GBCI-03.31.2014-10Q



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 March 31, 2014
 
¨ 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
¨
(Do not check if a smaller reporting company)
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 April 25, 2014 was 74,467,662. 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)
March 31,
2014
 
December 31,
2013
Assets
 
 
 
Cash on hand and in banks
$
116,267

 
109,995

Federal funds sold
14,055

 
10,527

Interest bearing cash deposits
31,369

 
35,135

Cash and cash equivalents
161,691

 
155,657

Investment securities, available-for-sale
2,669,180

 
3,222,829

Investment securities, held-to-maturity (fair values of $498,902 and $0)
481,476

 

Total investment securities
3,150,656

 
3,222,829

Loans held for sale
36,133

 
46,738

Loans receivable
4,088,629

 
4,062,838

Allowance for loan and lease losses
(130,729
)
 
(130,351
)
Loans receivable, net
3,957,900

 
3,932,487

Premises and equipment, net
166,757

 
167,671

Other real estate owned
27,332

 
26,860

Accrued interest receivable
41,274

 
41,898

Deferred tax asset
39,997

 
43,549

Core deposit intangible, net
8,802

 
9,512

Goodwill
129,706

 
129,706

Non-marketable equity securities
52,192

 
52,192

Other assets
58,283

 
55,251

Total assets
$
7,830,723

 
7,884,350

Liabilities
 
 
 
Non-interest bearing deposits
$
1,396,272

 
1,374,419

Interest bearing deposits
4,228,193

 
4,205,548

Securities sold under agreements to repurchase
327,322

 
313,394

Federal Home Loan Bank advances
686,744

 
840,182

Other borrowed funds
8,069

 
8,387

Subordinated debentures
125,597

 
125,562

Accrued interest payable
3,173

 
3,505

Other liabilities
70,393

 
50,103

Total liabilities
6,845,763

 
6,921,100

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
745

 
744

Paid-in capital
692,196

 
690,918

Retained earnings - substantially restricted
276,731

 
261,943

Accumulated other comprehensive income
15,288

 
9,645

Total stockholders’ equity
984,960

 
963,250

Total liabilities and stockholders’ equity
$
7,830,723

 
7,884,350

Number of common stock shares issued and outstanding
74,465,666

 
74,373,296

See accompanying notes to unaudited condensed consolidated financial statements.

3




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
Three Months ended
(Dollars in thousands, except per share data)
March 31,
2014
 
March 31,
2013
Interest Income
 
 
 
Residential real estate loans
$
7,087

 
7,260

Commercial loans
35,042

 
28,632

Consumer and other loans
7,643

 
7,864

Investment securities
24,315

 
14,199

Total interest income
74,087

 
57,955

Interest Expense
 
 
 
Deposits
3,089

 
3,712

Securities sold under agreements to repurchase
210

 
227

Federal Home Loan Bank advances
2,514

 
2,651

Federal funds purchased and other borrowed funds
53

 
52

Subordinated debentures
774

 
816

Total interest expense
6,640

 
7,458

Net Interest Income
67,447

 
50,497

Provision for loan losses
1,122

 
2,100

Net interest income after provision for loan losses
66,325

 
48,397

Non-Interest Income
 
 
 
Service charges and other fees
12,219

 
10,586

Miscellaneous loan fees and charges
1,029

 
1,089

Gain on sale of loans
3,595

 
9,089

Loss on sale of investments
(51
)
 
(137
)
Other income
2,596

 
2,323

Total non-interest income
19,388

 
22,950

Non-Interest Expense
 
 
 
Compensation and employee benefits
28,634

 
24,577

Occupancy and equipment
6,613

 
5,825

Advertising and promotions
1,777

 
1,548

Outsourced data processing
1,288

 
825

Other real estate owned
507

 
884

Regulatory assessments and insurance
1,592

 
1,641

Core deposit intangibles amortization
710

 
486

Other expense
8,949

 
7,648

Total non-interest expense
50,070

 
43,434

Income Before Income Taxes
35,643

 
27,913

Federal and state income tax expense
8,913

 
7,145

Net Income
$
26,730

 
20,768

Basic earnings per share
$
0.36

 
0.29

Diluted earnings per share
$
0.36

 
0.29

Dividends declared per share
$
0.16

 
0.14

Average outstanding shares - basic
74,437,393

 
71,965,665

Average outstanding shares - diluted
74,480,818

 
72,013,177


See accompanying notes to unaudited condensed consolidated financial statements.

