GBCI-09.30.2013-10Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
______________________________________________________________________
FORM 10-Q
______________________________________________________________________
ý 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 000-18911
______________________________________________________________________
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
 ______________________________________________________________________
MONTANA
81-0519541
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
49 Commons Loop, Kalispell, Montana
59901
(Address of principal executive offices)
(Zip Code)
(406) 756-4200
Registrant’s telephone number, including area code
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report) 
______________________________________________________________________
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.    ý  Yes    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).    ý  Yes    No  ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
ý
 
Accelerated Filer
¨
Non-Accelerated Filer
¨
 
Smaller reporting Company
¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨  Yes    ý  No
The number of shares of Registrant’s common stock outstanding on October 22, 2013 was 74,321,966. No preferred shares are issued or outstanding.





TABLE OF CONTENTS
 


 
Page
Part I. Financial Information
 
Item 1 – Financial Statements
 







Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Financial Condition
 
(Dollars in thousands, except per share data)
September 30,
2013
 
December 31,
2012
Assets
 
 
 
Cash on hand and in banks
$
130,285

 
123,270

Interest bearing cash deposits and federal funds sold
124,399

 
63,770

Cash and cash equivalents
254,684

 
187,040

Investment securities, available-for-sale
3,318,953

 
3,683,005

Loans held for sale
61,505

 
145,501

Loans receivable
4,001,099

 
3,397,425

Allowance for loan and lease losses
(130,765
)
 
(130,854
)
Loans receivable, net
3,870,334

 
3,266,571

Premises and equipment, net
168,633

 
158,989

Other real estate owned
36,531

 
45,115

Accrued interest receivable
44,261

 
37,770

Deferred tax asset
47,957

 
20,394

Core deposit intangible, net
10,228

 
6,174

Goodwill
129,706

 
106,100

Non-marketable equity securities
52,192

 
48,812

Other assets
52,946

 
41,969

Total assets
$
8,047,930

 
7,747,440

Liabilities
 
 
 
Non-interest bearing deposits
$
1,397,401

 
1,191,933

Interest bearing deposits
4,215,479

 
4,172,528

Securities sold under agreements to repurchase
314,313

 
289,508

Federal Home Loan Bank advances
967,382

 
997,013

Other borrowed funds
8,466

 
10,032

Subordinated debentures
125,526

 
125,418

Accrued interest payable
3,568

 
4,675

Other liabilities
67,988

 
55,384

Total liabilities
7,100,123

 
6,846,491

Stockholders’ Equity
 
 
 
Preferred shares, $0.01 par value per share, 1,000,000 shares authorized, none issued or outstanding

 

Common stock, $0.01 par value per share, 117,187,500 shares authorized
743

 
719

Paid-in capital
689,751

 
641,737

Retained earnings - substantially restricted
247,330

 
210,531

Accumulated other comprehensive income
9,983

 
47,962

Total stockholders’ equity
947,807

 
900,949

Total liabilities and stockholders’ equity
$
8,047,930

 
7,747,440

Number of common stock shares issued and outstanding
74,307,951

 
71,937,222




See accompanying notes to unaudited condensed consolidated financial statements.

3




Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Operations

 
Three Months ended
 
Nine Months ended
(Dollars in thousands, except per share data)
September 30,
2013
 
September 30,
2012
 
September 30,
2013
 
September 30,
2012
Interest Income
 
 
 
 
 
 
 
Residential real estate loans
$
7,320

 
7,740

 
21,606

 
23,019

Commercial loans
34,291

 
30,293

 
92,788

 
91,764

Consumer and other loans
8,447

 
8,826

 
24,220

 
26,809

Investment securities
19,473

 
15,156

 
51,023

 
52,499

Total interest income
69,531

 
62,015

 
189,637

 
194,091

Interest Expense
 
 
 
 
 
 
 
Deposits
3,398

 
4,485

 
10,584

 
14,048

Securities sold under agreements to repurchase
209

 
395

 
646

 
997

Federal Home Loan Bank advances
2,730

 
3,116

 
8,029

 
9,715

Federal funds purchased and other borrowed funds
54

 
53

 
160

 
176

Subordinated debentures
795

 
858

 
2,410

 
2,613

Total interest expense
7,186

 
8,907

 
21,829

 
27,549

Net Interest Income
62,345

 
53,108

 
167,808

 
166,542

Provision for loan losses
1,907

 
2,700

 
5,085

 
19,250

Net interest income after provision for loan losses
60,438

 
50,408

 
162,723

 
147,292

Non-Interest Income
 
 
 
 
 
 
 
Service charges and other fees
13,711

 
11,939

 
36,115

 
33,722

Miscellaneous loan fees and charges
1,408

 
1,080

 
3,650

 
3,139

Gain on sale of loans
7,021

 
8,728

 
23,582

 
23,063

Loss on sale of investments
(403
)
 

 
(299
)
 

Other income
2,136

 
2,227

 
6,997

 
6,179

Total non-interest income
23,873

 
23,974

 
70,045

 
66,103

Non-Interest Expense
 
 
 
 
 
 
 
Compensation and employee benefits
27,469

 
24,046

 
76,963

 
71,290

Occupancy and equipment
6,421

 
6,001

 
18,152

 
17,794

Advertising and promotions
1,897

 
1,820

 
5,066

 
4,935

Outsourced data processing
1,232

 
801

 
2,870

 
2,435

Other real estate owned
1,049

 
6,373

 
4,901

 
15,394

Federal Deposit Insurance Corporation premiums
1,331

 
1,767

 
3,789

 
4,779

Core deposit intangibles amortization
693

 
532

 
1,684

 
1,619

Other expense
10,276

 
8,838

 
28,858

 
27,167

Total non-interest expense
50,368

 
50,178

 
142,283

 
145,413

Income Before Income Taxes
33,943

 
24,204

 
90,485

 
67,982

Federal and state income tax expense
8,315

 
4,760

 
21,387

 
13,224

Net Income
$
25,628

 
19,444

 
69,098

 
54,758

Basic earnings per share
$
0.35

 
0.27

 
0.95

 
0.76

Diluted earnings per share
$
0.35

 
0.27

 
0.95

 
0.76

Dividends declared per share
$
0.15

 
0.13

 
0.44

 
0.39

Average outstanding shares - basic
73,945,523

 
71,933,141

 
72,804,321

 
71,925,664

Average outstanding shares - diluted
74,021,871

 
71,973,985

 
72,869,475

 
71,925,761

See accompanying notes to unaudited condensed consolidated financial statements.

4




Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
 
 
Three Months ended
 
Nine Months ended
(Dollars in thousands)
September 30,
2013
 
September 30,
2012
 
September 30,
2013
 
September 30,
2012
Net Income
$
25,628

 
19,444

 
69,098

 
54,758

Other Comprehensive Income, Net of Tax
 
 
 
 
 
 
 
Unrealized (losses) gains on available-for-sale securities
(21,600
)
 
8,733

 
(77,285
)
 
31,965

Reclassification adjustment for losses included in net income
403

 

 
299

 

Net unrealized (losses) gains on securities
(21,197
)
 
8,733

 
(76,986
)
 
31,965

Tax effect
8,246

 
(3,398
)
 
29,948

 
(12,435
)
Net of tax amount
(12,951
)
 
5,335

 
(47,038
)
 
19,530

Unrealized (losses) gains on derivatives used for cash flow hedges
(735
)
 
(2,507
)
 
14,827

 
(8,446
)
Tax effect
287

 
975

 
(5,768
)
 
3,285

Net of tax amount
(448
)
 
(1,532
)
 
9,059

 
(5,161
)
Total other comprehensive (loss) income, net of tax
(13,399
)
 
3,803

 
(37,979
)
 
14,369

Total Comprehensive Income
$
12,229

 
23,247

 
31,119

 
69,127





























See accompanying notes to unaudited condensed consolidated financial statements.

5




Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
Nine Months ended September 30, 2013 and 2012
 
(Dollars in thousands, except per share data)
Common Stock
 
Paid-in Capital
 
Retained
Earnings
Substantially Restricted
 
Accumulated
Other Compre-
hensive Income
 
 
Shares
 
Amount
 
 
 
 
Total
Balance at December 31, 2011
71,915,073

 
$
719

 
642,882

 
173,139

 
33,487

 
850,227

Comprehensive income

 

 

 
54,758

 
14,369

 
69,127

Cash dividends declared ($0.39 per share)

 

 

 
(28,052
)
 

 
(28,052
)
Stock issuances under stock incentive plans
22,149

 

 
323

 

 

 
323

Stock-based compensation and related taxes

 

 
(1,468
)
 

 

 
(1,468
)
Balance at September 30, 2012
71,937,222

 
$
719

 
641,737

 
199,845

 
47,856

 
890,157

Balance at December 31, 2012
71,937,222

 
$
719

 
641,737

 
210,531

 
47,962

 
900,949

Comprehensive income (loss)

 

 

 
69,098

 
(37,979
)
 
31,119

Cash dividends declared ($0.44 per share)

 

 

 
(32,299
)
 

 
(32,299
)
Stock issuances under stock incentive plans
227,597

 
2

 
3,500

 

 

 
3,502

Stock issued in connection with acquisitions
2,143,132

 
22

 
45,012

 

 

 
45,034

Stock-based compensation and related taxes

 

 
(498
)
 

 

 
(498
)
Balance at September 30, 2013
74,307,951

 
$
743

 
689,751

 
247,330

 
9,983

 
947,807
























See accompanying notes to unaudited condensed consolidated financial statements.

6




Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
 
Nine Months ended
(Dollars in thousands)
September 30,
2013
 
September 30,
2012
Operating Activities
 
 
 
Net income
$
69,098

 
54,758

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
5,085

 
19,250

Net amortization of investment securities premiums and discounts
55,043

 
48,712

Federal Home Loan Bank stock dividends

 
(5
)
Mortgage loans held for sale originated or acquired
(760,860
)
 
(844,155
)
Proceeds from sales of mortgage loans held for sale
904,066

 
872,659

Gain on sale of loans
(23,582
)
 
(23,063
)
Loss on sale of investments
299

 

Stock-based compensation expense, net of tax benefits
800

 
255

Excess tax deficiencies from stock-based compensation
219

 
8

Depreciation of premises and equipment
7,408

 
7,384

Loss on sale of other real estate owned and writedown, net
1,276

 
11,671

Amortization of core deposit intangibles
1,684

 
1,619

Net increase in accrued interest receivable
(2,628
)
 
(4,398
)
Net decrease (increase) in other assets
3,459

 
(3,649
)
Net decrease in accrued interest payable
(1,290
)
 
(1,172
)
Net increase in other liabilities
12,526

 
13,082

Net cash provided by operating activities
272,603

 
152,956

Investing Activities
 
 
 
Proceeds from sales, maturities and prepayments of investment securities, available-for-sale
1,676,928

 
1,397,533

Purchases of investment securities, available-for-sale
(1,321,504
)
 
(1,873,893
)
Principal collected on loans
854,553

 
706,240

Loans originated or acquired
(1,121,384
)
 
(716,729
)
Net addition of premises and equipment and other real estate owned
(6,861
)
 
(7,896
)
Proceeds from sale of other real estate owned
18,131

 
28,483

Net sale (purchase) of non-marketable equity securities
583

 
(664
)
Net cash received from acquisitions
26,155

 

Net cash provided by (used in) investment activities
126,601

 
(466,926
)
Financing Activities
 
 
 
Net (decrease) increase in deposits
(301,759
)
 
381,884

Net increase in securities sold under agreements to repurchase
24,805

 
156,193

Net decrease in Federal Home Loan Bank advances
(35,098
)
 
(152,025
)
Net (decrease) increase in federal funds purchased and other borrowed funds
(1,458
)
 
264

Cash dividends paid
(21,153
)
 
(28,052
)
Excess tax deficiencies from stock-based compensation
(219
)
 
(8
)
Proceeds from stock options exercised
3,322

 
81

Net cash (used in) provided by financing activities
(331,560
)
 
358,337

Net increase in cash and cash equivalents
67,644

 
44,367

Cash and cash equivalents at beginning of period
187,040

 
128,032

Cash and cash equivalents at end of period
$
254,684

 
172,399


See accompanying notes to unaudited condensed consolidated financial statements.

7




Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows (Continued)
 
 
Nine Months ended
(Dollars in thousands)
September 30,
2013
 
September 30,
2012
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
23,120

 
28,721

Cash paid during the period for income taxes
17,283

 
18,081

Supplemental Disclosure of Non-Cash Investing Activities
 
 
 
Sale and refinancing of other real estate owned
$
3,549

 
1,578

Transfer of loans to other real estate owned
13,091

 
21,029

Acquisitions
 
 
 
Fair value of common stock shares issued
45,033

 

Cash consideration for outstanding shares
24,858

 

Fair value of assets acquired
630,569

 

Liabilities assumed
560,678

 



































See accompanying notes to unaudited condensed consolidated financial statements.

8




Glacier Bancorp, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Note 1. Nature of Operations and Summary of Significant Accounting Policies

General
Glacier Bancorp, Inc. (“Company”) is a Montana corporation headquartered in Kalispell, Montana. The Company provides a full range of banking services to individual and corporate customers in Montana, Idaho, Wyoming, Colorado, Utah and Washington through thirteen divisions of its wholly-owned bank subsidiary, Glacier Bank (“Bank”). The Company offers a wide range of banking products and services, including transaction and savings deposits, real estate, commercial, agriculture and consumer loans, mortgage origination services, and retail brokerage services. The Company serves individuals, small to medium-sized businesses, community organizations and public entities.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Company’s financial condition as of September 30, 2013, the results of operations and comprehensive income for the three and nine month periods ended September 30, 2013 and 2012, and changes in stockholders’ equity and cash flows for the nine month periods ended September 30, 2013 and 2012. The condensed consolidated statement of financial condition of the Company as of December 31, 2012 has been derived from the audited consolidated statements of the Company as of that date.

The accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results anticipated for the year ending December 31, 2013.

The Company is a defendant in legal proceedings arising in the normal course of business. In the opinion of management, the disposition of pending litigation will not have a material affect on the Company’s consolidated financial position, results of operations or liquidity.

Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan and lease losses (“ALLL” or “allowance”) and the valuations related to investments and real estate acquired in connection with foreclosures or in satisfaction of loans. For the determination of the ALLL and real estate valuation estimates, management obtains independent appraisals (new or updated) for significant items. Estimates relating to investment valuations are obtained from independent third parties.

Principles of Consolidation
The consolidated financial statements of the Company include the parent holding company and the Bank. The Bank consists of thirteen bank divisions, a treasury division and an information technology division. Each of the bank divisions operate under separate names, management teams and directors. The Company considers the Bank to be its sole operating segment as the Bank 1) engages in similar bank business activity from which it earns revenues and incurs expenses, 2) the operating results of the Bank are regularly reviewed by the Chief Executive Officer (i.e., the chief operating decision maker) who makes decisions about resources to be allocated to the Bank, and 3) financial information is available for the Bank. All significant inter-company transactions have been eliminated in consolidation.

On May 31, 2013, the Company completed its acquisition of Wheatland Bankshares, Inc. (“Wheatland”) and its wholly-owned subsidiary, First State Bank, a community bank based in Wheatland, Wyoming. On July 31, 2013, the Company completed its acquisition of North Cascades Bancshares, Inc. (“NCBI”) and its wholly-owned subsidiary, North Cascades National Bank, a community bank based in Chelan, Washington. Both transactions were accounted for using the acquisition method, and their results of operations have been included in the Company’s consolidated financial statements as of the acquisition dates.

The Company formed GBCI Other Real Estate (“GORE”) to isolate certain bank foreclosed properties for legal protection and administrative purposes and the remaining properties are currently held for sale. GORE is included in the Bank operating segment due to its insignificant activity.


9




The Company owns the following trust subsidiaries, each of which issued trust preferred securities as Tier 1 capital instruments: Glacier Capital Trust II, Glacier Capital Trust III, Glacier Capital Trust IV, Citizens (ID) Statutory Trust I, Bank of the San Juans Bancorporation Trust I, First Company Statutory Trust 2001 and First Company Statutory Trust 2003. The trust subsidiaries are not included in the Company’s consolidated financial statements.

Variable Interest Entities
The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of New Markets Tax Credits (“NMTC”). The Company also has equity investments in Low-Income Housing Tax Credit (“LIHTC”) partnerships. The CDEs and the LIHTC partnerships are variable interest entities (“VIE”).

The following table summarizes the carrying amounts of the VIE’s assets and liabilities included in the Company’s consolidated financial statements at September 30, 2013 and December 31, 2012:
 
 
September 30, 2013
 
December 31, 2012
(Dollars in thousands)
CDE (NMTC)
 
LIHTC
 
CDE (NMTC)
 
LIHTC
Assets
 
 
 
 
 
 
 
Loans receivable
$
35,956

 

 
35,480

 

Premises and equipment, net

 
13,641

 

 
16,066

Accrued interest receivable
113

 

 
117

 

Other assets
903

 
153

 
1,114

 
143

Total assets
$
36,972

 
13,794

 
36,711

 
16,209

Liabilities
 
 
 
 
 
 
 
Other borrowed funds
$
4,555

 
1,723

 
4,555

 
3,639

Accrued interest payable
4

 
5

 
4

 
6

Other liabilities
92

 
203

 
182

 
136

Total liabilities
$
4,651

 
1,931

 
4,741

 
3,781


Amounts presented in the table above are adjusted for intercompany eliminations. All assets presented can be used only to settle obligations of the consolidated VIEs and all liabilities presented consist of liabilities for which creditors and other beneficial interest holders therein have no recourse to the general credit of the Company.

Loans Receivable
Loans that are intended to be held-to-maturity are reported at the unpaid principal balance less net charge-offs and adjusted for deferred fees and costs on originated loans and unamortized premiums or discounts on acquired loans. Fees and costs on originated loans and premiums or discounts on acquired loans are deferred and subsequently amortized or accreted as a yield adjustment over the expected life of the loan utilizing the interest method. The objective of the interest method is to calculate periodic interest income at a constant effective yield. When a loan is paid off prior to maturity, the remaining fees and costs on originated loans and premiums or discounts on acquired loans are immediately recognized into interest income.

The Company’s loan segments, which are based on the purpose of the loan, include residential real estate, commercial, and consumer loans. The Company’s loan classes, a further disaggregation of segments, include residential real estate loans (residential real estate segment), commercial real estate and other commercial loans (commercial segment), and home equity and other consumer loans (consumer segment).

Loans that are thirty days or more past due based on payments received and applied to the loan are considered delinquent. Loans are designated non-accrual and the accrual of interest is discontinued when the collection of the contractual principal or interest is unlikely. A loan is typically placed on non-accrual when principal or interest is due and has remained unpaid for ninety days or more. When a loan is placed on non-accrual status, interest previously accrued but not collected is reversed against current period interest income. Subsequent payments are applied to the outstanding principal balance if doubt remains as to the ultimate collectability of the loan. Interest accruals are not resumed on partially charged-off impaired loans. For other loans on nonaccrual, interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.


10




The Company considers impaired loans to be the primary credit quality indicator for monitoring the credit quality of the loan portfolio. Loans are designated impaired when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and therefore, the Company has serious doubts as to the ability of such borrowers to fulfill the contractual obligation. Impaired loans include non-performing loans (i.e., non-accrual loans and accruing loans ninety days or more past due) and accruing loans under ninety days past due where it is probable payments will not be received according to the loan agreement (e.g., troubled debt restructuring). Interest income on accruing impaired loans is recognized using the interest method. The Company measures impairment on a loan-by-loan basis in the same manner for each class within the loan portfolio. An insignificant delay or shortfall in the amounts of payments would not cause a loan or lease to be considered impaired. The Company determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all of the facts and circumstances surrounding the loan and the borrower, including the length and reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest due.

A restructured loan is considered a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. A TDR loan is considered an impaired loan and a specific valuation allowance is established when the fair value of the collateral-dependent loan or present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate based on the original contractual rate) is lower than the carrying value of the impaired loan. The Company made the following types of loan modifications, some of which were considered a TDR:
Reduction of the stated interest rate for the remaining term of the debt;
Extension of the maturity date(s) at a stated rate of interest lower than the current market rate for newly originated debt having similar risk characteristics; and
Reduction of the face amount of the debt as stated in the debt agreements.

The Company recognizes that while borrowers may experience deterioration in their financial condition, many continue to be creditworthy customers who have the willingness and capacity for debt repayment. In determining whether non-restructured or unimpaired loans issued to a single or related party group of borrowers should continue to accrue interest when the borrower has other loans that are impaired or are TDRs, the Company on a quarterly or more frequent basis performs an updated and comprehensive assessment of the willingness and capacity of the borrowers to timely and ultimately repay their total debt obligations, including contingent obligations. Such analysis takes into account current financial information about the borrowers and financially responsible guarantors, if any, including for example:
analysis of global, i.e., aggregate debt service for total debt obligations;
assessment of the value and security protection of collateral pledged using current market conditions and alternative market assumptions across a variety of potential future situations; and
loan structures and related covenants.

For additional information relating to loans, see Note 3.

Allowance for Loan and Lease Losses
Based upon management’s analysis of the Company’s loan portfolio, the balance of the ALLL is an estimate of probable credit losses known and inherent within the Bank’s loan portfolio as of the date of the consolidated financial statements. The ALLL is analyzed at the loan class level and is maintained within a range of estimated losses. Determining the adequacy of the ALLL involves a high degree of judgment and is inevitably imprecise as the risk of loss is difficult to quantify. The determination of the ALLL and the related provision for loan losses is a critical accounting estimate that involves management’s judgments about all known relevant internal and external environmental factors that affect loan losses. The balance of the ALLL is highly dependent upon management’s evaluations of borrowers’ current and prospective performance, appraisals and other variables affecting the quality of the loan portfolio. Individually significant loans and major lending areas are reviewed periodically to determine potential problems at an early date. Changes in management’s estimates and assumptions are reasonably possible and may have a material impact upon the Company’s consolidated financial statements, results of operations or capital.


11




The ALLL consists of a specific valuation allowance component and a general valuation allowance component. The specific component relates to loans that are determined to be impaired and individually evaluated for impairment. The Company measures impairment on a loan-by-loan basis based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except when it is determined that repayment of the loan is expected to be provided solely by the underlying collateral. For impairment based on expected future cash flows, the Company considers all information available as of a measurement date, including past events, current conditions, potential prepayments, and estimated cost to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the loan. For alternative ranges of cash flows, the likelihood of the possible outcomes is considered in determining the best estimate of expected future cash flows. The effective interest rate for a loan restructured in a TDR is based on the original contractual rate. For collateral-dependent loans and real estate loans for which foreclosure or a deed-in-lieu of foreclosure is probable, impairment is measured by the fair value of the collateral, less estimated cost to sell. The fair value of the collateral is determined primarily based upon appraisal or evaluation of the underlying real property value.

The general valuation allowance component relates to probable credit losses inherent in the balance of the loan portfolio based on historical loss experience, adjusted for changes in trends and conditions of qualitative or environmental factors. The historical loss experience is based on the previous twelve quarters loss experience by loan class adjusted for risk characteristics in the existing loan portfolio. The same trends and conditions are evaluated for each class within the loan portfolio; however, the risk characteristics are weighted separately at the individual class level based on the Company’s judgment and experience.

The changes in trends and conditions of certain items include the following:
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;
Changes in the nature and volume of the portfolio and in the terms of loans;
Changes in experience, ability, and depth of lending management and other relevant staff;
Changes in the volume and severity of past due and nonaccrual loans;
Changes in the quality of the Company’s loan review system;
Changes in the value of underlying collateral for collateral-dependent loans;
The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s existing portfolio.

The ALLL is increased by provisions for loan losses which are charged to expense. The portions of loan balances determined by management to be uncollectible are charged-off as a reduction of the ALLL and recoveries of amounts previously charged-off are credited as an increase to the ALLL. The Company’s charge-off policy is consistent with bank regulatory standards. Consumer loans generally are charged off when the loan becomes over 120 days delinquent. Real estate acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until such time as it is sold.

At acquisition date, the assets and liabilities of acquired banks are recorded at their estimated fair values which results in no ALLL carried over from acquired banks. Subsequent to acquisition, an allowance will be recorded on the acquired loan portfolios for further credit deterioration, if any.

Impact of Recent Authoritative Accounting Guidance
The Accounting Standards Codification (“ASC”) is the Financial Accounting Standards Board’s (“FASB”) officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative.


12




In June 2011, FASB amended FASB ASC Topic 220, Comprehensive Income. The amendment provides an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. Accounting Standards Update (“ASU”) No. 2011-12, Comprehensive Income (Topic 220) deferred the specific requirement of the amendment to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. The amendments were effective retrospectively during interim and annual periods beginning after December 15, 2011. ASU No. 2013-2, Comprehensive Income (Topic 220) reversed the deferment of ASU 2011-12 and will be effective prospectively for reporting periods beginning after December 15, 2012 and early adoption is permitted. The Company early adopted ASU No. 2013-2 as of December 31, 2012. The Company has evaluated the impact of the adoption of these amendments and determined there was not a material effect on the Company’s financial position or results of operations.

Note 2. Investment Securities, Available-for-Sale

A comparison of the amortized cost and estimated fair value of the Company’s investment securities designated as available-for-sale is presented below.
 
 
September 30, 2013
 
Weighted
 
Amortized
 
Gross Unrealized
 
Fair
(Dollars in thousands)
Yield
 
Cost
 
Gains
 
Losses
 
Value
U.S. government sponsored enterprises
 
 
 
 
 
 
 
 
 
Maturing after one year through five years
2.29
%
 
$
11,278

 
240

 

 
11,518

Maturing after five years through ten years
1.82
%
 
38

 

 

 
38

 
2.29
%
 
11,316

 
240

 

 
11,556

State and local governments
 
 
 
 
 
 
 
 
 
Maturing within one year
2.18
%
 
6,059

 
52

 

 
6,111

Maturing after one year through five years
2.10
%
 
162,569

 
3,096

 
(431
)
 
165,234

Maturing after five years through ten years
3.17
%
 
57,892

 
1,122

 
(832
)
 
58,182

Maturing after ten years
4.46
%
 
1,104,890

 
28,571

 
(21,604
)
 
1,111,857

 
4.10
%
 
1,331,410

 
32,841

 
(22,867
)
 
1,341,384

Corporate bonds
 
 
 
 
 
 
 
 
 
Maturing within one year
2.10
%
 
73,064

 
736

 

 
73,800

Maturing after one year through five years
2.10
%
 
358,034

 
2,890

 
(2,852
)
 
358,072

Maturing after five years through ten years
2.22
%
 
11,058

 

 
(85
)
 
10,973

 
2.10
%
 
442,156

 
3,626

 
(2,937
)
 
442,845

Residential mortgage-backed securities
2.44
%
 
1,515,728

 
15,357

 
(7,917
)
 
1,523,168

Total investment securities
3.06
%
 
$
3,300,610

 
52,064

 
(33,721
)
 
3,318,953


13




 
December 31, 2012
 
Weighted
 
Amortized
 
Gross Unrealized
 
Fair
(Dollars in thousands)
Yield
 
Cost
 
Gains
 
Losses
 
Value
U.S. government and federal agency
 
 
 
 
 
 
 
 
 
Maturing within one year
1.62
%
 
$
201

 
1

 

 
202

U.S. government sponsored enterprises
 
 
 
 
 
 
 
 
 
Maturing after one year through five years
2.30
%
 
17,064

 
371

 

 
17,435

Maturing after five years through ten years
2.03
%
 
44

 
1

 

 
45

 
2.29
%
 
17,108

 
372

 

 
17,480

State and local governments
 
 
 
 
 
 
 
 
 
Maturing within one year
2.01
%
 
4,288

 
28

 
(2
)
 
4,314

Maturing after one year through five years
2.11
%
 
149,497

 
4,142

 
(142
)
 
153,497

Maturing after five years through ten years
2.95
%
 
38,346

 
1,102

 
(99
)
 
39,349

Maturing after ten years
4.70
%
 
935,897

 
82,823

 
(1,362
)
 
1,017,358

 
4.29
%
 
1,128,028

 
88,095

 
(1,605
)
 
1,214,518

Corporate bonds
 
 
 
 
 
 
 
 
 
Maturing within one year
1.73
%
 
18,412

 
51

 

 
18,463

Maturing after one year through five years
2.22
%
 
250,027

 
4,018

 
(238
)
 
253,807

Maturing after five years through ten years
2.23
%
 
16,144

 
381

 

 
16,525

 
2.19
%
 
284,583

 
4,450

 
(238
)
 
288,795

Collateralized debt obligations
 
 
 
 
 
 
 
 
 
Maturing after ten years
8.03
%
 
1,708

 

 

 
1,708

Residential mortgage-backed securities
1.95
%
 
2,156,049

 
8,860

 
(4,607
)
 
2,160,302

Total investment securities
2.71
%
 
$
3,587,677

 
101,778

 
(6,450
)
 
3,683,005


Included in the residential mortgage-backed securities are $3,214,000 and $46,733,000 as of September 30, 2013 and December 31, 2012, respectively, of non-guaranteed private label whole loan mortgage-backed securities of which none of the underlying collateral is considered “subprime.”

Maturities of securities do not reflect repricing opportunities present in adjustable rate securities, nor do they reflect expected shorter maturities based upon early prepayment of principal. Weighted average yields are based on the interest method taking into account premium amortization, discount accretion and mortgage-backed securities’ prepayment provisions. Weighted average yields on tax-exempt investment securities exclude the federal income tax benefit.

