Edgar Filing: WESTERN ALLIANCE BANCORPORATION

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2013

¨	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)


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

One E. Washington Street, 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x

Common stock issued and outstanding: 87,198,769 shares as of October 25, 2013.

Table of Contents


Index	Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012		3
Consolidated Income Statements for the three and nine months ended September 30, 2013 and 2012 (unaudited)		4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012 (unaudited)		6
Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2013 (unaudited)		7
Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (unaudited)		8
Notes to unaudited Consolidated Financial Statements		10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		50
Item 3. Quantitative and Qualitative Disclosures About Market Risk		70
Item 4. Controls and Procedures		73

Part II. Other Information
Item 1. Legal Proceedings		73
Item 1A. Risk Factors		73
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		73
Item 3. Defaults Upon Senior Securities		73
Item 4. Mine Safety Disclosures		73
Item 5. Other Information		73
Item 6. Exhibits		73

Signatures		75

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,
	2013			2012
	(unaudited)
	(in thousands, except per share amounts)
Assets:
Cash and due from banks	$	142,625		$	141,789
Securities purchased under agreement to resell		128,102			—
Interest-bearing deposits in other financial institutions		238,306			62,836

Cash and cash equivalents		509,033			204,625
Money market investments		4,176			664
Investment securities—measured at fair value		3,621			5,061
Investment securities—available-for-sale, at fair value; amortized cost of $1,095,942 at September 30, 2013 and $926,050 at December 31, 2012		1,073,886			939,590
Investment securities—held-to-maturity, at amortized cost; fair value of $287,543 at September 30, 2013 and $292,819 at December 31, 2012		289,108			291,333
Investments in restricted stock, at cost		30,186			30,936
Loans—held for sale		25,413			31,124
Loans—held for investment, net of deferred fees		6,490,870			5,678,194
Less: allowance for credit losses		(97,851	)		(95,427	)

Total loans held for investment		6,393,019			5,582,767
Premises and equipment, net		105,925			107,910
Other assets acquired through foreclosure, net		76,475			77,247
Bank owned life insurance		139,658			138,336
Goodwill		23,224			23,224
Other intangible assets, net		4,747			6,539
Deferred tax assets, net		79,570			51,757
Prepaid expenses		5,236			12,029
Other assets		158,152			119,495

Total assets	$	8,921,429		$	7,622,637

Liabilities:
Deposits:
Non-interest-bearing demand	$	1,972,474		$	1,933,169
Interest-bearing		5,302,837			4,522,008

Total deposits		7,275,311			6,455,177
Customer repurchase agreements		55,524			79,034
Securities sold short		126,664			—
Other borrowings		394,105			193,717
Junior subordinated debt, at fair value		39,447			36,218
Other liabilities		204,090			98,875

Total liabilities		8,095,141			6,863,021

Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock—par value $0.0001 and liquidation value per share of $1,000; 20,000,000 authorized; 141,000 shares issued and outstanding at September 30, 2013 and December 31, 2012		141,000			141,000
Common stock—par value $0.0001; 200,000,000 authorized; 87,098,782 shares issued and outstanding at September 30, 2013 and 86,465,050 at December 31, 2012		9			9
Additional paid in capital		792,140			784,852
Accumulated deficit		(92,357	)		(174,471	)
Accumulated other comprehensive (loss) income		(14,504	)		8,226

Total stockholders’ equity		826,288			759,616

Total liabilities and stockholders’ equity	$	8,921,429		$	7,622,637

See accompanying Notes to unaudited Consolidated Financial Statements.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS (unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(in thousands, except per share amounts)
Interest income:
Loans, including fees	$	83,994		$	69,580		$	239,812		$	205,682
Investment securities—taxable		3,977			5,295			11,523			17,522
Investment securities—tax exempt		3,356			2,723			9,712			7,491
Dividends—taxable		286			305			909			899
Dividends—tax exempt		667			711			2,122			2,096
Other		400			55			995			262

Total interest income		92,680			78,669			265,073			233,952

Interest expense:
Deposits		4,232			3,974			11,893			12,904
Other borrowings		3,409			2,225			8,808			6,624
Junior subordinated debt		460			487			1,381			1,458
Customer repurchase agreements		20			37			77			158

Total interest expense		8,121			6,723			22,159			21,144

Net interest income		84,559			71,946			242,914			212,808
Provision for credit losses		—			8,932			8,920			35,343

Net interest income after provision for credit losses		84,559			63,014			233,994			177,465

Non-interest income:
Service charges and fees		2,425			2,412			7,408			7,014
Income from bank owned life insurance		1,832			1,116			3,904			3,359
Amortization of affordable housing investments		(1,504	)		(651	)		(3,304	)		(710	)
(Loss) gain on sales of securities, net		(1,679	)		1,031			(1,537	)		2,502
Mark to market (losses) gains, net		(7	)		470			(3,865	)		701
Bargain purchase gain from acquisition		—			—			10,044			—
Other income		1,558			2,604			4,736			7,397

Total noninterest income		2,625			6,982			17,386			20,263

Non-interest expense:
Salaries and employee benefits		28,689			25,500			83,363			78,159
Occupancy		4,901			4,655			14,500			14,046
Legal, professional and directors’ fees		3,006			2,291			8,017			6,380
Data processing		1,872			1,390			5,912			3,678
Insurance		1,884			2,121			6,350			6,323
Marketing		1,599			1,231			4,970			4,061
Loan and repossessed asset expenses		1,136			1,236			3,453			4,573
Customer service		677			653			2,037			1,926
Net loss (gain) on sales / valuations of repossesed assets and bank premises, net		371			126			(234	)		3,678
Intangible amortization		597			880			1,791			2,660
Goodwill and intangible impairment		—			3,435			—			3,435
Merger / restructure expenses		1,018			113			3,833			113
Other expense		3,925			3,912			11,143			10,839

Total non-interest expense		49,675			47,543			145,135			139,871

Income from continuing operations before provision for income taxes		37,509			22,453			106,245			57,857
Income tax expense		9,288			6,752			22,913			16,452

Income from continuing operations		28,221			15,701			83,332			41,405
Loss from discontinued operations, net of tax benefit		(29	)		(243	)		(160	)		(686	)

Net income		28,192			15,458			83,172			40,719
Dividends on preferred stock		352			352			1,058			3,440

Net income available to common shareholders	$	27,840		$	15,106		$	82,114		$	37,279

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS (unaudited)

(continued)


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013		2012			2013		2012
	(in thousands, except per share amounts)
Earnings per share from continuing operations:
Basic	$	0.32	$	0.19		$	0.96	$	0.47
Diluted	$	0.32	$	0.19		$	0.95	$	0.46
Loss per share from discontinued operations:
Basic	$	—	$	(0.00	)	$	—	$	(0.01	)
Diluted	$	—	$	(0.00	)	$	—	$	(0.01	)
Earnings per share applicable to common shareholders:
Basic	$	0.32	$	0.18		$	0.96	$	0.46
Diluted	$	0.32	$	0.18		$	0.95	$	0.45
Weighted average number of common shares outstanding:
Basic		85,799		81,758			85,596		81,570
Diluted		86,769		82,294			86,428		82,159
Dividends declared per common share	$	—	$	—		$	—	$	—