4




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months ended
(Dollars in thousands)
March 31,
2014
 
March 31,
2013
Net Income
$
26,730

 
20,768

Other Comprehensive Income, Net of Tax
 
 
 
Unrealized gains on available-for-sale securities
14,603

 
571

Reclassification adjustment for losses included in net income
73

 
137

Net unrealized gains on available-for-sale securities
14,676

 
708

Tax effect
(5,680
)
 
(275
)
Net of tax amount
8,996

 
433

Unrealized (losses) gains on derivatives used for cash flow hedges
(5,479
)
 
2,752

Tax effect
2,126

 
(1,072
)
Net of tax amount
(3,353
)
 
1,680

Total other comprehensive income, net of tax
5,643

 
2,113

Total Comprehensive Income
$
32,373

 
22,881































See accompanying notes to unaudited condensed consolidated financial statements.

5




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Three Months ended March 31, 2014 and 2013
 
(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, 2012
71,937,222

 
$
719

 
641,737

 
210,531

 
47,962

 
900,949

Comprehensive income

 

 

 
20,768

 
2,113

 
22,881

Cash dividends declared ($0.14 per share)

 

 

 
(10,099
)
 

 
(10,099
)
Stock issuances under stock incentive plans
81,395

 
1

 
1,265

 

 

 
1,266

Stock-based compensation and related taxes

 

 
(717
)
 

 

 
(717
)
Balance at March 31, 2013
72,018,617

 
$
720

 
642,285

 
221,200

 
50,075

 
914,280

Balance at December 31, 2013
74,373,296

 
$
744

 
690,918

 
261,943

 
9,645

 
963,250

Comprehensive income

 

 

 
26,730

 
5,643

 
32,373

Cash dividends declared ($0.16 per share)

 

 

 
(11,942
)
 

 
(11,942
)
Stock issuances under stock incentive plans
92,370

 
1

 
1,036

 

 

 
1,037

Stock-based compensation and related taxes

 

 
242

 

 

 
242

Balance at March 31, 2014
74,465,666

 
$
745

 
692,196

 
276,731

 
15,288

 
984,960

























See accompanying notes to unaudited condensed consolidated financial statements.

6




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Three Months ended
(Dollars in thousands)
March 31,
2014
 
March 31,
2013
Operating Activities
 
 
 
Net income
$
26,730

 
20,768

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
1,122

 
2,100

Net amortization of investment securities premiums and discounts
7,619

 
21,411

Loans held for sale originated or acquired
(116,771
)
 
(263,004
)
Proceeds from sales of loans held for sale
135,309

 
348,970

Gain on sale of loans
(3,595
)
 
(9,089
)
Loss on sale of investments
51

 
137

Stock-based compensation expense, net of tax benefits
453

 
347

Excess tax deficiencies from stock-based compensation
14

 
97

Depreciation of premises and equipment
2,685

 
2,338

Gain on sale of other real estate owned and writedowns, net
(524
)
 
(202
)
Amortization of core deposit intangibles
710

 
486

Net decrease (increase) in accrued interest receivable
624

 
(1,254
)
Net (increase) decrease in other assets
(4,927
)
 
8,100

Net decrease in accrued interest payable
(332
)
 
(580
)
Net increase (decrease) in other liabilities
4,751

 
(1,565
)
Net cash provided by operating activities
53,919

 
129,060

Investing Activities
 
 
 
Sales of available-for-sale securities
788

 
3,839

Maturities, prepayments and calls of available-for-sale securities
138,272

 
573,462

Purchases of available-for-sale securities
(58,192
)
 
(573,174
)
Maturities, prepayments and calls of held-to-maturity securities
3,930

 

Purchases of held-to-maturity securities
(5,618
)
 

Principal collected on loans
323,418

 
255,672

Loans originated or acquired
(358,240
)
 
(289,693
)
Net addition of premises and equipment and other real estate owned
(1,771
)
 
(2,654
)
Proceeds from sale of other real estate owned
4,000

 
7,493

Net cash provided by (used in) investment activities
46,587

 
(25,055
)
Financing Activities
 
 
 
Net increase in deposits
44,498

 
8,754

Net increase in securities sold under agreements to repurchase
13,928

 
22,997

Net decrease in Federal Home Loan Bank advances
(153,438
)
 
(195,009
)
Net (decrease) increase in other borrowed funds
(283
)
 
280

Excess tax deficiencies from stock-based compensation
(14
)
 
(97
)
Proceeds from stock options exercised
837

 
1,087

Net cash used in financing activities
(94,472
)
 
(161,988
)
Net increase (decrease) in cash and cash equivalents
6,034

 
(57,983
)
Cash and cash equivalents at beginning of period
155,657

 
187,040

Cash and cash equivalents at end of period
$
161,691

 
129,057



See accompanying notes to unaudited condensed consolidated financial statements.

7




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
 
Three Months ended
(Dollars in thousands)
March 31,
2014
 
March 31,
2013
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
6,972

 
8,038

Cash paid during the period for income taxes
818

 
100

Supplemental Disclosure of Non-Cash Investing Activities
 
 
 
Transfer of investment securities from available-for-sale to held-to-maturity
$
484,583

 

Sale and refinancing of other real estate owned
157

 
611

Transfer of loans to other real estate owned
4,105

 
6,683








































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 and mortgage origination 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 March 31, 2014, the results of operations and comprehensive income for the three month periods ended March 31, 2014 and 2013, and changes in stockholders’ equity and cash flows for the three month periods ended March 31, 2014 and 2013. The condensed consolidated statement of financial condition of the Company as of December 31, 2013 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, 2013. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results anticipated for the year ending December 31, 2014.

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: 1) the determination of the allowance for loan and lease losses (“ALLL” or “allowance”), 2) the valuations related to investments and real estate acquired in connection with foreclosures or in satisfaction of loans, and 3) the evaluation of goodwill impairment. 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. Estimates relating to the evaluation of goodwill for impairment are determined based on internal calculations using significant independent party inputs.

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. The treasury division includes the Bank’s investment security portfolio and wholesale borrowings and the information technology division includes the Bank’s internal data processing and information technology expenses. 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.

In May 2013, the Company acquired Wheatland Bankshares, Inc. and its wholly-owned subsidiary, First State Bank, a community bank based in Wheatland, Wyoming. In July 2013, the Company completed its acquisition of North Cascades Bancshares, Inc. 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 March 31, 2014 and December 31, 2013:
 
 
March 31, 2014
 
December 31, 2013
(Dollars in thousands)
CDE (NMTC)
 
LIHTC
 
CDE (NMTC)
 
LIHTC
Assets
 
 
 
 
 
 
 
Loans receivable
$
36,077

 

 
36,039

 

Premises and equipment, net

 
13,432

 

 
13,536

Accrued interest receivable
116

 

 
117

 

Other assets
780

 
153

 
843

 
153

Total assets
$
36,973

 
13,585

 
36,999

 
13,689

Liabilities
 
 
 
 
 
 
 
Other borrowed funds
$
4,555

 
1,690

 
4,555

 
1,723

Accrued interest payable
4

 
5

 
4

 
5

Other liabilities
152

 
87

 
151

 
189

Total liabilities
$
4,711

 
1,782

 
4,710

 
1,917


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 on non-accrual loans 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 has 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




Risk characteristics considered in the ALLL analysis applicable to each loan class within the Company's loan portfolio are as follows:

Residential Real Estate.  Residential real estate loans are secured by owner-occupied 1-4 family residences.  Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers.  Credit risk in these loans is impacted by economic conditions within the Company’s market areas that affect the value of the property securing the loans and affect the borrowers' personal incomes.  Mitigating risk factors for this loan class include a large number of borrowers, geographic dispersion of market areas and the loans are originated for relatively smaller amounts.

Commercial Real Estate.  Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operation of the property securing the loan and / or the business conducted on the property securing the loan.  Credit risk in these loans is impacted by the creditworthiness of a borrower, valuation of the property securing the loan and conditions within the local economies in the Company’s diverse, geographic market areas.

Commercial.  Commercial loans consist of loans to commercial customers for use in financing working capital needs, equipment purchases and business expansions.  The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation.  Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations across the Company’s diverse, geographic market areas.

Home Equity.  Home equity loans consist of junior lien mortgages and first and junior lien lines of credit (revolving open-end and amortizing closed-end) secured by owner-occupied 1-4 family residences.  Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers.  Credit risk in these loans is impacted by economic conditions within the Company’s market areas that affect the value of the residential property securing the loans and affect the borrowers' personal incomes.  Mitigating risk factors for this loan class are a large number of borrowers, geographic dispersion of market areas and the loans are originated for terms that range from 10 years to 15 years.

Other Consumer.  The other consumer loan portfolio consists of various short-term loans such as automobile loans and loans for other personal purposes.  Repayment of these loans is primarily dependent on the personal income of the borrowers.  Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Company’s diverse, geographic market area) and the creditworthiness of a borrower.

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.


12




The changes in trends and conditions evaluated for each class within the loan portfolio 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 global, 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.

In January 2014, FASB amended FASB ASC Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors. The amendment clarifies that an in substance repossession foreclosure occurs when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either 1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or 2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendment requires interim and annual disclosure of both 1) the amount of foreclosed residential real estate property held by the creditor and 2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendment is effective for public business entities for interim and annual periods beginning after December 15, 2014. An entity can elect to adopt the amendments using either a modified retrospective transition method or a prospective transition method as defined in the amendment. The Company is currently evaluating the impact of the adoption of this amendment, but does not expect it to have a material effect on the Company’s financial position or results of operations.

In January 2014, FASB amended FASB ASC Topic 323, Investments - Equity Method and Joint Ventures. The amendments permit entities to make an accounting policy election for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. The amendments should be applied retrospectively to all periods presented and are effective for public business entities for annual periods and interim periods within those annual periods, beginning after December 15, 2014. The Company is currently evaluating the impact of the adoption of the amendments, but does not expect them to have a material effect on the Company’s financial position or results of operations.


13




Note 2. Investment Securities

Effective January 1, 2014, the Company reclassified state and local government securities with a fair value of approximately $484,583,000, inclusive of a net unrealized gain of $4,624,000, from available-for-sale classification to held-to-maturity classification. The Company considers the held-to-maturity classification of these investment securities to be appropriate as it has the positive intent and ability to hold these securities to maturity.

The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of the Company’s investment securities:
 
March 31, 2014
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
Available-for-sale
 
 
 
 
 
 
 
U.S. government sponsored enterprises
$
9,792

 
150

 

 
9,942

State and local governments
902,464

 
27,337

 
(8,351
)
 
921,450

Corporate bonds
431,831

 
4,567

 
(713
)
 
435,685

Residential mortgage-backed securities 1
1,296,529

 
12,512

 
(6,938
)
 
1,302,103

Total available-for-sale
2,640,616

 
44,566

 
(16,002
)
 
2,669,180

Held-to-maturity
 
 
 
 
 
 
 
State and local governments
481,476

 
23,505

 
(6,079
)
 
498,902

Total held-to-maturity
481,476

 
23,505

 
(6,079
)
 
498,902

Total investment securities
$
3,122,092

 
68,071

 
(22,081
)
 
3,168,082


 
December 31, 2013
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
Available-for-sale
 
 
 
 
 
 
 
U.S. government sponsored enterprises
$
10,441

 
187

 

 
10,628

State and local governments
1,377,347

 
31,621

 
(23,890
)
 
1,385,078

Corporate bonds
440,337

 
3,922

 
(1,758
)
 
442,501

Residential mortgage-backed securities 1
1,380,816

 
14,071

 
(10,265
)
 
1,384,622

Total available-for-sale
3,208,941

 
49,801

 
(35,913
)
 
3,222,829

Total investment securities
$
3,208,941

 
49,801

 
(35,913
)
 
3,222,829

________
1 Residential mortgage-backed securities are obligations of U.S. government sponsored enterprises and include collateralized mortgage obligations.



14




The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity securities by contractual maturity at March 31, 2014. Actual maturities may differ from expected or contractual maturities since borrowers have the right to prepay obligations with or without prepayment penalties.
 
March 31, 2014
 
Available-for-Sale
 
Held-to-Maturity
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Carrying Value
 
Fair Value
Due within one year
$
110,456

 
111,108

 

 

Due after one year through five years
510,168

 
516,571

 

 

Due after five years through ten years
61,297

 
61,933

 

 

Due after ten years
662,166

 
677,465

 
481,476

 
498,902

 
1,344,087

 
1,367,077

 
481,476

 
498,902

Residential mortgage-backed securities 1
1,296,529

 
1,302,103

 

 

Total
$
2,640,616

 
2,669,180

 
481,476

 
498,902

________
1 Residential mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.

Gain or loss on sale of investment securities consists of the following:
 
Three Months ended
(Dollars in thousands)
March 31,
2014
 
March 31,
2013
Available-for-sale
 
 
 
Gross proceeds
$
11,927

 
3,839

Less amortized cost 1
(12,000
)
 
(3,976
)
Net loss on sale of available-for-sale investment securities
$
(73
)
 
(137
)
Gross gain on sale of investments
$
21

 

Gross loss on sale of investments
(94
)
 
(137
)
Net loss on sale of available-for-sale investment securities
$
(73
)
 
(137
)
Held-to-maturity 2
 
 
 
Gross proceeds
$
3,930

 

Less amortized cost 1
(3,908
)
 

Net gain on sale of held-to-maturity investment securities
$
22

 

Gross gain on sale of investments
$
22

 

Gross loss on sale of investments

 

Net gain on sale of held-to-maturity investment securities
$
22

 

__________
1 The cost of each investment security sold is determined by specific identification.
2 The gain or loss on sale of held-to-maturity investment securities is solely due to securities that were partially or wholly called.


15




Investment securities with an unrealized loss position are summarized as follows:
 
 
March 31, 2014
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. government sponsored enterprises
$
25

 

 

 

 
25

 

State and local governments
155,418

 
(4,861
)
 
77,090

 
(3,490
)
 
232,508

 
(8,351
)
Corporate bonds
65,131

 
(536
)
 
17,722

 
(177
)
 
82,853

 
(713
)
Residential mortgage-backed securities
273,531

 
(4,109
)
 
132,600

 
(2,829
)
 
406,131

 
(6,938
)
Total available-for-sale
$
494,105

 
(9,506
)
 
227,412

 
(6,496
)
 
721,517

 
(16,002
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
19,803

 
(979
)
 
75,916

 
(5,100
)
 
95,719

 
(6,079
)
Total held-to-maturity
$
19,803

 
(979
)
 
75,916

 
(5,100
)
 
95,719

 
(6,079
)
 
 
December 31, 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
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. government sponsored enterprises
$
3

 

 

 

 
3

 

State and local governments
408,812

 
(17,838
)
 
74,161

 
(6,052
)
 
482,973

 
(23,890
)
Corporate bonds
129,515

 
(1,672
)
 
1,702

 
(86
)
 
131,217

 
(1,758
)
Residential mortgage-backed securities
457,611

 
(10,226
)
 
1,993

 
(39
)
 
459,604

 
(10,265
)
Total available-for-sale
$
995,941

 
(29,736
)
 
77,856

 
(6,177
)
 
1,073,797

 
(35,913
)

Based on an analysis of its investment securities with unrealized losses as of March 31, 2014 and December 31, 2013, the Company determined that none of such securities had other-than-temporary impairment and the unrealized losses were primarily the result of interest rate changes and market spreads subsequent to acquisition. The fair value of the investment securities is expected to recover as payments are received and the securities approach maturity. At March 31, 2014, management determined that it did not intend to sell investment securities with unrealized losses, and there was no expected requirement to sell any of its investment securities with unrealized losses before recovery of their amortized cost.


16




Note 3. Loans Receivable, Net

The Company’s loan portfolio is comprised of three segments: residential real estate, commercial and consumer and other loans. The loan segments are further disaggregated into the following classes: residential real estate, commercial real estate, other commercial, home equity and other consumer loans. The following tables are presented for each portfolio class of loans receivable and provide information about the ALLL, loans receivable, impaired loans and TDRs.

The following schedules summarize the activity in the ALLL:
  
 
Three Months ended March 31, 2014
(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
$
130,351

 
14,067

 
70,332

 
28,630

 
9,299

 
8,023

Provision for loan losses
1,122

 
(178
)
 
40

 
933

 
203

 
124

Charge-offs
(1,586
)
 
(36
)
 
(181
)
 
(1,163
)
 
(113
)
 
(93
)
Recoveries
842

 
213

 
380

 
84

 
37

 
128

Balance at end of period
$
130,729

 
14,066

 
70,571

 
28,484

 
9,426

 
8,182

 
 
Three Months ended March 31, 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
2,100

 
23

 
(952
)
 
1,699

 
1,457

 
(127
)
Charge-offs
(3,614
)
 
(177
)
 
(765
)
 
(1,158
)
 
(1,338
)
 
(176
)
Recoveries
1,495

 
83

 
654

 
373

 
55

 
330

Balance at end of period
$
130,835

 
15,411

 
73,335

 
22,481

 
10,833

 
8,775


The following schedules disclose the ALLL and loans receivable:
 
 
March 31, 2014
(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
$
10,236

 
699

 
3,429

 
4,731

 
167

 
1,210

Collectively evaluated for impairment
120,493

 
13,367

 
67,142

 
23,753

 
9,259

 
6,972

Total allowance for loan and lease losses
$
130,729

 
14,066

 
70,571

 
28,484

 
9,426

 
8,182

Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
192,184

 
21,420

 
118,724

 
37,029

 
8,922

 
6,089

Collectively evaluated for impairment
3,896,445

 
558,886

 
1,952,308

 
820,934

 
354,190

 
210,127

Total loans receivable
$
4,088,629

 
580,306

 
2,071,032

 
857,963

 
363,112

 
216,216

 

17




 
December 31, 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
$
11,949

 
990

 
3,763

 
6,155

 
265

 
776

Collectively evaluated for impairment
118,402

 
13,077

 
66,569

 
22,475

 
9,034

 
7,247

Total allowance for loan and lease losses
$
130,351

 
14,067

 
70,332

 
28,630

 
9,299

 
8,023

Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
199,680

 
24,070

 
119,526

 
41,504

 
9,039

 
5,541

Collectively evaluated for impairment
3,863,158

 
553,519

 
1,929,721

 
810,532

 
357,426

 
211,960

Total loans receivable
$
4,062,838

 
577,589

 
2,049,247

 
852,036

 
366,465

 
217,501


Substantially all of the Company’s loans receivable 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 $7,746,000 and $10,662,000 were included in the loans receivable balance at March 31, 2014 and December 31, 2013, respectively.

The following schedules disclose the impaired loans:
 
 
At or for the Three Months ended March 31, 2014
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans with a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
59,876

 
6,083

 
27,047

 
22,794

 
1,104

 
2,848

Unpaid principal balance
61,145

 
6,277

 
27,762

 
22,975

 
1,190

 
2,941

Specific valuation allowance
10,236

 
699

 
3,429

 
4,731

 
167

 
1,210

Average balance
60,689

 
6,658

 
25,482

 
24,904

 
995

 
2,650

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
132,308

 
15,337

 
91,677

 
14,235

 
7,818

 
3,241

Unpaid principal balance
163,353

 
16,361

 
115,489

 
18,882

 
9,274

 
3,347

Average balance
135,243

 
16,087

 
93,643

 
14,362

 
7,986

 
3,165

Totals
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
192,184

 
21,420

 
118,724

 
37,029

 
8,922

 
6,089

Unpaid principal balance
224,498

 
22,638

 
143,251

 
41,857

 
10,464

 
6,288

Specific valuation allowance
10,236

 
699

 
3,429

 
4,731

 
167

 
1,210

Average balance
195,932

 
22,745

 
119,125

 
39,266

 
8,981

 
5,815

 

18




 
At or for the Year ended December 31, 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
$
61,503

 
7,233

 
23,917

 
27,015

 
886

 
2,452

Unpaid principal balance
63,406

 
7,394

 
25,331

 
27,238

 
949

 
2,494

Specific valuation allowance
11,949

 
990

 
3,763

 
6,155

 
265

 
776

Average balance
59,823

 
7,237

 
26,105

 
22,460

 
767

 
3,254

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
138,177

 
16,837

 
95,609

 
14,489

 
8,153

 
3,089

Unpaid principal balance
169,082

 
18,033

 
119,017

 
19,156

 
9,631

 
3,245

Average balance
139,129

 
18,103

 
95,808

 
14,106

 
8,844

 
2,268

Totals
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
199,680

 
24,070

 
119,526

 
41,504

 
9,039

 
5,541

Unpaid principal balance
232,488

 
25,427

 
144,348

 
46,394

 
10,580

 
5,739

Specific valuation allowance
11,949

 
990

 
3,763

 
6,155

 
265

 
776

Average balance
198,952

 
25,340

 
121,913

 
36,566

 
9,611

 
5,522


Interest income recognized on impaired loans for the periods ended March 31, 2014 and December 31, 2013 was not significant.

The following is a loans receivable aging analysis:
 
 
March 31, 2014
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Accruing loans 30-59 days past due
$
37,787

 
12,313

 
14,823

 
7,135

 
2,425

 
1,091

Accruing loans 60-89 days past due
5,075

 
1,043

 
2,183

 
1,245

 
186

 
418

Accruing loans 90 days or more past due
569

 
146

 
256

 
66

 
68

 
33

Non-accrual loans
78,905

 
8,439

 
51,614

 
8,640

 
7,875

 
2,337

Total past due and non-accrual loans
122,336

 
21,941

 
68,876

 
17,086

 
10,554

 
3,879

Current loans receivable
3,966,293

 
558,365

 
2,002,156

 
840,877

 
352,558

 
212,337

Total loans receivable
$
4,088,629

 
580,306

 
2,071,032

 
857,963

 
363,112

 
216,216

 

19




 
December 31, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Accruing loans 30-59 days past due
$
25,761

 
10,367

 
7,016

 
3,673

 
2,432

 
2,273

Accruing loans 60-89 days past due
6,355

 
1,055

 
2,709

 
1,421

 
668

 
502

Accruing loans 90 days or more past due
604

 
429

 

 
160

 
5

 
10

Non-accrual loans
81,956

 
10,702

 
51,438

 
10,139

 
7,950

 
1,727

Total past due and non-accrual loans
114,676

 
22,553

 
61,163

 
15,393

 
11,055

 
4,512

Current loans receivable
3,948,162

 
555,036

 
1,988,084

 
836,643

 
355,410

 
212,989

Total loans receivable
$
4,062,838

 
577,589

 
2,049,247

 
852,036

 
366,465

 
217,501


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:

 
Three Months ended March 31, 2014
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Troubled debt restructurings
 
 
 
 
 
 
 
 
 
 
 
Number of loans
13

 

 
5

 
7

 
1

 

Pre-modification recorded balance
$
5,110

 

 
2,475

 
2,439

 
196

 

Post-modification recorded balance
$
4,481

 

 
2,475

 
1,810

 
196

 

Troubled debt restructurings that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
2

 

 

 
2

 

 

Recorded balance
$
42

 

 

 
42

 

 


 
Three Months ended March 31, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Troubled debt restructurings
 
 
 
 
 
 
 
 
 
 
 
Number of loans
24

 
7

 
9

 
7

 

 
1

Pre-modification recorded balance
$
6,250

 
1,358

 
3,316

 
1,505

 

 
71

Post-modification recorded balance
$
6,591

 
1,699

 
3,316

 
1,505

 

 
71

Troubled debt restructurings that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
5

 

 
3

 
1

 

 
1

Recorded balance
$
1,109

 

 
1,052

 
12

 

 
45



20




During the three months ended March 31, 2014, 29 percent of the modifications were due to extensions of maturity dates and 39 percent were due to a combination of interest rate reductions, extensions of maturity dates, or reductions in the face amount. For commercial real estate, the class with the largest dollar amount of TDRs, approximately 81 percent of the modifications were due to a combination of interest rate reductions, extension of maturity dates, or reductions in the face amount. During the three months ended March 31, 2013, 43 percent of modifications were due to extensions of maturity dates and 29 percent were due to a combination of interest rate reductions, extensions of maturity dates, or reductions in the face amount. For commercial real estate, 29 percent of the modifications were due to to extensions of maturity dates and 30 percent were due to a combination of interest rate reductions, extension of maturity dates, or reductions in the face amount.

In addition to the TDRs that occurred during the period provided in the preceding table, the Company had TDRs with pre-modification loan balances of $4,413,000 and $7,186,000 for the three months ended March 31, 2014 and 2013, respectively, for which other real estate owned (“OREO”) was received in full or partial satisfaction of the loans. The majority of such TDRs were in residential real estate and commercial real estate for the three months ended March 31, 2014 and 2013, respectively. 

Note 4. Goodwill

The Company performed its annual goodwill impairment test during the third quarter of 2013 and determined the fair value of the aggregated reporting units exceeded the carrying value, such that the Company’s goodwill was not considered impaired. In recognition there were no events or circumstances that occurred since the third quarter of 2013 that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value, the Company did not perform interim testing at March 31, 2014. However, changes in the economic environment, operations of the aggregated reporting units, or other factors could result in the decline in the fair value of the aggregated reporting units which could result in a goodwill impairment in the future.
 
There were no changes in the carrying value of goodwill during the three months ended March 31, 2014 and 2013. The gross carrying value of goodwill and the accumulated impairment charge consists of the following:

(Dollars in thousands)
March 31,
2014
 
December 31,
2013
Gross carrying value
$
169,865

 
169,865

Accumulated impairment charge
(40,159
)
 
(40,159
)
Net carrying value
$
129,706

 
129,706


Note 5. Derivatives and Hedging Activities

As of March 31, 2014, the Company’s interest rate swap derivative financial instruments were designated as cash flow hedges and are summarized as follows:
 
(Dollars in thousands)
Forecasted
Notional  Amount
 
Variable
Interest Rate 1
 
Fixed
Interest Rate 1
 
Term 2
Interest rate swap
$
160,000

 
3 month LIBOR
 
3.378
%
 
Oct. 21, 2014 - Oct. 21, 2021
Interest rate swap
100,000

 
3 month LIBOR
 
2.498
%
 
Nov 30, 2015 - Nov. 30, 2022
__________
1 The Company pays the fixed interest rate and the counterparties pay the Company the variable interest rate.
2 No cash will be exchanged prior to the term.

The hedging strategy converts the LIBOR based variable interest rate on forecasted borrowings to a fixed interest rate, thereby protecting the Company from floating interest rate variability.


21




The following table discloses the offsetting of financial assets and interest rate swap derivative assets:

 
March 31, 2014
 
December 31, 2013
(Dollars in thousands)
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statements of Financial Position
 
Net Amounts of Assets Presented in the Statements of Financial Position
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statements of Financial Position
 
Net Amounts of Assets Presented in the Statements of Financial Position
Interest rate swaps
$
4,502

 
(4,502
)
 

 
6,844

 
(4,948
)
 
1,896


The following table discloses the offsetting of financial liabilities and interest rate swap derivative liabilities:

 
March 31, 2014
 
December 31, 2013
(Dollars in thousands)
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statements of Financial Position
 
Net Amounts of Liabilities Presented in the Statements of Financial Position
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statements of Financial Position
 
Net Amounts of Liabilities Presented in the Statements of Financial Position
Interest rate swaps
$
8,085

 
(4,502
)
 
3,583

 
4,948

 
(4,948
)
 


Pursuant to the interest rate swap agreements, the Company pledged collateral to the counterparties in the form of investment securities totaling $6,200,000 at March 31, 2014. There was $0 collateral pledged from the counterparties to the Company as of March 31, 2014. There is the possibility that the Company may need to pledge additional collateral in the future if there were declines in the fair value of the interest rate swap derivative financial instruments versus the collateral pledged.

