GBCI-03.31.2015-10Q



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, 2015
 
¨ 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 24, 2015 was 75,530,624. 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,
2015
 
December 31,
2014
Assets
 
 
 
Cash on hand and in banks
$
109,746

 
122,834

Federal funds sold

 
1,025

Interest bearing cash deposits
73,720

 
318,550

Cash and cash equivalents
183,466

 
442,409

Investment securities, available-for-sale
2,544,093

 
2,387,428

Investment securities, held-to-maturity
570,285

 
520,997

Total investment securities
3,114,378

 
2,908,425

Loans held for sale
54,132

 
46,726

Loans receivable
4,687,669

 
4,488,095

Allowance for loan and lease losses
(129,856
)
 
(129,753
)
Loans receivable, net
4,557,813

 
4,358,342

Premises and equipment, net
187,067

 
179,175

Other real estate owned
28,124

 
27,804

Accrued interest receivable
43,260

 
40,587

Deferred tax asset
41,220

 
41,737

Core deposit intangible, net
12,256

 
10,900

Goodwill
130,843

 
129,706

Non-marketable equity securities
54,277

 
52,868

Other assets
68,260

 
67,828

Total assets
$
8,475,096

 
8,306,507

Liabilities
 
 
 
Non-interest bearing deposits
$
1,675,451

 
1,632,403

Interest bearing deposits
4,783,341

 
4,712,809

Securities sold under agreements to repurchase
425,652

 
397,107

Federal Home Loan Bank advances
298,148

 
296,944

Other borrowed funds
6,703

 
7,311

Subordinated debentures
125,741

 
125,705

Accrued interest payable
3,893

 
4,155

Other liabilities
102,643

 
102,026

Total liabilities
7,421,572

 
7,278,460

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
755

 
750

Paid-in capital
719,506

 
708,356

Retained earnings - substantially restricted
315,236

 
301,197

Accumulated other comprehensive income
18,027

 
17,744

Total stockholders’ equity
1,053,524

 
1,028,047

Total liabilities and stockholders’ equity
$
8,475,096

 
8,306,507

Number of common stock shares issued and outstanding
75,530,030

 
75,026,092


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,
2015
 
March 31,
2014
Interest Income
 
 
 
Residential real estate loans
$
7,761

 
7,087

Commercial loans
39,022

 
35,042

Consumer and other loans
7,744

 
7,643

Investment securities
22,959

 
24,315

Total interest income
77,486

 
74,087

Interest Expense
 
 
 
Deposits
4,147

 
3,089

Securities sold under agreements to repurchase
241

 
210

Federal Home Loan Bank advances
2,195

 
2,514

Other borrowed funds
27

 
53

Subordinated debentures
772

 
774

Total interest expense
7,382

 
6,640

Net Interest Income
70,104

 
67,447

Provision for loan losses
765

 
1,122

Net interest income after provision for loan losses
69,339

 
66,325

Non-Interest Income
 
 
 
Service charges and other fees
12,999

 
12,219

Miscellaneous loan fees and charges
1,157

 
1,029

Gain on sale of loans
5,430

 
3,595

Gain (loss) on sale of investments
5

 
(51
)
Other income
3,102

 
2,596

Total non-interest income
22,693

 
19,388

Non-Interest Expense
 
 
 
Compensation and employee benefits
32,244

 
28,634

Occupancy and equipment
7,362

 
6,613

Advertising and promotions
1,927

 
1,777

Data processing
1,249

 
1,288

Other real estate owned
758

 
507

Regulatory assessments and insurance
1,305

 
1,592

Core deposit intangibles amortization
731

 
710

Other expenses
9,921

 
8,949

Total non-interest expense
55,497

 
50,070

Income Before Income Taxes
36,535

 
35,643

Federal and state income tax expense
8,865

 
8,913

Net Income
$
27,670

 
26,730

Basic earnings per share
$
0.37

 
0.36

Diluted earnings per share
$
0.37

 
0.36

Dividends declared per share
$
0.18

 
0.16

Average outstanding shares - basic
75,206,348

 
74,437,393

Average outstanding shares - diluted
75,244,959

 
74,480,818


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,
2015
 
March 31,
2014
Net Income
$
27,670

 
26,730

Other Comprehensive Income, Net of Tax
 
 
 
Unrealized gains on available-for-sale securities
5,181

 
14,603

Reclassification adjustment for (gains) losses included in net income
(4
)
 
73

Net unrealized gains on available-for-sale securities
5,177

 
14,676

Tax effect
(1,979
)
 
(5,680
)
Net of tax amount
3,198

 
8,996

Unrealized losses on derivatives used for cash flow hedges
(5,993
)
 
(5,479
)
Reclassification adjustment for losses included in net income
1,251

 

Net unrealized losses on derivatives used for cash flow hedges
(4,742
)
 
(5,479
)
Tax effect
1,827

 
2,126

Net of tax amount
(2,915
)
 
(3,353
)
Total other comprehensive income, net of tax
283

 
5,643

Total Comprehensive Income
$
27,953

 
32,373































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, 2015 and 2014
 
(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, 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

Balance at December 31, 2014
75,026,092

 
$
750

 
708,356

 
301,197

 
17,744

 
1,028,047

Comprehensive income

 

 

 
27,670

 
283

 
27,953

Cash dividends declared ($0.18 per share)

 

 

 
(13,631
)
 

 
(13,631
)
Stock issuances under stock incentive plans
60,294

 
1

 
(290
)
 

 

 
(289
)
Stock issued in connection with acquisitions
443,644

 
4

 
10,772

 

 

 
10,776

Stock-based compensation and related taxes

 

 
668

 

 

 
668

Balance at March 31, 2015
75,530,030

 
$
755

 
719,506

 
315,236

 
18,027

 
1,053,524























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,
2015
 
March 31,
2014
Operating Activities
 
 
 
Net income
$
27,670

 
26,730

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
765

 
1,122

Net amortization of investment securities premiums and discounts
6,282

 
7,619

Loans held for sale originated or acquired
(192,332
)
 
(116,771
)
Proceeds from sales of loans held for sale
193,667

 
135,309

Gain on sale of loans
(5,430
)
 
(3,595
)
(Gain) loss on sale of investments
(5
)
 
51

Stock-based compensation expense, net of tax benefits
347

 
453

Excess tax (benefits) deficiencies from stock-based compensation
(102
)
 
14

Depreciation of premises and equipment
3,206

 
2,685

Gain on sale of other real estate owned and write-downs, net
(2
)
 
(524
)
Amortization of core deposit intangibles
731

 
710

Net (increase) decrease in accrued interest receivable
(1,871
)
 
624

Net decrease (increase) in other assets
2,619

 
(4,927
)
Net decrease in accrued interest payable
(393
)
 
(332
)
Net increase in other liabilities
2,944

 
4,751

Net cash provided by operating activities
38,096

 
53,919

Investing Activities
 
 
 
Sales of available-for-sale securities
35,558

 
788

Maturities, prepayments and calls of available-for-sale securities
161,179

 
138,272

Purchases of available-for-sale securities
(311,895
)
 
(58,192
)
Maturities, prepayments and calls of held-to-maturity securities
460

 
3,930

Purchases of held-to-maturity securities
(50,005
)
 
(5,618
)
Principal collected on loans
332,693

 
323,418

Loans originated or acquired
(454,511
)
 
(358,240
)
Net addition of premises and equipment and other real estate owned
(3,889
)
 
(1,771
)
Proceeds from sale of other real estate owned
3,245

 
4,000

Net sale of non-marketable equity securities
514

 

Net cash received in acquisitions
19,712

 

Net cash (used in) provided by investing activities
(266,939
)
 
46,587












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,
2015
 
March 31,
2014
Financing Activities
 
 
 
Net (decrease) increase in deposits
$
(33,240
)
 
44,498

Net increase in securities sold under agreements to repurchase
27,188

 
13,928

Net decrease in short-term Federal Home Loan Bank advances

 
(126,000
)
Proceeds from long-term Federal Home Loan Bank advances

 
60,000

Repayments of long-term Federal Home Loan Bank advances
(731
)
 
(87,438
)
Net decrease in other borrowed funds
(572
)
 
(283
)
Cash dividends paid
(22,557
)
 

Excess tax benefits (deficiencies) from stock-based compensation
102

 
(14
)
Stock-based compensation activity
(290
)
 
837

Net cash used in by financing activities
(30,100
)
 
(94,472
)
Net (decrease) increase in cash and cash equivalents
(258,943
)
 
6,034

Cash and cash equivalents at beginning of period
442,409

 
155,657

Cash and cash equivalents at end of period
$
183,466

 
161,691

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
7,775

 
6,972

Cash paid during the period for income taxes

 
818

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
256

 
157

Transfer of loans to other real estate owned
3,217

 
4,105

Acquisitions
 
 
 
Fair value of common stock shares issued
10,776

 

Cash consideration for outstanding shares
12,219

 

Fair value of assets acquired
174,637

 

Liabilities assumed
152,779

 

















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 individuals and businesses in Montana, Idaho, Wyoming, Colorado, Utah and Washington through 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, 2015, the results of operations and comprehensive income for the three month periods ended March 31, 2015 and 2014, and changes in stockholders’ equity and cash flows for the three month periods ended March 31, 2015 and 2014. The condensed consolidated statement of financial condition of the Company as of December 31, 2014 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, 2014. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results anticipated for the year ending December 31, 2015.

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 valuation of investment securities; 3) the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans; and 4) 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, the Bank and all variable interest entities (“VIE”) for which the Company has both the power to direct the VIE’s significant activities and the obligation to absorb a majority of the expected losses and/or receive a majority of the expected residual returns. The Bank consists of thirteen bank divisions, a treasury division and an information technology division. The treasury division includes the Bank’s investment 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 February 2015, the Company completed its acquisition of Montana Community Banks, Inc. and its wholly-owned subsidiary, Community Bank, Inc. (“CB”), a community bank based in Ronan, Montana. In August 2014, the Company completed its acquisition of FNBR Holding Corporation and its wholly-owned subsidiary, First National Bank of the Rockies, a community bank based in Grand Junction, Colorado. The 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.


9




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.

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. The Company periodically enters into restructure agreements with borrowers whereby the loans were previously identified as TDRs. When such circumstances occur, the Company carefully evaluates the facts of the subsequent restructure to determine the appropriate accounting and under certain circumstances it may be acceptable not to account for the subsequently restructured loan as a TDR. When assessing whether a concession has been granted by the Company, any prior forgiveness on a cumulative basis is considered a continuing concession. 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.


10




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.

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.


11




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.

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. The following paragraphs provide descriptions of recently adopted or newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations.


12




In February 2015, FASB amended FASB ASC Topic 810, Consolidation. The amendments in this Update make targeted changes to the current consolidation guidance and ends a deferral available for investment companies. The amendments modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. Consolidation conclusions may change for entities that already are VIEs due to changes in how entities would analyze related-party relationships and fee arrangements. The amendments relax existing criteria for determining when fees paid to a decision maker or service provider do not represent a variable interest by focusing on whether those fees are “at market.” The amendments eliminate both the consolidation model specific to limited partnerships and the current presumption that a general partner controls a limited partnership. Application of the new amendments could result in some entities being deconsolidated or considered a VIE and subject to additional disclosures. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period with any adjustments reflected as of the beginning of the reporting year that includes the interim period. A reporting entity may apply the amendments using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the reporting year of adoption or may apply the amendments retrospectively. The Company is currently evaluating the impact of these amendments, but does not expect them to have a material effect on the Company’s financial position or results of operations.

In May 2014, FASB amended FASB ASC Topic 606, Revenue from Contracts with Customers. The amendments clarify the principals for recognizing revenue and develop a common revenue standard among industries. The new guidance establishes the following core principal: recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services. Five steps are provided for a company or organization to follow to achieve such core principle. The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. For public entities, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within the reporting period. Early application is not permitted. The entity should apply the amendments using one of two retrospective methods described in the amendment. The Company is currently evaluating the impact of these amendments, but does not expect them 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 adoption of these amendments did not have a material effect on the Company’s financial position or results of operations.


13




Note 2. Investment Securities

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, 2015
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
Available-for-sale
 
 
 
 
 
 
 
U.S. government and federal agency
$
53,114

 
17

 
(279
)
 
52,852

U.S. government sponsored enterprises
77,958

 
314

 
(44
)
 
78,228

State and local governments
960,495

 
40,771

 
(5,120
)
 
996,146

Corporate bonds
378,549

 
2,329

 
(568
)
 
380,310

Residential mortgage-backed securities
1,023,139

 
15,078

 
(1,660
)
 
1,036,557

Total available-for-sale
2,493,255

 
58,509

 
(7,671
)
 
2,544,093

Held-to-maturity
 
 
 
 
 
 
 
State and local governments
570,285

 
30,724

 
(3,882
)
 
597,127

Total held-to-maturity
570,285

 
30,724

 
(3,882
)
 
597,127

Total investment securities
$
3,063,540

 
89,233

 
(11,553
)
 
3,141,220


 
December 31, 2014
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
Available-for-sale
 
 
 
 
 
 
 
U.S. government and federal agency
$
44

 

 

 
44

U.S. government sponsored enterprises
21,916

 
31

 
(2
)
 
21,945

State and local governments
962,365

 
40,173

 
(4,569
)
 
997,969

Corporate bonds
313,545

 
2,059

 
(750
)
 
314,854

Residential mortgage-backed securities
1,043,897

 
11,205

 
(2,486
)
 
1,052,616

Total available-for-sale
2,341,767

 
53,468

 
(7,807
)
 
2,387,428

Held-to-maturity
 
 
 
 
 
 
 
State and local governments
520,997

 
32,925

 
(2,976
)
 
550,946

Total held-to-maturity
520,997

 
32,925

 
(2,976
)
 
550,946

Total investment securities
$
2,862,764

 
86,393

 
(10,783
)
 
2,938,374



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, 2015. Actual maturities may differ from expected or contractual maturities since borrowers have the right to prepay obligations with or without prepayment penalties.
 
March 31, 2015
 
Available-for-Sale
 
Held-to-Maturity
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due within one year
$
138,909

 
139,512

 

 

Due after one year through five years
471,592

 
475,338

 

 

Due after five years through ten years
134,959

 
139,173

 
2,081

 
2,092

Due after ten years
724,656

 
753,513

 
568,204

 
595,035

 
1,470,116

 
1,507,536

 
570,285

 
597,127

Residential mortgage-backed securities 1
1,023,139

 
1,036,557

 

 

Total
$
2,493,255

 
2,544,093

 
570,285

 
597,127

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

Proceeds from sales and calls of investment securities and the associated gains and losses that have been included in earnings are listed below:
 
Three Months ended
(Dollars in thousands)
March 31,
2015
 
March 31,
2014
Available-for-sale
 
 
 
Proceeds from sales and calls of investment securities
$
62,703

 
11,927

Gross realized gains 1
39

 
21

Gross realized losses 1
(35
)
 
(94
)
Held-to-maturity
 
 
 
Proceeds from calls of investment securities
460

 
3,930

Gross realized gains 1
1

 
22

Gross realized losses 1

 

__________
1 The gain or loss on the sale or call of each investment security is determined by the specific identification method.


15




Investment securities with an unrealized loss position are summarized as follows:
 
 
March 31, 2015
 
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 and federal agency
$
34,013

 
(279
)
 
3

 

 
34,016

 
(279
)
U.S. government sponsored enterprises
26,722

 
(44
)
 

 

 
26,722

 
(44
)
State and local governments
143,300

 
(2,157
)
 
95,229

 
(2,963
)
 
238,529

 
(5,120
)
Corporate bonds
79,816

 
(503
)
 
7,087

 
(65
)
 
86,903

 
(568
)
Residential mortgage-backed securities
120,745

 
(734
)
 
47,038

 
(926
)
 
167,783

 
(1,660
)
Total available-for-sale
$
404,596

 
(3,717
)
 
149,357

 
(3,954
)
 
553,953

 
(7,671
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
65,748

 
(1,379
)
 
66,621

 
(2,503
)
 
132,369

 
(3,882
)
Total held-to-maturity
$
65,748

 
(1,379
)
 
66,621

 
(2,503
)
 
132,369

 
(3,882
)
 
 
December 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 and federal agency
$

 

 
3

 

 
3

 

U.S. government sponsored enterprises
13,793

 
(2
)
 

 

 
13,793

 
(2
)
State and local governments
91,082

 
(1,273
)
 
115,927

 
(3,296
)
 
207,009

 
(4,569
)
Corporate bonds
60,289

 
(545
)
 
7,874

 
(205
)
 
68,163

 
(750
)
Residential mortgage-backed securities
192,962

 
(926
)
 
78,223

 
(1,560
)
 
271,185

 
(2,486
)
Total available-for-sale
$
358,126

 
(2,746
)
 
202,027

 
(5,061
)
 
560,153

 
(7,807
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
18,643

 
(624
)
 
76,761

 
(2,352
)
 
95,404

 
(2,976
)
Total held-to-maturity
$
18,643

 
(624
)
 
76,761

 
(2,352
)
 
95,404

 
(2,976
)

Based on an analysis of its investment securities with unrealized losses as of March 31, 2015 and December 31, 2014, 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, 2015, 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 table presents loans receivable for each portfolio class of loans:

(Dollars in thousands)
March 31,
2015
 
December 31,
2014
Residential real estate loans
$
637,465

 
611,463

Commercial loans
 
 
 
Real estate
2,418,843

 
2,337,548

Other commercial
1,007,173

 
925,900

Total
3,426,016

 
3,263,448

Consumer and other loans
 
 
 
Home equity
402,970

 
394,670

Other consumer
221,218

 
218,514

Total
624,188

 
613,184

Loans receivable 1
4,687,669

 
4,488,095

Allowance for loan and lease losses
(129,856
)
 
(129,753
)
Loans receivable, net
$
4,557,813

 
4,358,342

__________
1 
Includes net deferred fees, costs, premiums and discounts of $15,374,000 and $13,710,000 at March 31, 2015 and December 31, 2014, respectively.

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.

The following tables summarize the activity in the ALLL by portfolio segment:
  
 
Three Months ended March 31, 2015
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Balance at beginning of period
$
129,753

 
14,680

 
67,799

 
30,891

 
9,963

 
6,420

Provision for loan losses
765

 
440

 
(286
)
 
1,112

 
(459
)
 
(42
)
Charge-offs
(1,297
)
 
(14
)
 
(445
)
 
(694
)
 
(31
)
 
(113
)
Recoveries
635

 
25

 
259

 
206

 
46

 
99

Balance at end of period
$
129,856

 
15,131

 
67,327

 
31,515

 
9,519

 
6,364

 
 
Three Months ended March 31, 2014
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
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



17




The following tables disclose the balance in the ALLL and the recorded investment in loans by portfolio segment:
 
 
March 31, 2015
(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
$
10,324

 
1,262

 
2,426

 
5,974

 
172

 
490

Collectively evaluated for impairment
119,532

 
13,869

 
64,901

 
25,541

 
9,347

 
5,874

Total allowance for loan and lease losses
$
129,856

 
15,131

 
67,327

 
31,515

 
9,519

 
6,364

Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
162,546

 
19,014

 
98,466

 
34,636

 
6,497

 
3,933

Collectively evaluated for impairment
4,525,123

 
618,451

 
2,320,377

 
972,537

 
396,473

 
217,285

Total loans receivable
$
4,687,669

 
637,465

 
2,418,843

 
1,007,173

 
402,970

 
221,218

 
 
December 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
$
11,597

 
853

 
2,967

 
6,836

 
447

 
494

Collectively evaluated for impairment
118,156

 
13,827

 
64,832

 
24,055

 
9,516

 
5,926

Total allowance for loan and lease losses
$
129,753

 
14,680

 
67,799

 
30,891

 
9,963

 
6,420

Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
161,366

 
19,576

 
105,264

 
25,321

 
6,901

 
4,304

Collectively evaluated for impairment
4,326,729

 
591,887

 
2,232,284

 
900,579

 
387,769

 
214,210

Total loans receivable
$
4,488,095

 
611,463

 
2,337,548

 
925,900

 
394,670

 
218,514



18




The following tables disclose information related to impaired loans by portfolio segment:
 
 
At or for the Three Months ended March 31, 2015
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans with a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
34,317

 
5,107

 
12,957

 
14,144

 
403

 
1,706

Unpaid principal balance
35,663

 
5,187

 
13,561

 
14,297

 
419

 
2,199

Specific valuation allowance
10,324

 
1,262

 
2,426

 
5,974

 
172

 
490

Average balance
40,003

 
4,608

 
20,056

 
12,761

 
809

 
1,769

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
128,229

 
13,907

 
85,509

 
20,492

 
6,094

 
2,227

Unpaid principal balance
157,666

 
15,230

 
107,444

 
25,912

 
6,789

 
2,291

Average balance
121,953

 
14,686

 
81,809

 
17,218

 
5,891

 
2,349

Total
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
162,546

 
19,014

 
98,466

 
34,636

 
6,497

 
3,933

Unpaid principal balance
193,329

 
20,417

 
121,005

 
40,209

 
7,208

 
4,490

Specific valuation allowance
10,324

 
1,262

 
2,426

 
5,974

 
172

 
490

Average balance
161,956

 
19,294

 
101,865

 
29,979

 
6,700

 
4,118

 
 
At or for the Year ended December 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
$
45,688

 
4,110

 
27,155

 
11,377

 
1,214

 
1,832

Unpaid principal balance
48,477

 
4,276

 
28,048

 
12,461

 
1,336

 
2,356

Specific valuation allowance
11,597

 
853

 
2,967

 
6,836

 
447

 
494

Average balance
53,339

 
5,480

 
24,519

 
19,874

 
1,039

 
2,427

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
115,678

 
15,466

 
78,109

 
13,944

 
5,687

 
2,472

Unpaid principal balance
145,038

 
16,683

 
100,266

 
19,117

 
6,403

 
2,569

Average balance
128,645

 
15,580

 
89,015

 
14,024

 
7,163

 
2,863

Total
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
161,366

 
19,576

 
105,264

 
25,321

 
6,901

 
4,304

Unpaid principal balance
193,515

 
20,959

 
128,314

 
31,578

 
7,739

 
4,925

Specific valuation allowance
11,597

 
853

 
2,967

 
6,836

 
447

 
494

Average balance
181,984

 
21,060

 
113,534

 
33,898

 
8,202

 
5,290


Interest income recognized on impaired loans for the three months ended March 31, 2015 and 2014 was not significant.


19




The following tables present an aging analysis of the recorded investment in loans by portfolio segment:
 
 
March 31, 2015
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Accruing loans 30-59 days past due
$
26,255

 
4,585

 
9,663

 
7,621

 
2,997

 
1,389

Accruing loans 60-89 days past due
7,195

 
1,022

 
4,204

 
1,038

 
734

 
197

Accruing loans 90 days or more past due
2,357

 
222

 
47

 
2,056

 

 
32

Non-accrual loans
60,287

 
7,365

 
35,067

 
11,541

 
5,587

 
727

Total past due and non-accrual loans
96,094

 
13,194

 
48,981

 
22,256

 
9,318

 
2,345

Current loans receivable
4,591,575

 
624,271

 
2,369,862

 
984,917

 
393,652

 
218,873

Total loans receivable
$
4,687,669

 
637,465

 
2,418,843

 
1,007,173

 
402,970

 
221,218

 
 
December 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
$
19,139

 
3,506

 
7,925

 
5,310

 
1,374

 
1,024

Accruing loans 60-89 days past due
6,765

 
1,686

 
3,592

 
609

 
679

 
199

Accruing loans 90 days or more past due
214

 
35

 
31

 
74

 
17

 
57

Non-accrual loans
61,882

 
6,798

 
39,717

 
8,421

 
5,969

 
977

Total past due and non-accrual loans
88,000

 
12,025

 
51,265

 
14,414

 
8,039

 
2,257

Current loans receivable
4,400,095

 
599,438

 
2,286,283

 
911,486

 
386,631

 
216,257

Total loans receivable
$
4,488,095

 
611,463

 
2,337,548

 
925,900

 
394,670

 
218,514


The following tables present 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, 2015
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Troubled debt restructurings
 
 
 
 
 
 
 
 
 
 
 
Number of loans
5

 

 
2

 
3

 

 

Pre-modification recorded balance
$
3,085

 

 
2,182

 
903

 

 

Post-modification recorded balance
$
3,085

 

 
2,182

 
903

 

 

Troubled debt restructurings that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
6

 

 

 
3

 
2

 
1

Recorded balance
$
174

 

 

 
57

 
116

 
1



20




 
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

 

 


The modifications for the TDRS that occurred during the three months ended March 31, 2015 and 2014 were typically for extensions of maturity date and a combination of an interest rate reduction, extension of the maturity date, or reduction in the face amount.

In addition to the TDRs that occurred during the period provided in the preceding tables, the Company had TDRs with pre-modification loan balances of $3,595,000 and $4,413,000 for the three months ended March 31, 2015 and 2014, 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 commercial real estate and residential real estate for the three months ended March 31, 2015 and 2014, respectively. At March 31, 2015, the Company had $1,135,000 of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At March 31, 2015, the Company had $1,891,000 of OREO secured by residential real estate properties.

Note 4. Goodwill

The following schedule discloses the changes in the carrying value of goodwill:

 
Three Months ended
(Dollars in thousands)
March 31,
2015
 
March 31,
2014
Net carrying value at beginning of period
$
129,706

 
129,706

Acquisitions
1,137

 

Net carrying value at end of period
$
130,843

 
129,706


The gross carrying value of goodwill and the accumulated impairment charge consists of the following:

(Dollars in thousands)
March 31,
2015
 
December 31,
2014
Gross carrying value
$
171,002

 
169,865

Accumulated impairment charge
(40,159
)
 
(40,159
)
Net carrying value
$
130,843

 
129,706



21




The Company performed its annual goodwill impairment test during the third quarter of 2014 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 2014 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, 2015. 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.

For additional information on goodwill related to acquisitions, see Note 12.
 
Note 5. Variable Interest Entities

A VIE is a partnership, limited liability company, trust or other legal entity that meets either one of the following criteria; 1) the entity’s total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or 2) the entity has equity investors that cannot make significant decisions about the entity’s operations or that do not absorb their proportionate share of the expected losses or receive the expected returns of the entity. A VIE must be consolidated by the Company if it is deemed to be the primary beneficiary of the VIE, which is the party involved with the VIE that has the power to direct the VIE’s significant activities and will absorb a majority of the expected losses, receive a majority of the expected residual returns, or both.

The Company’s VIEs are regularly monitored to determine if any reconsideration events have occurred that could cause the primary beneficiary status to change. A previously unconsolidated VIE is consolidated when the Company becomes the primary beneficiary. A previously consolidated VIE is deconsolidated when the Company ceases to be the primary beneficiary or the entity is no longer a VIE.

Consolidated 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 VIEs. The underlying activities of the VIEs are community development projects designed primarily to promote community welfare, such as economic rehabilitation and development of low-income areas by providing housing, services, or jobs for residents. The maximum exposure to loss in the VIEs is the amount of equity invested and credit extended by the Company. However, the Company has credit protection in the form of indemnification agreements, guarantees, and collateral arrangements. The primary activities of the VIEs are recognized in commercial loans interest income, other non-interest income and other borrowed funds interest expense on the Company’s statements of operations and the federal income tax credit allocations from the investments are recognized in the Company’s statements of operations as a component of income tax expense. Such related cash flows are recognized in loans originated, principal collected on loans and change in other borrowed funds. The Company has evaluated the variable interests held by the Company in each CDE (NMTC) and LIHTC partnership investment and determined that the Company continues to be the primary beneficiary of such VIEs. As the primary beneficiary, the VIEs’ assets, liabilities, and results of operations are included in the Company’s consolidated financial statements.


22




The following table summarizes the carrying amounts of the consolidated VIEs’ assets and liabilities included in the Company’s statements of financial condition and 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.
 
 
March 31, 2015
 
December 31, 2014
(Dollars in thousands)
CDE (NMTC)
 
LIHTC
 
CDE (NMTC)
 
LIHTC
Assets
 
 
 
 
 
 
 
Loans receivable
$
36,114

 

 
36,077

 

Premises and equipment, net

 
12,991

 

 
13,106

Accrued interest receivable
117

 

 
116

 

Other assets
550

 
379

 
616

 
258

Total assets
$
36,781

 
13,370

 
36,809

 
13,364

Liabilities
 
 
 
 
 
 
 
Other borrowed funds
$
4,555

 
1,690

 
4,555

 
1,690

Accrued interest payable
4

 
5

 
4

 
5

Other liabilities
158

 

 
185

 

Total liabilities
$
4,717

 
1,695

 
4,744

 
1,695


The following table summarizes the net investment income or loss of the consolidated VIEs and the associated tax credits included in the Company’s statements of operations during the three months ended March 31, 2015 and 2014, respectively.
 
Three Months ended
 
March 31, 2015
 
March 31, 2014
(Dollars in thousands)
CDE (NMTC)
 
LIHTC
 
CDE (NMTC)
 
LIHTC
VIE income (loss)
$
209

 
(252
)
 
209

 
(270
)
Federal income tax credits

 
294

 

 
318


Unconsolidated variable interest entities
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 have no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the securities held by third parties. The trust subsidiaries are not included in the Company’s consolidated financial statements because the sole asset of each trust subsidiary is a receivable from the Company, even though the Company owns all of the voting equity shares of the trust subsidiaries, has fully guaranteed the obligations of the trust subsidiaries and may have the right to redeem the third party securities under certain circumstances. The Company reports the trust preferred securities issued to the trust subsidiaries as subordinated debentures on the Company’s statements of financial condition.

Note 6. Securities Sold Under Agreements to Repurchase

The Company’s securities sold under agreements to repurchase (“repurchase agreements”) amounted to $425,652,000 and $397,107,000 at March 31, 2015 and December 31, 2014, respectively, are short-term in nature, and are secured by residential mortgage-backed securities with carrying values of $474,377,000 and $479,345,000, respectively. Securities are pledged to customers at the time of the transaction in an amount at least equal to the outstanding balance and is held in custody accounts by third parties. The fair value of collateral is continually monitored and additional collateral is provided as deemed appropriate.


23




Note 7. Derivatives and Hedging Activities

As of March 31, 2015, 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
 
Payment 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 counterparty pays the Company the variable interest rate.
2 No cash will be exchanged prior to the beginning of the payment term.

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

In October 2014, the interest rate swap with the $160,000,000 notional amount began its payment term. The Company designated wholesale deposits as the cash flow hedge and these deposits were determined to be fully effective during the current period. As such, no amount of ineffectiveness has been included in the Company’s statements of operations for the three months ended March 31, 2015. Therefore, the aggregate fair value of the interest rate swap was recorded in other liabilities with changes recorded in other comprehensive income. The Company expects the hedge to remain highly effective during the remaining term of the interest rate swap. Interest expense recorded on this interest rate swap totaled $1,351,000 during 2015 and is reported as a component of interest expense on deposits. Unless the interest rate swap is terminated during the next year, the Company expects $5,064,000 of the unrealized loss reported in other comprehensive income at March 31, 2015 to be reclassified to interest expense during the next twelve months.

The following table presents the pre-tax gains or losses recorded in accumulated other comprehensive income and the Company’s statements of operations relating to the interest rate swap derivative financial instruments:

 
Three Months ended
(Dollars in thousands)
March 31,
2015
 
March 31,
2014
Interest rate swaps