See accompanying Notes to unaudited Consolidated Financial Statements.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(in thousands)
Net income	$	28,192		$	15,458		$	83,172		$	40,719

Other comprehensive (loss) income, net:
Unrealized (loss) gain on securities available-for-sale (AFS), net (tax effect of $2,887, $(4,607), $14,327, $(10,637) for each respective period presented)		(4,770	)		8,478			(23,670	)		18,803
Unrealized (loss) gain on cash flow hedge, net (tax effect of $18, $(5), $10, $(10) for each respective period presented)		(30	)		9			(17	)		17
Realized gain on cash flow hedge, net (tax effect of $294 for the respective period presented)		—			—			—			(519	)
Realized loss (gain) on sale of securities AFS included in income, net (tax effect of $(633), $363, $(580), $904 for each respective period presented)		1,046			(668	)		957			(1,598	)

Net other comprehensive (loss) income		(3,754	)		7,819			(22,730	)		16,703

Comprehensive income	$	24,438		$	23,277		$	60,442		$	57,422

See accompanying Notes to unaudited Consolidated Financial Statements.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (unaudited)


											Accumulated
									Additional		Other						Total
	Preferred Stock				Common Stock				Paid In		Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital		(Loss) Income			Deficit			Equity
	(in thousands)
Balance, December 31, 2012:		141	$	141,000		86,465	$	9	$	784,852	$	8,226		$	(174,471	)	$	759,616
Net income		—		—		—		—		—		—			83,172			83,172
Exercise of stock options		—		—		332		—		2,924		—			—			2,924
Stock-based compensation		—		—		111		—		1,608		—			—			1,608
Restricted stock grants, net		—		—		191		—		2,756		—			—			2,756
Dividends on preferred stock		—		—		—		—		—		—			(1,058	)		(1,058	)
Other comprehensive loss, net		—		—		—		—		—		(22,730	)		—			(22,730	)

Balance, September 30, 2013		141	$	141,000		87,099	$	9	$	792,140	$	(14,504	)	$	(92,357	)	$	826,288

See accompanying Notes to unaudited Consolidated Financial Statements.

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Nine Months Ended September 30,
	2013			2012
	(in thousands)
Cash flows from operating activities:
Net income	$	83,172		$	40,719
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses		8,920			35,343
Depreciation and amortization		6,655			7,319
Stock-based compensation		4,364			4,725
Deferred income taxes and income taxes receivable		1,761			16,125
Net amortization of discounts and premiums for investment securities		7,658			8,027
Goodwill and intangible impairment		—			3,435
Accretion and amortization of fair market value adjustments due to acquisitions		(10,285	)		—
(Gains) / Losses on:
Sales of securities, AFS		1,537			(2,502	)
Acquisition of Centennial Bank		(10,044	)		—
Other assets acquired through foreclosure, net		(2,388	)		(317	)
Valuation adjustments of other repossessed assets, net		2,279			4,060
Sale of premises and equipment, net		(125	)		(65	)
Sale of minority interest in Miller / Russell & Associates, Inc.		—			(776	)
Changes in, net of acquisitions:
Other assets/liabilities, net		26,437			9,554
Fair value of assets and liabilities measured at fair value		3,865			(701	)

Net cash provided by operating activities		123,806			124,946

Cash flows from investing activities:
Investment securities—measured at fair value Principal pay downs and maturities		1,358			954
Investment securities—available-for-sale
Proceeds from sales		63,153			143,553
Principal pay downs and maturities		161,394			304,428
Purchases		(373,485	)		(277,619	)
Investment securities—held-to-maturity Principal pay downs and maturities		—			735
Purchase of investment tax credits		(28,172	)		(17,901	)
(Purchase) / sale of money market investments, net		(3,512	)		1,577
Liquidation of restricted stock		750			676
Loan fundings and principal collections, net		(388,259	)		(612,929	)
Proceeds from loan sales		—			3,435
Sale and purchase of premises and equipment, net		(2,472	)		(5,951	)
Proceeds from sale of other real estate owned and repossessed assets, net		20,513			26,650
Cash and cash equivalents acquired in acquisition, net		21,204			—

Net cash used in investing activities		(527,528	)		(432,392	)

WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(continued)


	Nine Months Ended September 30,
	2013			2012
	(in thousands)
Cash flows from financing activities:
Net increase in deposits		481,989			503,464
Net decrease in customer repurchases		(23,510	)		—
Proceeds from securities sold short		126,664			—
Net increase (decrease) in borrowings		121,121			(42,276	)
Proceeds from exercise of common stock options		2,924			2,620
Cash dividends paid on preferred stock		(1,058	)		(3,440	)

Net cash provided by financing activities		708,130			460,368

Net increase in cash and cash equivalents		304,408			152,922
Cash and cash equivalents at beginning of year		204,625			154,995

Cash and cash equivalents at end of period	$	509,033		$	307,917

Supplemental disclosure:
Cash paid during the period for:
Interest	$	22,648		$	22,263
Income taxes		20,245			1,290
Non-cash investing and financing activity:
Transfers to other assets acquired through foreclosure, net		14,010			19,522
Unfunded commitments to purchase investment tax credits		21,828			34,599
Assets acquired in Centennial merger transaction		410,827			—
Liabilities assumed in Centennial merger transaction		421,987			—
Change in unrealized (loss) gain on AFS securities, net of tax		(23,670	)		18,803
Change in unrealized gain on cash flow hedge, net of tax		(17	)		17

See accompanying Notes to unaudited Consolidated Financial Statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of operations

Western Alliance Bancorporation (“WAL” or “the Company”), incorporated under the laws of the state of Nevada, is a bank holding company providing full service banking and related services to locally owned businesses, professional firms, real estate developers and investors, local non-profit organizations, high net worth individuals and other consumers through its three wholly owned subsidiary banks: Bank of Nevada (“BON”), operating in Southern Nevada; Western Alliance Bank (“WAB”), operating in Arizona and Northern Nevada; and Torrey Pines Bank (“TPB”), operating in California. In addition, there are two non-bank subsidiaries, Western Alliance Equipment Finance (“WAEF”), which offers equipment finance services nationwide, and Las Vegas Sunset Properties (“LVSP”), which holds certain non-performing assets. These entities are collectively referred to herein as the Company.

Basis of presentation

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to practices within the financial services industry. The accounts of the Company and its consolidated subsidiaries are included in these Consolidated Financial Statements. All intercompany balances and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for credit losses; fair value determinations related to acquisitions, including loans acquired with deteriorated credit quality; fair value of other assets acquired through foreclosure; determination of the valuation allowance related to deferred tax assets; impairment of goodwill and other intangible assets and other than temporary impairment of securities. Although the Company’s management (“Management”) believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of Management, all adjustments considered necessary have been reflected in the Consolidated Financial Statements.