The cost of each investment sold is determined by specific identification. Gain or loss on sale of investments consists of the following: 
 
Three Months ended
 
Nine Months ended
(Dollars in thousands)
September 30,
2013
 
September 30,
2012
 
September 30,
2013
 
September 30,
2012
Gross proceeds
$
102,483

 

 
181,971

 

Less amortized cost
(102,886
)
 

 
(182,270
)
 

Net loss on sale of investments
$
(403
)
 

 
(299
)
 

Gross gain on sale of investments
$
3,467

 

 
3,723

 

Gross loss on sale of investments
(3,870
)
 

 
(4,022
)
 

Net loss on sale of investments
$
(403
)
 

 
(299
)
 


14





Investments with an unrealized loss position are summarized as follows:
 
 
September 30, 2013
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
State and local governments
$
405,834

 
(21,121
)
 
22,373

 
(1,746
)
 
428,207

 
(22,867
)
Corporate bonds
189,130

 
(2,937
)
 

 

 
189,130

 
(2,937
)
Residential mortgage-backed securities
446,642

 
(7,917
)
 

 

 
446,642

 
(7,917
)
Total temporarily impaired securities
$
1,041,606

 
(31,975
)
 
22,373

 
(1,746
)
 
1,063,979

 
(33,721
)
 
 
December 31, 2012
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
State and local governments
$
102,896

 
(1,531
)
 
4,533

 
(74
)
 
107,429

 
(1,605
)
Corporate bonds
41,856

 
(238
)
 

 

 
41,856

 
(238
)
Residential mortgage-backed securities
955,235

 
(4,041
)
 
62,905

 
(566
)
 
1,018,140

 
(4,607
)
Total temporarily impaired securities
$
1,099,987

 
(5,810
)
 
67,438

 
(640
)
 
1,167,425

 
(6,450
)

With respect to the Company’s review of its securities in an unrealized loss position at September 30, 2013, management determined that it did not intend to sell and there was no expected requirement to sell any of its temporarily impaired securities. Based on an analysis of its impaired securities as of September 30, 2013 and December 31, 2012, the Company determined that none of such securities had other-than-temporary impairment.


15




Note 3. Loans Receivable, Net

The following schedules summarize the activity in the ALLL on a portfolio class basis:
  
 
Three Months ended September 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
130,883

 
14,797

 
73,885

 
24,116

 
9,626

 
8,459

Provision for loan losses
1,907

 
950

 
381

 
385

 
125

 
66

Charge-offs
(3,077
)
 
(42
)
 
(1,235
)
 
(1,065
)
 
(333
)
 
(402
)
Recoveries
1,052

 
45

 
367

 
385

 
73

 
182

Balance at end of period
$
130,765

 
15,750

 
73,398

 
23,821

 
9,491

 
8,305


 
Three Months ended September 30, 2012
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
137,459

 
18,139

 
79,098

 
20,570

 
10,904

 
8,748

Provision for loan losses
2,700

 
209

 
(1,210
)
 
2,859

 
(555
)
 
1,397

Charge-offs
(5,052
)
 
(1,172
)
 
(586
)
 
(1,441
)
 
(1,044
)
 
(809
)
Recoveries
1,553

 
73

 
453

 
241

 
679

 
107

Balance at end of period
$
136,660

 
17,249

 
77,755

 
22,229

 
9,984

 
9,443


 
Nine Months ended September 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
130,854

 
15,482

 
74,398

 
21,567

 
10,659

 
8,748

Provision for loan losses
5,085

 
464

 
(51
)
 
3,964

 
566

 
142

Charge-offs
(8,962
)
 
(391
)
 
(2,538
)
 
(2,817
)
 
(1,962
)
 
(1,254
)
Recoveries
3,788

 
195

 
1,589

 
1,107

 
228

 
669

Balance at end of period
$
130,765

 
15,750

 
73,398

 
23,821

 
9,491

 
8,305

 
 
Nine Months ended September 30, 2012
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
137,516

 
17,227

 
76,920

 
20,833

 
13,616

 
8,920

Provision for loan losses
19,250

 
2,294

 
11,800

 
4,163

 
(1,025
)
 
2,018

Charge-offs
(24,789
)
 
(2,492
)
 
(13,120
)
 
(3,797
)
 
(3,402
)
 
(1,978
)
Recoveries
4,683

 
220

 
2,155

 
1,030

 
795

 
483

Balance at end of period
$
136,660

 
17,249

 
77,755

 
22,229

 
9,984

 
9,443



16




The following schedules disclose the ALLL and loans receivable on a portfolio class basis:
 
 
September 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
12,728

 
1,088

 
6,662

 
3,810

 
109

 
1,059

Collectively evaluated for impairment
118,037

 
14,662

 
66,736

 
20,011

 
9,382

 
7,246

Total allowance for loan and lease losses
$
130,765

 
15,750

 
73,398

 
23,821

 
9,491

 
8,305

Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
206,918

 
27,104

 
125,566

 
38,390

 
10,091

 
5,767

Collectively evaluated for impairment
3,794,181

 
556,713

 
1,868,492

 
795,839

 
363,421

 
209,716

Total loans receivable
$
4,001,099

 
583,817

 
1,994,058

 
834,229

 
373,512

 
215,483

 
 
December 31, 2012
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
15,534

 
1,680

 
7,716

 
3,859

 
870

 
1,409

Collectively evaluated for impairment
115,320

 
13,802

 
66,682

 
17,708

 
9,789

 
7,339

Total allowance for loan and lease losses
$
130,854

 
15,482

 
74,398

 
21,567

 
10,659

 
8,748

Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
201,735

 
25,862

 
125,282

 
33,593

 
11,074

 
5,924

Collectively evaluated for impairment
3,195,690

 
490,605

 
1,530,226

 
589,804

 
392,851

 
192,204

Total loans receivable
$
3,397,425

 
516,467

 
1,655,508

 
623,397

 
403,925

 
198,128


Substantially all of the Company’s loan receivables are with customers in the Company’s geographic market areas. Although the Company has a diversified loan portfolio, a substantial portion of its customers’ ability to honor their obligations is dependent upon the economic performance in the Company’s market areas. Net deferred fees, costs, premiums, and discounts of $10,870,000 and $1,379,000 were included in the loans receivable balance at September 30, 2013 and December 31, 2012, respectively.


