-temporary if our analysis of these factors indicates that we will not recover our investment in the securities.

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 other operating expenses in the consolidated statements of operations. 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.

Unrealized gains and losses on our available-for-sale securities are reported, net of taxes, in accumulated other comprehensive loss included in shareholders’ equity. Amortization of premiums and accretion of discounts are recorded as interest income in the consolidated statements of operations using the interest method. Realized gains and losses from sales of securities available for sale are determined on a specific identification basis and are included in other income in the consolidated statements of operations in the period they are sold. For securities transferred from available-for-sale to held-to-maturity, carrying value also includes unrealized gains and losses recognized in accumulated other comprehensive loss at the date of transfer. Such unrealized gains or losses are accreted over the remaining life of the security with no impact on future net income.

Loan Classification

We classify loans based on our investment strategy and management’s assessment of our intent and ability to hold loans for the foreseeable future or until maturity. Management’s intent and ability with respect to certain loans may change from time to time depending on a number of factors, including economic, liquidity, and capital conditions. The accounting and measurement framework for loans differs depending on the loan classification. The classification criteria and accounting and measurement framework for bank loans and loans held for sale are described below.

Bank Loans and Allowance for Loan Losses

Bank loans consist of commercial and residential mortgage loans, commercial and industrial loans, stock-secured loans, home equity loans, construction loans, and consumer loans originated or acquired by Stifel Bank. Bank loans include those loans that management has the intent and ability to hold and are recorded at outstanding principal adjusted for any charge-offs, allowance for loan losses, deferred origination fees and costs, and purchased discounts. Loan origination costs, net of fees, and premiums and discounts on purchased loans are deferred and recognized over the contractual life of the loan as an adjustment of yield using the interest method. Bank loans are generally collateralized by real estate, real property, marketable securities, or other assets of the borrower. Interest income is recognized using the effective interest rate method, which is based upon the respective interest rates and the average daily asset balance. Discount accretion/premium amortization is recognized using the effective interest rate method, which is based upon the respective interest rate and expected lives of loans.

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 other operating expenses in the consolidated statements of operations. 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.

Loans Held for Sale

Loans that we intend to sell or for which we do not have the ability and intent to hold for the foreseeable future are classified as held for sale. Loans held for sale consist of fixed-rate and adjustable-rate residential and multi-family real estate mortgage loans intended for sale. Loans held for sale are stated at lower of cost or market value on an individual loan basis. Declines in market value below cost and any gains or losses on the sale of these assets are recognized in other income in the consolidated statements of operations.

Market value is determined based on prevailing market prices for loans with similar characteristics or on sale contract prices. Deferred fees and costs related to these loans are not amortized but are recognized as part of the cost basis of the loan at the time it is sold. Because loans held for sale are reported at lower of cost or market value, an allowance for loan losses is not established for loans held for sale.

Impaired Loans

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.

We consider a loan a trouble debt restructuring when an existing borrower is granted concessionary rates or terms, which would not otherwise be offered. The concessions granted do not reflect current market conditions for a new loan of similar risk to another borrower in similar financial circumstances.

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 for loan losses when we believe the uncollectibility of a loan balance is certain. Subsequent recoveries, if any, are credited to the allowance for loan losses.

Investments

Our broker-dealer subsidiaries report changes in fair value of marketable and non-marketable securities in other income in the consolidated statements of operations. The fair value of marketable investments is generally based on either quoted market or dealer prices. The fair value of non-marketable securities is based on management’s estimate using the best information available, which generally consists of quoted market prices for similar securities and internally developed discounted cash flow models.

Investments in the consolidated statements of financial condition contain investments in securities that are marketable and securities that are not readily marketable. These investments are not included in our broker-dealer trading inventory or available-for-sale or held-to-maturity portfolios and represent the acquiring and disposing of debt or equity instruments for our benefit.

Fixed Assets, Net

Office equipment is depreciated on a straight-line basis over the estimated useful life of the asset of two to seven years. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the term of the lease. Buildings and building improvements are amortized on a straight-line basis over the estimated useful life of the asset of three to thirty-nine years. Depreciation expense is recorded in occupancy and equipment rental expense in the consolidated statements of operations. Office equipment, leasehold improvements, and property are stated at cost net of accumulated depreciation and amortization in the consolidated statements of financial condition. Office equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

Goodwill and Intangible Assets

Goodwill represents the cost of acquired businesses in excess of the fair value of the related net assets acquired. 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. During 2017, the Company decided that it would change its annual impairment test date from July 31st to October 1st. The Company performed impairment testing on both July 31, 2017 and October 1, 2017 with no impairment charges resulting from the annual impairment tests.

Loans and Advances to Financial Advisors and Other Employees, Net

We offer transition pay, principally in the form of upfront loans, to financial advisors and certain key revenue producers as part of our company’s overall growth strategy. These loans are generally forgiven by a charge to compensation and benefits over a five- to ten-year period if the individual satisfies certain conditions, usually based on continued employment and certain performance standards. We monitor and compare individual financial advisor production to each loan issued to ensure future recoverability. If the individual leaves before the term of the loan expires or fails to meet certain performance standards, the individual is required to repay the balance. In determining the allowance for doubtful receivables from former employees, management considers the facts and circumstances surrounding each receivable, including the amount of the unforgiven balance, the reasons for the terminated employment relationship, and the former employees’ overall financial situation.

Derivative Instruments and Hedging Activities

We recognize all of our derivative instruments at fair value as either assets or liabilities in the consolidated statements of financial condition. These instruments are recorded in other assets or accounts payable and accrued expenses in the consolidated statements of financial condition and in the operating section of the consolidated statements of cash flows as increases or decreases of other assets and accounts payable and accrued expenses. Our company’s 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 accounting for changes in the fair value (i.e., gains and losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must also designate the hedging instrument or transaction, based upon the exposure being hedged.

For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss, net of tax, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. We do not use derivatives for trading or speculative purposes and, at December 31, 2017, all of our derivatives are designated as cash flow hedges. See Note 14 for additional details.

Revenue Recognition

Customer securities transactions are recorded on a settlement date basis, with related commission revenues and expenses recorded on a trade date basis. Commission revenues are recorded as the amount charged to the customer, which, in certain cases, may include varying discounts. Principal securities transactions are recorded on a trade date basis. We typically distribute our proprietary equity research products to our client base of institutional investors at no charge. These proprietary equity research products are accounted for as a cost of doing business.

Investment banking revenues, which include underwriting fees, management fees, advisory fees, placement fees, and sales credits earned in connection with the distribution of the underwritten securities, are recorded when services for the transactions are completed under the terms of each engagement. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded. Investment banking revenues are presented net of related unreimbursed expenses. We have not recognized any incentive income that is subject to contingent repayments.

Asset management and service fees are recorded when earned, based on the period-end assets in the accounts, and consist of customer account service fees, per account fees (such as IRA fees), and wrap fees, net of external manager costs on managed accounts.

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.

Operating Leases

We lease office space and equipment under operating leases. We recognize rent expense related to these operating leases on a straight-line basis over the lease term. The lease term commences on the earlier of the date when we become legally obligated for the rent payments or the date on which we take possession of the property. For tenant improvement allowances and rent holidays, we record a deferred rent liability in accounts payable and accrued expenses in the consolidated statements of financial condition and amortize the deferred rent over the lease term as a reduction to occupancy and equipment rental expense in the consolidated statements of operations.

Income Taxes

We compute income taxes using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial statement carrying amounts and the tax basis of our company’s assets and liabilities. We establish a valuation allowance for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefits, or that future deductibility is uncertain.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize interest and penalties related to uncertain tax positions in provision for income taxes in the consolidated statements of operations. See Note 23 for further information regarding income taxes.

Foreign Currency Translation

We consolidate our foreign subsidiaries, which have designated their local currency as their functional currency. Assets and liabilities of these foreign subsidiaries are translated at year-end rates of exchange. Revenues and expenses are translated at an average rate for the period. In accordance with FASB Accounting Standards Codification Topic 830, “Foreign Currency Matters,” gains or losses resulting from translating foreign currency financial statements are reflected in accumulated other comprehensive loss, a separate component of shareholders’ equity. Gains or losses resulting from foreign currency transactions are included in other income in the consolidated statements of operations.

Recently Issued Accounting Guidance

Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” that provides for the reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Cuts and Jobs Act of 2017. The accounting update is effective for the fiscal year beginning after December 15, 2018 (January 1, 2019 for our company) and early adoption is permitted. The accounting update should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act of 2017 is recognized. We are currently evaluating the impact of the accounting update, but the adoption is not expected to have a material impact on our consolidated financial statements.

Derivatives and Hedging

In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” which amends the hedge accounting recognition and presentation requirements. The accounting update improves the transparency and understandability of information conveyed to financial statement users by better aligning companies’ hedging relationship to their existing risk management strategies, simplifies the application of hedge accounting and increases transparency regarding the scope and results of hedging program. The accounting update is effective for the fiscal year beginning after December 15, 2019 (January 1, 2019 for our company) and early adoption is permitted. The Company will not early adopt this accounting update. We are currently evaluating the impact of the accounting update, but the adoption is not expected to have a material impact on our consolidated financial statements.

Callable debt securities

In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” which shortens the amortization period for the premium on certain callable debt securities to the earliest call date. The amendments are applicable to any purchased individual debt security with an explicit and non-contingent call feature that is callable at a fixed price on a preset date. The accounting update is effective for fiscal years beginning after December 15, 2018 (January 1, 2019 for our company) under a modified retrospective approach and early adoption is permitted. We are evaluating the impact the adoption of this new guidance will have on our consolidated financial statements.

Goodwill Impairment Testing

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. Under the accounting update, the annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The accounting update is effective for annual or any interim impairment tests in fiscal years beginning after December 15, 2019 (January 1, 2020 for our company) and early adoption is permitted. We are currently evaluating the impact of the accounting update, but the adoption is not expected to have a material impact on our consolidated financial statements.

Statement of Cash Flow

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flow - Restricted Cash,” which adds or clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. The accounting update is effective for the fiscal year beginning after December 15, 2017 (January 1, 2018 for our Company). We adopted the accounting update on January 1, 2018. Upon the adoption of the accounting update, we recorded increases to operating cash flows in the accompanying consolidated statements of cash flows of $17.6 million and $178.1 million for the years ended December 31, 2017 and 2015, respectively. We recorded a decrease to operating cash flows in the accompanying consolidated statements of cash flows of $153.8 million for the year ended December 31, 2016. These adjustments related to reclassifying the changes in our cash segregated for regulatory purposes and restricted cash balance from operating activities to the cash and cash equivalent balances. We also increased cash used in investing activities by $0.6 million for the year ended December 31, 2016 for restricted cash balances that were included in the sale of certain Sterne Agee businesses in 2016.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which amends and clarifies the current guidance to reduce diversity in practice of the classification of certain cash receipts and payments in the consolidated statements of cash flows. The accounting update is effective for the fiscal year beginning after December 31, 2017 (January 1, 2018 for our company). The accounting update is not expected to have a material impact on our consolidated financial statements.

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments − Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This accounting update impacts the impairment model for certain financial assets measured at amortized cost by requiring a current expected credit loss (“CECL”) methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. CECL will replace the loss model currently applicable to bank loans, held-to-maturity securities, and other receivables carried at amortized cost.

The accounting update also eliminates the concept of other-than-temporary impairment for available-for-sale securities. Impairments on available-for-sale securities will be required to be recognized in earnings through an allowance, when the fair value is less than amortized cost and a credit loss exists or the securities are expected to be sold before recovery of amortized cost. Under the accounting update, there may be an ability to determine there are no expected credit losses in certain circumstances, e.g., based on collateral arrangements for lending and financing transactions or based on the credit quality of the borrower or issuer.

Overall, the amendments in this accounting update are expected to accelerate the recognition of credit losses for portfolios where CECL models will be applied. The accounting update is effective for fiscal years beginning after December 15, 2019 (January 1, 2020 for our company) with early adoption permitted as of January 1, 2019. We are currently evaluating the impact of the accounting update, but the adoption is not expected to have a material impact on our consolidated financial statements.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases” that requires for leases longer than one year, a lessee recognize in the statements of financial condition a right-of-use asset, representing the right to use the underlying asset for the lease term, and a lease liability, representing the liability to make lease payments. The accounting update also requires that for finance leases, a lessee recognize interest expense on the lease liability, separately from the amortization of the right-of-use asset in the statements of earnings, while for operating leases, such amounts should be recognized as a combined expense. In addition, this accounting update requires expanded disclosures about the nature and terms of lease agreements.

The accounting update is effective for fiscal years beginning after December 15, 2018 (January 1, 2019 for our company) under a modified retrospective approach and early adoption is permitted. The Company’s implementation efforts include reviewing existing leases and service contracts, which may include embedded leases. Upon adoption, our company expects a gross up on its consolidated statements of financial condition upon recognition of the right-of-use assets and lease liabilities and does not expect the amount of the gross up to have a material impact on its financial condition.

Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” that will change the income statement impact of equity investments held by an entity, and the recognition of changes in fair value of financial liabilities when the fair value option is elected. The accounting update also amends certain disclosure requirements associated with the fair value of financial instruments. The accounting update is effective for fiscal years beginning after December 15, 2017 (January 1, 2018 for our company). The accounting update is not expected to have a material impact on our consolidated financial statements.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, “Revenue From Contracts With Customers (Topic 606),” (“ASU 2014-09”) that supersedes current revenue recognition guidance, including most industry-specific guidance. ASU 2014-09, as amended, requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The guidance also requires additional disclosures regarding the nature, amount, timing, and uncertainty of revenue that is recognized.

The Company will adopt the accounting update effective as of January 1, 2018 using the modified retrospective method, with a cumulative effect adjustment to opening retained earnings. The cumulative effect that the Company will recognize as an adjustment to retained earnings upon adoption is not material to our consolidated financial statements. Accordingly, the new revenue standard will be applied prospectively in our consolidated financial statements from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will continue to be reported under the accounting standards in effect during those historical periods.

This accounting update will change the presentation of certain costs related to underwriting and advisory activities so that such costs will be recorded in the relevant non-interest expense line item versus the current practice of netting such costs against Investment banking revenues. In addition, there may be certain situations where advisory fees are deferred and not recognized, dependent upon performance obligations. This change will not materially impact our company’s earnings, however, we will report higher revenues and higher non-compensation operating expenses.

The scope of the accounting update does not apply to revenue associated with financial instruments, and as a result, will not have an impact on the elements of our consolidated statements of operations most closely associated with financial instruments, including Principal transaction revenues, Interest income, and Interest expense. The adoption of the accounting update will not have a material impact on the Company’s consolidated financial statements.

Recently Adopted Accounting Guidance

Share-Based Payments

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”) that requires an entity to record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement. ASU 2016-09 will also require an entity to elect an accounting policy to either estimate the number of forfeitures or account for forfeitures when they occur. The guidance is effective for fiscal years beginning after December 15, 2016 (January 1, 2017 for our company). We adopted the guidance in the update on January 1, 2017. Cash paid to a tax authority by a company when withholding shares from an employee’s award for tax-withholding purposes are now classified as a financing activity in the accompanying consolidated statement of cash flows (adopted retrospectively). We reclassified $61.6 million and $65.0 million from operating activities to financing activities in the accompanying consolidated statement of cash flows for the years ended December 31, 2016 and 2015, respectively, pertaining to shares withheld from employee awards for tax withholding purposes.

NOTE 3 – Acquisitions

City Securities Corporation

On January 3, 2017, the Company completed the acquisition of City Financial Corporation and its wholly owned subsidiary, City Securities Corporation, (“City Securities”), an independent investment bank focused primarily on offering wealth management and public finance services across the Midwest. The acquisition was funded with cash from operations and our common stock.

goodwill in the consolidated statement of financial condition, which has been allocated to our company’s Global Wealth Management and Institutional Group segments. Identifiable intangible assets purchased by our company consisted of customer relationships with an acquisition-date fair value of $4.1 million.

The goodwill represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of the City Securities’ business and of the hired financial advisors and the conversion of the customer accounts to our platform. Goodwill is not expected to be deductible for federal income tax purposes.

We recognized a liability for estimated earn-out payments. These payments will be based on the performance of City Securities over a two-year period. The liability for earn-out payments was $0.5 million at December 31, 2017. The contingent consideration accrual is included in accounts payable and accrued expenses in the consolidated statements of financial condition.

Pro forma information is not presented, because the acquisition is not considered to be material, as defined by the SEC. The results of operations of City Securities have been included in our results prospectively from the date of acquisition.

ISM Capital LLP

On May 3, 2016, the Company completed the acquisition of ISM Capital LLP (“ISM”), an independent investment bank focused on international debt capital markets. The acquisition of ISM adds to the Company’s debt capital markets origination, sales, and research capabilities in Europe, including an end-to-end platform for convertible securities and other equity-linked debt instruments. The acquisition was funded with cash from operations and our common stock, issued out of treasury.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805 (“ASC 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 $6.3 million of goodwill in the consolidated statement of financial condition, which has been allocated to our company’s Institutional Group segment. Identifiable intangible assets purchased by our company consisted of customer relationships, non-compete, and customer backlog with aggregate acquisition-date fair values of $2.3 million.

The goodwill represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of ISM’s business and the addition of an end-to-end platform for convertible securities and other equity-linked debt instruments to our debt capital markets capabilities in Europe. Goodwill is not expected to be deductible for federal income tax purposes.

We recognized a liability for estimated earn-out payments. These payments will be based on ISM’s performance over a three-year period. The liability for earn-out payments was $1.9 million and $3.7 million at December 31, 2017 and 2016, respectively. The contingent consideration accrual is included in accounts payable and accrued expenses in the consolidated statements of financial condition.

Eaton Partners

On January 4, 2016, we completed the acquisition of Eaton Partners, LLC (“Eaton Partners”), a global fund placement and advisory firm. The acquisition was funded with cash from operations and our common stock, issued out of treasury.

The acquisition was accounted for under the acquisition method of accounting in accordance with Topic 805. 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 $72.0 million of goodwill in the consolidated statement of financial condition, which has been allocated to our company’s Institutional Group segment. Identifiable intangible assets purchased by our company consisted of customer relationships, trade name, non-compete, and customer backlog with aggregate acquisition-date fair values of $32.3 million.

The goodwill represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of Eaton’s business and from the relationships Eaton has established with private equity firms, hedge funds, high net worth family offices, and institutional investors. Goodwill is expected to be deductible for federal income tax purposes.

We recognized a liability for estimated earn-out payments. These payments will be based on Eaton Partner’s performance over a four-year period. The liability for earn-out payments was $31.2 million and $27.3 million at December 31, 2017 and 2016, respectively. The contingent consideration accrual is included in accounts payable and accrued expenses in the consolidated statements of financial condition.

Barclays Wealth and Investment Management, Americas

On December 4, 2015, we completed the purchase of the Barclays Wealth and Investment Management, Americas (“Barclays”), franchise in the U.S. The Company paid purchase consideration that was funded with cash from operations. As part of that transaction, Stifel Bank, a wholly owned subsidiary of the Company, acquired approximately $600.0 million of bank loans, at fair value, from Barclays. The fair values for those loans were estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms.

The acquisition was accounted for under the acquisition method of accounting in accordance with Topic 805. 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 $24.8 million of goodwill in the consolidated statement of financial condition, which has been allocated to our company’s Global Wealth Management segment. Identifiable intangible assets purchased by our company consisted of customer relationships, with acquisition-date fair value of $7.3 million.

The goodwill represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of the hired financial advisors and the conversion of the customer accounts to the Stifel platform. Goodwill is expected to be deductible for federal income tax purposes.

In addition, deferred consideration is payable based on certain revenue generated by Stifel in accordance with the distribution agreement. The deferred consideration of $15.2 million has been recognized as a liability and is included in accounts payable and accrued expenses in the consolidated statements of financial condition at December 31, 2017.

During 2016, the Company’s Board of Directors removed the continuing service requirements associated with restricted stock units that were granted to certain employees of Barclays in December 2015. As a result, the awards were expensed at date of modification resulting in a charge of $58.6 million during 2016. The fair value of the awards is based upon the closing price of our company’s common stock on the date of the grant of the awards. These charges are included in compensation and benefits in the consolidated statements of operations for the year ended December 31, 2016.

Sterne Agee Group, Inc.

On June 5, 2015, we completed the purchase of all of the outstanding shares of common stock of Sterne Agee Group, Inc. (“Sterne Agee”), a financial services firm that offers comprehensive wealth management and investment services to a diverse client base including corporations, municipalities, and individual investors. The purchase was completed pursuant to the merger agreement dated February 23, 2015. On July 1, 2016, the Company completed the sale of Sterne Agee’s legacy independent brokerage and clearing businesses pursuant to two separate stock purchase agreements dated June 24, 2016.

The acquisition was accounted for under the acquisition method of accounting in accordance with Topic 805. 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 $60.8 million of goodwill and intangible assets in the consolidated statement of financial condition, which has been allocated to our company’s Global Wealth Management and Institutional Group segments. Identifiable intangible assets purchased by our company consisted of customer relationships with acquisition-date fair value of $29.3 million.

The goodwill represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of Sterne Agee’s business and the reputation and expertise of Sterne Agee in the financial services sector.

On June 5, 2015, certain employees were granted restricted stock units of our company as retention. The fair value of the awards issued as retention was $23.8 million. The fair value of the awards is based upon the closing price of our company’s common stock on the date of grant. There are no continuing service requirements associated with these restricted stock units, and accordingly, they were expensed at date of grant. This charge is included in compensation and benefits in the consolidated statements of operations for the year ended December 31, 2015. In addition, we paid $33.8 million in the form of notes to associates for retention. These notes will be forgiven by a charge to compensation and benefits over a five- to ten-year period if the individual satisfies certain conditions, usually based on continued employment and certain performance standards.

Prior to the closing date, Sterne Agee had established adequate reserves for various claims that were included in the opening balance sheet. During the third quarter of 2015, one legal matter was settled and paid, and the excess reserves associated with the Canyon Ridge matter were distributed to Sterne Agee Group, Inc. shareholders. Under the terms of the agreements governing the acquisition, we have withheld a portion of the purchase price of Sterne Agee Group, Inc. pending the resolution of currently existing or subsequently arising liabilities relating to the operation of the Sterne Agee Group Inc. business prior to the closing of the acquisition. Based upon currently available information and review with counsel, we believe the amounts which we are allowed to withhold will be adequate to fully indemnify us from any losses related to the pre-closing operations of Sterne Agee Group, Inc.

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

Amounts receivable from brokers, dealers, and clearing organizations at December 31, 2017 and 2016, included (in thousands):

	December 31,
	2017			2016
Receivables from clearing organizations	$	270,285	$	568,373
Deposits paid for securities borrowed		132,776		382,691
Securities failed to deliver		56,046		73,688
	$	459,107	$	1,024,752

Amounts payable to brokers, dealers, and clearing organizations at December 31, 2017 and 2016, included (in thousands):

	December 31,
	2017			2016
Deposits received from securities loaned	$	219,782	$	478,814
Securities failed to receive		29,297		27,882
Payable to clearing organizations		27,223		16,411
	$	276,302	$	523,107

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 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, U.S. government securities, and corporate fixed income 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 securities infrequently traded, including fixed income securities, sovereign debt, and equity securities, state and municipal securities, and asset-backed securities, which primarily includes collateralized loan obligations.

We have identified Level 3 financial instruments to include certain equity and corporate fixed income 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 that are valued based on quoted prices in active markets are reported in Level 1. No securities with unobservable pricing inputs are reported in Level 3.

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.

Direct investments in private companies 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

Investments at fair value include investments in funds, including certain money market funds that are measured at net asset value (“NAV”). The Company uses NAV to measure the fair value of its fund investments when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the underlying investments at fair value.

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):

	December 31, 2017				December 31, 2016
	Fair value of investments		Unfunded commitments		Fair value of investments		Unfunded commitments
Money market funds	$	77,441	$	—	$	35,637	$	—
Mutual funds		11,748		—		11,301		—
Private equity funds		7,677		1,825		9,310		2,020
Partnership interests		5,124		1,330		15,798		1,822
Private company investments		—		—		18,763		8,526
Total	$	101,990	$	3,155	$	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 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 securities, including fixed income securities, sovereign debt, and equity 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 December 31, 2017, are presented below (in thousands):

	December 31, 2017
	Total		Level 1		Level 2		Level 3
Financial instruments owned:
U.S. government securities	$	13,466	$	13,466	$	—	$	—
U.S. government agency securities		147,223		—		147,223		—
Mortgage-backed securities:
Agency		329,691		—		329,691		—
Non-agency		75,154		—		74,796		358
Corporate securities:
Fixed income securities		329,179		362		328,575		242
Equity securities		46,802		46,411		138		253
Sovereign debt		32,470		—		32,470		—
State and municipal securities		169,699		—		169,699		—
Total financial instruments owned		1,143,684		60,239		1,082,592		853
Available-for-sale securities:
U.S. government agency securities		4,983		516		4,467		—
State and municipal securities		70,559		—		70,559		—
Mortgage-backed securities:
Agency		305,530		—		305,530		—
Commercial		72,488		—		72,488		—
Non-agency		1,568		—		1,568		—
Corporate fixed income securities		1,211,442		—		1,211,442		—
Asset-backed securities		2,106,938		—		2,106,938		—
Total available-for-sale securities		3,773,508		516		3,772,992		—
Investments:
Corporate equity securities		49,978		49,978		—		—
Auction rate securities:
Equity securities		34,789		—		—		34,789
Municipal securities		846		—		—		846
Other		1,217		—		360		857
Investments measured at NAV		24,549
Total investments		111,379		49,978		360		36,492
Cash equivalents measured at NAV		77,441
Derivative contracts ⁽¹⁾		7,995		—		7,995		—
	$	5,114,007	$	110,733	$	4,863,939	$	37,345

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

	December 31, 2017
	Total		Level 1		Level 2		Level 3
Liabilities:
Financial instruments sold, but not yet purchased:
U.S. government securities	$	442,402	$	442,402	$	—	$	—
U.S. government agency securities		10,348		—		10,348		—
Mortgage-backed securities:
Agency		86,612		—		86,612		—
Corporate securities:
Fixed income securities		180,755		—		180,755		—
Equity securities		38,510		38,070		440		—
Sovereign debt		20,236		—		20,236		—
Total financial instruments sold, but not yet purchased	$	778,863	$	480,472	$	298,391	$	—

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		269,561		1,944		267,344		273
Equity securities		32,044		31,444		—		600
Sovereign debt		30,385		—		30,385		—
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		175,301		980		174,321		—
Equity securities		18,395		18,395		—		—
Sovereign debt		27,667		—		27,667		—
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 tables summarize the changes in fair value associated with Level 3 financial instruments during the years ended December 31, 2017 and 2016 (in thousands):

	Year Ended December 31, 2017
	Financial instruments owned									Investments
	Mortgage- Backed Securities – Non-Agency			Corporate 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	)		—			(88	)		(133	)		785			14		—
Realized gains/(losses) ⁽¹⁾		90			—			(259	)		13			—			—		(383	)
Purchases		—			—			—			—			—			—		—
Sales		(324	)		—			—			(120	)		—			—		—
Redemptions		(230	)		(31	)		—			—			—			—		—
Transfers:
Into Level 3		—			—			—			—			—			—		—
Out of Level 3		—			—			—			(3,593	)		(14,685	)		—		—
Net change		(724	)		(31	)		(347	)		(3,833	)		(13,900	)		14		(383	)
Balance at December 31, 2017	$	358		$	242		$	253		$	—		$	34,789		$	846	$	857

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

	Year Ended December 31, 2016
	Financial instruments owned									Investments
	Mortgage- Backed Securities – Non-Agency			Corporate Fixed Income Securities			Equity Securities			Corporate Equity Securities			Auction Rate Securities – Equity			Auction Rate Securities – Municipal			Other
Balance at December 31, 2015	$	1,476		$	—		$	619		$	2,942		$	50,442		$	1,315		$	20
Unrealized gains/(losses):
Included in changes in net assets ⁽¹⁾		(18	)		—			(279	)		(361	)		547			67			—
Realized gains ⁽¹⁾		54			—			—			2,453			—			—			—
Purchases		—			292			253			3,593			50			—			3,782
Sales		—			—			—			—			—			—			—
Redemptions		(430	)		(19	)		—			(4,794	)		(2,350	)		(550	)		—
Transfers:					��
Into Level 3		—			—			7			—			—			—			465
Out of Level 3		—			—			—			—			—			—			(3,027	)
Net change		(394	)		273			(19	)		891			(1,753	)		(483	)		1,220
Balance at December 31, 2016	$	1,082		$	273		$	600		$	3,833		$	48,689		$	832		$	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.

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 during the year ended December 31, 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 year ended December 31, 2017, relating to Level 3 assets still held at December 31, 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 December 31, 2017.

	Valuation technique	Unobservable input	Range	Weighted average
Investments:
Auction rate securities:
Equity securities	Discounted cash flow	Discount rate	0.8% to 9.8%	4.8%
		Workout period	1-3 years	2.2 years
Municipal securities	Discounted cash flow	Discount rate	1.0% to 9.1%	3.4%
		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.

There were $1.1 million of transfers of financial assets from Level 2 to Level 1 during the year ended December 31, 2017, corporate fixed income securities for which market trades were observed that provided transparency into the valuation of these assets. There were $4.9 million of transfers of financial assets from Level 1 to Level 2 during the year ended December 31, 2017, primarily related to corporate fixed income securities for which there were low volumes of recent trade activity observed. There were no transfers of financial assets into Level 3 during the year ended December 31, 2017. There were $18.3 million of transfers of financial assets out of Level 3 during the year ended December 31, 2017, primarily related to ARS that were transferred to Level 2 upon receiving a tender offer and subsequently sold 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 December 31, 2017 and 2016, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands).

	December 31, 2017				December 31, 2016
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	696,283	$	696,283	$	912,932	$	912,932
Cash segregated for regulatory purposes		90,802		90,802		73,235		73,235
Securities purchased under agreements to resell		512,220		512,220		248,588		248,588
Financial instruments owned		1,143,684		1,143,684		925,045		925,045
Available-for-sale securities		3,773,508		3,773,508		3,181,313		3,181,313
Held-to-maturity securities		3,698,098		3,710,478		3,038,405		3,040,554
Loans held for sale		226,068		226,068		228,588		228,588
Bank loans		6,947,759		6,953,328		5,591,190		5,633,804
Investments		111,379		111,379		133,563		133,563
Derivative contracts ⁽¹⁾		7,995		7,995		10,390		10,390
Financial liabilities:
Securities sold under agreements to repurchase	$	233,704	$	233,704	$	268,546	$	268,546
Bank deposits		13,411,935		12,702,746		11,527,483		11,092,185
Financial instruments sold, but not yet purchased		778,863		778,863		699,032		699,032
Derivative contracts ⁽²⁾		—		—		1,823		1,823
Borrowings		256,000		256,000		377,000		377,000
Federal Home Loan Bank advances		745,000		745,000		500,000		500,000
Senior notes		1,014,940		1,044,768		795,891		799,632
Debentures to Stifel Financial Capital Trusts		67,500		64,962		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 for the periods indicated (in thousands):

	December 31, 2017
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash	$	618,842	$	618,842	$	—	$	—
Cash segregated for regulatory purposes		90,802		90,802		—		—
Securities purchased under agreements to resell		512,220		428,740		83,480		—
Held-to-maturity securities		3,710,478		—		3,517,781		192,697
Loans held for sale		226,068		—		226,068		—
Bank loans		6,953,328		—		6,953,328		—
Financial liabilities:
Securities sold under agreements to repurchase	$	233,704	$	92,278	$	141,426	$	—
Bank deposits		12,702,746		—		12,702,746		—
Borrowings		256,000		256,000		—		—
Federal Home Loan Bank advances		745,000		745,000		—		—
Senior notes		1,044,768		1,044,768		—		—
Debentures to Stifel Financial Capital Trusts		64,962		—		—		64,962

	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		—
Borrowings		377,000		377,000		—		—
Federal Home Loan Bank advances		500,000		500,000		—		—
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 December 31, 2017 and 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 December 31, 2017 and 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, commercial, and non-agency mortgage-backed securities, asset-backed securities, consisting of collateralized loan obligation securities and ARS, 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 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, 2017 and 2016 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.

Borrowings

The carrying amount of borrowings approximates fair value due to the relative short-term nature of such borrowings. In addition, Stifel Bank’s Federal Home Loan Bank 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.

NOTE 6 – Financial Instruments Owned and Financial Instruments Sold, But Not Yet Purchased

The components of financial instruments owned and financial instruments sold, but not yet purchased, at December 31, 2017 and 2016, are as follows (in thousands):

	December 31,
	2017		2016
Financial instruments owned:
U.S. government securities	$	13,466	$	9,951
U.S. government agency securities		147,223		89,833
Mortgage-backed securities:
Agency		329,691		305,774
Non-agency		75,154		28,402
Corporate securities:
Fixed income securities		329,179		269,561
Equity securities		46,802		32,044
Sovereign debt		32,470		30,385
State and municipal securities		169,699		159,095
	$	1,143,684	$	925,045
Financial instruments sold, but not yet purchased:
U.S. government securities	$	442,402	$	362,536
U.S. government agency securities		10,348		20,549
Mortgage-backed securities:
Agency		86,612		94,552
Non-agency		—		1
Corporate securities:
Fixed income securities		180,755		175,301
Equity securities		38,510		18,395
Sovereign debt		20,236		27,667
State and municipal securities		—		31
	$	778,863	$	699,032

At December 31, 2017 and 2016, financial instruments owned in the amount of $810.3 million and $992.9 million, respectively, were pledged as collateral (on a settlement-date basis) for our repurchase agreements and short-term borrowings. Financial instruments owned on a settlement-date basis were $1.3 billion at December 31, 2016. Our financial instruments owned are presented on a trade-date basis in the consolidated statements of financial condition.

Financial instruments 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 December 31, 2017 and 2016 (in thousands):

	December 31, 2017
	Amortized Cost		Gross Unrealized Gains ⁽¹⁾		Gross Unrealized Losses ⁽¹⁾			Estimated Fair Value
Available-for-sale securities
U.S. government agency securities	$	5,022	$	—	$	(39	)	$	4,983
State and municipal securities		74,691		—		(4,132	)		70,559
Mortgage-backed securities:
Agency		308,409		102		(2,981	)		305,530
Commercial		75,548		28		(3,088	)		72,488
Non-agency		1,568		—		—			1,568
Corporate fixed income securities		1,213,262		3,832		(5,652	)		1,211,442
Asset-backed securities		2,098,958		12,877		(4,897	)		2,106,938
	$	3,777,458	$	16,839	$	(20,789	)	$	3,773,508
Held-to-maturity securities ⁽²⁾
Mortgage-backed securities:
Agency	$	1,334,833	$	13,621	$	(16,208	)	$	1,332,246
Commercial		58,971		1,313		—			60,284
Asset-backed securities		2,264,283		15,526		(1,862	)		2,277,947
Corporate fixed income securities		40,011		27		(37	)		40,001
	$	3,698,098	$	30,487	$	(18,107	)	$	3,710,478

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains ⁽¹⁾		Gross Unrealized Losses ⁽¹⁾			Estimated Fair Value
Available-for-sale securities
U.S. government agency securities	$	4,213	$	2	$	(18	)	$	4,197
State and municipal securities		76,066		—		(3,576	)		72,490
Mortgage-backed securities:
Agency		340,738		298		(2,304	)		338,732
Commercial		77,417		59		(4,703	)		72,773
Non-agency		2,032		—		(140	)		1,892
Corporate fixed income securities		830,695		1,418		(8,602	)		823,511
Asset-backed securities		1,858,929		9,857		(1,068	)		1,867,718
	$	3,190,090	$	11,634	$	(20,411	)	$	3,181,313
Held-to-maturity securities ⁽²⁾
Mortgage-backed securities:
Agency	$	1,567,758	$	14,537	$	(17,037	)	$	1,565,258
Commercial		59,581		1,786		—			61,367
Non-agency		688		—		(13	)		675
Asset-backed securities		1,370,300		6,242		(3,396	)		1,373,146
Corporate fixed income securities		40,078		30		—			40,108
	$	3,038,405	$	22,595	$	(20,446	)	$	3,040,554

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

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

For the year ended December 31, 2017, we received proceeds of $87.3 million from the sale of available for sale securities, which resulted in realized gains of $0.4 million. For the year ended December 31, 2016, there were no sales of available-for-sale securities.

For the year ended December 31, 2015, we received proceeds of $641.6 million, from the sale of available-for-sale securities, which resulted in net realized gains of $3.2 million.

During the years ended December 31, 2017, 2016, and 2015, unrealized gains, net of deferred tax expense, of $4.7 million, $5.8 million, and $1.4 million, respectively, were recorded in accumulated other comprehensive loss 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.

	December 31, 2017
	Available-for-sale securities				Held-to-maturity securities
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Debt securities
Within one year	$	184,101	$	184,021	$	40,011	$	40,001
After one year through three years		229,680		229,627		—		—
After three years through five years		318,964		316,198		—		—
After five years through ten years		920,147		922,763		403,840		405,319
After ten years		1,739,041		1,741,313		1,860,443		1,872,628
Mortgage-backed securities
After three years through five years		—		—		58,971		60,284
After five years through ten years		58,263		55,824		143,715		141,770
After ten years		327,262		323,762		1,191,118		1,190,476
	$	3,777,458	$	3,773,508	$	3,698,098	$	3,710,478

The maturities of our available-for-sale (fair value) and held-to-maturity (amortized cost) securities at December 31, 2017, are as follows (in thousands):

	Within 1 Year		1-5 Years		5-10 Years		After 10 Years		Total
Available-for-sale:⁽¹⁾
U.S. government agency securities	$	1,722	$	3,261	$	—	$	—	$	4,983
State and municipal securities		274		84		18,745		51,456		70,559
Mortgage-backed securities:
Agency		—		—		338		305,192		305,530
Commercial		—		—		55,486		17,002		72,488
Non-agency		—		—		—		1,568		1,568
Corporate fixed income securities		182,025		542,480		486,937		—		1,211,442
Asset-backed securities		—		—		417,081		1,689,857		2,106,938
	$	184,021	$	545,825	$	978,587	$	2,065,075	$	3,773,508
Held-to-maturity:
Mortgage-backed securities:
Agency	$	—	$	—	$	143,715	$	1,191,118	$	1,334,833
Commercial		—		58,971		—		—		58,971
Asset-backed securities		—		—		403,840		1,860,443		2,264,283
Corporate fixed income securities		40,011		—		—		—		40,011
	$	40,011	$	58,971	$	547,555	$	3,051,561	$	3,698,098

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

At December 31, 2017 and 2016, securities of $2.2 billion and $2.0 billion, respectively, were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. At December 31, 2017 and 2016, securities of $2.0 billion and $1.7 billion, respectively, were pledged with the Federal Reserve discount window.

The following table shows the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses, aggregated by investment category and length of time the individual investment securities have been in continuous unrealized loss positions, at December 31, 2017 (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	$	(39	)	$	4,983		—			—	$	(39	)	$	4,983
State and municipal securities		(59	)		2,797		(4,073	)		67,762		(4,132	)		70,559
Mortgage-backed securities:
Agency		(1,024	)		113,363		(1,957	)		158,880		(2,981	)		272,243
Commercial		—			—		(3,088	)		71,161		(3,088	)		71,161
Corporate fixed income securities		(2,513	)		504,591		(3,139	)		185,879		(5,652	)		690,470
Asset-backed securities		(4,897	)		175,074		—			—		(4,897	)		175,074
	$	(8,532	)	$	800,808	$	(12,257	)	$	483,682	$	(20,789	)	$	1,284,490
Held-to-maturity securities
Mortgage-backed securities:
Agency	$	(743	)	$	76,481	$	(15,465	)	$	697,809	$	(16,208	)	$	774,290
Asset-backed securities		(29	)		29,399		(1,833	)		42,906		(1,862	)		72,305
Corporate fixed income securities		(37	)		9,965		—			—		(37	)		9,965
	$	(809	)	$	115,845	$	(17,298	)	$	740,715	$	(18,107	)	$	856,560

At December 31, 2017, the amortized cost of 186 securities classified as available for sale exceeded their fair value by $20.8 million, of which $12.3 million related to investment securities that had been in a loss position for 12 months or longer. The total fair value of these investments at December 31, 2017, was $1.3 billion, which was 34.0% of our available-for-sale portfolio.

At December 31, 2017, the carrying value of 42 securities held to maturity exceeded their fair value by $18.1 million, of which $17.3 million related to securities held to maturity that have been in a loss position for 12 months or longer. 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 OTTI assessment is a subjective process requiring the use of judgments and assumptions. There was no credit-related OTTI recognized during the years ended December 31, 2017, 2016, and 2015.

NOTE 8 – Bank Loans

The following table presents the balance and associated percentage of each major loan category in our bank loan portfolio at December 31, 2017 and 2016 (in thousands, except percentages):

	December 31, 2017						December 31, 2016
	Balance			Percent			Balance			Percent
Residential real estate	$	2,593,576			37.0	%	$	2,161,400			38.4	%
Commercial and industrial		2,437,938			34.8			1,710,399			30.3
Securities-based loans		1,819,206			25.9			1,614,033			28.6
Commercial real estate		116,258			1.7			78,711			1.4
Consumer		24,508			0.3			45,391			0.8
Home equity lines of credit		15,039			0.2			15,008			0.3
Construction and land		7,896			0.1			12,623			0.2
Gross bank loans		7,014,421			100.0	%		5,637,565			100.0	%
Unamortized loan premium/(discount), net		788						858
Loans in process		(856	)					(49	)
Unamortized loan fees, net		872						(2,021	)
Allowance for loan losses		(67,466	)					(45,163	)
Bank loans, net	$	6,947,759					$	5,591,190

At December 31, 2017 and 2016, Stifel Bank had loans outstanding to its executive officers, directors, and their affiliates in the amount of $4.0 million and $3.7 million, respectively, and loans outstanding to other Stifel Financial Corp. executive officers, directors, and their affiliates in the amount of $8.4 million and $5.6 million, respectively.

At December 31, 2017 and 2016, we had loans held for sale of $226.1 million and $228.6 million, respectively. For the years ended December 31, 2017, 2016, and 2015, we recognized gains of $12.3 million, $16.0 million, and $12.7 million, respectively, from the sale of originated loans, net of fees and costs.

At December 31, 2017 and 2016, residential and commercial real estate loans of $2.4 billion and $2.3 billion, respectively, were pledged at the Federal Home Loan Bank as collateral for borrowings.

The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2017 and 2016 (in thousands).

	Year Ended December 31, 2017
	Beginning Balance		Provision			Charge- offs			Recoveries		Ending Balance
Commercial and industrial	$	35,127	$	19,666		$	(355	)	$	36	$	54,474
Securities-based loans		3,094		(1,006	)		—			—		2,088
Residential real estate		2,660		5,770			—			—		8,430
Commercial real estate		1,363		2,860			(2,703	)		—		1,520
Home equity lines of credit		371		(212	)		—			3		162
Construction and land		232		(132	)		—			—		100
Consumer		129		(115	)		—			2		16
Qualitative		2,187		(1,511	)		—			—		676
	$	45,163	$	25,320		$	(3,058	)	$	41	$	67,466

	Year Ended December 31, 2016
	Beginning Balance		Provision		Charge- offs			Recoveries		Ending Balance
Commercial and industrial	$	24,748	$	10,646	$	(267	)	$	—	$	35,127
Securities-based loans		1,607		1,487		—			—		3,094
Residential real estate		1,241		1,430		(13	)		2		2,660
Commercial real estate		264		1,090		—			9		1,363
Home equity lines of credit		290		81		—			—		371
Construction and land		78		154		—			—		232
Consumer		105		38		(16	)		2		129
Qualitative		1,454		733		—			—		2,187
	$	29,787	$	15,659	$	(296	)	$	13	$	45,163

The following table presents the unpaid principal balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2017 (in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Residential real estate	$	24	$	8,406	$	8,430	$	171	$	2,593,405	$	2,593,576
Commercial and industrial		9,059		45,415		54,474		28,856		2,409,082		2,437,938
Securities-based loans		—		2,088		2,088		—		1,819,206		1,819,206
Commercial real estate		—		1,520		1,520		—		116,258		116,258
Consumer		2		14		16		2		24,506		24,508
Home equity lines of credit		20		142		162		184		14,855		15,039
Construction and land		—		100		100		—		7,896		7,896
Qualitative		—		676		676		—		—		—
	$	9,105	$	58,361	$	67,466	$	29,213	$	6,985,208	$	7,014,421

The following table presents the unpaid principal balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2016 (in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Residential real estate	$	24	$	2,636	$	2,660	$	178	$	2,161,222	$	2,161,400
Commercial and industrial		2,392		32,735		35,127		16,815		1,693,584		1,710,399
Securities-based loans	—			3,094		3,094	—			1,614,033		1,614,033
Commercial real estate		722		641		1,363		9,522		69,189		78,711
Consumer		6		123		129		6		45,385		45,391
Home equity lines of credit		231		140		371		413		14,595		15,008
Construction and land	—			232		232	—			12,623		12,623
Qualitative	—			2,187		2,187	—		—			—
	$	3,375	$	41,788	$	45,163	$	26,934	$	5,610,631	$	5,637,565

In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience, and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision.

