WAL 9.30.2014 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
FORM 10-Q
 
 
(Mark One)
 
 
 
ý
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended September 30, 2014
or
 
 
 
o
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the transition period from__________ to __________              
Commission file number: 001-32550 
 
 
WESTERN ALLIANCE BANCORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
88-0365922
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
One E. Washington Street Suite 1400, Phoenix, AZ
 
85004
(Address of principal executive offices)
 
(Zip Code)
(602) 389-3500
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
ý
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Common stock issued and outstanding: 88,081,701 shares as of October 24, 2014.


Table of Contents

INDEX
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 5.
Item 6.
 
 
 
 
 


2

Table of Contents

PART I. FINANCIAL INFORMATION
GLOSSARY OF ENTITIES AND TERMS
The acronyms and abbreviations identified below are used in various sections of this Form 10-Q, including the unaudited Consolidated Financial Statements and the Notes to Unaudited Consolidated Financial Statements in Item 1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in Item 2 of this Form 10-Q.
ENTITIES:
AAB
Alliance Association Bank
LVSP
Las Vegas Sunset Properties
ABA
Alliance Bank of Arizona
TPB
Torrey Pines Bank
Company
Western Alliance Bancorporation and Subsidiaries
WAB or Bank
Western Alliance Bank
BON
Bank of Nevada
WAEF
Western Alliance Equipment Finance
FIB
First Independent Bank
WAL or Parent
Western Alliance Bancorporation
TERMS:
AFS
Available-for-Sale
FVO
Fair Value Option
AMT
Alternative Minimum Tax
GAAP
U.S. Generally Accepted Accounting Principles
ALCO
Asset and Liability Management Committee
GSE
Government-Sponsored Enterprise
AOCI
Accumulated Other Comprehensive Income
HTM
Held-to-Maturity
ARPS
Adjustable-Rate Preferred Stock
ICS
Insured Cash Sweep Service
ASC
FASB Accounting Standards Codification
IRC
Internal Revenue Code
ASU
Accounting Standards Update
ISDA
International Swaps and Derivatives Association
ATM
At-the-Market
LIBOR
London Interbank Offered Rate
BOLI
Bank Owned Life Insurance
LIHTC
Low-Income Housing Tax Credit
CBL
Central Business Lines
MBS
Mortgage-Backed Securities
CDARS
Certificate Deposit Account Registry Service
NOL
Net Operating Loss
CDO
Collateralized Debt Obligation
NPV
Net Present Value
CEO
Chief Executive Officer
NUBILs
Net Unrealized Built In Losses
CFO
Chief Financial Officer
OCI
Other Comprehensive Income
CRA
Community Reinvestment Act
OREO
Other Real Estate Owned
CRE
Commercial Real Estate
OTTI
Other-than-Temporary Impairment
EVE
Economic Value of Equity
PCI
Purchased Credit Impaired
FASB
Financial Accounting Standards Board
SEC
Securities and Exchange Commission
FDIC
Federal Deposit Insurance Corporation
SSAE
Statement on Standards for Attestation Engagements
FHLB
Federal Home Loan Bank
TDR
Troubled Debt Restructuring
Form 10-Q
Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2014
TEB
Tax Equivalent Basis
FRB
Federal Reserve Bank
XBRL
eXtensible Business Reporting Language

3

Table of Contents


Item 1.
Financial Statements.
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
September 30, 2014
 
December 31, 2013
 
 
(Unaudited)
 
 
 
 
(in thousands, except per share amounts)
Assets:
 
 
 
 
Cash and due from banks
 
$
150,554

 
$
134,906

Interest-bearing deposits in other financial institutions
 
108,216

 
170,608

Cash and cash equivalents
 
258,770

 
305,514

Money market investments
 
373

 
2,632

Investment securities - measured at fair value
 
1,935

 
3,036

Investment securities - AFS, at fair value; amortized cost of $1,554,531 at September 30, 2014 and $1,404,048 at December 31, 2013
 
1,569,689

 
1,370,696

Investment securities - HTM, at amortized cost; fair value of $0 at September 30, 2014 and $281,704 at December 31, 2013
 

 
283,006

Investments in restricted stock, at cost
 
25,275

 
30,186

Loans, net of deferred loan fees and costs
 
7,929,520

 
6,801,415

Less: allowance for credit losses
 
(109,161
)
 
(100,050
)
Total loans
 
7,820,359

 
6,701,365

Premises and equipment, net
 
112,057

 
105,565

Other assets acquired through foreclosure, net
 
51,787

 
66,719

Bank owned life insurance
 
143,167

 
140,562

Goodwill
 
23,224

 
23,224

Other intangible assets, net
 
2,970

 
4,150

Deferred tax assets, net
 
67,501

 
80,688

Prepaid expenses
 
6,334

 
4,778

Other assets
 
205,383

 
185,221

Total assets
 
$
10,288,824

 
$
9,307,342

Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Non-interest-bearing demand
 
$
2,246,730

 
$
2,199,983

Interest-bearing
 
6,450,897

 
5,638,222

Total deposits
 
8,697,627

 
7,838,205

Customer repurchase agreements
 
52,957

 
71,192

Other borrowings
 
330,782

 
341,096

Junior subordinated debt, at fair value
 
41,793

 
41,858

Other liabilities
 
162,543

 
159,493

Total liabilities
 
9,285,702

 
8,451,844

Commitments and contingencies (Note 11)
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock - par value $0.0001 and liquidation value per share of $1,000; 20,000,000 authorized; 141,000 shares issued and outstanding at September 30, 2014 and December 31, 2013
 
141,000

 
141,000

Common stock - par value $0.0001; 200,000,000 authorized; 87,848,562 shares issued and outstanding at September 30, 2014 and 87,186,403 at December 31, 2013
 
9

 
9

Additional paid in capital
 
807,257

 
797,146

Retained earnings (accumulated deficit)
 
45,373

 
(61,111
)
Accumulated other comprehensive income (loss)
 
9,483

 
(21,546
)
Total stockholders’ equity
 
1,003,122

 
855,498

Total liabilities and stockholders’ equity
 
$
10,288,824

 
$
9,307,342

See accompanying Notes to Unaudited Consolidated Financial Statements.

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Table of Contents

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
 
Loans, including fees
 
$
94,436

 
$
83,994

 
$
271,823

 
$
239,812

Investment securities
 
9,263

 
7,333

 
29,416

 
21,235

Dividends
 
1,272

 
953

 
3,338

 
3,031

Other
 
583

 
400

 
1,651

 
995

Total interest income
 
105,554

 
92,680

 
306,228

 
265,073

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
5,172

 
4,232

 
14,767

 
11,893

Other borrowings
 
1,846

 
3,409

 
7,351

 
8,808

Junior subordinated debt
 
443

 
460

 
1,307

 
1,381

Customer repurchase agreements
 
20

 
20

 
55

 
77

Total interest expense
 
7,481

 
8,121

 
23,480

 
22,159

Net interest income
 
98,073

 
84,559

 
282,748

 
242,914

Provision for credit losses
 
419

 

 
4,426

 
8,920

Net interest income after provision for credit losses
 
97,654

 
84,559

 
278,322

 
233,994

Non-interest income:
 
 
 
 
 
 
 
 
Service charges and fees
 
2,434

 
2,425

 
7,701

 
7,408

Income from bank owned life insurance
 
1,136

 
1,832

 
3,044

 
3,904

Gain (loss) on sales of investment securities, net
 
181

 
(1,679
)
 
384

 
(1,537
)
Unrealized gains (losses) on assets and liabilities measured at fair value, net
 
896

 
(7
)
 
(145
)
 
(3,865
)
Bargain purchase gain from acquisition
 

 

 

 
10,044

Loss on extinguishment of debt
 
(502
)
 

 
(502
)
 

Other fee revenue
 
892

 
1,015

 
2,860

 
2,915

Other income
 
1,189

 
543

 
3,492

 
1,821

Total non-interest income
 
6,226

 
4,129

 
16,834

 
20,690

Non-interest expense:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
32,230

 
28,689

 
93,536

 
83,363

Occupancy
 
4,500

 
4,901

 
13,510

 
14,500

Legal, professional and directors’ fees
 
3,022

 
3,438

 
10,853

 
9,010

Data processing
 
2,109

 
1,872

 
7,184

 
5,912

Insurance
 
1,996

 
1,884

 
6,476

 
6,350

Loan and repossessed asset expenses
 
1,007

 
1,136

 
3,168

 
3,453

Customer service
 
888

 
677

 
2,216

 
2,037

Marketing
 
378

 
585

 
1,443

 
1,962

Intangible amortization
 
281

 
597

 
1,180

 
1,791

Net (gain) loss on sales / valuations of repossessed and other assets
 
(1,956
)
 
371

 
(4,319
)
 
(234
)
Merger / restructure expenses
 
15

 
1,018

 
198

 
3,833

Other expense
 
5,542

 
4,507

 
16,732

 
13,158

Total non-interest expense
 
50,012

 
49,675

 
152,177

 
145,135

Income from continuing operations before provision for income taxes
 
53,868

 
39,013

 
142,979

 
109,549

Income tax expense
 
12,949

 
10,390

 
34,279

 
25,838

Income from continuing operations
 
40,919

 
28,623

 
108,700

 
83,711

Loss from discontinued operations, net of tax
 

 
(29
)
 
(1,158
)
 
(160
)
Net income
 
40,919

 
28,594

 
107,542

 
83,551

Dividends on preferred stock
 
353

 
352

 
1,058

 
1,058

Net income available to common stockholders
 
$
40,566

 
$
28,242

 
$
106,484

 
$
82,493

 
 
 
 
 
 
 
 
 

5

Table of Contents

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands, except per share amounts)
Earnings per share from continuing operations:
 
 
 
 
 
 
 
 
Basic
 
$
0.47

 
$
0.33

 
$
1.24

 
$
0.97

Diluted
 
0.46

 
0.33

 
1.23

 
0.96

Loss per share from discontinued operations:
 
 
 
 
 
 
 
 
Basic
 

 

 
(0.01
)
 
(0.01
)
Diluted
 

 

 
(0.01
)
 
(0.01
)
Earnings per share applicable to common stockholders:
 
 
 
 
 
 
 
 
Basic
 
0.47

 
0.33

 
1.23

 
0.96

Diluted
 
0.46

 
0.33

 
1.22

 
0.95

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
86,723

 
85,799

 
86,495

 
85,596

Diluted
 
87,572

 
86,769

 
87,345

 
86,428

Dividends declared per common share
 
$

 
$

 
$

 
$

See accompanying Notes to Unaudited Consolidated Financial Statements.

6

Table of Contents

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Net income
 
$
40,919

 
$
28,594

 
$
107,542

 
$
83,551

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
 
Unrealized gain on transfer of HTM securities to AFS, net of tax effect of $0, $0, $(5,367), $0 for each respective period presented
 

 

 
8,976

 

Unrealized gain (loss) on AFS securities, net of tax effect of $(672), $2,887, $(13,331) and $14,327 for each respective period presented
 
1,124

 
(4,770
)
 
22,293

 
(23,670
)
Unrealized loss on cash flow hedge, net of tax effect of $0, $18, $0 and $10 for each respective period presented
 

 
(30
)
 

 
(17
)
Realized (gain) loss on sale of AFS securities included in income, net of tax effect of $68, $(633), $144 and $(580) for each respective period presented
 
(113
)
 
1,046

 
(240
)
 
957

Net other comprehensive income (loss)
 
1,011

 
(3,754
)
 
31,029

 
(22,730
)
Comprehensive income
 
$
41,930

 
$
24,840

 
$
138,571

 
$
60,821

See accompanying Notes to Unaudited Consolidated Financial Statements.

7

Table of Contents

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
 
 
 
Preferred Stock
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Total Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(in thousands)
December 31, 2012 (1)
 
141

 
$
141,000

 
86,465

 
$
9

 
$
784,852

 
$
8,226

 
$
(174,666
)
 
$
759,421

Net income
 

 

 

 

 

 

 
83,551

 
83,551

Exercise of stock options
 

 

 
332

 

 
2,924

 

 

 
2,924

Stock-based compensation
 

 

 
111

 

 
1,608

 

 

 
1,608

Restricted stock grants, net
 

 

 
191

 

 
2,756

 

 

 
2,756

Dividends on preferred stock
 

 

 

 

 

 

 
(1,058
)
 
(1,058
)
Other comprehensive loss, net
 

 

 

 

 

 
(22,730
)
 

 
(22,730
)
Balance, September 30, 2013
 
141

 
$
141,000

 
87,099

 
$
9

 
$
792,140

 
$
(14,504
)
 
$
(92,173
)
 
$
826,472

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
141

 
$
141,000

 
87,186

 
$
9

 
$
797,146

 
$
(21,546
)
 
$
(61,111
)
 
$
855,498

Net income
 

 

 

 

 

 

 
107,542

 
107,542

Exercise of stock options
 

 

 
216

 

 
2,774

 

 

 
2,774

Stock-based compensation
 

 

 
69

 

 
1,668

 

 

 
1,668

Restricted stock grants, net
 

 

 
262

 

 
3,110

 

 

 
3,110

Issuance of common stock under ATM offering, net of offering costs of $272
 

 

 
116

 

 
2,559

 

 

 
2,559

Dividends on preferred stock
 

 

 

 

 

 

 
(1,058
)
 
(1,058
)
Other comprehensive income, net
 

 

 

 

 

 
31,029

 

 
31,029

Balance, September 30, 2014
 
141

 
$
141,000

 
87,849

 
$
9

 
$
807,257

 
$
9,483

 
$
45,373

 
$
1,003,122


(1)
As adjusted, see "Note 10. Income Taxes" to the Unaudited Consolidated Financial Statements.
See accompanying Notes to Unaudited Consolidated Financial Statements.

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Table of Contents

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
 
(in thousands)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
107,542

 
$
83,551

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Provision for credit losses
 
4,426

 
8,920

Depreciation and amortization
 
4,328

 
4,626

Stock-based compensation
 
7,652

 
4,364

Deferred income taxes and income taxes receivable
 
(7,913
)
 
1,761

Net amortization of discounts and premiums for investment securities
 
6,037

 
7,658

Accretion and amortization of fair market value adjustments due to acquisitions
 
(13,574
)
 
(8,256
)
Income from bank owned life insurance
 
(3,044
)
 
(3,904
)
(Gains) / losses on:
 
 
 
 
Sales of securities, AFS
 
(384
)
 
1,537

Acquisition of Centennial Bank
 

 
(10,044
)
Extinguishment of debt
 
502

 

Other assets acquired through foreclosure, net
 
(2,648
)
 
(2,388
)
Valuation adjustments of other repossessed assets, net
 
1,175

 
2,279

Sale of premises and equipment and other assets, net
 
(2,846
)
 
(125
)
Changes in:
 
 
 
 
Other assets
 
(5,909
)
 
28,840

Other liabilities
 
11,634

 
1,122

Fair value of assets and liabilities measured at fair value
 
145

 
3,865

Net cash provided by operating activities
 
107,123

 
123,806

Cash flows from investing activities:
 
 
 
 
Investment securities - measured at fair value
 
 
 
 
Principal pay downs and maturities
 
1,071

 
1,358

Investment securities - AFS
 
 
 
 
Purchases
 
(81,365
)
 
(373,485
)
Principal pay downs and maturities
 
169,461

 
161,394

Proceeds from sales
 
32,235

 
63,153

Investment securities - HTM
 
 
 
 
Principal pay downs and maturities
 
6,600

 

Purchase of investment tax credits
 
(23,317
)
 
(28,172
)
Sale (purchase) of money market investments, net
 
2,259

 
(3,512
)
Liquidation of restricted stock
 
4,911

 
750

Loan fundings and principal collections, net
 
(1,117,166
)
 
(388,259
)
Sale and purchase of premises and equipment, net
 
(10,503
)
 
(2,472
)
Proceeds from sale of other real estate owned and repossessed assets, net
 
25,561

 
20,513

Cash and cash equivalents acquired in acquisition, net
 

 
21,204

Net cash used in investing activities
 
(990,253
)
 
(527,528
)
 
 
 
 
 

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Table of Contents

 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
 
(in thousands)
Cash flows from financing activities:
 
 
 
 
Net increase in deposits
 
859,847

 
481,989

Net decrease in customer repurchase agreements
 
(18,235
)
 
(23,510
)
Proceeds from securities sold short
 

 
126,664

Net (decrease) increase in borrowings
 
(9,501
)
 
121,121

Proceeds from exercise of common stock options
 
2,774

 
2,924

Cash dividends paid on preferred stock
 
(1,058
)
 
(1,058
)
Proceeds from issuance of stock in offerings, net
 
2,559

 

Net cash provided by financing activities
 
836,386

 
708,130

Net (decrease) increase in cash and cash equivalents
 
(46,744
)
 
304,408

Cash and cash equivalents at beginning of year
 
305,514

 
204,625

Cash and cash equivalents at end of period
 
$
258,770

 
$
509,033

Supplemental disclosure:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
26,677

 
$
22,648

Income taxes
 
21,680

 
20,245

Non-cash investing and financing activities:
 
 
 
 
Transfers to other assets acquired through foreclosure, net
 
9,156

 
14,010

Unfunded commitments to purchase investment tax credits
 
12,298

 
21,828

Non-cash assets acquired in Centennial Bank acquisition
 

 
410,827

Non-cash liabilities acquired in Centennial Bank acquisition
 

 
421,987

Change in unrealized gain (loss) on AFS securities, net of tax
 
22,053

 
(23,670
)
Change in unrealized loss on cash flow hedge, net of tax
 

 
(17
)
Change in unfunded obligations
 
(26,905
)
 
(79,033
)
Transfer of HTM securities to AFS, amortized cost
 
275,292

 

Unrealized gain on transfer of HTM securities to AFS, net of tax
 
8,976

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

10

Table of Contents

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operation
WAL, incorporated under the laws of the state of Delaware, is a bank holding company headquartered in Phoenix, Arizona. WAL provides full service banking and related services to locally owned businesses, professional firms, real estate developers and investors, local non-profit organizations, high net worth individuals and other consumers through its wholly-owned subsidiary bank, WAB. The Bank operates the following divisions doing business as ABA in Arizona, as FIB in Northern Nevada, as BON in Southern Nevada, as TPB in California, and as AAB throughout the U.S. In addition, the Company has one non-bank subsidiary, LVSP, which holds and manages certain non-performing loans and OREO.
Basis of presentation
The accounting and reporting policies of the Company are in accordance with GAAP and conform to practices within the financial services industry. The accounts of the Company and its consolidated subsidiaries are included in the unaudited Consolidated Financial Statements.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for credit losses; estimated cash flows related to PCI loans; fair value determinations related to acquisitions and other assets and liabilities carried at fair value; and determination of the valuation allowance related to deferred tax assets. Although management believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of management, all adjustments considered necessary have been reflected in the unaudited Consolidated Financial Statements.
Principles of consolidation
On December 31, 2013, the Company consolidated its three bank subsidiaries under one bank charter, WAB. As the subsidiary bank mergers did not meet the definition of a business combination under the guidance of ASC 805, Business Combinations, the entities were combined in a method similar to a pooling of interests.
As of September 30, 2014, WAL has eight wholly-owned subsidiaries: WAB, LVSP and six unconsolidated subsidiaries used as business trusts in connection with issuance of trust-preferred securities.
The Bank has the following wholly-owned subsidiaries: WAB Investments, Inc., BON Investments, Inc., and TPB Investments, Inc., which hold certain investment securities, municipal loans and leases; BW Real Estate, Inc., which operates as a real estate investment trust and holds certain of WAB's real estate loans and related securities; BW Nevada Holdings, LLC, which owns the Company’s 2700 West Sahara Avenue, Las Vegas, Nevada office building, and WAEF, which offers equipment finance services nationwide. WAL contributed to WAB all of the outstanding shares of common stock of WAEF on July 1, 2014.
The Company does not have any other significant entities that should be considered for consolidation. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the consolidated financial statements as of December 31, 2013 and for the three and nine months ended September 30, 2013 have been reclassified to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.

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Interim financial information
The accompanying unaudited Consolidated Financial Statements as of and for the three and nine months ended September 30, 2014 and 2013 have been prepared in condensed format and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied to the Company's audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal, recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the Company's audited Consolidated Financial Statements.
Business combinations
Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805. Under the acquisition method, the acquiring entity in a business combination recognizes all of the acquired assets and assumed liabilities at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including identified intangible assets, exceeds the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies are also recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the income statement from the date of acquisition. Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred.
Investment securities
Investment securities may be classified as HTM, AFS or trading. The appropriate classification is initially decided at the time of purchase. Securities classified as HTM are those debt securities that the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or general economic conditions. These securities are carried at amortized cost. The sale of a security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification and disclosure. See "Note 2. Investment Securities" of these Notes to Unaudited Consolidated Financial Statements for further discussion regarding the Company's HTM portfolio during the period ended September 30, 2014.
Securities classified as AFS or trading are reported as an asset on the Consolidated Balance Sheets at their estimated fair value. As the fair value of AFS securities changes, the changes are reported net of income tax as an element of OCI, except for other-than-temporarily impaired securities. When AFS securities are sold, the unrealized gain or loss is reclassified from OCI to non-interest income. The changes in the fair values of trading securities are reported in non-interest income. Securities classified as AFS are both equity and debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations.
Interest income is recognized based on the coupon rate and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual life of the security, adjusted for prepayment estimates, using the interest method.
In estimating whether there are any OTTI losses, management considers the 1) length of time and the extent to which the fair value has been less than amortized cost; 2) financial condition and near term prospects of the issuer; 3) impact of changes in market interest rates; and 4) intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value and whether it is not more likely than not the Company would be required to sell the security.
Declines in the fair value of individual AFS debt securities that are deemed to be other than temporary are reflected in earnings when identified. The fair value of the debt security then becomes the new cost basis. For individual debt securities where the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other than temporary decline in fair value of the debt security related to 1) credit loss is recognized in earnings; and 2) market or other factors is recognized in other comprehensive income or loss.

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For individual debt securities where the Company either intends to sell the security or more likely than not will not recover all of its amortized cost, the OTTI is recognized in earnings equal to the entire difference between the securities cost basis and its fair value at the balance sheet date. For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized on a cash basis.
Loans, interest and fees from loans
The Company generally holds loans for investment and has the intent and ability to hold loans until their maturity. Therefore, they are reported at book value. Net loans are stated at the amount of unpaid principal, reduced by deferred fees and costs, and an allowance for credit losses. In addition, the book value of loans that are subject to a fair value hedge is adjusted for changes in value attributable to the effective portion of the hedged benchmark interest rate risk. Purchased loans are recorded at estimated fair value on the date of purchase, comprised of unpaid principal less estimated credit losses and interest rate fair value adjustments.
The Company may acquire loans through a business combination or in a purchase for which differences may exist between the contractual cash flows and the cash flows expected to be collected, which are due, at least in part, to credit quality. Loans are evaluated individually to determine if there has been credit deterioration since origination. Such loans may then be aggregated and accounted for as a pool of loans based on common characteristics. When the Company acquires such loans, the yield that may be accreted (accretable yield) is limited to the excess of the Company’s estimate of undiscounted cash flows expected to be collected over the Company’s initial investment in the loan. The excess of contractual cash flows over the cash flows expected to be collected may not be recognized as an adjustment to yield, loss, or a valuation allowance. Subsequent increases in cash flows expected to be collected generally are recognized prospectively through adjustment of the loan’s yield over the remaining life. Subsequent decreases to cash flows expected to be collected are recognized as impairment. The Company may not “carry over” or create a valuation allowance in the initial accounting for loans acquired under these circumstances. For additional information, see "Note 3. Loans, Leases and Allowance for Credit Losses" of these Notes to Unaudited Consolidated Financial Statements.
For purchased loans that are not deemed impaired, fair value adjustments attributable to both credit and interest rates are accreted (or amortized) over the contractual life of the individual loan. Loan fees collected for the origination of loans less direct loan origination costs (net deferred loan fees) are amortized over the contractual life of the loan through interest income. If the loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the interest method over the contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the contractual life of the loan commitment. Commitment fees based on a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period.
When loans are repaid, any remaining unamortized balances of premiums, discounts, or net deferred fees are recognized as interest income.
Nonaccrual loans: For all loan types except credit cards, when a borrower discontinues making payments as contractually required by the note, the Company must determine whether it is appropriate to continue to accrue interest. Generally, the Company places loans in nonaccrual status and ceases recognizing interest income when the loan has become delinquent by more than 90 days or when management determines that the full repayment of principal and collection of interest according to contractual terms is no longer likely. The Company may decide to continue to accrue interest on certain loans more than 90 days delinquent if the loans are well secured by collateral and in the process of collection. Credit card loans and other personal loans are typically charged-off no later than 180 days delinquent.
For all loan types, when a loan is placed on nonaccrual status, all interest accrued but uncollected is reversed against interest income in the period in which the status is changed. Subsequent payments received from the customer are applied to principal and generally no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required. The Company recognizes income on a cash basis only for those non-accrual loans for which the collection of the remaining principal balance is not in doubt.
Impaired loans: A loan is identified as impaired when it is no longer probable that interest and principal will be collected according to the contractual terms of the original loan agreement. Generally, impaired loans are classified as nonaccrual. However, in certain instances, impaired loans may continue on an accrual basis if full repayment of all principal and interest is expected and the loan is both well secured and in the process of collection. Impaired loans are measured for reserve requirements in accordance with ASC 310, Receivables, based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral less applicable disposition costs if the loan is collateral dependent. The amount of an impairment reserve, if any, and

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any subsequent changes are recorded as a provision for credit losses. Losses are recoded as a charge-off when losses are confirmed. In addition to our own internal loan review process, the FDIC may from time to time direct the Company to modify loan grades, loan impairment calculations or loan impairment methodology.
Troubled Debt Restructured Loans: A TDR loan is a loan on which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a reduction in the face amount of the debt, a reduction in the accrued interest, or deferral of interest payments. A TDR loan is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may no longer be reported as a TDR in years subsequent to the restructuring if it is performing based on the terms specified by the restructuring agreement. However, such loans continue to be considered impaired.
Allowance for credit losses
Credit risk is inherent in the business of extending loans and leases to borrowers, for which the Company must maintain an adequate allowance for credit losses. The allowance for credit losses is established through a provision for credit losses recorded to expense. Loans are charged against the allowance for credit losses when management believes that the contractual principal or interest will not be collected. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount believed adequate to absorb estimated probable losses on existing loans that may become uncollectable, based on evaluation of the collectability of loans and prior credit loss experience, together with other factors. The Company formally re-evaluates and establishes the appropriate level of the allowance for credit losses on a quarterly basis.
The Company’s allowance for credit loss methodology incorporates several quantitative and qualitative risk factors used to establish the appropriate allowance for credit losses at each reporting date. Quantitative factors include: 1) our historical loss experience; 2) levels of and trends in delinquencies and impaired loans; 3) levels of and trends in charge-offs and recoveries; 4) trends in volume and terms of loans; 5) changes in underwriting standards or lending policies; 6) experience, ability, depth of lending staff; 7) national and local economic trends and conditions; 8) changes in credit concentrations; 9) changes in quality of loan review system; and 10) changes in the value of underlying collateral.
An internal five-year loss history is also incorporated into the allowance calculation model. Due to the credit concentration of our loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values in Nevada, Arizona and California, which, in some cases, have declined substantially from their peak. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic or other conditions. In addition, the FDIC and state bank regulatory agency, as an integral part of their examination processes, periodically review the Bank's allowances for credit losses, and may require us to make additions to our allowance based on their judgment about information available to them at the time of their examination. Management regularly reviews the assumptions and formulae used in determining the allowance and makes adjustments, if required, to reflect the current risk profile of the portfolio.
The allowance consists of specific and general components. The specific allowance applies to impaired loans. For impaired collateral dependent loans, the reserve is calculated based on collateral value, net of estimated disposition costs and other identified quantitative inputs such as historical losses on similar types of loans. Generally, the Company obtains independent collateral valuation analysis for each loan every twelve months. Loans not collateral dependent are evaluated based on the expected future cash flows discounted at the original contractual interest rate.
The general allowance covers all non-impaired loans and is based on historical loss experience adjusted for the various qualitative and quantitative factors listed above.
Other assets acquired through foreclosure
Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets (primarily repossessed assets formerly leased) are classified as OREO and other repossessed property and are initially reported at fair value of the asset less estimated selling costs. Subsequent adjustments are based on the lower of carrying value or fair value, less estimated costs to sell the property. Costs related to the development or improvement of the assets are capitalized and costs related to holding the assets are charged to non-interest expense. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value and valuation allowances.

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Derivative financial instruments
The Company uses interest-rate swaps to mitigate interest-rate risk associated with changes to 1) the fair value of certain fixed-rate financial instruments (fair value hedges), and 2) certain cash flows related to future interest payments on variable rate financial instruments (cash flow hedges).
The Company recognizes derivatives as assets or liabilities in the consolidated balance sheet at their fair value in accordance with ASC 815, Derivatives and Hedging. The accounting for changes in the fair value 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. On the date the derivative contract is entered into, the Company designates the derivative as a fair value hedge or cash flow hedge. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset or liability attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For a fair value hedge, the effective portion of a change in the fair value of an instrument is recorded as a basis adjustment to the underlying hedged asset or liability. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the change in fair value of a cash flow hedge is recognized immediately in non-interest income in the consolidated income statement. Under both the fair value and cash flow hedge scenarios, changes in the fair value of derivatives not considered to be highly effective in hedging the change in fair value or the expected cash flows of the hedged item are recognized in earnings as non-interest income during the period of the change.
The Company documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is executed. Both at inception and at least quarterly thereafter, the Company assesses whether the derivatives used in hedging transactions are highly effective (as defined in the guidance) in offsetting changes in either the fair value or cash flows of the hedged item. Retroactive effectiveness is assessed, as well as the continued expectation that the hedge will remain effective prospectively. The Company discontinues hedge accounting prospectively when it is determined that a hedge is no longer highly effective. When hedge accounting is discontinued on a fair value hedge that no longer qualifies as an effective hedge, the derivative continues to be reported at fair value on the consolidated balance sheet, but the carrying amount of the hedged item is no longer adjusted for future changes in fair value. The adjustment to the carrying amount of the hedged item that existed at the date hedge accounting is discontinued is amortized over the remaining life of the hedged item into earnings.
Derivative instruments that are not designated as hedges, so called free-standing derivatives, are reported in the consolidated balance sheet at fair value and the changes in fair value are recognized in earnings as non-interest income during the period of change.
The Company occasionally purchases a financial instrument or originates a loan that contains an embedded derivative instrument. Upon purchasing the instrument or originating the loan, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that 1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and 2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and carried at fair value. However, in cases where 1) the host contract is measured at fair value, with changes in fair value reported in current earnings, or 2) the Company is unable to reliably identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the consolidated balance sheet at fair value and is not designated as a hedging instrument.
Income taxes
The Company and its subsidiaries, other than BW Real Estate, Inc., file a consolidated federal tax return. Due to tax regulations, several items of income and expense are recognized in different periods for tax return purposes than for financial reporting purposes. These items represent temporary differences. Deferred taxes are provided on an asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and tax credit carryovers and deferred tax liabilities are recognized for taxable temporary differences. A temporary difference is the difference between the reported amount of an asset or liability and its tax basis. A deferred tax asset is reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

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Off-balance sheet instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instrument arrangements consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets. Losses would be experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as they were when the commitment was originally made. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.
As with outstanding loans, the Company applies qualitative factors and utilization rates to its off-balance sheet obligations in determining an estimate of losses inherent in these contractual obligations. The estimate for credit losses on off-balance sheet instruments is included within other liabilities and the charge to income that establishes this liability is included in non-interest expense.
Fair values of financial instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. ASC 820, Fair Value Measurement, establishes a framework for measuring fair value and a three-level valuation hierarchy for disclosure of fair value measurement as well as enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The Company uses various valuation approaches, including market, income and/or cost approaches. ASC 820 establishes 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 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 sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider 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 reliability of inputs, as follows:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.
Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models and similar techniques.
The availability of observable inputs varies based on the nature of the specific financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability, rather than an entity-specific measure. When market assumptions are available, ASC 820 requires the Company to

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make assumptions regarding the assumptions that market participants would use to estimate the fair value of the financial instrument at the measurement date.
ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at September 30, 2014 and December 31, 2013. The estimated fair value amounts for September 30, 2014 and December 31, 2013 have been measured as of period-end, and have not been reevaluated or updated for purposes of these Consolidated Financial Statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period-end.
The information in "Note 12. Fair Value Accounting" in these Notes to Unaudited Consolidated Financial Statements should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities.
Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheets for cash and due from banks approximate their fair value.
Money market and certificates of deposit investments
The carrying amounts reported in the consolidated balance sheets for money market investments approximate their fair value.
Investment securities
The fair values of U.S. Treasuries, corporate debt securities, mutual funds, and exchange-listed preferred stock are based on quoted market prices and are categorized as Level 1 in the fair value hierarchy.
The fair values of other investment securities were determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing are generally categorized as Level 2 in the fair value hierarchy.
The Company owns certain CDOs for which quoted prices are not available. Quoted prices for similar assets are also not available for these investment securities. In order to determine the fair value of these securities, the Company has estimated the future cash flows and discount rate using third party quotes adjusted based on assumptions regarding the adjustments a market participant would assume necessary for each specific security. As a result of the lack of an active market, the resulting fair values have been categorized as Level 3 in the fair value hierarchy.
Restricted stock
WAB is a member of the FHLB system and maintains an investment in capital stock of the FHLB. WAB also maintains an investment in its primary correspondent bank. These investments are carried at cost since no ready market exists for them, and they have no quoted market value. The Company conducts a periodic review and evaluation of its FHLB stock to determine if any impairment exists. The fair values of these investments have been categorized as Level 2 in the fair value hierarchy.
Loans
Fair value for loans is estimated based on discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality and adjustments that the Company believes a market participant would consider in determining fair value based on a third party independent valuation. As a result, the fair value for certain loans disclosed in "Note 12. Fair Value Accounting" of these Notes to Unaudited Consolidated Financial Statements is categorized as Level 2 in the fair value hierarchy, excluding impaired loans which are categorized as Level 3.

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Accrued interest receivable and payable
The carrying amounts reported in the Consolidated Balance Sheets for accrued interest receivable and payable approximate their fair value. Accrued interest receivable and payable fair value measurements are classified as Level 3 in the fair value hierarchy.
Derivative financial instruments
All derivatives are recognized in the Consolidated Balance Sheets at their fair value. The fair value for derivatives is determined based on market prices, broker-dealer quotations on similar products or other related input parameters. As a result, the fair values have been categorized as Level 2 in the fair value hierarchy.
Deposits
The fair value disclosed for demand and savings deposits is by definition equal to the amount payable on demand at their reporting date (that is, their carrying amount), which the Company believes a market participant would consider in determining fair value. The carrying amount for variable-rate deposit accounts approximates their fair value. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on these deposits. The fair value measurement of the deposit liabilities disclosed in "Note 12. Fair Value Accounting" of these Notes to Unaudited Consolidated Financial Statements is categorized as Level 2 in the fair value hierarchy.
FHLB advances and other borrowings
The fair values of the Company’s borrowings are estimated using discounted cash flow analyses, based on the market rates for similar types of borrowing arrangements. FHLB advances have been categorized as Level 2 in the fair value hierarchy due to their short durations. Other borrowings have been categorized as Level 3 in the fair value hierarchy.
Junior subordinated debt
Junior subordinated debt and subordinated debt are valued by comparing interest rates and spreads to an index relative to the ten-year treasury rate and discounting the contractual cash flows on the Company's debt using these market rates. Junior subordinated debt has been categorized as Level 3 in the fair value hierarchy.
Off-balance sheet instruments
Fair values for the Company’s off-balance sheet instruments (lending commitments and standby letters of credit) are based on quoted fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Recent accounting pronouncements
In February 2013, the FASB issued guidance within ASU 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The amendments in ASU 2013-04 to Topic 405, Liabilities, provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the Update is fixed at the reporting date, except for obligations addressed with existing GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation, as well as other information about those obligations. The amendment is effective retrospectively for reporting periods beginning after December 15, 2013. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In July 2013, the FASB issued guidance within ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in ASU 2013-11 to Topic 740, Income Taxes, provide guidance on the financial statement presentation of unrecognized tax benefits when a NOL carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In January 2014, the FASB issued guidance within ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The amendments in ASU 2014-01 to Topic 323, Equity Investments and Joint Ventures, provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable

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housing projects that qualify for the LIHTC. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for fiscal years, and interim periods within those years, beginning after December 31, 2014 and should be applied retrospectively to all periods presented, with early adoption permitted. All of the Company's LIHTC investments are within the scope of this guidance and the Company has adopted this amended guidance beginning on January 1, 2014. As a result, prior period financial information has been adjusted to conform to the amended guidance. See "Note 10. Income Taxes" for the impact that adoption had on the Company's financial condition and results of operations as well as additional disclosures required under these amendments.
In January 2014, the FASB issued guidance within ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective of the amendments in ASU 2014-04 to Topic 310, Receivables - Troubled Debt Restructurings by Creditors, is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 31, 2014. An entity can elect to adopt the amendments using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In June 2014, the FASB issued guidance within ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in ASU 2014-11 to Topic 860, Transfers and Servicing, change the accounting for repurchase-to-maturity transactions to secured borrowing accounting and, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The accounting changes are effective for the first interim or annual period beginning after December 15, 2014. The amendments also require disclosure of information about certain transactions accounted for as a sale in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets through an agreement with the same counterparty. An entity will also be required to disclose information about repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014 and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In June 2014, the FASB issued guidance within ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in ASU 2014-12 to Topic 718, Compensation - Stock Compensation, provide explicit guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. An entity may elect to apply the amendments either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company is in the process of evaluating the impact that adoption of this guidance will have on its Consolidated Financial Statements.
In August 2014, the FASB issued guidance within ASU 2014-15, Presentation of Financial Statements - Going Concern. The amendments in ASU 2014-15 to Subtopic 205-40 provide guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern. The amendments require management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

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2. INVESTMENT SECURITIES
The carrying amounts and fair values of investment securities at September 30, 2014 and December 31, 2013 are summarized as follows: 
 
 
September 30, 2014
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
 
 
(in thousands)
Available-for-sale
 
 
 
 
 
 
 
 
U.S. government-sponsored agency securities
 
$
18,699

 
$

 
$
(705
)
 
$
17,994

Corporate debt securities
 
97,773

 
789

 
(1,616
)
 
96,946

Municipal obligations
 
295,989

 
12,176

 
(770
)
 
307,395

Preferred stock
 
83,431

 
1,488

 
(2,692
)
 
82,227

Mutual funds
 
37,449

 
419

 
(54
)
 
37,814

Residential MBS issued by GSEs
 
902,528

 
8,658

 
(3,234
)
 
907,952

Commercial MBS issued by GSEs
 
2,061

 
56

 

 
2,117

Private label residential MBS
 
55,212

 
35

 
(1,602
)
 
53,645

Private label commercial MBS
 
5,177

 
159

 

 
5,336

Trust preferred securities
 
32,000

 

 
(5,780
)
 
26,220

CRA investments
 
24,162

 

 
(172
)
 
23,990

Collateralized debt obligations
 
50

 
8,052

 
(49
)
 
8,053

Total AFS securities
 
$
1,554,531

 
$
31,832

 
$
(16,674
)
 
$
1,569,689

 
 
 
 
 
 
 
 
 
Securities measured at fair value
 
 
 
 
 
 
 
 
Residential MBS issued by GSEs
 
 
 
 
 
 
 
$
1,935

 
In May 2014, the Company's investment committee reassessed the Company's holdings in CDOs, and gave management the discretion to sell CDOs and to reinvest in higher grade investment securities. This change in intent, prior to maturity or recovery, necessitated a reclassification of all HTM securities to AFS. At the date of transfer, the securities had a total amortized cost of $275.3 million and fair value of $289.6 million. The Company recognized an unrealized gain of $9.0 million, net of tax, in AOCI at the date of the transfer.
 
 
December 31, 2013
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
 
 
(in thousands)
Available-for-sale
 
 
 
 
 
 
 
 
U.S. government sponsored agency securities
 
$
49,110

 
$

 
$
(2,135
)
 
$
46,975

Municipal obligations
 
121,671

 
316

 
(6,322
)
 
115,665

Preferred stock
 
68,110

 
853

 
(7,479
)
 
61,484

Mutual funds
 
37,423

 
93

 
(984
)
 
36,532

Residential MBS issued by GSEs
 
1,028,402

 
5,567

 
(12,548
)
 
1,021,421

Private label residential MBS
 
38,250

 

 
(2,151
)
 
36,099

Private label commercial MBS
 
5,252

 
181

 

 
5,433

Trust preferred securities
 
32,000

 

 
(8,195
)
 
23,805

CRA investments
 
23,830

 

 
(548
)
 
23,282

Total AFS securities
 
$
1,404,048

 
$
7,010

 
$
(40,362
)
 
$
1,370,696

 
 
 
 
 
 
 
 
 
Securities measured at fair value
 
 
 
 
 
 
 
 
Residential MBS issued by GSEs
 
 
 
 
 
 
 
$
3,036


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December 31, 2013
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
 
 
(in thousands)
Held-to-maturity
 
 
 
 
 
 
 
 
Collateralized debt obligations
 
$
50

 
$
1,346

 
$

 
$
1,396

Corporate debt securities
 
97,777

 
775

 
(3,826
)
 
94,726

Municipal obligations
 
183,579

 
2,773

 
(2,370
)
 
183,982

CRA investments
 
1,600

 

 

 
1,600

Total HTM securities
 
$
283,006

 
$
4,894

 
$
(6,196
)
 
$
281,704

For additional information on the fair value changes of the securities measured at fair value, see the trading securities table in "Note 12. Fair Value Accounting" of these Notes to Unaudited Consolidated Financial Statements.
The Company conducts an OTTI analysis on a quarterly basis. The initial indication of OTTI for both debt and equity securities is a decline in the market value below the amount recorded for an investment, taking into account the severity and duration of the decline. Another potential indication of OTTI is a downgrade below investment grade. In determining whether an impairment is OTTI, the Company considers the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. For marketable equity securities, the Company also considers the issuer’s financial condition, capital strength and near-term prospects.
For debt securities, for the purpose of OTTI analysis, the Company also considers the cause of the price decline (general level of interest rates and industry and issuer specific factors), the issuer’s financial condition, near-term prospects and current ability to make future payments in a timely manner, as well as the issuer’s ability to service debt, and any change in agencies’ ratings at the evaluation date from the acquisition date and any likely imminent action. For ARPS with a fair value below cost that is not attributable to the credit deterioration of the issuer, such as a decline in cash flows from the security or a downgrade in the security’s rating below investment grade, a loss is recorded in other comprehensive income rather than earnings when the Company determines there is intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.
The Company has reviewed securities for which there is an unrealized loss in accordance with its accounting policy for OTTI described above and determined that there were no impairment charges for the three and nine months ended September 30, 2014 and 2013.
The Company does not consider any securities to be other-than-temporarily impaired as of September 30, 2014 and December 31, 2013. No assurance can be made that additional OTTI will not occur in future periods.

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Information pertaining to securities with gross unrealized losses at September 30, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows: 
 
 
September 30, 2014
 
 
Less Than Twelve Months
 
More Than Twelve Months
 
Total
 
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
 
(in thousands)
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government sponsored agency securities
 
$

 
$

 
$
705

 
$
17,993

 
$
705

 
$
17,993

Corporate debt securities
 
488

 
24,512

 
1,128

 
53,872

 
1,616

 
78,384

Preferred stock
 
271

 
16,808

 
2,421

 
28,136

 
2,692

 
44,944

Mutual funds
 
54

 
26,049

 

 

 
54

 
26,049

Residential MBS issued by GSEs
 
478

 
65,649

 
2,756

 
120,977

 
3,234

 
186,626

Municipal obligations
 
11

 
2,255

 
759

 
24,252

 
770

 
26,507

Private label residential MBS
 
63

 
6,615

 
1,539

 
25,903

 
1,602

 
32,518

Trust preferred securities
 

 

 
5,780

 
26,220

 
5,780

 
26,220

CRA investments
 

 

 
172

 
23,937

 
172

 
23,937

Collateralized debt obligations
 
49

 

 

 

 
49

 

Total AFS securities
 
$
1,414

 
$
141,888

 
$
15,260

 
$
321,290

 
$
16,674

 
$
463,178

 
 
 
December 31, 2013
 
 
Less Than Twelve Months
 
More Than Twelve Months
 
Total
 
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
 
(in thousands)
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government sponsored agency securities
 
$
2,135

 
$
46,976

 
$

 
$

 
$
2,135

 
$
46,976

Preferred stock
 
7,479

 
44,637

 

 

 
7,479

 
44,637

Mutual funds
 
984

 
30,101

 

 

 
984

 
30,101

Residential MBS issued by GSEs
 
11,934

 
601,756

 
614

 
8,984

 
12,548

 
610,740

Municipal obligations
 
3,545

 
72,300

 
2,777

 
17,923

 
6,322

 
90,223

Private label residential MBS
 
2,009

 
32,517

 
142

 
3,583

 
2,151

 
36,100

Trust preferred securities
 

 

 
8,195

 
23,807

 
8,195

 
23,807

Other
 
548

 
23,823

 

 

 
548

 
23,823

Total AFS securities
 
$
28,634

 
$
852,110

 
$
11,728

 
$
54,297

 
$
40,362

 
$
906,407

 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
163

 
$
9,837

 
$
3,663

 
$
71,337

 
$
3,826

 
$
81,174

Municipal obligations
 
1,624

 
50,740

 
746

 
5,102

 
2,370

 
55,842

Total HTM securities
 
$
1,787

 
$
60,577

 
$
4,409

 
$
76,439

 
$
6,196

 
$
137,016

At September 30, 2014 and December 31, 2013, the Company’s unrealized losses relate primarily to interest rate fluctuations, credit spread widening and reduced liquidity in applicable markets. The total number of securities in an unrealized loss position at September 30, 2014 was 134, compared to 252 at December 31, 2013. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysis reports. Since material downgrades have not occurred and management does not intend to sell the debt securities in an unrealized loss position in the foreseeable future, none of the securities described in the above table or in this paragraph were deemed to be other than temporarily impaired.

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The corporate bonds and trust preferred securities have yields based on floating rate LIBOR, which are highly correlated to the federal funds rate and have been negatively affected by the low rate environment. This has resulted in unrealized losses for these securities. The FRB continues to express its intention to keep interest rates, particularly the federal funds rate, at historically low levels into 2016.
The amortized cost and fair value of securities as of September 30, 2014, by contractual maturities, are shown below. The actual maturities of the MBS may differ from their contractual maturities because the loans underlying the securities may be repaid without any penalties due to borrowers that have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, these securities are listed separately in the maturity summary. 
 
 
September 30, 2014
 
 
Amortized Cost
 
Estimated Fair Value
 
 
(in thousands)
Available-for-sale
 
 
 
 
Due in one year or less
 
$
68,891

 
$
69,122

After one year through five years
 
51,764

 
53,051

After five years through ten years
 
196,033

 
198,078

After ten years
 
272,865

 
280,388

Mortgage-backed securities
 
964,978

 
969,050

Total AFS securities
 
$
1,554,531

 
$
1,569,689

The following tables summarize the carrying amounts of the Company’s investment ratings position as September 30, 2014 and December 31, 2013
 
 
September 30, 2014
 
 
AAA
 
Split-rated AAA/AA+
 
AA+ to AA-
 
A+ to A-
 
BBB+ to BBB-
 
BB+ and below
 
Unrated
 
Totals
 
 
(in thousands)
Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal obligations
 
$
8,264

 
$

 
$
137,984

 
$
154,672

 
$
6,270

 
$
205

 
$

 
$
307,395

Residential MBS issued by GSEs
 

 
907,952

 

 

 

 

 

 
907,952

Commercial MBS issued by GSEs
 

 
2,117

 

 

 

 

 

 
2,117

Private label residential MBS
 
42,970

 

 
79

 
3,590

 
3,835

 
3,171

 

 
53,645

Private label commercial MBS
 
5,336

 

 

 

 

 

 

 
5,336

Mutual funds (2)
 

 

 

 

 
37,814

 

 

 
37,814

U.S. government sponsored agency securities
 

 
17,994

 

 

 

 

 

 
17,994

Preferred stock
 

 

 

 

 
52,301

 
19,544

 
10,382

 
82,227

Trust preferred securities
 

 

 

 

 
26,220

 

 

 
26,220

Collateralized debt obligations
 

 

 

 

 

 
8,053

 

 
8,053

Corporate debt securities
 

 

 
2,777

 
25,211

 
68,958

 

 

 
96,946

CRA Investments
 

 

 

 

 

 

 
23,990

 
23,990

Total AFS Securities (1)
 
$
56,570

 
$
928,063

 
$
140,840

 
$
183,473

 
$
195,398

 
$
30,973

 
$
34,372

 
$
1,569,689

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Measured at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential MBS issued by GSEs
 
$

 
$
1,935

 
$

 
$

 
$

 
$

 
$

 
$
1,935


(1)
The Company used the average credit rating of the combination of S&P, Moody’s and Fitch in the above table where ratings differed.
(2)
At least 80% of the portfolio of these mutual funds consist of investment grade corporate debt securities.

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