10-Q 1 wal630201510q.htm 10-Q WAL 6.30.2015 10Q
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 June 30, 2015
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: 102,322,933 shares as of August 3, 2015.



INDEX
 



2


PART I
GLOSSARY OF ENTITIES AND TERMS
The acronyms and abbreviations identified below are used in various sections of this Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," in Item 2 and the Consolidated Financial Statements and the Notes to Consolidated Financial Statements in Item I of this Form 10-Q.
ENTITIES:
AAB
Alliance Association Bank
FIB
First Independent Bank
ABA
Alliance Bank of Arizona
LVSP
Las Vegas Sunset Properties
BON
Bank of Nevada
TPB
Torrey Pines Bank
Bridge
Bridge Bank
WAB or Bank
Western Alliance Bank
Centennial
Centennial Bank
WAL or Parent
Western Alliance Bancorporation
Company
Western Alliance Bancorporation and Subsidiaries
Western Liberty
Western Liberty Bancorp
TERMS:
AFS
Available-for-Sale
GSE
Government-Sponsored Enterprise
ALCO
Asset and Liability Management Committee
HFI
Held for Investment
AOCI
Accumulated Other Comprehensive Income
HFS
Held for Sale
ARPS
Adjustable-Rate Preferred Stock
HTM
Held-to-Maturity
ASC
Accounting Standards Codification
ICS
Insured Cash Sweep Service
ASU
Accounting Standards Update
IRC
Internal Revenue Code
ATM
At-the-Market
ISDA
International Swaps and Derivatives Association
BOD
Board of Directors
LIBOR
London Interbank Offered Rate
CBL
Central Business Lines
LIHTC
Low-Income Housing Tax Credit
CDARS
Certificate Deposit Account Registry Service
MBS
Mortgage-Backed Securities
CDO
Collateralized Debt Obligation
NOL
Net Operating Loss
CEO
Chief Executive Officer
NPV
Net Present Value
CFO
Chief Financial Officer
NUBILs
Net Unrealized Built In Losses
CRA
Community Reinvestment Act
OCI
Other Comprehensive Income
CRE
Commercial Real Estate
OREO
Other Real Estate Owned
EPS
Earnings per share
OTTI
Other-than-Temporary Impairment
EVE
Economic Value of Equity
PCI
Purchased Credit Impaired
Exchange Act
Securities Exchange Act of 1934, as amended
SBIC
Small Business Investment Company
FASB
Financial Accounting Standards Board
SEC
Securities and Exchange Commission
FDIC
Federal Deposit Insurance Corporation
SERP
Supplemental Executive Retirement Plan
FHLB
Federal Home Loan Bank
SSAE
Statement on Standards for Attestation Engagements
FRB
Federal Reserve Bank
TDR
Troubled Debt Restructuring
FVO
Fair Value Option
TEB
Tax Equivalent Basis
GAAP
U.S. Generally Accepted Accounting Principles
XBRL
eXtensible Business Reporting Language

3


Item 1.
Financial Statements.
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
June 30, 2015
 
December 31, 2014
 
 
(Unaudited)
 
 
 
 
(in thousands, except per share amounts)
Assets:
 
 
 
 
Cash and due from banks
 
$
149,929

 
$
125,329

Securities purchased under agreement to resell
 
58,150

 

Interest-bearing deposits in other financial institutions
 
550,257

 
39,067

Cash and cash equivalents
 
758,336

 
164,396

Money market investments
 
875

 
451

Investment securities - measured at fair value
 
1,701

 
1,858

Investment securities - AFS, at fair value; amortized cost of $1,453,820 at June 30, 2015 and $1,493,648 at December 31, 2014
 
1,478,234

 
1,520,237

Investments in restricted stock, at cost
 
51,040

 
25,275

Loans - HFS
 
39,401

 

Loans - HFI, net of deferred loan fees and costs
 
10,321,221

 
8,398,265

Less: allowance for credit losses
 
(115,056
)
 
(110,216
)
Total loans held for investment
 
10,206,165

 
8,288,049

Premises and equipment, net
 
116,044

 
113,818

Other assets acquired through foreclosure, net
 
59,335

 
57,150

Bank owned life insurance
 
161,100

 
141,969

Goodwill
 
282,851

 
23,224

Other intangible assets, net
 
17,124

 
2,689

Deferred tax assets, net
 
82,075

 
62,686

Other assets
 
215,823

 
198,696

Total assets
 
$
13,470,104

 
$
10,600,498

Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Non-interest-bearing demand
 
$
3,924,456

 
$
2,288,048

Interest-bearing
 
7,482,272

 
6,642,995

Total deposits
 
11,406,728

 
8,931,043

Customer repurchase agreements
 
42,172

 
54,899

Securities sold short
 
57,580

 

Other borrowings
 
69,429

 
390,263

Qualifying debt
 
208,417

 
40,437

Other liabilities
 
171,034

 
182,928

Total liabilities
 
11,955,360

 
9,599,570

Commitments and contingencies (Note 13)
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock - par value $0.0001 and liquidation value per share of $1,000; 20,000,000 authorized; 70,500 shares issued and outstanding at June 30, 2015 and December 31, 2014
 
70,500

 
70,500

Common stock - par value $0.0001; 200,000,000 authorized; 102,290,865 shares issued and outstanding at June 30, 2015 and 88,691,249 at December 31, 2014
 
10

 
9

Additional paid in capital
 
1,268,947

 
828,327

Accumulated other comprehensive income
 
15,348

 
16,639

Retained earnings
 
159,939

 
85,453

Total stockholders’ equity
 
1,514,744

 
1,000,928

Total liabilities and stockholders’ equity
 
$
13,470,104

 
$
10,600,498

See accompanying Notes to Unaudited Consolidated Financial Statements.

4


WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS (Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
 
Loans, including fees
 
$
105,468

 
$
90,583

 
$
205,859

 
$
177,387

Investment securities
 
8,003

 
9,926

 
16,516

 
20,153

Dividends
 
1,273

 
968

 
2,548

 
2,066

Other
 
1,874

 
496

 
2,657

 
1,068

Total interest income
 
116,618

 
101,973

 
227,580

 
200,674

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
5,362

 
4,930

 
10,508

 
9,595

Other borrowings
 
2,068

 
2,686

 
4,312

 
5,505

Qualifying debt
 
451

 
443

 
892

 
864

Customer repurchase agreements
 
19

 
16

 
42

 
35

Total interest expense
 
7,900

 
8,075

 
15,754

 
15,999

Net interest income
 
108,718

 
93,898

 
211,826

 
184,675

Provision for credit losses
 

 
507

 
700

 
4,007

Net interest income after provision for credit losses
 
108,718

 
93,391

 
211,126

 
180,668

Non-interest income:
 
 
 
 
 
 
 
 
Service charges and fees
 
3,128

 
2,758

 
6,017

 
5,319

Income from bank owned life insurance
 
772

 
959

 
1,749

 
1,908

Card income
 
899

 
860

 
1,712

 
1,645

Gain (loss) on sales of investment securities, net
 
55

 
(163
)
 
644

 
203

Loss on extinguishment of debt
 
(81
)
 

 
(81
)
 

Unrealized (losses) gains on assets and liabilities measured at fair value, net
 
(7,885
)
 
235

 
(8,194
)
 
(1,041
)
Other income
 
921

 
950

 
1,895

 
2,120

Total non-interest (loss) income
 
(2,191
)
 
5,599

 
3,742

 
10,154

Non-interest expense:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
32,406

 
31,751

 
64,947

 
61,306

Occupancy
 
4,949

 
4,293

 
9,762

 
8,979

Legal, professional, and directors' fees
 
4,611

 
4,192

 
8,606

 
7,831

Data processing
 
2,683

 
2,580

 
5,809

 
5,309

Insurance
 
2,274

 
2,087

 
4,364

 
4,480

Loan and repossessed asset expenses
 
1,284

 
889

 
2,374

 
2,036

Card expense
 
613

 
530

 
1,087

 
1,130

Marketing
 
463

 
506

 
840

 
1,065

Intangible amortization
 
281

 
302

 
562

 
899

Net (gain) loss on sales / valuations of repossessed and other assets
 
(1,218
)
 
184

 
(1,569
)
 
(2,377
)
Acquisition / restructure expense
 
7,842

 
26

 
8,001

 
183

Other expense
 
5,021

 
4,902

 
10,459

 
10,870

Total non-interest expense
 
61,209

 
52,242

 
115,242

 
101,711

Income from continuing operations before provision for income taxes
 
45,318

 
46,748

 
99,626

 
89,111

Income tax expense
 
10,599

 
10,706

 
24,717

 
21,330

Income from continuing operations
 
34,719

 
36,042

 
74,909

 
67,781

Loss from discontinued operations, net of tax
 

 
(504
)
 

 
(1,158
)
Net income
 
34,719

 
35,538

 
74,909

 
66,623

Dividends on preferred stock
 
247

 
352

 
423

 
705

Net income available to common stockholders
 
$
34,472

 
$
35,186

 
$
74,486

 
$
65,918

 
 
 
 
 
 
 
 
 

5


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands, except per share amounts)
Earnings per share from continuing operations:
 
 
 
 
 
 
 
 
Basic
 
$
0.39

 
$
0.41

 
$
0.85

 
$
0.78

Diluted
 
0.39

 
0.41

 
0.84

 
0.77

Loss per share from discontinued operations:
 
 
 
 
 
 
 
 
Basic
 

 

 

 
(0.02
)
Diluted
 

 
(0.01
)
 

 
(0.01
)
Earnings per share available to common stockholders:
 
 
 
 
 
 
 
 
Basic
 
0.39

 
0.41

 
0.85

 
0.76

Diluted
 
0.39

 
0.40

 
0.84

 
0.76

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
88,177

 
86,501

 
88,059

 
86,379

Diluted
 
88,682

 
87,333

 
88,567

 
87,229

Dividends declared per common share
 
$

 
$

 
$

 
$

See accompanying Notes to Unaudited Consolidated Financial Statements.

6


WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Net income
 
$
34,719

 
$
35,538

 
$
74,909

 
$
66,623

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
 
Unrealized gain on transfer of HTM securities to AFS, net of tax effect of $0, $(5,367), $0, and $(5,367), respectively
 

 
8,976

 

 
8,976

Unrealized (loss) gain on AFS securities, net of tax effect of $5,135, $(6,294), $858, and $(12,658), respectively
 
(8,378
)
 
10,525

 
(1,225
)
 
21,169

Unrealized gain on SERP, net of tax effect of $(207), $0, $(207), $0, respectively
 
337

 

 
337

 

Realized (gain) loss on sale of AFS securities included in income, net of tax effect of $21, $(61), $241, and $76, respectively
 
(34
)
 
102

 
(403
)
 
(127
)
Net other comprehensive (loss) income
 
(8,075
)
 
19,603

 
(1,291
)
 
30,018

Comprehensive income
 
$
26,644

 
$
55,141

 
$
73,618

 
$
96,641

See accompanying Notes to Unaudited Consolidated Financial Statements.

7


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)
Balance, December 31, 2013
 
141

 
$
141,000

 
87,186

 
$
9

 
$
797,146

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

Net income
 

 

 

 

 

 

 
66,623

 
66,623

Exercise of stock options
 

 

 
169

 

 
1,996

 

 

 
1,996

Restricted stock, performance stock unit, and other grants, net
 

 

 
303

 

 
1,623

 

 

 
1,623

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

 

 
116

 

 
2,611

 

 

 
2,611

Dividends on preferred stock
 

 

 

 

 

 

 
(705
)
 
(705
)
Other comprehensive income, net
 

 

 

 

 

 
30,018

 

 
30,018

Balance, June 30, 2014
 
141

 
$
141,000

 
87,774

 
$
9

 
$
803,376

 
$
8,472

 
$
4,807

 
$
957,664

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
 
71

 
$
70,500

 
88,691

 
$
9

 
$
828,327

 
$
16,639

 
$
85,453

 
$
1,000,928

Net income
 

 

 

 

 

 

 
74,909

 
74,909

Exercise of stock options
 

 

 
145

 

 
1,537

 

 

 
1,537

Restricted stock, performance stock unit, and other grants, net
 

 

 
458

 

 
8,053

 

 

 
8,053

Issuance of common stock in connection with the acquisition of Bridge (1)
 

 

 
12,997

 
1

 
431,030

 

 

 
431,031

Dividends on preferred stock
 

 

 

 

 

 

 
(423
)
 
(423
)
Other comprehensive loss, net
 

 

 

 

 

 
(1,291
)
 

 
(1,291
)
Balance, June 30, 2015
 
71

 
$
70,500

 
102,291

 
$
10

 
$
1,268,947

 
$
15,348

 
$
159,939

 
$
1,514,744

(1)    Includes value of certain share-based awards replaced in connection with the acquisition.

See accompanying Notes to Unaudited Consolidated Financial Statements.

8


WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
Six Months Ended June 30,
 
 
2015
 
2014
 
 
(in thousands)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
74,909

 
$
66,623

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Provision for credit losses
 
700

 
4,007

Depreciation and amortization
 
3,943

 
3,220

Stock-based compensation
 
7,908

 
6,039

Excess tax benefit of stock-based compensation
 
(5,164
)
 
(1,830
)
Deferred income taxes
 
(2,345
)
 
(6,665
)
Amortization of net premiums for investment securities
 
4,133

 
4,048

Accretion of fair market value adjustments on loans acquired from business combinations
 
(4,118
)
 
(8,962
)
Accretion and amortization of fair market value adjustments on other assets and liabilities acquired from business combinations
 
247

 
(193
)
Income from bank owned life insurance
 
(1,749
)
 
(1,908
)
Unrealized losses on assets and liabilities measured at fair value, net
 
8,194

 
1,041

(Gains) / Losses on:
 
 
 
 
Sales of investment securities
 
(644
)
 
(203
)
Sale of loans
 
(319
)
 

Extinguishment of debt
 
81

 

Other assets acquired through foreclosure, net
 
(3,055
)
 
(1,179
)
Valuation adjustments of other repossessed assets, net
 
1,504

 
293

Sale of premises, equipment, and other assets, net
 
(18
)
 
(1,491
)
Changes in, net of acquisitions:
 
 
 
 
Other assets
 
8,742

 
7,419

Other liabilities
 
(15,996
)
 
(9,738
)
Net cash provided by operating activities
 
76,953

 
60,521

Cash flows from investing activities:
 
 
 
 
Investment securities - measured at fair value
 
 
 
 
Principal pay downs and maturities
 
143

 
261

Investment securities - AFS
 
 
 
 
Purchases
 
(94,532
)
 
(38,785
)
Principal pay downs and maturities
 
114,127

 
124,615

Proceeds from sales
 
78,040

 
26,840

Investment securities - HTM
 
 
 
 
Principal pay downs and maturities
 

 
6,600

Purchase of investment tax credits
 
(11,884
)
 
(16,948
)
(Purchase) sale of money market investments, net
 
(424
)
 
1,225

(Purchase) liquidation of restricted stock
 
(18,749
)
 
4,911

Loan fundings and principal collections, net
 
(515,143
)
 
(719,720
)
Purchase of premises, equipment, and other assets, net
 
(3,886
)
 
(5,491
)
Proceeds from sale of other real estate owned and repossessed assets, net
 
14,375

 
14,732

Cash and cash equivalents acquired in Bridge acquisition, net
 
342,427

 

Net cash used in investing activities
 
(95,506
)
 
(601,760
)
 
 
 
 
 

9


 
 
Six Months Ended June 30,
 
 
2015
 
2014
 
 
(in thousands)
Cash flows from financing activities:
 
 
 
 
Net increase in deposits
 
733,788

 
631,609

Proceeds from issuance of subordinated debt
 
148,450

 

Net decrease in borrowings
 
(276,023
)
 
(22,334
)
Proceeds from exercise of common stock options
 
1,537

 
1,996

Excess tax benefit of stock-based compensation
 
5,164

 
1,830

Cash dividends paid on preferred stock
 
(423
)
 
(705
)
Proceeds from issuance of stock in offerings, net
 

 
2,611

Net cash provided by financing activities
 
612,493

 
615,007

Net increase in cash and cash equivalents
 
593,940

 
73,768

Cash and cash equivalents at beginning of period
 
164,396

 
305,514

Cash and cash equivalents at end of period
 
$
758,336

 
$
379,282

Supplemental disclosure:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
13,881

 
$
10,423

Income taxes
 
25,801

 
17,180

Non-cash investing and financing activity:
 
 
 
 
Transfers to other assets acquired through foreclosure, net
 
13,459

 
6,419

Change in unfunded investment tax credits and SBIC commitments
 
2,168

 
12,298

Non-cash assets acquired in Bridge acquisition
 
1,590,927

 

Non-cash liabilities acquired in Bridge acquisition
 
1,761,951

 

Change in unrealized gain on AFS securities, net of tax
 
(1,628
)
 
21,042

Change in unfunded obligations
 
13,654

 
(9,506
)
Unrealized gain on transfer of HTM securities to AFS, net of tax
 

 
8,976

See accompanying Notes to Unaudited Consolidated Financial Statements.

10


WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operation
WAL is a bank holding company headquartered in Phoenix, Arizona, incorporated under the laws of the state of Delaware. WAL provides a full spectrum of deposit, lending, treasury management, and online banking products and services through its wholly-owned banking subsidiary, WAB. On June 30, 2015, WAL acquired Bridge Capital Holdings and its wholly-owned subsidiary, Bridge Bank. Upon acquisition, Bridge Capital Holdings merged into WAL and its principal operating subsidiary, Bridge Bank, merged into WAB. Effective as of July 1, 2015, the existing Bridge offices and the two previously existing WAB Northern California offices are operating as a combined division under the Bridge trade name.
WAB operates the following full-service banking divisions: ABA in Arizona, BON in Southern Nevada, Bridge in Northern California, FIB in Northern Nevada, and TPB in Southern California. The Company also serves business customers through a national platform of specialized financial services including AAB, Corporate Finance, Equipment Finance, Public Finance, Resort Finance, Technology Finance, Energy Infrastructure Group, and Mortgage Warehouse Lending. 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 accounting for income taxes. 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
As of June 30, 2015, WAL has ten wholly-owned subsidiaries: WAB, LVSP, and eight 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; Western Alliance Equipment Finance, which offers equipment finance services nationwide. BW Nevada Holdings, LLC was dissolved on June 12, 2015 after contributing the Company’s 2700 West Sahara Avenue, Las Vegas, Nevada office building to WAB.
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, 2014 and for the three and six months ended June 30, 2014 may have been reclassified to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.

11


Interim financial information
The accompanying Unaudited Consolidated Financial Statements as of and for the three and six months ended June 30, 2015 and 2014 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, 2014.
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, Business Combinations. 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 Consolidated 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.
Securities classified as AFS or trading are reported as an asset in the Consolidated Balance Sheet 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) interest rate, 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 security's 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.
Restricted stock
On January 30, 2015, WAB became a member of the Federal Reserve System and, as part of its membership, is required to maintain stock in the FRB in a specified ratio to its capital. In addition, WAB is a member of the FHLB system and, accordingly, maintains an investment in capital stock of the FHLB based on the borrowing capacity used. The Company also maintains an investment in its primary correspondent bank. All of these investments are considered equity securities with no actively traded market. Therefore, the shares are considered restricted investment securities. These investments are carried at cost, which is equal to the value at which they may be redeemed. The dividend income received from the stock is reported in interest income. The Company conducts a periodic review and evaluation of its restricted stock to determine if any impairment exists. No impairment has been recorded to date.
Loans, held for investment
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 net 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 4. 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.
Non-accrual 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. The Company ceases accruing 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 non-accrual status, all interest accrued but uncollected is reversed against interest income in the period in which the status is changed and, the Company makes a loan-level decision to apply either the cash basis

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or cost recovery method. 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. Under the cost recovery method, 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.
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 non-accrual. 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 any subsequent changes are recorded as a provision for credit losses. Losses are recorded as a charge-off when losses are confirmed. In addition to management's internal loan review process, regulators 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. A TDR loan may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual restructured principal and interest is no longer in doubt. However, such loans continue to be considered impaired. Consistent with regulatory guidance, a TDR loan that is subsequently modified in another restructuring agreement but has shown sustained performance and classification as a TDR, will be removed from TDR status provided that the modified terms were market-based at the time of modification.
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) the Company's 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) out-of-market exposures; 10) changes in quality of loan review system; and 11) changes in the value of underlying collateral.
An internal ten-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. 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, regulators, as an integral part of their examination processes, periodically review the Bank's allowance for credit losses, and may require us to make additions to the 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 the collateral value, net of estimated disposition costs. 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 Company's impairment analysis also incorporates various valuation considerations, including loan type, loss experience, and geographic criteria.

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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.
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.
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk are recorded in current-period earnings. 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 in 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 may in the normal course of business purchase a financial instrument or originate 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

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embedded derivative for separation from its host contract, the entire contract is carried in the Consolidated Balance Sheet at fair value and is not designated as a hedging instrument.
Income taxes
The Company is subject to income taxes in the United States and files a consolidated federal income tax return with all of its subsidiaries, with the exception of BW Real Estate, Inc. Deferred income taxes are recorded to reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their income tax bases using enacted tax rates that are expected to be in effect when the taxes are actually paid or recovered. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Net deferred tax assets are recorded to the extent that these assets will more-likely-than-not be realized. In making these determinations, all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, tax planning strategies, projected future taxable income, and recent operating results. If it is determined that deferred income tax assets to be realized in the future are in excess of their net recorded amount, an adjustment to the valuation allowance will be recorded, which will reduce the Company's provision for income taxes.
A tax benefit from an unrecognized tax benefit may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including related appeals or litigation, based on technical merits. Income tax benefits must meet a more-likely-than-not recognition threshold at the effective date to be recognized.
Interest and penalties related to unrecognized tax benefits are recognized as part of the provision for income taxes in the Consolidated Income Statement. Accrued interest and penalties are included in other liabilities in the Consolidated Balance Sheet.
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 Sheet. 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 in 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:

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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 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 June 30, 2015 and December 31, 2014. The estimated fair value amounts for June 30, 2015 and December 31, 2014 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 period-end.
The information in "Note 14. 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 investments
The carrying amounts reported in the Consolidated Balance Sheets for money market investments approximate their fair value.
Investment securities
The fair values of CRA investments, 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.

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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 engages a third party to estimate the future cash flows and discount rate using third party quotes adjusted based on assumptions 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 Federal Reserve System and the FHLB and, accordingly, maintains investments in the capital stock of the FRB and 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 restricted 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
The fair value of 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 is categorized as Level 2 in the fair value hierarchy, excluding impaired loans which are categorized as Level 3.
Accrued interest receivable and payable
The carrying amounts reported in the Consolidated Balance Sheets for accrued interest receivable and payable approximate their fair value.
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 is categorized as Level 2 in the fair value hierarchy.
FHLB advances, other borrowings, and subordinated debt
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. The 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 is valued by comparing the BB Financial over SWAP index 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
The fair value of the Company’s off-balance sheet instruments (lending commitments and standby letters of credit) is 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.

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Recent accounting pronouncements
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 adoption of this guidance is not expected to have a material impact on the Company's 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, Going Concern, 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.
In February 2015, the FASB issued guidance within ASU 2015-02, Amendments to the Consolidation Analysis. The amendments in ASU 2015-02 to Topic 810, Consolidation, change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership, affect the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships, and provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. An entity may apply the amendments in this Update using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or, may apply the amendments retrospectively. The adoption of this guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.
Recently adopted accounting guidance
In the second quarter of 2015, the Company adopted the amended guidance within ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-03 to Subtopic 835-30, Interest - Imputation of Interest, require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance should be applied on a retrospective basis. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update.
On June 29, 2015, the Company issued $150.0 million in subordinated debt. As a result of the adoption of this amended guidance, subordinated debt was recorded net of related issuance costs of $1.6 million. Prior period balances were not adjusted for the change in accounting principle as unamortized debt issuance costs are not significant.

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2. MERGERS, ACQUISITIONS AND DISPOSITIONS
Acquisition of Bridge Capital Holdings
On June 30, 2015, the Company completed its acquisition of Bridge Capital Holdings and its wholly-owned subsidiary, Bridge Bank, headquartered in San Jose, California. Under the terms of the acquisition, each outstanding share of Bridge common stock was exchanged for 0.8145 shares of WAL's common stock plus $2.39 in cash. The Company paid $36.5 million in cash and issued 12.5 million common shares for all equity interests in Bridge. The merger was undertaken, in part, because Bridge strengthens the Company's Northern California presence and provides new avenues for growth in technology and international services.
Bridge’s results of operations will be included in the Company’s results beginning July 1, 2015. Acquisition / restructure expenses related to the Bridge acquisition of $7.8 million and $8.0 million for three and six months ended June 30, 2015, respectively, have been included in non-interest expense, of which, approximately $0.6 million are acquisition related costs as defined by ASC 805. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805. Assets purchased and liabilities assumed were recorded at their respective acquisition date estimated fair values. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. As the acquisition was completed at quarter end, the fair values of substantially all of the net assets are considered preliminary.
The Company merged Bridge Bank into WAB effective June 30, 2015, creating combined assets for the resulting bank of $13.47 billion and deposits of $11.41 billion. The recognized amounts of identifiable assets acquired and liabilities assumed are as follows:
 
June 30, 2015
 
(in thousands)
Assets:

Cash and cash equivalents (1)
$
378,966

Investment securities - AFS
61,349

Investments in restricted stock
7,015

Loans
1,447,135

Premises and equipment
1,931

Other assets acquired through foreclosure
1,550

Bank owned life insurance
17,385

Investment in LIHTC
5,648

Intangible assets
14,997

Deferred tax assets, net
14,261

Other assets
19,656

Total assets
$
1,969,893

Liabilities:

Deposits
$
1,742,031

Qualifying debt
11,287

Other liabilities
8,633

Total liabilities
1,761,951

Net assets acquired
$
207,942

Consideration paid
 
Common stock (12,451,240 shares at $33.76 per share)
$
420,354

Fair value of equity awards related to pre-combination vesting
10,676

Cash
36,539

Fair value of total consideration
467,569

Goodwill
$
259,627

(1)
Cash and cash equivalents is net of a $6.2 million payment made by Bridge related to the cash out of vested, unexercised stock options at the date of closing. Cash acquired, less cash consideration paid of $36.5 million, resulted in net cash and cash equivalents increasing by $342.4 million following the acquisition.

20


Loans acquired in the Bridge acquisition consist of loans that are not considered impaired (non-PCI loans) and loans that have shown evidence of credit deterioration since origination (PCI loans) as of the acquisition date. All loans were recorded net of fair value adjustments (interest rate and credit marks), which were determined using discounted contractual cash flow models. The fair value of non-PCI loans acquired totals $1.43 billion, which is net of interest and credit marks of $23.0 million. The fair value of PCI loans totals $12.2 million, which is net of interest and credit marks of $2.1 million. See "Note 4. Loans, Leases and Allowance for Credit Losses" of these Notes to Unaudited Consolidated Financial Statements for additional detail of the acquired loans.
In connection with the Bridge acquisition, the Company acquired intangible assets of $15.0 million, consisting primarily of core deposit intangibles. The core deposit intangible asset balance has been allocated to the Northern California and CBL segments based on their respective core deposit balances at June 30, 2015, and is subject to amortization over its estimated useful life of 10 years.
Goodwill in the amount of $259.6 million was recognized as a result of the acquisition, none of which is expected to be deductible for income tax purposes. Goodwill has been allocated to the newly formed Northern California and CBL segments based on their proportionate loan and deposit balances as of June 30, 2015. Management believes this methodology allocates goodwill to the reporting units in a manner consistent with the expected synergies of the combination.
Qualifying debt assumed from Bridge is comprised of junior subordinated debt with a contractual balance of $17.5 million and is recorded net of a $6.2 million fair value mark that will be amortized over the remaining life of the trusts. See "Note 7. Qualifying Debt" of these Notes to Unaudited Consolidated Financial Statements for further detail and discussion of the debt.
In connection with the acquisition, the Company assumed Bridge's SERP, an unfunded noncontributory defined benefit pension plan. The SERP provides retirement benefits to certain Bridge executives based on years of service and final average salary. Pursuant to the terms of the SERP agreements, if the executive officer's service is terminated by Bridge or by the executive officer for "good reason" (as defined in the SERP agreements) within 24 months following a change in control, such as the Bridge acquisition, the executive officer is entitled to full vesting of the normal benefit under the SERP agreement, and such SERP benefits will be made in installment payments commencing on the first business day of January of the year following the executive officer's attainment of age 55 or, if the executive officer is already age 55 as of such termination of employment, on the first business day of January of the year following the executive officer's termination of employment. As of June 30, 2015, a $7.1 million liability included in other liabilities was recorded in the Company's Consolidated Balance Sheet related to the SERP. A discount rate of 5.75% and a 4.00% employee compensation rate increase were used in determining the SERP liability as of June 30, 2015.
The following table presents pro forma information as if the Bridge acquisition was completed on January 1, 2014. The pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction and interest expense on deposits acquired. The pro forma information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates. 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands, except per share amounts)
Interest income
 
$
139,080

 
$
121,744

 
$
271,502

 
$
239,072

Non-interest income
 
1,840

 
9,578

 
11,047

 
16,882

Net income available to common stockholders (1)
 
45,607

 
39,452

 
90,372

 
73,901

Earnings per share - basic
 
$
0.45

 
$
0.40

 
$
0.89

 
$
0.74

Earnings per share - diluted
 
$
0.44

 
$
0.39

 
$
0.88

 
$
0.73

 
(1)
Excludes acquisition / restructure related costs incurred by the Company of $7.8 million and $8.0 million for the three and six months ended June 30, 2015, respectively, and acquisition / restructure related costs incurred by Bridge of $5.6 million and $6.8 million for the three and six months ended June 30, 2015, respectively, and related tax effects.