17




The following schedules disclose the impaired loans by portfolio class basis:
 
 
At or for the Three or Nine Months ended September 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans with a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
62,614

 
7,887

 
28,194

 
22,368

 
673

 
3,492

Unpaid principal balance
64,969

 
8,032

 
29,463

 
22,986

 
717

 
3,771

Specific valuation allowance
12,728

 
1,088

 
6,662

 
3,810

 
109

 
1,059

Average balance - three months
59,817

 
7,431

 
26,525

 
21,780

 
495

 
3,586

Average balance - nine months
59,402

 
7,237

 
26,653

 
21,321

 
737

 
3,454

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
144,304

 
19,217

 
97,372

 
16,022

 
9,418

 
2,275

Unpaid principal balance
174,258

 
20,681

 
120,914

 
19,233

 
11,026

 
2,404

Average balance - three months
139,928

 
18,481

 
95,175

 
15,768

 
8,766

 
1,738

Average balance - nine months
139,368

 
18,420

 
95,857

 
14,011

 
9,017

 
2,063

Totals
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
206,918

 
27,104

 
125,566

 
38,390

 
10,091

 
5,767

Unpaid principal balance
239,227

 
28,713

 
150,377

 
42,219

 
11,743

 
6,175

Specific valuation allowance
12,728

 
1,088

 
6,662

 
3,810

 
109

 
1,059

Average balance - three months
199,745

 
25,912

 
121,700

 
37,548

 
9,261

 
5,324

Average balance - nine months
198,770

 
25,657

 
122,510

 
35,332

 
9,754

 
5,517

 
 
At or for the Year ended December 31, 2012
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans with a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
62,759

 
7,334

 
29,595

 
21,205

 
1,354

 
3,271

Unpaid principal balance
70,261

 
7,459

 
36,887

 
21,278

 
1,362

 
3,275

Specific valuation allowance
15,534

 
1,680

 
7,716

 
3,859

 
870

 
1,409

Average balance
76,656

 
12,797

 
36,164

 
22,665

 
1,390

 
3,640

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
138,976

 
18,528

 
95,687

 
12,388

 
9,720

 
2,653

Unpaid principal balance
149,412

 
19,613

 
102,798

 
14,318

 
9,965

 
2,718

Average balance
162,505

 
16,034

 
111,554

 
19,733

 
11,993

 
3,191

Totals
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
201,735

 
25,862

 
125,282

 
33,593

 
11,074

 
5,924

Unpaid principal balance
219,673

 
27,072

 
139,685

 
35,596

 
11,327

 
5,993

Specific valuation allowance
15,534

 
1,680

 
7,716

 
3,859

 
870

 
1,409

Average balance
239,161

 
28,831

 
147,718

 
42,398

 
13,383

 
6,831


Interest income recognized on impaired loans for the periods ended September 30, 2013 and December 31, 2012 was not significant.


18




The following is a loans receivable aging analysis on a portfolio class basis:
 
 
September 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Accruing loans 30-59 days past due
$
21,294

 
516

 
11,829

 
5,854

 
1,828

 
1,267

Accruing loans 60-89 days past due
5,107

 
824

 
2,419

 
683

 
797

 
384

Accruing loans 90 days or more past due
174

 

 
109

 
35

 
28

 
2

Non-accrual loans
88,293

 
12,604

 
53,536

 
11,591

 
8,953

 
1,609

Total past due and non-accrual loans
114,868

 
13,944

 
67,893

 
18,163

 
11,606

 
3,262

Current loans receivable
3,886,231

 
569,873

 
1,926,165

 
816,066

 
361,906

 
212,221

Total loans receivable
$
4,001,099

 
583,817

 
1,994,058

 
834,229

 
373,512

 
215,483

 
 
December 31, 2012
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Accruing loans 30-59 days past due
$
17,454

 
3,897

 
7,424

 
2,020

 
2,872

 
1,241

Accruing loans 60-89 days past due
9,643

 
1,870

 
3,745

 
645

 
2,980

 
403

Accruing loans 90 days or more past due
1,479

 
451

 
594

 
197

 
188

 
49

Non-accrual loans
96,933

 
14,237

 
55,687

 
13,200

 
11,241

 
2,568

Total past due and non-accrual loans
125,509

 
20,455

 
67,450

 
16,062

 
17,281

 
4,261

Current loans receivable
3,271,916

 
496,012

 
1,588,058

 
607,335

 
386,644

 
193,867

Total loans receivable
$
3,397,425

 
516,467

 
1,655,508

 
623,397

 
403,925

 
198,128


The following is a summary of the TDRs that occurred during the periods presented and the TDRs that occurred within the previous twelve months that subsequently defaulted during the periods presented on a portfolio class basis:

 
Three Months ended September 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial