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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
FORM 10-Q
 
(Mark One)
 
 
 
ý
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended September 30, 2018
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 every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
ý
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 26, 2018, Western Alliance Bancorporation had 105,858,808 shares of common stock outstanding.


Table of Contents

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



2

Table of Contents

PART I
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 Unaudited Consolidated Financial Statements in Item I of this Form 10-Q.
ENTITIES / DIVISIONS:
ABA
Alliance Bank of Arizona
HOA Services
Homeowner Associations Services
BON
Bank of Nevada
LVSP
Las Vegas Sunset Properties
Bridge
Bridge Bank
TPB
Torrey Pines Bank
Company
Western Alliance Bancorporation and subsidiaries
WA PWI
Western Alliance Public Welfare Investments, LLC
CSI
CS Insurance Company
WAB or Bank
Western Alliance Bank
FIB
First Independent Bank
WABT
Western Alliance Business Trust
HFF
Hotel Franchise Finance
WAL or Parent
Western Alliance Bancorporation
TERMS:
AFS
Available-for-Sale
GNMA
Government National Mortgage Association
ALCO
Asset and Liability Management Committee
GSE
Government-Sponsored Enterprise
AOCI
Accumulated Other Comprehensive Income
HFI
Held for Investment
ASC
Accounting Standards Codification
HTM
Held-to-Maturity
ASU
Accounting Standards Update
ICS
Insured Cash Sweep Service
Basel Committee
Basel Committee on Banking Supervision
IRC
Internal Revenue Code
Basel III
Banking Supervision's December 2010 final capital framework
ISDA
International Swaps and Derivatives Association
BOD
Board of Directors
LIBOR
London Interbank Offered Rate
CDARS
Certificate Deposit Account Registry Service
LIHTC
Low-Income Housing Tax Credit
CDO
Collateralized Debt Obligation
MBS
Mortgage-Backed Securities
CEO
Chief Executive Officer
NBL
National Business Lines
CFO
Chief Financial Officer
NOL
Net Operating Loss
CRA
Community Reinvestment Act
NPV
Net Present Value
CRE
Commercial Real Estate
OCC
Office of the Comptroller of the Currency
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
OCI
Other Comprehensive Income
EGRRCPA
The Economic Growth, Regulatory Relief, and Consumer Protection Act
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
SBA
Small Business Administration
FASB
Financial Accounting Standards Board
SBIC
Small Business Investment Company
FDIC
Federal Deposit Insurance Corporation
SEC
Securities and Exchange Commission
FHLB
Federal Home Loan Bank
SERP
Supplemental Executive Retirement Plan
FHLMC
Federal Home Loan Mortgage Corporation
TCJA
Tax Cuts and Jobs Act
FNMA
Federal National Mortgage Association
TDR
Troubled Debt Restructuring
FRB
Federal Reserve Bank
TEB
Tax Equivalent Basis
FVO
Fair Value Option
XBRL
eXtensible Business Reporting Language
GAAP
U.S. Generally Accepted Accounting Principles
 
 

3

Table of Contents

Item 1.
Financial Statements
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
September 30, 2018
 
December 31, 2017
 
 
(Unaudited)
 
 
 
 
(in thousands,
except shares and per share amounts)
Assets:
 
 
 
 
Cash and due from banks
 
$
148,545

 
$
181,191

Interest-bearing deposits in other financial institutions
 
482,019

 
235,577

Federal funds sold
 
70,000

 

Cash, cash equivalents, and restricted cash
 
700,564

 
416,768

Money market investments
 
5

 

Investment securities - AFS, at fair value; amortized cost of $3,211,440 at September 30, 2018 and $3,515,401 at December 31, 2017
 
3,107,076

 
3,499,519

Investment securities - HTM, at amortized cost; fair value of $279,033 at September 30, 2018 and $256,314 at December 31, 2017
 
288,290

 
255,050

Investment securities - equity
 
172,294

 

Investments in restricted stock, at cost
 
65,993

 
65,785

Loans - HFI, net of deferred loan fees and costs
 
16,732,765

 
15,093,935

Less: allowance for credit losses
 
(150,011
)
 
(140,050
)
Net loans held for investment
 
16,582,754

 
14,953,885

Premises and equipment, net
 
119,211

 
118,719

Other assets acquired through foreclosure, net
 
20,028

 
28,540

Bank owned life insurance
 
169,162

 
167,764

Goodwill
 
289,895

 
289,895

Other intangible assets, net
 
9,658

 
10,853

Deferred tax assets, net
 
43,483

 
5,780

Investments in LIHTC
 
295,116

 
267,023

Other assets
 
312,618

 
249,504

Total assets
 
$
22,176,147

 
$
20,329,085

Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Non-interest-bearing demand
 
$
8,014,715

 
$
7,433,962

Interest-bearing
 
10,893,865

 
9,538,570

Total deposits
 
18,908,580

 
16,972,532

Customer repurchase agreements
 
20,969

 
26,017

Other borrowings
 

 
390,000

Qualifying debt
 
359,082

 
376,905

Other liabilities
 
399,123

 
333,933

Total liabilities
 
19,687,754

 
18,099,387

Commitments and contingencies (Note 12)
 

 

Stockholders’ equity:
 
 
 
 
Common stock - par value $0.0001; 200,000,000 authorized; 107,633,006 shares issued at September 30, 2018 and 107,057,520 at December 31, 2017
 
10

 
10

Treasury stock, at cost (1,771,509 shares at September 30, 2018 and 1,570,155 shares at December 31, 2017)
 
(52,035
)
 
(40,173
)
Additional paid in capital
 
1,444,555

 
1,424,540

Accumulated other comprehensive (loss) income
 
(70,363
)
 
(3,145
)
Retained earnings
 
1,166,226

 
848,466

Total stockholders’ equity
 
2,488,393

 
2,229,698

Total liabilities and stockholders’ equity
 
$
22,176,147

 
$
20,329,085

See accompanying Notes to Unaudited Consolidated Financial Statements.

4

Table of Contents

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
 
Loans, including fees
 
$
234,709

 
$
191,096

 
$
662,703

 
$
547,306

Investment securities
 
26,100

 
22,152

 
77,847

 
58,010

Dividends
 
1,831

 
2,005

 
5,506

 
6,154

Other
 
2,576

 
2,583

 
5,459

 
5,584

Total interest income
 
265,216

 
217,836

 
751,515

 
617,054

Interest expense:
 

 

 
 
 
 
Deposits
 
25,266

 
11,449

 
59,288

 
29,506

Other borrowings
 
90

 
84

 
3,352

 
333

Qualifying debt
 
5,794

 
4,708

 
16,458

 
13,539

Other
 
28

 
12

 
51

 
41

Total interest expense
 
31,178

 
16,253

 
79,149

 
43,419

Net interest income
 
234,038

 
201,583

 
672,366

 
573,635

Provision for credit losses
 
6,000

 
5,000

 
17,000

 
12,250

Net interest income after provision for credit losses
 
228,038

 
196,583

 
655,366

 
561,385

Non-interest income:
 

 

 
 
 
 
Service charges and fees
 
5,267

 
5,248

 
16,684

 
15,189

Card income
 
2,138

 
1,509

 
6,143

 
4,517

Income from equity investments
 
1,440

 
967

 
5,417

 
2,977

Lending related income and gains (losses) on sale of loans, net
 
1,422

 
97

 
3,447

 
746

Foreign currency income
 
1,092

 
756

 
3,475

 
2,630

Income from bank owned life insurance
 
868

 
975

 
2,963

 
2,896

(Loss) gain on sales of investment securities, net
 
(7,232
)
 
319

 
(7,232
)
 
907

Unrealized (losses) gains on assets measured at fair value, net
 
(1,212
)
 

 
(2,971
)
 
(1
)
Other income
 
635

 
585

 
1,579

 
1,795

Total non-interest income
 
4,418

 
10,456

 
29,505

 
31,656

Non-interest expense:
 

 

 
 
 
 
Salaries and employee benefits
 
64,762

 
52,747

 
188,680

 
156,640

Legal, professional, and directors' fees
 
7,907

 
6,038

 
21,856

 
23,324

Occupancy
 
7,406

 
7,507

 
21,671

 
21,328

Data processing
 
5,895

 
4,524

 
16,688

 
14,163

Deposit costs
 
4,848

 
2,904

 
11,888

 
6,778

Insurance
 
3,712

 
3,538

 
11,466

 
10,355

Business development
 
1,381

 
1,439

 
4,523

 
4,949

Card expense
 
1,282

 
966

 
3,305

 
2,558

Loan and repossessed asset expenses
 
1,230

 
1,263

 
2,830

 
3,639

Marketing
 
687

 
776

 
2,429

 
2,628

Intangible amortization
 
398

 
489

 
1,195

 
1,666

Net (gain) loss on sales / valuations of repossessed and other assets
 
(67
)
 
266

 
(1,474
)
 
(46
)
Other expense
 
14,400

 
6,839

 
29,481

 
17,561

Total non-interest expense
 
113,841

 
89,296

 
314,538

 
265,543

Income before provision for income taxes
 
118,615

 
117,743

 
370,333

 
327,498

Income tax expense
 
7,492

 
34,899

 
53,631

 
91,352

Net income
 
$
111,123

 
$
82,844

 
$
316,702

 
$
236,146

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
1.06

 
$
0.79

 
$
3.03

 
$
2.27

Diluted
 
1.05

 
0.79

 
3.00

 
2.25

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
104,768

 
104,221

 
104,664

 
104,124

Diluted
 
105,448

 
104,942

 
105,398

 
104,941

See accompanying Notes to Unaudited Consolidated Financial Statements.

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Table of Contents

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Net income
 
$
111,123

 
$
82,844

 
$
316,702

 
$
236,146

Other comprehensive (loss) income, net:
 
 
 
 
 
 
 
 
Unrealized (loss) gain on AFS securities, net of tax effect of $7,337, $(689), $23,438, and $(9,894), respectively
 
(22,462
)
 
1,116

 
(71,765
)
 
15,947

Unrealized (loss) gain on SERP, net of tax effect of $4, $(71), $10, and $(93), respectively
 
(12
)
 
114

 
(35
)
 
150

Unrealized (loss) gain on junior subordinated debt, net of tax effect of $661, $(394), $(61), and $1,649, respectively
 
(2,028
)
 
641

 
186

 
(2,677
)
Realized loss (gain) on sale of AFS securities included in income, net of tax effect of $(1,778), $122, $(1,778), and $346, respectively
 
5,454

 
(197
)
 
5,454

 
(561
)
Net other comprehensive (loss) income
 
(19,048
)
 
1,674

 
(66,160
)
 
12,859

Comprehensive income
 
$
92,075

 
$
84,518

 
$
250,542

 
$
249,005

See accompanying Notes to Unaudited Consolidated Financial Statements.

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Table of Contents

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
Common Stock
 
Additional Paid in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive (Loss) Income
 
Retained Earnings
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
 
(in thousands)
Balance, December 31, 2016
105,071

 
$
10

 
$
1,400,140

 
$
(26,362
)
 
$
(4,695
)
 
$
522,436

 
$
1,891,529

Balance, January 1, 2017 (1)
105,071

 
10

 
1,400,140

 
(26,362
)
 
(4,695
)
 
522,974

 
1,892,067

Net income

 

 

 

 

 
236,146

 
236,146

Exercise of stock options
36

 

 
786

 

 

 

 
786

Restricted stock, performance stock units, and other grants, net
653

 

 
17,909

 

 

 

 
17,909

Restricted stock surrendered (2)
(267
)
 

 

 
(13,642
)
 

 

 
(13,642
)
Other comprehensive income, net

 

 

 

 
12,859

 

 
12,859

Balance, September 30, 2017
105,493

 
$
10

 
$
1,418,835

 
$
(40,004
)
 
$
8,164

 
$
759,120

 
$
2,146,125

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
105,487

 
$
10

 
$
1,424,540

 
$
(40,173
)
 
$
(3,145
)
 
$
848,466

 
$
2,229,698

Balance, January 1, 2018 (3)
105,487

 
10

 
1,424,540

 
(40,173
)
 
(4,203
)
 
849,524

 
2,229,698

Net income

 

 

 

 

 
316,702

 
316,702

Exercise of stock options
21

 

 
534

 

 

 

 
534

Restricted stock, performance stock unit, and other grants, net
554

 

 
19,481

 

 

 

 
19,481

Restricted stock surrendered (2)
(201
)
 

 

 
(11,862
)
 

 

 
(11,862
)
Other comprehensive loss, net

 

 

 

 
(66,160
)
 

 
(66,160
)
Balance, September 30, 2018
105,861

 
$
10

 
$
1,444,555

 
$
(52,035
)
 
$
(70,363
)
 
$
1,166,226

 
$
2,488,393

(1)
As adjusted for adoption of ASU 2017-12. The cumulative effect of adoption of this guidance at January 1, 2017 resulted in an increase to retained earnings of $0.5 million and a corresponding increase to loans for the fair market value adjustment on the swaps.
(2)
Share amounts represent Treasury Shares, see "Note 1. Summary of Significant Accounting Policies" for further discussion.
(3)
As adjusted for adoption of ASU 2016-01 and ASU 2018-02. The cumulative effect of adoption of this guidance at January 1, 2018 resulted in an increase to retained earnings of $1.1 million and a corresponding decrease to accumulated other comprehensive income. See "Note 1. Summary of Significant Accounting Policies" for further discussion.
See accompanying Notes to Unaudited Consolidated Financial Statements.

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Table of Contents

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
(in thousands)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
316,702

 
$
236,146

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Provision for credit losses
 
17,000

 
12,250

Depreciation and amortization
 
10,460

 
9,956

Stock-based compensation
 
19,481

 
17,909

Deferred income taxes
 
(16,107
)
 
3,371

Amortization of net premiums for investment securities
 
10,795

 
14,926

Amortization of tax credit investments
 
26,546

 
19,524

Accretion of fair market value adjustments on loans acquired from business combinations
 
(14,099
)
 
(20,994
)
Accretion and amortization of fair market value adjustments on other assets and liabilities acquired from business combinations
 
1,427

 
1,898

Income from bank owned life insurance
 
(2,963
)
 
(2,896
)
(Gains) / Losses on:
 
 
 
 
Sales of investment securities
 
7,232

 
(907
)
Assets measured at fair value, net
 
2,971

 
1

Sale of loans
 
(2,434
)
 
117

Other assets acquired through foreclosure, net
 
(1,464
)
 
(233
)
Valuation adjustments of other repossessed assets, net
 
32

 
120

Sale of premises, equipment, and other assets, net
 
(42
)
 
67

Changes in:
 
 
 
 
Other assets
 
17,419

 
(12,958
)
Other liabilities
 
3,324

 
(7,214
)
Net cash provided by operating activities
 
$
396,280

 
$
271,083

Cash flows from investing activities:
 
 
 
 
Investment securities - trading
 
 
 
 
Proceeds from sales
 
$

 
$
994

Investment securities - AFS
 
 
 
 
Purchases
 
(251,413
)
 
(1,361,908
)
Principal pay downs and maturities
 
329,958

 
370,231

Proceeds from sales
 
44,308

 
87,853

Investment securities - HTM
 
 
 
 
Purchases
 
(34,275
)
 
(62,489
)
Principal pay downs and maturities
 
754

 

Equity securities
 
 
 
 
Purchases
 
(71,727
)
 

Reinvestment of dividends
 
(426
)
 

Purchase of investment tax credits
 
(66,456
)
 
(19,916
)
Purchase of SBIC investments
 
(3,063
)
 

(Purchase) sale of money market investments, net
 
(5
)
 
(175
)
Proceeds from bank owned life insurance
 
1,655

 
607

(Purchase) liquidation of restricted stock, net
 
(208
)
 
(430
)
Loan fundings and principal collections, net
 
(1,591,733
)
 
(1,179,494
)
Purchase of premises, equipment, and other assets, net
 
(8,319
)
 
(7,644
)
Proceeds from sale of other real estate owned and repossessed assets, net
 
8,793

 
20,748

Net cash used in investing activities
 
$
(1,642,157
)
 
$
(2,151,623
)

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Table of Contents

 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
(in thousands)
Cash flows from financing activities:
 
 
 
 
Net increase (decrease) in deposits
 
$
1,936,048

 
$
2,354,920

Net increase (decrease) in borrowings
 
(395,047
)
 
(95,661
)
Proceeds from exercise of common stock options
 
534

 
786

Cash paid for tax withholding on vested restricted stock
 
(11,862
)
 
(13,642
)
Net cash provided by financing activities
 
$
1,529,673

 
$
2,246,403

Net increase (decrease) in cash, cash equivalents, and restricted cash
 
283,796

 
365,863

Cash, cash equivalents, and restricted cash at beginning of period
 
416,768

 
284,491

Cash, cash equivalents, and restricted cash at end of period
 
$
700,564

 
$
650,354

Supplemental disclosure:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
81,247

 
$
47,815

Income taxes
 
14,658

 
79,522

Non-cash operating, investing, and financing activity:
 
 
 
 
Transfers to other assets acquired through foreclosure, net
 
5,744

 
1,812

Unfunded commitments originated
 
65,639

 
103,012

Change in unrealized (loss) gain on AFS securities, net of tax
 
(66,311
)
 
15,386

Change in unrealized gain (loss) on junior subordinated debt, net of tax
 
186

 
(2,677
)
Change in unfunded obligations
 
82,270

 
140,217

Non-cash charitable contribution
 
6,895

 

See accompanying Notes to Unaudited Consolidated Financial Statements.


9

Table of Contents

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, international banking, and online banking products and services through its wholly-owned banking subsidiary, WAB.
WAB operates the following full-service banking divisions: ABA, BON, FIB, Bridge, and TPB. The Company also serves business customers through a national platform of specialized financial services. In addition, the Company has two non-bank subsidiaries, LVSP, which holds and manages certain OREO properties and a captive insurance company formed and licensed under the laws of the State of Arizona, CSI. CSI was established as part of the Company's overall enterprise risk management strategy.
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 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. Management's estimates and judgments are ongoing and are based on experience, current and expected future conditions, third-party evaluations and various other assumptions that management believes are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities, as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from those estimates and assumptions used in the Consolidated Financial Statements and related notes. 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 certain assets and liabilities carried at fair value; and accounting for income taxes.
Principles of consolidation
As of September 30, 2018, WAL has the following significant wholly-owned subsidiaries: WAB, LVSP, and eight unconsolidated subsidiaries used as business trusts in connection with the issuance of trust-preferred securities.
The Bank has the following significant wholly-owned subsidiaries: WABT, which holds certain investment securities, municipal and nonprofit loans, and leases; WA PWI, which holds certain limited partnerships invested primarily in low income housing tax credits and small business investment corporations; and BW Real Estate, Inc., which operates as a real estate investment trust and holds certain of WAB's real estate loans and related securities.
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 reported in prior periods may have been reclassified in the Consolidated Financial Statements to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.

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Interim financial information
The accompanying Unaudited Consolidated Financial Statements as of and for the three and nine months ended September 30, 2018 and 2017 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, 2017.

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.
Investment securities
Investment securities include debt securities and equity securities. Debt securities may be classified as HTM, AFS, or measured at fair value. 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 an HTM 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 securities are reported as an asset in the Consolidated Balance Sheet at their estimated fair value. As the fair value of AFS debt securities changes, the changes are reported net of income tax as an element of OCI, except for other-than-temporarily-impaired securities. When AFS debt 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 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.
For periods prior to January 1, 2018, equity securities were classified as AFS and reported at fair value with unrealized gains and losses included as a separate component of AOCI, net of tax. Upon adoption of ASU 2016-01, the fair value changes in equity securities are recognized as part of non-interest income, see "Recently adopted accounting guidance" below for further discussion.
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 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.
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.

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Restricted stock
WAB is 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 Bank 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, adjusted for net deferred fees and costs, purchase accounting fair value adjustments, and an allowance for credit losses. In addition, the book values of loans subject to a fair value hedge are adjusted for changes in value attributable to the effective portion of the hedged benchmark interest rate risk.
The Company may also acquire loans through a business combination. These acquired loans are recorded at estimated fair value on the date of purchase, which is comprised of unpaid principal adjusted for estimated credit losses and interest rate fair value adjustments. Loans are evaluated individually at the acquisition date 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 purchased loans that are not deemed impaired at the acquisition date, fair value adjustments attributable to both credit and interest rates are accreted (or amortized) over the contractual life of the individual loan. For additional information, see "Note 3. Loans, Leases and Allowance for Credit Losses" of these Notes to Unaudited Consolidated Financial Statements.
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 a 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 a 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: 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.
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 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

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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 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 general allowance covers all non-impaired loans and incorporates several quantitative and qualitative factors, which are used for all of the Company's portfolio segments. Quantitative factors include company-specific, ten-year historical net charge-offs stratified by loans with similar characteristics. Qualitative factors include: 1) levels of and trends in delinquencies and impaired loans; 2) levels of and trends in charge-offs and recoveries; 3) trends in volume and terms of loans; 4) changes in underwriting standards or lending policies; 5) experience, ability, depth of lending staff; 6) national and local economic trends and conditions; 7) changes in credit concentrations; 8) out-of-market exposures; 9) changes in quality of loan review system; and 10) changes in the value of underlying collateral.
Due to the credit concentration of the Company's loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values in Arizona, Nevada, 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 the Bank 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.
Goodwill and other intangible assets
The Company records as goodwill the excess of the purchase price over the fair value of the identifiable net assets acquired in accordance with applicable guidance. 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. The Company can first elect to assess, through qualitative factors, whether it is more likely than not that goodwill is impaired. If the qualitative assessment indicates potential impairment, a quantitative impairment test is necessary. If, based on the quantitative test, a reporting unit's carrying amount exceeds its fair value, a goodwill impairment charge for this difference is recorded to current period earnings as non-interest expense.
The Company’s intangible assets consist primarily of core deposit intangible assets that are amortized over periods ranging from 5 to 10 years. The Company considers the remaining useful lives of its core deposit intangible assets each reporting period, as required by ASC 350, Intangibles—Goodwill and Other, to determine whether events and circumstances warrant a

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revision to the remaining period of amortization. If the estimate of an intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. The Company has not revised its estimates of the useful lives of its core deposit intangibles during the three and nine months ended September 30, 2018 and 2017.
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.
Treasury shares
The Company separately presents treasury shares, which represent shares surrendered to the Company equal in value to the statutory payroll tax withholding obligations arising from the vesting of employee restricted stock awards. Treasury shares are carried at cost.
Derivative financial instruments
The Company uses interest-rate swaps to mitigate interest-rate risk associated with changes to the fair value of certain fixed-rate financial instruments (fair value 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. 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.
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. Changes in the fair value of derivatives not considered to be highly effective in hedging the change in fair value 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 after the derivative contract is executed. At inception, the Company performs a quantitative assessment to determine whether the derivatives used in hedging transactions are highly effective (as defined in the guidance) in offsetting changes in the fair value of the hedged item. Retroactive effectiveness is assessed, as well as the continued expectation that the hedge will remain effective prospectively. After the initial quantitative assessment is performed, on a quarterly basis, the Company performs a qualitative hedge effectiveness assessment. This assessment takes into consideration any adverse developments related to the counterparty's risk of default and any negative events or circumstances that affect the factors that originally enabled the Company to assess that it could reasonably support, qualitatively, an expectation that the hedging relationship was and will continue to be highly effective. 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 the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host

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contract and 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 the host contract is measured at fair value, with changes in fair value reported in current earnings, or the Company is unable to reliably identify and measure an 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.
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.
The Company also has off-balance sheet arrangements related to its derivative instruments. Derivative instruments are recognized in the Consolidated Financial Statements at fair value and their notional values are carried off-balance sheet. See "Note 9. Derivatives and Hedging Activities" of these Notes to Unaudited Consolidated Financial Statements for further discussion.
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. Changes to estimated fair values from a business combination are recognized as an adjustment to goodwill during the measurement period and are recognized in the proper reporting period in which the adjustment amounts are determined. 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.
Fair values of financial instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. ASC 820, Fair Value Measurement, establishes a framework for measuring fair value and a three-level valuation hierarchy for disclosure of fair value measurement, as well as enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The Company uses various valuation approaches, including market, income, and/or cost approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

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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 may purchase the asset or assume 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 September 30, 2018 and 2017. The estimated fair value amounts for September 30, 2018 and 2017 have been measured as of period-end, and have not been re-evaluated 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 13. 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, cash equivalents, and restricted cash
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 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 debt 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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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 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 and customer repurchase agreements
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 and customer repurchase agreements have been categorized as Level 2 in the fair value hierarchy due to their short durations.
Subordinated debt
The fair value of subordinated debt is based on the market rate for the respective subordinated debt security. Subordinated debt has been categorized as Level 3 in the fair value hierarchy.
Junior subordinated debt
Junior subordinated debt is valued based on a discounted cash flow model which uses as inputs Treasury Bond rates and the 'BB' rated financial index. 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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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 is considered, 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 the related tax liability line with other liabilities in the Consolidated Balance Sheet. See "Note 11. Income Taxes" of these Notes to Unaudited Consolidated Financial Statements for further discussion on income taxes.
Non-interest income
Non-interest income includes service charges and fees, income from equity investments, card income, foreign currency income, income from bank owned life insurance, lending related income, net gain or loss on sales of investment securities, net unrealized gains or losses on assets measured at fair value, and other income. Service charges and fees consist of fees earned from performance of account analysis, general account services, and other deposit account services. These fees are recognized as the related services are provided in accordance with ASC 606, Revenue from Contracts with Customers. Income from equity investments includes gains on equity warrant assets, SBIC equity income, and success fees. Card income includes fees earned from customer use of debit and credit cards, interchange income from merchants, and international charges. Card income is generally within the scope of ASC 310, Receivables; however, certain processing transactions for merchants, such as interchange fees, are within the scope of ASC 606. Foreign currency income represents fees earned on the differential between purchases and sales of foreign currency on behalf of the Company’s clients. Income from bank owned life insurance is accounted for in accordance with ASC 325, Investments - Other. Lending related income includes fees earned from gains or losses on the sale of loans, SBA income, and letter of credit fees. Gains and losses on the sale of loans and SBA income are recognized pursuant to ASC 860, Transfers and Servicing. Net unrealized gains or losses on assets measured at fair value represent fair value changes in equity securities and are accounted for in accordance with ASC 321, Investments - Equity Securities. Fees related to standby letters of credit are accounted for in accordance with ASC 440, Commitments. Other income includes operating lease income, which is recognized on a straight-line basis over the lease term in accordance with ASC 840, Leases. Net gain or loss on sales / valuations of repossessed and other assets is presented as a component of non-interest expense, but may also be presented as a component of non-interest income in the event that a net gain is recognized. Net gain or loss on sales of repossessed and other assets are accounted for in accordance with ASC 610, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets. See "Note 15. Revenue from Contracts with Customers" of these Notes to Unaudited Consolidated Financial Statements for further details related to the nature and timing of revenue recognition for non-interest income revenue streams within the scope of the new standard.

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Recent accounting pronouncements
In February 2016, the FASB issued guidance within ASU 2016-02, Leases. The amendments in ASU 2016-02 to Topic 842, Leases, require lessees to recognize the lease assets and lease liabilities arising from operating leases in the statement of financial position, which will result in a gross up of assets and liabilities on the balance sheet. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. In July 2018, the FASB issued guidance within ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842) Targeted Improvements. The amendments within ASU 2018-10 clarify how to apply certain aspects of the new leases standard. The amendments address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other things. The amendments within ASU 2018-11 give entities another option for transition and provide lessors with a practical expedient. The transition option allows entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, under this transition approach, the modified retrospective transition method still applies; however, a cumulative-effect adjustment to the opening balance sheet of retained earnings is recognized in the period of adoption, rather than the earliest period presented. The practical expedient provides lessors with an option to not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined components in accordance with the new revenue standard if the associated non-lease components are the predominant components. The amendments in these ASUs are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management evaluated several lease software solutions and selected a software solution that it believes will be able to effectively facilitate the application of the new accounting requirements. The population of its leases that are within the scope of the new guidance has been finalized and largely relate to real estate leases. All key lease data has been gathered and input into the new application and management is in the process of validating this data.
In June 2016, the FASB issued guidance within ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The new standard significantly changes the impairment model for most financial assets that are measured at amortized cost, including off-balance sheet credit exposures, from an incurred loss model to an expected loss model. The amendments in ASU 2016-13 to Topic 326, Financial Instruments - Credit Losses, require that an organization measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU also requires enhanced disclosures, including qualitative and quantitative disclosures that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on AFS debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Management has formed a Steering Committee and established an implementation team made up of subject matter experts across different functions within the Company, including Finance, Risk, Credit, and IT, that will facilitate all phases of planning and implementation of the new guidance. Under the direction of the Company's CECL Steering Committee and in partnership with its Enterprise Project Management Office, the implementation team is fully engaged with the implementation of its plan. The Company has identified its portfolio segments and made modeling choices that include both internally-developed models as well as vended solutions, with parallel testing of certain models expected to begin in early 2019. The team is also focused on updating its accounting policies and assessing its control framework to identify risks resulting from new processes, judgments and data.
In March 2017, the FASB issued guidance within ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. The amendments in ASU 2017-08 to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date, which more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Financial Statements.
In June 2018, the FASB issued guidance within ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. The amendments in ASU 2018-07 to Topic 718, Compensation-Stock Compensation, are intended to align the accounting for share-based payment awards issued to employees and nonemployees. Changes to the accounting for nonemployee awards include: 1) equity classified share-based payment awards issued to nonemployees will now be measured on the grant date, instead of the previous requirement to remeasure the awards through the performance completion date; 2) for

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performance conditions, compensation cost associated with the award will be recognized when achievement of the performance condition is probable, rather than upon achievement of the performance condition; and 3) the current requirement to reassess the classification (equity or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible instruments. The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under ASC 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company's share-based payment awards to nonemployees consist only of grants made to the Company's BOD as compensation solely related to the individual's role as a Director. As such, in accordance with ASC 718, the Company accounts for these share-based payment awards to its Directors in the same manner as share-based payment awards for its employees. Accordingly, the amendments in this guidance will not have an effect on the accounting for the Company's share-based payment awards to its Directors.
In July 2018, the FASB issued guidance within ASU 2018-09, Codification Improvements. The amendments in ASU 2018-09 are intended to clarify or correct unintended guidance in the FASB Codification and affect a wide variety of Topics in the Codification. The topics that are applicable to the Company include: 1) debt modifications and extinguishments; 2) stock compensation; and 3) derivatives and hedging. For debt modifications and extinguishments, the amendment clarifies that, in an early extinguishment of debt for which the fair value option has been elected, the net carrying amount of the extinguished debt is equal to its fair value at the reacquisition date, and upon extinguishment, the cumulative amount of the gain or loss on the extinguished debt that resulted from changes in instrument-specific credit risk should be presented in net income. The Company has junior subordinated debt that is recorded at fair value at each reporting period due to election of the FVO. Accordingly, if in the future, the Company chooses to repay this debt prior to its contractual maturity, this amendment would be applicable. For stock compensation, the amendment clarifies that excess tax benefits or tax deficiencies should be recognized in the period in which the amount of the tax deduction is determined, which is typically when an award is exercised (in the case of share options) or vests (in the case of non-vested stock awards). The Company already records excess tax benefits or tax deficiencies in the periods in which the tax deduction is determined. Therefore, this amendment will not have an effect on the Company's accounting for excess tax benefits or tax deficiencies. For derivatives and hedging, previous guidance permits derivatives to be offset only when all four conditions (including the intent to set off) are met. This amendment clarifies that the intent to set off is not required to offset fair value amounts recognized for derivative instruments that are executed with the same counterparty under a master netting agreement. This amendment will not have an effect on the offsetting of the Company's derivative assets and liabilities.
In August 2018, the FASB issued guidance within ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments within ASU 2018-13 remove, modify, and supplement the disclosure requirements for fair value measurements. Disclosure requirements that were removed include: the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Additional disclosure requirements include: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. With the exception of the above additional disclosure requirements, which will be applied prospectively, all other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Financial Statements.
In August 2018, the FASB issued guidance within ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments in this Update require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments in this Update also require that the capitalized implementation costs of a hosting arrangement that is a service contract be expensed over the term of the hosting arrangement. Presentation requirements include: expense related to the capitalized implementation costs should be presented in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement, payments for capitalized implementation costs in the statement of cash flows should be classified in the same manner as payments made for fees associated with the hosting element, and capitalized implementation costs in the statement of financial position should be presented in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

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Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on the Company's Consolidated Financial Statements.
Recently adopted accounting guidance
In May 2014, the FASB issued guidance within ASU 2014-09, Revenue from Contracts with Customers. The amendments in ASU 2014-09 to ASC 606, Revenue from Contracts with Customers, creates a common revenue standard and clarifies the principles for recognizing revenue that can be applied consistently across various transactions, industries, and capital markets. The amendments in the ASU clarify that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As part of that principle, the entity should identify the contract(s) with the customer, identify the performance obligation(s) of the contract, determine the transaction price, allocate that transaction price to the performance obligation(s) of the contract, and then recognize revenue when or as the entity satisfies the performance obligation(s). The Company adopted ASU 2014-09 on January 1, 2018 using the modified retrospective method. Substantially all of the Company's revenue is generated from interest income related to loans and investment securities, which are not within the scope of this guidance. The contracts that are within the scope of this guidance include service charges and fees on deposit accounts, certain types of card income, and success fees earned from equity investments. The Company completed its review of contracts and other agreements that are within the scope of this guidance and did not identify any material changes to the timing or amount of revenue recognition. Accordingly, the Company did not recognize an adjustment to retained earnings upon adoption of this guidance. The Company’s accounting policies did not change materially since the principles of revenue recognition in the ASU are largely consistent with current practices applied by the Company. The Company has expanded its qualitative disclosures of performance obligations and disaggregation of significant categories of revenue. See "Note 15. Revenue from Contracts with Customers" for further discussion.
In January 2016, the FASB issued guidance within ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-01 to Subtopic 825-10, Financial Instruments, contain the following elements: 1) requires equity investments to be measured at fair value with changes in fair value recognized in net income; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 5) requires an entity to present separately in OCI the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements; 7) clarifies that the entity should evaluate the need for a valuation allowance on a deferred tax asset related to AFS securities in combination with the entity's other deferred tax assets. Effective on January 1, 2015, the Company adopted the amendment noted in item 5) above as discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. Effective on January 1, 2018, the Company adopted the other amendments in this guidance. The primary impact on the Company's Consolidated Financial Statements results from the amendments discussed in item 1) above as changes in the fair value of the Company's equity investments are now recognized in net income, rather than in AOCI. As of January 1, 2018, the Company recorded a cumulative-effect adjustment of $0.4 million to decrease accumulated other comprehensive income with a corresponding increase to opening retained earnings. During the nine months ended September 30, 2018, the Company recognized a loss of $3.0 million related to fair value changes in equity securities, which was recorded in the Consolidated Income Statement.
In August 2016, the FASB issued guidance within ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The amendments in ASU 2016-15 to Topic 230, Statement of Cash Flows, provide guidance on eight specific cash flow classification issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investments; 7) beneficial interest in securitization transactions; and 8) separately identifiable cash flows and the application of the predominance principle. The adoption of this guidance did not have a significant impact on the Company's Consolidated Statement of Cash Flows.
In January 2017, the FASB issued guidance within ASU 2017-01, Clarifying the Definition of a Business. The amendments in ASU 2017-01 to Topic 805, Business Combinations, clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or

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businesses. The adoption of this guidance did not have a significant impact on the Company's Consolidated Financial Statements.
In January 2017, the FASB issued guidance within ASU 2017-04, Simplifying the Test for Goodwill Impairment. The amendments in ASU 2017-04 to Topic 350, Intangibles - Goodwill and Other, modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Accordingly, the amendments eliminate Step 2 from the goodwill impairment test because goodwill impairment will no longer be determined by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The adoption of this guidance did not have a significant impact on the Company's Consolidated Financial Statements.
In February 2017, the FASB issued guidance within ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The amendments in ASU 2017-05 to Subtopic 610-20, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets, clarify the scope of Subtopic 610-20 and add guidance for partial sales of nonfinancial assets, including partial sales of real estate. Under current GAAP, there are several different accounting models to evaluate whether the transfer of certain assets qualify for sale treatment. The new standard reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. The adoption of this guidance did not have a significant impact on the Company's Consolidated Financial Statements.
In May 2017, the FASB issued guidance within ASU 2017-09, Scope of Modification Accounting. The amendments in ASU 2017-09 to Topic 718, Compensation - Stock Compensation, provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following conditions are met: the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The adoption of this guidance did not have a significant impact on the Company's Consolidated Financial Statements.
In February 2018, the FASB issued guidance within ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under current GAAP, the effect of a change in tax laws or rates on deferred tax liabilities and assets are included in income from continuing operations even in situations in which the related income tax effects of items in AOCI were originally recognized in comprehensive income. Accordingly, as the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate is required to be included in income from continuing operations, the tax effects of items within AOCI do not reflect the current tax rate. The amendments in ASU 2018-02 to Topic 220, Income Statement - Reporting Comprehensive Income, allow a reclassification from AOCI to retained earnings from tax effects resulting from the TCJA. The Company elected to adopt this guidance effective January 1, 2018 and recorded a cumulative-effect adjustment of $0.7 million to decrease accumulated other comprehensive income with a corresponding increase to opening retained earnings.



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2. INVESTMENT SECURITIES
The carrying amounts and fair values of investment securities at September 30, 2018 and December 31, 2017 are summarized as follows:
 
 
September 30, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
 
 
(in thousands)
Held-to-maturity debt securities
 
 
 
 
 
 
 
 
Tax-exempt
 
$
288,290

 
$
773

 
$
(10,030
)
 
$
279,033

 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
CDO
 
$
50

 
$
19,098

 
$

 
$
19,148

Commercial MBS issued by GSEs
 
107,915

 
42

 
(7,014
)
 
100,943

Corporate debt securities
 
105,033

 
119

 
(5,768
)
 
99,384

Private label residential MBS
 
887,581

 
42

 
(31,681
)
 
855,942

Residential MBS issued by GSEs
 
1,515,408

 
167

 
(65,516
)
 
1,450,059

Tax-exempt
 
511,957

 
4,015

 
(11,065
)
 
504,907

Trust preferred securities
 
32,000

 

 
(3,383
)
 
28,617

U.S. government sponsored agency securities
 
49,000

 

 
(3,399
)
 
45,601

U.S. treasury securities
 
2,496

 

 
(21
)
 
2,475

Total AFS debt securities
 
$
3,211,440

 
$
23,483

 
$
(127,847
)
 
$
3,107,076

 
 
 
 
 
 
 
 
 
Equity securities (1)
 
 
 
 
 
 
 
 
CRA investments
 
$
52,058

 
$

 
$
(1,314
)
 
$
50,744

Preferred stock
 
122,699

 
880

 
(2,029
)
 
121,550

Total equity securities
 
$
174,757

 
$
880

 
$
(3,343
)
 
$
172,294

 
 
December 31, 2017
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
 
 
(in thousands)
Held-to-maturity debt securities
 
 
 
 
 
 
 
 
Tax-exempt
 
$
255,050

 
$
4,514

 
$
(3,250
)
 
$
256,314

 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
CDO
 
$
50

 
$
21,807

 
$

 
$
21,857

Commercial MBS issued by GSEs
 
113,069

 
46

 
(4,038
)
 
109,077

Corporate debt securities
 
105,044

 
261

 
(1,822
)
 
103,483

Private label residential MBS
 
874,261

 
756

 
(6,493
)
 
868,524

Residential MBS issued by GSEs
 
1,719,188

 
810

 
(30,703
)
 
1,689,295

Tax-exempt
 
501,988

 
10,893

 
(1,971
)
 
510,910

Trust preferred securities
 
32,000

 

 
(3,383
)
 
28,617

U.S. government sponsored agency securities
 
64,000

 

 
(2,538
)
 
61,462

U.S. treasury securities
 
2,496

 

 
(14
)
 
2,482

 
 
 
 
 
 
 
 
 
Available-for-sale equity securities (1)
 
 
 
 
 
 
 
 
CRA investments
 
51,133

 

 
(517
)
 
50,616

Preferred stock
 
52,172

 
1,160

 
(136
)
 
53,196

Total AFS securities
 
$
3,515,401

 
$
35,733

 
$
(51,615
)
 
$
3,499,519

(1)
The Company's equity securities consist of CRA investments and preferred stock. Effective January 1, 2018, the Company adopted the amendments within ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which requires that fair value changes in equity securities be recognized as part of non-interest income. Prior to January 1, 2018, equity securities were classified as part of AFS securities. On a prospective basis, equity securities will be reported separately.

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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, credit spreads, and industry and issuer-specific factors), whether downgrades by bond rating agencies have occurred, 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.
At September 30, 2018 and December 31, 2017, the Company’s unrealized losses relate primarily to market interest rate increases since the securities' original purchase date. The total number of AFS securities in an unrealized loss position at September 30, 2018 is 409, compared to 302 at December 31, 2017. 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 are no impairment charges for the three and nine months ended September 30, 2018 and 2017. The Company does not consider any securities to be other-than-temporarily impaired as of September 30, 2018 and December 31, 2017. No assurance can be made that OTTI will not occur in future periods.
Information pertaining to securities with gross unrealized losses at September 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows: 
 
September 30, 2018
 
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)
Held-to-maturity debt securities
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt
$
10,030

 
$
215,827

 
$

 
$

 
$
10,030

 
$
215,827

 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
Commercial MBS issued by GSEs
$

 
$

 
$
7,014

 
$
99,134

 
$
7,014

 
$
99,134

Corporate debt securities
766

 
19,234

 
5,002

 
74,998

 
5,768

 
94,232

Private label residential MBS
13,004

 
463,026

 
18,677

 
374,504

 
31,681

 
837,530

Residential MBS issued by GSEs
16,624

 
563,642

 
48,892

 
878,925

 
65,516

 
1,442,567

Tax-exempt
6,337

 
227,531

 
4,728

 
66,047

 
11,065

 
293,578

Trust preferred securities

 

 
3,383

 
28,617

 
3,383

 
28,617

U.S. government sponsored agency securities
151

 
4,849

 
3,248

 
40,752

 
3,399

 
45,601

U.S. treasury securities
16

 
978

 
5

 
1,497

 
21

 
2,475

Total AFS securities
$
36,898

 
$
1,279,260

 
$
90,949

 
$
1,564,474

 
$
127,847

 
$
2,843,734


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December 31, 2017
 
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)
Held-to-maturity debt securities
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt
$
3,250

 
$
107,921

 
$

 
$

 
$
3,250

 
$
107,921

 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
Commercial MBS issued by GSEs
$
161

 
$
13,565

 
$
3,877

 
$
93,641

 
$
4,038

 
$
107,206

Corporate debt securities
1,398

 
78,602

 
424

 
19,576

 
1,822

 
98,178

Private label residential MBS
3,115

 
480,885

 
3,378

 
188,710

 
6,493

 
669,595

Residential MBS issued by GSEs
13,875

 
999,478

 
16,828

 
523,270

 
30,703

 
1,522,748

Tax-exempt
17

 
6,159

 
1,954

 
69,674

 
1,971

 
75,833

Trust preferred securities

 

 
3,383

 
28,617

 
3,383

 
28,617

U.S. government sponsored agency securities
14

 
4,986

 
2,524

 
56,476

 
2,538

 
61,462

U.S. treasury securities
14

 
2,482

 

 

 
14

 
2,482

 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale equity securities
 
 
 
 
 
 
 
 
 
 
 
CRA investments

 

 
517

 
50,616

 
517

 
50,616

Preferred stock
136

 
7,357

 

 

 
136

 
7,357

Total AFS securities
$
18,730

 
$
1,593,514

 
$
32,885

 
$
1,030,580

 
$
51,615

 
$
2,624,094

The portion of unrealized gains and losses related to equity securities still held at the reporting date is calculated as follows:
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
(in thousands)
Net (losses) gains on equity securities
 
$
(1,212
)
 
$
(2,971
)
Less: Net gains (losses) recognized on equity securities sold
 

 

Unrealized (losses) gains on equity securities still held at the reporting date
 
$
(1,212
)
 
$
(2,971
)
The amortized cost and fair value of securities as of September 30, 2018, 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. 
 
 
September 30, 2018
 
 
Amortized Cost
 
Estimated Fair Value
 
 
(in thousands)
Held-to-maturity
 
 
 
 
Due in one year or less
 
$
1,200

 
$
1,236

After one year through five years
 
10,100

 
10,122

After five years through ten years
 
14,602

 
14,351

After ten years
 
262,388

 
253,324

Total HTM securities
 
$
288,290

 
$
279,033

 
 
 
 
 
Available-for-sale
 
 
 
 
Due in one year or less
 
$
4,001

 
$
3,996

After one year through five years
 
17,355

 
17,571

After five years through ten years
 
223,060

 
215,580

After ten years
 
456,120

 
462,985

Mortgage-backed securities
 
2,510,904

 
2,406,944

Total AFS securities
 
$
3,211,440

 
$
3,107,076


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Table of Contents

The following tables summarize the carrying amount of the Company’s investment ratings position as of September 30, 2018 and December 31, 2017
 
 
September 30, 2018
 
 
AAA
 
Split-rated AAA/AA+
 
AA+ to AA-
 
A+ to A-
 
BBB+ to BBB-
 
BB+ and below
 
Unrated
 
Totals
 
 
(in thousands)
Held-to-maturity debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt
 
$

 
$

 
$

 
$

 
$

 
$

 
$
288,290

 
$
288,290

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDO
 
$

 
$

 
$

 
$

 
$

 
$
19,148

 
$

 
$
19,148

Commercial MBS issued by GSEs
 

 
100,943

 

 

 

 

 

 
100,943

Corporate debt securities
 

 

 

 
71,685

 
27,699

 

 

 
99,384

Private label residential MBS
 
818,046

 

 
34,957

 
395

 
1,019

 
1,525

 

 
855,942

Residential MBS issued by GSEs
 

 
1,450,059

 

 

 

 

 

 
1,450,059

Tax-exempt
 
61,443

 
20,636

 
244,696

 
170,409

 

 

 
7,723

 
504,907

Trust preferred securities
 

 

 

 

 
28,617

 

 

 
28,617

U.S. government sponsored agency securities
 

 
45,601

 

 

 

 

 

 
45,601

U.S. treasury securities
 

 
2,475

 

 

 

 

 

 
2,475

Total AFS securities (1)
 
$
879,489

 
$
1,619,714

 
$
279,653

 
$
242,489

 
$
57,335

 
$
20,673

 
$
7,723

 
$
3,107,076

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities