WESTERN ALLIANCE BANCORPORATION - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)




ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended June 30, 2017 or

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from__________ to __________

Commission file number: 001-32550

WESTERN ALLIANCE BANCORPORATION

(Exact name of registrant as specified in its charter)



Delaware		88-0365922
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



One E. Washington Street Suite 1400, Phoenix, AZ		85004
(Address of principal executive offices)		(Zip Code)

(602) 389-3500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 July 21, 2017, Western Alliance Bancorporation had 105,536,405 shares of common stock outstanding.

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INDEX



		Page
PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	4
	Consolidated Income Statements	5
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	60
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	87
Item 4.	Controls and Procedures	89

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	89
Item 1A.	Risk Factors	89
Item 5.	Other Information	89
Item 6.	Exhibits	90

SIGNATURES		91

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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:
AAB	Alliance Association Bank	HFF	Hotel Franchise Finance
ABA	Alliance Bank of Arizona	LVSP	Las Vegas Sunset Properties
BON	Bank of Nevada	TPB	Torrey Pines Bank
Bridge	Bridge Bank	WA PWI	Western Alliance Public Welfare Investments, LLC
Company	Western Alliance Bancorporation and subsidiaries	WAB or Bank	Western Alliance Bank
FIB	First Independent Bank	WABT	Western Alliance Business Trust
HOA Services	Homeowner Associations Services	WAL or Parent	Western Alliance Bancorporation
TERMS:
AFS	Available-for-Sale	HFS	Held for Sale
ALCO	Asset and Liability Management Committee	HTM	Held-to-Maturity
AOCI	Accumulated Other Comprehensive Income	ICS	Insured Cash Sweep Service
ASC	Accounting Standards Codification	IRC	Internal Revenue Code
ASU	Accounting Standards Update	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	NUBILs	Net Unrealized Built In Losses
EPS	Earnings per share	OCI	Other Comprehensive Income
EVE	Economic Value of Equity	OREO	Other Real Estate Owned
Exchange Act	Securities Exchange Act of 1934, as amended	OTTI	Other-than-Temporary Impairment
FASB	Financial Accounting Standards Board	PCI	Purchased Credit Impaired
FDIC	Federal Deposit Insurance Corporation	SBA	Small Business Administration
FHLB	Federal Home Loan Bank	SBIC	Small Business Investment Company
FRB	Federal Reserve Bank	SEC	Securities and Exchange Commission
FVO	Fair Value Option	SERP	Supplemental Executive Retirement Plan
GAAP	U.S. Generally Accepted Accounting Principles	TDR	Troubled Debt Restructuring
GSE	Government-Sponsored Enterprise	TEB	Tax Equivalent Basis
HFI	Held for Investment	XBRL	eXtensible Business Reporting Language

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Item 1.	Financial Statements

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	June 30, 2017			December 31, 2016
	(Unaudited)
	(in thousands, except shares and per share amounts)
Assets:
Cash and due from banks	$	149,569		$	168,066
Interest-bearing deposits in other financial institutions	457,106			116,425
Cash and cash equivalents	606,675			284,491
Money market investments	147			—
Investment securities - measured at fair value; amortized cost of $0 at June 30, 2017 and $1,055 at December 31, 2016	—			1,053
Investment securities - AFS, at fair value; amortized cost of $3,085,124 at June 30, 2017 and $2,633,298 at December 31, 2016	3,084,658			2,609,380
Investment securities - HTM, at amortized cost; fair value of $137,526 at June 30, 2017 and $91,966 at December 31, 2016	132,802			92,079
Investments in restricted stock, at cost	65,357			65,249
Loans - HFS	16,736			18,909
Loans - HFI, net	13,973,259			13,189,527
Less: allowance for credit losses	(131,811		)	(124,704		)
Net loans held for investment	13,841,448			13,064,823
Premises and equipment, net	120,467			119,833
Other assets acquired through foreclosure, net	30,988			47,815
Bank owned life insurance	166,430			164,510
Goodwill	289,895			289,967
Other intangible assets, net	11,750			12,927
Deferred tax assets, net	87,658			95,194
Other assets	389,734			334,612
Total assets	$	18,844,745		$	17,200,842
Liabilities:
Deposits:
Non-interest-bearing demand	$	6,859,358		$	5,632,926
Interest-bearing	9,171,755			8,916,937
Total deposits	16,031,113			14,549,863
Customer repurchase agreements	32,661			41,728
Other borrowings	—			80,000
Qualifying debt, net	375,444			367,937
Other liabilities	346,853			269,785
Total liabilities	16,786,071			15,309,313
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock - par value $0.0001; 200,000,000 authorized; 106,931,341 shares issued at June 30, 2017 and 106,371,093 at December 31, 2016	10			10
Treasury stock, at cost (1,502,498 shares at June 30, 2017 and 1,300,232 shares at December 31, 2016)	(36,651		)	(26,362		)
Additional paid in capital	1,413,061			1,400,140
Accumulated other comprehensive income (loss)	6,490			(4,695		)
Retained earnings	675,764			522,436
Total stockholders’ equity	2,058,674			1,891,529
Total liabilities and stockholders’ equity	$	18,844,745		$	17,200,842

See accompanying Notes to Unaudited Consolidated Financial Statements.

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WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
	(in thousands, except per share amounts)
Interest income:
Loans, including fees	$	183,657		$	160,015	$	356,210		$	299,801
Investment securities	19,286			11,456		35,858			23,482
Dividends	1,921			1,994		4,149			4,007
Other	2,089			624		3,001			1,055
Total interest income	206,953			174,089		399,218			328,345
Interest expense:
Deposits	9,645			7,678		18,057			13,921
Qualifying debt	4,493			2,514		8,831			4,698
Other borrowings	59			197		249			298
Other	13			14		29			31
Total interest expense	14,210			10,403		27,166			18,948
Net interest income	192,743			163,686		372,052			309,397
Provision for credit losses	3,000			2,500		7,250			5,000
Net interest income after provision for credit losses	189,743			161,186		364,802			304,397
Non-interest income:
Service charges and fees	5,203			4,544		9,941			9,043
Card income	1,380			1,274		2,802			2,464
Income from equity investments	1,291			59		1,983			401
Income from bank owned life insurance	973			1,029		1,921			1,959
Foreign currency income	832			842		1,874			1,783
Lending related income and gains (losses) on sale of loans, net	227			194		649			3,801
(Loss) gain on sales of investment securities, net	(47		)	—		588			1,001
Other income	590			617		1,235			1,240
Total non-interest income	10,449			8,559		20,993			21,692
Non-interest expense:
Salaries and employee benefits	52,246			44,711		103,866			89,566
Legal, professional, and directors' fees	8,483			5,747		17,286			11,319
Occupancy	6,927			7,246		13,821			13,503
Data processing	4,396			5,114		9,667			9,175
Insurance	3,589			2,963		6,817			6,286
Deposit costs	2,133			986		3,874			1,758
Marketing	1,131			1,097		1,852			1,754
Loan and repossessed asset expenses	1,098			832		2,376			1,734
Card expense	704			824		1,358			1,711
Intangible amortization	488			697		1,177			1,394
Net loss (gain) on sales / valuations of repossessed and other assets	231			357		(312		)	55
Acquisition / restructure expense	—			3,662		—			3,662
Other expense	6,831			7,568		14,232			15,380
Total non-interest expense	88,257			81,804		176,014			157,297
Income before provision for income taxes	111,935			87,941		209,781			168,792
Income tax expense	31,964			26,327		56,453			45,846
Net income	$	79,971		$	61,614	$	153,328		$	122,946

Earnings per share
Basic	$	0.77		$	0.60	$	1.47		$	1.20
Diluted	0.76			0.60		1.46			1.19
Weighted average number of shares outstanding:
Basic	104,162			102,688		104,075			102,294
Diluted	105,045			103,472		104,941			103,007

See accompanying Notes to Unaudited Consolidated Financial Statements.

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WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
	(in thousands)
Net income	$	79,971		$	61,614	$	153,328		$	122,946
Other comprehensive income, net:
Unrealized gain (loss) on AFS securities, net of tax effect of $(3,534), $(8,008), $(9,204), and $(12,508), respectively	5,662			12,712		14,831			23,731
Unrealized gain (loss) on SERP, net of tax effect of $(23), $(4), $(23), and $(6)	37			6		36			12
Unrealized (loss) gain on junior subordinated debt, net of tax effect of $1,287, $(431), $2,044, and $(884)	(2,089		)	575		(3,318		)	1,334
Realized loss (gain) on sale of AFS securities included in income, net of tax effect of $(18), $0, $224, and $290, respectively	29			—		(364		)	(711		)
Net other comprehensive income	3,639			13,293		11,185			24,366
Comprehensive income	$	83,610		$	74,907	$	164,513		$	147,312

See accompanying Notes to Unaudited Consolidated Financial Statements.

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WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



	Common Stock				Additional Paid in Capital		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total Stockholders’ Equity
	Shares		Amount		Additional Paid in Capital		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total Stockholders’ Equity
	(in thousands)
Balance, December 31, 2015	103,087		$	10	$	1,323,473	$	(16,879	)	$	22,260		$	262,638	$	1,591,502
Net income	—		—		—		—			—			122,946		122,946
Exercise of stock options	53		—		519		—			—			—		519
Restricted stock, performance stock units, and other grants	687		—		10,137		—			—			—		10,137
Restricted stock surrendered (1)	(293	)	—		—		(9,045		)	—			—		(9,045		)
Issuance of common stock under ATM offering, net of offering costs	1,550		—		55,785		—			—					55,785
Other comprehensive income, net	—		—		—		—			24,366			—		24,366
Balance, June 30, 2016	105,084		$	10	$	1,389,914	$	(25,924	)	$	46,626		$	385,584	$	1,796,210

Balance, December 31, 2016	105,071		$	10	$	1,400,140	$	(26,362	)	$	(4,695	)	$	522,436	$	1,891,529
Net income	—		—		—		—			—			153,328		153,328
Exercise of stock options	23		—		527		—			—			—		527
Restricted stock, performance stock unit, and other grants	537		—		12,394		—			—			—		12,394
Restricted stock surrendered (1)	(202	)	—		—		(10,289		)	—			—		(10,289		)
Other comprehensive income, net	—		—		—		—			11,185			—		11,185
Balance, June 30, 2017	105,429		$	10	$	1,413,061	$	(36,651	)	$	6,490		$	675,764	$	2,058,674


(1)	Share amounts represent Treasury Shares, see Note 1. Summary of Significant Accounting Policies for further discussion.

See accompanying Notes to Unaudited Consolidated Financial Statements.

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WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Six Months Ended June 30,
	2017			2016
	(in thousands)
Cash flows from operating activities:
Net income	$	153,328		$	122,946
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses	7,250			5,000
Depreciation and amortization	6,389			6,136
Stock-based compensation	12,394			10,137
Excess tax benefit of stock-based compensation	(5,145		)	(3,899		)
Deferred income taxes	517			5,173
Amortization of net premiums for investment securities	10,426			6,229
Accretion of fair market value adjustments on loans acquired from business combinations	(13,584		)	(13,485		)
Accretion and amortization of fair market value adjustments on other assets and liabilities acquired from business combinations	1,332			1,549
Income from bank owned life insurance	(1,921		)	(1,959		)
(Gains) / Losses on:
Sales of investment securities	(588		)	(1,001		)
Sale of loans	107			(2,213		)
Other assets acquired through foreclosure, net	172			329
Valuation adjustments of other repossessed assets, net	(224		)	(311		)
Sale of premises, equipment, and other assets, net	(260		)	37
Changes in, net of acquisitions:
Other assets	9,704			(2,892		)
Other liabilities	(4,459		)	(16,639		)
Net cash provided by operating activities	175,438			115,137
Cash flows from investing activities:
Investment securities - measured at fair value
Principal pay downs and maturities	—			150
Proceeds from sales	995			—
Investment securities - AFS
Purchases	(759,768		)	(361,195		)
Principal pay downs and maturities	222,706			176,410
Proceeds from sales	75,332			34,304
Investment securities - HTM
Purchases	(40,765		)	(37,030		)
Principal pay downs and maturities	—			25
Purchase of investment tax credits	(10,756		)	(17,773		)
(Purchase) sale of money market investments, net	(147		)	12
(Purchase) liquidation of restricted stock	(107		)	(571		)
Loan fundings and principal collections, net	(736,342		)	(401,692		)
Purchase of premises, equipment, and other assets, net	(5,093		)	(6,592		)
Proceeds from sale of other real estate owned and repossessed assets, net	18,271			4,808
Cash and cash equivalents (used) acquired in acquisitions, net	—			(1,272,187		)
Net cash used in investing activities	(1,235,674		)	(1,881,331		)

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	Six Months Ended June 30,
	2017			2016
	(in thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits	$	1,481,249		$	2,170,733
Proceeds from issuance of subordinated debt	—			169,470
Net (decrease) increase in borrowings	(89,067		)	(149,665		)
Proceeds from exercise of common stock options	527			519
Purchases of treasury stock	(10,289		)	(9,045		)
Proceeds from issuance of stock in offerings, net	—			55,785
Net cash provided by financing activities	1,382,420			2,237,797
Net increase (decrease) in cash and cash equivalents	322,184			471,603
Cash and cash equivalents at beginning of period	284,491			224,640
Cash and cash equivalents at end of period	$	606,675		$	696,243
Supplemental disclosure:
Cash paid (returned) during the period for:
Interest	$	26,375		$	18,206
Income taxes	53,937			27,176
Non-cash investing and financing activities:
Transfers to other assets acquired through foreclosure, net	1,392			10,726
Change in unfunded LIHTC and SBIC commitments	67,718			27,000
Non-cash assets acquired in acquisition	—			1,284,557
Non-cash liabilities acquired in acquisition	—			12,559
Change in unrealized gain (loss) on AFS securities, net of tax	14,467			23,019
Change in unrealized (loss) gain on junior subordinated debt, net of tax	(3,318		)	1,334
Change in unfunded obligations	(32,742		)	(12,966		)

See accompanying Notes to Unaudited Consolidated Financial Statements.

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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 including AAB, Corporate Finance, Equity Fund Resources, HFF, Life Sciences Group, Mortgage Warehouse Lending, Public and Nonprofit Finance, Renewable Resource Group, Resort Finance, and Technology Finance. In addition, the Company has one non-bank subsidiary, LVSP, which holds and manages certain non-performing loans and OREO.

Basis of presentation

The accounting and reporting policies of the Company are in accordance with GAAP and conform to practices within the financial services industry. The accounts of the Company and its consolidated subsidiaries are included in the 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 June 30, 2017, WAL has ten 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, LLC, 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 in the Consolidated Financial Statements as of December 31, 2016 and for the three and six months ended June 30, 2016 may have been reclassified to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.

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Interim financial information

The accompanying Unaudited Consolidated Financial Statements as of and for the three and six months ended June 30, 2017 and 2016 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, 2016.

The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal, recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the Company's audited Consolidated Financial Statements.

Business combinations

Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes all of the acquired assets and assumed liabilities at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including identified intangible assets, exceeds the purchase price, a bargain purchase gain is recognized. 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.

Investment securities

Investment 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 a security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification and disclosure.

Securities classified as AFS or trading securities measured at fair value are reported as an asset in the Consolidated Balance Sheet at their estimated fair value. As the fair value of AFS securities changes, the changes are reported net of income tax as an element of OCI, except for other-than-temporarily-impaired securities. When AFS securities are sold, the unrealized gain or loss is reclassified from OCI to non-interest income. The changes in the fair values of trading securities are reported in non-interest income. Securities classified as AFS are both equity and debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations.

Interest income is recognized based on the coupon rate and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual life of the security, adjusted for prepayment estimates, using the interest method.

In estimating whether there are any OTTI losses, management considers the 1) length of time and the extent to which the fair value has been less than amortized cost; 2) financial condition and near term prospects of the issuer; 3) impact of changes in market interest rates; and 4) intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value and whether it is not more likely than not the Company would be required to sell the security.

Declines in the fair value of individual AFS debt securities that are deemed to be other-than-temporary are reflected in earnings when identified. The fair value of the debt security then becomes the new cost basis. For individual debt securities where the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary decline in fair value of the debt security related to 1) credit loss is recognized in earnings; and 2) interest rate, market, or other factors is recognized in other comprehensive income or loss.

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For individual debt securities where the Company either intends to sell the security or more likely than not will not recover all of its amortized cost, the OTTI is recognized in earnings equal to the entire difference between the security's cost basis and its fair value at the balance sheet date. For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized on a cash basis.

Restricted stock

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 sale

Loans, held for sale consist of SBA loans that the Company originates (or acquires) and intends to sell. These loans are carried at the lower of aggregate cost or fair value. Fair value is determined based on available market data for similar assets, expected cash flows, and appraisals of underlying collateral or the credit quality of the borrower. Gains and losses on the sale of loans are recognized pursuant to ASC 860, Transfers and Servicing. Interest income of these loans is accrued daily and loan origination fees and costs are deferred and included in the cost basis of the loan. The Company issues various representations and warranties associated with these loan sales. The Company has not experienced any losses as a result of these representations and warranties.

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 value of loans that are subject to a fair value hedge is adjusted for changes in value attributable to the effective portion of the hedged benchmark interest rate risk.

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 the loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the interest method over the contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the contractual life of the loan commitment. Commitment fees based on a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period. When loans are repaid, any remaining unamortized balances of premiums, discounts, or net deferred fees are recognized as interest income.

Non-accrual loans: 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

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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 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

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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, the Company will proceed with a two-step process. The first step tests for impairment, while the second step, if necessary, measures the impairment. The resulting impairment amount, if any, is charged 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 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 six months ended June 30, 2017 and 2016.

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 1) the fair value of certain fixed-rate financial instruments (fair value hedges) and 2) certain cash flows related to future interest payments on variable rate financial instruments (cash flow hedges).

The Company recognizes derivatives as assets or liabilities in the Consolidated Balance Sheet at their fair value in accordance with ASC 815, Derivatives and Hedging. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. On the date the derivative contract is entered into, the Company designates the derivative as a fair value hedge or cash flow hedge. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset or liability attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk are recorded in current-period earnings. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the change in fair value of a cash flow hedge is recognized immediately in non-interest income in the Consolidated Income Statement. Under both the fair value and cash flow hedge scenarios, changes in the fair value of derivatives not considered to be highly effective in hedging the change in fair value or the expected cash flows of the hedged item are recognized in earnings as non-interest income during the period of the change.

The Company documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is

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executed. Both at inception and at least quarterly thereafter, the Company assesses whether the derivatives used in hedging transactions are highly effective (as defined in the guidance) in offsetting changes in either the fair value or cash flows of the hedged item. Retroactive effectiveness is assessed, as well as the continued expectation that the hedge will remain effective prospectively. The Company discontinues hedge accounting prospectively when it is determined that a hedge is no longer highly effective. When hedge accounting is discontinued on a fair value hedge that no longer qualifies as an effective hedge, the derivative continues to be reported at fair value in the Consolidated Balance Sheet, but the carrying amount of the hedged item is no longer adjusted for future changes in fair value. The adjustment to the carrying amount of the hedged item that existed at the date hedge accounting is discontinued is amortized over the remaining life of the hedged item into earnings.

Derivative instruments that are not designated as hedges, so called free-standing derivatives, are reported in the Consolidated Balance Sheet at fair value and the changes in fair value are recognized in earnings as non-interest income during the period of change.

The Company may in the normal course of business purchase a financial instrument or originate a loan that contains an embedded derivative instrument. Upon purchasing the instrument or originating the loan, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host 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.

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.

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

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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.

Fair values of financial instruments

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. ASC 820, Fair Value Measurement, establishes a framework for measuring fair value and a three-level valuation hierarchy for disclosure of fair value measurement, as well as enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The Company uses various valuation approaches, including market, income, and/or cost approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:


•	Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.

•

Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models, and similar techniques.

The availability of observable inputs varies based on the nature of the specific financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant who 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

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June 30, 2017 and 2016. The estimated fair value amounts for June 30, 2017 and 2016 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 and cash equivalents

The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks approximate their fair value.

Money market investments

The carrying amounts reported in the Consolidated Balance Sheets for money market investments approximate their fair value.

Investment securities

The fair values of CRA investments, exchange-listed preferred stock, and certain corporate debt securities are based on quoted market prices and are categorized as Level 1 in the fair value hierarchy.

The fair values of other investment securities were determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield curves, credit ratings, and prepayment speeds. Fair values determined using matrix pricing are generally categorized as Level 2 in the fair value hierarchy.

During the year ended December 31, 2016, the Company's CDO securities were transferred from Level 3 to Level 2 as a result of an increase in the availability and reliability of the observable inputs utilized in the securities' fair value measurement. Previously, quoted prices and quoted prices for similar assets were not available. Therefore, the Company would engage a third party to estimate the future cash flows and discount rate using third party quotes adjusted based on assumptions a market participant would assume necessary for each specific security, which resulted in fair values for these securities being categorized as Level 3 in the fair value hierarchy.

Restricted stock

WAB is a member of the Federal Reserve System and the FHLB and, accordingly, maintains investments in the capital stock of the FRB and the FHLB. WAB also maintains an investment in its primary correspondent bank. These investments are carried at cost since no ready market exists for them, and they have no quoted market value. The Company conducts a periodic review and evaluation of its restricted stock to determine if any impairment exists. The fair values of these investments have been categorized as Level 2 in the fair value hierarchy.

Loans

The fair value of loans is estimated based on discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality and adjustments that the Company believes a market participant would consider in determining fair value based on a third party independent valuation. As a result, the fair value for 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.

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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.

Recent accounting pronouncements

In May 2014, the FASB issued guidance within ASU 2014-09, Revenue from Contracts with Customers. The amendments in ASU 2014-09 to Topic 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). In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, which deferred the original effective date of ASU No. 2014-09 by one year. Accordingly, the amendments in ASU No. 2014-09 will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that annual reporting period. The amendments will be applied through the election of one of two retrospective methods. 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 and warrant related income. While the Company is completing its review of contracts and other agreements to be prepared for adoption of this guidance on January 1, 2018, including presentation of prior periods, the Company does not expect the adoption will have a significant impact on its Consolidated Financial Statements.

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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. The amendments are effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Except for the early application of the amendment noted in item 5) above, which the Company elected to early adopt effective January 1, 2015 as discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, early adoption of the amendments in this Update is not permitted. The adoption of the other amendments in this guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.

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. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Management is in the early stages of its implementation assessment, which includes identifying the population of the Company's leases that are within the scope of the new guidance, gathering all key lease data, and considering new lease software options that will facilitate application of the new accounting requirements.

In June 2016, the FASB issued guidance within ASU 2016-13, Measurement of Credit Losses on Financial Instruments. 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 Update 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 an implementation team led by a full-time project manager that will facilitate all phases of planning and implementation of the new guidance. The implementation team is in the process of compiling key data elements and has engaged a third party to assist in developing models that will meet the requirements of the new guidance.

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 amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. However, an entity is required to adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The adoption of this guidance is not expected to 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 businesses. The amendments in this Update should be applied prospectively and are effective for annual periods beginning after December 31, 2017, including interim periods within those periods. The adoption of this guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.

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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 amendments in this Update should be applied on a prospective basis and are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The adoption of this guidance is not expected to have a material 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. An entity may elect to apply the amendments in this Update either retrospectively to each period presented in the financial statements or, retrospectively with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The adoption of this guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.

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 Update 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 Update 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 material 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 amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The amendments in this Update are effective for annual periods, and interim periods within those annual periods, beginning after December 31, 2017. Early adoption is permitted, including adoption in any interim period. The adoption of this guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.

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Recently adopted accounting guidance

In November 2015, the FASB issued guidance within ASU 2015-17, Income Taxes. The amendments in ASU 2015-17 to Topic 740, Income Taxes, changes the presentation of deferred income tax liabilities and assets, from previously bifurcated current and noncurrent, to a single noncurrent amount on the classified statement of financial position. The amendment was effective for the annual period ending after December 15, 2016, and for and interim periods within those annual periods. The adoption of this guidance did not have a material impact on the Company's Consolidated Financial Statements.

In March 2016, the FASB issued guidance within ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in ASU 2016-05 to Topic 815, Derivatives and Hedging, clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this Update were effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company's Consolidated Financial Statements.

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2. INVESTMENT SECURITIES

The carrying amounts and fair values of investment securities at June 30, 2017 and December 31, 2016 are summarized as follows:



	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
	(in thousands)
Held-to-maturity
Tax-exempt	$	132,802	$	4,759	$	(35	)	$	137,526

Available-for-sale
CDO	$	50	$	15,503	$	—		$	15,553
Commercial MBS issued by GSEs	118,535		45		(3,253		)	115,327
Corporate debt securities	65,051		376		(1,505		)	63,922
CRA investments	49,854		—		(372		)	49,482
Preferred stock	93,007		4,668		(169		)	97,506
Private label residential MBS	685,477		1,133		(6,362		)	680,248
Residential MBS issued by GSEs	1,566,373		3,398		(14,634		)	1,555,137
Tax-exempt	398,281		11,015		(5,107		)	404,189
Trust preferred securities	32,000		—		(2,595		)	29,405
U.S. government sponsored agency securities	74,000		—		(2,609		)	71,391
U.S. treasury securities	2,496		4		(2		)	2,498
Total AFS securities	$	3,085,124	$	36,142	$	(36,608	)	$	3,084,658



	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
	(in thousands)
Held-to-maturity
Tax-exempt	$	92,079	$	433	$	(546	)	$	91,966

Available-for-sale
CDO	$	50	$	13,440	$	—		$	13,490
Commercial MBS issued by GSEs	121,742		—		(3,950		)	117,792
Corporate debt securities	65,058		371		(1,285		)	64,144
CRA investments	37,627		—		(514		)	37,113
Preferred stock	96,071		833		(2,242		)	94,662
Private label residential MBS	440,272		182		(6,769		)	433,685
Residential MBS issued by GSEs	1,369,289		3,046		(17,130		)	1,355,205
Tax-exempt	409,693		8,477		(9,937		)	408,233
Trust preferred securities	32,000		—		(5,468		)	26,532
U.S. government sponsored agency securities	59,000		—		(2,978		)	56,022
U.S. treasury securities	2,496		6		—			2,502
Total AFS securities	$	2,633,298	$	26,355	$	(50,273	)	$	2,609,380

Securities measured at fair value
Residential MBS issued by GSEs								$	1,053

During the three months ended June 30, 2017, the Company sold all of its investment securities measured at fair value. No significant gain or loss was recognized upon sale of these securities. For additional information on the fair value changes of securities measured at fair value, see the trading securities table in "Note 13. Fair Value Accounting" of these Notes to Unaudited Consolidated Financial Statements.

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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), 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.

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 six months ended June 30, 2017 and 2016. The Company does not consider any securities to be other-than-temporarily impaired as of June 30, 2017 and December 31, 2016. No assurance can be made that OTTI will not occur in future periods.

Information pertaining to securities with gross unrealized losses at June 30, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:



	June 30, 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
Tax-exempt	$	35	$	15,165	$	—	$	—	$	35	$	15,165
Available-for-sale
Commercial MBS issued by GSEs	$	3,253	$	98,719	$	—	$	—	$	3,253	$	98,719
Corporate debt securities	1,505		58,495		—		—		1,505		58,495
CRA investments	372		49,482		—		—		372		49,482
Preferred stock	169		5,684		—		—		169		5,684
Private label residential MBS	5,602		438,389		760		29,349		6,362		467,738
Residential MBS issued by GSEs	14,117		983,921		517		32,932		14,634		1,016,853
Tax-exempt	5,107		131,136		—		—		5,107		131,136
Trust preferred securities	—		—		2,595		29,405		2,595		29,405
U.S. government sponsored agency securities	2,609		56,391		—		—		2,609		56,391
U.S. treasury securities	2		1,503		—		—		2		1,503
Total AFS securities	$	32,736	$	1,823,720	$	3,872	$	91,686	$	36,608	$	1,915,406

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	December 31, 2016
	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
Tax-exempt	$	546	$	30,364	$	—	$	—	$	546	$	30,364
Available-for-sale
Commercial MBS issued by GSEs	$	3,950	$	117,792	$	—	$	—	$	3,950	$	117,792
Corporate debt securities	1,285		38,716		—		—		1,285		38,716
CRA investments	514		37,113		—		—		514		37,113
Preferred stock	2,188		63,151		54		1,471		2,242		64,622
Private label residential MBS	6,170		377,638		599		16,969		6,769		394,607
Residential MBS issued by GSEs	16,990		950,480		140		5,326		17,130		955,806
Tax-exempt	9,937		148,780		—		—		9,937		148,780
Trust preferred securities	—		—		5,468		26,532		5,468		26,532
U.S. government sponsored agency securities	2,978		56,022		—		—		2,978		56,022
Total AFS securities	$	44,012	$	1,789,692	$	6,261	$	50,298	$	50,273	$	1,839,990

At June 30, 2017 and December 31, 2016, the Company’s unrealized losses relate primarily to interest rate fluctuations and tightening of credit spreads in applicable markets. The total number of securities in an unrealized loss position at June 30, 2017 is 219, compared to 244 at December 31, 2016. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysis reports. Since material downgrades have not occurred and management does not intend to sell the debt securities in an unrealized loss position in the foreseeable future, none of the securities described in the above table or in this paragraph are deemed to be OTTI.

The trust preferred securities have yields based on floating rate LIBOR, which are highly correlated to the federal funds rate and have been negatively affected by the low rate environment. This has resulted in unrealized losses for these securities.

The amortized cost and fair value of securities as of June 30, 2017, by contractual maturities, are shown below. MBS are shown separately as individual MBS are comprised of pools of loans with varying maturities. Therefore, these securities are listed separately in the maturity summary.



	June 30, 2017
	Amortized Cost		Estimated Fair Value
	(in thousands)
Held-to-maturity
After ten years	$	132,802	$	137,526

Available-for-sale
Due in one year or less	$	52,131	$	51,823
After one year through five years	67,910		71,080
After five years through ten years	260,920		262,406
After ten years	333,778		348,637
Mortgage-backed securities	2,370,385		2,350,712
Total AFS securities	$	3,085,124	$	3,084,658

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The following tables summarize the carrying amount of the Company’s investment ratings position as of June 30, 2017 and December 31, 2016:



	June 30, 2017
	AAA		Split-rated AAA/AA+		AA+ to AA-		A+ to A-		BBB+ to BBB-		BB+ and below		Unrated		Totals
	(in thousands)
Held-to-maturity
Tax-exempt	$	—	$	—	$	—	$	—	$	—	$	—	$	132,802	$	132,802

Available-for-sale
CDO	$	—	$	—	$	—	$	—	$	—	$	15,553	$	—	$	15,553
Commercial MBS issued by GSEs	—		115,327		—		—		—		—		—		115,327
Corporate debt securities	—		—		—		44,722		19,200		—		—		63,922
CRA investments	—		25,215		—		—		—		—		24,267		49,482
Preferred stock	—		—		—		10,617		66,453		4,339		16,097		97,506
Private label residential MBS	617,783		—		57,209		1,776		1,353		2,127		—		680,248
Residential MBS issued by GSEs	—		1,555,137		—		—		—		—		—		1,555,137
Tax-exempt	36,655		25,286		222,009		118,347		—		—		1,892		404,189
Trust preferred securities	—		—		—		—		29,405		—		—		29,405
U.S. government sponsored agency securities	—		71,391		—		—		—		—		—		71,391
U.S. treasury securities	—		2,498		—		—		—		—		—		2,498
Total AFS securities (1)	$	654,438	$	1,794,854	$	279,218	$	175,462	$	116,411	$	22,019	$	42,256	$	3,084,658


(1)	Where ratings differ, the Company uses an average of the available ratings by S&P, Moody’s, and/or Fitch.



	December 31, 2016
	AAA		Split-rated AAA/AA+		AA+ to AA-		A+ to A-		BBB+ to BBB-		BB+ and below		Unrated		Totals
	(in thousands)
Held-to-maturity
Tax-exempt	$	—	$	—	$	—	$	—	$	—	$	—	$	92,079	$	92,079
Available-for-sale
CDO	$	—	$	—	$	—	$	—	$	—	$	13,490	$	—	$	13,490
Commercial MBS issued by GSEs	—		117,792		—		—		—		—		—		117,792
Corporate debt securities	—		—		5,429		38,715		20,000		—		—		64,144
CRA investments	—		—		—		—		—		—		37,113		37,113
Preferred stock	—		—		—		—		64,486		14,658		15,518		94,662
Private label residential MBS	399,013		—		29,921		2,117		2,634		—		—		433,685
Residential MBS issued by GSEs	—		1,355,205		—		—		—		—		—		1,355,205
Tax-exempt	80,862		—		268,249		59,122		—		—		—		408,233
Trust preferred securities	—		—		—		—		26,532		—		—		26,532
U.S. government sponsored agency securities	—		56,022		—		—		—		—		—		56,022
U.S. treasury securities	—		2,502		—		—		—		—		—		2,502
Total AFS securities (1)	$	479,875	$	1,531,521	$	303,599	$	99,954	$	113,652	$	28,148	$	52,631	$	2,609,380

Securities measured at fair value
Residential MBS issued by GSEs	$	—	$	1,053	$	—	$	—	$	—	$	—	$	—	$	1,053


(1)	Where ratings differ, the Company uses an average of the available ratings by S&P, Moody’s, and/or Fitch.

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Securities with carrying amounts of approximately $991.1 million and $763.0 million at June 30, 2017 and December 31, 2016, respectively, were pledged for various purposes as required or permitted by law.

The following table presents gross gains and losses on sales of investment securities:



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
	(in thousands)
Gross gains	$	78		$	—	$	713		$	2,057
Gross losses	(125		)	—		(125		)	(1,056		)
Net (losses) gains on sales of investment securities	$	(47	)	$	—	$	588		$	1,001

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3. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES

The composition of the Company’s held for investment loan portfolio is as follows:



	June 30, 2017			December 31, 2016
	(in thousands)
Commercial and industrial	$	6,236,083		$	5,755,021
Commercial real estate - non-owner occupied	3,649,108			3,543,956
Commercial real estate - owner occupied	2,021,226			2,013,276
Construction and land development	1,601,705			1,478,114
Residential real estate	334,800			259,432
Commercial leases	82,429			100,765
Consumer	47,908			38,963
Loans, net	13,973,259			13,189,527
Allowance for credit losses	(131,811		)	(124,704		)
Total loans HFI	$	13,841,448		$	13,064,823

Net deferred loan fees and costs as of June 30, 2017 and December 31, 2016 total $20.4 million and $22.3 million, respectively, which is a reduction in the carrying value of loans. Net unamortized purchase discounts on loans total $7.4 million and $5.2 million as of June 30, 2017 and December 31, 2016, respectively. Total loans held for investment are also net of interest rate and credit marks on acquired loans, which are a net reduction in the carrying value of loans. Interest rate marks were $20.7 million and $22.2 million as of June 30, 2017 and December 31, 2016, respectively. Credit marks were $37.8 million and $47.3 million as of June 30, 2017 and December 31, 2016, respectively.

As of June 30, 2017 and December 31, 2016, the Company also has $16.7 million and $18.9 million of HFS loans, respectively.

The following table presents the contractual aging of the recorded investment in past due loans held for investment by class of loans:



	June 30, 2017
	Current		30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Total
	(in thousands)
Commercial real estate
Owner occupied	$	2,016,000	$	1,120	$	248	$	3,858	$	5,226	$	2,021,226
Non-owner occupied	3,413,497		—		594		654		1,248		3,414,745
Multi-family	234,363		—		—		—		—		234,363
Commercial and industrial
Commercial	6,230,151		668		2,465		2,799		5,932		6,236,083
Leases	82,409		—		20		—		20		82,429
Construction and land development
Construction	1,072,426		—		—		—		—		1,072,426
Land	527,996		—		—		1,283		1,283		529,279
Residential real estate	327,871		232		687		6,010		6,929		334,800
Consumer	47,690		58		5		155		218		47,908
Total loans	$	13,952,403	$	2,078	$	4,019	$	14,759	$	20,856	$	13,973,259

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	December 31, 2016
	Current		30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Total
	(in thousands)
Commercial real estate
Owner occupied	$	2,009,728	$	71	$	—	$	3,477	$	3,548	$	2,013,276
Non-owner occupied	3,339,121		672		2		—		674		3,339,795
Multi-family	204,161		—		—		—		—		204,161
Commercial and industrial
Commercial	5,747,368		549		584		6,520		7,653		5,755,021
Leases	100,761		—		—		4		4		100,765
Construction and land development
Construction	973,242		—		—		—		—		973,242
Land	503,588		—		—		1,284		1,284		504,872
Residential real estate	249,726		4,333		281		5,092		9,706		259,432
Consumer	38,765		26		2		170		198		38,963
Total loans	$	13,166,460	$	5,651	$	869	$	16,547	$	23,067	$	13,189,527

The following table presents the recorded investment in non-accrual loans and loans past due ninety days or more and still accruing interest by class of loans:



	June 30, 2017								December 31, 2016
	Non-accrual loans						Loans past due 90 days or more and still accruing		Non-accrual loans						Loans past due 90 days or more and still accruing
	Current		Past Due/ Delinquent		Total Non-accrual		Loans past due 90 days or more and still accruing		Current		Past Due/ Delinquent		Total Non-accrual		Loans past due 90 days or more and still accruing
	(in thousands)
Commercial real estate
Owner occupied	$	4,084	$	3,858	$	7,942	$	—	$	5,084	$	3,264	$	8,348	$	285
Non-owner occupied	2,474		308		2,782		345		8,317		1		8,318		—
Multi-family	—		—		—		—		—		—		—		—
Commercial and industrial
Commercial	9,566		4,716		14,282		147		10,893		6,043		16,936		775
Leases	18		—		18		—		28		3		31		—
Construction and land development
Construction	—		—		—		—		—		—		—		—
Land	—		1,284		1,284		—		—		1,284		1,284		—
Residential real estate	1,127		2,481		3,608		3,529		99		5,093		5,192		—
Consumer	—		155		155		—		—		163		163		7
Total	$	17,269	$	12,802	$	30,071	$	4,021	$	24,421	$	15,851	$	40,272	$	1,067

The reduction in interest income associated with loans on non-accrual status was approximately $0.6 million and $0.5 million for the three months ended June 30, 2017 and 2016, respectively, and $1.2 million and $0.9 million for the six months ended June 30, 2017 and 2016, respectively.

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

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The following tables present gross loans by risk rating:



	June 30, 2017
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,950,186	$	17,877	$	50,828	$	2,335	$	—	$	2,021,226
Non-owner occupied	3,367,136		10,658		36,951		—		—		3,414,745
Multi-family	234,363		—		—		—		—		234,363
Commercial and industrial
Commercial	6,058,156		89,063		88,864		—		—		6,236,083
Leases	82,411		—		18		—		—		82,429
Construction and land development
Construction	1,051,677		9,678		11,071		—		—		1,072,426
Land	513,966		12,879		2,434		—		—		529,279
Residential real estate	325,593		828		8,379		—		—		334,800
Consumer	47,640		53		215		—		—		47,908
Total	$	13,631,128	$	141,036	$	198,760	$	2,335	$	—	$	13,973,259



	June 30, 2017
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)
Current (up to 29 days past due)	$	13,629,028	$	140,755	$	181,028	$	1,592	$	—	$	13,952,403
Past due 30 - 59 days	550		103		1,425		—		—		2,078
Past due 60 - 89 days	1,454		31		2,534		—		—		4,019
Past due 90 days or more	96		147		13,773		743		—		14,759
Total	$	13,631,128	$	141,036	$	198,760	$	2,335	$	—	$	13,973,259



	December 31, 2016
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,935,322	$	53,634	$	22,090	$	2,230	$	—	$	2,013,276
Non-owner occupied	3,278,090		22,972		38,733		—		—		3,339,795
Multi-family	203,964		197		—		—		—		204,161
Commercial and industrial
Commercial	5,621,448		70,011		58,562		5,000		—		5,755,021
Leases	100,737		—		28		—		—		100,765
Construction and land development
Construction	961,290		—		11,952		—		—		973,242
Land	501,569		337		2,966		—		—		504,872
Residential real estate	252,304		929		6,199		—		—		259,432
Consumer	38,698		64		201		—		—		38,963
Total	$	12,893,422	$	148,144	$	140,731	$	7,230	$	—	$	13,189,527

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	December 31, 2016
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)
Current (up to 29 days past due)	$	12,887,308	$	147,838	$	124,084	$	7,230	$	—	$	13,166,460
Past due 30 - 59 days	5,433		96		122		—		—		5,651
Past due 60 - 89 days	410		210		249		—		—		869
Past due 90 days or more	271		—		16,276		—		—		16,547
Total	$	12,893,422	$	148,144	$	140,731	$	7,230	$	—	$	13,189,527

The table below reflects the recorded investment in loans classified as impaired:



	June 30, 2017			December 31, 2016
	(in thousands)
Impaired loans with a specific valuation allowance under ASC 310 (1)	$	8,295		$	10,909
Impaired loans without a specific valuation allowance under ASC 310 (2)	97,339			88,300
Total impaired loans	$	105,634		$	99,209
Valuation allowance related to impaired loans (3)	$	(3,878	)	$	(4,239	)


(1)	Includes TDR loans of $6.9 million and $2.5 million at June 30, 2017 and December 31, 2016, respectively.


(2)	Includes TDR loans of $48.3 million and $58.3 million at June 30, 2017 and December 31, 2016, respectively.


(3)	Includes valuation allowance related to TDR loans of $2.6 million and $0.6 million at June 30, 2017 and December 31, 2016, respectively.

The following table presents impaired loans by class:



	June 30, 2017		December 31, 2016
	(in thousands)
Commercial real estate
Owner occupied	$	20,928	$	20,748
Non-owner occupied	21,957		25,524
Multi-family	—		—
Commercial and industrial
Commercial	33,197		21,107
Leases	341		355
Construction and land development
Construction	—		—
Land	12,146		14,838
Residential real estate	16,867		16,391
Consumer	198		246
Total	$	105,634	$	99,209

A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable, in the table above as “Impaired loans without a specific valuation allowance under ASC 310.” However, before concluding that an impaired loan needs no associated valuation allowance, an assessment is made to consider all available and relevant information for the method used to evaluate impairment and the type of loan being assessed. The valuation allowance disclosed above is included in the allowance for credit losses reported in the Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016.

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The following table presents the average investment in impaired loans and income recognized on impaired loans:



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands)
Average investment in impaired loans	$	107,816	$	109,833	$	105,504	$	116,173
Interest income recognized on impaired loans	1,115		1,050		2,035		2,163
Interest recognized on non-accrual loans, cash basis	350		225		678		397

The following table presents the average investment in impaired loans by loan class:



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands)
Commercial real estate
Owner occupied	$	21,500	$	19,075	$	21,314	$	20,406
Non-owner occupied	22,149		31,894		23,274		32,463
Multi-family	—		—		—		—
Commercial and industrial
Commercial	33,557		24,299		29,646		28,001
Leases	343		333		355		1,191
Construction and land development
Construction	—		—		—		—
Land	12,956		18,299		13,694		18,099
Residential real estate	17,107		15,635		17,007		15,700
Consumer	204		298		214		313
Total	$	107,816	$	109,833	$	105,504	$	116,173

The average investment in TDR loans was $57.5 million and $72.1 million for the three months ended June 30, 2017 and 2016, respectively, and $58.9 million and $75.1 million for the six months ended June 30, 2017 and 2016, respectively.

The following table presents interest income on impaired loans by class:



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands)
Commercial real estate
Owner occupied	$	188	$	247	$	364	$	542
Non-owner occupied	280		313		519		651
Multi-family	—		—		—		—
Commercial and industrial
Commercial	333		121		473		229
Leases	4		4		7		36
Construction and land development
Construction	—		—		—		—
Land	166		239		388		446
Residential real estate	143		125		282		256
Consumer	1		1		2		3
Total	$	1,115	$	1,050	$	2,035	$	2,163

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

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The following table summarizes nonperforming assets:



	June 30, 2017		December 31, 2016
	(in thousands)
Non-accrual loans (1)	$	30,071	$	40,272
Loans past due 90 days or more on accrual status (2)	4,021		1,067
Accruing troubled debt restructured loans	44,221		53,637
Total nonperforming loans	78,313		94,976
Other assets acquired through foreclosure, net	30,988		47,815
Total nonperforming assets	$	109,301	$	142,791


(1)	Includes non-accrual TDR loans of $11.0 million and $7.1 million at June 30, 2017 and December 31, 2016, respectively.


(2)	Includes $0.3 million from loans acquired with deteriorated credit quality at each of the periods ended June 30, 2017 and December 31, 2016.

Loans Acquired with Deteriorated Credit Quality

Changes in the accretable yield for loans acquired with deteriorated credit quality are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands)
Balance, at beginning of period	$	13,812		$	13,541		$	15,177		$	15,925
Additions due to acquisition	—			4,301			—			4,301
Reclassifications from non-accretable to accretable yield (1)	2,086			—			2,086			—
Accretion to interest income	(777		)	(887		)	(1,684		)	(1,669		)
Reversal of fair value adjustments upon disposition of loans	(874		)	(1,092		)	(1,332		)	(2,694		)
Balance, at end of period	$	14,247		$	15,863		$	14,247		$	15,863


(1)	The primary drivers of reclassification from non-accretable to accretable yield resulted from changes in estimated cash flows.

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Allowance for Credit Losses

The following table summarizes the changes in the allowance for credit losses by portfolio type:



	Three Months Ended June 30,
	Construction and Land Development			Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Total
	(in thousands)
2017
Beginning Balance	$	21,097		$	28,004		$	4,412		$	73,429		$	707		$	127,649
Charge-offs	—			1,819			332			651			8			2,810
Recoveries	(508		)	(406		)	(1,299		)	(1,759		)	—			(3,972		)
Provision	(753		)	2,002			(541		)	2,197			95			3,000
Ending balance	$	20,852		$	28,593		$	4,838		$	76,734		$	794		$	131,811
2016
Beginning Balance	$	19,425		$	23,104		$	4,938		$	71,156		$	604		$	119,227
Charge-offs	—			244			—			1,161			46			1,451
Recoveries	(58		)	(770		)	(153		)	(804		)	(43		)	(1,828		)
Provision	1,903			1,237			(545		)	(252		)	157			2,500
Ending balance	$	21,386		$	24,867		$	4,546		$	70,547		$	758		$	122,104



	Six Months Ended June 30,
	Construction and Land Development			Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Total
	(in thousands)
2017
Beginning Balance	$	21,175		$	25,673		$	3,851		$	73,333		$	672		$	124,704
Charge-offs	—			1,819			447			3,245			42			5,553
Recoveries	(785		)	(938		)	(1,551		)	(2,087		)	(49		)	(5,410		)
Provision	(1,108		)	3,801			(117		)	4,559			115			7,250
Ending balance	$	20,852		$	28,593		$	4,838		$	76,734		$	794		$	131,811
2016
Beginning Balance	$	18,976		$	23,160		$	5,278		$	71,181		$	473		$	119,068
Charge-offs	—			654			26			8,652			120			9,452
Recoveries	(153		)	(4,435		)	(410		)	(2,380		)	(110		)	(7,488		)
Provision	2,257			(2,074		)	(1,116		)	5,638			295			5,000
Ending balance	$	21,386		$	24,867		$	4,546		$	70,547		$	758		$	122,104

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The following table presents impairment method information related to loans and allowance for credit losses by loan portfolio segment:



	Commercial Real Estate-Owner Occupied		Commercial Real Estate-Non-Owner Occupied		Commercial and Industrial		Residential Real Estate		Construction and Land Development		Commercial Leases		Consumer		Total Loans
	(in thousands)
Loans as of June 30, 2017:
Recorded Investment:
Impaired loans with an allowance recorded	$	743	$	—	$	7,552	$	—	$	—	$	—	$	—	$	8,295
Impaired loans with no allowance recorded	20,186		21,957		25,644		16,867		12,146		341		198		97,339
Total loans individually evaluated for impairment	20,929		21,957		33,196		16,867		12,146		341		198		105,634
Loans collectively evaluated for impairment	1,989,251		3,489,985		6,202,887		317,323		1,589,559		82,088		47,710		13,718,803
Loans acquired with deteriorated credit quality	11,046		137,166		—		610		—		—		—		148,822
Total recorded investment	$	2,021,226	$	3,649,108	$	6,236,083	$	334,800	$	1,601,705	$	82,429	$	47,908	$	13,973,259
Unpaid Principal Balance
Impaired loans with an allowance recorded	$	743	$	—	$	7,568	$	—	$	—	$	—	$	—	$	8,311
Impaired loans with no allowance recorded	28,552		29,346		55,105		26,174		29,416		493		10,815		179,901
Total loans individually evaluated for impairment	29,295		29,346		62,673		26,174		29,416		493		10,815		188,212
Loans collectively evaluated for impairment	1,989,251		3,489,985		6,202,887		317,323		1,589,559		82,088		47,710		13,718,803
Loans acquired with deteriorated credit quality	14,551		166,158		4,880		729		—		—		—		186,318
Total unpaid principal balance	$	2,033,097	$	3,685,489	$	6,270,440	$	344,226	$	1,618,975	$	82,581	$	58,525	$	14,093,333
Related Allowance for Credit Losses
Impaired loans with an allowance recorded	$	743	$	—	$	3,135	$	—	$	—	$	—	$	—	$	3,878
Impaired loans with no allowance recorded	—		—		—		—		—		—		—		—
Total loans individually evaluated for impairment	743		—		3,135		—		—		—		—		3,878
Loans collectively evaluated for impairment	12,553		14,455		73,597		4,838		20,014		—		794		126,251
Loans acquired with deteriorated credit quality	—		842		2		—		838		—		—		1,682
Total allowance for credit losses	$	13,296	$	15,297	$	76,734	$	4,838	$	20,852	$	—	$	794	$	131,811

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	Commercial Real Estate-Owner Occupied		Commercial Real Estate-Non-Owner Occupied		Commercial and Industrial		Residential Real Estate		Construction and Land Development		Commercial Leases		Consumer		Total Loans
	(in thousands)
Loans as of December 31, 2016:
Recorded Investment:
Impaired loans with an allowance recorded	$	3,125	$	—	$	7,766	$	—	$	—	$	—	$	18	$	10,909
Impaired loans with no allowance recorded	17,624		25,524		13,340		16,391		14,838		355		228		88,300
Total loans individually evaluated for impairment	20,749		25,524		21,106		16,391		14,838		355		246		99,209
Loans collectively evaluated for impairment	1,981,176		3,383,585		5,733,915		242,409		1,443,952		100,410		38,717		12,924,164
Loans acquired with deteriorated credit quality	11,351		134,847		—		632		19,324		—		—		166,154
Total recorded investment	$	2,013,276	$	3,543,956	$	5,755,021	$	259,432	$	1,478,114	$	100,765	$	38,963	$	13,189,527
Unpaid Principal Balance
Impaired loans with an allowance recorded	$	3,125	$	—	$	8,019	$	—	$	—	$	—	$	18	$	11,162
Impaired loans with no allowance recorded	26,336		33,632		43,176		26,225		33,487		507		1,358		164,721
Total loans individually evaluated for impairment	29,461		33,632		51,195		26,225		33,487		507		1,376		175,883
Loans collectively evaluated for impairment	1,981,176		3,383,585		5,733,915		242,409		1,443,952		100,410		38,717		12,924,164
Loans acquired with deteriorated credit quality	14,878		165,275		925		738		19,858		—		—		201,674
Total unpaid principal balance	$	2,025,515	$	3,582,492	$	5,786,035	$	269,372	$	1,497,297	$	100,917	$	40,093	$	13,301,721
Related Allowance for Credit Losses
Impaired loans with an allowance recorded	$	937	$	—	$	3,301	$	—	$	—	$	—	$	1	$	4,239
Impaired loans with no allowance recorded	—		—		—		—		—		—		—		—
Total loans individually evaluated for impairment	937		—		3,301		—		—		—		1		4,239
Loans collectively evaluated for impairment	11,403		12,646		69,673		3,851		20,398		—		671		118,642
Loans acquired with deteriorated credit quality	—		687		359		—		777		—		—		1,823
Total allowance for credit losses	$	12,340	$	13,333	$	73,333	$	3,851	$	21,175	$	—	$	672	$	124,704

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Troubled Debt Restructurings

A TDR loan is a loan on which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a reduction in the face amount of the debt, a reduction in the accrued interest, or deferral of interest payments. The majority of the Company's modifications are extensions in terms or deferral of payments which result in no lost principal or interest followed by reductions in interest rates or accrued interest. A TDR loan is also considered impaired. Consistent with regulatory guidance, a TDR loan that is subsequently modified in another restructuring agreement but has shown sustained performance and classification as a TDR, will be removed from TDR status provided that the modified terms were market-based at the time of modification.

During the three months ended June 30, 2017, the Company did not have any new TDR loans. During the six months ended June 30, 2017, the Company had one new TDR loan with a recorded investment of $4.9 million. No principal amounts were forgiven and there were no waived fees or other expenses resulting from the TDR. The Company did not have any new TDR loans during the three and six months ended June 30, 2016.

During the three months ended June 30, 2017, there was one CRE, non-owner occupied TDR loan with a net recorded investment of $0.3 million for which there was a payment default. During the six months ended June 30, 2017, there were two TDR loans with a net recorded investment of $0.4 million for which there was a payment default. During the three months ended June 30, 2016, there was one residential real estate TDR loan with a net recorded investment of $0.3 million for which there was a payment default. During the six months ended June 30, 2016, there were two TDR loans with a net recorded investment of $5.7 million for which there was a payment default.

A TDR loan is deemed to have a payment default when it becomes past due 90 days, goes on non-accrual, or is restructured again. Payment defaults, along with other qualitative indicators, are considered by management in the determination of the allowance for credit losses.

At June 30, 2017 and December 31, 2016 there were no loan commitments outstanding on TDR loans.

Loan Purchases and Sales

For the three months ended June 30, 2017 and 2016, secondary market loan purchases totaled $196.7 million and $64.6 million, respectively. For the six months ended June 30, 2017 and 2016, secondary market loan purchases totaled $450.0 million and $98.3 million, respectively. For 2017, these purchased loans consisted of $347.6 million of commercial and industrial loans and $102.4 million of residential real estate loans. For 2016, these purchased loans consisted of commercial and industrial loans.

During the three months ended June 30, 2017, there were no significant secondary market loan sales. During the six months ended June 30, 2017, the Company sold CRE loans with a carrying value of $9.2 million and recognized a loss of less than $0.1 million on the sales. During the three and six months ended June 30, 2016, the Company sold loans, which consisted primarily of CRE and commercial and industrial loans, with a carrying value of $23.8 million and recognized a gain of $2.5 million on the sales.

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4. OTHER ASSETS ACQUIRED THROUGH FORECLOSURE

The following table represents the changes in other assets acquired through foreclosure:



	Three Months Ended June 30, 2017
	Gross Balance			Valuation Allowance			Net Balance
	(in thousands)
Balance, beginning of period	$	50,919		$	(5,719	)	$	45,200
Transfers to other assets acquired through foreclosure, net	1,392			—			1,392
Proceeds from sale of other real estate owned and repossessed assets, net	(17,208		)	1,826			(15,382		)
Valuation adjustments, net	—			(156		)	(156		)
(Losses) gains, net (1)	(66		)	—			(66		)
Balance, end of period	$	35,037		$	(4,049	)	$	30,988

	Three Months Ended June 30, 2016
Balance, beginning of period	$	61,346		$	(8,570	)	$	52,776
Transfers to other assets acquired through foreclosure, net	88			—			88
Proceeds from sale of other real estate owned and repossessed assets, net	(4,480		)	1,813			(2,667		)
Valuation adjustments, net	—			134			134
(Losses) gains, net (1)	(489		)	—			(489		)
Balance, end of period	$	56,465		$	(6,623	)	$	49,842



	Six Months Ended June 30, 2017
	Gross Balance			Valuation Allowance			Net Balance
	(in thousands)
Balance, beginning of period	$	54,138		$	(6,323	)	$	47,815
Transfers to other assets acquired through foreclosure, net	1,392			—			1,392
Proceeds from sale of other real estate owned and repossessed assets, net	(20,321		)	2,050			(18,271		)
Valuation adjustments, net	—			224			224
(Losses) gains, net (1)	(172		)	—			(172		)
Balance, end of period	$	35,037		$	(4,049	)	$	30,988

	Six Months Ended June 30, 2016
Balance, beginning of period	$	52,984		$	(9,042	)	$	43,942
Transfers to other assets acquired through foreclosure, net	10,726			—			10,726
Proceeds from sale of other real estate owned and repossessed assets, net	(6,916		)	2,108			(4,808		)
Valuation adjustments, net	—			311			311
(Losses) gains, net (1)	(329		)	—			(329		)
Balance, end of period	$	56,465		$	(6,623	)	$	49,842


(1)	There were $0.1 million and zero net gains related to initial transfers to other assets during the three and six months ended June 30, 2017 and 2016, respectively.

At June 30, 2017 and 2016, the majority of the Company’s repossessed assets consisted of properties located in Nevada. The Company held 21 properties at June 30, 2017, compared to 31 at December 31, 2016, and 34 at June 30, 2016.

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5. OTHER BORROWINGS

The following table summarizes the Company’s borrowings as of June 30, 2017 and December 31, 2016:



	June 30, 2017		December 31, 2016
	(in thousands)
Short-Term:
FHLB advances	$	—	$	80,000
Total short-term borrowings	$	—	$	80,000

The Company maintains other lines of credit with correspondent banks totaling $168.0 million, of which $23.0 million is secured by pledged securities and has a floating interest rate of one-month or three-month LIBOR plus 1.50%. The remaining $145.0 million is unsecured and has a floating interest rate of one-month LIBOR plus 3.25%. As of June 30, 2017 and December 31, 2016, there were no outstanding balances on the Company's lines of credit.

The Company maintains lines of credit with the FHLB and the FRB. The Company’s borrowing capacity is determined based on collateral pledged, generally consisting of investment securities and loans, at the time of the borrowing. At June 30, 2017, the Company had no short-term borrowings. At December 31, 2016, short-term FHLB advances of $80.0 million had a weighted average interest rate of 0.55%.

As of June 30, 2017 and December 31, 2016, the Company had additional available credit with the FHLB of approximately $2.33 billion and $2.15 billion, respectively, and with the FRB of approximately $1.16 billion and $997.0 million, respectively.

6. QUALIFYING DEBT

Subordinated Debt

The Company has $175.0 million of subordinated debentures with a maturity date of July 1, 2056. Beginning on or after July 1, 2021, the Company may redeem the debentures, in whole or in part, at their principal amount plus any accrued and unpaid interest. The subordinated debt was recorded net of issuance costs of $5.5 million. The debentures have a fixed interest rate of 6.25% per annum.

WAB has $150.0 million of subordinated debt, which was recorded net of debt issuance costs of $1.8 million, and matures July 15, 2025. The subordinated debt has a fixed interest rate of 5.00% through June 30, 2020 and then converts to a variable rate of 3.20% plus three-month LIBOR through maturity.

To hedge the interest rate risk on the Company's subordinated debt issuances, the Company entered into fair value interest rate hedges with pay variable/receive fixed swaps. The carrying value of all subordinated debt, which includes the effective portion of related hedges, totals $307.8 million and $305.8 million at June 30, 2017 and December 31, 2016, respectively.

Junior Subordinated Debt

The Company has formed or acquired through acquisition eight statutory business trusts, which exist for the exclusive purpose of issuing Cumulative Trust Preferred Securities.

With the exception of debt issued by Bridge Capital Trust I and Bridge Capital Trust II, junior subordinated debt is recorded at fair value at each reporting date due to the FVO election made by the Company under ASC 825. The Company did not make the FVO election for the junior subordinated debt acquired as part of the Bridge acquisition. Accordingly, the carrying value of these trusts does not reflect the current fair value of the debt and includes a fair market value adjustment established at acquisition that is being accreted over the remaining life of the trusts. The carrying value of junior subordinated debt was $67.7 million and $62.2 million at June 30, 2017 and December 31, 2016, respectively.

The weighted average interest rate of all junior subordinated debt as of June 30, 2017 was 3.64%, which is three-month LIBOR plus the contractual spread of 2.34%, compared to a weighted average interest rate of 3.34% at December 31, 2016.

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7. STOCKHOLDERS' EQUITY

Stock-Based Compensation

Restricted Stock Awards

Restricted stock awards granted to employees in 2017 and 2016 generally vest over a three-year period. Stock grants made to non-employee WAL directors during 2017 became fully vested at June 30, 2017. The Company estimates the compensation cost for stock grants based upon the grant date fair value. Stock compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The aggregate grant date fair value for the restricted stock awards granted during the three and six months ended June 30, 2017 was $0.3 million and $16.2 million, respectively. Stock compensation expense related to restricted stock awards and stock options granted to employees are included in Salaries and employee benefits in the Consolidated Income Statement. For restricted stock awards granted to WAL directors, the related stock compensation expense is included in Legal, professional, and directors' fees in the Consolidated Income Statement. For the three and six months ended June 30, 2017, the Company recognized $4.1 million and $8.6 million and in stock-based compensation expense related to all restricted stock award grants, including those assumed as part of the Bridge acquisition, compared to $3.7 million and $7.5 million for the three and six months ended June 30, 2016, respectively.

In addition, the Company grants shares of restricted stock to certain members of executive management that have both performance and service conditions that affect vesting. The performance condition is based on achieving an EPS target over a one-year performance period. For the three and six months ended June 30, 2017, the Company recognized $0.4 million and $0.8 million, respectively, in stock-based compensation expense related to these performance-based restricted stock grants, compared to $0.3 million and $0.5 million for the three and six months ended June 30, 2016, respectively.

Performance Stock Units

The Company grants members of its executive management committee performance stock units that do not vest unless the Company achieves a specified cumulative EPS target over a three-year performance period. The number of shares issued will vary based on the cumulative EPS target that is achieved. The Company estimates the cost of performance stock units based upon the grant date fair value and expected vesting percentage over the three-year performance period. For the three and six months ended June 30, 2017, the Company recognized $1.4 million and $2.7 million, respectively, in stock-based compensation expense related to these performance stock units, compared to $1.2 million and $2.3 million for the three and six months ended June 30, 2016, respectively.

The three-year performance period for the 2014 grant ended on December 31, 2016, and the Company's cumulative EPS for the performance period exceeded the level required for a maximum award under the terms of the grant. As a result, executive management committee members were entitled to the maximum award, which was 206,050 shares.

Stock Options

The Company's stock option awards consist of those awards assumed as part of the Bridge acquisition. During the three and six months ended June 30, 2017, the Company recognized $0.2 million and $0.4 million in compensation expense related to these awards, compared to $0.2 million and $0.4 million for the three and six months ended June 30, 2016, respectively.

Treasury Shares

During the three and six months ended June 30, 2017, the Company purchased treasury shares of 960 and 202,266, respectively, at a weighted average price of $48.20 and $50.86 per share, respectively. During the three and six months ended June 30, 2016, the Company purchased treasury shares of 2,735 and 293,167, respectively, at a weighted average price of $35.20 and $31.09 per share, respectively.

8. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of tax, for the periods indicated:



	Three Months Ended June 30,
	Unrealized holding gains (losses) on AFS			Unrealized holding gains (losses) on SERP		Unrealized holding gains (losses) on junior subordinated debt			Impairment loss on securities		Total
	(in thousands)
Balance, March 31, 2017	$	(6,140	)	$	120	$	8,727		$	144	$	2,851
Other comprehensive income before reclassifications	5,662			37		(2,089		)	—		3,610
Amounts reclassified from accumulated other comprehensive income	29			—		—			—		29
Net current-period other comprehensive income (loss)	5,691			37		(2,089		)	—		3,639
Balance, June 30, 2017	$	(449	)	$	157	$	6,638		$	144	$	6,490

Balance, March 31, 2016	$	20,301		$	96	$	12,792		$	144	$	33,333
Other comprehensive income before reclassifications	12,712			6		575			—		13,293
Amounts reclassified from accumulated other comprehensive income	—			—		—			—		—
Net current-period other comprehensive income (loss)	12,712			6		575			—		13,293
Balance, June 30, 2016	$	33,013		$	102	$	13,367		$	144	$	46,626



	Six Months Ended June 30,
	Unrealized holding gains (losses) on AFS			Unrealized holding gains (losses) on SERP		Unrealized holding gains (losses) on junior subordinated debt			Impairment loss on securities		Total
	(in thousands)
Balance, December 31, 2016	$	(14,916	)	$	121	$	9,956		$	144	$	(4,695	)
Other comprehensive income before reclassifications	14,831			36		(3,318		)			11,549
Amounts reclassified from accumulated other comprehensive income	(364		)	—		—			—		(364		)
Net current-period other comprehensive income (loss)	14,467			36		(3,318		)	—		11,185
Balance, June 30, 2017	$	(449	)	$	157	$	6,638		$	144	$	6,490

Balance, December 31, 2015	$	9,993		$	90	$	12,033		$	144	$	22,260
Other comprehensive income before reclassifications	23,731			12		1,334			—		25,077
Amounts reclassified from accumulated other comprehensive income	(711		)	—		—			—		(711		)
Net current-period other comprehensive income (loss)	23,020			12		1,334			—		24,366
Balance, June 30, 2016	$	33,013		$	102	$	13,367		$	144	$	46,626

The following table presents reclassifications out of accumulated other comprehensive income:



	Three Months Ended June 30,					Six Months Ended June 30,
Income Statement Classification	2017			2016		2017			2016
	(in thousands)
(Loss) gain on sales of investment securities, net	$	(47	)	$	—	$	588		$	1,001
Income tax benefit (expense)	18			—		(224		)	(290		)
Net of tax	$	(29	)	$	—	$	364		$	711

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9. DERIVATIVES AND HEDGING ACTIVITIES

The Company is a party to various derivative instruments. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require a small or no initial investment, and allow for the net settlement of positions. A derivative’s notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. A derivative’s underlying variable is a specified interest rate, security price, commodity price, foreign exchange rate, index, or other variable. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the fair value of the derivative contract.

The primary type of derivatives that the Company uses are interest rate swaps. Generally, these instruments are used to help manage the Company's exposure to interest rate risk and meet client financing and hedging needs.

Derivatives are recorded at fair value in the Consolidated Balance Sheets, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allow the Company to settle all derivative contracts held with the same counterparty on a net basis, and to offset net derivative positions with related cash collateral, where applicable.

As of June 30, 2017, December 31, 2016, and June 30, 2016, the Company does not have any significant outstanding cash flow hedges or free-standing derivatives.

Derivatives Designated in Hedge Relationships

The Company utilizes derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance to minimize the exposure to changes in benchmark interest rates and volatility of net interest income and EVE to interest rate fluctuations. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index.

The Company has entered into pay fixed/receive variable interest rate swaps designated as fair value hedges of certain fixed rate loans. As a result, the Company receives variable-rate interest payments in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts.

The Company has also entered into pay variable/receive fixed interest rate swaps, designated as fair value hedges on its fixed rate subordinated debt offerings. As a result, the Company is paying a floating rate of three month LIBOR plus 3.16% and is receiving semi-annual fixed payments of 5.00% to match the payments on the $150.0 million subordinated debt. For the fair value hedge on the Company's $175.0 million subordinated debentures issued on June 16, 2016, the Company is paying a floating rate of three month LIBOR plus 3.25% and is receiving quarterly fixed payments of 6.25% to match the payments on the debt.

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Fair Values, Volume of Activity, and Gain/Loss Information Related to Derivative Instruments

The following table summarizes the fair values of the Company's derivative instruments on a gross and net basis as of June 30, 2017, December 31, 2016, and June 30, 2016. The change in the notional amounts of these derivatives from June 30, 2016 to June 30, 2017 indicates the volume of the Company's derivative transaction activity during these periods. The derivative asset and liability balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements. Total derivative assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow the Company to settle all derivative contracts with the same counterparty on a net basis and to offset the net derivative position with the related collateral. Where master netting agreements are not in effect or are not enforceable under bankruptcy laws, the Company does not adjust those derivative amounts with counterparties. The fair value of derivative contracts, after taking into account the effects of master netting agreements, is included in other assets or other liabilities in the Consolidated Balance Sheets, as indicated in the following table:



	June 30, 2017						December 31, 2016						June 30, 2016
			Fair Value						Fair Value						Fair Value
	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
	(in thousands)
Derivatives designated as hedging instruments:
Fair value hedges
Interest rate swaps	$	1,032,586	$	3,793	$	64,153	$	993,485	$	4,220	$	65,749	$	970,382	$	7,757	$	107,097
Total	1,032,586		3,793		64,153		993,485		4,220		65,749		970,382		7,757		107,097
Netting adjustments (1)	—		1,447		1,447		—		1,869		1,869		—		—		—
Net derivatives in the balance sheet	$	1,032,586	$	2,346	$	62,706	$	993,485	$	2,351	$	63,880	$	970,382	$	7,757	$	107,097


(1)	Netting adjustments represent the amounts recorded to convert the Company's derivative balances from a gross basis to a net basis in accordance with the applicable accounting guidance.

Fair value hedges

An assessment of effectiveness is performed at initiation of a hedge and on a quarterly basis thereafter. All of the Company's fair value hedges remained “highly effective” as of June 30, 2017, December 31, 2016, and June 30, 2016.

The following table summarizes the gains (losses) on fair value hedges for the three and six months ended June 30, 2017 and 2016, all of which are recorded in non-interest income.



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands)
Hedge of Fixed Rate Loans (1)
Gain (loss) on "pay fixed" swap	$	(8,185	)	$	(18,115	)	$	(616	)	$	(42,312	)
Gain (loss) on receive fixed rate loans	8,195			18,122			642			42,319
Net ineffectiveness	$	10		$	7		$	26		$	7
Hedge of Fixed Rate Subordinated Debt Issuances (1)
Gain (loss) on "receive fixed" swap	$	4,977		$	3,024		$	1,786		$	4,189
Gain (loss) on subordinated debt	(4,977		)	(3,024		)	(1,786		)	(4,189		)
Net ineffectiveness	$	—		$	—		$	—		$	—

(1)

The fair value of derivatives contracts are carried as other assets and other liabilities in the Consolidated Balance Sheets. The effective portion of hedging gains (losses) is recorded as basis adjustments to the underlying hedged asset or liability. Gains and losses on both the hedging derivative and hedged item are recorded through non-interest income with a resulting net income impact for the amount of ineffectiveness.

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Counterparty Credit Risk

Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected positive replacement value of the contracts. Management generally enters into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with the same counterparty. Additionally, management monitors counterparty credit risk exposure on each contract to determine appropriate limits on the Company's total credit exposure across all product types. In general, the Company has a zero credit threshold with regard to derivative exposure with counterparties. Management reviews the Company's collateral positions on a daily basis and exchanges collateral with counterparties in accordance with standard ISDA documentation and other related agreements. The Company generally holds collateral in the form of highly rated securities issued by the U.S. Treasury or government-sponsored enterprises, such as GNMA, FNMA, and FHLMC. The total collateral netted against net derivative liabilities totaled $64.2 million at June 30, 2017, $65.7 million at December 31, 2016, and $107.1 million at June 30, 2016.

The following table summarizes the Company's largest exposure to an individual counterparty at the dates indicated:



	June 30, 2017		December 31, 2016		June 30, 2016
	(in thousands)
Largest gross exposure (derivative asset) to an individual counterparty	$	2,347	$	2,351	$	7,556
Collateral posted by this counterparty	2,560		1,691		7,680
Derivative liability with this counterparty	—		—		—
Collateral pledged to this counterparty	—		—		—
Net exposure after netting adjustments and collateral	$	—	$	660	$	—

Credit Risk Contingent Features

Management has entered into certain derivative contracts that require the Company to post collateral to the counterparties when these contracts are in a net liability position. Conversely, the counterparties may be required to post collateral when these contracts are in a net asset position. The amount of collateral to be posted is based on the amount of the net liability and exposure thresholds. As of June 30, 2017, December 31, 2016, and June 30, 2016 the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting provisions) held by the Company that were in a net liability position totaled $62.7 million, $63.9 million, and $107.1 million, respectively. As of June 30, 2017, the Company was in an over-collateralized net position of $17.9 million after considering $82.1 million of collateral held in the form of cash and securities. As of December 31, 2016 and June 30, 2016, the Company was in an over-collateralized position of $24.3 million and $28.7 million, respectively.

10. EARNINGS PER SHARE

Diluted EPS is based on the weighted average outstanding common shares during each period, including common stock equivalents. Basic EPS is based on the weighted average outstanding common shares during the period.

The following table presents the calculation of basic and diluted EPS:



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands, except per share amounts)
Weighted average shares - basic	104,162		102,688		104,075		102,294
Dilutive effect of stock awards	883		784		866		713
Weighted average shares - diluted	105,045		103,472		104,941		103,007
Net income	$	79,971	$	61,614	$	153,328	$	122,946
Earnings per share - basic	0.77		0.60		1.47		1.20
Earnings per share - diluted	0.76		0.60		1.46		1.19

The Company had no anti-dilutive stock options outstanding at each of the periods ended June 30, 2017 and 2016.

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11. INCOME TAXES

The effective tax rate was 28.55% and 29.94% for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, the Company's effective tax rate was 26.91% and 27.16%, respectively.

As of June 30, 2017, the net deferred tax asset was $87.7 million, a decrease of $7.5 million from December 31, 2016. This overall decrease in the net deferred tax asset was primarily the result of increases in the fair market value of AFS securities.

Although realization is not assured, the Company believes that the realization of the recognized deferred tax asset of $87.7 million at June 30, 2017 is more-likely-than-not based on expectations as to future taxable income and based on available tax planning strategies within the meaning of ASC 740, Income Taxes, that could be implemented if necessary to prevent a carryover from expiring.

At June 30, 2017 and December 31, 2016, the Company had no deferred tax valuation allowance.

The deferred tax asset related to federal and state NOL carryovers outstanding at each of the periods ended June 30, 2017 and December 31, 2016 available to reduce the tax liability in future years totaled $8.9 million and $9.0 million, respectively. These tax benefits relate entirely to federal NOL carryovers (subject to an annual limitation imposed by IRC Section 382). The Company’s ability to use federal NOL carryovers, as well as its ability to use certain future tax deductions called NUBILs associated with the Company's acquisitions is subject to annual limitations. In management’s opinion, it is more-likely-than-not that the results of future operations will generate sufficient taxable income to realize all of the deferred tax benefits related to these NOL carryovers and NUBILs.

Investments in LIHTC

The Company invests in LIHTC funds that are designed to generate a return primarily through the realization of federal tax credits.

Investments in LIHTC and unfunded LIHTC obligations are included as part of other assets and other liabilities, respectively, in the Consolidated Balance Sheets and total $234.7 million and $133.6 million, respectively, as of June 30, 2017, compared to $187.4 million and $84.4 million as of December 31, 2016. For the three months ended June 30, 2017 and 2016, $6.9 million and $3.8 million, respectively, of amortization related to LIHTC investments was recognized as a component of income tax expense. For the six months ended June 30, 2017 and 2016, $12.7 million and $8.2 million of amortization related to LIHTC investments was recognized as a component of income tax expense, respectively.

12. COMMITMENTS AND CONTINGENCIES

Unfunded Commitments and Letters of Credit

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the Consolidated Balance Sheets.

Lines of credit are obligations to lend money to a borrower. Credit risk arises when the borrower's current financial condition may indicate less ability to pay than when the commitment was originally made. In the case of standby letters of credit, the risk arises from the potential failure of the customer to perform according to the terms of a contract. In such a situation, the third party might draw on the standby letter of credit to pay for completion of the contract and the Company would look to its customer to repay these funds with interest. To minimize the risk, the Company uses the same credit policies in making commitments and conditional obligations as it would for a loan to that customer.

Standby letters of credit and financial guarantees are commitments issued by the Company to guarantee the performance of a customer to a third party in borrowing arrangements. The Company generally has recourse to recover from the customer any amounts paid under the guarantees. Typically, letters of credit issued have expiration dates within one year.

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A summary of the contractual amounts for unfunded commitments and letters of credit are as follows:



	June 30, 2017		December 31, 2016
	(in thousands)
Commitments to extend credit, including unsecured loan commitments of $329,903 at June 30, 2017 and $360,840 at December 31, 2016	$	5,181,532	$	4,428,495
Credit card commitments and financial guarantees	134,637		115,536
Standby letters of credit, including unsecured letters of credit of $10,859 at June 30, 2017 and $6,431 at December 31, 2016	111,124		78,576
Total	$	5,427,293	$	4,622,607

Commitments to extend credit are agreements to lend to a customer provided that there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.

The Company has exposure to credit losses from unfunded commitments and letters of credit. As funds have not been disbursed on these commitments, they are not reported as loans outstanding. Credit losses related to these commitments are included in other liabilities as a separate loss contingency and are not included in the allowance for credit losses reported in "Note 3. Loans, Leases and Allowance for Credit Losses" of these Consolidated Financial Statements. This loss contingency for unfunded loan commitments and letters of credit was $5.9 million and $7.0 million as of June 30, 2017 and December 31, 2016, respectively. Changes to this liability are adjusted through non-interest expense.

Concentrations of Lending Activities

The Company’s lending activities are driven in large part by the customers served in the market areas where the Company has branch offices in the states of Arizona, Nevada, and California. Despite the geographic concentration of lending activities, the Company does not have a single external customer from which it derives 10% or more of its revenues. The Company monitors concentrations within four broad categories: geography, industry, product, and collateral. The Company's loan portfolio includes significant credit exposure to the CRE market. As of June 30, 2017 and December 31, 2016, CRE related loans accounted for approximately 52% and 53% of total loans, respectively. Substantially all of these loans are secured by first liens with an initial loan to value ratio of generally not more than 75%. Approximately 36% of these CRE loans, excluding construction and land loans, were owner-occupied at each of the periods ended June 30, 2017 and December 31, 2016.

Contingencies

The Company is involved in various lawsuits of a routine nature that are being handled and defended in the ordinary course of the Company’s business. Expenses are being incurred in connection with these lawsuits, but in the opinion of management, based in part on consultation with outside legal counsel, the resolution of these lawsuits and associated defense costs will not have a material impact on the Company’s financial position, results of operations, or cash flows.

Lease Commitments

The Company leases the majority of its office locations and many of these leases contain multiple renewal options and provisions for increased rents. Total rent expense of $2.7 million and $2.8 million for three months ended June 30, 2017 and 2016, respectively, was included in occupancy expense. For the six months ended June 30, 2017 and 2016, total rent expense was $5.4 million and $5.3 million, respectively.

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13. FAIR VALUE ACCOUNTING

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC 825 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 825 are described in "Note 1. Summary of Significant Accounting Policies" of these Notes to Unaudited Consolidated Financial Statements.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. Transfers between levels in the fair value hierarchy are recognized as of the end of the month following the event or change in circumstances that caused the transfer.

Under ASC 825, the Company elected the FVO treatment for junior subordinated debt held by WAL. This election is irrevocable and results in the recognition of unrealized gains and losses on these items at each reporting date. Due to the Company's election to early adopt an element of ASU 2016-01, effective January 1, 2015, these unrealized gains and losses are recognized as part of other comprehensive income rather than earnings. The Company did not elect FVO treatment for the junior subordinated debt assumed in the Bridge Capital Holdings acquisition in 2015.

All securities for which the fair value measurement option had been elected are included in a separate line item in the Consolidated Balance Sheets as securities measured at fair value. During the three months ended June 30, 2017, the Company sold all of its investment securities measured at fair value. No significant gain or loss was recognized upon sale of these securities.

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For the three and six months ended June 30, 2017 and 2016, gains and losses from fair value changes on securities and junior subordinated debt were as follows:



	Changes in Fair Values for Items Measured at Fair Value Pursuant to Election of the Fair Value Option
	Unrealized Gain/(Loss) on Assets and Liabilities Measured at Fair Value, Net			Interest Income on Securities		Interest Expense on Junior Subordinated Debt			Total Changes Included in Current-Period Earnings			Total Changes Included in OCI
	(in thousands)
Three Months Ended June 30, 2017
Securities measured at fair value	$	—		$	2	$	—		$	2		$	—
Junior subordinated debt	(3,376		)	—		(791		)	(791		)	(2,089		)
Total	$	(3,376	)	$	2	$	(791	)	$	(789	)	$	(2,089	)
Six Months Ended June 30, 2017
Securities measured at fair value	$	—		$	9	$	—		$	9		$	—
Junior subordinated debt	(5,362		)	—		(1,540		)	(1,540		)	(3,318		)
Total	$	(5,362	)	$	9	$	(1,540	)	$	(1,531	)	$	(3,318	)
Three Months Ended June 30, 2016
Securities measured at fair value	$	(1	)	$	11	$	—		$	10		$	—
Junior subordinated debt	1,006			—		693			693			575
Total	$	1,005		$	11	$	693		$	703		$	575
Six Months Ended June 30, 2016
Securities measured at fair value	$	(6	)	$	22	$	—		$	16		$	—
Junior subordinated debt	2,218			—		1,373			1,373			1,334
Total	$	2,212		$	22	$	1,373		$	1,389		$	1,334

Interest income on securities measured at fair value is accounted for similarly to those classified as AFS. Any premiums or discounts are recognized in interest income over the term of the securities. Interest expense on junior subordinated debt is also determined under a constant yield calculation.

Fair value on a recurring basis

Financial assets and financial liabilities measured at fair value on a recurring basis include the following:

Securities measured at fair value: All of the Company’s securities measured at fair value, which consist of MBS, are reported at fair value utilizing Level 2 inputs in the same manner as described below for AFS securities.

AFS securities: Preferred stock, CRA investments, and certain corporate debt securities are reported at fair value utilizing Level 1 inputs. Other securities classified as AFS are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things.

Historically, the Company has estimated the fair value of its CDO securities utilizing Level 3 inputs, which include pricing indications from comparable securities. During the year ended December 31, 2016, these securities were transferred from Level 3 to Level 2 as a result of an increase in the availability and reliability of the observable inputs utilized in the securities' fair value measurement.

Independent pricing service: The Company's independent pricing service provides pricing information on the majority of the Company's Level 1 and 2 securities. Management independently evaluates the fair value measurements received from the Company's third party pricing service through multiple review steps. First, management reviews what has transpired in the marketplace with respect to interest rates, credit spreads, volatility, and mortgage rates, among other things, and develops an expectation of changes to the securities' valuations from the previous quarter. Then, management obtains market values from additional sources. The pricing service provides management with observable market data including interest rate curves and mortgage prepayment speed grids, as well as dealer quote sheets, new bond offering sheets, and historical trade documentation. Management reviews the assumptions and decides whether they are reasonable. Management may compare interest rates, credit spreads, and prepayments speeds used as part of the assumptions to those that management believes are reasonable. Management may price securities using the provided assumptions to determine whether they can develop similar prices on like

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securities. Any discrepancies between management’s review and the prices provided by the vendor are discussed with the vendor and the Company’s other valuation advisors. Lastly, management selects a sample of investment securities and compares the values provided by its primary third party pricing service to the market values obtained from secondary sources and evaluates those with notable variances.

Interest rate swaps: Interest rate swaps are reported at fair value utilizing Level 2 inputs. The Company obtains dealer quotations to value its interest rate swaps.

Junior subordinated debt: The Company estimates the fair value of its junior subordinated debt using a discounted cash flow model which incorporates the effect of the Company’s own credit risk in the fair value of the liabilities (Level 3). The Company’s cash flow assumptions are based on contractual cash flows as the Company anticipates that it will pay the debt according to its contractual terms.

As of June 30, 2017, the Company estimates the discount rate at 5.21%, which represents an implied credit spread of 3.91% plus three-month LIBOR (1.30%). As of December 31, 2016, the Company estimated the discount rate at 5.66%, which was a 4.66% credit spread plus three-month LIBOR (1.00%).

The fair value of assets and liabilities measured at fair value on a recurring basis was determined using the following inputs as of the periods presented:



	Fair Value Measurements at the End of the Reporting Period Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
	(in thousands)
June 30, 2017
Assets:
Available-for-sale
CDO	$	—	$	15,553	$	—	$	15,553
Commercial MBS issued by GSEs	—		115,327		—		115,327
Corporate debt securities	—		63,922		—		63,922
CRA investments	49,482		—		—		49,482
Preferred stock	97,506		—		—		97,506
Private label residential MBS	—		680,248		—		680,248
Residential MBS issued by GSEs	—		1,555,137		—		1,555,137
Tax-exempt	—		404,189		—		404,189
Trust preferred securities	—		29,405		—		29,405
U.S. government sponsored agency securities	—		71,391		—		71,391
U.S. treasury securities	—		2,498		—		2,498
Total AFS securities	$	146,988	$	2,937,670	$	—	$	3,084,658
Loans - HFS	$	—	$	16,736	$	—	$	16,736
Derivative assets (1)	—		3,793		—		3,793
Liabilities:
Junior subordinated debt (2)	$	—	$	—	$	55,772	$	55,772
Derivative liabilities (1)	—		64,153		—		64,153


(1)	Derivative assets and liabilities relate to interest rate swaps, see "Note 9. Derivatives and Hedging Activities." In addition, the carrying value of loans is increased by $49,057 and the net carrying value of subordinated debt is decreased by $10,540 as of June 30, 2017, which relates to the effective portion of the hedges put in place to mitigate against fluctuations in interest rates.


(2)	Includes only the portion of junior subordinated debt that is recorded at fair value at each reporting period pursuant to the election of FVO treatment.

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	Fair Value Measurements at the End of the Reporting Period Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
	(in thousands)
December 31, 2016
Assets:
Measured at fair value
Residential MBS issued by GSEs	$	—	$	1,053	$	—	$	1,053
Available-for-sale
CDO	—		13,490		—		13,490
Commercial MBS issued by GSEs	—		117,792		—		117,792
Corporate debt securities	20,000		44,144		—		64,144
CRA investments	37,113		—		—		37,113
Preferred stock	94,662		—		—		94,662
Private label residential MBS	—		433,685		—		433,685
Residential MBS issued by GSEs	—		1,355,205		—		1,355,205
Tax-exempt	—		408,233		—		408,233
Trust preferred securities	—		26,532		—		26,532
U.S. government sponsored agency securities	—		56,022		—		56,022
U.S. treasury securities	—		2,502		—		2,502
Total AFS securities	$	151,775	$	2,457,605	$	—	$	2,609,380
Loans - HFS	$	—	$	18,909	$	—	$	18,909
Derivative assets (1)	—		4,220		—		4,220
Liabilities:
Junior subordinated debt	$	—	$	—	$	50,410	$	50,410
Derivative liabilities (1)	—		65,749		—		65,749


(1)	Derivative assets and liabilities relate to interest rate swaps, see "Note 9. Derivatives and Hedging Activities." In addition, the carrying value of loans is increased by $$48,161 and the net carrying value of subordinated debt is decreased by$12,325as of December 31, 2016, which relates to the effective portion of the hedges put in place to mitigate against fluctuations in interest rates.

For the three and six months ended June 30, 2017 and 2016, the change in Level 3 assets and liabilities measured at fair value on a recurring basis was as follows:



	Junior Subordinated Debt
	Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017		2016
	(in thousands)
Beginning balance	$	52,396	$	45,716		$	50,410	$	46,928
Transfers into Level 3	—		—			—		—
Total gains (losses) for the period
Included in earnings	—		—			—		—
Included in other comprehensive income	3,376		(1,006		)	5,362		(2,218		)
Ending balance	$	55,772	$	44,710		$	55,772	$	44,710

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	CDO Securities
	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands)
Beginning balance	$	—	$	9,076	$	—	$	10,060
Transfers into Level 3	—		—		—		—
Total gains (losses) for the period
Included in other comprehensive income	—		1,107		—		123
Ending balance	$	—	$	10,183	$	—	$	10,183

The Company transferred all CDO securities from Level 3 to Level 2 during the year ended December 31, 2016 as a result of an increase in the availability and reliability of the observable inputs utilized in the securities' fair value measurement. The Company recognized this transfer between levels on October 31, 2016, in accordance with its policy to recognize transfers between levels in the fair value hierarchy as of the end of the month following the event or change in circumstance that caused the transfer.

For Level 3 assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, the significant unobservable inputs used in the fair value measurements were as follows:



	June 30, 2017		Valuation Technique	Significant Unobservable Inputs	Input Value
	(in thousands)
Junior subordinated debt	$	55,772	Discounted cash flow	Implied credit rating of the Company	5.21	%



	December 31, 2016		Valuation Technique	Significant Unobservable Inputs	Input Value
	(in thousands)
Junior subordinated debt	$	50,410	Discounted cash flow	Implied credit rating of the Company	5.66	%

The significant unobservable inputs used in the fair value measurement of the Company’s junior subordinated debt as of June 30, 2017 and December 31, 2016 was the implied credit risk for the Company, calculated as the difference between the 20-year 'BB' rated financial index over the corresponding swap index.

Fair value on a nonrecurring basis

Certain assets are measured at fair value on a nonrecurring basis. That is, the assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents such assets carried on the balance sheet by caption and by level within the ASC 825 hierarchy:



	Fair Value Measurements at the End of the Reporting Period Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Active Markets for Similar Assets (Level 2)		Unobservable Inputs (Level 3)
	(in thousands)
As of June 30, 2017:
Impaired loans with specific valuation allowance	$	4,417	$	—	$	—	$	4,417
Impaired loans without specific valuation allowance (1)	76,575		—		—		76,575
Other assets acquired through foreclosure	30,988		—		—		30,988
As of December 31, 2016:
Impaired loans with specific valuation allowance	$	6,670	$	—	$	—	$	6,670
Impaired loans without specific valuation allowance (1)	60,738		—		—		60,738
Other assets acquired through foreclosure	47,815		—		—		47,815


(1)	Net of loan balances with charge-offs of $20.8 million and $27.6 million as of June 30, 2017 and December 31, 2016, respectively.

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For Level 3 assets measured at fair value on a nonrecurring basis as of June 30, 2017 and December 31, 2016, the significant unobservable inputs used in the fair value measurements were as follows:



	June 30, 2017		Valuation Technique(s)		Significant Unobservable Inputs	Range
	(in thousands)
Impaired loans	$	80,992	Collateral method	Third party appraisal or valuation	Costs to sell	4.0% to 10.0%
			Discounted cash flow method	Discount rate	Contractual loan rate	4.0% to 7.0%
				Scheduled cash collections	Probability of default	0% to 20.0%
				Proceeds from non-real estate collateral	Loss given default	0% to 70.0%
Other assets acquired through foreclosure	30,988		Collateral method	Third party appraisal	Costs to sell	4.0% to 10.0%



	December 31, 2016		Valuation Technique(s)		Significant Unobservable Inputs	Range
	(in thousands)
Impaired loans	$	67,408	Collateral method	Third party appraisal	Costs to sell	4.0% to 10.0%
			Discounted cash flow method	Discount rate	Contractual loan rate	4.0% to 7.0%
				Scheduled cash collections	Probability of default	0% to 20.0%
				Proceeds from non-real estate collateral	Loss given default	0% to 70.0%
Other assets acquired through foreclosure	47,815		Collateral method	Third party appraisal	Costs to sell	4.0% to 10.0%

Impaired loans: The specific reserves for collateral dependent impaired loans are based on collateral value, net of estimated disposition costs and other identified quantitative inputs. Collateral value is determined based on independent third-party appraisals or internally-developed discounted cash flow analyses. Appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore qualifying the assets as Level 3 in the fair value hierarchy. In addition, when adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. Internal discounted cash flow analyses are also utilized to estimate the fair value of impaired loans, which considers internally-developed, unobservable inputs such as discount rates, default rates, and loss severity.

Total Level 3 impaired loans had an estimated fair value of $81.0 million and $67.4 million at June 30, 2017 and December 31, 2016, respectively. Impaired loans with a specific valuation allowance had a gross estimated fair value of $8.3 million and $10.9 million at June 30, 2017 and December 31, 2016, respectively, which was reduced by a specific valuation allowance of $3.9 million and $4.2 million, respectively.

Other assets acquired through foreclosure: Other assets acquired through foreclosure consist of properties acquired as a result of, or in-lieu-of, foreclosure. These assets are initially reported at the fair value determined by independent appraisals using appraised value less estimated cost to sell. Such properties are generally re-appraised every twelve months. There is risk for subsequent volatility. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to expense.

Fair value is determined, where possible, using market prices derived from an appraisal or evaluation, which are considered to be Level 2. However, certain assumptions and unobservable inputs are often used by the appraiser, therefore qualifying the assets as Level 3 in the fair value hierarchy. When significant adjustments are based on unobservable inputs, such as when a current appraised value is not available or management determines the fair value of the collateral is further impaired below the

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appraised value and there is no observable market price, the resulting fair value measurement has been categorized as a Level 3 measurement. The Company had $31.0 million and $47.8 million of such assets at June 30, 2017 and December 31, 2016, respectively.

Credit vs. non-credit losses

Under the provisions of ASC 320, Investments-Debt and Equity Securities, OTTI is separated into the amount of total impairment related to the credit loss and the amount of the total impairment related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in OCI.

For the three and six months ended June 30, 2017 and 2016, the Company determined that no securities experienced credit losses.

There is no OTTI balance recognized in comprehensive income as of June 30, 2017 and 2016.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company’s financial instruments is as follows:



	June 30, 2017
	Carrying Amount		Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Investment securities:
HTM	$	132,802	$	—	$	137,526	$	—	$	137,526
AFS	3,084,658		146,988		2,937,670		—		3,084,658
Derivative assets	3,793		—		3,793		—		3,793
Loans, net	13,858,184		—		13,546,599		80,992		13,627,591
Accrued interest receivable	75,994		—		75,994		—		75,994
Financial liabilities:
Deposits	$	16,031,113	$	—	$	16,037,566	$	—	$	16,037,566
Customer repurchase agreements	32,661		—		32,661		—		32,661
Qualifying debt	375,444		—		—		401,093		401,093
Derivative liabilities	64,153		—		64,153		—		64,153
Accrued interest payable	16,146		—		16,146		—		16,146

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	December 31, 2016
	Carrying Amount		Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Investment securities:
HTM	$	92,079	$	—	$	91,966	$	—	$	91,966
AFS	2,609,380		151,775		2,457,605		—		2,609,380
Trading	1,053		—		1,053		—		1,053
Derivative assets	4,220		—		4,220		—		4,220
Loans, net	13,083,732		—		12,736,336		67,408		12,803,744
Accrued interest receivable	70,320		—		70,320		—		70,320
Financial liabilities:
Deposits	$	14,549,863	$	—	$	14,553,931	$	—	$	14,553,931
Customer repurchase agreements	41,728		—		41,728		—		41,728
FHLB advances	80,000		—		80,000		—		80,000
Qualifying debt	367,937		—		—		375,626		375,626
Derivative liabilities	65,749		—		65,749		—		65,749
Accrued interest payable	15,354		—		15,354		—		15,354

Interest rate risk

The Company assumes interest rate risk (the risk to the Company’s earnings and capital from changes in interest rate levels) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments, as well as its future net interest income will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.

Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Company's change in EVE and net interest income resulting from hypothetical changes in interest rates. If potential changes to EVE and net interest income resulting from hypothetical interest rate changes are not within the limits established by the BOD, the BOD may direct management to adjust the asset and liability mix to bring interest rate risk within BOD-approved limits. As of June 30, 2017, the Company’s interest rate risk profile was within BOD-approved limits.

WAB has an ALCO charged with managing interest rate risk within the BOD-approved limits. Limits are structured to prohibit an interest rate risk profile that does not conform to both management and BOD risk tolerances. There is also ALCO reporting at the Parent company level for reviewing interest rate risk for the Company, which gets reported to the BOD and its Finance and Investment Committee.

Fair value of commitments

The estimated fair value of standby letters of credit outstanding at June 30, 2017 and December 31, 2016 is insignificant. Loan commitments on which the committed interest rates are less than the current market rate are also insignificant at June 30, 2017 and December 31, 2016.

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14. SEGMENTS

The Company's reportable segments are aggregated based primarily on geographic location, services offered, and markets served. The Company's regional segments, which include Arizona, Nevada, Southern California, and Northern California, provide full service banking and related services to their respective markets. The operations from the regional segments correspond to the following banking divisions: ABA in Arizona, BON and FIB in Nevada, TPB in Southern California, and Bridge in Northern California.

The Company's NBL segments provide specialized banking services to niche markets. The Company's NBL reportable segments include HOA Services, Public & Nonprofit Finance, Technology & Innovation, HFF, and Other NBLs. These NBLs are managed centrally and are broader in geographic scope than the Company's other segments, though still predominately located within the Company's core market areas. The HOA Services NBL corresponds to the AAB division. The operations of Public and Nonprofit Finance are combined into one reportable segment. The Technology & Innovation NBL includes the operations of Equity Fund Resources, Life Sciences Group, Renewable Resource Group, and Technology Finance. The HFF NBL includes the hotel franchise loan portfolio acquired from GE Capital US Holdings, Inc. on April 20, 2016. The Other NBLs segment consists of Corporate Finance, Mortgage Warehouse Lending, and Resort Finance.

The Corporate & Other segment consists of corporate-related items, income and expense items not allocated to the Company's other reportable segments, and inter-segment eliminations.

The Company's segment reporting process begins with the assignment of all loan and deposit accounts directly to the segments where these products are originated and/or serviced. Equity capital is assigned to each segment based on the risk profile of their assets and liabilities. With the exception of goodwill, which is assigned a 100% weighting, equity capital allocations ranged from 0% to 12% during the year, with a funds credit provided for the use of this equity as a funding source. Any excess or deficient equity not allocated to segments based on risk is assigned to the Corporate & Other segment.

Net interest income, provision for credit losses, and non-interest expense amounts are recorded in their respective segment to the extent that the amounts are directly attributable to those segments. Net interest income is recorded in each segment on a TEB with a corresponding increase in income tax expense, which is eliminated in the Corporate & Other segment.

Further, net interest income of a reportable segment includes a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Using this funds transfer pricing methodology, liquidity is transferred between users and providers. A net user of funds has lending/investing in excess of deposits/borrowings and a net provider of funds has deposits/borrowings in excess of lending/investing. A segment that is a user of funds is charged for the use of funds, while a provider of funds is credited through funds transfer pricing, which is determined based on the average life of the assets or liabilities in the portfolio.

The net income amount for each reportable segment is further derived by the use of expense allocations. Certain expenses not directly attributable to a specific segment are allocated across all segments based on key metrics, such as number of employees, average loan balances, and average deposit balances. These types of expenses include information technology, operations, human resources, finance, risk management, credit administration, legal, and marketing.

Income taxes are applied to each segment based on the effective tax rate for the geographic location of the segment. Any difference in the corporate tax rate and the aggregate effective tax rates in the segments are adjusted in the Corporate & Other segment.

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The following is a summary of operating segment information for the periods indicated:



				Regional Segments
Balance Sheet:	Consolidated Company			Arizona			Nevada			Southern California			Northern California
At June 30, 2017	(in millions)
Assets:
Cash, cash equivalents, and investment securities	$	3,889.7		$	1.8		$	7.4		$	2.2		$	1.9
Loans, net of deferred loan fees and costs	13,989.9			3,089.9			1,729.3			1,838.4			1,172.5
Less: allowance for credit losses	(131.8		)	(30.7		)	(18.3		)	(20.6		)	(10.1		)
Total loans	13,858.1			3,059.2			1,711.0			1,817.8			1,162.4
Other assets acquired through foreclosure, net	31.0			2.3			15.7			—			0.2
Goodwill and other intangible assets, net	301.6			—			23.3			—			157.0
Other assets	764.3			41.7			59.3			13.8			13.8
Total assets	$	18,844.7		$	3,105.0		$	1,816.7		$	1,833.8		$	1,335.3
Liabilities:
Deposits	$	16,031.1		$	4,778.5		$	3,925.3		$	2,251.6		$	1,547.8
Borrowings and qualifying debt	375.4			—			—			—			—
Other liabilities	379.5			8.6			27.9			5.9			11.0
Total liabilities	16,786.0			4,787.1			3,953.2			2,257.5			1,558.8
Allocated equity:	2,058.7			373.9			253.3			205.8			291.0
Total liabilities and stockholders' equity	$	18,844.7		$	5,161.0		$	4,206.5		$	2,463.3		$	1,849.8
Excess funds provided (used)	—			2,056.0			2,389.8			629.5			514.5



Income Statement:
Three Months Ended June 30, 2017:	(in thousands)
Net interest income (expense)	$	192,743		$	49,295		$	36,422		$	29,058		$	19,719
Provision for credit losses	3,000			384			(3,123		)	(53		)	698
Net interest income (expense) after provision for credit losses	189,743			48,911			39,545			29,111			19,021
Non-interest income	10,449			1,189			2,313			888			1,930
Non-interest expense	(88,257		)	(17,922		)	(15,115		)	(13,020		)	(12,162		)
Income (loss) before income taxes	111,935			32,178			26,743			16,979			8,789
Income tax expense (benefit)	31,964			12,624			9,360			7,140			3,696
Net income (loss)	$	79,971		$	19,554		$	17,383		$	9,839		$	5,093



Six Months Ended June 30, 2017:	(in thousands)
Net interest income (expense)	$	372,052		$	93,202		$	71,718		$	54,276		$	41,754
Provision for (recovery of) credit losses	7,250			398			(3,334		)	38			1,094
Net interest income (expense) after provision for credit losses	364,802			92,804			75,052			54,238			40,660
Non-interest income	20,993			2,302			4,446			1,631			4,043
Non-interest expense	(176,014		)	(36,544		)	(30,985		)	(25,723		)	(24,871		)
Income (loss) before income taxes	209,781			58,562			48,513			30,146			19,832
Income tax expense (benefit)	56,453			22,974			16,980			12,677			8,339
Net income (loss)	$	153,328		$	35,588		$	31,533		$	17,469		$	11,493

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	National Business Lines
Balance Sheet:	HOA Services			Public & Nonprofit Finance			Technology & Innovation			Hotel Franchise Finance			Other NBLs			Corporate & Other
At June 30, 2017
Assets:	(in millions)
Cash, cash equivalents, and investment securities	$	—		$	—		$	—		$	—		$	—		$	3,876.4
Loans, net of deferred loan fees and costs	150.3			1,545.7			1,044.4			1,238.5			2,173.2			7.7
Less: allowance for credit losses	(1.6		)	(16.1		)	(10.1		)	(1.2		)	(22.6		)	(0.5		)
Total loans	148.7			1,529.6			1,034.3			1,237.3			2,150.6			7.2
Other assets acquired through foreclosure, net	—			—			—			—			—			12.8
Goodwill and other intangible assets, net	—			—			121.2			0.1			—			—
Other assets	0.4			16.4			5.5			5.3			8.5			599.6
Total assets	$	149.1		$	1,546.0		$	1,161.0		$	1,242.7		$	2,159.1		$	4,496.0
Liabilities:
Deposits	$	2,186.9		$	—		$	1,272.4		$	—		$	—		$	68.6
Borrowings and qualifying debt	—			—			—			—			—			375.4
Other liabilities	0.6			50.7			0.7			0.3			49.6			224.2
Total liabilities	2,187.5			50.7			1,273.1			0.3			49.6			668.2
Allocated equity:	57.1			126.4			229.5			100.9			175.5			245.3
Total liabilities and stockholders' equity	$	2,244.6		$	177.1		$	1,502.6		$	101.2		$	225.1		$	913.5
Excess funds provided (used)	2,095.5			(1,368.9		)	341.6			(1,141.5		)	(1,934.0		)	(3,582.5		)



Income Statement:
Three Months Ended June 30, 2017:	(in thousands)
Net interest income (expense)	$	13,781		$	7,488		$	21,029		$	13,410		$	15,304		$	(12,763	)
Provision for credit losses	165			196			603			1,808			2,322			—
Net interest income (expense) after provision for credit losses	13,616			7,292			20,426			11,602			12,982			(12,763		)
Non-interest income	140			10			1,961			—			532			1,486
Non-interest expense	(7,258		)	(1,983		)	(9,082		)	(3,056		)	(4,566		)	(4,093		)
Income (loss) before income taxes	6,498			5,319			13,305			8,546			8,948			(15,370		)
Income tax expense (benefit)	2,436			1,994			4,989			3,205			3,356			(16,836		)
Net income (loss)	$	4,062		$	3,325		$	8,316		$	5,341		$	5,592		$	1,466



Six Months Ended June 30, 2017:	(in thousands)
Net interest income (expense)	$	26,529		$	13,973		$	39,195		$	26,991		$	29,447		$	(25,033	)
Provision for (recovery of) credit losses	292			705			899			1,808			5,849			(499		)
Net interest income (expense) after provision for credit losses	26,237			13,268			38,296			25,183			23,598			(24,534		)
Non-interest income	281			25			3,834			—			1,253			3,178
Non-interest expense	(14,405		)	(4,236		)	(17,861		)	(6,044		)	(9,287		)	(6,058		)
Income (loss) before income taxes	12,113			9,057			24,269			19,139			15,564			(27,414		)
Income tax expense (benefit)	4,542			3,396			9,100			7,177			5,837			(34,569		)
Net income (loss)	$	7,571		$	5,661		$	15,169		$	11,962		$	9,727		$	7,155

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				Regional Segments
Balance Sheet:	Consolidated Company			Arizona			Nevada			Southern California			Northern California
At December 31, 2016	(in millions)
Assets:
Cash, cash equivalents, and investment securities	$	3,052.3		$	1.9		$	10.1		$	2.1		$	1.9
Loans, net of deferred loan fees and costs	13,208.5			2,955.9			1,725.5			1,766.8			1,095.4
Less: allowance for credit losses	(124.7		)	(30.1		)	(18.5		)	(19.4		)	(8.8		)
Total loans	13,083.8			2,925.8			1,707.0			1,747.4			1,086.6
Other assets acquired through foreclosure, net	47.8			6.2			18.0			—			0.3
Goodwill and other intangible assets, net	302.9			—			23.7			—			157.5
Other assets	714.0			42.9			58.8			14.5			14.3
Total assets	$	17,200.8		$	2,976.8		$	1,817.6		$	1,764.0		$	1,260.6
Liabilities:
Deposits	$	14,549.8		$	3,843.4		$	3,731.5		$	2,382.6		$	1,543.6
Borrowings and qualifying debt	447.9			—			—			—			—
Other liabilities	311.6			12.8			28.3			12.9			12.4
Total liabilities	15,309.3			3,856.2			3,759.8			2,395.5			1,556.0
Allocated equity:	1,891.5			346.6			250.7			201.6			283.7
Total liabilities and stockholders' equity	$	17,200.8		$	4,202.8		$	4,010.5		$	2,597.1		$	1,839.7
Excess funds provided (used)	—			1,226.0			2,192.9			833.1			579.1



Income Statement:
Three Months Ended June 30, 2016:	(in thousands)
Net interest income (expense)	$	163,686		$	41,204		$	33,464		$	25,803		$	21,896
Provision for (recovery of) credit losses	2,500			1,703			(1,704		)	220			926
Net interest income (expense) after provision for credit losses	161,186			39,501			35,168			25,583			20,970
Non-interest income	8,559			888			2,097			561			2,516
Non-interest expense	(81,804		)	(14,550		)	(14,824		)	(10,635		)	(13,481		)
Income (loss) before income taxes	87,941			25,839			22,441			15,509			10,005
Income tax expense (benefit)	26,327			10,137			7,855			6,522			4,206
Net income (loss)	$	61,614		$	15,702		$	14,586		$	8,987		$	5,799



Six Months Ended June 30, 2016:	(in thousands)
Net interest income (expense)	$	309,397		$	79,660		$	66,039		$	50,231		$	45,091
Provision for (recovery of) credit losses	5,000			8,476			(2,517		)	250			1,968
Net interest income (expense) after provision for credit losses	304,397			71,184			68,556			49,981			43,123
Non-interest income	21,692			4,569			4,156			1,221			4,942
Non-interest expense	(157,297		)	(29,006		)	(29,570		)	(21,869		)	(27,448		)
Income (loss) before income taxes	168,792			46,747			43,142			29,333			20,617
Income tax expense (benefit)	45,846			18,339			15,100			12,335			8,669
Net income (loss)	$	122,946		$	28,408		$	28,042		$	16,998		$	11,948

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	National Business Lines
Balance Sheet:	HOA Services			Public & Nonprofit Finance			Technology & Innovation			Hotel Franchise Finance			Other NBLs			Corporate & Other
At December 31, 2016
Assets:	(in millions)
Cash, cash equivalents, and investment securities	$	—		$	—		$	—		$	—		$	—		$	3,036.3
Loans, net of deferred loan fees and costs	116.8			1,454.3			1,011.4			1,292.1			1,776.9			13.4
Less: allowance for credit losses	(1.3		)	(15.6		)	(10.6		)	(0.8		)	(19.0		)	(0.6		)
Total loans	115.5			1,438.7			1,000.8			1,291.3			1,757.9			12.8
Other assets acquired through foreclosure, net	—			—			—			—			—			23.3
Goodwill and other intangible assets, net	—			—			121.5			0.2			—			—
Other assets	0.3			15.6			7.2			5.3			11.1			544.0
Total assets	$	115.8		$	1,454.3		$	1,129.5		$	1,296.8		$	1,769.0		$	3,616.4
Liabilities:
Deposits	$	1,890.3		$	—		$	1,038.2		$	—		$	—		$	120.2
Borrowings and qualifying debt	—			—			—			—			—			447.9
Other liabilities	0.7			50.5			2.0			1.4			17.5			173.1
Total liabilities	1,891.0			50.5			1,040.2			1.4			17.5			741.2
Allocated equity:	65.6			117.1			224.1			107.1			145.5			149.5
Total liabilities and stockholders' equity	$	1,956.6		$	167.6		$	1,264.3		$	108.5		$	163.0		$	890.7
Excess funds provided (used)	1,840.8			(1,286.7		)	134.8			(1,188.3		)	(1,606.0		)	(2,725.7		)



Income Statement:
Three Months Ended June 30, 2016:	(in thousands)
Net interest income (expense)	$	9,909		$	5,026		$	16,631		$	12,068		$	12,523		$	(14,838	)
Provision for (recovery of) credit losses	10			175			(614		)	—			1,699			85
Net interest income (expense) after provision for credit losses	9,899			4,851			17,245			12,068			10,824			(14,923		)
Non-interest income	110			7			1,115			—			235			1,030
Non-interest expense	(5,820		)	(1,929		)	(7,434		)	(2,557		)	(3,598		)	(6,976		)
Income (loss) before income taxes	4,189			2,929			10,926			9,511			7,461			(20,869		)
Income tax expense (benefit)	1,571			1,098			4,097			3,567			2,798			(15,524		)
Net income (loss)	$	2,618		$	1,831		$	6,829		$	5,944		$	4,663		$	(5,345	)



Six Months Ended June 30, 2016:	(in thousands)
Net interest income (expense)	$	18,541		$	10,247		$	32,940		$	12,068		$	23,160		$	(28,580	)
Provision for (recovery of) credit losses	88			(194		)	(1,779		)	—			1,937			(3,229		)
Net interest income (expense) after provision for credit losses	18,453			10,441			34,719			12,068			21,223			(25,351		)
Non-interest income	215			3			2,752			—			870			2,964
Non-interest expense	(11,361		)	(3,953		)	(14,340		)	(2,557		)	(7,035		)	(10,158		)
Income (loss) before income taxes	7,307			6,491			23,131			9,511			15,058			(32,545		)
Income tax expense (benefit)	2,740			2,434			8,674			3,567			5,647			(31,659		)
Net income (loss)	$	4,567		$	4,057		$	14,457		$	5,944		$	9,411		$	(886	)

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15. MERGERS, ACQUISITIONS AND DISPOSITIONS

Acquisition of GE Capital US Holdings, Inc. Loan Portfolio

On April 20, 2016, WAB completed its acquisition of GE Capital US Holdings, Inc.'s domestic select-service hotel franchise finance loan portfolio, paying cash of $1.27 billion. The acquisition was undertaken, in part, to expand the Company's national reach and diversify the Company's loan portfolio.

Effective April 20, 2016, the results of the acquired loan portfolio are reflected in the Company's HFF NBL operating segment. There were no acquisition / restructure expenses related to the acquisition recognized during the three and six months ended June 30, 2017. For the three and six months ended June 30, 2016, acquisition / restructure expenses related to the acquisition totaled $1.9 million. The transaction was accounted for under the acquisition method of accounting in accordance with ASC 805. Assets purchased and liabilities assumed were recorded at their respective acquisition date estimated fair values. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. During the six months ended June 30, 2017, the Company recognized measurement period adjustments totaling $0.1 million for tax related items. The measurement period for the HFF acquisition ended on April 20, 2017. Therefore, the fair values of these assets acquired and liabilities assumed were considered final effective April 20, 2017.

The recognized amounts of identifiable assets acquired and liabilities assumed, at their as adjusted acquisition date fair values, are as follows:



	April 20, 2016
	(in thousands)
Assets:
Loans	$	1,280,997
Other assets	3,632
Total assets	$	1,284,629
Liabilities:
Other liabilities	$	12,559
Total liabilities	12,559
Net assets acquired	$	1,272,070
Consideration paid
Cash	$	1,272,187
Goodwill	$	117

The following table presents pro forma information as if the acquisition was completed on January 1, 2015. The pro forma information includes adjustments for interest income on loans acquired and excludes acquisition / restructure expense. The pro forma information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates.



	Three Months Ended June 30, 2016		Six Months Ended June 30, 2016
	(in thousands, except per share amounts)
Interest income	$	172,779	$	343,664
Non-interest income	8,559		21,692
Net income	61,749		130,240
Earnings per share - basic	0.60		1.27
Earnings per share - diluted	0.60		1.26

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16. RELATED PARTY TRANSACTIONS

Principal stockholders, directors, and executive officers of the Company, their immediate family members, and companies they control or own more than a 10% interest in, are considered to be related parties. In the ordinary course of business, the Company engages in various related party transactions, including extending credit and bank service transactions. All related party transactions are subject to review and approval pursuant to the Company's Related Party Transactions policy.

On April 1, 2017, the Company hired an executive officer who was previously the Managing Partner of an external consulting firm that the Company actively uses for risk management services. Prior to joining the Company, the executive officer sold his interest in this external consulting firm and was paid with a combination of cash and a $1.0 million note that will be paid in equal installments ending in 2019. Expenses to this external consulting firm as well as sponsorships, donations and other services to related parties totaled less than $2.0 million during each of the six months ended June 30, 2017 and 2016.


Item 2.	Management's Discussions and Analysis of Financial Condition and Results of Operations.

This discussion is designed to provide insight into management's assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources, and interest rate sensitivity. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2016 and the interim Unaudited Consolidated Financial Statements and Notes to Unaudited Consolidated Financial Statements hereto and financial information appearing elsewhere in this report. Unless the context requires otherwise, the terms "Company," "we," and "our" refer to Western Alliance Bancorporation and its wholly-owned subsidiaries on a consolidated basis.

Forward-Looking Information

Certain statements contained in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements that are related to or are dependent on estimates or assumptions relating to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts.

The forward-looking statements contained in this Form 10-Q reflect the Company's current views about future events and financial performance and involve certain risks, uncertainties, assumptions, and changes in circumstances that may cause the Company's actual results to differ significantly from historical results and those expressed in any forward-looking statement, including those risks discussed under the heading “Risk Factors” in this Form 10-Q. Risks and uncertainties include those set forth in the Company's filings with the SEC and the following factors that could cause actual results to differ materially from those presented: 1) financial market and economic conditions adversely effecting financial performance; 2) dependency on real estate and events that negatively impact real estate; 3) high concentration of commercial real estate and commercial and industrial loans; 4) actual credit losses may exceed expected losses in the loan portfolio; 5) the geographic concentrations of the Company's assets increase the risks related to local economic conditions; 6) exposure of financial instruments to certain market risks may increase the volatility of AOCI; 7) dependence on low-cost deposits; 8) ability to borrow from the FHLB or the FRB; 9) perpetration of fraud; 10) information security breaches; 11) reliance on third parties to provide key components of the Company's infrastructure; 12) a change in the Company's creditworthiness; 13) the Company's ability to implement and improve its controls and processes to keep pace with its growth; 14) expansion strategies may not be successful; 15) the Company's ability to compete in a highly competitive market; 16) the Company's ability to recruit and retain qualified employees and implement adequate succession planning to mitigate the loss of key members of its senior management team; 17) inadequate or ineffective risk management practices and internal controls and procedures; 18) risks associated with new lines of businesses or new products and services within existing lines of business; 19) the Company's ability to adapt to technological change; 20) exposure to natural disasters in markets that the Company operates; 21) risk of operating in a highly regulated industry and the Company's ability to remain in compliance; 22) failure to comply with state and federal banking agency laws and regulations; 23) changes in interest rates and increased rate competition; 24) exposure to environmental liabilities related to the properties to which the Company acquires title; and 25) risks related to ownership and price of the Company's common stock.

For more information regarding risks that may cause the Company's actual results to differ materially from any forward-looking statements, see “Risk Factors” in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

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Financial Overview and Highlights

WAB operates the following full-service banking divisions: ABA, BON and FIB, Bridge, and TPB. The Company also serves business customers through a national platform of specialized financial services including AAB, Corporate Finance, Equity Fund Resources, HFF, Life Sciences Group, Mortgage Warehouse Lending, Public and Nonprofit Finance, Renewable Resource Group, Resort Finance, and Technology Finance.

Financial Result Highlights for the Second Quarter of 2017


•	Net income of $80.0 million, compared to $61.6 million for the second quarter 2016


•	Diluted earnings per share of $0.76, compared to $0.60 per share for the second quarter 2016


•	Total loans of $13.99 billion, up $781.6 million from December 31, 2016


•	Total deposits of $16.03 billion, up $1.48 billion from December 31, 2016


•	Net interest margin of 4.61% compared to 4.63% in the second quarter 2016


•	Net operating revenue of $203.2 million constituting year-over-year growth of 18.0% or $31.0 million, and an increase in operating non-interest expenses of 13.17% or $10.2 million for the second quarter 2016¹


•	Operating PPNR of $115.2 million, up 22.0% from $94.5 million in the second quarter 2016¹


•	Efficiency ratio of 41.3% in the second quarter 2017, compared to 45.2% in the second quarter 2016


•	Operating efficiency ratio of 41.2% in the second quarter 2017, compared to 43.0% in the second quarter 2016¹


•	Nonperforming assets (nonaccrual loans and repossessed assets) decreased to 0.32% of total assets, from 0.54% at June 30, 2016


•	Annualized net loan (recoveries) charge-offs to average loans outstanding of (0.03)%, compared to (0.01)% for the second quarter 2016


•	Tangible common equity ratio of 9.5%, compared to 9.1% at June 30, 2016¹


•	Stockholders' equity of $2.06 billion, an increase of $262.5 million from June 30, 2016


•	Book value per common share of $19.53, an increase of 14.3% from $17.09 at June 30, 2016


•	Tangible book value per share, net of tax, of $16.71, an increase of 17.3% from $14.25 at June 30, 2016¹

The impact to the Company from these items, and others of both a positive and negative nature, are discussed in more detail below as they pertain to the Company’s overall comparative performance for the three and six months ended June 30, 2017.

¹See Non-GAAP Financial Measures section beginning on page 63.

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As a bank holding company, management focuses on key ratios in evaluating the Company's financial condition and results of operations.

Results of Operations and Financial Condition

A summary of the Company's results of operations, financial condition, and selected metrics are included in the following tables:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands, except per share amounts)
Net income	$	79,971		$	61,614		$	153,328		$	122,946
Earnings per share - basic	0.77			0.60			1.47			1.20
Earnings per share - diluted	0.76			0.60			1.46			1.19
Net interest margin	4.61		%	4.63		%	4.62		%	4.60		%
Return on average assets	1.71			1.55			1.70			1.62
Return on average tangible common equity (1)	18.42			17.36			18.14			17.88


(1)	See Non-GAAP Financial Measures section beginning on page 62



	June 30, 2017		December 31, 2016
	(in thousands)
Total assets	$	18,844,745	$	17,200,842
Loans, net of deferred loan fees and costs	13,989,995		13,208,436
Total deposits	16,031,113		14,549,863

Asset Quality

For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution and results of operations. The Company measures asset quality in terms of non-accrual loans as a percentage of gross loans and net charge-offs as a percentage of average loans. Net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans. The following table summarizes the Company's key asset quality metrics:



	June 30, 2017			December 31, 2016
	(in thousands)
Non-accrual loans	$	30,071		$	40,272
Non-performing assets	109,301			142,791
Non-accrual loans to gross loans	0.22		%	0.31		%
Net (recoveries) charge-offs to average loans (1)	(0.03		)	0.02


(1)	Annualized for the three months ended June 30, 2017. Actual year-to-date for the year ended December 31, 2016.

Asset and Deposit Growth

The Company’s assets and liabilities are comprised primarily of loans and deposits. Therefore, the ability to originate new loans and attract new deposits is fundamental to the Company’s growth. Total assets increased to $18.84 billion at June 30, 2017 from $17.20 billion at December 31, 2016. The increase in total assets of $1.64 billion, or 9.6%, relates primarily to organic loan growth and an increase in cash and cash equivalents and investment securities resulting from increased deposits. Total loans, including HFS loans, increased by $781.6 million, or 5.9%, to $13.99 billion as of June 30, 2017, compared to $13.21 billion as of December 31, 2016. Total deposits increased $1.48 billion, or 10.2%, to $16.03 billion as of June 30, 2017 from $14.55 billion as of December 31, 2016.

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RESULTS OF OPERATIONS

The following table sets forth a summary financial overview for the comparable periods:



	Three Months ended June 30,				Increase		Six Months Ended June 30,				Increase
	2017		2016		(Decrease)		2017		2016		(Decrease)
	(in thousands, except per share amounts)
Consolidated Income Statement Data:
Interest income	$	206,953	$	174,089	$	32,864	$	399,218	$	328,345	$	70,873
Interest expense	14,210		10,403		3,807		27,166		18,948		8,218
Net interest income	192,743		163,686		29,057		372,052		309,397		62,655
Provision for credit losses	3,000		2,500		500		7,250		5,000		2,250
Net interest income after provision for credit losses	189,743		161,186		28,557		364,802		304,397		60,405
Non-interest income	10,449		8,559		1,890		20,993		21,692		(699		)
Non-interest expense	88,257		81,804		6,453		176,014		157,297		18,717
Income before income taxes	111,935		87,941		23,994		209,781		168,792		40,989
Income tax expense	31,964		26,327		5,637		56,453		45,846		10,607
Net income	$	79,971	$	61,614	$	18,357	$	153,328	$	122,946	$	30,382
Earnings per share - basic	$	0.77	$	0.60	$	0.17	$	1.47	$	1.20	$	0.27
Earnings per share - diluted	$	0.76	$	0.60	$	0.16	$	1.46	$	1.19	$	0.27

Non-GAAP Financial Measures

The following discussion and analysis contains financial information determined by methods other than those prescribed by GAAP. The Company's management uses these non-GAAP financial measures in their analysis of the Company's performance. These measurements typically adjust GAAP performance measures to exclude the effects of certain significant activities or transactions that, in management's opinion, do not reflect recurring period-to-period comparisons of the Company's performance. Management believes presentation of these non-GAAP financial measures provides useful supplemental information that is essential to a complete understanding of the operating results of the Company's core businesses. Since the presentation of these non-GAAP performance measures and their impact differ between companies, these non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Operating Pre-Provision Net Revenue

Operating PPNR is defined by the Federal Reserve in SR 14-3, which requires companies subject to the rule to project PPNR over the planning horizon for each of the economic scenarios defined annually by the regulators. Banking regulations define PPNR as net interest income plus non-interest income less non-interest expense. Management has further adjusted this metric to exclude any non-recurring or non-operational elements of non-interest income or non-interest expense, which are outlined in the table below. Management feels that this is an important metric as it illustrates the underlying performance of the Company, it enables investors and others to assess the Company's ability to generate capital to cover credit losses through the credit cycle, and provides consistent reporting with a key metric used by bank regulatory agencies.

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The following table shows the components of operating PPNR for the three and six months ended June 30, 2017 and 2016:



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
	(in thousands)
Total non-interest income	$	10,449		$	8,559	$	20,993		$	21,692
Less:
(Loss) gain on sales of investment securities, net (1)	(47		)	—		588			1,001
Unrealized gains (losses) on assets and liabilities measured at fair value, net (1)	11			6		25			(1		)
Total operating non-interest income	10,485			8,553		20,380			20,692
Plus: net interest income	192,743			163,686		372,052			309,397
Net operating revenue	$	203,228		$	172,239	$	392,432		$	330,089
Total non-interest expense	$	88,257		$	81,804	$	176,014		$	157,297
Less:
Net loss (gain) on sales / valuations of repossessed and other assets (1)	231			357		(312		)	55
Acquisition / restructure expense (1)	—			3,662		—			3,662
Total operating non-interest expense	$	88,026		$	77,785	$	176,326		$	153,580
Operating pre-provision net revenue (2)	$	115,202		$	94,454	$	216,106		$	176,509
Plus:
Non-operating revenue adjustments	(36		)	6		613			1,000
Less:
Provision for credit losses	3,000			2,500		7,250			5,000
Non-operating expense adjustments	231			4,019		(312		)	3,717
Income before provision for income taxes	111,935			87,941		209,781			168,792
Income tax expense	31,964			26,327		56,453			45,846
Net income	$	79,971		$	61,614	$	153,328		$	122,946


(1)	The operating PPNR non-GAAP performance metric is adjusted to exclude the effects of this non-operational item.


(2)	There were no adjustments made for non-recurring items during the three and six months ended June 30, 2017 and 2016.

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Tangible Common Equity

The following table presents financial measures related to tangible common equity. Tangible common equity represents total stockholders' equity, less identifiable intangible assets and goodwill. Management believes that tangible common equity financial measures are useful in evaluating the Company's capital strength, financial condition, and ability to manage potential losses. In addition, management believes that these measures improve comparability to other institutions that have not engaged in acquisitions that resulted in recorded goodwill and other intangible assets.



	June 30, 2017			December 31, 2016
	(dollars and shares in thousands)
Total stockholders' equity	$	2,058,674		$	1,891,529
Less: goodwill and intangible assets	301,645			302,894
Total tangible stockholders' equity	1,757,029			1,588,635
Plus: deferred tax - attributed to intangible assets	4,550			4,949
Total tangible common equity, net of tax	$	1,761,579		$	1,593,584

Total assets	$	18,844,745		$	17,200,842
Less: goodwill and intangible assets, net	301,645			302,894
Tangible assets	18,543,100			16,897,948
Plus: deferred tax - attributed to intangible assets	4,550			4,949
Total tangible assets, net of tax	$	18,547,650		$	16,902,897

Tangible equity ratio	9.5		%	9.4		%
Tangible common equity ratio	9.5			9.4
Common shares outstanding	105,429			105,071
Tangible book value per share, net of tax	$	16.71		$	15.17

Operating Efficiency Ratio

The following table shows the components used in the calculation of the operating efficiency ratio, which management uses as a metric for assessing cost efficiency:



	Three Months ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(dollars in thousands)
Total non-interest expense	$	88,257		$	81,804		$	176,014		$	157,297
Non-operating expense adjustments	(231		)	(4,019		)	312			(3,717		)
Total operating non-interest expense	$	88,026		$	77,785		$	176,326		$	153,580

Divided by:
Total net interest income	$	192,743		$	163,686		$	372,052		$	309,397
Plus:
Tax equivalent interest adjustment	10,453			8,704			20,129			17,138
Non-interest income	10,449			8,559			20,993			21,692
Net revenue - TEB	$	213,645		$	180,949		$	413,174		$	348,227
Non-operating revenue adjustments	36			(6		)	(613		)	(1,000		)
Net operating revenue - TEB	$	213,681		$	180,943		$	412,561		$	347,227

Efficiency ratio - TEB	41.3		%	45.2		%	42.6		%	45.2		%
Operating efficiency ratio - TEB	41.2			43.0			42.7			44.2

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Regulatory Capital

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



	June 30, 2017			December 31, 2016
	(dollars in thousands)
Common Equity Tier 1:
Common Equity	$	2,058,674		$	1,891,529
Less:
Non-qualifying goodwill and intangibles	295,655			294,754
Disallowed deferred tax asset	1,060			1,400
AOCI related adjustments	(147		)	(13,460		)
Unrealized gain on changes in fair value liabilities	8,092			8,118
Common Equity Tier 1 (regulatory)	$	1,754,014		$	1,600,717
Divided by: Risk-weighted assets (regulatory)	$	16,992,251		$	15,980,092
Common Equity Tier 1 ratio	10.3		%	10.0		%

Common Equity Tier 1 (regulatory)	$	1,754,014		$	1,600,717
Plus:
Trust preferred securities	81,500			81,500
Less:
Disallowed deferred tax asset	265			934
Unrealized gain on changes in fair value liabilities	2,023			5,412
Tier 1 capital	$	1,833,226		$	1,675,871
Divided by: Tangible average assets	$	18,436,948		$	16,868,674
Tier 1 leverage ratio	9.9		%	9.9		%

Total Capital:
Tier 1 capital (regulatory)	$	1,833,226		$	1,675,871
Plus:
Subordinated debt	298,637			299,927
Qualifying allowance for credit losses	131,811			124,704
Other	5,851			6,978
Less: Tier 2 qualifying capital deductions	—			—
Tier 2 capital	$	436,299		$	431,609

Total capital	$	2,269,525		$	2,107,480

Total capital ratio	13.4		%	13.2		%

Classified assets to Tier 1 capital plus allowance for credit losses:
Classified assets	$	249,491		$	211,782
Divided by:
Tier 1 capital	1,833,226			1,675,871
Plus: Allowance for credit losses	131,811			124,704
Total Tier 1 capital plus allowance for credit losses	$	1,965,037		$	1,800,575

Classified assets to Tier 1 capital plus allowance	12.7		%	11.8		%

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Net Interest Margin

The net interest margin is reported on a TEB. A tax equivalent adjustment is added to reflect interest earned on certain securities and loans that are exempt from federal and state income tax. The following tables set forth the average balances, interest income, interest expense, and average yield (on a fully TEB) for the periods indicated:



	Three Months Ended June 30,
	2017							2016
	Average Balance			Interest		Average Yield / Cost		Average Balance			Interest		Average Yield / Cost
	(dollars in thousands)
Interest-earning assets
Loans:
Commercial and industrial	$	6,054,351		$	75,857	5.52	%	$	5,365,035		$	63,621	5.24	%
Commercial real estate	5,626,274			78,347		5.57		5,270,319			73,167		5.55
Construction and land development	1,605,614			24,965		6.22		1,293,659			19,094		5.90
Residential real estate	322,205			3,950		4.90		299,849			3,383		4.51
Consumer	44,681			395		3.54		35,679			428		4.80
Loans held for sale	17,255			143		3.31		22,762			322		5.66
Total loans (1), (2), (3)	13,670,380			183,657		5.60		12,287,303			160,015		5.43
Securities:
Securities - taxable	2,446,546			14,847		2.43		1,547,833			8,514		2.20
Securities - tax-exempt	627,960			5,782		5.48		469,637			4,357		5.44
Total securities (1)	3,074,506			20,629		3.05		2,017,470			12,871		2.95
Other	903,269			2,667		1.18		597,542			1,203		0.81
Total interest-earning assets	17,648,155			206,953		4.93		14,902,315			174,089		4.91
Non-interest earning assets
Cash and due from banks	140,302							134,174
Allowance for credit losses	(129,979		)					(120,373		)
Bank owned life insurance	165,793							163,694
Other assets	919,641							832,648
Total assets	$	18,743,912						$	15,912,458
Interest-bearing liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts	$	1,492,700		$	986	0.26	%	$	1,194,171		$	504	0.17	%
Savings and money market accounts	6,155,832			5,831		0.38		5,837,403			4,978		0.34
Time certificates of deposit	1,575,969			2,828		0.72		1,757,158			2,196		0.50
Total interest-bearing deposits	9,224,501			9,645		0.42		8,788,732			7,678		0.35
Short-term borrowings	34,556			72		0.83		153,063			211		0.55
Qualifying debt	359,282			4,493		5.00		227,510			2,514		4.42
Total interest-bearing liabilities	9,618,339			14,210		0.59		9,169,305			10,403		0.45
Non-interest-bearing liabilities
Non-interest-bearing demand deposits	6,735,358							4,772,582
Other liabilities	351,713							246,742
Stockholders’ equity	2,038,502							1,723,829
Total liabilities and stockholders' equity	$	18,743,912						$	15,912,458
Net interest income and margin (4)				$	192,743	4.61	%				$	163,686	4.63	%


(1)	Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $10.4 million and $8.7 million for the three months ended June 30, 2017 and 2016, respectively.


(2)	Included in the yield computation are net loan fees of $10.0 million and accretion on acquired loans of $7.1 million for the three months ended June 30, 2017, compared to $6.5 million and $8.2 million for the three months ended June 30, 2016, respectively.


(3)	Includes non-accrual loans.


(4)	Net interest margin is computed by dividing net interest income by total average earning assets.

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	Six Months Ended June 30,
	2017							2016
	Average Balance			Interest		Average Yield / Cost		Average Balance			Interest		Average Yield / Cost
	(dollars in thousands)
Interest-earning assets
Loans:
Commercial and industrial	$	5,904,870		$	144,260	5.38	%	$	5,262,789		$	124,546	5.24	%
Commercial real estate	5,579,767			156,579		5.61		4,802,066			130,306		5.43
Construction and land development	1,558,460			47,067		6.04		1,229,881			36,589		5.95
Residential real estate	297,175			6,974		4.69		305,680			6,891		4.51
Consumer	41,604			888		4.27		32,251			794		4.92
Loans held for sale	18,009			442		4.91		23,452			675		5.76
Total loans (1), (2), (3)	13,399,885			356,210		5.53		11,656,119			299,801		5.37
Securities:
Securities - taxable	2,276,811			27,285		2.40		1,558,093			17,851		2.29
Securities - tax-exempt	616,195			11,458		5.52		462,183			8,528		5.33
Total securities (1)	2,893,006			38,743		3.06		2,020,276			26,379		2.99
Other	693,813			4,265		1.23		507,521			2,165		0.85
Total interest-earning assets	16,986,704			399,218		4.94		14,183,916			328,345		4.87
Non-interest earning assets
Cash and due from banks	141,501							137,462
Allowance for credit losses	(127,865		)					(120,953		)
Bank owned life insurance	165,316							163,238
Other assets	910,145							827,638
Total assets	$	18,075,801						$	15,191,301
Interest-bearing liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts	$	1,463,923		$	1,791	0.24	%	$	1,143,028		$	959	0.17	%
Savings and money market accounts	6,112,654			11,143		0.36		5,585,654			9,012		0.32
Time certificates of deposit	1,530,670			5,123		0.67		1,659,327			3,950		0.48
Total interest-bearing deposits	9,107,247			18,057		0.40		8,388,009			13,921		0.33
Short-term borrowings	72,513			278		0.77		102,942			329		0.64
Qualifying debt	356,699			8,831		4.95		213,474			4,698		4.40
Total interest-bearing liabilities	9,536,459			27,166		0.57		8,704,425			18,948		0.44
Non-interest-bearing liabilities
Non-interest-bearing demand deposits	6,230,071							4,561,357
Other liabilities	316,350							245,614
Stockholders’ equity	1,992,921							1,679,905
Total liabilities and stockholders' equity	$	18,075,801						$	15,191,301
Net interest income and margin (4)				$	372,052	4.62	%				$	309,397	4.60	%


(1)	Yields on loans and securities have been adjusted to a TEB. The taxable-equivalent adjustment was $20.1 million and $17.1 million for the six months ended June 30, 2017 and 2016, respectively.


(2)	Included in the yield computation are net loan fees of $16.6 million and accretion on acquired loans of $13.5 million for the six months ended June 30, 2017, compared to $13.0 million and $13.5 million for the six months ended June 30, 2016, respectively.


(3)	Includes non-accrual loans.


(4)	Net interest margin is computed by dividing net interest income by total average earning assets.

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	Three Months Ended June 30,									Six Months Ended June 30,
	2017 versus 2016									2017 versus 2016
	Increase (Decrease) Due to Changes in (1)									Increase (Decrease) Due to Changes in (1)
	Volume			Rate			Total			Volume			Rate			Total
										(in thousands)
Interest income:
Loans:
Commercial and industrial	$	8,637		$	3,599		$	12,236		$	15,686		$	4,028		$	19,714
Commercial real estate	4,957			223			5,180			21,824			4,449			26,273
Construction and land development	4,850			1,021			5,871			9,923			555			10,478
Residential real estate	274			293			567			(200		)	283			83
Consumer	80			(113		)	(33		)	200			(106		)	94
Loans held for sale	(46		)	(133		)	(179		)	(134		)	(99		)	(233		)
Total loans	18,752			4,890			23,642			47,299			9,110			56,409
Securities:
Securities - taxable	5,454			879			6,333			8,613			821			9,434
Securities - tax-exempt	1,458			(33		)	1,425			2,864			66			2,930
Total securities	6,912			846			7,758			11,477			887			12,364
Other	903			561			1,464			1,145			955			2,100
Total interest income	26,567			6,297			32,864			59,921			10,952			70,873

Interest expense:
Interest bearing transaction accounts	$	197		$	285		$	482		$	393		$	439		$	832
Savings and money market	302			551			853			961			1,170			2,131
Time certificates of deposit	(325		)	957			632			(431		)	1,604			1,173
Short-term borrowings	(247		)	108			(139		)	(117		)	66			(51		)
Qualifying debt	1,648			331			1,979			3,546			587			4,133
Total interest expense	1,575			2,232			3,807			4,352			3,866			8,218

Net increase	$	24,992		$	4,065		$	29,057		$	55,569		$	7,086		$	62,655


(1)	Changes due to both volume and rate have been allocated to volume changes.

Comparison of interest income, interest expense and net interest margin

The Company's primary source of revenue is interest income. For the three months ended June 30, 2017, interest income was $207.0 million, an increase of $32.9 million, or 18.9%, compared to $174.1 million for the three months ended June 30, 2016. This increase was primarily the result of a $1.38 billion increase in the average loan balance which, together, with the effect of the rising rate environment, drove a $23.6 million increase in loan interest income for the three months ended June 30, 2017. The acquisition of the HFF loan portfolio on April 20, 2016 contributed $259.1 million to the increase in the Company's average loan balance and also contributed $3.6 million to the increase in loan interest income as the full quarter effect of the acquisition was reflected in the current period. Interest income from investment securities increased by $7.8 million for the comparable period primarily due to an increase in the average investment balance of $1.06 billion from June 30, 2016 as well as an increase in interest rates. Average yield on interest earning assets increased to 4.93% for the three months ended June 30, 2017, compared to 4.91% for the same period in 2016, which was primarily the result of increased yields on loans and investment securities, attributable to rising interest rate environment.

For the six months ended June 30, 2017, interest income was $399.2 million, an increase of $70.9 million, or 21.6%, compared to $328.3 million for the six months ended June 30, 2016. This increase was primarily the result of a $1.74 billion increase in the average loan balance which, together, with the effect of the rising rate environment, drove a $56.4 million increase in loan interest income for the six months ended June 30, 2017. The acquisition of the HFF loan portfolio on April 20, 2016 contributed $773.4 million to the increase in the Company's average loan balance and also contributed $25.2 million to the increase in loan interest income as the full year-to-date effect of the acquisition was reflected in 2017. The remaining increase in the Company's loan balance from the prior year is attributable to organic loan growth. Interest income from investment securities increased by $12.4 million for the comparable period primarily due to an increase in the average investment balance of $872.7 million from June 30, 2016 as well an increase in interest rates. Average yield on interest earning assets increased to 4.94% for the six months ended June 30, 2017, compared to 4.87% for the same period in 2016, which was primarily the result

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of increased yields on loans and investment securities resulting from rising interest rates during the six months ended June 30, 2017.

For the three months ended June 30, 2017, interest expense was $14.2 million, compared to $10.4 million for the three months ended June 30, 2016. Interest expense on deposits increased $2.0 million for the same period as average interest-bearing deposits increased $435.8 million, which is a 7 basis point increase in average cost of interest bearing deposits. Interest expense on qualifying debt increased by $2.0 million as a result of a $131.8 million increase in average qualifying debt for the three months ended June 30, 2017 compared to the same period in 2016.

For the six months ended June 30, 2017, interest expense was $27.2 million, compared to $18.9 million for the six months ended June 30, 2016. Interest expense on deposits increased $4.1 million for the same period as average interest-bearing deposits increased $719.2 million, which is a 7 basis point increase in average cost of interest bearing deposits. Interest expense on qualifying debt increased by $4.1 million as a result of a $143.2 million increase in average qualifying debt for the six months ended June 30, 2017 compared to the same period in 2016.

For the three months ended June 30, 2017, net interest income was $192.7 million, compared to $163.7 million for the three months ended June 30, 2016. The increase in net interest income reflects a $2.75 billion increase in average interest-earning assets, offset by a $449.0 million increase in average interest-bearing liabilities. The decrease in net interest margin of 2 basis points is the result of an increase the cost of interest-bearing deposits and interest expense resulting from the issuance of long-term subordinated debt in June 2016 as the full quarter effect was realized in 2017. These decreases were partially offset by higher yields on loans and securities in the current period.

For the six months ended June 30, 2017, net interest income was $372.1 million, compared to $309.4 million for the six months ended June 30, 2016. The increase in net interest income reflects a $2.80 billion increase in average interest-earning assets, offset by a $832.0 million increase in average interest-bearing liabilities. The increase in net interest margin of 2 basis points compared to the same period in 2016 is the result of an increase in average yield on loans and securities due to the rising interest rate environment, partially offset by higher deposit and funding costs.

Provision for Credit Losses

The provision for credit losses in each period is reflected as a reduction in earnings for that period. The provision is equal to the amount required to maintain the allowance for credit losses at a level that is adequate to absorb probable credit losses inherent in the loan portfolio. For the three months ended June 30, 2017, the provision for credit losses was $3.0 million compared to $2.5 million for the three months ended June 30, 2016. For the six months ended June 30, 2017, the provision for credit losses was $7.3 million, compared to $5.0 million for the six months ended June 30, 2016. The provision increase was primarily due to an increase in total organic loans during the three and six months ended June 30, 2017. The Company may establish an additional allowance for credit losses for PCI loans through provision for credit losses when impairment is determined as a result of lower than expected cash flows. As of June 30, 2017 and December 31, 2016, the allowance for credit losses on PCI loans was $1.7 million and $1.8 million, respectively.

Non-interest Income

The following table presents a summary of non-interest income for the periods presented:



	Three Months ended June 30,								Six Months Ended June 30,
	2017			2016		Increase (Decrease)			2017		2016		Increase (Decrease)
	(in thousands)
Service charges and fees	$	5,203		$	4,544	$	659		$	9,941	$	9,043	$	898
Card income	1,380			1,274		106			2,802		2,464		338
Income from equity investments	1,291			59		1,232			1,983		401		1,582
Income from bank owned life insurance	973			1,029		(56		)	1,921		1,959		(38		)
Foreign currency income	832			842		(10		)	1,874		1,783		91
Lending related income and gains (losses) on sale of loans, net	227			194		33			649		3,801		(3,152		)
(Loss) gain on sales of investment securities, net	(47		)	—		(47		)	588		1,001		(413		)
Other income	590			617		(27		)	1,235		1,240		(5		)
Total non-interest income	$	10,449		$	8,559	$	1,890		$	20,993	$	21,692	$	(699	)

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Total non-interest income for the three months ended June 30, 2017 compared to the same period in 2016, increased by $1.9 million, or 22.1%. The increase in non-interest income is due primarily to an increase in service charges and fees and income from equity investments.

Total non-interest income for the six months ended June 30, 2017 compared to the same period in 2016, decreased by $0.7 million, or 3.2%. The decrease in non-interest income is due primarily to a decrease in lending related income. Lending related income decreased $1.0 million as a result of decreased SBA income and total non-recurring net gains on sale of loans was $2.0 million for the six months ended June 30, 2016, compared to less than $0.1 million for the six months ended June 30, 2017.

Non-interest Expense

The following table presents a summary of non-interest expense for the periods presented:



	Three Months ended June 30,							Six Months Ended June 30,
	2017		2016		Increase (Decrease)			2017			2016		Increase (Decrease)
	(in thousands)
Salaries and employee benefits	$	52,246	$	44,711	$	7,535		$	103,866		$	89,566	$	14,300
Legal, professional, and directors' fees	8,483		5,747		2,736			17,286			11,319		5,967
Occupancy	6,927		7,246		(319		)	13,821			13,503		318
Data processing	4,396		5,114		(718		)	9,667			9,175		492
Insurance	3,589		2,963		626			6,817			6,286		531
Deposit costs	2,133		986		1,147			3,874			1,758		2,116
Marketing	1,131		1,097		34			1,852			1,754		98
Loan and repossessed asset expenses	1,098		832		266			2,376			1,734		642
Card expense	704		824		(120		)	1,358			1,711		(353		)
Intangible amortization	488		697		(209		)	1,177			1,394		(217		)
Net loss (gain) on sales / valuations of repossessed and other assets	231		357		(126		)	(312		)	55		(367		)
Acquisition / restructure expense	—		3,662		(3,662		)	—			3,662		(3,662		)
Other expense	6,831		7,568		(737		)	14,232			15,380		(1,148		)
Total non-interest expense	$	88,257	$	81,804	$	6,453		$	176,014		$	157,297	$	18,717

Total non-interest expense for the three months ended June 30, 2017, compared to the same period in 2016, increased $6.5 million, or 7.9%. This increase primarily relates to salaries and employee benefits and legal, professional, and directors' fees. Salaries and employee benefits and legal, professional, and directors' fees have increased as the Company continues to build out its infrastructure to support its continued growth. These increases were offset by a $3.7 million decrease in acquisition / restructure expense related to the HFF acquisition and restructure costs for the system conversion that occurred in the fourth quarter of 2016.

Total non-interest expense for the six months ended June 30, 2017, compared to the same period in 2016, increased $18.7 million, or 11.9%. This increase primarily relates to salaries and employee benefits, legal, professional, and directors' fees, and deposit costs. The explanation for the increase in salaries and employee benefits and legal, professional, and directors' fees for the six months ended June 30, 2017 compared to the same period in 2016 is the same as the explanation for the three months ended June 30, 2017 compared to the same period in 2016. Deposits costs consist of fees to Promontory and others for reciprocal deposits as well as earnings credits on select non-interest bearing deposits. The increase in deposit costs for the six months ended June 30, 2017, compared to the same period in 2016 primarily relates to an increase in deposit earnings credits paid to account holders.

Income Taxes

The effective tax rate for the six months ended June 30, 2017 was 26.91%, compared to 27.16% for the six months ended June 30, 2016.

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Business Segment Results

The Company's reportable segments are aggregated primarily based on geographic location, services offered, and markets served. The Company's regional segments, which include Arizona, Nevada, Southern California, and Northern California, provide full service banking and related services to their respective markets. The Company's NBL segments, which include HOA Services, Public & Nonprofit Finance, Technology & Innovation, HFF, and Other NBLs, provide specialized banking services to niche markets. These NBLs are managed centrally and are broader in geographic scope than the Company's other segments, though still predominately located within the Company's core market areas. The Corporate & Other segment consists of corporate-related items, income and expense items not allocated to the Company's other reportable segments, and inter-segment eliminations.

The following tables present selected operating segment information for the periods presented:



			Regional Segments
	Consolidated Company		Arizona		Nevada		Southern California		Northern California
At June 30, 2017	(in millions)
Loans, net of deferred loan fees and costs	$	13,989.9	$	3,089.9	$	1,729.3	$	1,838.4	$	1,172.5
Deposits	16,031.1		4,778.5		3,925.3		2,251.6		1,547.8

At December 31, 2016
Loans, net of deferred loan fees and costs	$	13,208.5	$	2,955.9	$	1,725.5	$	1,766.8	$	1,095.4
Deposits	14,549.8		3,843.4		3,731.5		2,382.6		1,543.6



	(in thousands)
Three Months Ended June 30, 2017:
Income (loss) before income taxes	$	111,935	$	32,178	$	26,743	$	16,979	$	8,789

Six Months Ended June 30, 2017:
Income (loss) before income taxes	$	209,781	$	58,562	$	48,513	$	30,146	$	19,832

Three Months Ended June 30, 2016:
Income (loss) before income taxes	$	87,941	$	25,839	$	22,441	$	15,509	$	10,005

Six Months Ended June 30, 2016:
Income (loss) before income taxes	$	168,792	$	46,747	$	43,142	$	29,333	$	20,617

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	National Business Lines
	HOA Services		Public & Nonprofit Finance		Technology & Innovation		Hotel Franchise Finance		Other NBLs		Corporate & Other
At June 30, 2017	(in millions)
Loans, net of deferred loan fees and costs	$	150.3	$	1,545.7	$	1,044.4	$	1,238.5	$	2,173.2	$	7.7
Deposits	2,186.9		—		1,272.4		—		—		68.6

At December 31, 2016
Loans, net of deferred loan fees and costs	$	116.8	$	1,454.3	$	1,011.4	$	1,292.1	$	1,776.9	$	13.4
Deposits	1,890.3		—		1,038.2		—		—		120.2



	(in thousands)
Three Months Ended June 30, 2017:
Income (loss) before income taxes	$	6,498	$	5,319	$	13,305	$	8,546	$	8,948	$	(15,370	)

Six Months Ended June 30, 2017:
Income (loss) before income taxes	$	12,113	$	9,057	$	24,269	$	19,139	$	15,564	$	(27,414	)

Three Months Ended June 30, 2016:
Income (loss) before income taxes	$	4,189	$	2,929	$	10,926	$	9,511	$	7,461	$	(20,869	)

Six Months Ended June 30, 2016:
Income (loss) before income taxes	$	7,307	$	6,491	$	23,131	$	9,511	$	15,058	$	(32,545	)

BALANCE SHEET ANALYSIS

Total assets increased $1.64 billion, or 9.6%, to $18.84 billion at June 30, 2017, compared to $17.20 billion at December 31, 2016. The increase in total assets relates primarily to organic loan growth and an increase in cash and cash equivalents and investment securities resulting from increased deposits. Loans increased $781.6 million, or 5.9%, to $13.99 billion at June 30, 2017, compared to $13.21 billion at December 31, 2016.

Total liabilities increased $1.48 billion, or 9.6%, to $16.79 billion at June 30, 2017, compared to $15.31 billion at December 31, 2016. The increase in liabilities is due primarily to an increase in total deposits of $1.48 billion, or 10.2%, to $16.03 billion, all of which is attributable to organic deposit growth.

Total stockholders’ equity increased by $167.1 million, or 8.8%, to $2.06 billion at June 30, 2017, compared to $1.89 billion at December 31, 2016. The increase in stockholders' equity relates primarily to net income for the six months ended June 30, 2017 and an increase in the fair value of the Company's AFS portfolio, which is recognized as part of AOCI.

Investment securities

Investment securities are classified at the time of acquisition as either HTM, AFS, or measured at fair value based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. HTM securities are carried at amortized cost, adjusted for amortization of premiums or accretion of discounts. AFS securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Investment securities classified as AFS are carried at fair value. Unrealized gains or losses on AFS securities are recorded as part of AOCI in stockholders’ equity. Amortization of premiums or accretion of discounts on MBS is periodically adjusted for estimated prepayments. Investment securities measured at fair value are reported at fair value, with unrealized gains and losses included in current period earnings.

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The Company's investment securities portfolio is utilized as collateral for borrowings, required collateral for public deposits and customer repurchase agreements, and to manage liquidity, capital, and interest rate risk. The following table summarizes the carrying value of the investment securities portfolio for each of the periods below:



	June 30, 2017		December 31, 2016
	(in thousands)
CDO	$	15,553	$	13,490
Commercial MBS issued by GSEs	115,327		117,792
Corporate debt securities	63,922		64,144
CRA investments	49,482		37,113
Preferred stock	97,506		94,662
Private label residential MBS	680,248		433,685
Residential MBS issued by GSEs	1,555,137		1,356,258
Tax-exempt	536,991		500,312
Trust preferred securities	29,405		26,532
U.S. government sponsored agency securities	71,391		56,022
U.S. treasury securities	2,498		2,502
Total investment securities	$	3,217,460	$	2,702,512

Loans

The table below summarizes the distribution of the Company’s held for investment loan portfolio:



	June 30, 2017			December 31, 2016
	(in thousands)
Commercial and industrial	$	6,236,083		$	5,755,021
Commercial real estate - non-owner occupied	3,649,108			3,543,956
Commercial real estate - owner occupied	2,021,226			2,013,276
Construction and land development	1,601,705			1,478,114
Residential real estate	334,800			259,432
Commercial leases	82,429			100,765
Consumer	47,908			38,963
Loans, net	13,973,259			13,189,527
Allowance for credit losses	(131,811		)	(124,704		)
Total loans HFI	$	13,841,448		$	13,064,823

As of June 30, 2017 and December 31, 2016, the Company also has $16.7 million and $18.9 million of HFS loans, respectively.

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Concentrations of Lending Activities

The Company monitors concentrations within four broad categories: product, collateral, geography, and industry. The Company’s loan portfolio includes significant credit exposure to the CRE market. As of June 30, 2017 and December 31, 2016, CRE related loans accounted for approximately 52% and 53% of total loans, respectively. Substantially all of these loans are secured by first liens with an initial loan to value ratio of generally not more than 75%. Approximately 36% of these CRE loans, excluding construction and land loans, were owner-occupied at each of the periods ended June 30, 2017 and December 31, 2016.

Impaired loans

A loan is identified as impaired when it is no longer probable that interest and principal will be collected according to the contractual terms of the original loan agreement. Generally, impaired loans are classified as non-accrual. However, in certain instances, impaired loans may continue on an accrual basis if full repayment of all principal and interest is expected and the loan is both well-secured and in the process of collection. Impaired loans are measured for reserve requirements in accordance with ASC 310 based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral less applicable disposition costs if the loan is collateral dependent. The amount of an impairment reserve, if any, and any subsequent changes are charged against the allowance for credit losses.

In addition to the Company's own internal loan review process, regulators may from time to time direct the Company to modify loan grades, loan impairment calculations, or loan impairment methodology.

Total non-performing loans decreased by $16.7 million, or 17.5%, at June 30, 2017 to $78.3 million from $95.0 million at December 31, 2016.



	June 30, 2017			December 31, 2016
	(dollars in thousands)
Total non-accrual loans (1)	$	30,071		$	40,272
Loans past due 90 days or more on accrual status (2)	4,021			1,067
Accruing troubled debt restructured loans	44,221			53,637
Total nonperforming loans, excluding loans acquired with deteriorated credit quality	78,313			94,976
Other impaired loans	27,321			4,233
Total impaired loans	$	105,634		$	99,209
Other assets acquired through foreclosure, net	$	30,988		$	47,815
Non-accrual loans to gross loans held for investment	0.22		%	0.31		%
Loans past due 90 days or more on accrual status to gross loans held for investment	0.03			0.01


(1)	Includes non-accrual TDR loans of $11.0 million and $7.1 million at June 30, 2017 and December 31, 2016, respectively.


(2)	Includes $0.3 million from loans acquired with deteriorated credit quality at each of the periods ended June 30, 2017 and December 31, 2016.

Interest income received on non-accrual loans was $0.4 million and $0.2 million for the three months ended June 30, 2017 and 2016 and $0.7 million and $0.4 million for the six months ended June 30, 2017 and 2016, respectively. Interest income that would have been recorded under the original terms of non-accrual loans was $0.6 million and $0.5 million for the three months ended June 30, 2017 and 2016 and $1.2 million and $0.9 million for the six months ended June 30, 2017 and 2016, respectively.

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The composition of non-accrual loans by loan type and by segment were as follows:



	June 30, 2017						December 31, 2016
	Non-accrual Balance		Percent of Non-Accrual Balance		Percent of Total HFI Loans		Non-accrual Balance		Percent of Non-Accrual Balance		Percent of Total HFI Loans
	(dollars in thousands)
Commercial and industrial	$	14,300	47.55	%	0.10	%	$	16,967	42.13	%	0.13	%
Commercial real estate	10,724		35.66		0.08		16,666		41.39		0.13
Construction and land development	1,284		4.27		0.01		1,284		3.19		0.01
Residential real estate	3,608		12.00		0.03		5,192		12.89		0.04
Consumer	155		0.52		—		163		0.40		—
Total non-accrual loans	$	30,071	100.00	%	0.22	%	$	40,272	100.00	%	0.31	%



	June 30, 2017				December 31, 2016
	Nonaccrual Loans		Percent of Segment's Total HFI Loans		Nonaccrual Loans		Percent of Segment's Total HFI Loans
	(dollars in thousands)
Arizona	$	9,285	0.30	%	$	10,424	0.35	%
Nevada	4,546		0.26		10,407		0.60
Southern California	2,835		0.15		2,891		0.16
Northern California	4,464		0.39		4,408		0.41
Technology and Innovation	6,312		0.60		8,813		0.87
Other NBLs	155		0.01		166		0.01
Corporate & Other	2,474		32.10		3,163		23.22
Total non-accrual loans	$	30,071	0.22	%	$	40,272	0.31	%

Troubled Debt Restructured Loans

A TDR loan is a loan that is granted a concession, for reasons related to a borrower’s financial difficulties, that the lender would not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a reduction in the face amount of the debt, a reduction in accrued interest, extensions, deferrals, renewals, and rewrites. A TDR loan is also considered impaired. Generally, a loan that is modified at an effective market rate of interest is no longer disclosed as a TDR in years subsequent to the restructuring if it is performing based on the terms specified by the restructuring agreement. However, such loans continue to be considered impaired.

As of June 30, 2017 and December 31, 2016, the aggregate amount of loans classified as impaired was $105.6 million and $99.2 million, respectively, a net increase of 6.5%. The total specific allowance for credit losses related to these loans was $3.9 million and $4.2 million at June 30, 2017 and December 31, 2016, respectively. The Company had $44.2 million and $53.6 million in loans classified as accruing restructured loans at June 30, 2017 and December 31, 2016, respectively.

Impaired loans by segment at June 30, 2017 and December 31, 2016 were as follows:



	June 30, 2017		December 31, 2016
	(in thousands)
Arizona	$	17,941	$	19,180
Nevada	49,827		48,348
Southern California	6,364		2,888
Northern California	7,423		4,024
Technology & Innovation	19,319		8,461
Other NBLs	155		163
Corporate & Other	4,605		16,145
Total impaired loans	$	105,634	$	99,209

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The following tables present a breakdown of total impaired loans and the related specific reserves for the periods indicated:



	June 30, 2017
	Impaired Balance		Percent of Impaired Balance		Percent of Total HFI Loans		Reserve Balance		Percent of Reserve Balance		Percent of Total Allowance
	(dollars in thousands)
Commercial and industrial	$	33,538	31.74	%	0.24	%	$	3,135	80.84	%	2.38	%
Commercial real estate	42,885		40.60		0.31		743		19.16		0.56
Construction and land development	12,146		11.50		0.09		—		—		—
Residential real estate	16,867		15.97		0.12		—		—		—
Consumer	198		0.19		—		—		—		—
Total impaired loans	$	105,634	100.00	%	0.76	%	$	3,878	100.00	%	2.94	%



	December 31, 2016
	Impaired Balance		Percent of Impaired Balance		Percent of Total HFI Loans		Reserve Balance		Percent of Reserve Balance		Percent of Total Allowance
	(dollars in thousands)
Commercial and industrial	$	21,462	21.63	%	0.16	%	$	3,301	77.88	%	2.65	%
Commercial real estate	46,272		46.64		0.36		937		22.10		0.75
Construction and land development	14,838		14.96		0.11		—		—		—
Residential real estate	16,391		16.52		0.12		—		—		—
Consumer	246		0.25		—		1		0.02		—
Total impaired loans	$	99,209	100.00	%	0.75	%	$	4,239	100.00	%	3.40	%

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Allowance for Credit Losses

The following table summarizes the activity in the Company's allowance for credit losses for the period indicated:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(dollars in thousands)
Allowance for credit losses:
Balance at beginning of period	$	127,649		$	119,227		$	124,704		$	119,068
Provision charged to operating expense:
Commercial and industrial	2,197			(252		)	4,559			5,638
Commercial real estate	2,002			1,237			3,801			(2,074		)
Construction and land development	(753		)	1,903			(1,108		)	2,257
Residential real estate	(541		)	(545		)	(117		)	(1,116		)
Consumer	95			157			115			295
Total Provision	3,000			2,500			7,250			5,000
Recoveries of loans previously charged-off:
Commercial and industrial	(1,759		)	(804		)	(2,087		)	(2,380		)
Commercial real estate	(406		)	(770		)	(938		)	(4,435		)
Construction and land development	(508		)	(58		)	(785		)	(153		)
Residential real estate	(1,299		)	(153		)	(1,551		)	(410		)
Consumer	—			(43		)	(49		)	(110		)
Total recoveries	(3,972		)	(1,828		)	(5,410		)	(7,488		)
Loans charged-off:
Commercial and industrial	651			1,161			3,245			8,652
Commercial real estate	1,819			244			1,819			654
Construction and land development	—			—			—			—
Residential real estate	332			—			447			26
Consumer	8			46			42			120
Total charged-off	2,810			1,451			5,553			9,452
Net (recoveries) charge-offs	(1,162		)	(377		)	143			1,964
Balance at end of period	$	131,811		$	122,104		$	131,811		$	122,104
Net (recoveries) charge-offs to average loans outstanding - annualized	(0.03		)%	(0.01		)%	0.00		%	0.03		%
Allowance for credit losses to gross organic loans	1.08			1.15

The following table summarizes the allocation of the allowance for credit losses by loan type. However, the allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.



	Commercial and Industrial			Commercial Real Estate			Construction and Land Development			Residential Real Estate			Consumer			Total
	(dollars in thousands)
June 30, 2017
Allowance for Credit Losses	$	76,734		$	28,593		$	20,852		$	4,838		$	794		$	131,811
Percent of Total Allowance for Credit Losses	58.2		%	21.7		%	15.8		%	3.7		%	0.6		%	100.0		%
Percent of Gross Loans to Total Gross HFI Loans	44.3			41.4			11.7			2.3			0.3			100.0
December 31, 2016
Allowance for Credit Losses	$	73,333		$	25,673		$	21,175		$	3,851		$	672		$	124,704
Percent of Total Allowance for Credit Losses	58.8		%	20.6		%	17.0		%	3.1		%	0.5		%	100.0		%
Percent of Gross Loans to Total Gross HFI Loans	44.3			42.1			11.3			2.0			0.3			100.0

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Problem Loans

The Company classifies loans consistent with federal banking regulations using a nine category grading system. These loan grades are described in further detail in "Item 1. Business” of the Company's Annual Report for the year ended December 31, 2016. The following table presents information regarding potential and actual problem loans, consisting of loans graded Special Mention, Substandard, Doubtful, and Loss, but still performing, and excluding acquired loans:



	June 30, 2017
	Number of Loans	Loan Balance		Percent of Loan Balance		Percent of Total HFI Loan Balance
	(dollars in thousands)
Commercial and industrial	95	$	121,804	60.08	%	0.87	%
Commercial real estate	38	63,715		31.43		0.46
Construction and land development	7	16,053		7.92		0.11
Residential real estate	3	1,027		0.51		0.01
Consumer	5	113		0.06		—
Total	148	$	202,712	100.00	%	1.45	%



	December 31, 2016
	Number of Loans	Loan Balance		Percent of Loan Balance		Percent of Total HFI Loan Balance
	(dollars in thousands)
Commercial and industrial	96	$	92,019	51.65	%	0.70	%
Commercial real estate	41	71,900		40.36		0.55
Construction and land development	7	12,297		6.90		0.09
Residential real estate	9	1,831		1.03		0.01
Consumer	9	103		0.06		—
Total	162	$	178,150	100.00	%	1.35	%

Based on discussions with regulatory authorities, we expect that credit rating guidelines for technology loans may involve broader parameters for classification as Special Mention, which could result in increased levels of Special Mention loans in this category than reported historically. However, such classification changes should not affect the ultimate collectability of such loans, nor result in higher levels on non-performing assets.

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Other Assets Acquired Through Foreclosure

The following table represents the changes in other assets acquired through foreclosure:



	Three Months Ended June 30, 2017
	Gross Balance			Valuation Allowance			Net Balance
	(in thousands)
Balance, beginning of period	$	50,919		$	(5,719	)	$	45,200
Transfers to other assets acquired through foreclosure, net	1,392			—			1,392
Proceeds from sale of other real estate owned and repossessed assets, net	(17,208		)	1,826			(15,382		)
Valuation adjustments, net	—			(156		)	(156		)
(Losses) gains, net (1)	(66		)	—			(66		)
Balance, end of period	$	35,037		$	(4,049	)	$	30,988

	Three Months Ended June 30, 2016
Balance, beginning of period	$	61,346		$	(8,570	)	$	52,776
Transfers to other assets acquired through foreclosure, net	88			—			88
Proceeds from sale of other real estate owned and repossessed assets, net	(4,480		)	1,813			(2,667		)
Valuation adjustments, net	—			134			134
(Losses) gains, net (1)	(489		)	—			(489		)
Balance, end of period	$	56,465		$	(6,623	)	$	49,842



	Six Months Ended June 30, 2017
	Gross Balance			Valuation Allowance			Net Balance
	(in thousands)
Balance, beginning of period	$	54,138		$	(6,323	)	$	47,815
Transfers to other assets acquired through foreclosure, net	1,392			—			1,392
Proceeds from sale of other real estate owned and repossessed assets, net	(20,321		)	2,050			(18,271		)
Valuation adjustments, net	—			224			224
(Losses) gains, net (1)	(172		)	—			(172		)
Balance, end of period	$	35,037		$	(4,049	)	$	30,988

	Six Months Ended June 30, 2016
Balance, beginning of period	$	52,984		$	(9,042	)	$	43,942
Transfers to other assets acquired through foreclosure, net	10,726			—			10,726
Proceeds from sale of other real estate owned and repossessed assets, net	(6,916		)	2,108			(4,808		)
Valuation adjustments, net	—			311			311
(Losses) gains, net (1)	(329		)	—			(329		)
Balance, end of period	$	56,465		$	(6,623	)	$	49,842


(1)	There were $0.1 million and zero net gains related to initial transfers to other assets during the three and six months ended June 30, 2017 and 2016, respectively.

Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure. OREO and other repossessed property are reported at the lower of carrying value or fair value less estimated costs to sell the property. Costs relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to expense. The Company has $31.0 million, $47.8 million $49.8 million of such assets at June 30, 2017, December 31, 2016, and June 30, 2016, respectively.

At June 30, 2017, the Company held 21 OREO properties, compared to 31 at December 31, 2016, and 34 at June 30, 2016.

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Goodwill and Other Intangible Assets

Goodwill represents the excess consideration paid for net assets acquired in a business combination over their fair value. Goodwill and other intangible assets acquired in a business combination that are determined to have an indefinite useful life are not subject to amortization, but are subsequently evaluated for impairment at least annually. The Company has goodwill of $289.9 million and intangible assets totaling $11.8 million at June 30, 2017, which have been allocated to the Nevada, Northern California, Technology & Innovation, and HFF operating segments.

The Company performs its annual goodwill and intangibles impairment tests as of October 1 each year, or more often if events or circumstances indicate that the carrying value may not be recoverable. During the three and six months ended June 30, 2017 and 2016, there were no events or circumstances that indicated an interim impairment test of goodwill or other intangible assets was necessary.

The Company recognized initial goodwill of $0.2 million during the three months ended June 30, 2016 related to the HFF loan portfolio acquisition, which closed on April 20, 2016. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. During the six months ended June 30, 2017, the Company recognized measurement period adjustments totaling $0.1 million for tax related items, which reduced goodwill related to the HFF acquisition to $0.1 million. The measurement period for the HFF acquisition ended on April 20, 2017. Therefore, the fair values of these assets acquired and liabilities assumed were considered final effective April 20, 2017.

During the three and six months ended June 30, 2016, the Company identified $0.8 million and $1.5 million, respectively, in measurement period adjustments from the Bridge acquisition, primarily related to reductions in other assets and accrued liabilities. The measurement period for the Bridge acquisition ended on June 30, 2016, therefore, the fair values of these assets acquired and liabilities assumed are final.

Deferred Tax Assets

At June 30, 2017 and December 31, 2016, the Company had no deferred tax valuation allowance.

Deposits

Deposits are the primary source for funding the Company's asset growth. Total deposits increased to $16.03 billion at June 30, 2017, from $14.55 billion at December 31, 2016, an increase of $1.48 billion, or 10.2%. The increase in deposits is attributable to organic deposit growth. Non-interest-bearing demand deposits increased by $1.23 billion from December 31, 2016. Savings and money market deposits decreased $16.83 million from December 31, 2016.

WAB is a participant in the Promontory Interfinancial Network, a network that offers deposit placement services such as CDARS and ICS, which offer products that qualify large deposits for FDIC insurance. At June 30, 2017, the Company has $406.5 million of CDARS deposits and $559.9 million of ICS deposits, compared to $413.9 million of CDARS deposits and $607.5 million of ICS deposits at December 31, 2016. At June 30, 2017 and December 31, 2016, the Company also has $71.4 million and $136.2 million, respectively, of wholesale brokered deposits. In addition, non-interest bearing deposits for which the Company provides account holders with earnings credits totaled $2.04 billion and $1.10 billion at June 30, 2017 and December 31, 2016, respectively. The Company incurred $2.1 million and $1.0 million in deposit related costs during the three months ended June 30, 2017 and 2016, respectively. During the six months ended June 30, 2017 and 2016, the Company incurred $3.9 million and $1.8 million, respectively, in deposit related costs.

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The average balances and weighted average rates paid on deposits are presented below:



	Three Months ended June 30,
	2017				2016
	Average Balance		Rate		Average Balance		Rate
	(dollars in thousands)
Interest-bearing transaction accounts	$	1,492,700	0.26	%	$	1,194,171	0.17	%
Savings and money market accounts	6,155,832		0.38		5,837,403		0.34
Time certificates of deposit	1,575,969		0.72		1,757,158		0.50
Total interest-bearing deposits	9,224,501		0.42		8,788,732		0.35
Non-interest-bearing demand deposits	6,735,358		—		4,772,582		—
Total deposits	$	15,959,859	0.24	%	$	13,561,314	0.23	%

	Six Months Ended June 30,
	2017				2016
	Average Balance		Rate		Average Balance		Rate
	(dollars in thousands)
Interest-bearing transaction accounts	$	1,463,923	0.24	%	$	1,143,028	0.17	%
Savings and money market accounts	6,112,654		0.36		5,585,654		0.32
Time certificates of deposit	1,530,670		0.67		1,659,327		0.48
Total interest-bearing deposits	9,107,247		0.40		8,388,009		0.33
Non-interest-bearing demand deposits	6,230,071		—		4,561,357		—
Total deposits	$	15,337,318	0.24	%	$	12,949,366	0.22	%

Other Borrowings

The Company from time to time utilizes short-term borrowed funds to support short-term liquidity needs generally created by increased loan demand. The majority of these short-term borrowed funds consist of advances from the FHLB and customer repurchase agreements. The Company’s borrowing capacity with the FHLB is determined based on collateral pledged, generally consisting of securities and loans. In addition, the Company has borrowing capacity from other sources, collateralized by securities, including securities sold under agreements to repurchase, which are reflected at the amount of cash received in connection with the transaction, and may require additional collateral based on the fair value of the underlying securities. At June 30, 2017, total short-term borrowed funds consist of customer repurchase agreements of $32.7 million. At December 31, 2016, total short-term borrowed funds consisted of customer repurchase agreements of $41.7 million and FHLB advances of $80.0 million.

As of June 30, 2017 and December 31, 2016, the Company does not have any borrowings classified as long-term.

Qualifying Debt

Qualifying debt consists of subordinated debt and junior subordinated debt, inclusive of issuance costs and fair market value adjustments. At June 30, 2017, the carrying value of qualifying debt was $375.4 million, compared to $367.9 million at December 31, 2016.

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Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could trigger certain mandatory or discretionary actions that, if undertaken, could have a direct material effect on the Company’s business and financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items (discussed in "Note 12. Commitments and Contingencies" to the Unaudited Consolidated Financial Statements) as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The capital framework under Basel III became effective for the Company on January 1, 2015. Under the Basel III final rules, minimum requirements have increased for both the quantity and quality of capital held by the Company. A new capital conservation buffer, comprised of Common Equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer began being phased in on January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility requirements for regulatory capital instruments have been implemented under the final rules and the final rules also revise the definitions and calculations of Tier 1 capital, total capital, and risk-weighted assets.

As of June 30, 2017 and December 31, 2016, the Company and the Bank exceeded the capital levels necessary to be classified as well-capitalized, as defined by the banking agencies. The actual capital amounts and ratios for the Company and the Bank are presented in the following tables as of the periods indicated:



	Total Capital		Tier 1 Capital		Risk-Weighted Assets		Tangible Average Assets		Total Capital Ratio		Tier 1 Capital Ratio		Tier 1 Leverage Ratio		Common Equity Tier 1
	(dollars in thousands)
June 30, 2017
WAL	$	2,269,525	$	1,833,226	$	16,992,251	$	18,436,948	13.4	%	10.8	%	9.9	%	10.3	%
WAB	2,148,130		1,860,974		16,916,701		18,342,329		12.7		11.0		10.1		11.0
Well-capitalized ratios									10.0		8.0		5.0		6.5
Minimum capital ratios									8.0		6.0		4.0		4.5

December 31, 2016
WAL	$	2,107,480	$	1,675,871	$	15,980,092	$	16,868,674	13.2	%	10.5	%	9.9	%	10.0	%
WAB	2,001,081		1,720,072		15,888,346		16,764,327		12.6		10.8		10.3		10.8
Well-capitalized ratios									10.0		8.0		5.0		6.5
Minimum capital ratios									8.0		6.0		4.0		4.5

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Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. The critical accounting policies upon which the Company's financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and all amendments thereto, as filed with the SEC. There were no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K.

Liquidity

Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in asset and liability levels due to changes in the Company's business operations or unanticipated events.

The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors, and regulators. The Company's liquidity, represented by cash and amounts due from banks, federal funds sold, and non-pledged marketable securities, is a result of the Company's operating, investing, and financing activities and related cash flows. In order to ensure funds are available when necessary, on at least a quarterly basis, the Company projects the amount of funds that will be required over a twelve month period and it also strives to maintain relationships with a diversified customer base. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets.

The following table presents the available and outstanding balances of the Company's lines of credit:



	June 30, 2017
	Available Balance		Outstanding Balance
	(in millions)
Unsecured fed funds credit lines at correspondent banks	$	100.0	$	—
Other lines with correspondent banks:
Secured other lines with correspondent banks	23.0		—
Unsecured other lines with correspondent banks	45.0		—
Total other lines with correspondent banks	$	168.0	$	—

In addition to lines of credit, the Company has borrowing capacity with the FHLB and FRB from pledged loans and securities. The borrowing capacity, outstanding borrowings, and available credit as of June 30, 2017 are presented in the following table:



	June 30, 2017
	(in millions)
FHLB:
Borrowing capacity	$	2,672.4
Outstanding borrowings	—
Letters of credit	343.0
Total available credit	$	2,329.4

FRB:
Borrowing capacity	$	1,162.8
Outstanding borrowings	—
Total available credit	$	1,162.8

The Company has a formal liquidity policy and, in the opinion of management, its liquid assets are considered adequate to meet cash flow needs for loan funding and deposit cash withdrawals for the next 90-120 days. At June 30, 2017, there is $2.58 billion in liquid assets, comprised of $606.8 million in cash, cash equivalents, and money market investments and $1.98 billion in unpledged marketable securities. At December 31, 2016, the Company maintained $2.00 billion in liquid assets, comprised

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of $284.5 million of cash, cash equivalents, and money market investments, and $1.72 billion of unpledged marketable securities.

The Parent maintains liquidity that would be sufficient to fund its operations and certain non-bank affiliate operations for an extended period should funding from normal sources be disrupted. Since deposits are taken by WAB and not by the Parent, Parent liquidity is not dependent on the Bank's deposit balances. In the Company's analysis of Parent liquidity, it is assumed that the Parent is unable to generate funds from additional debt or equity issuances, receives no dividend income from subsidiaries and does not pay dividends to stockholders, while continuing to make nondiscretionary payments needed to maintain operations and repayment of contractual principal and interest payments owed by the Parent and affiliated companies. Under this scenario, the amount of time the Parent and its non-bank subsidiary can operate and meet all obligations before the current liquid assets are exhausted is considered as part of the Parent liquidity analysis. Management believes the Parent maintains adequate liquidity capacity to operate without additional funding from new sources for over twelve months.

WAB maintains sufficient funding capacity to address large increases in funding requirements, such as deposit outflows. This capacity is comprised of liquidity derived from a reduction in asset levels and various secured funding sources. On a long-term basis, the Company’s liquidity will be met by changing the relative distribution of its asset portfolios (for example, by reducing investment or loan volumes, or selling or encumbering assets). Further, the Company can increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from correspondent banks, the FHLB of San Francisco, and the FRB. At June 30, 2017, the Company's long-term liquidity needs primarily relate to funds required to support loan originations, commitments, and deposit withdrawals, which can be met by cash flows from investment payments and maturities, and investment sales, if necessary.

The Company’s liquidity is comprised of three primary classifications: 1) cash flows provided by operating activities; 2) cash flows used in investing activities; and 3) cash flows provided by financing activities. Net cash provided by or used in operating activities consists primarily of net income, adjusted for changes in certain other asset and liability accounts and certain non-cash income and expense items, such as the provision for credit losses, investment and other amortization and depreciation. For the six months ended June 30, 2017 and 2016, net cash provided by operating activities was $175.4 million and $115.1 million, respectively.

The Company's primary investing activities are the origination of real estate and commercial loans, the collection of repayments of these loans, and the purchase and sale of securities. The Company's net cash provided by and used in investing activities has been primarily influenced by its loan and securities activities. The net increase in loans for the six months ended June 30, 2017 and 2016 was $736.3 million and $401.7 million, respectively. There was a net increase in investment securities for the six months ended June 30, 2017 of $501.5 million, compared to a net increase of $187.3 million for the six months ended June 30, 2016.

Net cash provided by financing activities has been impacted significantly by increased deposit levels. During the six months ended June 30, 2017 and 2016, net deposits increased $1.48 billion and $2.17 billion, respectively.

Fluctuations in core deposit levels may increase the Company's need for liquidity as certificates of deposit mature or are withdrawn before maturity, and as non-maturity deposits, such as checking and savings account balances, are withdrawn. Additionally, the Company is exposed to the risk that customers with large deposit balances will withdraw all or a portion of such deposits, due in part to the FDIC limitations on the amount of insurance coverage provided to depositors. To mitigate the uninsured deposit risk, the Company participates in the CDARS and ICS programs, which allow an individual customer to invest up to $50.0 million and $110.0 million, respectively, through one participating financial institution or, a combined total of $150.0 million per individual customer, with the entire amount being covered by FDIC insurance. As of June 30, 2017, the Company has $406.5 million of CDARS and $559.9 million of ICS deposits.

As of June 30, 2017, the Company has $71.4 million of wholesale brokered deposits outstanding. Brokered deposits are generally considered to be deposits that have been received from a third party who is engaged in the business of placing deposits on behalf of others. A traditional deposit broker will direct deposits to the banking institution offering the highest interest rate available. Federal banking laws and regulations place restrictions on depository institutions regarding brokered deposits because of the general concern that these deposits are not relationship based and are at a greater risk of being withdrawn and placed on deposit at another institution offering a higher interest rate, thus posing liquidity risk for institutions that gather brokered deposits in significant amounts. There were also $249.0 million and $571.9 million of additional deposits as of June 30, 2017 and December 31, 2016, respectively, that the Company considers core deposits, but which are classified as brokered deposits for regulatory reporting purposes.

Federal and state banking regulations place certain restrictions on dividends paid. The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the bank. Dividends paid by WAB to the Parent would be prohibited if the effect thereof would cause the bank’s capital to be reduced below applicable minimum capital requirements.

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During the three months ended June 30, 2017, the Parent contributed no amounts to WAB and WAB and LVSP paid dividends to the Parent of $10.0 million and $12.5 million, respectively. During the six months ended June 30, 2017, the Parent contributed $9.9 million to WAB and WAB and LVSP paid dividends to the Parent of $30.0 million and $22.4 million, respectively. Subsequent to June 30, 2017, WAB paid dividends to the Parent of $10.0 million.

Recent accounting pronouncements

See "Note 1. Summary of Significant Accounting Policies," of the Notes to Unaudited Consolidated Financial Statements contained in Item 1. Financial Statements for information on recent and recently adopted accounting pronouncements and their expected impact, if any, on the Company's consolidated financial statements.

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Item 3.	Quantitative and Qualitative Disclosures about Market Risk.

Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's market risk arises primarily from interest rate risk inherent in its lending, investing, and deposit taking activities. To that end, management actively monitors and manages the Company's interest rate risk exposure. The Company generally manages its interest rate sensitivity by evaluating re-pricing opportunities on its earning assets to those on its funding liabilities.

Management uses various asset/liability strategies to manage the re-pricing characteristics of the Company's assets and liabilities, all of which are designed to ensure that exposure to interest rate fluctuations is limited to within the Company's guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits and management of the deployment of its securities, are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.

Interest rate risk is addressed by the ALCO, which includes members of executive management, finance, and operations. ALCO monitors interest rate risk by analyzing the potential impact on the net EVE and net interest income from potential changes in interest rates and considers the impact of alternative strategies or changes in balance sheet structure. The Company manages its balance sheet in part to maintain the potential impact on EVE and net interest income within acceptable ranges despite changes in interest rates.

The Company's exposure to interest rate risk is reviewed at least quarterly by the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine its change in both EVE and net interest income in the event of hypothetical changes in interest rates. If potential changes to EVE and net interest income resulting from hypothetical interest rate changes are not within the limits established by the BOD, the BOD may direct management to adjust the asset and liability mix to bring interest rate risk within Board-approved limits.

Net Interest Income Simulation. In order to measure interest rate risk at June 30, 2017, the Company uses a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference between a baseline net interest income forecast using current yield curves that do not take into consideration any future anticipated rate hikes, compared to forecasted net income resulting from an immediate parallel shift in rates upward or downward, along with other scenarios directed by ALCO. The income simulation model includes various assumptions regarding the re-pricing relationships for each of the Company's products. Many of the Company's assets are floating rate loans, which are assumed to re-price immediately and, proportional to the change in market rates, depending on their contracted index, including the impact of caps or floors. Some loans and investments contain contractual prepayment features (embedded options) and, accordingly, the simulation model incorporates prepayment assumptions. The Company's non-term deposit products re-price more slowly, usually changing less than the change in market rates and at the Company's discretion.

This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet remains static and that its structure does not change over the course of the year. It does not account for all factors that could impact the Company's results, including changes by management to mitigate interest rate changes or secondary factors, such as changes to the Company's credit risk profile as interest rates change.

Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment speeds that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the modeled assumptions may have significant effects on the Company's actual net interest income.

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This simulation model assesses the changes in net interest income that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates over a twelve-month period. At June 30, 2017, the Company's net interest income exposure for the next twelve months related to these hypothetical changes in market interest rates was within the Company's current guidelines.

Sensitivity of Net Interest Income



	Interest Rate Scenario (change in basis points from Base)
	Down 100			Base		Up 100			Up 200			Up 300			Up 400
	(in thousands)
Interest Income	$	765,565		$	843,114	$	933,752		$	1,027,804		$	1,123,266		$	1,219,231
Interest Expense	26,849			59,767		101,028			142,295			183,568			224,847
Net Interest Income	738,716			783,347		832,724			885,509			939,698			994,384
% Change	(5.7		)%			6.3		%	13.0		%	20.0		%	26.9		%

Economic Value of Equity. The Company measures the impact of market interest rate changes on the NPV of estimated cash flows from its assets, liabilities, and off-balance sheet items, defined as EVE, using a simulation model. This simulation model assesses the changes in the market value of interest rate sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates.

At June 30, 2017, the Company's EVE exposure related to these hypothetical changes in market interest rates was within the Company's current guidelines. The following table shows the Company's projected change in EVE for this set of rate shocks at June 30, 2017:

Economic Value of Equity



	Interest Rate Scenario (change in basis points from Base)
	Down 100			Base		Up 100			Up 200			Up 300			Up 400
	(in thousands)
Assets	$	19,126,466		$	18,858,165	$	18,506,340		$	18,156,288		$	17,833,061		$	17,514,812
Liabilities	16,070,506			15,696,287		15,382,131			15,115,166			14,886,033			14,688,251
Net Present Value	3,055,960			3,161,878		3,124,209			3,041,122			2,947,028			2,826,561
% Change	(3.3		)%			(1.2		)%	(3.8		)%	(6.8		)%	(10.6		)%

The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, asset prepayments, and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates. Actual amounts may differ from the projections set forth above should market conditions vary from the underlying assumptions.

Derivative Contracts. In the normal course of business, the Company uses derivative instruments to meet the needs of its customers and manage exposure to fluctuations in interest rates. The following table summarizes the aggregate notional amounts, market values, and terms of the Company’s derivative positions as of June 30, 2017 and December 31, 2016 :

Outstanding Derivatives Positions



June 30, 2017						December 31, 2016
Notional		Net Value			Weighted Average Term (Years)	Notional		Net Value			Weighted Average Term (Years)
(dollars in thousands)
$	1,032,586	$	(60,360	)	17.8	$	993,485	$	(61,529	)	18.2

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Item 4.	Controls and Procedures.

Evaluation of Disclosure Controls

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the CEO and CFO have concluded that the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Additionally, the Company's disclosure controls and procedures were also effective in ensuring that information required to be disclosed by the Company in the reports it files or is subject to under the Exchange Act is accumulated and communicated to the Company's management, including the CEO and CFO, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company's internal control over financial reporting during the quarter ended June 30, 2017, which have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings.

There are no material pending legal proceedings to which the Company is a party or to which any of its properties are subject. There are no material proceedings known to the Company to be contemplated by any governmental authority. From time to time, the Company is involved in a variety of litigation matters in the ordinary course of its business and anticipates that it will become involved in new litigation matters in the future.


Item 1A.	Risk Factors.

There have not been any material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table provides information about the Company's purchases of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act for the periods indicated.



	(a)	(b)		( c)	(d)
	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs ⁽²⁾
4/1/2017 through 4/30/2017	868	48.32		—	—
5/1/2017 through 5/31/2017	92	47.16		—	—
6/1/2017 through 6/30/2017	—	—		—	—
Total	960	$	48.20	—	—

⁽¹⁾ All shares purchased during the period were transferred to the Company from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock awards during the period.
⁽²⁾ The Company has not announced a repurchase plan relating to its common stock.


Item 5.	Other Information

Not applicable.

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Item 6.	Exhibits

EXHIBITS



3.1		Articles of Conversion, as filed with the Nevada Secretary of State on May 29, 2014 (incorporated by reference to Exhibit 3.1 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).

3.2		Certificate of Conversion, as filed with the Delaware Secretary of State on May 29, 2014 (incorporated by reference to Exhibit 3.2 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).

3.3		Certificate of Incorporation, as filed with the Delaware Secretary of State on May 29, 2014 (incorporated by reference to Exhibit 3.3 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).

3.4		Certificate of Amendment of Certificate of Incorporation of Western Alliance, effective as of May 19, 2015 (incorporated by reference to Exhibit 3.1 of Western Alliance's Form 8-K filed with the SEC on May 22, 2015).

3.5		Amended and Restated Bylaws of Western Alliance, effective as of May 19, 2015 (incorporated by reference to Exhibit 3.2 of Western Alliance's Form 8-K filed with the SEC on May 22, 2015).

4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Western Alliance’s Form 8-K filed with the SEC on June 3, 2014).

4.2		Form of Subordinated Debt Indenture (incorporated by reference to Exhibit 4.3 of Western Alliance's Form S-3 filed with the SEC on May 7, 2015).

4.3		Form of 5.00% Fixed to Floating Rate Subordinated Bank Note due July 15, 2025 (incorporated by reference to Exhibit 4.1 of Western Alliance's Form 8-K filed with the SEC on July 2, 2015).

4.4		Subordinated Debt Indenture, dated June 16, 2016, between Western Alliance and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of Western Alliance's Form 8-K filed with the SEC on June 16, 2016).

4.5		First Supplemental Indenture (including Form of Debenture) dated June 16, 2016 between Western Alliance and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 of Western Alliance's Form 8-K filed with the SEC on June 16, 2016).

4.6		Form of Global Debenture dated June 16, 2016 (incorporated by reference to Exhibit 4.3 of Western Alliance's Form 8-K filed with the SEC on June 16, 2016).

10.1±		Offer Letter, dated May 1, 2017, by and between Kenneth Vecchione and Western Alliance (incorporated by reference to Exhibit 10.1 of Western Alliance's Form 8-K filed with the SEC on May 5, 2017).

31.1*		CEO Certification Pursuant Rule 13a-14(a)/15d-14(a).

31.2*		CFO Certification Pursuant Rule 13a-14(a)/15d-14(a).

32**		CEO and CFO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes Oxley Act of 2002.

101.INS*		XBRL Instance Document.

101.SCH*		XBRL Taxonomy Extension Schema Document.

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed herewith.


**	Furnished herewith.


±	Management compensatory arrangement or contract.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	WESTERN ALLIANCE BANCORPORATION

July 28, 2017	By:	/s/ Robert Sarver
		Robert Sarver
		Chairman of the Board and
		Chief Executive Officer

July 28, 2017	By:	/s/ Dale Gibbons
		Dale Gibbons
		Executive Vice President and
		Chief Financial Officer

July 28, 2017	By:	/s/ J. Kelly Ardrey Jr.
		J. Kelly Ardrey Jr.
		Senior Vice President and
		Chief Accounting Officer