Principles of consolidation

WAL has eleven wholly owned subsidiaries: BON, WAB, TPB, which are all banking subsidiaries; WAEF, which provides equipment finance services; LVSP, which holds certain non-performing assets; and six unconsolidated subsidiaries used as business trusts in connection with the issuance of trust-preferred securities. In addition, until October 31, 2012, WAL maintained an 80% interest in Shine Investment Advisory Services Inc. (“Shine”), a registered investment advisor. WAL divested its 80% interest in Shine as of October 31, 2012. On April 30, 2013, the Company completed its acquisition of Centennial Bank (“Centennial”) and merged Centennial into WAB effective as of the acquisition date. The assets and liabilities of Centennial are included in the Company’s Consolidated Financial Statements as of April 30, 2013. See Note 2, “Acquisitions and Dispositions” for further discussion.

BON has three wholly owned subsidiaries: BW Real Estate, Inc., which operates as a real estate investment trust and holds certain of BON’s real estate loans and related securities; BON Investments, Inc., which holds certain investment securities, municipal loans and leases; and BW Nevada Holdings, LLC, which owns the Company’s 2700 West Sahara Avenue, Las Vegas, Nevada office building.

WAB has one wholly owned subsidiary, WAB Investments, Inc., which holds certain investment securities, municipal loans and leases, and TPB has one wholly owned subsidiary, TPB Investments, Inc., which holds certain investment securities and leases.

The Company does not have any other entities that should be considered for consolidation. All intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

Certain amounts in the Consolidated Financial Statements as of December 31, 2012 and for the three and nine months ended September 30, 2013 have been reclassified to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.

Interim financial information

The accompanying unaudited Consolidated Financial Statements as of September 30, 2013 and 2012 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 Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

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

Acquisitions are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), which requires that all identified assets acquired and liabilities assumed are recorded at their estimated fair value as of the acquisition date. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed, is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred.

Fair values are determined in accordance with FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). In many cases, the determination of these fair values required Management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are subjective in nature and subject to change. Determining the fair value of the assets and liabilities, especially the loan portfolio and other real estate owned (“OREO”), is a complex process involving significant judgment regarding the methods and assumptions used to calculate estimated fair values. The fair value of loans acquired is estimated based on discounted cash flows, which take into consideration current portfolio interest rates and repricing characteristics as well as assumptions related to prepayment speeds and credit losses. Loans acquired with credit deterioration are considered to be impaired and are accounted for in accordance with GAAP (see the policy note, “Loans Acquired with Deteriorated Credit Quality,” for further discussion).

Investment securities

Investment securities may be classified as held-to-maturity (“HTM”), available-for-sale (“AFS”) or trading. The appropriate classification is initially decided at the time of purchase. Securities classified as HTM are those debt securities that the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or general economic conditions. These securities are carried at amortized cost. The sale of a security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification and disclosure.

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

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, using the interest method. For mortgage-backed securities, estimates of prepayments are considered in the constant yield calculations.

In estimating whether there are any other than temporary impairment (“OTTI”) losses, Management considers (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates, and (4) the 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 prior to recovery.

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

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

Allowance for credit losses

Credit risk is inherent in the business of extending loans and leases to borrowers. Like other financial institutions, the Company must maintain an adequate allowance for credit losses. The allowance for credit losses is established through a provision for credit losses charged 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 probable losses on existing loans that may become uncollectable, based on evaluation of the collectability of loans and prior credit loss experience, together with other factors. The Company formally re-evaluates and establishes the appropriate level of the allowance for credit losses on a quarterly basis.

The Company’s allowance for credit loss methodology incorporates several quantitative and qualitative risk factors used to establish the appropriate allowance for credit losses at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in the level of nonperforming loans and other factors. Qualitative factors include the economic condition of the Company’s operating markets and the state of certain industries. Specific changes in the risk factors are based on actual loss experience, as well as perceived risk of similar groups of loans classified by collateral type and loan grade. An internal one-year and five-year loss history are also incorporated into the allowance calculation model. 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 Nevada, Arizona and California. While Management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic or other conditions. In addition, the Federal Deposit Insurance Corporation (“FDIC”) and state bank regulatory agencies, as an integral part of their examination processes, periodically review the Company’s subsidiary banks’ allowances for credit losses, and may require the subsidiary banks to make additions to the allowance based on their judgment about information available to them at the time of their examinations. Management regularly reviews the assumptions and formulas used in determining the allowance and makes adjustments if required to reflect the current risk profile of the portfolio.

The allowance consists of specific and general components. The specific allowance relates to impaired loans. In general, impaired loans include non-accrual loans, loans 90 days past due and still accruing, and other criticized and classified loans. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan are lower than the carrying value of that loan, pursuant to FASB ASC 310, Receivables (“ASC 310”). Loans not collateral dependent are evaluated based on the expected future cash flows discounted at the original contractual interest rate. The amount to which the present value falls short of the current loan obligation is recorded as a reserve or charge-off.

The Company uses an appraised value method to determine the need for a reserve or charge-off on impaired, collateral dependent loans and further discounts the appraisal for disposition costs. The Company obtains an independent collateral valuation analysis for each impaired loan, at least annually.

Loans acquired with deteriorated credit quality

FASB ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“ASC 310-30”), applies to a loan with evidence of deterioration of credit quality since its origination, and for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. For these loans, accounted for under ASC 310-30, Management determines the value of the loan portfolio based, in part, on work provided by an appraiser. Factors considered in the valuation are projected cash flows for the loans, type of loan and related collateral, loan grade, delinquency and loan to value. Loans are grouped together according to similar characteristics and are treated in the aggregate when applying various valuation techniques. Loans are first evaluated individually to determine if there has been credit deterioration since origination. Once acquired loans are determined to have deteriorated credit quality, the Company evaluates such loans for common risk characteristics and aggregation into one or more pools. Common risk characteristics for pooling acquired loans may include credit ratings, loan type, collateral type, delinquency status, geographic location, loan to value, or combinations thereof. Management also estimates the amount of credit losses that are expected to be realized for individual loans by estimating the probability of default and the loss given default, which incorporates the liquidation value of collateral securing loans. These estimates are subjective. The accretion of the fair value adjustments attributable to interest rates on loans acquired with deteriorated credit quality is recorded in interest income in the Consolidated Income Statements over the estimated life of the pool. The fair value adjustment attributable to credit losses on these loans is non-accretable. When a loan is sold, paid off or transferred to OREO and liquidated, any remaining non-accretable yield is recorded in interest income.

Adjustments to these loan values in future periods may occur based on Management’s expectation of future cash flows to be collected over the lives of the loans. Estimating cash flows is performed at a pool level and incorporates analysis of historical cash flows, delinquencies, and charge-offs as well as assumptions about future cash flows. Performance can vary from period to period, causing changes in estimates of the expected cash flows. If based on the review of a pool of loans, it is probable that a significant increase or improvement in cash flows previously expected to be collected, any valuation allowance established for the pool of loans is first reduced for the increase in the present value of cash flows expected to be collected, and any remaining increase in estimated cash flows increases the accretable yield and is recognized over the remaining estimated life of the loan pool. If based on the review of a pool of loans, it is probable that a decrease or impairment in cash flows previously expected to be collected or if actual cash flows are less than cash flows previously expected, the allowance for credit losses is increased for the decrease in the present value of the cash flows expected to be collected.

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 other real estate owned 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 relating to the development or improvement of the assets are capitalized and costs relating to holding the assets are charged to non-interest expense. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value and valuation allowances.

Derivative financial instruments

The Company uses interest-rate swaps to mitigate interest-rate risk associated with changes to (1) the fair value of certain fixed-rate financial instruments (fair value hedges) and (2) certain cash flows related to future interest payments on variable rate financial instruments (cash flow hedges).

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

For a fair value hedge, the change in the fair value of the derivative instrument is recognized in earnings. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in accumulated other comprehensive income (loss) (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the change in fair value of a cash flow hedge is recognized immediately in non-interest income in the Consolidated Income Statement. Under both the fair value and cash flow hedge scenarios, changes in the fair value of derivatives not considered to be highly effective in hedging the change in fair value or the expected cash flows of the hedged item are recognized in earnings as non-interest income during the period of the change.

The Company documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is executed. Both at inception and at least quarterly thereafter, the Company assesses whether the derivatives used in hedging transactions are highly effective (as defined in the guidance) in offsetting changes in either the fair value or cash flows of the hedged item. Retroactive effectiveness is assessed, as well as the continued expectation that the hedge will remain effective prospectively. The Company discontinues hedge accounting prospectively when it is determined that a hedge is no longer highly effective. When hedge accounting is discontinued on a fair value hedge that no longer qualifies as an effective hedge, the derivative continues to be reported at fair value on the Consolidated Balance Sheets, 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 per the accounting guidance are reported in the Consolidated Balance Sheets at fair value and the changes in fair value are recognized in earnings as non-interest income during the period of change.

The Company occasionally purchases a financial instrument or originates a loan that contains an embedded derivative instrument. Upon purchasing the instrument or originating the loan, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and carried at fair value. However, in cases where (1) the host contract is measured at fair value, with changes in fair value reported in current earnings, or (2) the Company is unable to reliably identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the Consolidated Balance Sheet at fair value and is not designated as a hedging instrument.

Commitments and letters of credit

In the ordinary course of business, the Company enters into commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the Consolidated Financial Statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for credit losses.

Income taxes

The Company and its subsidiaries, other than BW Real Estate, Inc., file a consolidated federal tax return. Due to tax regulations, several items of income and expense are recognized in different periods for tax return purposes than for financial reporting purposes. These items represent “temporary differences.” Deferred taxes are provided on an asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of Management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

Fair values of financial instruments

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

•

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

•

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

•

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

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

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. When market assumptions are available, ASC 820 requires the Company to make assumptions regarding the assumptions that market participants would use to estimate the fair value of the financial instrument at the measurement date.

FASB ASC 825, Financial Instruments (“ASC 825”), requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at September 30, 2013 or December 31, 2012. The estimated fair value amounts for September 30, 2013 and December 31, 2012 have been measured as of period-end, and have not been reevaluated or updated for purposes of these Consolidated Financial Statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period-end.

The information in Note 11, “Fair Value Accounting,” should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities.

Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash and cash equivalents

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

Money market and certificates of deposit investments

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

Investment securities

The fair values of U.S. Treasuries, corporate bonds, mutual funds, and exchange-listed preferred stock are based on quoted market prices and are categorized as Level 1 in the fair value hierarchy.

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

The Company owns certain collateralized debt obligations (“CDOs”) for which quoted prices are not available. Quoted prices for similar assets are also not available for these investment securities. In order to determine the fair value of these securities, the Company has estimated the future cash flows and discount rate using observable market inputs adjusted based on assumptions regarding the adjustments a market participant would assume necessary for each specific security. As a result, the resulting fair values have been categorized as Level 3 in the fair value hierarchy.

Restricted stock

The Company’s subsidiary banks are members of the Federal Home Loan Bank (“FHLB”) system and maintain an investment in capital stock of the FHLB. The Company’s subsidiary banks also maintain an investment in their primary correspondent bank. These investments are carried at cost since no ready market exists for them, and they have no quoted market value. The Company conducts a periodic review and evaluation of its FHLB stock to determine if any impairment exists. The fair values have been categorized as Level 2 in the fair value hierarchy.

Loans

Fair value for loans is estimated based on discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality with 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 disclosed in Note 11, “Fair Value Accounting,” is categorized as Level 2 in the fair value hierarchy.

Accrued interest receivable and payable

The carrying amounts reported in the Consolidated Balance Sheets for accrued interest receivable and payable approximate their fair value. Accrued interest receivable and payable fair value measurements are classified as Level 3 in the fair value hierarchy.

Derivative financial instruments

All derivatives are recognized in the Consolidated Balance Sheet at their fair value. The fair value for derivatives is determined based on market prices, broker-dealer quotations on similar products or other related input parameters. As a result, the fair values have been categorized as Level 2 in the fair value hierarchy.

Deposits

The fair value disclosed for demand and savings deposits is by definition equal to the amount payable on demand at their reporting date (that is, their carrying amount), which the Company believes a market participant would consider in determining fair value. The carrying amount for variable-rate deposit accounts approximates their fair value. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on these deposits. The fair value measurement of the deposit liabilities disclosed in Note 11, “Fair Value Accounting,” is categorized as Level 2 in the fair value hierarchy.

Federal Home Loan Bank advances and other borrowings

The fair values of the Company’s borrowings are estimated using discounted cash flow analyses, based on the market rates for similar types of borrowing arrangements. The FHLB advances have been categorized as Level 2 in the fair value hierarchy due to their short durations. The other borrowings have been categorized as Level 3 in the fair value hierarchy.

Junior subordinated debt

Junior subordinated debt and subordinated debt are valued by comparing interest rates and spreads to benchmark indices offered to institutions with similar credit profiles to the Company and discounting the contractual cash flows on the Company’s debt using these market rates. The junior subordinated debt has been categorized as Level 3 in the fair value hierarchy.

Off-balance sheet instruments

Fair values for the Company’s off-balance sheet instruments (lending commitments and standby letters of credit) are based on quoted fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Recent accounting pronouncements

In January 2013, the FASB issued guidance within Accounting Standards Update (“ASU”) 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The amendments in ASU 2013-01 to Topic 210, Balance Sheet, clarify that the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, would apply to derivatives, including bifurcated embedded derivatives, repurchase and reverse agreements, and securities borrowing and lending transactions that are either offset or subject to a master netting arrangement. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance did not have a material impact on the Company’s Consolidated Income Statement, Consolidated Balance Sheet, or Consolidated Cash Flows.

In February 2013, the FASB issued guidance within ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in ASU 2013-02 to Topic 220, Comprehensive Income, update, supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 and 2011-12. The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this guidance did not have a material impact on the Company’s Consolidated Income Statement, Consolidated Balance Sheet, or Consolidated Cash Flows and only impacted the presentation of other comprehensive income in the Consolidated Financial Statements.

In February 2013, the FASB issued guidance within ASU 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The amendments in ASU 2013-04 to Topic 405, Liabilities, provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the Update is fixed at the reporting date, except for obligations addressed with existing GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation, as well as other information about those obligations. The amendment is effective retrospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Income Statement, Consolidated Balance Sheet, or Consolidated Cash Flows.

In July 2013, the FASB issued guidance within ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in ASU 2013-11 to Topic 740, Income Taxes, provide guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

2. ACQUISITIONS AND DISPOSITIONS

Acquisitions

On April 30, 2013, the Company completed its acquisition of Centennial Bank (“Centennial”). Under the terms of the merger, the Company paid $57.5 million in cash for all equity interests in Centennial. The Company merged Centennial into WAB effective April 30, 2013, reporting combined assets for the resulting bank of $3.16 billion and deposits of $2.76 billion. The merger was undertaken, in part, because the purchase price of Centennial was at a discount to its tangible book value and was accretive to capital at close of the transaction.

Centennial’s results of operations are included in the Company’s results beginning April 30, 2013. Merger / restructure expenses related to the Centennial acquisition of $0.2 million and $2.7 million for the three and nine months ended September 30, 2013, respectively, have been included in non-interest expense, of which, $1.0 million are acquisition related costs as defined by ASC 805. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805. Assets purchased and liabilities assumed were all recorded at their respective acquisition date fair values. A bargain purchase gain of $10.0 million resulted from the acquisition and is included as a component of non-interest income in the Consolidated Income Statement. The amount of gain is equal to the amount by which the estimated fair value of net assets purchased exceeded the consideration paid. Pursuant to the terms of the transaction, $12.7 million in loan receivables were not acquired by the Company.

The recognized amounts of identifiable assets acquired and liabilities assumed are as follows:


	(in thousands)
Assets:
Cash and cash equivalents ⁽¹⁾	$	70,349
Federal funds sold ⁽¹⁾		8,355
Investment securities - avaialable-for-sale		26,014
Loans		351,474
Deferred tax assets, net		21,666
Premises and equipment		44
Other assets acquired through foreclosure, net		5,622
Other assets		6,007

Total assets acquired		489,531

Liabilities:
Deposits		338,811
FHLB advances		79,943
Other liabilities		3,233
Total liabilities assumed	$	421,987

Net assets acquired		67,544

Consideration paid ⁽¹⁾		57,500

Bargain purchase gain from acquisition	$	10,044

⁽¹⁾	Cash acquired, net of cash consideration paid of $57.5 million represents the net cash and cash equivalents acquired of $21.2 million as part of the acquisition.

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. Accordingly, the estimated fair value of net assets are preliminary and subject to measurement period adjustments. Assets that are particularly susceptible to adjustment include certain loans and other assets acquired through foreclosure. However, these adjustments are not expected to be significant. The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to acquired loans which have shown evidence of credit deterioration since origination.

On October 17, 2012, the Company acquired Western Liberty Bancorp (“Western Liberty”), which included two wholly owned subsidiaries, Service 1^st Bank of Nevada and LVSP. Service 1^st Bank of Nevada was merged into the Company’s wholly owned subsidiary, BON, effective October 19, 2012. LVSP remains a wholly owned subsidiary of WAL.

The following table presents pro forma information as if the Centennial and Western Liberty acquisitions had occurred as of January 1, 2012. 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 September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands, except per share amounts)
Net Interest income⁽¹⁾	$	81,093	$	85,151	$	238,430	$	254,535
Non Interest income⁽²⁾		2,625		8,138		7,468		22,147
Net income⁽³⁾		25,820		13,549		69,435		36,012
Earnings per share—basic	$	0.30	$	0.17	$	0.81	$	0.44
Earnings per share—diluted	$	0.30	$	0.16	$	0.80	$	0.44

(1)	Excludes accretion (or amortization) of fair market value adjustments for loans, deposits and other borrowings advances of $3,466 for the three months ended September 30, 2013 and $10,285 for the nine months ended September 30, 2013.

(2)	Excludes bargain purchase gain of $10,044 related to the Centennial acquisition.

(3)

Excludes merger / restructure related costs incurred by the Company($181 for the three months ended September 30, 2013 and $2,660 for the nine months ended September 30, 2013) and Centennial ($0 for the three months ended September 30, 2013 and $1,000 for the nine months ended September 30, 2013) and footnotes 1 and 2 noted above as well as the related tax effects.

Discontinued Operations

The Company has discontinued its affinity credit card business, PartnersFirst, and has presented these activities as discontinued operations. At September 30, 2013 and December 31, 2012, the outstanding credit card loans held for sale were $25.4 million and $31.1 million, respectively. As discussed in Note 14, “Subsequent Events,” certain receivables in this portfolio were sold on October 1, 2013.

The following table summarizes the operating results of the discontinued operations for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(in thousands)
Operating revenue	$	1,105		$	315		$	3,376		$	947
Non-interest expenses		(1,155	)		(734	)		(3,653	)		(2,130	)

Loss before income taxes		(50	)		(419	)		(277	)		(1,183	)
Income tax benefit		(21	)		(176	)		(117	)		(497	)

Net loss	$	(29	)	$	(243	)	$	(160	)	$	(686	)

3. INVESTMENT SECURITIES

Carrying amounts and fair values of investment securities at September 30, 2013 and December 31, 2012 are summarized as follows:

September 30, 2013

Gross

Amortized

Unrealized

Fair

Cost

Gains

(Losses)

Value

(in thousands)

Held-to-maturity

Collateralized debt obligations

578

—

628

Corporate bonds

97,778

647

(4,586

)

93,839

Municipal obligations

189,680

3,531

(1,735

)

191,476

Other

1,600

—

1,600

289,108

4,756

(6,321

)

287,543

OTTI

Recognized

in Other

Gross

Amortized

Comprehensive

Unrealized

Fair

Cost

Income

Gains

(Losses)

Value

(in thousands)

Available-for-sale

U.S. government sponsored agency securities

28,694

—

(1,317

)

27,377

Municipal obligations

110,081

—

302

(4,838

)

105,545

Adjustable-rate preferred stock

66,093

—

864

(5,568

)

61,389

Mutual funds

32,422

—

123

(222

)

32,323

Direct U.S. obligations and GSE residential mortgage-backed securities

769,983

—

5,748

(7,253

)

768,478

Private label residential mortgage-backed securities

27,683

—

(1,544

)

26,147

Trust preferred securities

32,000

—

(8,166

)

23,834

CRA investments

23,703

—

(403

)

23,300

Collateralized mortgage-backed securities

5,283

—

210

—

5,493

1,095,942

—

7,255

(29,311

)

1,073,886

Measured at fair value

Direct U.S. obligations and GSE residential mortgage-backed securities

3,621


	December 31, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
	(in thousands)
*Held-to-maturity*
Collateralized debt obligations	$	50	$	1,401	$	—		$	1,451
Corporate bonds		97,781		984		(6,684	)		92,081
Municipal obligations		191,902		5,887		(102	)		197,687
CRA investments		1,600		—		—			1,600

	$	291,333	$	8,272	$	(6,786	)	$	292,819


			OTTI
			Recognized
			in Other			Gross		Gross
	Amortized		Comprehensive			Unrealized		Unrealized			Fair
	Cost		Income			Gains		(Losses)			Value
	(in thousands)
*Available-for-sale*
Municipal obligations	$	71,777	$	—		$	1,578	$	(184	)	$	73,171
Adjustable-rate preferred stock		72,717		—			3,591		(753	)		75,555
Mutual funds		36,314		—			1,647		—			37,961
Direct U.S. obligations and GSE residential mortgage-backed securities		648,641		—			14,573		(10	)		663,204
Private label residential mortgage-backed securities		35,868		(1,811	)		2,067		(517	)		35,607
Private label commercial mortgage-backed securities		5,365		—			376		—			5,741
Trust preferred securities		32,000		—			—		(7,865	)		24,135
CRA investments		23,368		—			848		—			24,216

	$	926,050	$	(1,811	)	$	24,680	$	(9,329	)	$	939,590

*Measured at fair value*
Direct U.S. obligations and GSE residential mortgage-backed securities (3)											$	5,061

During the second quarter 2013, a private label mortgage-backed security with a $1.8 million balance of OTTI recognized in other comprehensive income was sold. Accordingly, there is no OTTI balance recognized in other comprehensive income as of September 30, 2013. For additional information on the fair value changes of the securities measured at fair value, see the trading securities table in Note 11, “Fair Value Accounting.”

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 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 and adjustable-rate preferred stock (“ARPS”) that are treated as debt securities for the purpose of OTTI analysis, the Company also considers the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuer’s financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer’s ability to service debt, and any change in agencies’ ratings at evaluation date from acquisition date and any likely imminent action. For ARPS with a fair value below cost that is not attributable to the credit deterioration of the issuer, such as a decline in cash flows from the security or a downgrade in the security’s rating below investment grade, the Company does not recognize an OTTI charge where determines that it has the intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.

Gross unrealized losses at September 30, 2013 and December 31, 2012 are primarily caused by interest rate fluctuations, credit spread widening and reduced liquidity in applicable markets. The Company has reviewed securities on which there is an unrealized loss in accordance with its accounting policy for OTTI described above and determined there were no securities impairment charges needed for the three and nine months ended September 30, 2013 and 2012.

The Company does not consider any other securities to be other-than-temporarily impaired as of September 30, 2013 and December 31, 2012. No assurance can be made that additional OTTI will not occur in future periods.

Information pertaining to securities with gross unrealized losses at September 30, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:


	September 30, 2013
	Less Than Twelve Months				More Than Twelve Months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value		Losses		Value
	(in thousands)
*Held-to-maturity*
Corporate bonds	$	—	$	—	$	4,586	$	80,414	$	4,586	$	80,414
Municipal obligations		1,735		41,505		—		—		1,735		41,505

	$	1,735	$	41,505	$	4,586	$	80,414	$	6,321	$	121,919

*Available-for-sale*
U.S. Government-sponsored agency securities	$	1,317	$	17,377	$	—	$	—	$	1,317	$	17,377
Adjustable-rate preferred stock		5,568		43,599		—		—		5,568		43,599
Mutual funds		222		25,862		—		—		222		25,862
Direct U.S obligations and GSE residential mortgage-backed securities		7,242		358,092		11		1,528		7,253		359,620
Municipal obligations		4,838		79,308		—		—		4,838		79,308
Private label residential mortgage-backed securities		1,500		20,322		44		3,460		1,544		23,782
Trust preferred securities		—		—		8,166		23,834		8,166		23,834
Other		403		23,299		—		—		403		23,299

	$	21,090	$	567,859	$	8,221	$	28,822	$	29,311	$	596,681


	December 31, 2012
	Less Than Twelve Months				More Than Twelve Months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value		Losses		Value
	(in thousands)
*Held-to-maturity*
Corporate bonds	$	206	$	14,794	$	6,478	$	63,522	$	6,684	$	78,316
Municipal obligations		102		10,908		—		—		102		10,908

	$	308	$	25,702	$	6,478	$	63,522	$	6,786	$	89,224

*Available-for-sale*
Adjustable-rate preferred stock	$	110	$	7,811	$	643	$	8,723	$	753	$	16,534
Mutual funds		—		—		—		—		—		—
Corporate bonds		—		—		—		—		—		—
Direct U.S obligations and GSE residential mortgage-backed securities		2		557		8		1,938		10		2,495
Municipal obligations		184		15,713		—		—		184		15,713
Private label residential mortgage-backed securities		120		16,901		397		6,986		517		23,887
Trust preferred securities		—		—		7,865		24,135		7,865		24,135

	$	416	$	40,982	$	8,913	$	41,782	$	9,329	$	82,764

The total number of securities in an unrealized loss position at September 30, 2013 was 202, compared to 66 at December 31, 2012. 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 for the foreseeable future, none of the securities described in the above table or in this paragraph were deemed to be other than temporarily impaired.

At September 30, 2013 and December 31, 2012, the gross unrealized loss on trust preferred securities classified as AFS was $8.2 million and $7.9 million, respectively. The Company actively monitors its debt and other structured securities portfolios classified as AFS for declines in fair value. At September 30, 2013, the gross unrealized loss on the corporate bond portfolio classified as HTM was $4.6 million, compared to $6.7 million at December 31, 2012. During the prior year, the Federal Reserve announced its intention to keep interest rates at historically low levels into 2015. The yields of most of the bonds in the portfolio are tied to LIBOR, thus, negatively affecting their anticipated returns. Additionally, Moody’s had downgraded certain bonds held in the portfolio during 2012. However, all of the bonds remain investment grade.

The amortized cost and fair value of securities as of September 30, 2013 and December 31, 2012, by contractual maturities, are shown below. The actual maturities of the mortgage-backed securities may differ from their contractual maturities because the loans underlying the securities may be repaid without any penalties due to borrowers that have the right to call or prepay obligations with or without call or prepayment penalties. These securities are included in the after ten years category in the following table.


	September 30, 2013				December 31, 2012
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(in thousands)
Held-to-maturity
Due in one year or less	$	2,517	$	2,534	$	1,600	$	1,600
After one year through five years		15,400		15,760		13,596		13,934
After five years through ten years		147,897		144,898		121,238		116,020
After ten years		123,294		124,351		154,899		161,265

	$	289,108	$	287,543	$	291,333	$	292,819

Available-for-sale
Due in one year or less	$	56,226	$	55,725	$	65,190	$	67,794
After one year through five years		23,694		24,216		24,261		25,906
After five years through ten years		34,019		32,661		8,165		8,000
After ten years (1)		982,003		961,284		828,434		837,890

	$	1,095,942	$	1,073,886	$	926,050	$	939,590

(1)	Includes mortgage-backed securities.

The following table summarizes the Company’s investment ratings position as of September 30, 2013:


	As of September 30, 2013
	AAA		Split-rated AAA/AA+		AA+ to AA-		A+ to A-		BBB+ to BBB-		BB+ and below		Totals
	(in thousands)
Municipal obligations	$	8,006	$	—	$	130,149	$	149,477	$	7,323	$	270	$	295,225
Direct U.S. obligations & GSE residential mortgage-backed securities		—		772,098		—		—		—		—		772,098
Private label residential mortgage-backed securities		12,396		—		151		5,563		4,145		3,892		26,147
Mutual funds (3)		—		—		—		—		32,323		—		32,323
U.S. Government-sponsored agency securities		—		27,377		—		—		—		—		27,377
Adjustable-rate preferred stock		—		—		—		—		45,970		13,371		59,341
Trust preferred securities		—		—		—		—		23,834		—		23,834
Collateralized debt obligations		—		—		—		—		—		50		50
Corporate bonds		—		—		2,697		40,105		54,976		—		97,778
Collarteralized mortgage-backed securities		5,493		—		—		—		—		—		5,493

Total (1) (2)	$	25,895	$	799,475	$	132,997	$	195,145	$	168,571	$	17,583	$	1,339,666

(1)	The Company used the average credit rating of the combination of S&P, Moody’s and Fitch in the above table where ratings differed.

(2)	Securities values are shown at carrying value as of September 30, 2013. Unrated securities consist of CRA investments with a carrying value of $23.3 million, ARPS with a carrying value of $2.0 million and an other investment of $1.6 million.

(3)	At least 80% of mutual funds are investment grade corporate bonds.

The following table summarizes the Company’s investment ratings position as of December 31, 2012:


	As of December 31, 2012
	AAA		Split-rated AAA/AA+		AA+ to AA-		A+ to A-		BBB+ to BBB-		BB+ and below		Totals
	(in thousands)
Municipal obligations	$	8,120	$	—	$	149,352	$	92,401	$	14,922	$	278	$	265,073
Direct U.S. obligations & GSE residential mortgage-backed securities		—		668,265		—		—		—		—		668,265
Private label residential mortgage-backed securities		15,219		—		1,649		6,069		5,249		7,421		35,607
Private label commercial mortgage-backed securities		5,741		—		—		—		—		—		5,741
Mutual funds (3)		—		—		—		—		37,961		—		37,961
U.S. Government-sponsored agency securities		—		—		—		—		—		—		—
Adjustable-rate preferred stock		—		—		826		—		60,807		10,838		72,471
Trust preferred securities		—		—		—		—		24,135		—		24,135
Collateralized debt obligations		—		—		—		—		—		50		50
Corporate bonds		—		—		2,696		40,116		54,969		—		97,781

Total (1) (2)	$	29,080	$	668,265	$	154,523	$	138,586	$	198,043	$	18,587	$	1,207,084

(1)	The Company used the average credit rating of the combination of S&P, Moody’s and Fitch in the above table where ratings differed.

(2)	Securities values are shown at carrying value as of December 31, 2012. Unrated securities consist of CRA investments with a carrying value of $24.2 million, one ARPS security with a carrying value of $3.1 million and an other investment of $1.6 million.

(3)	At least 80% of mutual funds are investment grade corporate bonds.

Securities with carrying amounts of approximately $638.5 million and $711.7 million at September 30, 2013 and December 31, 2012, 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						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(in thousands)
Gross gains	$	602		$	1,073		$	870		$	2,786
Gross (losses)		(2,281	)		(42	)		(2,407	)		(284	)

	$	(1,679	)	$	1,031		$	(1,537	)	$	2,502

4. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES

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


	September 30,			December 31,
	2013			2012
	(in thousands)
Commercial and industrial	$	1,990,568		$	1,659,003
Commercial real estate—non-owner occupied		1,864,333			1,505,600
Commercial real estate—owner occupied		1,551,187			1,396,797
Construction and land development		459,764			394,319
Residential real estate		358,962			407,937
Commercial leases		244,312			288,747
Consumer		29,850			31,836
Deferred fees and unearned income, net		(8,106	)		(6,045	)

		6,490,870			5,678,194
Allowance for credit losses		(97,851	)		(95,427	)

Total	$	6,393,019		$	5,582,767

The following table presents the contractual aging of the recorded investment in past due loans by class of loans including loans held for sale and excluding deferred fees:

September 30, 2013

Current

30-59 Days
Past Due

60-89 Days
Past Due

Over 90 days
Past Due

Total
Past Due

Total

(in thousands)

Commercial real estate

Owner occupied

1,538,589

2,123

—

10,475

12,598

1,551,187

Non-owner occupied

1,629,045

1,475

12,607

7,294

21,376

1,650,421

Multi-family

213,912

—

213,912

Commercial and industrial

Commercial

1,986,782

1,094

817

1,875

3,786

1,990,568

Leases

243,959

—

353

244,312

Construction and land development

Construction

264,145

—

264,145

Land

194,218

—

1,345

1,401

195,619

Residential real estate

342,382

560

127

15,893

16,580

358,962

Consumer

54,195

309

248

511

1,068

55,263

Total loans

6,467,227

5,617

13,799

37,746

57,162

6,524,389


	December 31, 2012
	Current		30-59 Days Past Due		60-89 Days Past Due		Over 90 days Past Due		Total Past Due		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,372,550	$	13,153	$	1,757	$	9,337	$	24,247	$	1,396,797
Non-owner occupied		1,327,481		917		4,416		8,573		13,906		1,341,387
Multi-family		164,213		—		—		—		—		164,213
Commercial and industrial
Commercial		1,654,787		3,109		121		986		4,216		1,659,003
Leases		287,768		515		—		464		979		288,747
Construction and land development
Construction		215,597		—		—		—		—		215,597
Land		171,919		826		571		5,406		6,803		178,722
Residential real estate		387,641		3,525		1,837		14,934		20,296		407,937
Consumer		62,271		524		—		165		689		62,960

Total loans	$	5,644,227	$	22,569	$	8,702	$	39,865	$	71,136	$	5,715,363

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


	September 30, 2013								December 31, 2012
							Loans past								Loans past
	Non-accrual loans						due 90 days		Non-accrual loans						due 90 days
			Past Due/		Total		or more and				Past Due/		Total		or more and
	Current		Delinquent		Non-accrual		still accruing		Current		Delinquent		Non-accrual		still accruing
	(in thousands)
Commercial real estate
Owner occupied	$	10,222	$	10,391	$	20,613	$	388	$	14,392	$	18,394	$	32,786	$	1,272
Non-owner occupied		12,761		12,885		25,646		4,553		18,299		8,572		26,871		—
Multi-family		—		—		—		—		318		—		318		—
Commercial and industrial
Commercial		1,909		2,092		4,001		4		2,549		3,194		5,743		15
Leases		114		353		467		—		—		979		979		—
Construction and land development
Construction		—		—		—		—		—		—		—		—
Land		5,241		1,401		6,642		—		4,375		6,718		11,093		—
Residential real estate		3,350		15,894		19,244		—		11,561		15,161		26,722		101
Consumer		28		—		28		511		39		165		204		—

Total	$	33,625	$	43,016	$	76,641	$	5,456	$	51,533	$	53,183	$	104,716	$	1,388

The reduction in interest income associated with loans on nonaccrual status was approximately $1.3 million and $3.8 million for the three and nine months ended September 30, 2013, respectively, and $1.3 million and $4.1 million for the three and nine months ended September 30, 2012, 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 have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The final rating of Loss covers loans considered uncollectible and having such little recoverable value that it is not practical to defer writing off the asset. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve Management’s close attention, are deemed to be Special Mention. Risk ratings are updated, at a minimum, quarterly. The following tables present the recorded investment and delinquency status by class of loans including loans held for sale and excluding deferred fees by risk rating:

September 30, 2013

Pass

Special
Mention

Substandard

Doubtful

Loss

Total

(in thousands)

Commercial real estate

Owner occupied

1,465,697

35,217

49,293

980

—

1,551,187

Non-owner occupied

1,490,250

64,405

95,766

—

1,650,421

Multi-family

206,586

5,618

1,708

—

213,912

Commercial and industrial

Commercial

1,964,491

9,661

14,904

1,512

—

1,990,568

Leases

239,002

4,843

467

—

244,312

Construction and land development

Construction

256,037

8,108

—

264,145

Land

167,523

4,676

23,420

—

195,619

Residential real estate

324,254

3,865

30,843

—

358,962

Consumer

53,518

853

892

—

55,263

Total

6,167,358

137,246

217,293

2,492

—

6,524,389

September 30, 2013

Pass

Special
Mention

Substandard

Doubtful

Loss

Total

(in thousands)

Current (up to 29 days past due)

6,164,416

136,297

165,836

678

—

6,467,227

Past due 30—59 days

2,622

378

2,617

—

5,617

Past due 60—89 days

320

571

12,908

—

13,799

Past due 90 days or more

—

35,932

1,814

—

37,746

Total

6,167,358

137,246

217,293

2,492

—

6,524,389


	December 31, 2012
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)
Commercial real estate
Owner occupied	$	1,280,337	$	50,552	$	65,908	$	—	$	—	$	1,396,797
Non-owner occupied		1,257,011		21,065		63,311		—		—		1,341,387
Multi-family		163,895		—		318		—		—		164,213
Commercial and industrial
Commercial		1,630,166		12,370		15,499		968		—		1,659,003
Leases		282,075		5,693		979		—		—		288,747
Construction and land development
Construction		215,395		202		—		—		—		215,597
Land		141,436		5,641		31,645		—		—		178,722
Residential real estate		365,042		7,559		32,446		2,890		—		407,937
Consumer		61,469		469		1,022		—		—		62,960

Total	$	5,396,826	$	103,551	$	211,128	$	3,858	$	—	$	5,715,363


	December 31, 2012
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)
Current (up to 29 days past due)	$	5,387,543	$	100,549	$	152,827	$	3,308	$	—	$	5,644,227
Past due 30—59 days		4,410		1,310		16,849		—		—		22,569
Past due 60—89 days		4,450		1,692		2,560		—		—		8,702
Past due 90 days or more		423		—		38,892		550		—		39,865

Total	$	5,396,826	$	103,551	$	211,128	$	3,858	$	—	$	5,715,363

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


	September 30,			December 31,
	2013			2012
	(in thousands)
Impaired loans with a specific valuation allowance under ASC 310	$	20,717		$	51,538
Impaired loans without a specific valuation allowance under ASC 310		153,514			146,617

Total impaired loans	$	174,231		$	198,155

Valuation allowance related to impaired loans	$	(5,909	)	$	(12,866	)

The following table presents the impaired loans by class:


	September 30,		December 31,
	2013		2012
	(in thousands)
Commercial real estate
Owner occupied	$	45,516	$	58,074
Non-owner occupied		54,052		52,146
Multi-family		—		318
Commercial and industrial
Commercial		14,106		15,531
Leases		467		979
Construction and land development
Construction		—		—
Land		26,748		32,492
Residential real estate		32,811		37,851
Consumer		531		764

Total	$	174,231	$	198,155

An allowance for credit loss 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 specific valuation allowance under ASC 310.” The valuation allowance disclosed above is included in the allowance for credit losses reported in the Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(in thousands)
Commercial real estate
Owner occupied	$	46,108	$	61,223	$	52,030	$	55,881
Non-owner occupied		54,211		60,207		54,553		57,433
Multi-family		—		882		118		983
Commercial and industrial
Commercial		13,786		25,616		14,558		26,097
Leases		565		1,030		817		839
Construction and land development
Construction		—		—		—		1,315
Land		27,418		35,215		28,268		37,440
Residential real estate		34,616		37,814		34,972		34,567
Consumer		564		794		629		1,256

Total	$	177,268	$	222,781	$	185,945	$	215,811

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(in thousands)
Commercial real estate
Owner occupied	$	426	$	841	$	1,182	$	1,696
Non-owner occupied		458		649		1,283		1,661
Multi-family		—		—		—		—
Commercial and industrial
Commercial		185		406		454		920
Leases		—		—		—		—
Construction and land development
Construction		—		—		—		—
Land		328		171		874		867
Residential real estate		21		78		45		199
Consumer		7		13		22		31

Total	$	1,425	$	2,158	$	3,860	$	5,374

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

The following table summarizes nonperforming assets:


	September 30,		December 31,
	2013		2012
	(in thousands)
Nonaccrual loans	$	76,641	$	104,716
Loans past due 90 days or more on accrual status		5,456		1,388
Troubled debt restructured loans		87,387		84,609

Total nonperforming loans		169,484		190,713
Other assets acquired through foreclosure, net		76,475		77,247

Total nonperforming assets	$	245,959	$	267,960

Loans Acquired with Deteriorated Credit Quality

The following table presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of loans acquired in the Centennial acquisition, as of April 30, 2013, the closing date of the transaction:


	April 30, 2013
	Commercial		Residential
	Real Estate		Real Estate		Total
	(in thousands)
Contractually required payments:
Loans with credit deterioration since origination	$	253,419	$	—	$	253,419
Purchased non-credit impaired loans		368,040		2,136		370,176

Total loans acquired	$	621,459	$	2,136	$	623,595

Cash flows expected to be collected:
Loans with credit deterioration since origination	$	145,346	$	—	$	145,346
Purchased non-credit impaired loans		304,818		1,352		306,170

Total loans acquired	$	450,164	$	1,352	$	451,516

Fair value of loans acquired:
Loans with credit deterioration since origination	$	108,863	$	—	$	108,863
Purchased non-credit impaired loans		241,541		1,070		242,611

Total loans acquired	$	350,404	$	1,070	$	351,474

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


	September 30, 2013
	Three Months Ended			Nine Months Ended
	(in thousands)
Balance, at beginning of period	$	26,073		$	7,072
Addition due to acquisition		—			22,318
Reclassification from nonaccretable difference		4,804			5,851
Accretion to interest income		(2,044	)		(6,408	)

Balance, at end of period	$	28,833		$	28,833

The addition during the nine months ended September 30, 2013 reflected in the above table relate to the acquisition of Centennial. The primary drivers of reclassification from nonaccretable to accretable yield resulted from changes in estimated cash flows.

Allowance for Credit Losses

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

For the Three Months Ended September 30,

Construction and

Commercial

Residential

Commercial

Land Development

Real Estate

and Industrial

Consumer

Total

(in thousands)

2013

Beginning Balance

9,614

34,583

13,847

37,383

896

96,323

Charge-offs

—

(864

)

(1,138

)

(544

)

(712

)

(3,258

)

Recoveries

966

422

430

2,242

726

4,786

Provision

(533

)

(278

)

(247

)

354

704

—

Ending balance

10,047

33,863

12,892

39,435

1,614

97,851