Note 6. Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:
 
(Dollars in thousands)
March 31,
2014
 
December 31,
2013
Unrealized gains on available-for-sale securities
$
28,564

 
13,888

Tax effect
(11,083
)
 
(5,403
)
Net of tax amount
17,481

 
8,485

Unrealized (losses) gains on derivatives used for cash flow hedges
(3,583
)
 
1,896

Tax effect
1,390

 
(736
)
Net of tax amount
(2,193
)
 
1,160

Total accumulated other comprehensive income
$
15,288

 
9,645



22




Note 7. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period presented. Diluted earnings per share is computed by including the net increase in shares as if dilutive outstanding stock options were exercised and restricted stock awards were vested, using the treasury stock method.

Basic and diluted earnings per share has been computed based on the following:

 
Three Months ended
(Dollars in thousands, except per share data)
March 31,
2014
 
March 31,
2013
Net income available to common stockholders, basic and diluted
$
26,730

 
20,768

Average outstanding shares - basic
74,437,393

 
71,965,665

Add: dilutive stock options and awards
43,425

 
47,512

Average outstanding shares - diluted
74,480,818

 
72,013,177

Basic earnings per share
$
0.36

 
0.29

Diluted earnings per share
$
0.36

 
0.29


There were 0 and 152,559 options excluded from the diluted average outstanding share calculation for the three months ended March 31, 2014 and 2013, respectively, due to the option exercise price exceeding the market price of the Company’s common stock.

Note 8. Fair Value of Assets and Liabilities

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:
 
Level 1    Quoted prices in active markets for identical assets or liabilities
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Transfers in and out of Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs) and Level 3 (significant unobservable inputs) are recognized on the actual transfer date. There were no transfers between fair value hierarchy levels during the three month periods ended March 31, 2014 and 2013.


23




Recurring Measurements
The following is a description of the inputs and valuation methodologies used for assets and liabilities measured at fair value on a recurring basis, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2014.

Investment securities, available-for-sale: fair value for available-for-sale securities is estimated by obtaining quoted market prices for identical assets, where available. If such prices are not available, fair value is based on independent asset pricing services and models, the inputs of which are market-based or independently sourced market parameters, including but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections, and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. Where Level 1 or Level 2 inputs are not available, such securities are classified as Level 3 within the hierarchy.

Fair value determinations of available-for-sale securities are the responsibility of the Company’s corporate accounting and treasury departments. The Company obtains fair value estimates from independent third party vendors on a monthly basis. The Company reviews the vendors’ inputs for fair value estimates and the recommended assignments of levels within the fair value hierarchy. The review includes the extent to which markets for investment securities are determined to have limited or no activity, or are judged to be active markets. The Company reviews the extent to which observable and unobservable inputs are used as well as the appropriateness of the underlying assumptions about risk that a market participant would use in active markets, with adjustments for limited or inactive markets. In considering the inputs to the fair value estimates, the Company places less reliance on quotes that are judged to not reflect orderly transactions, or are non-binding indications. In assessing credit risk, the Company reviews payment performance, collateral adequacy, third party research and analyses, credit rating histories and issuers’ financial statements. For those markets determined to be inactive or limited, the valuation techniques used are models for which management has verified that discount rates are appropriately adjusted to reflect illiquidity and credit risk. The Company also independently obtains cash flow estimates that are stressed at levels that exceed those used by the independent third party pricing vendors.

Interest rate swap derivative financial instruments: fair values for interest rate swap derivative financial instruments are based upon the estimated amounts to settle the contracts considering current interest rates and are calculated using discounted cash flows that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The inputs used to determine fair value include the 3 month LIBOR forward curve to estimate variable rate cash inflows and the Fed Funds Effective Swap Rate to estimate the discount rate. The estimated variable rate cash inflows are compared to the fixed rate outflows and such difference is discounted to a present value to estimate the fair value of the interest rate swaps. The Company also obtains and compares the reasonableness of the pricing from an independent third party.

The following schedules disclose the fair value measurement of assets and liabilities measured at fair value on a recurring basis:
  
 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Fair Value March 31, 2014
 
Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Investment securities, available-for-sale
 
 
 
 
 
 
 
U.S. government sponsored enterprises
$
9,942

 

 
9,942

 

State and local governments
921,450

 

 
921,450

 

Corporate bonds
435,685

 

 
435,685

 

Residential mortgage-backed securities
1,302,103

 

 
1,302,103

 

Total assets measured at fair value on a recurring basis
$
2,669,180

 

 
2,669,180

 

Interest rate swaps
$
3,583

 

 
3,583