21


PartnersFirst Discontinued Operations
The Company discontinued its affinity credit card business and presented these activities as discontinued operations. During the second quarter 2014, the Company shut down its remaining affinity credit card operations. Therefore, no additional discontinued operations have been reported.
The following table summarizes the operating results of the discontinued operations for the three and six months ended June 30, 2014
 
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
 
 
(in thousands)
Operating revenue
 
$
(214
)
 
$
(358
)
Non-interest expenses
 
(511
)
 
(1,369
)
Loss before income taxes
 
(725
)
 
(1,727
)
Income tax benefit
 
(221
)
 
(569
)
Net loss
 
$
(504
)
 
$
(1,158
)
3. INVESTMENT SECURITIES
The carrying amounts and fair values of investment securities at June 30, 2015 and December 31, 2014 are summarized as follows: 
 
 
June 30, 2015
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
 
 
(in thousands)
Available-for-sale
 
 
 
 
 
 
 
 
Collateralized debt obligations
 
$
50

 
$
10,754

 
$

 
$
10,804

Commercial MBS issued by GSEs
 
13,145

 
64

 

 
13,209

Corporate debt securities
 
13,097

 
568

 

 
13,665

CRA investments
 
32,599

 

 
(62
)
 
32,537

Municipal obligations
 
281,895

 
10,889

 
(371
)
 
292,413

Preferred stock
 
82,888

 
1,935

 
(1,772
)
 
83,051

Private label commercial MBS
 
4,908

 
71

 

 
4,979

Private label residential MBS
 
102,760

 
250

 
(939
)
 
102,071

Residential MBS issued by GSEs
 
861,681

 
11,297

 
(1,621
)
 
871,357

Trust preferred securities
 
32,000

 

 
(6,352
)
 
25,648

U.S. government sponsored agency securities
 
24,906

 

 
(297
)
 
24,609

U.S. treasury securities
 
3,891

 

 

 
3,891

Total AFS securities
 
$
1,453,820

 
$
35,828

 
$
(11,414
)
 
$
1,478,234

 
 
 
 
 
 
 
 
 
Securities measured at fair value
 
 
 
 
 
 
 
 
Residential MBS issued by GSEs
 
 
 
 
 
 
 
$
1,701


22


 
 
December 31, 2014
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
Available-for-sale
 
 
 
 
 
 
 
 
Collateralized debt obligations
 
$
50

 
$
11,395

 
$

 
$
11,445

Commercial MBS issued by GSEs
 
2,047

 
100

 

 
2,147

Corporate debt securities
 
52,773

 
717

 
(1,001
)
 
52,489

CRA investments
 
24,302

 
30

 

 
24,332

Municipal obligations
 
285,398

 
13,688

 
(49
)
 
299,037

Mutual funds
 
37,449

 
500

 
(247
)
 
37,702

Preferred stock
 
83,192

 
2,099

 
(2,679
)
 
82,612

Private label commercial MBS
 
5,017

 
132

 

 
5,149

Private label residential MBS
 
70,985

 
379

 
(1,121
)
 
70,243

Residential MBS issued by GSEs
 
881,734

 
11,440

 
(1,985
)
 
891,189

Trust preferred securities
 
32,000

 

 
(6,454
)
 
25,546

U.S. government-sponsored agency securities
 
18,701

 

 
(355
)
 
18,346

Total AFS securities
 
$
1,493,648

 
$
40,480

 
$
(13,891
)
 
$
1,520,237

 
 
 
 
 
 
 
 
 
Securities measured at fair value
 
 
 
 
 
 
 
 
Residential MBS issued by GSEs
 
 
 
 
 
 
 
$
1,858

For additional information on the fair value changes of the securities measured at fair value, see the trading securities table in "Note 14. 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, and 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 an 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 that it has the 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 six months ended June 30, 2015 and 2014. The Company does not consider any securities to be other-than-temporarily impaired as of June 30, 2015 and December 31, 2014. No assurance can be made that OTTI will not occur in future periods.

23


Information pertaining to securities with gross unrealized losses at June 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows: 
 
June 30, 2015
 
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
 
 
 
 
 
 
 
 
 
 
 
CRA investments
$
62

 
$
24,446

 
$

 
$

 
$
62

 
$
24,446

Municipal obligations
371

 
20,722

 

 

 
371

 
20,722

Preferred stock
513

 
16,791

 
1,259

 
17,798

 
1,772

 
34,589

Private label residential MBS
365

 
31,789

 
574

 
22,920

 
939

 
54,709

Residential MBS issued by GSEs
655

 
116,929

 
966

 
43,114

 
1,621

 
160,043

Trust preferred securities

 

 
6,352

 
25,648

 
6,352

 
25,648

U.S. government sponsored agency securities

 

 
297

 
18,403

 
297

 
18,403

Total AFS securities
$
1,966

 
$
210,677

 
$
9,448

 
$
127,883

 
$
11,414

 
$
338,560

 
December 31, 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
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
$
139

 
$
9,860

 
$
862

 
$
29,139

 
$
1,001

 
$
38,999

Municipal obligations

 

 
49

 
4,430

 
49

 
4,430

Mutual funds
247

 
25,855

 

 

 
247

 
25,855

Preferred stock
232

 
13,811

 
2,447

 
28,109

 
2,679

 
41,920

Private label residential MBS
157

 
24,056

 
964

 
26,614

 
1,121

 
50,670

Residential MBS issued by GSEs
227

 
49,217

 
1,758

 
97,296

 
1,985

 
146,513

Trust preferred securities

 

 
6,454

 
25,546

 
6,454

 
25,546

U.S. government sponsored agency securities

 

 
355

 
18,346

 
355

 
18,346

Total AFS securities
$
1,002

 
$
122,799

 
$
12,889

 
$
229,480

 
$
13,891

 
$
352,279

At June 30, 2015 and December 31, 2014, 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 June 30, 2015 was 105, compared to 109 at December 31, 2014. 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 OTTI.
The preferred stock 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 through 2015.

24


The amortized cost and fair value of securities as of June 30, 2015, by contractual maturities, are shown below. MBS are shown separately as individual MBS are comprised of pools of loans with varying maturities. Therefore, these securities are listed separately in the maturity summary. 
 
 
June 30, 2015
 
 
Amortized Cost
 
Estimated Fair Value
 
 
(in thousands)
Available-for-sale
 
 
 
 
Due in one year or less
 
$
45,871

 
$
45,989

After one year through five years
 
68,992

 
71,415

After five years through ten years
 
102,814

 
105,800

After ten years
 
253,649

 
263,414

Mortgage-backed securities
 
982,494

 
991,616

Total AFS securities
 
$
1,453,820

 
$
1,478,234

The following tables summarize the carrying amount of the Company’s investment ratings position as of June 30, 2015 and December 31, 2014
 
 
June 30, 2015
 
 
AAA
 
Split-rated AAA/AA+
 
AA+ to AA-
 
A+ to A-
 
BBB+ to BBB-
 
BB+ and below
 
Unrated
 
Totals
 
 
(in thousands)
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized debt obligations
 
$

 
$

 
$

 
$

 
$

 
$
10,804

 
$

 
$
10,804

Commercial MBS issued by GSEs
 

 
13,209

 

 

 

 

 

 
13,209

Corporate debt securities
 

 

 
2,748

 
10,591

 

 

 
326

 
13,665

CRA investments
 

 

 

 

 

 

 
32,537

 
32,537

Municipal obligations
 
9,284

 

 
145,706

 
131,055

 
6,183

 
185

 

 
292,413

Preferred stock
 

 

 

 

 
55,223

 
18,062

 
9,766

 
83,051

Private label commercial MBS
 
4,979

 

 

 

 

 

 

 
4,979

Private label residential MBS
 
70,856

 

 
181

 
11,434

 
15,969

 
3,488

 
143

 
102,071

Residential MBS issued by GSEs
 

 
871,357

 

 

 

 

 

 
871,357

Trust preferred securities
 

 

 

 

 
25,648

 

 

 
25,648

U.S. government sponsored agency securities
 

 
24,609

 

 

 

 

 

 
24,609

U.S. treasury securities
 

 
3,891

 

 

 

 

 

 
3,891

Total AFS securities (1)
 
$
85,119

 
$
913,066

 
$
148,635

 
$
153,080

 
$
103,023

 
$
32,539

 
$
42,772

 
$
1,478,234

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities measured at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential MBS issued by GSEs
 
$

 
$
1,701

 
$

 
$

 
$

 
$

 
$

 
$
1,701

(1)
The Company uses the average credit rating of the combination of S&P, Moody’s, and Fitch, where ratings differ.


25


 
 
December 31, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized debt obligations
 
$

 
$

 
$

 
$

 
$

 
$
11,445

 
$

 
$
11,445

Commercial MBS issued by GSEs
 

 
2,147

 

 

 

 

 

 
2,147

Corporate debt securities
 

 

 
2,759

 
5,570

 
44,160

 

 

 
52,489

CRA investments
 

 

 

 

 

 

 
24,332

 
24,332

Municipal obligations
 
8,168

 

 
138,256

 
146,155

 
6,263

 
195

 

 
299,037

Mutual funds (2)
 

 

 

 

 
37,702

 

 

 
37,702

Preferred stock
 

 

 

 

 
54,585

 
17,632

 
10,395

 
82,612

Private label commercial MBS
 
5,149

 

 

 

 

 

 

 
5,149

Private label residential MBS
 
59,944

 

 
68

 
3,439

 
3,595

 
3,197

 

 
70,243

Residential MBS issued by GSEs
 

 
891,189

 

 

 

 

 

 
891,189

Trust preferred securities
 

 

 

 

 
25,546

 

 

 
25,546

U.S. government sponsored agency securities
 

 
18,346

 

 

 

 

 

 
18,346

Total AFS securities (1)
 
$
73,261

 
$
911,682

 
$
141,083

 
$
155,164

 
$
171,851

 
$
32,469

 
$
34,727

 
$
1,520,237

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities measured at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential MBS issued by GSEs
 
$

 
$
1,858

 
$

 
$

 
$

 
$

 
$

 
$
1,858

(1)
The Company uses the average credit rating of the combination of S&P, Moody’s, and Fitch, where ratings differ.
(2)
At least 80% of mutual funds are investment grade corporate debt securities.
Securities with carrying amounts of approximately $658.8 million and $755.5 million at June 30, 2015 and December 31, 2014, respectively, were pledged for various purposes as required or permitted by law.
The following table presents gross gains and losses on sales of investment securities: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Gross gains
 
$
55

 
$

 
$
1,103

 
$
366

Gross losses
 

 
(163
)
 
(459
)
 
(163
)
Net gains on sales of investment securities
 
$
55

 
$
(163
)
 
$
644

 
$
203


26


4. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES
The composition of the Company’s loan portfolio is as follows: 
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Loans, held for investment
 
 
 
 
Commercial and industrial
 
$
4,576,303

 
$
3,326,708

Commercial real estate - non-owner occupied
 
2,195,018

 
2,052,566

Commercial real estate - owner occupied
 
2,019,280

 
1,732,888

Construction and land development
 
1,002,698

 
748,053

Residential real estate
 
320,591

 
299,402

Commercial leases
 
183,378

 
205,639

Consumer
 
23,953

 
33,009

Loans, net of deferred loan fees and costs
 
10,321,221

 
8,398,265

Allowance for credit losses
 
(115,056
)
 
(110,216
)
Total loans HFI
 
$
10,206,165

 
$
8,288,049

Net deferred loan fees and costs as of June 30, 2015 and December 31, 2014 total $14.0 million and $12.5 million, respectively. Net unamortized discounts on loans total $8.1 million and $7.5 million as of June 30, 2015 and December 31, 2014, respectively.
As of June 30, 2015, the Company also has $39.4 million of HFS loans.
The following table presents the contractual aging of the recorded investment in past due loans held for investment by class of loans:
 
 
June 30, 2015
 
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Over 90 days
Past Due
 
Total
Past Due
 
Total
 
 
(in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$
2,018,462

 
$
343

 
$

 
$
475

 
$
818

 
$
2,019,280

Non-owner occupied
 
2,000,579

 
181

 

 
3,626

 
3,807

 
2,004,386

Multi-family
 
190,207

 

 

 
425

 
425

 
190,632

Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
4,566,978

 
1,692

 
1,239

 
6,394

 
9,325

 
4,576,303

Leases
 
183,378

 

 

 

 

 
183,378

Construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
597,059

 

 

 

 

 
597,059

Land
 
404,356

 

 

 
1,283

 
1,283

 
405,639

Residential real estate
 
310,628

 
169

 
151

 
9,643

 
9,963

 
320,591

Consumer
 
23,515

 
13

 
219

 
206

 
438

 
23,953

Total loans
 
$
10,295,162

 
$
2,398

 
$
1,609

 
$
22,052

 
$
26,059

 
$
10,321,221

 

27


 
 
December 31, 2014
 
 
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Over 90 days
Past Due
 
Total
Past Due
 
Total
 
 
(in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$
1,730,164

 
$
1,406

 
$
180

 
$
1,138

 
$
2,724

 
$
1,732,888

Non-owner occupied
 
1,855,454

 
2,389

 
3,361

 
8,737

 
14,487

 
1,869,941

Multi-family
 
182,180

 

 
445

 

 
445

 
182,625

Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
3,324,132

 
1,523

 
15

 
1,038

 
2,576

 
3,326,708

Leases
 
205,639

 

 

 

 

 
205,639

Construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
388,399

 

 

 

 

 
388,399

Land
 
356,209

 

 
2,640

 
805

 
3,445

 
359,654

Residential real estate
 
292,065

 
2,347

 
205

 
4,785

 
7,337

 
299,402

Consumer
 
32,540

 
177

 
21

 
271

 
469

 
33,009

Total loans
 
$
8,366,782

 
$
7,842

 
$
6,867

 
$
16,774

 
$
31,483

 
$
8,398,265

The following table presents the recorded investment in non-accrual loans and loans past due ninety days or more and still accruing interest by class of loans: 
 
 
June 30, 2015
 
December 31, 2014
 
 
Non-accrual loans
 
Loans past due 90 days or more and still accruing
 
Non-accrual loans
 
Loans past due 90 days or more and still accruing
 
 
Current
 
Past Due/
Delinquent
 
Total
Non-accrual
 
 
Current
 
Past Due/
Delinquent
 
Total
Non-accrual
 
 
 
(in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$
10,090

 
$

 
$
10,090

 
$
474

 
$
13,630

 
$

 
$
13,630

 
$
1,138

Non-owner occupied
 
26,756

 
2,769

 
29,525

 
858

 
30,226

 
8,601

 
38,827

 
2,171

Multi-family
 

 

 

 
425

 

 

 

 

Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
809

 
2,241

 
3,050

 
4,153

 
2,621

 
496

 
3,117

 
703

Leases
 
3,930

 

 
3,930

 

 
373

 

 
373

 

Construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 

 

 

 

 

 

 

 

Land
 
2,516

 

 
2,516

 
1,283

 
2,686

 
2,640

 
5,326

 
805

Residential real estate
 
1,556

 
8,561

 
10,117

 
1,082

 
1,332

 
4,841

 
6,173

 
232

Consumer
 

 
197

 
197

 
9

 
25

 
188

 
213

 
83

Total
 
$
45,657

 
$
13,768

 
$
59,425

 
$
8,284

 
$
50,893

 
$
16,766

 
$
67,659

 
$
5,132

The reduction in interest income associated with loans on non-accrual status was approximately $0.7 million and $0.8 million for the three months ended June 30, 2015 and 2014, respectively, and $1.4 million and $1.8 million for the six months ended June 30, 2015 and 2014, respectively.
The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as Special Mention, Substandard, Doubtful, and Loss. Substandard loans include those characterized by well-defined weaknesses and carry the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful, or risk rated eight, have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The final rating of Loss covers loans considered uncollectible and having such little recoverable value that it is not practical to defer writing off the asset. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention. Risk ratings are updated, at a minimum, quarterly.

28


The following tables present gross loans by risk rating: 
 
 
June 30, 2015
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
 
(in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$
1,957,152

 
$
33,347

 
$
28,071

 
$
710

 
$

 
$
2,019,280

Non-owner occupied
 
1,932,983

 
20,676

 
50,727

 

 

 
2,004,386

Multi-family
 
188,894

 

 
1,738

 

 

 
190,632

Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
4,473,382

 
66,656

 
36,265

 

 

 
4,576,303

Leases
 
173,634

 
5,793

 
3,951

 

 

 
183,378

Construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
594,752

 
2,307

 

 

 

 
597,059

Land
 
385,659

 
374

 
19,606

 

 

 
405,639

Residential real estate
 
299,941

 
2,288

 
18,362

 

 

 
320,591

Consumer
 
23,318

 
377

 
258

 

 

 
23,953

Total
 
$
10,029,715

 
$
131,818

 
$
158,978

 
$
710

 
$

 
$
10,321,221

 
 
June 30, 2015
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
 
(in thousands)
Current (up to 29 days past due)
 
$
10,027,949

 
$
129,876

 
$
136,627

 
$
710

 
$

 
$
10,295,162

Past due 30 - 59 days
 
1,330

 
769

 
299

 

 

 
2,398

Past due 60 - 89 days
 
436

 
1,173

 

 

 

 
1,609

Past due 90 days or more
 

 

 
22,052

 

 

 
22,052

Total
 
$
10,029,715

 
$
131,818

 
$
158,978

 
$
710

 
$

 
$
10,321,221

 
 
 
December 31, 2014
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
 
(in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
$
1,664,270

 
$
28,072

 
$
39,222

 
$
1,324

 
$

 
$
1,732,888

Non-owner occupied
 
1,771,138

 
35,752

 
62,611

 
440

 

 
1,869,941

Multi-family
 
182,180

 

 
445

 

 

 
182,625

Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
3,295,027

 
14,380

 
17,146

 
155

 

 
3,326,708

Leases
 
202,772

 
2,494

 
373

 

 

 
205,639

Construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
383,677

 
4,241

 
481

 

 

 
388,399

Land
 
328,278

 
10,289

 
21,087

 

 

 
359,654

Residential real estate
 
284,052

 
2,044

 
13,306

 

 

 
299,402

Consumer
 
32,419

 
233

 
357

 

 

 
33,009

Total
 
$
8,143,813

 
$
97,505

 
$
155,028

 
$
1,919

 
$

 
$
8,398,265

 

29


 
 
December 31, 2014
 
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
 
(in thousands)
Current (up to 29 days past due)
 
$
8,140,140

 
$
95,091

 
$
129,787

 
$
1,764

 
$

 
$
8,366,782

Past due 30 - 59 days
 
2,771

 
198

 
4,718

 
155

 

 
7,842

Past due 60 - 89 days
 
385

 
37

 
6,445

 

 

 
6,867

Past due 90 days or more
 
517

 
2,179

 
14,078

 

 

 
16,774

Total
 
$
8,143,813

 
$
97,505

 
$
155,028

 
$
1,919

 
$

 
$
8,398,265

The table below reflects the recorded investment in loans classified as impaired: 
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Impaired loans with a specific valuation allowance under ASC 310 (1)
 
$
106,369

 
$
124,928

Impaired loans without a specific valuation allowance under ASC 310 (2)
 
44,780

 
41,822

Total impaired loans
 
$
151,149

 
$
166,750

Valuation allowance related to impaired loans (3)
 
$
(7,157
)
 
$
(10,765
)
(1)
Includes TDR loans with a specific valuation allowance under ASC 310 of $92.7 million and $103.3 million at June 30, 2015 and December 31, 2014, respectively.
(2)
Includes TDR loans without a specific valuation allowance under ASC 310 of $30.1 million and $35.0 million at June 30, 2015 and December 31, 2014, respectively.
(3)
Includes valuation allowance related to TDR loans of $5.6 million and $8.9 million at June 30, 2015 and December 31, 2014, respectively.
The following table presents impaired loans by class: 
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Commercial real estate
 
 
 
 
Owner occupied
 
$
34,336

 
$
44,893

Non-owner occupied
 
59,025

 
66,324

Multi-family
 

 

Commercial and industrial
 
 
 
 
Commercial
 
11,806

 
13,749

Leases
 
3,930

 
373

Construction and land development
 
 
 
 
Construction
 

 

Land
 
19,117

 
21,748

Residential real estate
 
22,611

 
19,300

Consumer
 
324

 
363

Total
 
$
151,149

 
$
166,750

A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable in the table above as “Impaired loans without a specific valuation allowance under ASC 310.” However, before concluding that an impaired loan needs no associated valuation allowance, an assessment is made to consider all available and relevant information for the method used to evaluate impairment and the type of loan being assessed. The valuation allowance disclosed above is included in the allowance for credit losses reported in the Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014.

30


The following table presents the average investment in impaired loans and income recognized on impaired loans: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Average balance on impaired loans
 
$
155,943

 
$
167,326

 
$
159,186

 
$
170,010

Interest income recognized on impaired loans
 
1,126

 
1,435

 
2,310

 
2,821

Interest recognized on non-accrual loans, cash basis
 
548

 
566

 
1,201

 
1,172

The following table presents average investment in impaired loans by loan class: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
Owner occupied
 
$
38,750

 
$
34,341

 
$
40,839

 
$
35,545

Non-owner occupied
 
59,873

 
68,725

 
62,636

 
69,382

Multi-family
 

 

 

 

Commercial and industrial
 
 
 
 
 
 
 
 
Commercial
 
12,401

 
15,438

 
12,835

 
15,510

Leases
 
4,879

 
419

 
2,618

 
429

Construction and land development
 
 
 
 
 
 
 
 
Construction
 

 

 

 

Land
 
19,834

 
20,291

 
20,523

 
21,438

Residential real estate
 
19,838

 
27,607

 
19,375

 
27,203

Consumer
 
368

 
505

 
360

 
503

Total
 
$
155,943

 
$
167,326

 
$
159,186

 
$
170,010

The average investment in TDR loans included in the average investment in impaired loans table above for the three months ended June 30, 2015 and 2014 was $121.2 million and $123.6 million, respectively, and $123.6 million and $126.6 million for the six months ended June 30, 2015 and 2014, respectively.
The following table presents interest income on impaired loans by class: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
Owner occupied
 
$
406

 
$
374

 
$
827

 
$
765

Non-owner occupied
 
360

 
402

 
690

 
775

Multi-family
 

 

 

 

Commercial and industrial
 
 
 
 
 
 
 
 
Commercial
 
60

 
184

 
139

 
377

Leases
 

 

 

 

Construction and land development
 
 
 
 
 
 
 
 
Construction
 

 

 

 

Land
 
197

 
295

 
392

 
556

Residential real estate
 
102

 
160

 
259

 
317

Consumer
 
1

 
20

 
3

 
31

Total
 
$
1,126

 
$
1,435

 
$
2,310

 
$
2,821

The Company is not committed to lend significant additional funds on these impaired loans.

31


The following table summarizes nonperforming assets: 
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Non-accrual loans (1)
 
$
59,425

 
$
67,659

Loans past due 90 days or more on accrual status
 
8,284

 
5,132

Troubled debt restructured loans (2)
 
80,192

 
84,720

Total nonperforming loans
 
147,901

 
157,511

Other assets acquired through foreclosure, net
 
59,335

 
57,150

Total nonperforming assets
 
$
207,236

 
$
214,661

(1)
Includes non-accrual TDR loans of $42.6 million and $53.6 million at June 30, 2015 and December 31, 2014, respectively.
(2)
Includes accruing TDR loans only.
Loans Acquired in Bridge Acquisition
The following table presents information regarding the contractually required principal payments receivable, cash flows expected to be collected, and the preliminary estimated fair value of loans acquired in the Bridge acquisition, as of June 30, 2015, the closing date of the transaction:
 
 
June 30, 2015
 
 
Commercial and Industrial
 
Commercial Real Estate
 
Construction and Land Development
 
Residential Real Estate
 
Consumer
 
Total
 
 
(in thousands)
Contractually required principal payments:
 
 
 
 
 
 
 
 
 
 
Loans with credit deterioration since origination
 
$
10,229

 
$
1,625

 
$

 
$
2,455

 
$

 
$
14,309

Purchased non-credit impaired loans
 
1,098,965

 
235,206

 
99,025

 
23,797

 
938

 
1,457,931

Total loans acquired
 
1,109,194

 
236,831

 
99,025

 
26,252

 
938

 
1,472,240

Cash flows expected to be collected:
 
 
 
 
 
 
 
 
 
 
 
 
Loans with credit deterioration since origination
 
9,613

 
1,496

 

 
2,087

 

 
13,196

Purchased non-credit impaired loans
 
1,170,869

 
302,186

 
102,018

 
26,865

 
1,169

 
1,603,107

Total loans acquired
 
1,180,482

 
303,682

 
102,018

 
28,952

 
1,169

 
1,616,303

Fair value of loans acquired:
 
 
 
 
 
 
 
 
 
 
 
 
Loans with credit deterioration since origination
 
8,619

 
1,480

 

 
2,075

 

 
12,174

Purchased non-credit impaired loans
 
1,082,413

 
229,470

 
99,078

 
23,069

 
931

 
1,434,961

Total loans acquired
 
$
1,091,032

 
$
230,950

 
$
99,078

 
$
25,144

 
$
931

 
$
1,447,135


32


Loans Acquired with Deteriorated Credit Quality
Changes in the accretable yield for loans acquired with deteriorated credit quality in the Centennial, Western Liberty, and Bridge acquisitions are as follows: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Balance, at beginning of period
 
$
17,956

 
$
26,831

 
$
19,156

 
$
28,164

Additions due to acquisition of Bridge
 
857

 

 
857

 

Reclassifications from non-accretable to accretable yield (1)
 
265

 
1,564

 
695

 
3,030

Accretion to interest income
 
(1,012
)
 
(1,798
)
 
(2,090
)
 
(4,202
)
Reversal of fair value adjustments upon disposition of loans
 
(876
)
 
(3,414
)
 
(1,428
)
 
(3,809
)
Balance, at end of period
 
$
17,190

 
$
23,183

 
$
17,190

 
$
23,183

(1)
The primary drivers of reclassification from non-accretable to accretable yield resulted from changes in estimated cash flows.
Allowance for Credit Losses
The following table summarizes the changes in the allowance for credit losses by portfolio type: 
 
 
Three Months Ended June 30,
 
 
Construction and Land Development
 
Commercial Real Estate
 
Residential Real Estate
 
Commercial and Industrial
 
Consumer
 
Total
 
 
(in thousands)
2015
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
17,999

 
$
28,111

 
$
6,666

 
$
58,651

 
$
671

 
$
112,098

Charge-offs
 

 

 
(218
)
 
(1,771
)
 
(53
)
 
(2,042
)
Recoveries
 
1,373

 
1,738

 
1,184

 
681

 
24

 
5,000

Provision
 
165

 
(903
)
 
(1,233
)
 
2,028

 
(57
)
 

Ending balance
 
$
19,537

 
$
28,946

 
$
6,399

 
$
59,589

 
$
585

 
$
115,056

2014
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
16,700

 
$
34,853

 
$
11,297

 
$
39,493

 
$
1,556

 
$
103,899

Charge-offs
 
(78
)
 
(330
)
 
(523
)
 
(1,038
)
 
(5
)
 
(1,974
)
Recoveries
 
498

 
1,248

 
314

 
1,254

 
191

 
3,505

Provision
 
(247
)
 
(1,422
)
 
(861
)
 
3,152

 
(115
)
 
507

Ending balance
 
$
16,873

 
$
34,349

 
$
10,227

 
$
42,861

 
$
1,627

 
$
105,937

 
 
Six Months Ended June 30,
 
 
Construction and Land Development
 
Commercial Real Estate
 
Residential Real Estate
 
Commercial and Industrial
 
Consumer
 
Total
 
 
(in thousands)
2015
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
18,558

 
$
28,783

 
$
7,456

 
$
54,566

 
$
853

 
$
110,216

Charge-offs
 

 

 
(618
)
 
(2,164
)
 
(107
)
 
(2,889
)
Recoveries
 
1,530

 
2,121

 
1,717

 
1,597

 
64

 
7,029

Provision
 
(551
)
 
(1,958
)
 
(2,156
)
 
5,590

 
(225
)
 
700

Ending balance
 
$
19,537

 
$
28,946

 
$
6,399

 
$
59,589

 
$
585

 
$
115,056

2014
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
14,519

 
$
32,064

 
$
11,640

 
$
39,657

 
$
2,170

 
$
100,050

Charge-offs
 
(78
)
 
(501
)
 
(929
)
 
(2,516
)
 
(17
)
 
(4,041
)
Recoveries
 
709

 
1,808

 
867

 
2,176

 
361

 
5,921

Provision
 
1,723

 
978

 
(1,351
)
 
3,544

 
(887
)
 
4,007

Ending balance
 
$
16,873

 
$
34,349

 
$
10,227

 
$
42,861

 
$
1,627

 
$
105,937


33


The following table presents impairment method information related to loans and allowance for credit losses by loan portfolio segment: 
 
 
Commercial Real Estate-Owner Occupied
 
Commercial Real Estate-Non-Owner Occupied
 
Commercial and Industrial
 
Residential Real Estate
 
Construction and Land Development
 
Commercial Leases
 
Consumer
 
Total Loans
 
 
(in thousands)
Loans as of June 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with an allowance recorded
 
$
19,274

 
$
43,135

 
$
11,805

 
$
13,477

 
$
18,542

 
$
10

 
$
126

 
$
106,369

Impaired loans with no allowance recorded
 
15,062

 
15,889

 
2

 
9,134

 
576

 
3,920

 
197

 
44,780

Total loans individually evaluated for impairment
 
34,336

 
59,024

 
11,807

 
22,611

 
19,118

 
3,930

 
323

 
151,149

Loans collectively evaluated for impairment
 
1,967,622

 
2,068,457

 
4,555,653

 
293,200

 
983,580

 
179,448

 
23,630

 
10,071,590

Loans acquired with deteriorated credit quality
 
17,322

 
67,537

 
8,843

 
4,780

 

 

 

 
98,482

Total recorded investment
 
$
2,019,280

 
$
2,195,018

 
$
4,576,303

 
$
320,591

 
$
1,002,698

 
$
183,378

 
$
23,953

 
$
10,321,221

Unpaid Principal Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with an allowance recorded
 
$
21,847

 
$
43,929

 
$
12,235

 
$
17,196

 
$
18,659

 
$
10

 
$
139

 
$
114,015

Impaired loans with no allowance recorded
 
15,349

 
15,954

 
2

 
10,026

 
765

 
4,071

 
197

 
46,364

Total loans individually evaluated for impairment
 
37,196

 
59,883

 
12,237

 
27,222

 
19,424

 
4,081

 
336

 
160,379

Loans collectively evaluated for impairment
 
1,967,622

 
2,068,457

 
4,555,653

 
293,200

 
983,580

 
179,448

 
23,630

 
10,071,590

Loans acquired with deteriorated credit quality
 
23,124

 
95,187

 
11,151

 
5,852

 

 

 

 
135,314

Total unpaid principal balance
 
$
2,027,942

 
$
2,223,527

 
$
4,579,041

 
$
326,274

 
$
1,003,004

 
$
183,529

 
$
23,966

 
$
10,367,283

Related Allowance for Credit Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with an allowance recorded
 
$
1,330

 
$
2,004

 
$
1,685

 
$
717

 
$
1,416

 
$
1

 
$
4

 
$
7,157

Impaired loans with no allowance recorded
 

 

 

 

 

 

 

 

Total loans individually evaluated for impairment
 
1,330

 
2,004

 
1,685

 
717

 
1,416

 
1

 
4

 
7,157

Loans collectively evaluated for impairment
 
11,684

 
13,891

 
55,363

 
5,682

 
18,121

 
2,540

 
581

 
107,862

Loans acquired with deteriorated credit quality
 

 
37

 

 

 

 

 

 
37

Total allowance for credit losses
 
$
13,014

 
$
15,932

 
$
57,048

 
$
6,399

 
$
19,537

 
$
2,541

 
$
585

 
$
115,056


34


 
 
Commercial Real Estate-Owner Occupied
 
Commercial Real Estate-Non-Owner Occupied
 
Commercial and Industrial
 
Residential Real Estate
 
Construction and Land Development
 
Commercial Leases
 
Consumer
 
Total Loans
 
 
(in thousands)
Loans as of December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with an allowance recorded
 
$
28,024

 
$
44,937

 
$
11,399

 
$
19,300

 
$
21,052

 
$
41

 
$
175

 
$
124,928

Impaired loans with no allowance recorded
 
16,869

 
21,387

 
2,350

 

 
696

 
332

 
188

 
41,822

Total loans individually evaluated for impairment
 
44,893

 
66,324

 
13,749

 
19,300

 
21,748

 
373

 
363

 
166,750

Loans collectively evaluated for impairment
 
1,670,083

 
1,910,420

 
3,312,629

 
277,692

 
726,305

 
205,266

 
32,646

 
8,135,041

Loans acquired with deteriorated credit quality
 
17,912

 
75,822

 
330

 
2,410

 

 

 

 
96,474

Total recorded investment
 
$
1,732,888

 
$
2,052,566

 
$
3,326,708

 
$
299,402

 
$
748,053

 
$
205,639

 
$
33,009

 
$
8,398,265

Unpaid Principal Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with an allowance recorded
 
$
31,292

 
$
45,853

 
$
11,829

 
$
24,420

 
$
21,169

 
$
41

 
$
187

 
$
134,791

Impaired loans with no allowance recorded
 
17,010

 
21,550

 
4,104

 

 
885

 
483

 
188

 
44,220

Total loans individually evaluated for impairment
 
48,302

 
67,403

 
15,933

 
24,420

 
22,054

 
524

 
375

 
179,011

Loans collectively evaluated for impairment
 
1,670,083

 
1,910,420

 
3,312,629

 
277,692

 
726,305

 
205,266

 
32,646

 
8,135,041

Loans acquired with deteriorated credit quality
 
24,273

 
108,935

 
1,150

 
3,439

 

 

 

 
137,797

Total unpaid principal balance
 
$
1,742,658

 
$
2,086,758

 
$
3,329,712

 
$
305,551

 
$
748,359

 
$
205,790

 
$
33,021

 
$
8,451,849

Related Allowance for Credit Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with an allowance recorded
 
$
2,082

 
$
2,537

 
$
1,926

 
$
1,052

 
$
3,112

 
$
39

 
$
17

 
$
10,765

Impaired loans with no allowance recorded
 

 

 

 

 

 

 

 

Total loans individually evaluated for impairment
 
2,082

 
2,537

 
1,926

 
1,052

 
3,112

 
39

 
17

 
10,765

Loans collectively evaluated for impairment
 
10,198

 
13,734

 
49,809

 
6,404

 
15,446

 
2,761

 
836

 
99,188

Loans acquired with deteriorated credit quality
 
174

 
58

 
31

 

 

 

 

 
263

Total allowance for credit losses
 
$
12,454

 
$
16,329

 
$
51,766

 
$
7,456

 
$
18,558

 
$
2,800

 
$
853

 
$
110,216

Troubled Debt Restructurings
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. The majority of the Company's modifications are extensions in terms or deferral of payments which result in no lost principal or interest followed by reductions in interest rates or accrued interest. A TDR loan is also considered impaired. Consistent with regulatory guidance, a TDR loan that is subsequently modified in another restructuring agreement but has shown sustained performance and classification as a TDR, will be removed from TDR status provided that the modified terms were market-based at the time of modification.

35


The following table presents information on the financial effects of TDR loans by class for the three and six months ended June 30, 2015 and 2014:
 
 
Three Months Ended June 30, 2015
 
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Forgiven Principal Balance
 
Lost Interest Income
 
Post-Modification Outstanding Recorded Investment
 
Waived Fees and Other Expenses
 
 
(dollars in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 

 
$

 
$

 
$

 
$

 
$

Non-owner occupied
 

 

 

 

 

 

Multi-family
 

 

 

 

 

 

Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
1

 
256

 

 

 
256

 

Leases
 

 

 

 

 

 

Construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 

 

 

 

 

 

Land
 

 

 

 

 

 

Residential real estate
 

 

 

 

 

 

Consumer
 

 

 

 

 

 

Total
 
1

 
$
256

 
$

 
$

 
$
256

 
$

 
 
Six Months Ended June 30, 2015
 
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Forgiven Principal Balance
 
Lost Interest Income
 
Post-Modification Outstanding Recorded Investment
 
Waived Fees and Other Expenses
 
 
(dollars in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 

 
$

 
$

 
$

 
$

 
$

Non-owner occupied
 

 

 

 

 

 

Multi-family
 

 

 

 

 

 

Commercial and industrial
 
 
 

 
 
 
 
 
 
 
 
Commercial
 
1

 
256

 

 

 
256

 

Leases
 

 

 

 

 

 

Construction and land development
 
 
 

 
 
 
 
 
 
 
 
Construction
 

 

 

 

 

 

Land
 

 

 

 

 

 

Residential real estate
 

 

 

 

 

 

Consumer
 

 

 

 

 

 

Total
 
1

 
$
256

 
$

 
$

 
$
256

 
$


36


 
 
Three Months Ended June 30, 2014
 
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Forgiven Principal Balance
 
Lost Interest Income
 
Post-Modification Outstanding Recorded Investment
 
Waived Fees and Other Expenses
 
 
(dollars in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 

 
$

 
$

 
$

 
$

 
$

Non-owner occupied
 
1

 
13,423

 

 

 
13,423

 
8

Multi-family
 

 

 

 

 

 

Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
1

 
966

 

 

 
966

 
1

Leases
 

 

 

 

 

 

Construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 

 

 

 

 

 

Land
 

 

 

 

 

 

Residential real estate
 
2

 
897

 
281

 
33

 
583

 
7

Consumer
 

 

 

 

 

 

Total
 
4

 
$
15,286

 
$
281

 
$
33

 
$
14,972

 
$
16

 
 
Six Months Ended June 30, 2014
 
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Forgiven Principal Balance
 
Lost Interest Income
 
Post-Modification Outstanding Recorded Investment
 
Waived Fees and Other Expenses
 
 
(dollars in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
 
1

 
$
798

 
$
378

 
$
117

 
$
303

 
$
33

Non-owner occupied
 
1

 
13,423

 

 

 
13,423

 
8

Multi-family
 

 

 

 

 

 

Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
2

 
1,029

 

 

 
1,029

 
4

Leases
 

 

 

 

 

 

Construction and land development
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 

 

 

 

 

 

Land
 

 

 

 

 

 

Residential real estate
 
3

 
1,302

 
447

 
70

 
785

 
7

Consumer
 

 

 

 

 

 

Total
 
7

 
$
16,552

 
$
825

 
$
187

 
$
15,540

 
$
52


37


The following table presents TDR loans by class for which there was a payment default during the period: 
 
 
Three Months Ended June 30,
 
 
2015
 
2014
 
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
 
(dollars in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
Owner occupied
 

 
$

 
1

 
$
92

Non-owner occupied
 

 

 

 

Multi-family
 

 

 

 

Commercial and industrial
 
 
 
 
 
 
 
 
Commercial
 

 

 
2

 
306

Leases
 

 

 

 

Construction and land development
 
 
 
 
 
 
 
 
Construction
 

 

 

 

Land
 

 

 

 

Residential real estate
 
1

 
202

 

 

Consumer
 

 

 

 

Total
 
1

 
$
202

 
3

 
$
398

 
 
Six Months Ended June 30,
 
 
2015
 
2014
 
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
 
(dollars in thousands)
Commercial real estate
 
 
 
 
 
 
 
 
Owner occupied
 

 
$

 
2

 
$
395

Non-owner occupied
 

 

 

 

Multi-family
 

 

 

 

Commercial and industrial
 
 
 
 
 
 
 
 
Commercial
 

 

 
3

 
369

Leases
 

 

 

 

Construction and land development
 
 
 
 
 
 
 
 
Construction
 
1

 
137

 

 

Land
 

 

 

 

Residential real estate
 
1

 
202

 
1

 
202

Consumer
 

 

 

 

Total
 
2

 
$
339

 
6

 
$
966

A TDR loan is deemed to have a payment default when it becomes past due 90 days, goes on non-accrual, or is restructured again. Payment defaults, along with other qualitative indicators, are considered by management in the determination of the allowance for credit losses.
At June 30, 2015, there were no loan commitments outstanding on TDR loans. At December 31, 2014, there was $1.2 million loan commitments outstanding on TDR loans.
Loan Purchases and Sales
For the three months ended June 30, 2015 and 2014, the Company had secondary market loan purchases of $7.7 million and $16.7 million, respectively. For the six months ended June 30, 2015 and 2014, secondary market loan purchases totaled $26.1 million and $32.3 million, respectively. For 2015, these purchased loans consisted of $13.0 million of commercial and industrial loans and $13.1 million of commercial real estate loans. For 2014, these purchased loans consisted of commercial and industrial loans. In addition, the Company periodically acquires newly originated loans at closing through participations or loan syndications.

38


During the six months ended June 30, 2015, the Company sold loans, which primarily consisted of commercial and industrial loans, with a carrying value of $56.3 million and recognized a gain of $0.3 million on the sale. The Company had no significant loan sales in 2014.
5. OTHER ASSETS ACQUIRED THROUGH FORECLOSURE
The following table represents the changes in other assets acquired through foreclosure: 
 
 
Three Months Ended June 30,
 
 
2015
 
 
Gross Balance
 
Valuation Allowance
 
Net Balance
 
 
(in thousands)
Balance, beginning of period

$
77,968


$
(14,209
)

$
63,759

Additions from acquisition of Bridge

1,550




1,550

Transfers to other assets acquired through foreclosure, net

5,739




5,739

Proceeds from sale of other real estate owned and repossessed assets, net

(15,415
)

2,480


(12,935
)
Valuation adjustments, net



(718
)

(718
)
Gains, net (1)

1,940




1,940

Balance, end of period

$
71,782


$
(12,447
)

$
59,335

 
 
 
 
 
 
 
 
 
2014
Balance, beginning of period
 
$
72,226

 
$
(15,776
)
 
$
56,450

Transfers to other assets acquired through foreclosure, net
 
4,309

 

 
4,309

Proceeds from sale of other real estate owned and repossessed assets, net
 
(1,903
)
 
683

 
(1,220
)
Valuation adjustments, net
 

 
(258
)
 
(258
)
Gains, net (1)
 
11

 

 
11

Balance, end of period
 
$
74,643

 
$
(15,351
)
 
$
59,292

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
2015
 
 
Gross Balance
 
Valuation Allowance
 
Net Balance
 
 
(in thousands)
Balance, beginning of period

$
71,421


$
(14,271
)

$
57,150

Additions from acquisition of Bridge

1,550




1,550

Transfers to other assets acquired through foreclosure, net

13,459




13,459

Proceeds from sale of other real estate owned and repossessed assets, net

(17,703
)

3,328


(14,375
)
Valuation adjustments, net



(1,504
)

(1,504
)
Gains, net (2)

3,055




3,055

Balance, end of period

$
71,782


$
(12,447
)

$
59,335

 
 
 
 
 
 
 
 
 
2014
Balance, beginning of period
 
$
88,421

 
$
(21,702
)
 
$
66,719

Transfers to other assets acquired through foreclosure, net
 
6,419

 

 
6,419

Proceeds from sale of other real estate owned and repossessed assets, net
 
(21,376
)
 
6,644

 
(14,732
)
Valuation adjustments, net
 

 
(293
)
 
(293
)
Gains, net (2)
 
1,179

 

 
1,179

Balance, end of period
 
$
74,643

 
$
(15,351
)
 
$
59,292

(1)
Includes net gains related to initial transfers to other assets of zero during both the three months ended June 30, 2015 and 2014, pursuant to accounting guidance.
(2)
Includes net gains related to initial transfers to other assets of $0.6 million and zero during the six months ended June 30, 2015 and 2014, respectively, pursuant to accounting guidance.

39


At June 30, 2015 and December 31, 2014, the majority of the Company’s repossessed assets consisted of properties located in Nevada. The Company held 56 properties at June 30, 2015, compared to 67 at December 31, 2014.
6. OTHER BORROWINGS
The following table summarizes the Company’s borrowings as of June 30, 2015 and December 31, 2014
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Short-Term:
 
 
 
 
Revolving line of credit
 
$

 
$
25,000

FHLB advances
 
11,051

 
96,987

Other short-term debt
 
58,378

 
58,182

Total short-term borrowings
 
$
69,429

 
$
180,169

Long-Term:
 
 
 
 
   FHLB advances
 
$

 
$
210,094

Total long-term borrowings
 
$

 
$
210,094

The Company maintains other lines of credit with correspondent banks totaling $70.0 million, of which $25.0 million is secured by pledged securities and $45.0 million is unsecured. As of June 30, 2015, there were no outstanding balances on the Company's lines of credit. At December 31, 2014, the Company had revolving lines of credit with other institutions with outstanding advances totaling $25.0 million, at an interest rate of 1.75%. In addition, the Bank has entered into federal funds credit line agreements with correspondent banks under which it can borrow up to $100.0 million on an unsecured basis. There were no amounts outstanding on these lines of credit as of June 30, 2015 and December 31, 2014. The lending institutions will determine the interest rate charged on funds at the time of the borrowing.
The Company maintains lines of credit with the FHLB and the FRB. The Company’s borrowing capacity is determined based on collateral pledged, generally consisting of investment securities and loans, at the time of the borrowing. At June 30, 2015, there were $11.1 million of FHLB advances classified as short-term with a weighted average interest rate of 1.61%. At December 31, 2014, short-term FHLB advances of $97.0 million had a weighted average interest rate of 1.24%.
The Company also has outstanding 10% Senior Notes of $58.4 million at June 30, 2015, maturing in September 2015. The weighted average interest rate on all short-term debt is 8.67% at June 30, 2015, compared to 4.15% at December 31, 2014.
During the second quarter, the Company paid off $200.0 million of FHLB advances classified as long-term for a loss on extinguishment of $0.1 million. As of December 31, 2014, long-term FHLB advances of $210.1 million had a weighted average interest rate of 1.06%.
As of June 30, 2015 and December 31, 2014, the Company had additional available credit with the FHLB of approximately $1.53 billion and $935.0 million, respectively, and with the FRB of approximately $1.63 billion and $1.15 billion, respectively.

40


7. QUALIFYING DEBT
Subordinated Debt
On June 29, 2015, the Company issued $150.0 million of subordinated debt, recorded net of debt issuance costs of $1.6 million, maturing July 15, 2025. The subordinated debt has a fixed interest rate of 5.00% through June 30, 2020 and then converts to a variable rate of 3.20% plus three month LIBOR through maturity. To hedge the interest rate risk, the Bank entered into a fair value interest rate hedge with a "pay variable/receive fixed" swap.
Junior Subordinated Debt
The Company has formed or acquired through mergers, eight statutory business trusts, including two new business trusts, Bridge Capital Trust I and Bridge Capital Trust II, acquired in the acquisition of Bridge on June 30, 2015. These trusts exist for the exclusive purpose of issuing Cumulative Trust Preferred Securities. All of the funds raised from the issuance of these securities were passed to the Company and are reflected in the accompanying Consolidated Balance Sheet as junior subordinated debt, with a carrying value of $59.8 million as of June 30, 2015.
The junior subordinated debt has contractual balances and maturity dates as follows: 
Name of Trust
 
Maturity
 
June 30, 2015
 
December 31, 2014
 
 
 
 
(in thousands)
BankWest Nevada Capital Trust II
 
2033
 
$
15,464

 
$
15,464

Intermountain First Statutory Trust I
 
2034
 
10,310

 
10,310

First Independent Capital Trust I
 
2035
 
7,217

 
7,217

WAL Trust No. 1
 
2036
 
20,619

 
20,619

WAL Statutory Trust No. 2
 
2037
 
5,155

 
5,155

WAL Statutory Trust No. 3
 
2037
 
7,732

 
7,732

Total contractual balance
 
 
 
66,497

 
66,497

Unrealized gains on trust preferred securities measured at fair value, net
 
 
 
(18,015
)
 
(26,060
)
Junior subordinated debt, at fair value
 
 
 
$
48,482

 
$
40,437

 
 
 
 
 
 
 
Bridge Capital Trust I
 
2035
 
$
12,372

 
$

Bridge Capital Trust II
 
2037
 
5,155

 

Total contractual balance
 
 
 
17,527

 

Fair market value adjustment (1)
 
 
 
(6,240
)
 

Junior subordinated debt, assumed from Bridge
 
 
 
$
11,287

 
$

 
 
 
 
 
 
 
Total junior subordinated debt
 
 
 
$
59,769

 
$
40,437

(1)
The fair market value adjustment will be amortized over the remaining life of the trusts.
Bridge Capital Trust I and Bridge Capital Trust II are statutory trusts created under the laws of the State of Delaware. Interest on the debt securities of Bridge Capital Trust I and Bridge Capital Trust II is payable quarterly at a rate of LIBOR plus 1.98% and LIBOR plus 1.38%, respectively. These debt securities can be redeemed at par at the Company’s option, or if certain events occur that impact the tax or capital treatment of the issuance. The Company owns a 3% minority interest in the each of the trusts.
With the exception of debt issued by Bridge Capital Trust I and Bridge Capital Trust II, junior subordinated debt is recorded at fair value at each reporting date due to the FVO election made by the Company under ASC 825. The Bridge trusts were initially recorded at a fair value of $11.3 million on June 30, 2015, which includes a fair market value adjustment of $6.2 million that will be amortized over the remaining life of the debt. The Company did not make the FVO election for the Bridge trusts. Accordingly, the carrying value of these trusts at each future reporting date will not reflect the fair value of the debt.
Given the pricing of 90 day LIBOR plus 3.20% on the Company's $150.0 million issuance of subordinated debt on June 29, 2015, the Company reviewed the methodology for calculating the estimated fair value of its outstanding junior subordinated debt, which was priced at 30 day LIBOR plus 5.96% as of March 31, 2015 under fair value option accounting.  Considering the significantly lower spread of WAB’s newly issued subordinated debt, that the Company’s debt is junior in subordination, and that the debt was issued by the parent company rather than the insured depository, the Company adjusted the spread for valuation purposes to 30 day LIBOR plus 4.69%, which is between the 90 day LIBOR plus 3.20% rate achieved on the WAB

41


subordinated debt and 30 day LIBOR plus 5.96% rate that was previously used.  This spread reduction resulted in a non-cash, non-recurring debt valuation loss of $7.7 million during the three months ended June 30, 2015. This charge had no effect on regulatory capital.
The weighted average contractual interest rate of all junior subordinated debt was 2.62% and 2.73% as of June 30, 2015 and December 31, 2014, respectively.
In the event of certain changes or amendments to regulatory requirements or federal tax rules, the debt is redeemable in whole. The obligations under these instruments are fully and unconditionally guaranteed by the Company and rank subordinate and junior in right of payment to all other liabilities of the Company. Based on guidance issued by the FRB on July 8, 2013, there will not be a Tier 1 phase out of grandfathered trust preferred securities for banks with assets of less than $15 billion. As such, the Company's securities continue to qualify as Tier 1 Capital.
8. STOCKHOLDERS' EQUITY
Common Stock Issuance
In Connection with Bridge Acquisition
Under the terms of the Bridge merger agreement, each share of Bridge common stock issued and outstanding as of June 30, 2015, the acquisition date, was exchanged for 0.8145 shares of WAL common stock and $2.39 in cash. This resulted in the issuance of 12,451,240 shares, or $420.4 million, of the Company's common stock and payment of $36.5 million in cash.
Under ATM Distribution Agreement
On June 4, 2014, the Company entered into a distribution agency agreement with Credit Suisse Securities (USA) LLC, under which the Company may sell shares of its common stock up to an aggregate offering price of $100.0 million on the New York Stock Exchange. The parties executed an Amended and Restated Distribution Agency Agreement on October 30, 2014. The Company pays Credit Suisse a mutually agreed rate, not to exceed 2% of the gross offering proceeds of the shares. The common stock will be sold at prevailing market prices at the time of the sale or at negotiated prices and, as a result, prices will vary.
Sales in the ATM offering are being made pursuant to a prospectus dated May 14, 2012 and a prospectus supplement filed with the SEC on June 4, 2014, in connection with one or more offerings of shares from the Company's shelf registration statement on Form S-3 (No. 333-181128). During the three and six months ended June 30, 2015, there were no sales under the ATM offering. During the three and six months ended June 30, 2014, the Company sold 115,866 shares under the ATM offering at a weighted-average selling price of $24.44 per share for gross proceeds of $2.8 million. Total offering costs under the ATM program for the three and six months ended June 30, 2014 were $0.2 million, of which less than $0.1 million relates to compensation costs paid to Credit Suisse Securities.

42


Stock-Based Compensation
Equity Awards Assumed in Bridge Acquisition
In connection with the Bridge acquisition, the Company assumed unvested restricted stock awards and stock options originally granted by Bridge and converted them into WAL restricted stock awards and stock options. Bridge equity awards were converted into WAL equity awards at a conversion ratio of 0.905, resulting in the issuance of 546,151 shares of WAL restricted stock and 213,091 of WAL options. The portion of the fair value of these equity awards associated with prior service of Bridge employees represents a component of the total consideration for the Bridge acquisition, which totaled $10.7 million.
Bridge's restricted stock awards generally had an original vesting period of five years. The remaining vesting period of these awards remained unchanged upon conversion. The value of restricted stock replacement awards were based on WAL's stock price as of the acquisition date and totaled $17.0 million as of June 30, 2015, of which $9.0 million is considered purchase price consideration for pre-combination service and $8.0 million is post-combination compensation service expense that will be recognized over the remaining vesting period of the awards.
Bridge's stock options had an original vesting period of four years and a contractual term of ten years. Stock option replacement awards were valued using the Black-Scholes option valuation model, using the following weighted average assumptions.
 
June 30, 2015
Dividend yield
%
Volatility
33.96
%
Risk-free interest rate
2.11
%
Expected life in years
7.66

Weighted average fair value of assumed options
$
19.06

The total value of assumed stock options as of June 30, 2015 totaled $4.1 million, of which $1.7 million is considered purchase price consideration for pre-combination service and $2.3 million is post-combination compensation service expense that will be recognized over the remaining vesting period of the options.
Restricted Stock
For the three and six months ended June 30, 2015, 44,975 and 335,975 shares of restricted stock that generally vest over three years were granted to Company employees and 64,000 shares of restricted stock that were fully vested at June 30, 2015 were granted to non-employee WAL and WAB directors. The Company estimates the compensation cost for restricted stock grants based upon the grant date fair value. The aggregate grant date fair value for the restricted stock issued during the three and six months ended June 30, 2015 was $1.4 million and $10.9 million, respectively. For the three and six months ended June 30, 2015, the Company recognized $2.6 million and $5.1 million, respectively, in stock-based compensation expense related to these restricted stock grants, compared to $1.9 million and $3.6 million, respectively, in stock-based compensation expense for the three and six months ended June 30, 2014.
In addition, the Company granted 52,200 shares of restricted stock to certain members of executive management that have both performance and service conditions that affect vesting. The performance condition is based on achieving an EPS target for fiscal year 2015 and, if this target is met, the restricted stock awards will vest over a three-year service period. Assuming the EPS target is met, the grant date fair value of the awards was $1.4 million. For the three and six months ended June 30, 2015, the Company recognized $0.1 million and $0.2 million, respectively, in stock-based compensation expense related to these restricted stock grants. There was no related stock-based compensation expense for the three and six months ended June 30, 2014.
There were approximately 1.5 million and 1.1 million restricted shares outstanding at June 30, 2015 and December 31, 2014, respectively.

43


Performance Stock Units
The Company grants executive management committee members performance stock units that do not vest unless the Company achieves a specified cumulative EPS target over a three-year performance period. The number of shares issued will vary based on the cumulative EPS target that is achieved. The Company estimates the cost of performance stock units based upon the grant date fair value and expected vesting percentage over the three-year performance period. For the three and six months ended June 30, 2015, the Company recognized $1.0 million and $2.0 million, respectively, in stock-based compensation expense related to these performance stock units, compared to $0.7 million and $1.5 million, respectively, in stock-based compensation expense for the three and six months ended June 30, 2014.
The first three-year performance period ended on December 31, 2014, and the Company's cumulative EPS for the performance period exceeded the level required for a maximum award under the terms of the grant. As a result, on February 18, 2015, executive management committee members were granted 285,000 of fully vested common shares.
As of June 30, 2015, outstanding performance stock unit grants made in 2013 and 2014 are expected to pay out at the maximum award amount, or 514,450 common shares. In January 2015, performance stock units were granted to executive management committee members with cumulative target awards equivalent to 104,300 shares of common stock. Assuming a 100% vesting percentage for the 2015 performance stock units, the grant date fair value of the awards was $2.8 million.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of tax, for the periods indicated: 
 
 
Three Months Ended June 30,
 
 
2015
 
2014
 
 
Unrealized holding gains (losses) on AFS
 
Unrealized holding gains on SERP
 
Impairment loss on securities
 
Total
 
Unrealized holding gains (losses) on AFS
 
Impairment loss on securities
 
Total
 
 
(in thousands)
Beginning Balance
 
$
23,279

 
$

 
$
144

 
$
23,423

 
$
(11,275
)
 
$
144

 
$
(11,131
)
SERP assumed in Bridge acquisition
 

 
337

 

 
337

 

 

 

Transfer of HTM securities to AFS
 

 

 

 

 
8,976

 

 
8,976

Other comprehensive (loss) income before reclassifications
 
(8,378
)
 

 

 
(8,378
)
 
10,525

 

 
10,525

Amounts reclassified from accumulated other comprehensive income
 
(34
)
 

 

 
(34
)
 
102

 

 
102

Net current-period other comprehensive (loss) income
 
(8,412
)
 
337

 

 
(8,075
)
 
19,603

 

 
19,603

Ending Balance
 
$
14,867

 
$
337

 
$
144

 
$
15,348

 
$
8,328

 
$
144

 
$
8,472


44


 
 
Six Months Ended June 30,
 
 
2015
 
2014
 
 
Unrealized holding gains (losses) on AFS
 
Unrealized holding gains on SERP
 
Impairment loss on securities
 
Total
 
Unrealized holding gains (losses) on AFS
 
Impairment loss on securities
 
Total
 
 
(in thousands)
Beginning Balance
 
$
16,495

 
$

 
$
144

 
$
16,639

 
$
(21,690
)
 
$
144

 
$
(21,546
)
SERP assumed in Bridge acquisition
 

 
337

 

 
337

 
 
 
 
 
 
Transfer of HTM securities to AFS
 

 

 

 

 
8,976

 

 
8,976

Other comprehensive (loss) income before reclassifications
 
(1,225
)
 

 

 
(1,225
)
 
21,169

 

 
21,169

Amounts reclassified from accumulated other comprehensive income
 
(403
)
 

 

 
(403
)
 
(127
)
 

 
(127
)
Net current-period other comprehensive (loss) income
 
(1,628
)
 
337

 

 
(1,291
)
 
30,018

 

 
30,018

Ending Balance
 
$
14,867

 
$
337

 
$
144

 
$
15,348

 
$
8,328

 
$
144

 
$
8,472

The following table presents reclassifications out of accumulated other comprehensive income (loss): 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Income Statement Classification
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Gain (loss) on sales of investment securities, net
 
$
55

 
$
(163
)
 
$
644

 
$
203

Income tax expense
 
(21
)
 
61

 
(241
)
 
(76
)
Net of tax
 
$
34

 
$
(102
)
 
$
403

 
$
127


45


10. DERIVATIVES AND HEDGING ACTIVITIES
The Company is a party to various derivative instruments through its subsidiary, WAB. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require a small or no initial investment, and allow for the net settlement of positions. A derivative’s notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. A derivative’s underlying variable is a specified interest rate, security price, commodity price, foreign exchange rate, index, or other variable. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the fair value of the derivative contract.
The primary type of derivatives that the Company uses are interest rate swaps. Generally, these instruments are used to help manage the Company's exposure to interest rate risk and meet client financing and hedging needs.
Derivatives are recorded at fair value in the Consolidated Balance Sheets, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allow the Company to settle all derivative contracts held with the same counterparty on a net basis, and to offset net derivative positions with related cash collateral, where applicable.
As of June 30, 2015, December 31, 2014, and June 30, 2014, the Company does not have any significant outstanding cash flow hedges or free-standing derivatives.
Derivatives Designated in Hedge Relationships
The Company utilizes derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance to minimize the exposure to changes in benchmark interest rates and volatility of net interest income and EVE to interest rate fluctuations. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index.
The Company designates its “pay fixed/receive variable” interest rate swaps as fair value hedges. These contracts convert certain fixed-rate long-term loan assets into variable-rate assets, thereby modifying the Company's exposure to changes in interest rates. As a result, the Company receives variable-rate interest payments in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts.
During the three months ended June 30, 2015, the Company entered into a "pay variable/receive fixed" interest rate swap agreement to hedge the interest rate exposure on its subordinated debt issuance. As a result, the Company is paying a floating rate of 3 month LIBOR plus 3.16% and receiving semi-annual fixed payments of 5.00% to match the payments on the debt.

46


Fair Values, Volume of Activity, and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of the Company's derivative instruments on a gross and net basis as of June 30, 2015, December 31, 2014, and June 30, 2014. The change in the notional amounts of these derivatives from December 31, 2014 to June 30, 2015 indicates the volume of the Company's derivative transaction activity during 2015. The derivative asset and liability balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements. Total derivative assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow the Company to settle all derivative contracts with the same counterparty on a net basis and to offset the net derivative position with the related collateral. Where master netting agreements are not in effect or are not enforceable under bankruptcy laws, the Company does not adjust those derivative amounts with counterparties. The fair value of derivative contracts, after taking into account the effects of master netting agreements, is included in other assets or other liabilities in the Consolidated Balance Sheets, as indicated in the following table:
 
June 30, 2015
 
December 31, 2014
 
June 30, 2014
 
 
 
Fair Value
 
 
 
Fair Value
 
 
 
Fair Value
 
Notional
Amount
 
Derivative Assets
 
Derivative Liabilities
 
Notional
Amount
 
Derivative Assets
 
Derivative Liabilities
 
Notional
Amount
 
Derivative Assets
 
Derivative Liabilities
 
(in thousands)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
828,036

 
$
198

 
$
49,037

 
$
647,703

 
$
7

 
$
57,820

 
$
568,006

 
$
2

 
$
29,129

Total
828,036

 
198

 
49,037

 
647,703

 
7

 
57,820

 
568,006

 
2

 
29,129

Netting adjustments (1)

 

 

 

 

 

 

 
2

 
2

Net derivatives in the balance sheet
$
828,036

 
$
198

 
$
49,037

 
$
647,703

 
$
7

 
$
57,820

 
$
568,006

 
$

 
$
29,127

(1)
Netting adjustments represent the amounts recorded to convert our derivative balances from a gross basis to a net basis in accordance with the applicable accounting guidance.
Fair value hedges
An assessment of effectiveness is performed at both initiation of a hedge and on a quarterly basis thereafter. All of the Company's fair value hedges remained “highly effective” as of June 30, 2015, December 31, 2014, and June 30, 2014.
The following table summarizes the pre-tax net gains (losses) on fair value hedges for the three and six months ended June 30, 2015 and June 30, 2014 and where they are recorded in the income statement.


Three Months Ended June 30,


2015

2014
Income Statement Classification

Net Gain (Loss) on Derivatives

Increase (Decrease) to Basis of Hedged Asset/Liability (a)

Net Gain (Loss) on Derivatives

Increase (Decrease) to Basis of Hedged Asset/Liability (a)
 
 
(in thousands)
Unrealized (losses) gains on assets and liabilities measured at fair value, net
 
$
24,201

 
$
(24,186
)
 
$
(16,635
)
 
$
16,795

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
2015
 
2014
Income Statement Classification
 
Net Gain (Loss) on Derivatives
 
Increase (Decrease) to Basis of Hedged Asset/Liability (a)
 
Net Gain (Loss) on Derivatives
 
Increase (Decrease) to Basis of Hedged Asset/Liability (a)
 
 
(in thousands)
Unrealized (losses) gains on assets and liabilities measured at fair value, net
 
$
8,971

 
$
(8,950
)
 
$
(31,774
)
 
$
31,570

(a)
Net gain (loss) on loans represent the change in fair value caused by fluctuations in interest rates; differences relate to ineffectiveness associated with the fair value hedge.

47


Counterparty Credit Risk
Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected positive replacement value of the contracts. Management generally enters into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with the same counterparty. Additionally, management monitors counterparty credit risk exposure on each contract to determine appropriate limits on the Company's total credit exposure across all product types. In general, the Company has a zero credit threshold with regard to derivative exposure with counterparties. Management reviews the Company's collateral positions on a daily basis and exchanges collateral with counterparties in accordance with standard ISDA documentation and other related agreements. The Company generally holds collateral in the form of highly rated securities issued by the U.S. Treasury or government-sponsored enterprises, such as GNMA, FNMA, and FHLMC. The total collateral netted against net derivative liabilities totaled $46.7 million at June 30, 2015, $57.8 million at December 31, 2014, and $29.2 million at June 30, 2014.
The following table summarizes our largest exposure to an individual counterparty at the dates indicated:
 
 
June 30, 2015
 
December 31, 2014
 
June 30, 2014
 
 
(in thousands)
Largest gross exposure (derivative asset) to an individual counterparty
 
$
198

 
$
7

 
$
2

Collateral posted by this counterparty
 

 

 

Derivative liability with this counterparty
 

 

 
28,874

Collateral pledged to this counterparty
 

 

 
28,872

Net exposure after netting adjustments and collateral
 
$
198

 
$
7

 
$

Credit Risk Contingent Features
Management has entered into certain derivative contracts that require the Company to post collateral to the counterparties when these contracts are in a net liability position. Conversely, the counterparties post collateral when these contracts are in a net asset position. The amount of collateral to be posted is based on the amount of the net liability and exposure thresholds. As of June 30, 2015, December 31, 2014, and June 30, 2014 the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting provisions) held by the Company that were in a net liability position totaled $49.0 million, $57.8 million, and $29.1 million, respectively. As of June 30, 2015, the Company was in an over-collateralized net position of $18.0 million after considering $64.6 million of collateral held in the form of securities. As of December 31, 2014 and June 30, 2014, the Company was in an over-collateralized position of $14.2 million and $17.5 million, respectively.
11. EARNINGS PER SHARE
Diluted EPS is based on the weighted average outstanding common shares during each period, including common stock equivalents. Basic EPS is based on the weighted average outstanding common shares during the period.
The following table presents the calculation of basic and diluted EPS: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands, except per share amounts)
Weighted average shares - basic
 
88,177

 
86,501

 
88,059

 
86,379

Dilutive effect of stock awards
 
505

 
832

 
508

 
850

Weighted average shares - diluted
 
88,682

 
87,333

 
88,567

 
87,229

Net income available to common stockholders
 
$
34,472

 
$
35,186

 
$
74,486

 
$
65,918

Earnings per share - basic
 
0.39

 
0.41

 
0.85

 
0.76

Earnings per share - diluted
 
0.39

 
0.40

 
0.84

 
0.76

The Company had zero and 1,500 stock options outstanding as of June 30, 2015 and December 31, 2014, respectively, that were not included in the computation of diluted earnings per common share because their effect would be anti-dilutive.

48


12. INCOME TAXES
The effective tax rate was 23.39% and 22.90% for the three months ended June 30, 2015 and 2014, respectively. For the six months ended June 30, 2015 and 2014, the Company's effective tax rate was 24.81%, and 23.94%, respectively. The increase in the effective tax rate is due primarily to proportionately lower tax-exempt income, increased state taxes, and a decrease in the amount of valuation allowance that will be released during 2015.
As of June 30, 2015, there is $0.5 million recorded for unrecognized tax benefits, all of which carried over from the Bridge acquisition. Management believes that this recorded liability for unrecognized tax benefits is adequate. The Company estimates that it is reasonably possible that the entire liability for unrecognized tax benefits will be settled within the next twelve months.
Interest and penalties related to unrecognized tax benefits are recognized in the provision for income taxes. As of June 30, 2015, a liability has not been recorded for interest or penalties. All of the Company's unrecognized tax benefits relate to legacy Bridge positions. Therefore, all amounts of interest and penalties through June 30, 2015 were recorded in the pre-acquisition period.
Deferred tax assets and liabilities are included in the Consolidated Financial Statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be reversed. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
For the six months ended June 30, 2015, the net deferred tax assets increased $19.4 million to $82.1 million. This overall increase in the net deferred tax asset was primarily the result of the Bridge acquisition and an increase in the allowance for credit losses.
Although realization is not assured, the Company believes that the realization of the recognized deferred tax asset of $82.1 million at June 30, 2015 is more-likely-than-not based on expectations as to future taxable income and based on available tax planning strategies within the meaning of ASC 740, Income Taxes, that could be implemented if necessary to prevent a carryover from expiring.
As of June 30, 2015 and December 31, 2014, the Company had a $1.1 million and $1.8 million, respectively, deferred tax valuation allowance related to net capital loss carryovers from the sale of preferred stock investments and $0.5 million, for both periods, related to IRC Section 382 limitations associated with the Company's acquisition of Western Liberty.
The deferred tax asset related to federal and state NOL carryovers outstanding at June 30, 2015 and December 31, 2014 available to reduce the tax liability in future years totaled $8.5 million. The entire $8.5 million of tax benefits relate to federal NOL carryovers (subject to an annual limitation imposed by IRC Section 382). The Company’s ability to use federal NOL carryovers, as well as its ability to use certain future tax deductions called NUBILs associated with the Company's acquisitions of Western Liberty and Centennial, will be subject to separate annual limitations of $1.8 million and $1.6 million of deductions from taxable income, respectively. In management’s opinion, it is more-likely-than-not that the results of future operations will generate sufficient taxable income to realize all but $0.5 million of the deferred tax benefits related to these NOL carryovers and NUBILs.
Investments in LIHTC
The Company invests in LIHTC funds that are designed to generate a return primarily through the realization of federal tax credits.
Investments in LIHTC and unfunded LIHTC obligations are included as part of other assets and other liabilities, respectively, in the Consolidated Balance Sheets and total $126.9 million and $43.8 million, respectively, as of June 30, 2015. For the three months ended June 30, 2015 and 2014, $2.2 million and $3.3 million of amortization related to LIHTC investments was recognized as a component of current income tax expense, respectively. For the six months ended June 30, 2015 and 2014, $5.6 million and $6.3 million of amortization related to LIHTC investments was recognized as a component of income tax expense, respectively.

49


13. COMMITMENTS AND CONTINGENCIES
Unfunded Commitments and Letters of Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the Consolidated Balance Sheets.
Lines of credit are obligations to lend money to a borrower. Credit risk arises when the borrower's current financial condition may indicate less ability to pay than when the commitment was originally made. In the case of standby letters of credit, the risk arises from the potential failure of the customer to perform according to the terms of a contract. In such a situation, the third party might draw on the standby letter of credit to pay for completion of the contract and the Company would look to its customer to repay these funds with interest. To minimize the risk, the Company uses the same credit policies in making commitments and conditional obligations as it would for a loan to that customer.
Standby letters of credit and financial guarantees are commitments issued by the Company to guarantee the performance of a customer to a third party in borrowing arrangements. The Company generally has recourse to recover from the customer any amounts paid under the guarantees. Typically, letters of credit issued have expiration dates within 1 year.
A summary of the contractual amounts for unfunded commitments and letters of credit are as follows: 
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Commitments to extend credit, including unsecured loan commitments of $358,971 at June 30, 2015 and $232,863 at December 31, 2014
 
$
3,230,537

 
$
2,164,523

Credit card commitments and financial guarantees
 
57,452

 
42,038

Standby letters of credit, including unsecured letters of credit of $33,485 at June 30, 2015 and $5,166 at December 31, 2014
 
73,513

 
49,556

Total
 
$
3,361,502

 
$
2,256,117

Commitments to extend credit are agreements to lend to a customer provided that 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.
The Company has exposure to credit losses from unfunded commitments and letters of credit. As funds have not been disbursed on these commitments, they are not reported as loans outstanding. Credit losses related to these commitments are not included in the allowance for credit losses reported in "Note 4. Loans, Leases and Allowance for Credit Losses" of these Unaudited Consolidated Financial Statements and are accounted for as a separate loss contingency. This loss contingency for unfunded loan commitments and letters of credit was $2.1 million as of June 30, 2015 and December 31, 2014. Changes to this liability are adjusted through non-interest expense.
Concentrations of Lending Activities
The Company’s lending activities are driven in large part by the customers served in the market areas where the Company has branch offices in the states of Arizona, Nevada, and California. Despite the geographic concentration of lending activities, the Company does not have a single external customer from which it derives 10% or more of its revenues. The Company monitors concentrations within five broad categories: geography, industry, product, call report classifications, and collateral. The Company's loan portfolio includes significant credit exposure to the CRE market. As of June 30, 2015 and December 31, 2014, CRE related loans accounted for approximately 51% and 54% of total loans, respectively. Substantially all of these loans are secured by first liens with an initial loan to value ratio of generally not more than 75%. Approximately 48% and 46% of these CRE loans, excluding construction and land loans, were owner-occupied at June 30, 2015 and December 31, 2014, respectively.

50


Contingencies
The Company is involved in various lawsuits of a routine nature that are being handled and defended in the ordinary course of the Company’s business. Expenses are being incurred in connection with these lawsuits, but in the opinion of management, based in part on consultation with outside legal counsel, the resolution of these lawsuits and associated defense costs will not have a material impact on the Company’s financial position, results of operations, or cash flows.
Lease Commitments
The Company leases the majority of its office locations and many of these leases contain multiple renewal options and provisions for increased rents. Total rent expense of $1.6 million and $1.7 million was included in occupancy expenses for the three months ended June 30, 2015 and 2014, respectively. For the six months ended June 30, 2015 and 2014, total rent expense was $3.2 million and $3.3 million, respectively.
14. FAIR VALUE ACCOUNTING
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC 825 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 825 are described in "Note 1. Summary of Significant Accounting Policies" of these Notes to Unaudited Consolidated Financial Statements.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. Transfers between levels in the fair value hierarchy are recognized as of the end of the month following the event or change in circumstances that caused the transfer.
Under ASC 825, the Company elected the FVO treatment for junior subordinated debt issued by WAL. This election is irrevocable and unrealized gains and losses on these items must be reported in earnings at each reporting date. The Company did not elect FVO treatment for newly assumed Bridge junior subordinated debt.
All securities for which the fair value measurement option had been elected are included in a separate line item in the Consolidated Balance Sheet as securities measured at fair value.

51


For the three and six months ended June 30, 2015 and 2014, gains and losses from fair value changes included in the Consolidated Income Statements were as follows: 
 
 
Changes in Fair Values for Items Measured at Fair Pursuant to Election of the Fair Value Option
 
 
Unrealized Gain/(Loss) on Assets and Liabilities Measured at Fair Value, Net
 
Interest Income on Securities
 
Interest Expense on Junior Subordinated Debt
 
Total Changes Included in Current-Period Earnings
 
 
(in thousands)
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
Securities measured at fair value
 
$
(9
)
 
$
1

 
$

 
$
(8
)
Junior subordinated debt
 
(7,736
)
 

 
451

 
(7,285
)
Total
 
$
(7,745
)
 
$
1

 
$
451

 
$
(7,293
)
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
Securities measured at fair value
 
$
(14
)
 
$
1

 
$

 
$
(13
)
Junior subordinated debt
 
(8,045
)
 

 
892

 
(7,153
)
Total
 
$
(8,059
)
 
$
1

 
$
892

 
$
(7,166
)
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
Securities measured at fair value
 
$
(2
)
 
$
1

 
$

 
$
(1
)
Junior subordinated debt
 
125

 

 
(443
)
 
(318
)
Total
 
$
123

 
$
1

 
$
(443
)
 
$
(319
)
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
Securities measured at fair value
 
$
16

 
$
2

 
$

 
$
18

Junior subordinated debt
 
(853
)
 

 
(864
)
 
(1,717
)
Total
 
$
(837
)
 
$
2

 
$
(864
)
 
$
(1,699
)
There were no net gains or losses recognized during the three and six months ended June 30, 2015 and 2014 on trading securities sold during the period.
Interest income on securities measured at fair value is accounted for similarly to those classified as AFS. Any premiums or discounts are recognized in interest income over the term of the securities. For MBS, estimates of prepayments are considered in the constant yield calculations. Interest expense on junior subordinated debt is also determined under a constant yield calculation.
Fair value on a recurring basis
Financial assets and financial liabilities measured at fair value on a recurring basis include the following:
Securities measured at fair value: All of the Company’s securities measured at fair value, which consist of MBS, are reported at fair value utilizing Level 2 inputs in the same manner as described below for AFS securities.
AFS securities: Preferred stock, mutual funds, and CRA investments are reported at fair value utilizing Level 1 inputs. With the exception of CDO securities, other securities classified as AFS are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. The Company estimates the fair value of CDO securities utilizing Level 3 inputs, which include pricing indications from comparable securities.
Independent pricing service: Our independent pricing service provides pricing information on Level 1, 2, and 3 securities, and represents the pricing source for the majority of the portfolio. Management independently evaluates the fair value measurements received from the Company's third party pricing service through multiple review steps. First, management reviews what has transpired in the marketplace with respect to interest rates, credit spreads, volatility, and mortgage rates, among other things, and develops an expectation of changes to the securities valuations from the previous quarter. Then, management obtains market values from additional sources. The pricing service provides management with observable market data including interest rate curves and mortgage prepayment speed grids, as well as dealer quote sheets, new bond offering sheets, and historical trade documentation. Management reviews the assumptions and decides whether they are reasonable. Management may compare interest rates, credit spreads and prepayments speeds used as part of the assumptions to those that

52


management believes are reasonable. Management may price securities using the provided assumptions to determine whether they can develop similar prices on like securities. Any discrepancies between management’s review and the prices provided by the vendor are discussed with the vendor and the Company’s other valuation advisors. Last, management selects a sample of investment securities and compares the values provided by its primary third party pricing service to the market values obtained from secondary sources and evaluates those with notable variances.
Annually, the Company receives an SSAE 16 report from its independent pricing service attesting to the controls placed on the operations of the service from its auditor.
Interest rate swaps: Interest rate swaps are reported at fair value utilizing Level 2 inputs. The Company obtains dealer quotations to value its interest rate swaps.
Junior subordinated debt: The Company estimates the fair value of its junior subordinated debt using a discounted cash flow model which incorporates the effect of the Company’s own credit risk in the fair value of the liabilities (Level 3). The Company’s cash flow assumptions are based on contractual cash flows as the Company anticipates that it will pay the debt according to its contractual terms.
Given the pricing of 90 day LIBOR plus 3.20% on the Company's $150.0 million issuance of subordinated debt on June 29, 2015, the Company reviewed the methodology for calculating the estimated fair value of its outstanding junior subordinated debt, which was priced at 30 day LIBOR plus 5.96% as of March 31, 2015 under fair value option accounting.  Considering the significantly lower spread of WAB’s newly issued subordinated debt, that the Company’s debt is junior in subordination, and that the debt was issued by the parent company rather than the insured depository, the Company adjusted the spread for valuation purposes to 30 day LIBOR plus 4.69%, which is between the 90 day LIBOR plus 3.20% rate achieved on the WAB subordinated debt and 30 day LIBOR plus 5.96% rate that was previously used.  This spread reduction resulted in a non-cash, non-recurring debt valuation loss of $7.7 million during the three months ended June 30, 2015. This charge had no effect on regulatory capital.
As of June 30, 2015, the Company estimated the discount rate at 4.972%, which represents the implied credit spread of the BB Financial curve, and is a 4.69% spread plus 3 month LIBOR (0.283%). As of December 31, 2014, the Company estimated the discount rate at 6.242%, which was a 5.99% spread plus 3 month LIBOR of 0.256%.

53


The fair value of assets and liabilities measured at fair value on a recurring basis were determined using the following inputs as of the periods presented: 
 
 
Fair Value Measurements at the End of the Reporting Period Using:
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Fair Value
 
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Measured at fair value
 
 
 
 
 
 
 
 
Residential MBS issued by GSEs
 
$

 
$
1,701

 
$

 
$
1,701

Available-for-sale
 
 
 
 
 
 
 
 
Collateralized debt obligations
 
$

 
$

 
$
10,804

 
$
10,804

Commercial MBS issued by GSEs
 
11,126

 
2,083

 

 
13,209

Corporate debt securities
 
326

 
13,339

 

 
13,665

CRA investments
 
32,537

 

 

 
32,537

Municipal obligations
 
1,235

 
291,178

 

 
292,413

Preferred stock
 
83,051

 

 

 
83,051

Private label commercial MBS
 

 
4,979

 

 
4,979

Private label residential MBS
 
31,527

 
70,544

 

 
102,071

Residential MBS issued by GSEs
 

 
871,357

 

 
871,357

Trust preferred securities
 

 
25,648

 

 
25,648

U.S. government sponsored agency securities
 
6,206

 
18,403

 

 
24,609

U.S. treasury securities
 
3,891

 

 

 
3,891

Total AFS securities
 
$
169,899

 
$
1,297,531

 
$
10,804

 
$
1,478,234

Derivative assets (1)
 
$

 
$
198

 
$

 
$
198

Liabilities:
 
 
 
 
 
 
 
 
Junior subordinated debt (2)
 
$

 
$

 
$
48,482

 
$
48,482

Derivative liabilities (1)
 

 
49,037

 

 
49,037

(1)
Derivative assets and liabilities relate to interest rate swaps, see "Note 10. Derivatives and Hedging Activities." In addition, the carrying value of loans includes a net positive value of $48,258 as of June 30, 2015, which relates to the effective portion of the hedges put in place to mitigate against fluctuations in interest rates.
(2)
Includes only the portion of junior subordinated debt that is recorded at fair value at each reporting period pursuant to the election of FVO treatment.


54


 
 
Fair Value Measurements at the End of the Reporting Period Using:
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Fair
Value
 
 
(in thousands)
December 31, 2014
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Measured at fair value
 
 
 
 
 
 
 
 
Residential MBS issued by GSEs
 
$

 
$
1,858

 
$

 
$
1,858

Available-for-sale
 
 
 
 
 
 
 
 
Collateralized debt obligations
 
$

 
$

 
$
11,445

 
$
11,445

Commercial MBS issued by GSEs
 

 
2,147

 

 
2,147

Corporate debt securities
 

 
52,489

 

 
52,489

CRA investments
 
24,332

 

 

 
24,332

Municipal obligations
 

 
299,037

 

 
299,037

Mutual funds
 
37,702

 

 

 
37,702

Preferred stock
 
82,612

 

 

 
82,612

Private label commercial MBS
 

 
5,149

 

 
5,149

Private label residential MBS
 

 
70,243

 

 
70,243

Residential MBS issued by GSEs
 

 
891,189

 

 
891,189

Trust preferred securities
 

 
25,546

 

 
25,546

U.S. government sponsored agency securities
 

 
18,346

 

 
18,346

Total AFS securities
 
$
144,646

 
$
1,364,146

 
$
11,445

 
$
1,520,237

Derivative assets (1)
 
$

 
$
7

 
$

 
$
7

Liabilities:
 
 
 
 
 
 
 
 
Junior subordinated debt
 
$

 
$

 
$
40,437

 
$
40,437

Derivative liabilities (1)
 

 
57,820

 

 
57,820

(1)
Derivative assets and liabilities relate to interest rate swaps, see "Note 10. Derivatives and Hedging Activities." In addition, the carrying value of loans includes a positive value of $57,140 as of December 31, 2014, which relates to the effective portion of the hedges put in place to mitigate against fluctuations in interest rates.
For the three and six months ended June 30, 2015 and 2014, the change in Level 3 assets and liabilities measured at fair value on a recurring basis was as follows: 
 
 
Junior Subordinated Debt
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Beginning balance
 
$
(40,746
)
 
$
(42,836
)
 
$
(40,437
)
 
$
(41,858
)
Transfers into Level 3
 

 

 

 

Total gains (losses) for the period
 
 
 
 
 
 
 
 
Included in earnings (1)
 
(7,736
)
 
125

 
(8,045
)
 
(853
)
Ending balance
 
$
(48,482
)
 
$
(42,711
)
 
$
(48,482
)
 
$
(42,711
)
Change in unrealized gains (losses) for the period included in earnings
 
$
(7,736
)
 
$
125

 
$
(8,045
)
 
$
(853
)
 

55


 
 
CDO Securities
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Beginning balance
 
$
10,520

 
$

 
$
11,445

 
$

Transfers into Level 3
 

 
58

 

 
58

Total gains (losses) for the period
 
 
 
 
 
 
 
 
Included in other comprehensive income (2)
 
284

 

 
$
(641
)
 
$

Ending balance
 
$
10,804

 
$
58

 
$
10,804

 
$
58

(1)
Total gains (losses) for the period are included in the non-interest income line, Unrealized gains (losses) on assets and liabilities measured at fair value, net.
(2)
Total gains (losses) for the period are included in the other comprehensive income line, Unrealized (loss) gain on AFS securities.
For Level 3 liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows: 
 
 
June 30, 2015
 
Valuation Technique
 
Significant Unobservable Inputs
 
 
(in thousands)
 
 
 
 
Junior subordinated debt
 
$
48,482

 
Discounted cash flow
 
Implied credit rating of the Company
CDO securities
 
10,804

 
S&P Model
 
Pricing indications from comparable securities
 
 
 
December 31, 2014
 
Valuation Technique
 
Significant Unobservable Inputs
 
 
(in thousands)
 
 
 
 
Junior subordinated debt
 
$
40,437

 
Discounted cash flow
 
Adjusted Corporate Bond over Treasury Index with comparable credit spread
CDO securities
 
11,445

 
S&P Model
 
Pricing indications from comparable securities
The significant unobservable inputs used in the fair value measurement of the Company’s junior subordinated debt as of June 30, 2015 was the BB Financial over SWAP index and as of December 31, 2014 was the BB 20-Year over Treasury Index with comparable credit spread. The input value used in the fair value measurement of the Company's junior subordinated debt was 4.972% and 6.242% as of June 30, 2015 and December 31, 2014, respectively.
The significant unobservable inputs used in the fair value measurement of the Company's CDO securities include securities terms, conditions, and underlying collateral type, as well as trustee and servicer reports, trade data on comparable securities, and market quotes that are converted into spreads to benchmark LIBOR curves. Significant increases or decreases in these inputs could result in significantly different fair value measurements.

56


Fair value on a nonrecurring basis
Certain assets are measured at fair value on a nonrecurring basis. That is, the assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents such assets carried on the balance sheet by caption and by level within the ASC 825 hierarchy:
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
 
Total
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Active Markets for Similar Assets
(Level 2)
 
Unobservable Inputs
(Level 3)
 
 
(in thousands)
As of June 30, 2015:
 
 
 
 
 
 
 
 
Impaired loans with specific valuation allowance
 
$
99,212

 
$

 
$

 
$
99,212

Impaired loans without specific valuation allowance (1)
 
38,010

 

 

 
38,010

Other assets acquired through foreclosure
 
59,335

 

 

 
59,335

As of December 31, 2014:
 
 
 
 
 
 
 
 
Impaired loans with specific valuation allowance
 
$
114,163

 
$

 
$

 
$
114,163

Impaired loans without specific valuation allowance (1)
 
38,019

 

 

 
38,019

Other assets acquired through foreclosure
 
57,150

 

 

 
57,150

(1)
Excludes loan balances with charge-offs of $6.8 million and $3.8 million as of June 30, 2015 and December 31, 2014, respectively.
Impaired loans: The specific reserves for collateral dependent impaired loans are based on collateral value, net of estimated disposition costs and other identified quantitative inputs. Collateral value is determined based on third-party appraisals. Appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2. However, certain assumptions and unobservable inputs are often used by the appraiser. Therefore, qualifying the assets as Level 3 in the fair value hierarchy. In some cases, adjustments are made to the appraised values due to various factors, including age of the appraisal (which are generally obtained every twelve months), age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments are based on unobservable inputs, such as when a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the resulting fair value measurement has been categorized as a Level 3 measurement. These Level 3 impaired loans had an estimated fair value of $106.4 million and $124.9 million at June 30, 2015 and December 31, 2014, respectively. The fair value of these Level 3 impaired loans reflects the carrying value of loan, which has been reduced by any deficit in appraised value compared to book value, estimated disposition costs, and estimated losses of similar impaired loans based on historical loss experience. Specific reserves in the allowance for loan losses for these loans were $7.2 million and $10.8 million at June 30, 2015 and December 31, 2014, respectively.
Other assets acquired through foreclosure: Other assets acquired through foreclosure consist of properties acquired as a result of, or in-lieu-of, foreclosure. These assets are initially reported at the fair value determined by independent appraisals using appraised value less estimated cost to sell. Such properties are generally re-appraised every twelve months. There is risk for subsequent volatility. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to expense. The Company had $59.3 million of such assets at June 30, 2015. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2. However, certain assumptions and unobservable inputs are often used by the appraiser; therefore, qualifying the assets as Level 3 in the fair value hierarchy. When significant adjustments are based on unobservable inputs, such as when a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the resulting fair value measurement has been categorized as a Level 3 measurement.
Credit vs. non-credit losses
Under the provisions of ASC 320, Investments-Debt and Equity Securities, OTTI is separated into the amount of total impairment related to the credit loss and the amount of the total impairment related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in OCI.

57


For the three and six months ended June 30, 2015 and 2014, the Company determined that no securities experienced credit losses.
There is no OTTI balance recognized in comprehensive income as of June 30, 2015 and 2014.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company’s financial instruments is as follows: 
 
 
June 30, 2015
 
 
Carrying Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
AFS
 
$
1,478,234

 
$
169,899

 
$
1,297,531

 
$
10,804

 
$
1,478,234

Trading
 
1,701

 

 
1,701

 

 
1,701

Derivative assets
 
198

 

 
198

 

 
198

Loans, net
 
10,245,566

 

 
9,891,399

 
137,222

 
10,028,621

Accrued interest receivable
 
46,222

 

 
46,222

 

 
46,222

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
11,406,728

 
$

 
$
11,410,560

 
$

 
$
11,410,560

Customer repurchases
 
42,172

 

 
42,172

 

 
42,172

FHLB and FRB advances
 
11,051

 

 
11,051

 

 
11,051

Other borrowed funds
 
58,378

 

 

 
58,637

 
58,637

Qualifying debt
 
208,417

 

 

 
209,019

 
209,019

Derivative liabilities
 
49,037

 

 
49,037

 

 
49,037

Accrued interest payable
 
11,764

 

 
11,764

 

 
11,764

 
 
December 31, 2014
 
 
Carrying Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
AFS
 
$
1,520,237

 
$
144,646

 
$
1,364,146

 
$
11,445

 
$
1,520,237

Trading
 
1,858

 

 
1,858

 

 
1,858

Derivative assets
 
7

 

 
7

 

 
7

Loans, net
 
8,288,049

 

 
7,984,692

 
152,182

 
8,136,874

Accrued interest receivable
 
36,705

 

 
36,705

 

 
36,705

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
8,931,043

 
$

 
$
8,935,566

 
$

 
$
8,935,566

Customer repurchases
 
54,899

 

 
54,899

 

 
54,899

FHLB and FRB advances
 
307,081

 

 
307,081

 

 
307,081

Other borrowed funds
 
83,182

 

 
25,000

 
61,074

 
86,074

Junior subordinated debt
 
40,437

 

 

 
40,437

 
40,437

Derivative liabilities
 
57,820

 

 
57,820

 

 
57,820

Accrued interest payable
 
9,890

 

 
9,890

 

 
9,890


58


Interest rate risk
The Company assumes interest rate risk (the risk to the Company’s earnings and capital from changes in interest rate levels) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments as well as its future net interest income will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.
Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in EVE and net interest income resulting from hypothetical changes in interest rates. If potential changes to EVE and net interest income resulting from hypothetical interest rate changes are not within the limits established by the BOD, the BOD may direct management to adjust the asset and liability mix to bring interest rate risk within BOD-approved limits. As of June 30, 2015, the Company’s interest rate risk profile was within BOD-approved limits.
WAB has an ALCO charged with managing interest rate risk within the BOD-approved limits. Limits are structured to prohibit an interest rate risk profile that does not conform to both management and BOD risk tolerances. There is also ALCO reporting at the Parent company level for reviewing interest rate risk for the Company, which gets reported to the BOD and the Finance and Investment Committee.
Fair value of commitments
The estimated fair value of standby letters of credit outstanding at June 30, 2015 and December 31, 2014 was insignificant. Loan commitments on which the committed interest rates were less than the current market rate were also insignificant at June 30, 2015 and December 31, 2014.
15. REGULATORY CAPITAL REQUIREMENTS
The Company and WAB are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could trigger certain mandatory or discretionary actions that, if undertaken, could have a direct material effect on the Company’s business and financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and WAB must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The capital framework under Basel III became effective for the Company on January 1, 2015. Under the Basel III final rules, minimum requirements have increased for both the quantity and quality of capital held by the Company. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility requirements for regulatory capital instruments have been implemented under the final rules and the final rules also revise the definitions and calculations of Tier 1 capital, total capital, and risk-weighted assets.

59


As of June 30, 2015 and December 31, 2014, the Company and WAB exceeded the capital levels necessary to be classified as well-capitalized, as defined by the federal banking agencies. The actual capital amounts and ratios for the Company and WAB are presented in the following tables as of the periods indicated:
 
 
Total Capital
 
Tier 1 Capital
 
Risk-Weighted Assets
 
Tangible Average Assets
 
Total Capital Ratio
 
Tier 1 Capital Ratio
 
Tier 1 Leverage Ratio
 
Common Equity
Tier 1
 
 
(dollars in thousands)
Basel III
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WAL
 
$
1,522,991

 
$
1,269,033

 
$
12,435,603

 
$
12,733,458

 
12.2
%
 
10.2
%
 
10.0
%
 
9.1
%
WAB
 
1,408,273

 
1,142,684

 
12,326,696

 
12,549,292

 
11.4

 
9.3

 
9.1

 
9.3

Well-capitalized ratios
 
 
 
 
 
 
 
 
 
10.0

 
8.0

 
5.0

 
6.5

Minimum capital ratios
 
 
 
 
 
 
 
 
 
8.0

 
6.0

 
4.0

 
4.5

Basel I
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WAL
 
$
1,119,618

 
$
1,007,278

 
$
9,555,390

 
$
10,367,575

 
11.7
%
 
10.5
%
 
9.7
%
 

WAB
 
1,057,253

 
945,687

 
9,435,459

 
10,232,297

 
11.2

 
10.0

 
9.2

 

Well-capitalized ratios
 
 
 
 
 
 
 
 
 
10.0

 
6.0

 
5.0

 

Minimum capital ratios
 
 
 
 
 
 
 
 
 
8.0

 
4.0

 
4.0

 

16. SEGMENTS
The Company's reportable segments are aggregated primarily based on geographic location, services offered, and markets served. As a result of the Bridge acquisition on June 30, 2015, former Bridge activities were allocated between the newly formed Northern California segment and the CBL segment. As a substantial portion of Bridge's balance sheet is generated from nationally-focused business lines, the Technology and Energy Infrastructure lines of Bridge's business are included in the CBL segment. Substantially all of the remaining assets and liabilities are included in the Northern California segment. The Southern California segment represents legacy Western Alliance operations in California, excluding two branches located in northern California, which are now included in the Northern California segment. Prior period amounts have been adjusted accordingly.
The Arizona, Nevada, Southern California, and Northern California segments provide full service banking and related services to their respective markets although operations may not be domiciled in these states. The Company's CBL segment provides banking services to niche markets and, as of June 30, 2015, includes the Technology and Energy Infrastructure operations of Bridge. These CBLs are managed centrally and are broader in geographic scope, though still predominately within the Company's core market areas. The Corporate & Other segment primarily relates to our Treasury division and also includes other corporate-related items, income and expense items not allocated to other reportable segments, and inter-segment eliminations.
The Company's segment reporting process begins with the assignment of all loan and deposit accounts directly to the segments where these products are originated and/or serviced. Equity capital is assigned to each segment based on the risk profile of their assets and liabilities. With the exception of goodwill, which is assigned a 100% weighting, equity capital allocations ranged from 0% to 12% during the year, with a funds credit provided for the use of this equity as a funding source. Any excess equity not allocated to segments based on risk is assigned to the Corporate & Other segment.
Net interest income, provision for credit losses, and non-interest expense amounts are recorded in their respective segment to the extent that the amounts are directly attributable to those segments. Net interest income is recorded in each segment on a TEB with a corresponding increase in income tax expense, which is eliminated in the Corporate & Other segment.
Further, net interest income of a reportable segment includes a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Using this funds transfer pricing methodology, liquidity is transferred between users and providers. A net user of funds has lending/investing in excess of deposits/borrowings and a net provider of funds has deposits/borrowings in excess of lending/investing. A segment that is a user of funds is charged for the use of funds, while a provider of funds is credited through funds transfer pricing, which is determined based on the average life of the assets or liabilities in the portfolio.
Net income amounts for each reportable segment is further derived by the use of expense allocations. Certain expenses not directly attributable to a specific segment are allocated across all segments based on key metrics, such as number of employees, average loan balances, and average deposit balances. These types of expenses include information technology, operations, human resources, finance, risk management, credit administration, legal, and marketing.

60


Income taxes are applied to each segment based on the effective tax rate for the geographic location of the segment. Any difference in the corporate tax rate and the aggregate effective tax rates in the segments are adjusted in the Corporate & Other segment.
As the Bridge acquisition was completed on June 30, 2015, the balance sheet data of Bridge is included in the Company's Consolidated Balance Sheet as of June 30, 2015. However, the results of operations of Bridge will be included in the Company's Consolidated Income Statements beginning on July 1, 2015. Accordingly, the results of operations of the Northern California segment for the three and six months ended June 30, 2015 and 2014 only include the operations of the Company's two previously existing Northern California branch offices.
The following is a summary of selected operating segment information as of June 30, 2015, December 31, 2014, and June 30, 2014 and for the three and six months ended June 30, 2015 and 2014.
 
 
Arizona
 
Nevada
 
Southern California
 
Northern California
(1)
 
Central Business Lines (1)
 
Corporate & Other (1)
 
Consolidated Company
At June 30, 2015
 
(dollars in millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, and investment securities
 
$
2.3

 
$
10.2

 
$
2.6

 
$
2.1

 
$

 
$
2,273.0

 
$
2,290.2

Loans, net of deferred loan fees and costs
 
2,432.8

 
1,761.9

 
1,659.9

 
1,077.5

 
3,388.0

 
40.5

 
10,360.6

Less: allowance for credit losses
 
(31.4
)
 
(22.8
)
 
(21.4
)
 
(3.2
)
 
(35.7
)
 
(0.6
)
 
(115.1
)
Total loans
 
2,401.4

 
1,739.1

 
1,638.5

 
1,074.3

 
3,352.3

 
39.9

 
10,245.5

Other assets acquired through foreclosure, net
 
18.6

 
23.4

 

 
1.6

 

 
15.7

 
59.3

Goodwill and other intangible assets, net
 

 
25.4

 

 
155.2

 
119.4

 

 
300.0

Other assets
 
43.8

 
63.0

 
13.7

 
15.7

 
29.1

 
409.8

 
575.1

Total assets
 
$
2,466.1

 
$
1,861.1

 
$
1,654.8

 
$
1,248.9

 
$
3,500.8

 
$
2,738.4

 
$
13,470.1

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
2,369.9

 
$
3,316.9

 
$
1,946.8

 
$
1,550.2

 
$
1,945.1

 
$
277.8

 
$
11,406.7

Borrowings and qualifying debt
 

 

 

 

 

 
277.8

 
277.8

Other liabilities
 
20.3

 
29.2

 
3.5

 
8.4

 
77.6

 
131.9

 
270.9

Total liabilities
 
2,390.2

 
3,346.1

 
1,950.3

 
1,558.6

 
2,022.7

 
687.5

 
11,955.4

Allocated equity:
 
267.6

 
244.9

 
182.1

 
281.5

 
409.8

 
128.8

 
1,514.7

Total liabilities and stockholders' equity
 
$
2,657.8

 
$
3,591.0

 
$
2,132.4

 
$
1,840.1

 
$
2,432.5

 
$
816.3

 
$
13,470.1

Excess funds provided (used)
 
191.7

 
1,729.9

 
477.6

 
591.2

 
(1,068.3
)
 
(1,922.1
)
 

(1)    Includes Bridge balances.

61


 
 
Arizona
 
Nevada
 
Southern California
 
Northern California
 
Central Business Lines
 
Corporate & Other
 
Consolidated Company
At December 31, 2014
 
(dollars in millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, and investment securities
 
$
2.3

 
$
5.0

 
$
2.2

 
$
0.3

 
$

 
$
1,702.4

 
$
1,712.2

Loans, net of deferred loan fees and costs
 
2,341.9

 
1,668.7

 
1,553.1

 
198.6

 
2,590.0

 
46.0

 
8,398.3

Less: allowance for credit losses
 
(30.7
)
 
(21.9
)
 
(17.9
)
 
(5.1
)
 
(34.0
)
 
(0.6
)
 
(110.2
)
Total loans
 
2,311.2

 
1,646.8

 
1,535.2

 
193.5

 
2,556.0

 
45.4

 
8,288.1

Other assets acquired through foreclosure, net
 
15.5

 
21.0

 

 

 

 
20.6

 
57.1

Goodwill and other intangible assets, net
 

 
25.9

 

 

 

 

 
25.9

Other assets
 
34.8

 
64.2

 
6.2

 
15.3

 
22.9

 
373.8

 
517.2

Total assets
 
$
2,363.8

 
$
1,762.9

 
$
1,543.6

 
$
209.1

 
$
2,578.9

 
$
2,142.2

 
$
10,600.5

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
2,178.0

 
$
3,230.6

 
$
1,744.5

 
$
584.0

 
$
946.6

 
$
247.3

 
$
8,931.0

Other borrowings
 

 

 

 

 

 
390.3

 
390.3

Other liabilities
 
17.4

 
40.8

 
8.9

 
0.2

 
72.4

 
138.6

 
278.3

Total liabilities
 
2,195.4

 
3,271.4

 
1,753.4

 
584.2

 
1,019.0

 
776.2

 
9,599.6

Allocated equity:
 
250.8

 
209.0

 
70.9

 
126.8

 
232.9

 
110.5

 
1,000.9

Total liabilities and stockholders' equity
 
$
2,446.2

 
$
3,480.4

 
$
1,824.3

 
$
711.0

 
$
1,251.9

 
$
886.7

 
$
10,600.5

Excess funds provided (used)
 
82.4

 
1,717.5

 
280.7

 
501.9

 
(1,327.0
)
 
(1,255.5
)
 

 
 
Arizona
 
Nevada
 
Southern California
 
Northern California
 
Central Business Lines
 
Corporate & Other
 
Consolidated Company
At June 30, 2014
 
(dollars in millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, and investment securities
 
$
3.0

 
$
7.0

 
$
2.2

 
$
0.2

 
$

 
$
1,973.6

 
$
1,986.0

Loans, net of deferred loan fees and costs
 
2,131.0

 
1,682.6

 
1,515.3

 
179.5

 
1,951.5

 
84.6

 
7,544.5

Less: allowance for credit losses
 
(29.9
)
 
(23.6
)
 
(18.7
)
 
(5.1
)
 
(27.4
)
 
(1.2
)
 
(105.9
)
Total loans
 
2,101.1

 
1,659.0

 
1,496.6

 
174.4

 
1,924.1

 
83.4

 
7,438.6

Other assets acquired through foreclosure, net
 
13.1

 
24.1

 

 

 

 
22.1

 
59.3

Goodwill and other intangible assets, net
 

 
26.5

 

 

 

 

 
26.5

Other assets
 
42.2

 
62.7

 
10.8

 
15.4

 
21.1

 
361.0

 
513.2

Total assets
 
$
2,159.4

 
$
1,779.3

 
$
1,509.6

 
$
190.0

 
$
1,945.2

 
$
2,440.1

 
$
10,023.6

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
2,115.4

 
$
3,187.8

 
$
1,666.2

 
$
394.9

 
$
886.3

 
$
218.9

 
$
8,469.5

Other borrowings
 

 

 

 

 

 
337.5

 
337.5

Other liabilities
 
20.9

 
46.8

 
4.7

 
0.1

 
24.7

 
161.7

 
258.9

Total liabilities
 
2,136.3

 
3,234.6

 
1,670.9

 
395.0

 
911.0

 
718.1

 
9,065.9

Allocated equity:
 
233.7

 
212.5

 
83.1

 
105.6

 
152.3

 
170.5

 
957.7

Total liabilities and stockholders' equity
 
$
2,370.0

 
$
3,447.1

 
$
1,754.0

 
$
500.6

 
$
1,063.3

 
$
888.6

 
$
10,023.6

Excess funds provided (used)
 
210.6

 
1,667.8

 
244.4

 
310.6

 
(881.9
)
 
(1,551.5
)
 


62


 
 
Arizona

Nevada

Southern California

Northern California
(2)
 
Central Business Lines (2)
 
Corporate & Other (2)

Consolidated Company
Three Months Ended June 30, 2015:
 
(in thousands)
Net interest income (expense)
 
$
32,091

 
$
29,946

 
$
24,070

 
$
5,216

 
$
24,432

 
$
(7,037
)
 
$
108,718

Provision for (recovery of) credit losses
 
826

 
(3,148
)
 
634

 
513

 
1,251

 
(76
)
 

Net interest income (expense) after provision for credit losses
 
31,265

 
33,094

 
23,436

 
4,703

 
23,181

 
(6,961
)
 
108,718

Non-interest income
 
1,008

 
2,370

 
850

 
271

 
321

 
(7,011
)
 
(2,191
)
Non-interest expense
 
(14,507
)
 
(14,918
)
 
(11,777
)
 
(2,142
)
 
(9,548
)
 
(8,317
)
 
(61,209
)
Income (loss) from continuing operations before income taxes
 
17,766

 
20,546

 
12,509

 
2,832

 
13,954

 
(22,289
)
 
45,318

Income tax expense (benefit)
 
6,970

 
7,191

 
5,261

 
1,191

 
5,233

 
(15,247
)
 
10,599

Net income
 
$
10,796

 
$
13,355

 
$
7,248

 
$
1,641

 
$
8,721

 
$
(7,042
)
 
$
34,719

(2)    Excludes legacy Bridge operations; Northern California includes two legacy TPB branches.
 
 
Arizona

Nevada

Southern California

Northern California
 
Central Business Lines

Corporate & Other

Consolidated Company
Three Months Ended June 30, 2014:
 
(in thousands)
Net interest income (expense)
 
$
29,211

 
$
29,359

 
$
22,502

 
$
2,200

 
$
16,226

 
$
(5,600
)
 
$
93,898

Provision for credit losses
 
3

 
(2,011
)
 
(1,672
)
 

 
3,467

 
720

 
507

Net interest income (expense) after provision for credit losses
 
29,208

 
31,370

 
24,174

 
2,200

 
12,759

 
(6,320
)
 
93,391

Non-interest income
 
934

 
2,248

 
865

 
34

 
643

 
875

 
5,599

Non-interest expense
 
(12,793
)
 
(15,922
)
 
(12,410
)
 
(861
)
 
(6,640
)
 
(3,616
)
 
(52,242
)
Income (loss) from continuing operations before income taxes
 
17,349

 
17,696

 
12,629

 
1,373

 
6,762

 
(9,061
)
 
46,748

Income tax expense (benefit)
 
6,805

 
6,194

 
5,310

 
577

 
2,536

 
(10,716
)
 
10,706

Income from continuing operations
 
10,544

 
11,502

 
7,319

 
796

 
4,226

 
1,655

 
36,042

Loss from discontinued operations, net
 

 

 

 

 

 
(504
)
 
(504
)
Net income
 
$
10,544

 
$
11,502

 
$
7,319

 
$
796

 
$
4,226

 
$
1,151

 
$
35,538

 
 
Arizona
 
Nevada
 
Southern California
 
Northern California
(2)
 
Central Business Lines (2)
 
Corporate & Other (2)
 
Consolidated Company
Six Months Ended June 30, 2015:
 
(in thousands)
Net interest income (expense)
 
$
61,076

 
$
59,155

 
$
46,560

 
$
9,669

 
$
47,742

 
$
(12,376
)
 
$
211,826

Provision for (recovery of) credit losses
 
158

 
(2,799
)
 
266

 
486

 
2,660

 
(71
)
 
700

Net interest income (expense) after provision for credit losses
 
60,918

 
61,954

 
46,294

 
9,183

 
45,082

 
(12,305
)
 
211,126

Non-interest income
 
1,947

 
4,653

 
1,515

 
322

 
1,037

 
(5,732
)
 
3,742

Non-interest expense
 
(29,268
)
 
(29,392
)
 
(23,398
)
 
(4,159
)
 
(18,826
)
 
(10,199
)
 
(115,242
)
Income (loss) from continuing operations before income taxes
 
33,597

 
37,215

 
24,411

 
5,346

 
27,293

 
(28,236
)
 
99,626

Income tax expense (benefit)
 
13,180

 
13,025

 
10,265

 
2,248

 
10,235

 
(24,236
)
 
24,717

Net income
 
$
20,417

 
$
24,190

 
$
14,146

 
$
3,098

 
$
17,058

 
$
(4,000
)
 
$
74,909

(2)    Excludes legacy Bridge operations; Northern California includes two legacy TPB branches.

63


 
 
Arizona
 
Nevada
 
Southern California
 
Northern California
 
Central Business Lines
 
Corporate & Other (1)
 
Consolidated Company
Six Months Ended June 30, 2014:
 
(in thousands)
Net interest income (expense)
 
$
55,819

 
$
57,954

 
$
43,181

 
$
4,313

 
$
30,190

 
$
(6,782
)
 
$
184,675

Provision for credit losses
 
1,561

 
(2,895
)
 
(1,017
)
 

 
5,637

 
721

 
4,007

Net interest income (expense) after provision for credit losses
 
54,258

 
60,849

 
44,198

 
4,313

 
24,553

 
(7,503
)
 
180,668

Non-interest income
 
1,710

 
4,384

 
2,015

 
65

 
725

 
1,255

 
10,154

Non-interest expense
 
(26,053
)
 
(31,005
)
 
(24,358
)
 
(1,887
)
 
(13,148
)
 
(5,260
)
 
(101,711
)
Income (loss) from continuing operations before income taxes
 
29,915

 
34,228

 
21,855

 
2,491

 
12,130

 
(11,508
)
 
89,111

Income tax expense (benefit)
 
11,734

 
11,981

 
9,190

 
1,047

 
4,549

 
(17,171
)
 
21,330

Income from continuing operations
 
18,181

 
22,247

 
12,665

 
1,444

 
7,581

 
5,663

 
67,781

Loss from discontinued operations, net
 

 

 

 

 

 
(1,158
)
 
(1,158
)
Net income
 
$
18,181

 
$
22,247

 
$
12,665

 
$
1,444

 
$
7,581

 
$
4,505

 
$
66,623




64


Item 2.
Management's Discussions and Analysis of Financial Condition and Results of Operations.
This discussion is designed to provide insight into management's assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources, and interest rate sensitivity. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2014 and the interim Unaudited Consolidated Financial Statements and Notes to Unaudited Consolidated Financial Statements hereto and financial information appearing elsewhere in this report. Unless the context requires otherwise, the terms "Company," "we," and "our" refer to Western Alliance Bancorporation and its wholly-owned subsidiaries on a consolidated basis.
Forward-Looking Information
Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements that are related to or are dependent on estimates or assumptions relating to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts.
The forward-looking statements contained in this Form 10-Q reflect our current views about future events and financial performance and involve certain risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement, including those risks discussed under the heading “Risk Factors” in this Form 10-Q. Risks and uncertainties include those set forth in our filings with the SEC and the following factors that could cause actual results to differ materially from those presented: 1) financial market and economic conditions adversely effecting financial performance; 2) dependency on real estate and events that negatively impact real estate; 3) high concentration of commercial real estate, construction and land development, and commercial and industrial loans; 4) actual credit losses may exceed expected losses in the loan portfolio; 5) the geographic concentrations of our assets increase the risks related to local economic conditions; 6) sovereign credit rating downgrades; 7) exposure of financial instruments to certain market risks may cause volatility in earnings; 8) dependence on low-cost deposits; 9) ability to borrow from the FHLB or the FRB; 10) perpetration of internet fraud; 11) information security breaches; 12) reliance on other companies' infrastructure; 13) a change in our creditworthiness; 14) expansion strategies may not be successful; 15) our ability to compete in a highly competitive market; 16) our ability to recruit and retain qualified employees, especially seasoned relationship bankers and senior management; 17) the effects of terrorist attacks or threats of war; 18) ineffective risk management policies and procedures; 19) risks associated with new lines of businesses; 20) risk of operating in a highly regulated industry and our ability to remain in compliance; 21) failure to comply with state and federal banking agency laws and regulations; 22) changes in interest rates and increased rate competition; 23) exposure to environmental liabilities related to the properties to which we acquire title; and 24) risks related to ownership and price of our common stock.
For more information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.
Financial Overview and Highlights
WAL is a bank holding company headquartered in Phoenix, Arizona, incorporated under the laws of the state of Delaware. WAL provides a full spectrum of deposit, lending, treasury management, and online banking products and services through its wholly-owned banking subsidiary, WAB. On June 30, 2015, WAL acquired Bridge Capital Holdings and its wholly-owned subsidiary, Bridge Bank. Upon acquisition, Bridge Capital Holdings merged into WAL and its principal operating subsidiary, Bridge Bank, merged into WAB. Effective as of July 1, 2015, the existing Bridge offices and the previously existing WAB Northern California offices are operating as a combined division under the Bridge trade name.
WAB operates the following full-service banking divisions: ABA in Arizona, BON in Southern Nevada, Bridge in Northern California, FIB in Northern Nevada, and TPB in Southern California. The Company also serves business customers through a national platform of specialized financial services including AAB, Corporate Finance, Equipment Finance, Public Finance, Resort Finance, Technology Finance, Energy Infrastructure Group, and Mortgage Warehouse Lending. In addition, the Company has one non-bank subsidiary, LVSP, which holds and manages certain non-performing loans and OREO.

65


Financial Result Highlights for the Second Quarter of 2015

Net income available to common stockholders of $34.5 million and earnings per share of $0.39

Operating net income of $43.5 million and earnings per share of $0.49, excluding merger charges, debt valuation adjustments, gains on other real estate1, and operating performance of Bridge

Bridge merger, completed on June 30, 2015, increased total assets, gross loans, and deposits by $2.23 billion, $1.45 billion, and $1.74 billion, respectively

Pre-tax, pre-provision operating earnings of $59.9 million, up from $47.4 million for the second quarter 20141

Net operating revenue of $114.4 million, constituting year-over-year growth of 15.1%, or $15.0 million, compared to an increase in operating expenses of 4.9%, or $2.6 million1

Net interest margin of 4.41%, compared to 4.35% in the first quarter 2015, and 4.39% in the second quarter 2014

Efficiency ratio of 44.6%, compared to 46.7% in the first quarter 2015, and 49.3% in the second quarter 20141 

Total loans of $10.36 billion, including $1.45 billion acquired from Bridge and loans held for sale of $39.4 million, with organic loan growth for the quarter of $95.0 million and $515.3 million for the first six months of 2015

Total deposits of $11.41 billion, including $1.74 billion acquired from Bridge, and organic deposit growth flat during the second quarter and $733.7 million for the first six months of 2015

Nonperforming assets (nonaccrual loans and repossessed assets) decreased to 0.88% of total assets, from 1.11% at March 31, 2015, and from 1.23% at June 30, 2014

Net loan recoveries (annualized) to average loans outstanding of 0.13%, compared to 0.06% in the first quarter 2015, and 0.09% in the second quarter 2014

Qualifying debt of $208.4 million, an increase of $168.0 million from March 31, 2015 due to the issuance of $150.0 million in subordinated debt and $11.3 million in junior subordinated debt assumed in the Bridge merger

Common Equity Tier 1 ratio of 9.1% and Total Capital ratio of 12.2%, compared to 9.0% and 11.3%, respectively, at March 31, 2015 under Basel III federal regulatory standards, which became effective on January 1, 2015

Stockholders' equity of $1.51 billion, an increase of $463.4 million from March 31, 2015, including $431.0 million related to the Bridge acquisition, and an increase of $557.0 million from June 30, 2014

Tangible book value per share, net of tax, of $11.25, an increase of 4.9% from $10.72 at March 31, 2015, and an increase of 24.7% from $9.02 at June 30, 2014
The impact to the Company from these items, and others of both a positive and negative nature, are discussed in more detail below as they pertain to the Company’s overall comparative performance for the three and six months ended June 30, 2015. As a bank holding company, management focuses on key ratios in evaluating the Company's financial condition and results of operations.

1 See Non-GAAP Financial Measures section beginning on page 70.

66


Acquisition of Bridge Capital Holdings
On June 30, 2015, the Company completed its acquisition of Bridge Capital Holdings and its wholly-owned subsidiary, Bridge Bank, headquartered in San Jose, California. Under the terms of the acquisition, each outstanding share of Bridge common stock was exchanged for 0.8145 shares of the Company's common stock plus $2.39 in cash. The Company paid $36.5 million in cash and issued 12.5 million common shares for all equity interests in Bridge. The merger was undertaken, in part, because Bridge strengthens the Company's Northern California presence and provides new avenues for growth in technology and international services.
Bridge’s results of operations will be included in the Company’s results beginning July 1, 2015. Acquisition / restructure expenses related to the Bridge acquisition of $7.8 million and $8.0 million for three and six months ended June 30, 2015, respectively, have been included in non-interest expense, of which, approximately $0.6 million are acquisition related costs as defined by ASC 805. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805. Assets purchased and liabilities assumed were recorded at their respective acquisition date fair values. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. As the acquisition was completed at quarter end, the fair values of substantially all of the net assets are considered preliminary.
The Company merged Bridge Bank into WAB effective June 30, 2015, creating combined assets for the resulting bank of $13.47 billion and deposits of $11.41 billion. The recognized amounts of identifiable assets acquired and liabilities assumed are as follows:
 
June 30, 2015
 
(in thousands)
Assets:

Cash and cash equivalents (1)
$
378,966

Investment securities - AFS
61,349

Investments in restricted stock
7,015

Loans
1,447,135

Premises and equipment
1,931

Other assets acquired through foreclosure
1,550

Bank owned life insurance
17,385

Investment in LIHTC
5,648

Intangible assets
14,997

Deferred tax assets, net
14,261

Other assets
19,656

Total assets
$
1,969,893

Liabilities:

Deposits
$
1,742,031

Qualifying debt
11,287

Other liabilities
8,633

Total liabilities
1,761,951

Net assets acquired
$
207,942

Consideration paid
 
Common stock (12,451,240 shares at $33.76 per share)
$
420,354

Fair value of equity awards related to pre-combination vesting
10,676

Cash
36,539

Fair value of total consideration
467,569

Goodwill
$
259,627

(1)
Cash and cash equivalents is net of a $6.2 million payment made by Bridge related to the cash out of vested, unexercised stock options at the date of closing. Cash acquired, less cash consideration paid of $36.5 million, resulted in net cash and cash equivalents increasing by $342.4 million following the acquisition.

67


Loans acquired in the Bridge acquisition consist of loans that are not considered impaired (non-PCI loans) and loans that have shown evidence of credit deterioration since origination (PCI loans) as of the acquisition date. All loans were recorded net of fair value adjustments (interest rate and credit marks), which were determined using discounted contractual cash flow models. The fair value of non-PCI loans acquired totals $1.43 billion, which is net of interest and credit marks of $23.0 million. The fair value of PCI loans totals $12.2 million, which is net of interest and credit marks of $2.1 million. See "Note 4. Loans, Leases and Allowance for Credit Losses" of these Notes to Unaudited Consolidated Financial Statements for additional detail of the acquired loans.
In connection with the Bridge acquisition, the Company acquired intangible assets of $15.0 million, consisting primarily of core deposit intangibles. The core deposit intangible asset balance has been allocated to the Northern California and CBL segments based on their respective core deposit balances at June 30, 2015, and is subject to amortization over its estimated useful life of 10 years.
Goodwill in the amount of $259.6 million was recognized as a result of the acquisition. Goodwill has been allocated to the newly formed Northern California and CBL segments based on their proportionate loan and deposit balances as of June 30, 2015.
Qualifying debt assumed from Bridge is comprised of junior subordinated debt with a contractual balance of $17.5 million and is recorded net of a $6.2 million fair value mark that will be amortized over the remaining life of the trusts. See "Note 7. Qualifying Debt" of these Notes to Unaudited Consolidated Financial Statements for further detail and discussion of the debt.
In connection with the acquisition, the Company assumed Bridge's SERP, an unfunded noncontributory defined benefit pension plan. The SERP provides retirement benefits to certain Bridge executives based on years of service and final average salary. Pursuant to the terms of the SERP agreements, if the executive officer's service is terminated by Bridge or by the executive officer for "good reason" (as defined in the SERP agreements) within 24 months following a change in control, such as the Bridge acquisition, the executive officer is entitled to full vesting of the normal benefit under the SERP agreement, and such SERP benefits will be made in installment payments commencing on the first business day of January of the year following the executive officer's attainment of age 55 or, if the executive officer is already age 55 as of such termination of employment, on the first business day of January of the year following the executive officer's termination of employment. As of June 30, 2015, a $7.1 million liability included in other liabilities was recorded in the Company's Consolidated Balance Sheet related to the SERP. A discount rate of 5.75% and a 4.00% employee compensation rate increase were used in determining the SERP liability as of June 30, 2015.
Results of Operations and Financial Condition
A summary of our results of operations, financial condition, and select metrics are included in the following tables: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands, except per share amounts)
Net income available to common stockholders
 
$
34,472

 
$
35,186

 
$
74,486

 
$
65,918

Earnings per share applicable to common stockholders - basic
 
0.39

 
0.41

 
0.85

 
0.76

Earnings per share applicable to common stockholders - diluted
 
0.39

 
0.40

 
0.84

 
0.76

Net interest margin
 
4.41
%
 
4.39
%
 
4.38
%
 
4.40
%
Return on average assets
 
1.24

 
1.46

 
1.37

 
1.39

Return on average tangible common equity
 
14.10

 
18.62

 
15.61

 
17.98

 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Total assets
 
$
13,470,104

 
$
10,600,498

Loans, net of deferred loan fees and costs
 
10,360,622

 
8,398,265

Total deposits
 
11,406,728

 
8,931,043


68


Asset Quality
For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution and results of operations. The Company measures asset quality in terms of non-accrual loans as a percentage of gross loans and net charge-offs as a percentage of average loans. Net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans. The following table summarizes asset quality metrics: 
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Non-accrual loans
 
$
59,425

 
$
67,659

Non-performing assets
 
207,236

 
214,661

Non-accrual loans to gross loans
 
0.58
 %
 
0.81
 %
Net recoveries to average loans (1)
 
(0.13
)
 
(0.07
)
(1)
Annualized for the three months ended June 30, 2015. Actual year-to-date for the year ended December 31, 2014.
Asset and Deposit Growth
The Company’s assets and liabilities are comprised primarily of loans and deposits; therefore, the ability to originate new loans and attract new deposits is fundamental to the Company’s growth. Total assets increased to $13.47 billion at June 30, 2015 from $10.60 billion at December 31, 2014. Total loans, including HFS loans, increased by $1.96 billion, or 23.4%, to $10.36 billion as of June 30, 2015, compared to $8.40 billion as of December 31, 2014. This loan growth primarily relates to the $1.45 billion of loans acquired from Bridge. Total deposits increased $2.48 billion, or 27.7%, to $11.41 billion as of June 30, 2015 from $8.93 billion as of December 31, 2014. The deposit growth primarily relates to the $1.74 billion of deposits acquired from Bridge.
RESULTS OF OPERATIONS
The following table sets forth a summary financial overview for the comparable periods:  
 
 
Three Months Ended June 30,
 
Increase
 
Six Months Ended June 30,
 
Increase
 
 
2015
 
2014
 
(Decrease)
 
2015
 
2014
 
(Decrease)
 
 
(in thousands, except per share amounts)
Consolidated Income Statement Data:
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
116,618

 
$
101,973

 
$
14,645

 
$
227,580

 
$
200,674

 
$
26,906

Interest expense
 
7,900

 
8,075

 
(175
)
 
15,754

 
15,999

 
(245
)
Net interest income
 
108,718

 
93,898

 
14,820

 
211,826

 
184,675

 
27,151

Provision for credit losses
 

 
507

 
(507
)
 
700

 
4,007

 
(3,307
)
Net interest income after provision for credit losses
 
108,718

 
93,391

 
15,327

 
211,126

 
180,668

 
30,458

Non-interest income
 
(2,191
)
 
5,599

 
(7,790
)
 
3,742

 
10,154

 
(6,412
)
Non-interest expense
 
61,209

 
52,242

 
8,967

 
115,242

 
101,711

 
13,531

Income from continuing operations before income taxes
 
45,318

 
46,748

 
(1,430
)
 
99,626

 
89,111

 
10,515

Income tax expense
 
10,599

 
10,706

 
(107
)
 
24,717

 
21,330

 
3,387

Income from continuing operations
 
34,719

 
36,042

 
(1,323
)
 
74,909

 
67,781

 
7,128

Loss from discontinued operations, net of tax
 

 
(504
)
 
(504
)
 

 
(1,158
)
 
(1,158
)
Net income
 
$
34,719

 
$
35,538

 
$
(819
)
 
$
74,909

 
$
66,623

 
$
8,286

Net income available to common stockholders
 
$
34,472

 
$
35,186

 
$
(714
)
 
$
74,486

 
$
65,918

 
$
8,568

Earnings per share applicable to common stockholders - basic
 
$
0.39

 
$
0.41

 
$
(0.02
)
 
$
0.85

 
$
0.76

 
$
0.09

Earnings per share applicable to common stockholders - diluted
 
$
0.39

 
$
0.40

 
$
(0.01
)
 
$
0.84

 
$
0.76

 
$
0.08


69


Non-GAAP Financial Measures
The following discussion and analysis contains financial information determined by methods other than those prescribed by GAAP. The Company's management uses these non-GAAP financial measures in their analysis of the Company's performance. These measurements typically adjust GAAP performance measures to exclude the effects of unrealized gains or losses on assets and liabilities measured at fair value as well as other items to adjust income available to common stockholders for certain significant activities or transactions that, in management's opinion, do not reflect recurring period-to-period comparisons of the Company's performance. Management believes presentation of these non-GAAP financial measures provides useful supplemental information that is essential to a complete understanding of the operating results of the Company's core businesses. Since the presentation of these non-GAAP performance measures and their impact differ between companies, these non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Pre-Tax, Pre-Provision Operating Earnings
Pre-tax, pre-provision operating earnings adjusts the level of earnings to exclude the impact of income taxes, provision for credit losses, and non-recurring or other items not considered part of the Company's core operations. Management believes that eliminating the effects of these items makes it easier to analyze underlying performance trends and enables investors to assess the Company's earnings power and ability to generate capital to cover credit losses.
The following table shows the components of pre-tax, pre-provision operating earnings for the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Total non-interest (loss) income
$
(2,191
)
 
$
5,599

 
$
3,742

 
$
10,154

Less:
 
 
 
 
 
 
 
Gain (loss) on sales of investment securities, net
55

 
(163
)
 
644

 
203

Unrealized (losses) gains on assets and liabilities measured at fair value, net
(7,885
)
 
235

 
(8,194
)
 
(1,041
)
Loss on extinguishment of debt
(81
)
 

 
(81
)
 

Total operating non-interest income
5,720

 
5,527

 
11,373

 
10,992

Plus: net interest income
108,718

 
93,898

 
211,826

 
184,675

Net operating revenue
$
114,438

 
$
99,425

 
$
223,199

 
$
195,667

Total non-interest expense
$
61,209

 
$
52,242

 
$
115,242

 
$
101,711

Less:
 
 
 
 
 
 
 
Net (gain) loss on sales / valuations of repossessed and other assets
(1,218
)
 
184

 
(1,569
)
 
(2,377
)
Acquisition / restructure expense
7,842

 
26

 
8,001

 
183

Total operating non-interest expense
$
54,585

 
$
52,032

 
$
108,810

 
$
103,905

Pre-tax, pre-provision operating earnings
$
59,853

 
$
47,393

 
$
114,389

 
$
91,762


70


Tangible Common Equity
The following table presents financial measures related to tangible common equity. Tangible common equity represents total stockholders' equity less identifiable intangible assets, goodwill, and preferred stock. Management believes that tangible common equity financial measures are useful in evaluating the Company's capital strength, financial condition, and ability to manage potential losses. In addition, management believes that these measures improve comparability to other institutions that have not engaged in acquisitions that resulted in recorded goodwill and other intangible assets.
 
June 30, 2015
 
December 31, 2014
 
(dollars and shares in thousands)
Total stockholders' equity
$
1,514,744

 
$
1,000,928

Less: goodwill and intangible assets
299,975

 
25,913

Total tangible stockholders' equity
1,214,769

 
975,015

Less: preferred stock
70,500

 
70,500

Total tangible common equity
1,144,269

 
904,515

Plus: deferred tax - attributed to intangible assets
6,515

 
903

Total tangible common equity, net of tax
$
1,150,784

 
$
905,418

 
 
 
 
Total assets
$
13,470,104

 
$
10,600,498

Less: goodwill and intangible assets, net
299,975

 
25,913

Tangible assets
13,170,129

 
10,574,585

Plus: deferred tax - attributed to intangible assets
6,515

 
903

Total tangible assets, net of tax
$
13,176,644

 
$
10,575,488

 
 
 
 
Tangible equity ratio
9.2
%
 
9.2
%
Tangible common equity ratio
8.7

 
8.6

Common shares outstanding
102,291

 
88,691

Tangible book value per share, net of tax
$
11.25

 
$
10.21

Efficiency Ratio
The following table shows the components used in the calculation of the efficiency ratio, which management uses as a metric for assessing cost efficiency:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(dollars in thousands)
Total operating non-interest expense
$
54,585

 
$
52,032

 
$
108,810

 
$
103,905

 
 
 
 
 
 
 
 
Divided by:
 
 
 
 
 
 
 
Total net interest income
$
108,718

 
$
93,898

 
$
211,826

 
$
184,675

Plus:
 
 
 
 
 
 
 
Tax equivalent interest adjustment
7,878

 
6,029

 
15,267

 
11,734

Operating non-interest income
5,720

 
5,527

 
11,373

 
10,992

Net operating revenue - TEB
122,316

 
105,454

 
238,466

 
207,401

 
 
 
 
 
 
 
 
Efficiency ratio - TEB
44.6
%
 
49.3
%
 
45.6
%
 
50.1
%

71


Adjusted Allowance for Credit Losses
The adjusted allowance for credit losses to gross loans ratio includes an adjustment for the remaining credit marks on acquired performing and purchased credit impaired loans. Under GAAP, the allowance for credit losses on acquired loans is not carried over in an acquisition as acquired loans are recorded at fair value, net of related interest rate and credit marks, which discounts the loans based on expected future cash flows. The credit marks on acquired loans represent the allowance for credit losses carried over to the Company. Therefore, by adding back the remaining credit marks on acquired loans, management believes this is more indicative of the allowance available for inherent losses in the loan portfolio.
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Allowance for credit losses
$
115,056

 
$
110,216

Plus: remaining credit marks
 
 
 
Acquired performing loans
16,405

 
2,335

Purchased credit impaired loans
8,643

 
9,279

Adjusted allowance for credit losses
$
140,104

 
$
121,830

 
 
 
 
Gross loans held for investment and deferred fees, net
$
10,321,221

 
$
8,398,265

Plus: remaining credit marks
 
 
 
Acquired performing loans
16,405

 
2,335

Purchased credit impaired loans
8,643

 
9,279

Adjusted loans, net of deferred fees and costs
$
10,346,269

 
$
8,409,879

 
 
 
 
Allowance for credit losses to gross loans
1.11
%
 
1.31
%
Allowance for credit losses to gross loans, adjusted for acquisition accounting
1.35

 
1.45



72


Regulatory Capital
The following table presents certain financial measures related to regulatory capital under Basel III, which includes common equity Tier 1 and total capital. The FRB and other banking regulators use common equity Tier 1 and total capital as a basis for assessing a bank's capital adequacy; therefore, management believes it is useful to assess financial condition and capital adequacy using this same basis. Specifically, the total capital ratio takes into consideration the risk levels of assets and off-balance sheet financial instruments. In addition, management believes that the classified assets to common equity Tier 1 plus allowance measure is an important regulatory metric for assessing asset quality.
 
Basel III
 
June 30, 2015
 
(dollars in thousands)
Common Equity Tier 1:
 
Common Equity
$
1,444,244

Less:
 
Accumulated other comprehensive income
15,348

Non-qualifying goodwill and intangibles
289,217

Disallowed deferred tax asset
3,093

Unrealized gain on trust preferred securities
5,965

Common equity Tier 1 (regulatory)
1,130,621

Plus:
 
Trust preferred securities
81,500

Preferred stock
70,500

Less:
 
Disallowed deferred tax asset
4,640

Unrealized gain on trust preferred securities
8,948

Tier 1 capital
$
1,269,033

Divided by:
 
Risk-weighted assets (regulatory)
$
12,435,603

Common equity Tier 1 ratio
9.1
%
 
 
Total Capital:
 
Tier 1 capital (regulatory)
$
1,269,033

Plus:
 
Subordinated debt
136,778

Qualifying allowance for credit losses
115,056

Other
2,124

Less: Tier 2 qualifying capital deductions

Tier 2 capital
253,958

 
 
Total capital
$
1,522,991

Total capital ratio
12.2
%
 
 
Classified assets to common equity Tier 1 plus allowance for credit losses:
 
Classified assets
$
230,959

Divided by:
 
Common equity Tier 1 (regulatory)
1,130,621

Plus: Allowance for credit losses
115,056

Total common equity Tier 1 plus allowance for credit losses
$
1,245,677

Classified assets to common equity Tier 1 plus allowance
19
%




73


Net Interest Margin
The net interest margin is reported on a TEB. A tax equivalent adjustment is added to reflect interest earned on certain municipal securities and loans that are exempt from federal income tax. The following tables set forth the average balances and interest income on a fully TEB and interest expense for the periods indicated:
 
 
Three Months Ended June 30,
 
 
2015
 
2014
 
 
Average
Balance
 
Interest
 
Average
Yield / Cost
 
Average
Balance
 
Interest
 
Average
Yield / Cost
 
 
(dollars in thousands)
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1), (2), (3)
 
$
8,837,746

 
$
105,468

 
5.06
%
 
$
7,178,255

 
$
90,583

 
5.29
%
Securities - taxable (1)
 
1,043,257

 
5,793

 
2.22

 
1,198,620

 
7,025

 
2.34

Securities - tax-exempt
 
380,303

 
3,483

 
5.36

 
431,330

 
3,869

 
7.66

Total Securities
 
1,423,560

 
9,276

 
3.06

 
1,629,950

 
10,894

 
3.08

Other
 
309,437

 
1,874

 
2.42

 
292,386

 
496

 
0.68

Total interest earnings assets
 
10,570,743

 
116,618

 
4.71

 
9,100,591

 
101,973

 
4.75

Non-interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
118,581

 
 
 
 
 
138,660

 
 
 
 
Allowance for credit losses
 
(114,892
)
 
 
 
 
 
(105,024
)
 
 
 
 
Bank owned life insurance
 
143,214

 
 
 
 
 
141,844

 
 
 
 
Other assets
 
459,075

 
 
 
 
 
462,051

 
 
 
 
Total assets
 
$
11,176,721

 
 
 
 
 
$
9,738,122

 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing transaction accounts
 
$
971,609

 
$
414

 
0.17
%
 
$
791,501

 
$
385

 
0.19
%
Savings and money market
 
4,213,013

 
2,975

 
0.28

 
3,583,500

 
2,691

 
0.30

Time certificates of deposits
 
1,834,352

 
1,973

 
0.43

 
1,700,412

 
1,854

 
0.44

Total interest-bearing deposits
 
7,018,974

 
5,362

 
0.31

 
6,075,413

 
4,930

 
0.32

Short-term borrowings
 
177,799

 
1,774

 
3.99

 
236,197

 
216

 
0.37

Long-term debt
 
110,957

 
313

 
1.13

 
280,356

 
2,486

 
3.55

Junior subordinated debt
 
40,831

 
451

 
4.42

 
42,834

 
443

 
4.14

Total interest-bearing liabilities
 
7,348,561

 
7,900

 
0.43

 
6,634,800

 
8,075

 
0.49

Non-interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing demand deposits
 
2,593,543

 
 
 
 
 
2,045,534

 
 
 
 
Other liabilities
 
148,371

 
 
 
 
 
126,732

 
 
 
 
Stockholders’ equity
 
1,086,246

 
 
 
 
 
931,056

 
 
 
 
Total liabilities and stockholders' equity
 
$
11,176,721

 
 
 
 
 
$
9,738,122

 
 
 
 
Net interest income and margin (4)
 
 
 
$
108,718

 
4.41
%
 
 
 
$
93,898

 
4.39
%
Net interest spread (5)
 
 
 
 
 
4.28
%
 
 
 
 
 
4.26
%
(1)
Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $7.9 million and $6.0 million for the three months ended June 30, 2015 and 2014, respectively.
(2)
Net loan fees of $6.1 million and $4.8 million are included in the yield computation for the three months ended June 30, 2015 and 2014, respectively.
(3)
Includes non-accrual loans.
(4)
Net interest margin is computed by dividing net interest income by total average earning assets.
(5)
Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest bearing liabilities.


74


 
 
Six Months Ended June 30,
 
 
2015
 
2014
 
 
Average
Balance
 
Interest
 
Average
Yield / Cost
 
Average
Balance
 
Interest
 
Average
Yield / Cost
 
 
(dollars in thousands)
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1), (2), (3)
 
$
8,693,105

 
$
205,859

 
5.01
%
 
$
7,036,539

 
$
205,859

 
5.28
%
Securities - taxable (1)
 
1,069,238

 
12,085

 
2.87

 
1,194,498

 
14,162

 
2.93

Securities - tax-exempt
 
382,074

 
6,979

 
5.35

 
446,252

 
8,057

 
5.10

Total Securities
 
1,451,312

 
19,064

 
3.07

 
1,640,750

 
22,219

 
3.11

Other
 
223,283

 
2,657

 
2.38

 
251,551

 
2,657

 
0.85

Total interest earnings assets
 
10,367,700

 
227,580

 
4.68

 
8,928,840

 
200,674

 
4.76

Non-interest earning assets
 

 
 
 
 
 

 
 
 
 
Cash and due from banks
 
118,337

 
 
 
 
 
138,091

 
 
 
 
Allowance for credit losses
 
(112,955
)
 
 
 
 
 
(103,099
)
 
 
 
 
Bank owned life insurance
 
142,792

 
 
 
 
 
141,372

 
 
 
 
Other assets
 
454,616

 
 
 
 
 
447,654

 
 
 
 
Total assets
 
$
10,970,490

 
 
 
 
 
$
9,552,858

 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing transaction accounts
 
$
945,943

 
$
808

 
0.17
%
 
$
778,341

 
$
768

 
0.20
%
Savings and money market
 
4,062,052

 
5,751

 
0.28

 
3,518,279

 
5,254

 
0.30

Time certificates of deposits
 
1,884,643

 
3,949

 
0.42

 
1,660,212

 
3,573

 
0.43

Total interest-bearing deposits
 
6,892,638

 
10,508

 
0.30

 
5,956,832

 
9,595

 
0.32

Short-term borrowings
 
177,647

 
3,525

 
3.97

 
201,799

 
345

 
0.34

Long-term debt
 
156,222

 
829

 
1.06

 
291,031

 
5,195

 
3.57

Junior subordinated debt
 
40,637

 
892

 
4.39

 
42,355

 
864

 
4.08

Total interest-bearing liabilities
 
7,267,144

 
15,754

 
0.43

 
6,492,017

 
15,999

 
0.49

Non-interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing demand deposits
 
2,482,314

 
 
 
 
 
2,049,806

 
 
 
 
Other liabilities
 
162,658

 
 
 
 
 
102,251

 
 
 
 
Stockholders’ equity
 
1,058,374

 
 
 
 
 
908,784

 
 
 
 
Total liabilities and stockholders' equity
 
$
10,970,490

 
 
 
 
 
$
9,552,858

 
 
 
 
Net interest income and margin (4)
 
 
 
$
211,826

 
4.38
%
 
 
 
$
184,675

 
4.40
%
Net interest spread (5)
 
 
 
 
 
4.25
%
 
 
 
 
 
4.27
%
(1)
Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $15.3 million and $11.7 million for the six months ended June 30, 2015 and 2014, respectively.
(2)
Net loan fees of $11.2 million and $8.9 million are included in the yield computation for the six months ended June 30, 2015 and 2014, respectively.
(3)
Includes non-accrual loans.
(4)
Net interest margin is computed by dividing net interest income by total average earning assets.
(5)
Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest bearing liabilities.

 

75


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015 versus 2014
 
2015 versus 2014
 
 
Increase (Decrease) Due to Changes in (1)
 
Increase (Decrease) Due to Changes in (1)
 
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
 
 
(in thousands)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
19,804

 
$
(4,919
)
 
$
14,885

 
$
39,229

 
$
(10,757
)
 
$
28,472

Interest on investment securities
 
(1,345
)
 
(273
)
 
(1,618
)
 
(2,488
)
 
(667
)
 
(3,155
)
Federal funds sold and other
 
103

 
1,275

 
1,378

 
(336
)
 
1,925

 
1,589

Total interest income
 
18,562

 
(3,917
)
 
14,645

 
36,405

 
(9,499
)
 
26,906

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing transaction accounts
 
77

 
(48
)
 
29

 
143

 
(103
)
 
40

Savings and money market
 
445

 
(161
)
 
284

 
770

 
(273
)
 
497

Time deposits
 
144

 
(25
)
 
119

 
470

 
(94
)
 
376

Short-term borrowings
 
(583
)
 
2,141

 
1,558

 
(480
)
 
3,660

 
3,180

Long-term debt
 
(478
)
 
(1,695
)
 
(2,173
)
 
(715
)
 
(3,651
)
 
(4,366
)
Junior subordinated debt
 
(22
)
 
30

 
8

 
(38
)
 
66

 
28

Total interest expense
 
(417
)
 
242

 
(175
)
 
150

 
(395
)
 
(245
)
 
 
 
 
 
 
 
 

 

 

Net increase (decrease)
 
$
18,979

 
$
(4,159
)
 
$
14,820

 
$
36,255

 
$
(9,104
)
 
$
27,151

 
(1)
Changes due to both volume and rate have been allocated to volume changes.
Comparison of interest income, interest expense and net interest margin
The Company’s primary source of revenue is interest income. Interest income for the three months ended June 30, 2015 was $116.6 million, an increase of 14.4%, compared to $102.0 million for the three months ended June 30, 2014. This increase was primarily the result of a $1.66 billion increase in the average loan balance which drove a $14.9 million increase in loan interest income for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. Additionally, interest income for the three months ended June 30, 2015 includes $3.2 million of accretion income from PCI loans, compared to $4.9 million for the same period 2014. Interest income on investment securities decreased $1.6 million and other interest income increased by $1.4 million for the comparable period. Despite the increase in interest income, average yield on interest earning assets dropped 4 basis points for the three months ended June 30, 2015 compared to the same period in 2014, which was primarily the result of decreased yields on loans of 23 basis points.
For the six months ended June 30, 2015, interest income was $227.6 million, an increase of 13.4%, compared to $200.7 million for the six months ended June 30, 2014. This increase was primarily the result of a $1.66 billion increase in the average loan balance which drove a $28.5 million increase in loan interest income for the six months ended June 30, 2015. Additionally, interest income for the six months ended June 30, 2015 includes $5.2 million of accretion income from PCI loans, compared to $8.3 million for the same period 2014. Interest income on investment securities decreased $3.2 million and other interest income increased by $1.6 million for the comparable period. Despite the increase in interest income, average yield on interest earning assets dropped 8 basis points for the six months ended June 30, 2015 compared to the same period in 2014, which was primarily the result of decreased yields on loans of 27 basis points.
Interest expense for the three months ended June 30, 2015 was $7.9 million, compared to $8.1 million for the three months ended June 30, 2014. Interest expense on deposits increased $0.4 million for the same period as average interest bearing deposits for the quarter increased $943.6 million, offset by a 1 basis point decrease in average cost of interest bearing deposits. Interest expense on borrowings decreased by $0.6 million as a result of a $227.8 million decrease in average borrowings for the quarter.
For the six months ended June 30, 2015, interest expense was $15.8 million, compared to $16.0 million for the six months ended June 30, 2014. Interest expense on deposits increased $0.9 million for the same period as average interest bearing deposits increased $935.8 million, offset by a 2 basis point decrease in average cost of interest bearing deposits. Interest expense on borrowings decreased by $1.2 million as a result of a $159.0 million decrease in average borrowings for the year.


76


Net interest income was $108.7 million for the three months ended June 30, 2015, compared to $93.9 million for the three months ended June 30, 2014, an increase of $14.8 million, or 15.8%. The increase in net interest income reflects a $1.47 billion increase in average interest earning assets, offset by a $713.8 million increase in average interest-bearing liabilities. The increase in net interest margin of 2 basis points was mostly due to a 6 basis point decrease in our average cost of interest-bearing liabilities during the three months ended June 30, 2015 compared to the same period in 2014.
For the six months ended June 30, 2015, net interest income was $211.8 million, compared to $184.7 million for the six months ended June 30, 2014. The increase in net interest income reflects a $1.44 billion increase in average interest earning assets, offset by a $775.1 million increase in average interest-bearing liabilities. The decrease in net interest margin of 2 basis points was mostly due to a 27 basis point decrease in our average loan yield during the six months ended June 30, 2015 compared to the same period in 2014.
Provision for Credit Losses
The provision for credit losses in each period is reflected as a reduction in earnings in that period. The provision is equal to the amount required to maintain the allowance for credit losses at a level that is adequate to absorb probable credit losses inherent in the loan portfolio. There was no provision for credit losses for the three months ended June 30, 2015, compared with $0.5 million for the three months ended June 30, 2014. For the six months ended June 30, 2015, the provision for credit losses was $0.7 million, compared to $4.0 million for the six months ended June 30, 2014. The provision decrease was primarily due to an improvement in underlying asset quality. The Company may establish an additional allowance for credit losses for PCI loans through provision for credit losses when impairment is determined as a result of lower than expected cash flows. As of June 30, 2015 and December 31, 2014, the allowance for credit losses on PCI loans was less than $0.1 million and $0.3 million, respectively.
Non-interest Income
The following table presents a summary of non-interest income for the periods presented: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
Increase (Decrease)
 
2015
 
2014
 
Increase (Decrease)
 
(in thousands)
Service charges and fees
$
3,128

 
$
2,758

 
$
370

 
$
6,017

 
$
5,319

 
$
698

Income from bank owned life insurance
772

 
959

 
(187
)
 
1,749

 
1,908

 
(159
)
Card income
899

 
860

 
39

 
1,712

 
1,645

 
67

Gain (loss) on sales of investment securities, net
55

 
(163
)
 
218

 
644

 
203

 
441

Loss on extinguishment of debt
(81
)
 

 
(81
)
 
(81
)
 

 
(81
)
Unrealized (losses) gains on assets and liabilities measured at fair value, net
(7,885
)
 
235

 
(8,120
)
 
(8,194
)
 
(1,041
)
 
(7,153
)
Other income
921

 
950

 
(29
)
 
1,895

 
2,120

 
(225
)
Total non-interest (loss) income
$
(2,191
)
 
$
5,599

 
$
(7,790
)
 
$
3,742

 
$
10,154

 
$
(6,412
)
Total non-interest income for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 decreased by $7.8 million. The decrease in non-interest income is largely attributable to the $8.1 million increase in net unrealized losses on assets and liabilities measured at fair value, which primarily relates to the fair value adjustment of junior subordinated debt due to updated valuation inputs as discussed in "Note 7. Qualifying Debt" to the Consolidated Financial Statements. The loss resulting from the fair value adjustment of junior subordinated debt was $7.7 million for the three months ended June 30, 2015, compared to a gain of $0.1 million for the three months ended June 30, 2014.
Total non-interest income for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 decreased by $6.4 million, or 63.1%. The decrease in non-interest income is largely attributable to the $7.2 million increase in net unrealized losses on assets and liabilities measured at fair value, which primarily relates to the fair value adjustment of junior subordinated debt. The loss resulting from the fair value adjustment of junior subordinated debt was $8.0 million for the six months ended June 30, 2015, compared to a loss of $0.9 million for the six months ended June 30, 2014. This decrease was slightly offset by the $0.7 million increase in service charges and fees.


77


Non-interest Expense
The following table presents a summary of non-interest expense for the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
Increase (Decrease)
 
2015
 
2014
 
Increase (Decrease)
 
(in thousands)
Salaries and employee benefits
$
32,406

 
$
31,751

 
$
655

 
$
64,947

 
$
61,306

 
$
3,641

Occupancy
4,949

 
4,293

 
656

 
9,762

 
8,979

 
783

Legal, professional, and directors' fees
4,611

 
4,192

 
419

 
8,606

 
7,831

 
775

Data processing
2,683

 
2,580

 
103

 
5,809

 
5,309

 
500

Insurance
2,274

 
2,087

 
187

 
4,364

 
4,480

 
(116
)
Loan and repossessed asset expenses
1,284

 
889

 
395

 
2,374

 
2,036

 
338

Card expense
613

 
530

 
83

 
1,087

 
1,130

 
(43
)
Marketing
463

 
506

 
(43
)
 
840

 
1,065

 
(225
)
Intangible amortization
281

 
302

 
(21
)
 
562

 
899

 
(337
)
Net (gain) loss on sales / valuations of repossessed and other assets
(1,218
)
 
184

 
1,402

 
(1,569
)
 
(2,377
)
 
(808
)
Acquisition / restructure expense
7,842

 
26

 
7,816

 
8,001

 
183

 
7,818

Other expense
5,021

 
4,902

 
119

 
10,459

 
10,870

 
(411
)
Total non-interest expense
$
61,209

 
$
52,242

 
$
8,967

 
$
115,242

 
$
101,711

 
$
13,531

Total non-interest expense for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 increased $9.0 million, or 17.2%. This increase primarily relates to an increase in acquisition / restructure expense, salaries and employee benefits, and occupancy, which was slightly offset by the increase in the net gain on sales / valuation of repossessed and other assets. The increase in the acquisition / restructure expense relates to the acquisition of Bridge. The increase in salaries and employee benefits is the result of growth in staffing to support continued asset growth. Further, the $1.4 million increase in the net gain on sales / valuations of repossessed and other assets for the same period is due to greater non-recurring gains from the performance of OREO and other assets owned by the Company period over period.
Total non-interest expense for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 increased $13.5 million, or 13.3%. This increase primarily relates to an increase in acquisition / restructure expense and salaries and employee benefits. The increase in the acquisition / restructure expense relates to our acquisition of Bridge. The increase in salaries and employee benefits is the result of growth in staffing to support continued asset growth as well as an increase in performance awards.
Income Taxes
The effective tax rate for the six months ended June 30, 2015 was 24.81%, compared to 23.94% for the six months ended June 30, 2014. The increase in the effective tax rate is primarily due to proportionately lower tax-exempt income, increased state taxes, and a decrease in the amount of valuation allowance that will be released during 2015.
Business Segment Results
The operating segments are as follows: Arizona, Nevada, Southern California, Northern California, CBL, and Corporate & Other.
Arizona reported a gross loan balance of $2.43 billion at June 30, 2015, compared to $2.34 billion at December 31, 2014, and $2.13 billion at June 30, 2014. In addition, total deposits at June 30, 2015 were $2.37 billion, compared to $2.18 billion at December 31, 2014, and $2.12 billion at June 30, 2014. Pre-tax income was $17.8 million and $17.3 million for the three months ended June 30, 2015 and 2014, respectively, and $33.6 million and $29.9 million for the six months ended June 30, 2015 and 2014, respectively.
Nevada reported a gross loan balance of $1.76 billion at June 30, 2015, compared to $1.67 billion at December 31, 2014 and $1.68 billion at June 30, 2014. In addition, total deposits at June 30, 2015 were $3.32 billion, compared to $3.23 billion at December 31, 2014, and $3.19 billion at June 30, 2014. Pre-tax income was $20.5 million and $17.7 million for the three months ended June 30, 2015 and 2014, respectively, and $37.2 million and $34.2 million for the six months ended June 30, 2015 and 2014, respectively.

78


Southern California reported a gross loan balance of $1.66 billion at June 30, 2015, compared to $1.55 billion at December 31, 2014, and $1.52 billion at June 30, 2014. In addition, total deposits at June 30, 2015 were $1.95 billion, compared to $1.74 billion at December 31, 2014, and $1.67 billion at June 30, 2014. Pre-tax income was $12.5 million and $12.6 million for the three months ended June 30, 2015 and 2014, respectively, and $24.4 million and $21.9 million for the six months ended June 30, 2015 and 2014, respectively.
Northern California reported a gross loan balance of $1.08 billion at June 30, 2015, compared to $198.6 million at December 31, 2014, and $179.5 million at June 30, 2014. Total deposits at June 30, 2015 were $1.55 billion, compared to $584.0 million at December 31, 2014, and $394.9 million at June 30, 2014. Pre-tax income was $2.8 million and $1.4 million for the three months ended June 30, 2015 and 2014, respectively, and $5.3 million and $2.5 million for the six months ended June 30, 2015 and 2014, respectively.
CBL reported a gross loan balance of $3.39 billion at June 30, 2015, compared to $2.59 billion at December 31, 2014, and $1.95 billion at June 30, 2014. In addition, total deposits at June 30, 2015 were $1.95 billion, compared to $946.6 million at December 31, 2014, and $886.3 million at June 30, 2014. Pre-tax income was $14.0 million and $6.8 million for the three months ended June 30, 2015 and 2014, respectively, and $27.3 million and $12.1 million for the six months ended June 30, 2015 and 2014, respectively.
BALANCE SHEET ANALYSIS
Total assets increased $2.87 billion, or 27.1%, to $13.47 billion at June 30, 2015, compared to $10.60 billion at December 31, 2014. The increase in assets primarily relates to the assets acquired from Bridge. Loans increased $1.96 billion, or 23.4%, to $10.36 billion at June 30, 2015, including $1.45 billion acquired from Bridge, and $515 million organic growth.
Total liabilities increased $2.36 billion, or 24.5%, to $11.96 billion at June 30, 2015, compared to $9.60 billion at December 31, 2014. The increase in liabilities is due to the increase in total deposits of $2.48 billion, or 27.7%, to $11.41 billion, including $1.74 billion acquired from Bridge, and $734 million of organic growth.
Total stockholders’ equity increased by $513.8 million, or 51.3%, to $1.51 billion at June 30, 2015, compared to $1.00 billion at December 31, 2014. The merger of Bridge increased stockholders equity by $431 million primarily due to the issuance of 12.5 million shares of the Company's stock.
Investment securities
Investment securities are classified at the time of acquisition as either HTM, AFS, or trading based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. HTM securities are carried at amortized cost, adjusted for amortization of premiums or accretion of discounts. AFS securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Investment securities classified as AFS are carried at fair value. Unrealized gains or losses on AFS securities are recorded as part of AOCI in stockholders’ equity. Amortization of premiums or accretion of discounts on MBS is periodically adjusted for estimated prepayments. Investment securities measured at fair value are reported at fair value, with unrealized gains and losses included in current period earnings.

79


The investment securities portfolio of the Company is utilized as collateral for borrowings, required collateral for public deposits, and customer repurchase agreements, and to manage liquidity, capital, and interest rate risk. The following table summarizes the carrying value of the investment securities portfolio for each of the periods below: 
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Collateralized debt obligations
 
$
10,804

 
$
11,445

Commercial MBS issued by GSEs
 
13,209

 
2,147

Corporate debt securities
 
13,665

 
52,489

CRA investments
 
32,537

 
24,332

Municipal obligations
 
292,413

 
299,037

Mutual funds
 

 
37,702

Preferred stock
 
83,051

 
82,612

Private label commercial MBS
 
4,979

 
5,149

Private label residential MBS
 
102,071

 
70,243

Residential MBS issued by GSEs
 
873,058

 
893,047

Trust preferred securities
 
25,648

 
25,546

U.S. government sponsored agency securities
 
24,609

 
18,346

U.S. treasury securities
 
3,891

 

Total investment securities
 
$
1,479,935

 
$
1,522,095

Gross unrealized losses at June 30, 2015 are primarily caused by interest rate fluctuations, credit spread widening, and reduced liquidity in applicable markets. The Company has reviewed securities on which there is an unrealized loss in accordance with its accounting policy for OTTI securities described in "Note 3. Investment Securities" to the Unaudited Consolidated Financial Statements contained herein. There were no impairment charges recorded during the three and six months ended June 30, 2015 and 2014.
The Company does not consider any securities to be other-than-temporarily impaired as of June 30, 2015 and December 31, 2014. However, the Company cannot guarantee that additional OTTI will not occur in future periods. At June 30, 2015, the Company had the intent and ability to retain its investments for a period of time sufficient to allow for any anticipated recovery in fair value.
Loans
The table below summarizes the distribution of the Company’s held for investment loan portfolio at the end of each of the periods indicated: 
 
 
June 30, 2015
 
December 31, 2014
 
 
(in thousands)
Loans, held for investment
 
 
 
 
Commercial and industrial
 
$
4,576,303

 
$
3,326,708

Commercial real estate - non-owner occupied
 
2,195,018

 
2,052,566

Commercial real estate - owner occupied
 
2,019,280

 
1,732,888

Construction and land development
 
1,002,698

 
748,053

Residential real estate
 
320,591

 
299,402

Commercial leases
 
183,378

 
205,639

Consumer
 
23,953

 
33,009

Loans, net of deferred loan fees and costs
 
10,321,221

 
8,398,265

Allowance for credit losses
 
(115,056
)
 
(110,216
)
Total loans HFI
 
$
10,206,165

 
$
8,288,049

Net deferred loan fees and costs as of June 30, 2015 and December 31, 2014 total $14.0 million and $12.5 million, respectively. Net unamortized discounts on loans total $8.1 million and $7.5 million as of June 30, 2015 and December 31, 2014, respectively.

80


As of June 30, 2015, the Company also has $39.4 million of HFS loans.
Concentrations of Lending Activities
The Company monitors concentrations within five broad categories: geography, industry, product, call report classifications, and collateral. The Company’s loan portfolio includes significant credit exposure to the CRE market. At June 30, 2015 and December 31, 2014, CRE related loans accounted for approximately 51% and 54% of total loans, respectively. Substantially all of these loans are secured by first liens with an initial loan to value ratio of generally not more than 75%. Approximately 48% and 46% of these CRE loans, excluding construction and land loans, were owner-occupied at June 30, 2015 and December 31, 2014, respectively.
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 non-accrual. 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 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 any subsequent changes are charged against the allowance for credit losses.
In addition to our own internal loan review process, regulators may from time to time direct the Company to modify loan grades, loan impairment calculations, or loan impairment methodology.
Total non-performing loans decreased by $9.6 million, or 6.1%, at June 30, 2015 to $147.9 million from $157.5 million at December 31, 2014
 
 
June 30, 2015
 
December 31, 2014
 
 
(dollars in thousands)
Total non-accrual loans (1)
 
$
59,425

 
$
67,659

Loans past due 90 days or more on accrual status
 
8,284

 
5,132

Troubled debt restructured loans (2)
 
80,192

 
84,720

Total nonperforming loans
 
147,901

 
157,511

Other impaired loans
 
3,248

 
9,239

Total impaired loans
 
$
151,149

 
$
166,750

Other assets acquired through foreclosure, net
 
$
59,335

 
$
57,150

Non-accrual loans to gross loans held for investment
 
0.58
%
 
0.81
%
Loans past due 90 days or more on accrual status to total loans
 
0.08

 
0.06

(1)
Includes non-accrual TDR loans of $42.6 million and $53.6 million as of June 30, 2015 and December 31, 2014, respectively.
(2)
Includes accruing TDR loans only.
Interest income received on non-accrual loans was $0.5 million and $1.2 million for the three and six months ended June 30, 2015, respectively, compared to $0.6 million and $1.2 million for the three and six months ended June 30, 2014, respectively. The interest income that would have been recorded under the original terms of non-accrual loans was $0.7 million and $1.4 million for the three and six months ended June 30, 2015, respectively, compared to $0.8 million and $1.8 million for the three and six months ended June 30, 2014, respectively.

81


The composition of non-accrual loans by loan type and by segment were as follows: 
 
 
At June 30, 2015
 
December 31, 2014
 
 
Non-accrual
Balance
 
Percent
 
Percent of
Total HFI Loans
 
Non-accrual
Balance
 
Percent
 
Percent of
Total HFI Loans
 
 
(dollars in thousands)
Commercial and industrial
 
$
6,980

 
11.75
%
 
0.07
%
 
$
3,490

 
5.16
%
 
0.04
%
Commercial real estate
 
39,615

 
66.67

 
0.38

 
52,457

 
77.54

 
0.63

Construction and land development
 
2,516

 
4.23

 
0.03

 
5,326

 
7.87

 
0.06

Residential real estate
 
10,117

 
17.02

 
0.10

 
6,173

 
9.12

 
0.07

Consumer
 
197

 
0.33

 

 
213

 
0.31

 
0.01

Total non-accrual loans
 
$
59,425

 
100.00
%
 
0.58
%
 
$
67,659

 
100.00
%
 
0.81
%
 
 
June 30, 2015
 
December 31, 2014
 
 
Nonaccrual Loans
 
Percent of Segment's Total Loans
 
Nonaccrual Loans
 
Percent of Segment's Total Loans
Arizona
 
17,641

 
0.73
%
 
24,179

 
1.03
%
Nevada
 
15,354

 
0.87
%
 
26,678

 
1.60
%
Southern California
 
7,141

 
0.26
%
 
388

 
0.02
%
Northern California
 

 
%
 

 
%
Central Business Lines
 
3,797

 
0.11
%
 
188

 
0.01
%
Corporate & Other
 
15,492

 
38.22
%
 
16,225

 
35.30
%
Total non-accrual loans
 
59,425

 
 
 
67,658

 
 
Troubled Debt Restructured Loans
A TDR loan is a loan that is granted a concession, for reasons related to a borrower’s financial difficulties, that the lender 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 accrued interest, extensions, deferrals, renewals, and rewrites. A TDR loan is also considered impaired. Generally, a loan that is modified at an effective market rate of interest is no longer disclosed 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.
As of June 30, 2015 and December 31, 2014, the aggregate amount of loans classified as impaired was $151.1 million and $166.8 million, respectively, a net decrease of 9.4%. The total specific allowance for credit losses related to these loans was $7.2 million and $10.8 million for June 30, 2015 and December 31, 2014, respectively. The Company had $80.2 million and $84.7 million in loans classified as accruing restructured loan for June 30, 2015 and December 31, 2014, respectively.
Impaired loans by segment at June 30, 2015 were as follows:
 
 
June 30, 2015
 
December 31, 2014
Arizona
 
32,884

 
43,174

Nevada
 
66,671

 
78,072

Southern California
 
9,363

 
5,203

Northern California
 

 

Central Business Lines
 
3,797

 
188

Corporate & Other
 
38,434

 
40,113

Total impaired loans
 
151,149

 
166,750


82


The following tables present a breakdown of total impaired loans and the related specific reserves for the periods indicated: 
 
 
June 30, 2015
 
 
Impaired
Balance
 
Percent
 
Percent of
Total HFI Loans
 
Reserve
Balance
 
Percent
 
Percent of
Total Allowance
 
 
(dollars in thousands)
Commercial and industrial
 
$
15,736

 
10.41
%
 
0.15
%
 
$
1,686

 
23.56
%
 
1.47
%
Commercial real estate
 
93,361

 
61.77

 
0.90

 
3,334

 
46.58

 
2.90

Construction and land development
 
19,117

 
12.65

 
0.19

 
1,416

 
19.78

 
1.23

Residential real estate
 
22,611

 
14.96

 
0.22

 
717

 
10.02

 
0.62

Consumer
 
324

 
0.21

 

 
4

 
0.06

 

Total impaired loans
 
$
151,149

 
100.00
%
 
1.46
%
 
$
7,157

 
100.00
%
 
6.22
%
 
 
 
December 31, 2014
 
 
Impaired
Balance
 
Percent
 
Percent of
Total HFI Loans
 
Reserve
Balance
 
Percent
 
Percent of
Total Allowance
 
 
(dollars in thousands)
Commercial and industrial
 
$
14,122

 
8.47
%
 
0.17
%
 
$
1,965

 
18.25
%
 
1.78
%
Commercial real estate
 
111,217

 
66.70

 
1.32

 
4,619

 
42.91

 
4.19

Construction and land development
 
21,748

 
13.04

 
0.26

 
3,112

 
28.91

 
2.82

Residential real estate
 
19,300

 
11.57

 
0.23

 
1,052

 
9.77

 
0.95

Consumer
 
363

 
0.22

 

 
17

 
0.16

 
0.02

Total impaired loans
 
$
166,750

 
100.00
%
 
1.98
%
 
$
10,765

 
100.00
%
 
9.76
%



83


Allowance for Credit Losses
The following table summarizes the activity in our allowance for credit losses for the period indicated: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(dollars in thousands)
Allowance for credit losses:
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
112,098

 
$
103,899

 
$
110,216

 
$
100,050

Provision charged to operating expense:
 
 
 
 
 
 
 
 
Commercial and industrial
 
2,028

 
3,152

 
5,590

 
3,544

Commercial real estate
 
(903
)
 
(1,422
)
 
(1,958
)
 
978

Construction and land development
 
165

 
(247
)
 
(551
)
 
1,723

Residential real estate
 
(1,233
)
 
(861
)
 
(2,156
)
 
(1,351
)
Consumer
 
(57
)
 
(115
)
 
(225
)
 
(887
)
Total Provision
 

 
507

 
700

 
4,007

Recoveries of loans previously charged-off:
 
 
 
 
 
 
 
 
Commercial and industrial
 
681

 
1,254

 
1,597

 
2,176

Commercial real estate
 
1,738

 
1,248

 
2,121

 
1,808

Construction and land development
 
1,373

 
498

 
1,530

 
709

Residential real estate
 
1,184

 
314

 
1,717

 
867

Consumer
 
24

 
191

 
64

 
361

Total recoveries
 
5,000

 
3,505

 
7,029

 
5,921

Loans charged-off:
 
 
 
 
 
 
 
 
Commercial and industrial
 
(1,771
)
 
(1,038
)
 
(2,164
)
 
(2,516
)
Commercial real estate
 

 
(330
)
 

 
(501
)
Construction and land development
 

 
(78
)
 

 
(78
)
Residential real estate
 
(218
)
 
(523
)
 
(618
)
 
(929
)
Consumer
 
(53
)
 
(5
)
 
(107
)
 
(17
)
Total charged-off
 
(2,042
)
 
(1,974
)
 
(2,889
)
 
(4,041
)
Net recoveries
 
2,958

 
1,531

 
4,140

 
1,880

Balance at end of period
 
$
115,056

 
$
105,937

 
$
115,056

 
$
105,937

Net recoveries to average loans outstanding - annualized
 
0.13
%
 
0.09
%
 
0.19
%
 
0.11
%
Allowance for credit losses to gross loans
 
1.11

 
1.49

 


 


The following table summarizes the allocation of the allowance for credit losses by loan type. However, the allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. 
 
 
June 30, 2015
 
December 31, 2014
 
 
Amount
 
Percent of Total Allowance for Credit Loss
 
Percent of Loans to Total HFI Loans
 
Amount
 
Percent of Total Allowance for Credit Loss
 
Percent of Loans to Total HFI Loans
 
 
(dollars in thousands)
Commercial and industrial
 
$
59,589

 
51.7
%
 
46.2
%
 
$
54,566

 
49.5
%
 
42.1
%
Commercial real estate
 
28,946

 
25.2

 
40.8

 
28,783

 
26.1

 
45.0

Construction and land development
 
19,537

 
17.0

 
9.7

 
18,558

 
16.8

 
8.9

Residential real estate
 
6,399

 
5.6

 
3.1

 
7,456

 
6.8

 
3.6

Consumer
 
585

 
0.5

 
0.2

 
853

 
0.8

 
0.4

        Total
 
$
115,056

 
100.0
%
 
100.0
%
 
$
110,216

 
100.0
%
 
100.0
%
The allowance for credit losses as a percentage of total loans decreased to 1.11% at June 30, 2015 from 1.31% at December 31, 2014. The total balance of the allowance for credit losses has increased due to the increase in the size of the loan portfolio. However, the increase in the allowance is not proportional to the increase in the portfolio as the Company has experienced improved credit quality in its portfolio as reflected in net recoveries achieved during the three and six months ended June 30, 2015 as well as a change in portfolio mix toward higher rated credits.

84


Potential Problem Loans
The Company classifies loans consistent with federal banking regulations using a nine category grading system. These loan grades are described in further detail in "Item 1. Business” of the Company's Annual Report on Form 10-K for the year ended December 31, 2014. The following table presents information regarding potential problem loans, consisting of loans graded Special Mention, Substandard, Doubtful, and Loss, but still performing, and excluding acquired loans: 
 
 
June 30, 2015
 
 
Number of Loans
 
Loan Balance
 
Percent
 
Percent of Total HFI Loans
 
 
(dollars in thousands)
Commercial and industrial
 
120

 
$
54,098

 
50.14
%
 
0.53
%
Commercial real estate
 
56

 
45,758

 
42.42

 
0.45

Construction and land development
 
3

 
2,080

 
1.93

 
0.02

Residential real estate
 
16

 
5,505

 
5.10

 
0.05

Consumer
 
9

 
437

 
0.41

 

Total
 
204

 
$
107,878

 
100.00
%
 
1.05
%
 
 
 
At December 31, 2014
 
 
Number of Loans
 
Loan Balance
 
Percent
 
Percent of Total HFI Loans
 
 
(dollars in thousands)
Commercial and industrial
 
76

 
$
24,060

 
23.89
%
 
0.29
%
Commercial real estate
 
55

 
53,514

 
53.14

 
0.64

Construction and land development
 
6

 
15,646

 
15.53

 
0.19

Residential real estate
 
16

 
7,121

 
7.07

 
0.08

Consumer
 
10

 
377

 
0.37

 

Total
 
163

 
$
100,718

 
100.00
%
 
1.20
%
Total potential problem loans are primarily secured by real estate.

85


Other Assets Acquired Through Foreclosure
The following table represents the changes in other assets acquired through foreclosure: 
 
 
Three Months Ended June 30,
 
 
2015
 
 
Gross Balance
 
Valuation Allowance
 
Net Balance
 
 
(in thousands)
Balance, beginning of period
 
$
77,968

 
$
(14,209
)
 
$
63,759

Additions from acquisition of Bridge
 
1,550

 

 
1,550

Transfers to other assets acquired through foreclosure, net
 
5,739

 

 
5,739

Proceeds from sale of other real estate owned and repossessed assets, net
 
(15,415
)
 
2,480

 
(12,935
)
Valuation adjustments, net
 

 
(718
)
 
(718
)
Gains, net (1)
 
1,940

 

 
1,940

Balance, end of period
 
71,782

 
(12,447
)
 
59,335

 
 
 
 
 
 
 
 
 
2014
Balance, beginning of period
 
$
72,226

 
$
(15,776
)
 
$
56,450

Transfers to other assets acquired through foreclosure, net
 
4,309

 

 
4,309

Proceeds from sale of other real estate owned and repossessed assets, net
 
(1,903
)
 
683

 
(1,220
)
Valuation adjustments, net
 

 
(258
)
 
(258
)
Gains, net (1)
 
11

 

 
11

Balance, end of period
 
$
74,643

 
$
(15,351
)
 
$
59,292

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
2015
 
 
Gross Balance
 
Valuation Allowance
 
Net Balance
 
 
(in thousands)
Balance, beginning of period
 
$
71,421

 
$
(14,271
)
 
$
57,150

Additions from acquisition of Bridge
 
1,550

 

 
1,550

Transfers to other assets acquired through foreclosure, net
 
13,459

 

 
13,459

Proceeds from sale of other real estate owned and repossessed assets, net
 
(17,703
)
 
3,328

 
(14,375
)
Valuation adjustments, net
 

 
(1,504
)
 
(1,504
)
Gains, net (2)
 
3,055

 

 
3,055

Balance, end of period
 
$
71,782

 
$
(12,447
)
 
$
59,335

 
 
 
 
 
 
 
 
 
2014
Balance, beginning of period
 
$
88,421

 
$
(21,702
)
 
$
66,719

Transfers to other assets acquired through foreclosure, net
 
6,419

 

 
6,419

Proceeds from sale of other real estate owned and repossessed assets, net
 
(21,376
)
 
6,644

 
(14,732
)
Valuation adjustments, net
 

 
(293
)
 
(293
)
Gains, net (2)
 
1,179

 

 
1,179

Balance, end of period
 
$
74,643

 
$
(15,351
)
 
$
59,292

(1)
Includes net gains related to initial transfers to other assets of zero during both the three months ended June 30, 2015 and 2014, pursuant to accounting guidance.
(2)
Includes net gains related to initial transfers to other assets of $0.6 million and zero during the six months ended June 30, 2015 and 2014, respectively, pursuant to accounting guidance.
Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure. OREO and other repossessed property are reported at the lower of carrying value or fair value less estimated costs to sell the property. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to expense.

86


The Company had $59.3 million and $57.2 million of such assets at June 30, 2015 and December 31, 2014. At June 30, 2015, the Company held 56 OREO properties, compared to 67 at December 31, 2014.
Goodwill and Other Intangible Assets
Goodwill represents the excess consideration paid for net assets acquired in a business combination over their fair value and is subsequently evaluated for impairment at least annually. The Company has goodwill of $282.9 million, which includes $259.6 million acquired in the Bridge acquisition. Intangible assets total $17.1 million at June 30, 2015, which includes $15.0 million acquired in the Bridge acquisition. The goodwill and intangible balances at June 30, 2015 are allocated to the Nevada, Northern California, and CBL operating segments. See "Note 2. Mergers, Acquisitions and Dispositions" for further discussion of the Bridge acquisition and the allocation of goodwill and intangible assets acquired.
The Company performs its annual goodwill and intangibles impairment tests as of October 1 each year, or more often if events or circumstances indicate that the carrying value may not be recoverable. During the three and six months ended June 30, 2015 and 2014, there were no events or circumstances that indicated an interim impairment test of goodwill or other intangible assets was necessary.
Deferred Tax Assets
Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets (other than non-deductible goodwill) and liabilities. Deferred tax assets are measured using the income tax rate expected to be in effect when the taxes are actually paid or recovered. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted. Deferred tax assets are recorded to the extent these assets are more-likely-than-not to be realized.
See "Note 12. Income Taxes" to the Consolidated Financial Statements for further discussion on income taxes.
Deposits
Deposits are the primary source for funding the Company's asset growth. Total deposits increased to $11.41 billion at June 30, 2015, from $8.93 billion at December 31, 2014, an increase of $2.48 billion, or 27.7%. This increase was primarily due to the Bridge acquisition of $1.74 billion deposits. The non-interest-bearing demand deposit and savings and money market increased by $1.64 billion and $864.2 million, respectively.
WAB is a member of Promontory, a network that offers deposit placement services such as CDARS and ICS services, which offer products that qualify for FDIC insurance on large deposits. At June 30, 2015, the Company had $599.3 million of CDARS deposits and $748.9 million of ICS deposits, compared to $700.7 million of CDARS deposits and $479.2 million of ICS deposits at December 31, 2014. At June 30, 2015 and December 31, 2014, the Company also had $397.3 million and $321.5 million, respectively, of wholesale brokered deposits.

87


The average balances and weighted average rates paid on deposits are presented below:
 
 
Three Months Ended June 30,
 
 
2015
 
2014
 
 
Average Balance
 
Rate
 
Average Balance
 
Rate
 
 
(dollars in thousands)
Interest checking (NOW)
 
$
971,609

 
0.17
%
 
$
791,501

 
0.19
%
Savings and money market
 
4,213,013

 
0.28

 
3,583,500

 
0.30

Time
 
1,834,352

 
0.43

 
1,700,412

 
0.44

Total interest-bearing deposits
 
7,018,974

 
0.31

 
6,075,413

 
0.32

Non-interest-bearing demand deposits
 
2,593,543

 

 
2,045,534

 

Total deposits
 
$
9,612,517

 
0.22
%
 
$
8,120,947

 
0.24
%
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
2015
 
2014
 
 
Average Balance
 
Rate
 
Average Balance
 
Rate
 
 
(dollars in thousands)
Interest checking (NOW)
 
$
945,943

 
0.17
%
 
$
778,341

 
0.20
%
Savings and money market
 
4,062,052

 
0.28

 
3,518,279

 
0.30

Time
 
1,884,643

 
0.42

 
1,660,212

 
0.43

Total interest-bearing deposits
 
6,892,638

 
0.30

 
5,956,832

 
0.32

Non-interest-bearing demand deposits
 
2,482,314

 

 
2,049,806

 

Total deposits
 
$
9,374,952

 
0.22
%
 
$
8,006,638

 
0.24
%
Securities Sold Short
During the second quarter of 2015, the Company entered into a Treasury short transaction to mitigate the interest rate risk profile of floating-rate loans that are currently priced at their floor rate. The Company sold short fixed-rate Treasury securities and invested the proceeds in a short-term repurchase agreement. The balance was $57.6 million at June 30, 2015.
Other Borrowings
The Company from time to time utilizes short-term borrowed funds to support short-term liquidity needs generally created by increased loan demand. The majority of these short-term borrowed funds consist of advances from the FHLB and FRB, federal funds purchased, and customer repurchase agreements. The Company’s borrowing capacity with the FHLB and FRB is determined based on collateral pledged, generally consisting of securities and loans. In addition, the Company has borrowing capacity from other sources, collateralized by securities, including securities sold under agreements to repurchase, which are reflected at the amount of cash received in connection with the transaction, and may require additional collateral based on the fair value of the underlying securities. At June 30, 2015, total short-term borrowed funds consisted of customer repurchases of $42.2 million, FHLB advances of $11.1 million, and Senior Notes of $58.4 million, maturing in September 2015. At December 31, 2014, total short-term borrowed funds consisted of customer repurchases of $54.9 million, Senior Notes with a carrying value of $58.2 million, a revolving line of credit of $25.0 million, and FHLB advances of $97.0 million.
At June 30, 2015, the Company did not have FHLB advances classified as long-term. At December 31, 2014, total long-term debt consisted of $210.1 million of FHLB advances.
Qualifying Debt
At June 30, 2015, total qualifying debt consisted of $150.0 million of subordinated debt, recorded net of debt issuance costs of $1.6 million, and junior subordinated debt of $59.8 million. At December 31, 2014, qualifying debt consisted of junior subordinated debt of $40.4 million.

88


Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. The critical accounting policies upon which the Company's financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and all amendments thereto, as filed with the SEC. There were no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K.
Liquidity
Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth, and business operations and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in asset and liability levels due to changes in our business operations or unanticipated events.
The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors, and regulators. Our liquidity, represented by cash and amounts due from banks, federal funds sold, and non-pledged marketable securities, is a result of our operating, investing, and financing activities and related cash flows. In order to ensure funds are available when necessary, on at least a quarterly basis, we project the amount of funds that will be required over a twelve month period and we strive to maintain relationships with a diversified customer base. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets.
The following table presents the available and outstanding balances of the Company's lines of credit:
 
 
June 30, 2015
 
 
Available
Balance
 
Outstanding Balance
 
 
(in millions)
 
 
 
 
 
Unsecured fed funds credit lines at correspondent banks
 
$
100.0

 
$

Other lines with correspondent banks:
 
 
 
 
Secured other lines with correspondent banks
 
$
25.0

 
$

Unsecured other lines with correspondent banks
 
45.0

 

Total other lines with correspondent banks
 
$
70.0

 
$

In addition to lines of credit, the Company has borrowing capacity with the FHLB and FRB from pledged loans and securities. The borrowing capacity, outstanding borrowings, and available credit as of June 30, 2015 are presented in the following table:
 
 
June 30, 2015
 
 
(in millions)
FHLB:
 
 
Borrowing capacity
 
$
1,965.2

Outstanding borrowings
 
11.0

Letters of credit
 
422.9

Total available credit
 
$
1,531.3

 
 
 
FRB:
 
 
Borrowing capacity
 
$
1,627.0

Outstanding borrowings
 

Total available credit
 
$
1,627.0

The Company has a formal liquidity policy and, in the opinion of management, our liquid assets are considered adequate to meet cash flow needs for loan funding and deposit cash withdrawals for the next 90-120 days. At June 30, 2015, there was $1.52 billion in liquid assets, comprised of $701.2 million in cash, cash equivalents, and money market investments and $823.1 million in unpledged marketable securities. At December 31, 2014, the Company maintained $862.5 million in liquid assets,

89


comprised of $165.3 million of cash, cash equivalents, and money market investments, and $697.2 million of unpledged marketable securities.
The Parent maintains liquidity that would be sufficient to fund its operations and certain non-bank affiliate operations for an extended period should funding from normal sources be disrupted. Since deposits are taken by WAB and not by the Parent, Parent liquidity is not dependent on the bank's deposit balances. In our analysis of Parent liquidity, we assume that the Parent is unable to generate funds from additional debt or equity issuances, receives no dividend income from subsidiaries and does not pay dividends to stockholders, while continuing to make nondiscretionary payments needed to maintain operations and repayment of contractual principal and interest payments owed by the Parent and affiliated companies. Under this scenario, the amount of time the Parent and its non-bank subsidiary can operate and meet all obligations before the current liquid assets are exhausted is considered as part of the Parent liquidity analysis. Management believes the Parent maintains adequate liquidity capacity to operate without additional funding from new sources for over 12 months. WAB maintains sufficient funding capacity to address large increases in funding requirements, such as deposit outflows. This capacity is comprised of liquidity derived from a reduction in asset levels and various secured funding sources.
On a long-term basis, the Company’s liquidity will be met by changing the relative distribution of our asset portfolios (for example, by reducing investment or loan volumes, or selling or encumbering assets). Further, the Company can increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from correspondent banks, the FHLB of San Francisco, and the FRB. At June 30, 2015, our long-term liquidity needs primarily relate to funds required to support loan originations, commitments, and deposit withdrawals, which can be met by cash flows from investment payments and maturities, and investment sales, if necessary.
The Company’s liquidity is comprised of three primary classifications: 1) cash flows provided by operating activities; 2) cash flows used in investing activities; and 3) cash flows provided by financing activities. Net cash provided by or used in operating activities consists primarily of net income, adjusted for changes in certain other asset and liability accounts and certain non-cash income and expense items, such as the provision for credit losses, investment and other amortization and depreciation. For the six months ended June 30, 2015 and 2014, net cash provided by operating activities was $77.0 million and $60.5 million, respectively.
Our primary investing activities are the origination of real estate and commercial loans and the purchase and sale of securities. Our net cash provided by and used in investing activities has been primarily influenced by our loan and securities activities. The net increase in loans for the six months ended June 30, 2015 and 2014, was $515.1 million and $719.7 million, respectively. There was a net decrease in investment securities for the six months ended June 30, 2015 and 2014, of $97.8 million and $119.5 million, respectively.
Net cash provided by financing activities has been impacted significantly by increased deposit levels. During the six months ended June 30, 2015 and 2014, deposits increased $733.8 million and $631.6 million, respectively. Also, during the six months ended June 30, 2015, WAB issued $150.0 million of subordinated debt, receiving proceeds of $148.5 million.
Fluctuations in core deposit levels may increase our need for liquidity as certificates of deposit mature or are withdrawn before maturity, and as non-maturity deposits, such as checking and savings account balances, are withdrawn. Additionally, we are exposed to the risk that customers with large deposit balances will withdraw all or a portion of such deposits, due in part to the FDIC limitations on the amount of insurance coverage provided to depositors. To mitigate the uninsured deposit risk, we have joined the CDARS and ICS programs, which allow an individual customer to invest up to $50.0 million and $110.0 million, respectively, through one participating financial institution or, a combined total of $150.0 million per individual customer, with the entire amount being covered by FDIC insurance. As of June 30, 2015, we had $599.3 million of CDARS and $748.9 million of ICS deposits.
As of June 30, 2015, we had $397.3 million of wholesale brokered deposits outstanding. Brokered deposits are generally considered to be deposits that have been received from a third party that is acting on behalf of that party’s customer. Often, a broker will direct a customer’s deposits to the banking institution offering the highest interest rate available. Federal banking laws and regulations place restrictions on depository institutions regarding brokered deposits because of the general concern that these deposits are at a greater risk of being withdrawn and placed on deposit at another institution offering a higher interest rate, thus posing liquidity risk for institutions that gather brokered deposits in significant amounts.
Federal and state banking regulations place certain restrictions on dividends paid. The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the bank. Dividends paid by WAB to the Parent would be prohibited if the effect thereof would cause the bank’s capital to be reduced below applicable minimum capital requirements. WAB and LVSP paid dividends to the Parent in the amount of $82.0 million and $6.5 million, respectively, during the six months ended June 30, 2015. Subsequent to June 30, 2015, WAB paid a $30.0 million dividend to the Parent.

90


Capital Resources
The Company and WAB are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could trigger certain mandatory or discretionary actions that, if undertaken, could have a direct material effect on the Company’s business and financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and WAB must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The capital framework under Basel III became effective for the Company on January 1, 2015. Under the Basel III final rules, minimum requirements have increased for both the quantity and quality of capital held by the Company. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility requirements for regulatory capital instruments have been implemented under the final rules and the final rules also revise the definitions and calculations of Tier 1 capital, total capital, and risk-weighted assets.
As of June 30, 2015 and December 31, 2014, the Company and WAB exceeded the capital levels necessary to be classified as well-capitalized, as defined by the banking agencies. The actual capital amounts and ratios for the Company and WAB are presented in the following tables as of the periods indicated:
 
 
Total Capital
 
Tier 1 Capital
 
Risk-Weighted Assets
 
Tangible Average Assets
 
Total Capital Ratio
 
Tier 1 Capital Ratio
 
Tier 1 Leverage Ratio
 
Common Equity
Tier 1
 
 
(dollars in thousands)
Basel III
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WAL
 
$
1,522,991

 
$
1,269,033

 
$
12,435,603

 
$
12,733,458

 
12.2
%
 
10.2
%
 
10.0
%
 
9.1
%
WAB
 
1,408,273

 
1,142,684

 
12,326,696

 
12,549,292

 
11.4

 
9.3

 
9.1

 
9.3

Well-capitalized ratios
 
 
 
 
 
 
 
 
 
10.0

 
8.0

 
5.0

 
6.5

Minimum capital ratios
 
 
 
 
 
 
 
 
 
8.0

 
6.0

 
4.0

 
4.5

Basel I
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WAL
 
$
1,119,618

 
$
1,007,278

 
$
9,555,390

 
$
10,367,575

 
11.7
%
 
10.5
%
 
9.7
%
 

WAB
 
1,057,253

 
945,687

 
9,435,459

 
10,232,297

 
11.2

 
10.0

 
9.2

 

Well-capitalized ratios
 
 
 
 
 
 
 
 
 
10.0

 
6.0

 
5.0

 

Minimum capital ratios
 
 
 
 
 
 
 
 
 
8.0

 
4.0

 
4.0

 


91


Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices, and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and deposit taking activities. To that end, management actively monitors and manages our interest rate risk exposure. We generally manage our interest rate sensitivity by evaluating re-pricing opportunities on our earning assets to those on our funding liabilities.
Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities, all of which are designed to ensure that exposure to interest rate fluctuations is limited to within our guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits and management of the deployment of our securities, are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.
Interest rate risk is addressed by the ALCO or its equivalent, which includes members of executive management, finance, and operations. ALCO monitors interest rate risk by analyzing the potential impact on the net EVE and net interest income from potential changes in interest rates and considers the impact of alternative strategies or changes in balance sheet structure. We manage our balance sheet in part to maintain the potential impact on EVE and net interest income within acceptable ranges despite changes in interest rates.
Our exposure to interest rate risk is reviewed at least quarterly by the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in both EVE and net interest income in the event of hypothetical changes in interest rates. If potential changes to EVE and net interest income resulting from hypothetical interest rate changes are not within the limits established by the bank’s BOD, the BOD may direct management to adjust the asset and liability mix to bring interest rate risk within Board-approved limits.
Net Interest Income Simulation. In order to measure interest rate risk at June 30, 2015, we used a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis, which includes Bridge, calculates the difference between a baseline net interest income forecast using current yield curves compared to forecasted net income resulting from an immediate parallel shift in rates upward or downward. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately and, proportional to the change in market rates, depending on their contracted index. Some loans and investments include the opportunity of prepayment (embedded options) and, accordingly, the simulation model uses estimated market speeds to derive prepayments and reinvests proceeds at modeled yields. Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and at our discretion.
This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet remains static and that its structure does not change over the course of the year. It does not account for all factors that could impact our results, including changes by management to mitigate interest rate changes or secondary factors such as changes to our credit risk profile as interest rates change.
Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment speeds that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the modeled assumptions may have significant effects on our actual net interest income.

92


This simulation model assesses the changes in net interest income that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates. At June 30, 2015, our net interest income exposure for the next twelve months related to these hypothetical changes in market interest rates was within our current guidelines.
Sensitivity of Net Interest Income
 
 
Interest Rate Scenario (change in basis points from Base)
 
 
Down 100
 
Base
 
Up 100
 
Up 200
 
Up 300
 
Up 400
 
 
(in thousands)
Interest Income
 
$
533,153

 
$
543,476

 
$
596,971

 
$
657,825

 
$
689,981

 
$
744,975

Interest Expense
 
29,140

 
29,585

 
61,830

 
93,862

 
125,899

 
157,941

   Net Interest Income
 
504,013

 
513,891

 
535,141

 
563,963

 
564,082

 
587,034

   % Change
 
(1.9
)%
 
 
 
4.1
%
 
9.7
%
 
9.8
%
 
14.2
%
Economic Value of Equity. We measure the impact of market interest rate changes on the NPV of estimated cash flows from our assets, liabilities, and off-balance sheet items, defined as EVE, using a simulation model. This simulation model, which includes Bridge, assesses the changes in the market value of interest rate sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates.
At June 30, 2015, our EVE exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us. The following table shows our projected change in EVE for this set of rate shocks at June 30, 2015:
Economic Value of Equity 
 
 
Interest Rate Scenario (change in basis points from Base)
 
 
Down 100
 
Base
 
Up 100
 
Up 200
 
Up 300
 
Up 400
 
 
(in thousands)
Assets
 
$
13,633,180

 
$
13,471,721

 
$
13,259,846

 
$
13,052,212

 
$
12,840,489

 
$
12,639,538

Liabilities
 
11,475,939

 
11,184,288

 
10,934,405

 
10,712,413

 
10,508,066

 
10,319,458

Net Present Value
 
2,157,241

 
2,287,433

 
2,325,441

 
2,339,799

 
2,332,423

 
2,320,080

   % Change
 
(5.7
)%
 
 
 
1.7
%
 
2.3
%
 
2.0
%
 
1.4
%
The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, asset prepayments, and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates. Actual amounts may differ from the projections set forth above should market conditions vary from the underlying assumptions.
Derivative Contracts. In the normal course of business, the Company uses derivative instruments to meet the needs of its customers and manage exposure to fluctuations in interest rates. The following table summarizes the aggregate notional amounts, market values, and terms of the Company’s derivative positions with derivative market makers as of June 30, 2015 and December 31, 2014:
Outstanding Derivatives Positions
June 30, 2015
 
December 31, 2014
Notional
 
Net Value
 
Weighted Average Term (Years)
 
Notional
 
Net Value
 
Weighted Average Term (Years)
(dollars in thousands)
$
828,036

 
$
(48,839
)
 
14.9

 
$
647,703

 
$
(57,813
)
 
17.6



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Item 4.
Controls and Procedures.
Evaluation of Disclosure Controls
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the CEO and CFO have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Additionally, our disclosure controls and procedures were also effective in ensuring that information required to be disclosed by the Company in the reports we file or subject under the Exchange Act is accumulated and communicated to our management, including the CEO and CFO, to allow timely decisions regarding required disclosures. We completed the Bridge acquisition on June 30, 2015. Bridge was excluded from our evaluation in accordance with the SEC's general guidance that a recently acquired business may be omitted from the scope of the assessment for a period of up to one year from the date of acquisition.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company's internal control over financial reporting during the quarter ended June 30, 2015, which have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION
Item 1.
Legal Proceedings.
There are no material pending legal proceedings to which the Company is a party or to which any of our properties are subject. There are no material proceedings known to us to be contemplated by any governmental authority. From time to time, we are involved in a variety of litigation matters in the ordinary course of our business and anticipate that we will become involved in new litigation matters in the future.
Item 1A.
Risk Factors.
There have not been any material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

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Item 6.
Exhibits.
EXHIBITS
2.1
 
Agreement and Plan of Merger, dated as of August 17, 2012, by and between Western Alliance Bancorporation, or Western Alliance, and Western Liberty Bancorp (incorporated by reference to Exhibit 2.1 to Western Alliance’s Form 8-K filed with the SEC on August 22, 2012).
 
 
 
2.2
 
Agreement and Plan of Merger, dated as of January 18, 2013, by and between Western Alliance Bank, LandAmerica Financial Group, Inc., Orange County Bancorp and Centennial Bank (incorporated by reference to Exhibit 2.1 of Western Alliance’s Form 8-K filed with the SEC on January 22, 2013).
 
 
 
2.3
 
Plan of Conversion, dated May 29, 2014 (incorporated by reference to Exhibit 2.1 of Western Alliance Bancorporation’s Form 8-K filed with the SEC on June 3, 2014).
 
 
 
2.4
 
Agreement and Plan of Merger, dated as of March 9, 2015, by and between Western Alliance Bancorporation and Bridge Capital Holdings (incorporated by reference to Exhibit 2.1 of Western Alliance’s Form 8-K filed with the SEC on March 13, 2015).
 
 
 
2.5
 
Letter of Agreement, effective as of June 22, 2015 (incorporated by reference to Exhibit 2.1 of Western Alliance's Form 8-K filed with the SEC on June 22, 2015).
 
 
 
3.1
 
Articles of Conversion, as filed with the Nevada Secretary of State on May 29, 2014 (incorporated by reference to Exhibit 3.1 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).
 
 
 
3.2
 
Certificate of Conversion, as filed with the Delaware Secretary of State on May 29, 2014 (incorporated by reference to Exhibit 3.2 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).
 
 
 
3.3
 
Certificate of Incorporation, as filed with the Delaware Secretary of State on May 29, 2014 (incorporated by reference to Exhibit 3.3 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).
 
 
 
3.4
 
Certificate of Designation of Non-Cumulative Perpetual Preferred Stock, Series B, as filed with the Delaware Secretary of State on May 29, 2014 (incorporated by reference to Exhibit 3.4 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).
 
 
 
3.5
 
Certificate of Amendment of Certificate of Incorporation of Western Alliance Bancorporation, effective as of May 19, 2015 (incorporated by reference to Exhibit 3.1 of Western Alliance's Form 8-K filed with the SEC on May 22, 2015).
 
 
 
3.6
 
Amended and Restated Bylaws of Western Alliance Bancorporation, effective as of May 19, 2015 (incorporated by reference to Exhibit 3.2 of Western Alliance's Form 8-K filed with the SEC on May 22, 2015).
 
 
 
4.1
 
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).
 
 
 
4.2
 
Senior Debt Indenture, dated August 25, 2010, between Western Alliance Bancorporation and Wells Fargo Bank, National Association, as trustee. (incorporated by reference to Exhibit 4.1 of Western Alliance’s Form 8-K filed with the SEC on August 25, 2010).
 
 
 
4.3
 
First Supplemental Indenture, dated August 25, 2010, between Western Alliance Bancorporation and Wells Fargo Bank, National Association, as trustee. (incorporated by reference to Exhibit 4.2 of Western Alliance’s Form 8-K filed with the SEC on August 25, 2010).
 
 
 
4.4
 
Form of 10.00% Senior Notes due 2015 (incorporated by reference to Exhibit 4.3 of Western Alliance’s Form 8-K filed with the SEC on August 25, 2010).
 
 
 
4.5
 
Form of Non-Cumulative Perpetual Preferred Stock, Series B, stock certificate (incorporated by reference to Exhibit 4.8 of Western Alliance’s Annual Report on form 10-K filed with the SEC on March 2, 2012).
 
 
 
31.1*
 
CEO Certification Pursuant Rule 13a-14(a)/15d-14(a).
 
 
 
31.2*
 
CFO Certification Pursuant Rule 13a-14(a)/15d-14(a).
 
 
 
32**
 
CEO and CFO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes Oxley Act of 2002.
 
 
 


96


101.INS*
 
XBRL Instance Document.
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed herewith.
**Furnished herewith.

97


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
WESTERN ALLIANCE BANCORPORATION
 
 
 
 
 
August 7, 2015
 
By:
 
/s/ Robert Sarver
 
 
 
 
Robert Sarver
 
 
 
 
Chairman of the Board and
 
 
 
 
Chief Executive Officer
 
 
 
 
 
August 7, 2015
 
By:
 
/s/ Dale Gibbons
 
 
 
 
Dale Gibbons
 
 
 
 
Executive Vice President and
 
 
 
 
Chief Financial Officer
 
 
 
 
 
August 7, 2015
 
By:
 
/s/ J. Kelly Ardrey Jr.
 
 
 
 
J. Kelly Ardrey Jr.
 
 
 
 
Senior Vice President and
 
 
 
 
Chief Accounting Officer


98