There are two components of the allowance for loan losses: the inherent allowance component and the specific allowance component. The inherent allowance component of the allowance for loan losses is used to estimate the probable losses inherent in the loan portfolio and includes non-homogeneous loans that have not been identified as impaired and portfolios of smaller balance homogeneous loans. Our company maintains methodologies by loan product for calculating an allowance for loan losses that estimates the inherent losses in the loan portfolio. Qualitative and environmental factors, such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered in the calculations. The allowance for loan losses is maintained at a level reasonable to ensure that it can adequately absorb the estimated probable losses inherent in the portfolio.

The specific allowance component of the allowance for loan losses is used to estimate probable losses for non-homogeneous exposures, including loans modified in a Troubled Debt Restructuring (TDR), which have been specifically identified for impairment analysis by our company and determined to be impaired. At December 31, 2017, we had $29.2 million of impaired loans, net of discounts, which included $9.1 million in troubled debt restructurings. The specific allowance on impaired loans at December 31, 2017 was $9.1 million. At December 31, 2016, we had $26.9 million of impaired loans, net of discounts, which included $9.7 million in troubled debt restructurings. The specific allowance on impaired loans at December 31, 2016 was $3.4 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 year ended December 31, 2017 and 2016, were insignificant to the consolidated financial statements.

The tables below present loans that were individually evaluated for impairment by portfolio segment at December 31, 2017 and 2016, including the average recorded investment balance (in thousands):

	December 31, 2017
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	28,856	$	5,211	$	23,645	$	28,856	$	9,059	$	30,277
Consumer		677		—		2		2		2		5
Home equity lines of credit		184		—		184		184		20		300
Residential real estate		171		—		171		171		24		174
Total	$	29,888	$	5,211	$	24,002	$	29,213	$	9,105	$	30,756

	December 31, 2016
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	16,815	$	—	$	16,815	$	16,815	$	2,392	$	22,559
Commercial real estate		10,503	—			9,522		9,522		722		9,080
Consumer		833	—			6		6		6		9
Home equity lines of credit		413	—			413		413		231		413
Residential real estate		178	—			178		178		24		181
Total	$	28,742	$	—	$	26,934	$	26,934	$	3,375	$	32,242

The following tables present the aging of the recorded investment in past due loans at December 31, 2017 and 2016, by portfolio segment (in thousands):

	December 31, 2017
	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Residential real estate	$	7,892	$	—	$	7,892	$	2,585,684		2,593,576
Commercial and industrial		11,883		—		11,883		2,426,055		2,437,938
Securities-based loans		—		—		—		1,819,206		1,819,206
Commercial real estate		—		—		—		116,258		116,258
Consumer		2		—		2		24,506		24,508
Home equity lines of credit		184		—		184		14,855		15,039
Construction and land		—		—		—		7,896		7,896
Total	$	19,961	$	—	$	19,961	$	6,994,460	$	7,014,421

	December 31, 2017 *
	Non-accrual		Restructured		Total
Commercial and industrial	$	19,904	$	8,952	$	28,856
Home equity lines of credit		184		—		184
Residential real estate		—		171		171
Consumer		2		—		2
Total	$	20,090	$	9,123	$	29,213

* There were no loans past due 90 days and still accruing interest at December 31, 2017.

	December 31, 2016
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Residential real estate	$	1,923	$	—	$	1,923	$	2,159,477		2,161,400
Commercial and industrial	—		—			—		1,710,399		1,710,399
Securities-based loans	—		—			—		1,614,033		1,614,033
Commercial real estate		9,522	—			9,522		69,189		78,711
Consumer	—			2		2		45,389		45,391
Home equity lines of credit		78		196		274		14,734		15,008
Construction and land	—		—			—		12,623		12,623
Total	$	11,523	$	198	$	11,721	$	5,625,844	$	5,637,565

	December 31, 2016 *
	Non-accrual		Restructured		Total
Commercial and industrial	$	16,815	$	—	$	16,815
Commercial real estate		—		9,522		9,522
Home equity lines of credit		413		—		413
Residential real estate		—		178		178
Consumer		6		—		6
Total	$	17,234	$	9,700	$	26,934

* There were no loans past due 90 days and still accruing interest at December 31, 2016.

Credit quality indicators

As of December 31, 2017, bank loans were primarily extended to non-investment-grade borrowers. Substantially all of these loans align with the U.S. federal bank regulatory agencies’ definition of Pass. Loans meet the definition of Pass when they are performing and/or do not demonstrate adverse characteristics that are likely to result in a credit loss. 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.

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 December 31, 2017 and 2016, 97.2% and 97.9% 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. Our company uses the following definitions for risk ratings:

Pass. A credit exposure rated pass has a continued expectation of timely repayment, all obligations of the borrower are current, and the obligor complies with material terms and conditions of the lending agreement.

Special Mention. Extensions of credit that have potential weakness that deserve management’s close attention and, if left uncorrected, may, at some future date, result in the deterioration of the repayment prospects or collateral position.

Substandard. Obligor has a well-defined weakness that jeopardizes the repayment of the debt and has a high probability of payment default with the distinct possibility that we will sustain some loss if noted deficiencies are not corrected.

Doubtful. Inherent weakness in the exposure makes the collection or repayment in full, based on existing facts, conditions, and circumstances, highly improbable, and the amount of loss is uncertain.

Doubtful loans are considered impaired. Substandard loans are regularly reviewed for impairment. When a loan is impaired, the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent.

Portfolio segments:

Commercial and industrial (“C&I”). C&I loans primarily include commercial and industrial lending used for general corporate purposes, working capital and liquidity, and “event-driven.” “Event-driven” loans support client merger, acquisition, or recapitalization activities. C&I lending is structured as revolving lines of credit, letter of credit facilities, term loans, and bridge loans.

Risk factors considered in determining the allowance for corporate loans include the borrower’s financial strength, seniority of the loan, collateral type, leverage, volatility of collateral value, debt cushion, and covenants.

Securities-based loans. Securities-based loans allow clients to borrow money against the value of qualifying securities for any suitable purpose other than purchasing, trading, or carrying securities or refinancing margin debt. The majority of consumer loans are structured as revolving lines of credit and letter of credit facilities and are primarily offered through Stifel’s Pledged Asset (SPA) program. The allowance methodology for securities-based lending considers the collateral type underlying the loan.

Consumer. Consumer loans allow customers to purchase non-investment goods and services.

Real Estate. Real estate loans include commercial real estate, residential real estate non-conforming loans, residential real estate conforming loans, and home equity lines of credit. The allowance methodology real estate loans considers several factors, including, but not limited to, loan-to-value ratio, FICO score, home price index, delinquency status, credit limits, and utilization rates.

Construction and land. Short-term loans used to finance the development of a real estate project.

Based on the most recent analysis performed, the risk category of our loan portfolio was as follows: (in thousands):

	December 31, 2017
	Pass		Special Mention		Substandard		Doubtful		Total
Residential real estate	$	2,593,096	$	309	$	171	$	—	$	2,593,576
Commercial and industrial		2,385,152		22,443		30,343		—		2,437,938
Securities-based loans		1,819,206		—		—		—		1,819,206
Commercial real estate		116,258		—		—		—		116,258
Consumer		24,506		—		2		—		24,508
Home equity lines of credit		14,855		—		184		—		15,039
Construction and land		7,896		—		—		—		7,896
Total	$	6,960,969	$	22,752	$	30,700	$	—	$	7,014,421

	December 31, 2016
	Pass		Special Mention		Substandard		Doubtful		Total
Residential real estate	$	2,161,223	$	—	$	177	$	—		2,161,400
Commercial and industrial		1,652,211		27,905		30,283	—			1,710,399
Securities-based loans		1,614,033	—		—		—			1,614,033
Commercial real estate		69,189	—			9,522	—			78,711
Consumer		45,385	—			6	—			45,391
Home equity lines of credit		14,595	—			413	—			15,008
Construction and land		12,623	—		—		—			12,623
Total	$	5,569,259	$	27,905	$	40,401	$	—	$	5,637,565

NOTE 9 – Fixed Assets

The following is a summary of fixed assets as of December 31, 2017 and 2016 (in thousands):

	December 31,
	2017			2016
Furniture and equipment	$	201,917		$	254,705
Building and leasehold improvements		192,320			160,369
Property on operating leases		—			21,064
		394,237			436,138
Less accumulated depreciation and amortization		(239,117	)		(263,310	)
	$	155,120		$	172,828

For the years ended December 31, 2017, 2016, and 2015, depreciation and amortization totaled $32.5 million, $43.1 million, and $36.7 million, respectively.

NOTE 10 – Goodwill and Intangible Assets

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, 2016		Net Additions		Write-off		December 31, 2017
Goodwill
Global Wealth Management	$	270,779	$	5,698	$	—	$	276,477
Institutional Group		691,503		854		—		692,357
	$	962,282	$	6,552	$	—	$	968,834

	December 31, 2016		Net Additions		Amortization			December 31, 2017
Intangible assets
Global Wealth Management	$	45,231	$	3,800	$	(4,506	)	$	44,525
Institutional Group		71,073		1,658		(7,629	)		65,102
	$	116,304	$	5,458	$	(12,135	)	$	109,627

The adjustments to goodwill and intangible assets during the year ended December 31, 2017, are primarily attributable to the acquisitions of ISM, which closed on May 3, 2016, and City Securities, which closed on January 3, 2017. Goodwill for certain of our acquisitions is deductible for tax purposes.

Amortizable intangible assets consist of acquired customer relationships, trade name, investment banking backlog, and non-compete agreements that are amortized over their contractual or determined useful lives. Intangible assets subject to amortization as of December 31, 2017 and 2016 were as follows (in thousands):

	December 31, 2017				December 31, 2016
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Customer relationships	$	146,986	$	55,809	$	141,621	$	46,209
Trade name		24,713		10,228		24,713		8,670
Investment banking backlog		2,598		1,202		1,345		379
Non-compete agreements		1,419		968		2,578		813
	$	175,716	$	68,207	$	170,257	$	56,071

Amortization expense related to intangible assets was $12.1 million, $14.4 million, and $10.4 million for the years ended December 31, 2017, 2016, and 2015, respectively.

The weighted-average remaining lives of the following intangible assets at December 31, 2017, are: customer relationships, 10.8 years; trade name, 10.6 years; and non-compete agreements, 9.6 years. We have an intangible asset that is not subject to amortization and is, therefore, not included in the table below. As of December 31, 2017, we expect amortization expense in future periods to be as follows (in thousands):

Fiscal year
2018	$	10,890
2019		10,341
2020		10,124
2021		9,622
2022		8,880
Thereafter		57,652
	$	107,509

NOTE 11 – Borrowings and Federal Home Loan Bank Advances

Our short-term financing is generally obtained through short-term bank line financing on an uncommitted, secured basis, advances from the Federal Home Loan Bank, 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. We also have an unsecured, committed bank line available.

Our committed bank line financing at December 31, 2017, consisted of a $200.0 million revolving credit facility. The credit facility expires in March 2020. The applicable interest rate under the revolving credit facility is calculated as a per annum rate equal to the London Interbank Offered Rate (“LIBOR”) plus 2.00%, as defined in the revolving credit facility. At December 31, 2017, we had no advances on our revolving credit facility and were in compliance with all covenants.

The Federal Home Loan advances of $745.0 million as of December 31, 2017, are floating-rate advances. The weighted average interest rates on these advances during the year ended December 31, 2017, was 1.07%. The advances are secured by Stifel Bank’s residential mortgage loan portfolio and investment portfolio. The interest rates reset on a daily basis. Stifel Bank has the option to prepay these advances without penalty on the interest reset date.

NOTE 12 – Senior Notes

The following table summarizes our senior notes as of December 31, 2017 and 2016 (in thousands):

	December 31,
	2017			2016
4.250% senior notes, due 2024 ⁽¹⁾	$	500,000		$	500,000
3.50% senior notes, due 2020 ⁽²⁾		300,000			300,000
5.20% senior notes, due 2047 ⁽³⁾		225,000			—
		1,025,000			800,000
Debt issuance costs, net		(10,060	)		(4,109	)
	$	1,014,940		$	795,891

⁽¹⁾

In July 2014, we sold in a registered underwritten public offering, $300.0 million in aggregate principal amount of 4.250% senior notes due July 2024. Interest on these senior notes is payable semi-annually in arrears. We may redeem the notes in whole or in part, at our option, at a redemption price equal to 100% of their principal amount, plus a “make-whole” premium and accrued and unpaid interest, if any, to the date of redemption. In July 2016, we issued an additional $200.0 million in aggregate principal amount of 4.25% senior notes due 2024.

⁽²⁾

In December 2015, we sold in a registered underwritten public offering, $300.0 million in aggregate principal amount of 3.50% senior notes due December 2020. Interest on these senior notes is payable semi-annually in arrears. We may redeem the notes in whole or in part, at our option, at a redemption price equal to 100% of their principal amount, plus a “make-whole” premium and accrued and unpaid interest, if any, to the date of redemption.

⁽³⁾

Our senior notes mature as follows, based upon contractual terms (in thousands):

2018	$	—
2019		—
2020		300,000
2021		—
2022		—
Thereafter		725,000
	$	1,025,000

NOTE 13 – Bank Deposits

Deposits consist of money market and savings accounts, certificates of deposit, and demand deposits. Deposits at December 31, 2017 and 2016 were as follows (in thousands):

	December 31,
	2017		2016
Money market and savings accounts	$	13,219,675	$	11,264,285
Demand deposits (interest-bearing)		184,829		253,545
Demand deposits (non-interest-bearing)		5,856		5,752
Certificates of deposit		1,575		3,901
	$	13,411,935	$	11,527,483

The weighted-average interest rate on deposits was 0.10% and 0.09% at December 31, 2017 and 2016, respectively.

At December 31, 2017 and 2016, the amount of deposits includes related party deposits, primarily brokerage customers’ deposits from Stifel of $13.4 billion and $11.5 billion, respectively, and interest-bearing and time deposits of executive officers, directors, and their affiliates of $0.2 million and $0.5 million, respectively.

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 December 31, 2017 and 2016 (in thousands):

	December 31, 2017
	Asset Derivatives
	Notional Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments under Topic 815:
Cash flow interest rate contracts	$	540,000	Other assets	$	7,995

	December 31, 2016
	Asset Derivatives
	Notional Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments under Topic 815:
Cash flow interest rate contracts	$	790,000	Other assets	$	10,390

	December 31, 2016
	Liability Derivatives
	Notional Value		Balance Sheet Location	Fair Value
Cash flow interest rate contracts	$	121,442	Accounts payable and accrued expenses	$	1,823

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. The swaps have an average remaining life of 2.1 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 in the consolidated statements of operations. The ineffective portion of the cash flow hedging instruments is recorded in other income or other operating expense in the consolidated statements of operations.

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 $3.2 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 years ended December 31, 2017, 2016, and 2015 (in thousands):

Year Ended December 31, 2017

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

1,085

Interest Expense

635

Interest Expense

—

Year Ended December 31, 2016

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

6,383

Interest expense

5,444

Interest expense

Year Ended December 31, 2015

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

(2,137

)

Interest expense

3,824

Interest expense

—

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 December 31, 2017, the fair value of derivatives in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was not material (termination value). We have minimum collateral posting thresholds with certain of our derivative counterparties and have posted cash collateral of $0.8 million against our obligations under these agreements. If we had breached any of these provisions at December 31, 2017, 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 December 31, 2017 and 2016 (in thousands):

	December 31,
	2017		2016
Debenture to Stifel Financial Capital Trust II ⁽¹⁾	$	20,000	$	20,000
Debenture to Stifel Financial Capital Trust III ⁽²⁾		35,000		35,000
Debenture to Stifel Financial Capital Trust IV⁽³⁾		12,500		12,500
	$	67,500	$	67,500

⁽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 are payable at a floating interest rate equal to three-month LIBOR plus 1.70% per annum. During 2016, we extinguished $15.0 million of the Trust II debentures.

⁽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 are 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 are 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 December 31, 2017 and 2016 (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		Amounts available for offset			Available collateral			Net Amount
As of December 31, 2017:
Securities borrowing ⁽¹⁾	$	132,776	$	—	$	132,776	$	(78,474	)	$	(37,248	)	$	17,054
Reverse repurchase agreements ⁽²⁾		512,220		—		512,220		(233,624	)		(266,008	)		12,588
Cash flow interest rate contracts		7,995		—		7,995		—			—			7,995
	$	652,991	$	—	$	652,991	$	(312,098	)	$	(303,256	)	$	37,637
As of December 31, 2016:
Securities borrowing ⁽¹⁾	$	382,691	$	—	$	382,691	$	(291,793	)	$	(68,776	)	$	22,122
Reverse repurchase agreements ⁽²⁾		248,588		—		248,588		(216,542	)		(32,046	)		—
Cash flow interest rate contracts		10,390		—		10,390		—			—			10,390
	$	641,669	$	—	$	641,669	$	(508,335	)	$	(100,822	)	$	32,512

⁽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 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 fair value of securities pledged as collateral was $509.4 million and $248.5 million at December 31, 2017 and 2016, respectively.

The following table provides information about financial liabilities and derivative liabilities that are subject to offset as of December 31, 2017 and 2016 (in thousands):

									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			Amounts available for offset		Collateral Pledged		Net Amount
As of December 31, 2017:
Securities lending ⁽³⁾	$	(219,782	)	$	—	$	(219,782	)	$	78,474	$	133,772	$	(7,536	)
Repurchase agreements ⁽⁴⁾		(233,704	)		—		(233,704	)		233,624		80		—
	$	(453,486	)	$	—	$	(453,486	)	$	312,098	$	133,852	$	(7,536	)
As of December 31, 2016:
Securities lending ⁽³⁾	$	(478,814	)	$	—	$	(478,814	)	$	291,793	$	175,849	$	(11,172	)
Repurchase agreements ⁽⁴⁾		(268,546	)		—		(268,546	)		216,542		52,004		—
Cash flow interest rate contracts		(1,823	)		—		(1,823	)		—		1,823		—
	$	(749,183	)	$	—	$	(749,183	)	$	508,335	$	229,676	$	(11,172	)

⁽³⁾

Securities lending transactions are included in payables to brokers, dealers, and clearing organizations on the consolidated statements of financial condition. See Note 4 in the notes to 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. Collateral pledged by our company to the counter party includes U.S. government agency securities, U.S. government securities, and corporate fixed income securities with market values of $241.4 million and $299.3 million at December 31, 2017 and 2016, respectively.

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 December 31, 2017, had no material effect on the consolidated financial statements.

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.

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 consolidated financial statements for further details.

We have committed capital to certain entities, and these commitments generally have no specified call dates. We had $3.2 million of commitments outstanding at December 31, 2017.

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 December 31, 2017 and 2016, we did not have significant concentrations of credit risk with any one customer or counterparty, or any group of customers or counterparties.

Operating Leases

Future minimum commitments under non-cancelable operating leases at December 31, 2017, are as follows (in thousands):

2018	$	96,009
2019		90,763
2020		77,186
2021		60,279
2022		52,732
Thereafter		151,548
	$	528,517

Certain leases contain provisions for renewal options and escalation clauses based on increases in certain costs incurred by the lessor. We amortize office lease incentives and rent escalation on a straight-line basis over the life of the lease. Rent expense for the years ended December 31, 2017, 2016, and 2015, was $104.5 million, $108.7 million, and $93.6 million, net of sublease income.

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 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 our 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 reasonably 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 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.

Broyles, et al. v. Cantor Fitzgerald & Co. et al. Matter

In December 2013, Stone & Youngberg, LLC (“Stone & Youngberg”) was named in an Amended Complaint filed in U.S. District Court for the Middle District of Louisiana alleging fraud on the part of Stone & Youngberg in connection with the 2007 formation of the Collybus CDO, which was manufactured by Cantor Fitzgerald & Co. (“Cantor”) and purchased by Commonwealth Advisors (“CA”) on behalf of several CA funds (the “fund plaintiffs”), as well as in connection with, among other things, Stone & Youngberg’s facilitation of subsequent trades of Collybus CDO securities by CA on behalf of the CA funds during 2007 and 2008. In the Amended Complaint, the fund plaintiffs allege that they lost over $200.0 million during the financial crisis through mismanagement of the CA funds.

In addition to the claims asserted against Stone & Youngberg, the Amended Complaint seeks to hold our company and Stifel liable for Stone & Youngberg’s alleged wrongdoing under theories of successor and alter ego liability, arising out of our company’s purchase of the membership interests of Stone & Youngberg in 2011 and the subsequent operation of that business.

In a related action, approximately one dozen individual investors (the “individual plaintiffs”) brought a direct action against the Company and other defendants, seeking recessionary damages of approximately $90 million. The court ruled that the individual plaintiffs had no standing to pursue these claims because the CA funds are separately pursuing claims. The individual plaintiffs appealed that decision to the Fifth Circuit.

During December 2017, the fund plaintiffs, the individual plaintiffs, our company and our subsidiaries, including Stone & Youngberg, entered into a settlement agreement that resolved all outstanding litigation related to 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 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). Our other broker-dealer subsidiaries 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 are subject to the regulatory supervision and requirements of the Financial Conduct Authority (“FCA”) in the United Kingdom. At December 31, 2017, our international subsidiaries’ capital and reserves were in excess of the financial resources requirement under the rules of the FCA.

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.

Under the Basel III rules, the quantity and quality of regulatory capital increases, a capital conservation buffer was established, selected changes were made to the calculation of risk-weighted assets, and a new ratio, common equity Tier 1 was introduced, all of which are applicable to both our company and Stifel Bank. Various aspects of Basel III will be subject to multi-year transition periods through December 31, 2018.

Our company and Stifel Bank are required to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), Tier 1 capital to average assets (as defined), and under rules defined in Basel III, Common equity Tier 1 capital to risk-weighted assets. Our company and Stifel Bank each calculate these ratios in order to assess compliance with both regulatory requirements and their internal capital policies. At current capital levels, our company and Stifel Bank are each categorized as “well capitalized” under the regulatory framework for prompt corrective action.

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

December 31, 2017

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital	$	1,689,291		16.9	%	$	450,758		4.5	%	$	651,095		6.5	%
Tier 1 capital		1,899,162		19.0			601,011		6.0			801,347		8.0
Total capital		1,966,634		19.6			801,347		8.0			1,001,684		10.0
Tier 1 leverage		1,899,162		9.5			795,679		4.0			994,599		5.0

Stifel Bank – Federal Reserve Capital Amounts

December 31, 2017

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital	$	1,056,211		14.3	%	$	331,447		4.5	%	$	478,757		6.5	%
Tier 1 capital		1,056,211		14.3			441,930		6.0			589,240		8.0
Total capital		1,124,452		15.3			589,240		8.0			736,550		10.0
Tier 1 leverage		1,056,211		7.1			595,872		4.0			744,840		5.0

NOTE 20 – Interest Income and Interest Expense

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

	Year Ended December 31,
	2017		2016		2015
Interest income:
Bank loans, net of unearned income	$	206,084	$	131,808	$	79,816
Investment securities		189,472		108,992		53,787
Margin balances		37,218		32,147		22,421
Inventory		17,563		18,965		17,757
Other		4,044		2,420		5,320
	$	454,381	$	294,332	$	179,101
Interest expense:
Senior notes	$	35,338	$	36,217	$	25,695
Bank deposits		12,661		7,331		7,262
Federal Home Loan Bank advances		8,305		6,777		551
Other		13,726		16,549		11,891
	$	70,030	$	66,874	$	45,399

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 award, stock units, and debentures 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 one- to ten-year vesting period.

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 6.7 million shares at December 31, 2017.

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 $246.7 million, $190.1 million, and $142.1 million for the years ended December 31, 2017, 2016, and 2015, respectively.

As a result of the adoption of a new accounting standard on January 1, 2017, we recognized an excess tax benefit from stock-based compensation of $64.7 million for the year ended December 31, 2017. We adopted the new guidance prospectively. The tax provision related to stock-based compensation recognized in shareholders’ equity was $4.9 million for the year ended December 31, 2016, and a benefit of $14.7 million for the year ended December 31, 2015, respectively.

In response to the Tax Legislation that was enacted in December 2017, the Company offered certain employees the opportunity to participate in the conversion of certain restricted stock units into restricted stock pursuant to a Modification Award Agreement. Under the terms of the Modification Award Agreement, vesting of certain restricted stock will no longer be contingent upon continued employment but rather will vest so long as the employee is not engaged in certain competitive or soliciting activities as provided in the Wealth Accumulation Plan (the “Plan”). The conversion through acceptance of the Modification Agreement by the participating employees resulted in a charge of $55.9 million, which is included in compensation and benefits in the consolidated statement of operations for the year ended December 31, 2017. The fair value of these awards was based upon the closing price of our company’s common stock on the date of the grant of the awards.

In December 2017, the Company accelerated the vesting of certain outstanding debenture awards, resulting in a charge of $51.4 million, which is included in compensation and benefits in the consolidated statement of operations for the year ended December 31, 2017.

During 2016, the Company’s Board of Directors removed the continuing service requirements associated with restricted stock units that were granted to certain employees of Barclays in December 2015. As a result of the modification, the awards were expensed at date of modification, resulting in a charge of $58.6 million during 2016. The fair value of the awards is based upon the closing price of our company’s common stock on the date of the grant of the awards. These charges are included in compensation and benefits in the consolidated statements of operations for the year ended December 31, 2016.

expensed at date of grant. This charge is included in compensation and benefits in the consolidated statements of operations for the year ended December 31, 2015.

Stock Options

We have substantially eliminated the use of stock options as a form of compensation. During the year ended December 31, 2017, no options were granted. At December 31, 2017, we had 11,934 options outstanding with a weighted average exercise price of $29.33.

At December 31, 2017, all outstanding options were exercisable. The total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 were not material. Cash proceeds from the exercise of stock options were not material for the years ended December 31, 2017, 2016, and 2015.

Restricted Stock Units and Restricted Stock Awards

A restricted 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 one to ten years and are distributable, if vested, at future specified dates. Restricted stock awards are restricted as to sale or disposition. These restrictions lapse over the next one to five years.

Our company grants Performance-based Restricted Stock Units (“PRSUs”) to its executive officers. Under the terms of the grants, the number of PRSUs that will vest and convert to shares will be based on our company's achievement of the pre-determined performance objectives during the performance period. The PRSUs will be measured over a four-year performance period and vested over a five-year period. The number of shares converted has the potential to range from 0% to 200% based on how our company performs during the performance period. Compensation expense is amortized on a straight-line basis over the service period based on the fair value of the award on the grant date. The Company’s pre-determined performance objectives must be met for the awards to vest. Employees forfeit unvested share units upon termination of employment with a corresponding reversal of compensation expense. At December 31, 2017, the total number of restricted stock units and restricted stock awards outstanding was 16.5 million, of which 12.3 million were unvested. At December 31, 2017, the total number of PRSU’s was 0.6 million, of which all were unvested.

A summary of unvested restricted equity award activity, which includes restricted stock units and restricted stock awards, for the year ended December 31, 2017 is presented below (in thousands, except weighted-average fair value):

	Units/Awards			Weighted-average grant date fair value
Unvested December 31, 2016		16,276		$	39.40
Granted		1,422			51.24
Vested		(1,875	)		33.59
Converted to restricted stock		(3,111	)		39.49
Cancelled		(433	)		33.93
Unvested December 31, 2017		12,279		$	42.17

At December 31, 2017, there was approximately $251.3 million of unrecognized compensation cost for restricted stock units and restricted stock, which is expected to be recognized over a weighted-average period of 3.1 years. The fair value of restricted stock units and restricted stock that vested or converted during the year ended December 31, 2017, was $185.8 million.

Deferred Compensation Plans

The Wealth Accumulation Plan (the “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 and debentures. Participants may elect to defer a portion of their incentive compensation. Deferred awards generally vest over a one- to ten-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.

Additionally, the Plan allows Stifel financial advisors who achieve certain levels of production the option to defer a certain percentage of their gross commissions. As stipulated by the Plan, the financial advisors will defer 5% of their gross commissions. The mandatory deferral will be split evenly between company restricted stock units and a company fixed-rate cash debenture. They have the option to defer an additional 1% of gross commissions into company stock units with a 25% matching contribution

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 one- to eight-year period. Deferred compensation costs are amortized on a straight-line basis over the deferral period.

Employee Profit Sharing Plan

Eligible employees of our company who have met certain service requirements may participate in the Stifel Financial Corp. Profit Sharing 401(k) Plan (the “Plan”). Employees are permitted within limitations imposed by tax law to make pre-tax contributions to the Plan. We may match certain employee contributions or make additional contributions to the Plan at our discretion. Our contributions to the Profit Sharing Plan were $7.1 million, $6.5 million, and $7.7 million for the years ended December 31, 2017, 2016, and 2015, respectively.

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 two 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 December 31, 2017 and 2016, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $2.4 billion and $2.5 billion, respectively, and the fair value of the collateral that had been sold or repledged was $233.7 million and $268.5 million, respectively.

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 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 December 31, 2017 and 2016, Stifel Bank had outstanding commitments to originate loans aggregating $160.2 million and $205.8 million, respectively. The commitments extended over varying periods of time, with all commitments at December 31, 2017, 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 December 31, 2017 and 2016, Stifel Bank had outstanding letters of credit totaling $82.5 million and $88.9 million, respectively. A majority of the standby letters of credit commitments at December 31, 2017, 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 December 31, 2017 and 2016, Stifel Bank had granted unused lines of credit to commercial and consumer borrowers aggregating $590.5 million and $492.5 million, respectively.

NOTE 23 – Income Taxes

The provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2017			2016		2015
Current taxes:
Federal	$	(29,396	)	$	7,927	$	43,962
State		(334	)		5,818		9,672
Foreign		(1,734	)		1,255		1,329
		(31,464	)		15,000		54,963
Deferred taxes:
Federal		114,842			39,127		(9,396	)
State		1,728			6,261		3,056
Foreign		1,559			674		608
		118,129			46,062		(5,732	)
Provision for income taxes	$	86,665		$	61,062	$	49,231

Reconciliation of the statutory federal income tax rate with our company’s effective income tax rate is as follows (in thousands):

	Year Ended December 31,
	2017			2016			2015
Statutory rate	$	94,338		$	49,904		$	49,548
State income taxes, net of federal income tax		6,721			7,688			7,908
Investment in subsidiary		—			—			(4,800	)
Change in uncertain tax position		1,544			41			(3,903	)
Non-deductible litigation expense		—			7,700			—
Foreign tax rate difference		(412	)		(1,810	)		(106	)
Excess tax benefit from stock-based compensation		(57,431	)		—			—
Revaluation of deferred tax assets		42,443			—			—
Other, net		(538	)		(2,461	)		584
	$	86,665		$	61,062		$	49,231

Tax effect of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities (in thousands):

	December 31,
	2017			2016
Deferred tax assets:
Deferred compensation	$	71,687		$	181,575
Accrued expenses		33,957			35,443
Net operating loss carryforwards		31,986			40,266
Receivable reserves		22,679			22,870
Depreciation		4,012			12,550
Total deferred tax assets		164,321			292,704
Valuation allowance		(4,285	)		(8,768	)
		160,036			283,936
Deferred tax liabilities:
Goodwill and other intangibles		(38,982	)		(49,481	)
Unrealized gain on investments		(11,081	)		(1,459	)
Prepaid expenses		(2,834	)		(4,557	)
Other		(1,987	)		(2,986	)
		(54,884	)		(58,483	)
Net deferred tax asset	$	105,152		$	225,453

The Company has calculated an estimate of the impact of the Tax Legislation in its year end income tax provision in accordance with its understanding of the Tax Legislation and guidance available as of the date of this filing and as a result has recorded $42.4 million as an additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities is based on the rates at which they are expected to reverse in the future. In addition, the Tax Legislation includes a one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries. We have performed an initial earnings and profits analysis and have determined that there was no income tax effect in the current period, which we consider to be a provisional analysis. In accordance with SAB 118, any subsequent adjustments to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

Our net deferred tax asset at December 31, 2017, includes net operating loss carryforwards of $334.3 million that expire between 2020 and 2037. Certain of our net operating loss carryforwards do not expire. A valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized. The valuation allowance was decreased by $4.5 million due to 1) an inactive foreign entity was formally dissolved and 2) a change in the federal tax rate as a result of the enactment of the Tax Cuts and Jobs Act in the fourth quarter of 2017. We believe the realization of the remaining net deferred tax asset of $105.2 million is more likely than not based on the ability to carry back losses against prior year taxable income and expectations of future taxable income.

The current tax payable, included in accounts payable and accrued expenses, is $4.2 million and $16.0 million as of December 31, 2017 and 2016, respectively. At December 31, 2017, the Company has a tax receivable of $54.3 million, included in other assets, which is primarily attributable to tax deductions that the Company will realize as a result of the actions taken to maximize tax savings in response to the Tax Legislation that was enacted in the fourth quarter of 2017 and prior year tax overpayments.

We have recorded income tax expense at U.S. tax rates on all profits, except for undistributed profits of our foreign subsidiaries that are considered indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested profits is not feasible. If management’s intentions or U.S. tax laws change in the future, there may be a significant impact on the provision for income taxes to record a change in the tax liability in the period the change occurs.

Uncertain Tax Positions

As of December 31, 2017 and 2016, we had $3.2 million and $1.8 million, respectively, of gross unrecognized tax benefits, all of which, if recognized, would impact the effective tax rate. We recognize interest and penalties related to uncertain tax positions in provision for income taxes in the consolidated statements of operations. As of December 31, 2017 and 2016, we had accrued interest and penalties of $0.5 million and $0.7 million, respectively, before benefit of federal tax deduction, included in accounts payable and accrued expenses on our consolidated statements of financial condition. The amount of interest and penalties recognized on our consolidated statements of operations for the years ended December 31, 2017, 2016, and 2015, was not significant.

The following table summarizes the activity related to our company’s unrecognized tax benefits from January 1, 2015 to December 31, 2017 (in thousands):

	Year Ended December 31,
	2017			2016			2015
Beginning balance	$	1,800		$	2,717		$	5,510
Increase related to prior year tax positions		3,036			5			1,206
Decrease related to prior year tax positions		(287	)		(31	)		(33	)
Increase related to current year tax positions		—			—			—
Decrease related to settlements with taxing authorities		(171	)		(42	)		(4,815	)
Decrease related to lapsing of statute of limitations		(1,198	)		—			—
Increase/(decrease) related to business acquisitions		—			(849	)		849
Ending balance	$	3,180		$	1,800		$	2,717

We file income tax returns with the U.S. federal jurisdiction, various states, and certain foreign jurisdictions. We are not subject to U.S. federal examination for taxable years before 2012. We are not subject to certain state and local, or non-U.S. income tax examinations for taxable years before 2010.

There is a reasonable possibility that the unrecognized tax benefits will change within the next 12 months as a result of the expiration of various statutes of limitations or for the resolution of U.S. federal and state examinations, but we do not expect this change to be material to the consolidated financial statements.

NOTE 24 – Segment Reporting

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

Our Global Wealth Management segment consists of two operating segments, 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. 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 private client group 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, compensation expense associated with the expensing of restricted stock awards with no continuing service requirements in conjunction with recent acquisitions and the actions taken by the Company in response to the Tax Regulation enacted in the fourth quarter of 2017, amortization of stock-based awards, 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 and acquisition charges.

Information concerning operations in these segments of business for the years ended December 31, 2017, 2016, and 2015, is as follows (in thousands):

	Year Ended December 31,
	2017			2016			2015
Net revenues: ⁽¹⁾
Global Wealth Management	$	1,822,218		$	1,563,410		$	1,377,313
Institutional Group		1,110,768			1,014,164			975,594
Other		(6,554	)		(2,078	)		(21,313	)
	$	2,926,432		$	2,575,496		$	2,331,594
Income/(loss) before income taxes:
Global Wealth Management	$	626,906		$	430,318		$	382,126
Institutional Group		217,981			164,143			141,042
Other		(575,351	)		(451,879	)		(381,601	)
	$	269,536		$	142,582		$	141,567

⁽¹⁾	No individual client accounted for more than 10 percent of total net revenues for the years ended December 31, 2017, 2016, and 2015.

The following table presents our company’s total assets on a segment basis at December 31, 2017 and 2016 (in thousands):

	December 31,
	2017		2016
Global Wealth Management	$	17,717,617	$	16,065,503
Institutional Group		3,313,304		2,657,183
Other		353,032		406,670
	$	21,383,953	$	19,129,356

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

Revenues, classified by the major geographic areas in which they were earned for the years ended December 31, 2017, 2016, and 2015, were as follows (in thousands):

	Year Ended December 31,
	2017		2016		2015
United States	$	2,783,175	$	2,429,714	$	2,195,538
United Kingdom		129,288		132,622		125,552
Other		13,969		13,160		10,504
	$	2,926,432	$	2,575,496	$	2,331,594

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 years ended December 31, 2017, 2016, and 2015 (in thousands, except per share data):

	Year Ended December 31,
	2017		2016		2015
Net income	$	182,871	$	81,520	$	92,336
Preferred dividends		9,375		3,906		—
Net income available to common shareholders	$	173,496	$	77,614	$	92,336
Shares for basic and diluted calculation:
Average shares used in basic computation		68,562		66,871		68,543
Dilutive effect of stock options and units ⁽¹⁾		12,473		10,692		10,011
Average shares used in diluted computation		81,035		77,563		78,554
Earnings per common share:
Basic	$	2.53	$	1.16	$	1.35
Diluted	$	2.14	$	1.00	$	1.18

⁽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 years ended December 31, 2017, 2016, and 2015, 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 December 31, 2017, the maximum number of shares that may yet be purchased under this plan was 7.1 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 year ended December 31, 2017, we repurchased $13.0 million or 0.3 million shares using existing Board authorization at an average price of $43.83 per share to meet obligations under our company’s employee benefit plans and for general corporate purposes. During the year ended December 31, 2016, we repurchased $113.5 million or 3.4 million shares using existing Board authorization at an average price of $33.22 per share to meet obligations under our company’s employee benefit plans and for general corporate purposes.

Issuance of Common Stock from Treasury

During the year ended December 31, 2017, we issued 2.4 million shares of common stock from treasury.

Share issuances out of treasury during the year ended December 31, 2017, were primarily a result of the vesting and exercise transactions under our incentive stock award plans.

During the year ended December 31, 2016, we issued 0.3 million shares of common stock from treasury, in aggregate, as part of the purchase consideration for our acquisitions of Eaton Partners, which closed on January 4, 2016, and ISM, which closed on May 3, 2016.

Issuance of Common Stock

On January 3, 2017, we issued 0.2 million shares related to the purchase of City Securities, Inc. See Note 3 in the notes to consolidated financial statements for additional information regarding the acquisition.

On June 5, 2015, we issued 1.4 million shares related to the purchase of Sterne Agee Group, Inc. See Note 3 in the notes to consolidated financial statements for additional information regarding the acquisition.

Issuance of Preferred Stock

On July 11, 2016, our company issued $150.0 million of perpetual 6.25% Non-Cumulative Perpetual Preferred Stock, Series A, $1.00 par value, with a liquidation preference of $25,000 per share (equivalent to $25 liquidation preference per depositary share).

When, as, and if declared by the board of directors of the company, dividends will be payable at an annual rate of 6.25%, payable quarterly, in arrears. We may redeem the Series A preferred stock at our option, subject to regulatory approval, on or after July 15, 2021, or following a regulatory capital treatment event, as defined.

NOTE 27 – Variable Interest Entities

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 assets of $199.6 million at December 31, 2017. 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 years ended December 31, 2017, 2016, and 2015. In addition, our direct investment interest in these entities is insignificant at December 31, 2017 and 2016.

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 assets of $286.0 million at December 31, 2017. 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 insignificant at December 31, 2017. Management fee revenue earned by our company was insignificant during the years ended December 31, 2017, 2016, and 2015.

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.

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.

NOTE 29 – Quarterly Financial Information (Unaudited)

	Year Ended December 31, 2017
(in thousands, except per share amounts)	1^st Quarter		2^nd Quarter		3^rd Quarter		4^th Quarter
Operating revenues	$	590,474	$	633,340	$	620,932	$	697,335
Interest income		100,953		108,951		117,862		126,615
Total revenues		691,427		742,291		738,794		823,950
Interest expense		15,896		16,644		17,625		19,865
Net revenues		675,531		725,647		721,169		804,085
Total non-interest expenses		596,512		642,449		613,030		804,905
Income before income tax expense		79,019		83,198		108,139		(820	)
Provision for income taxes		13,507		30,387		41,603		1,168
Net income		65,512		52,811		66,536		(1,988	)
Preferred dividends		2,344		2,344		2,343		2,344
Net income available to common shareholders	$	63,168	$	50,467	$	64,193	$	(4,332	)
Earnings per common share ⁽¹⁾
Basic	$	0.92	$	0.74	$	0.94	$	(0.06	)
Diluted	$	0.78	$	0.63	$	0.79	$	(0.06	)

Weighted-average number of common shares outstanding:
Basic		68,386		68,556		68,522		68,782
Diluted		80,695		80,021		80,881		68,782
Cash dividends declared per common share	$	—	$	—	$	0.10	$	0.10

	Year Ended December 31, 2016
(in thousands, except per share amounts)	1^st Quarter		2^nd Quarter		3^rd Quarter		4^th Quarter
Operating revenues	$	571,299	$	603,627	$	586,488	$	586,665
Interest income		62,786		65,780		74,881		90,844
Total revenues		634,085		669,407		661,369		677,509
Interest expense		14,111		17,262		19,383		16,118
Net revenues		619,974		652,145		641,986		661,391
Total non-interest expenses		576,061		636,352		614,004		606,497
Income before income tax expense		43,913		15,793		27,982		54,894
Provision for income taxes		16,858		6,022		10,168		28,014
Net income		27,055		9,771		17,814		26,880
Preferred dividends		—		—		1,563		2,343
Net income available to common shareholders	$	27,055	$	9,771	$	16,251	$	24,537
Earnings per common share
Basic	$	0.40	$	0.15	$	0.24	$	0.37
Diluted	$	0.36	$	0.13	$	0.21	$	0.31
Weighted-average number of common shares outstanding:
Basic		67,579		66,792		66,482		66,636
Diluted		76,086		75,982		77,544		79,539
Cash dividends declared per common share	$	—	$	—	$	—	$	—

⁽¹⁾

GAAP earnings per share for the three months ended December 31, 2017 is calculated using the basic weighted average number of common shares outstanding, not fully dilutive shares, as they are anti-dilutive in periods a loss is incurred.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by the management of Stifel Financial Corp., 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) occurred during the fourth quarter of our fiscal year ended December 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Management of Stifel Financial Corp., together with its consolidated subsidiaries, is responsible for establishing and maintaining adequate internal control over financial reporting. Our company’s internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management has assessed the effectiveness of our company’s internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013).

Based on management’s assessment and those criteria, we conclude that, as of December 31, 2017, our company’s internal control over financial reporting is effective.

Our internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of our company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our company’s assets that could have a material effect on our consolidated financial statements.

Our company’s internal control over financial reporting as of December 31, 2017, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report appearing on the following page, which expresses an unqualified opinion on the effectiveness of our company’s internal control over financial reporting as of December 31, 2017.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Stifel Financial Corp.

Opinion on Internal Control over Financial Reporting

We have audited Stifel Financial Corp.’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Stifel Financial Corp. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of Stifel Financial Corp. as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017 and the related notes, and our report dated February 23, 2018, except for the effects of the adoption of ASU 2016-18, as discussed in Note 2 as to which the date is June 19, 2018, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

St. Louis, Missouri

February 23, 2018

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