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GLACIER BANCORP, INC. - Quarter Report: 2013 June (Form 10-Q)


Table of Contents

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 June 30, 2013
 
¨ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________             
Commission file number 000-18911
______________________________________________________________________
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
 ______________________________________________________________________
MONTANA
81-0519541
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
49 Commons Loop, Kalispell, Montana
59901
(Address of principal executive offices)
(Zip Code)
(406) 756-4200
Registrant’s telephone number, including area code
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report) 
______________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    No  ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
ý
 
Accelerated Filer
¨
Non-Accelerated Filer
¨
 
Smaller reporting Company
¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨  Yes    ý  No
The number of shares of Registrant’s common stock outstanding on July 23, 2013 was 73,590,155. No preferred shares are issued or outstanding.



Table of Contents

TABLE OF CONTENTS
 


 
Page
Part I. Financial Information
 
Item 1 – Financial Statements
 





Table of Contents

Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Financial Condition
 
(Dollars in thousands, except per share data)
June 30, 2013
 
December 31, 2012
Assets
 
 
 
Cash on hand and in banks
$
105,272

 
123,270

Interest bearing cash deposits and federal funds sold
27,184

 
63,770

Cash and cash equivalents
132,456

 
187,040

Investment securities, available-for-sale
3,721,377

 
3,683,005

Loans held for sale
95,495

 
145,501

Loans receivable
3,673,456

 
3,397,425

Allowance for loan and lease losses
(130,883
)
 
(130,854
)
Loans receivable, net
3,542,573

 
3,266,571

Premises and equipment, net
161,918

 
158,989

Other real estate owned
40,713

 
45,115

Accrued interest receivable
43,593

 
37,770

Deferred tax asset
35,115

 
20,394

Core deposit intangible, net
7,262

 
6,174

Goodwill
119,509

 
106,100

Non-marketable equity securities
49,752

 
48,812

Other assets
47,053

 
41,969

Total assets
$
7,996,816

 
7,747,440

Liabilities
 
 
 
Non-interest bearing deposits
$
1,236,104

 
1,191,933

Interest bearing deposits
4,122,093

 
4,172,528

Securities sold under agreements to repurchase
300,024

 
289,508

Federal Home Loan Bank advances
1,217,445

 
997,013

Other borrowed funds
8,489

 
10,032

Subordinated debentures
125,490

 
125,418

Accrued interest payable
3,824

 
4,675

Other liabilities
54,345

 
55,384

Total liabilities
7,067,814

 
6,846,491

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

 

Common stock, $0.01 par value per share, 117,187,500 shares authorized
736

 
719

Paid-in capital
672,035

 
641,737

Retained earnings - substantially restricted
232,849

 
210,531

Accumulated other comprehensive income
23,382

 
47,962

Total stockholders’ equity
929,002

 
900,949

Total liabilities and stockholders’ equity
$
7,996,816

 
7,747,440

Number of common stock shares issued and outstanding
73,564,900

 
71,937,222




See accompanying notes to unaudited condensed consolidated financial statements.

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Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Operations

 
Three Months ended
 
Six Months ended
(Dollars in thousands, except per share data)
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
Interest Income
 
 
 
 
 
 
 
Residential real estate loans
$
7,026

 
7,495

 
14,286

 
15,279

Commercial loans
29,865

 
30,430

 
58,497

 
61,471

Consumer and other loans
7,909

 
8,813

 
15,773

 
17,983

Investment securities
17,351

 
17,454

 
31,550

 
37,343

Total interest income
62,151

 
64,192

 
120,106

 
132,076

Interest Expense
 
 
 
 
 
 
 
Deposits
3,474

 
4,609

 
7,186

 
9,563

Securities sold under agreements to repurchase
210

 
303

 
437

 
602

Federal Home Loan Bank advances
2,648

 
3,218

 
5,299

 
6,599

Federal funds purchased and other borrowed funds
54

 
61

 
106

 
123

Subordinated debentures
799

 
853

 
1,615

 
1,755

Total interest expense
7,185

 
9,044

 
14,643

 
18,642

Net Interest Income
54,966

 
55,148

 
105,463

 
113,434

Provision for loan losses
1,078

 
7,925

 
3,178

 
16,550

Net interest income after provision for loan losses
53,888

 
47,223

 
102,285

 
96,884

Non-Interest Income
 
 
 
 
 
 
 
Service charges and other fees
11,818

 
11,291

 
22,404

 
21,783

Miscellaneous loan fees and charges
1,153

 
1,113

 
2,242

 
2,059

Gain on sale of loans
7,472

 
7,522

 
16,561

 
14,335

Gain on sale of investments
241

 

 
104

 

Other income
2,538

 
1,865

 
4,861

 
3,952

Total non-interest income
23,222

 
21,791

 
46,172

 
42,129

Non-Interest Expense
 
 
 
 
 
 
 
Compensation and employee benefits
24,917

 
23,684

 
49,494

 
47,244

Occupancy and equipment
5,906

 
5,825

 
11,731

 
11,793

Advertising and promotions
1,621

 
1,713

 
3,169

 
3,115

Outsourced data processing
813

 
788

 
1,638

 
1,634

Other real estate owned
2,968

 
2,199

 
3,852

 
9,021

Federal Deposit Insurance Corporation premiums
1,154

 
1,300

 
2,458

 
3,012

Core deposit intangibles amortization
505

 
535

 
991

 
1,087

Other expense
10,597

 
10,146

 
18,582

 
18,329

Total non-interest expense
48,481

 
46,190

 
91,915

 
95,235

Income Before Income Taxes
28,629

 
22,824

 
56,542

 
43,778

Federal and state income tax expense
5,927

 
3,843

 
13,072

 
8,464

Net Income
$
22,702

 
18,981

 
43,470

 
35,314

Basic earnings per share
$
0.31

 
0.26

 
0.60

 
0.49

Diluted earnings per share
$
0.31

 
0.26

 
0.60

 
0.49

Dividends declared per share
$
0.15

 
0.13

 
0.29

 
0.26

Average outstanding shares - basic
72,480,019

 
71,928,697

 
72,224,263

 
71,921,885

Average outstanding shares - diluted
72,548,172

 
71,928,853

 
72,282,104

 
71,921,990

See accompanying notes to unaudited condensed consolidated financial statements.

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Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
 
 
Three Months ended
 
Six Months ended
(Dollars in thousands)
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
Net Income
$
22,702

 
18,981

 
43,470

 
35,314

Other Comprehensive (Loss) Income, Net of Tax
 
 
 
 
 
 
 
Unrealized (losses) gains on available-for-sale securities
(56,256
)
 
13,214

 
(55,685
)
 
23,232

Reclassification adjustment for gains included in net income
(241
)
 

 
(104
)
 

Net unrealized (losses) gains on securities
(56,497
)
 
13,214

 
(55,789
)
 
23,232

Tax effect
21,977

 
(5,140
)
 
21,702

 
(9,037
)
Net of tax amount
(34,520
)
 
8,074

 
(34,087
)
 
14,195

Unrealized gains (losses) on derivatives used for cash flow hedges
12,810

 
(9,051
)
 
15,562

 
(5,939
)
Tax effect
(4,983
)
 
3,521

 
(6,055
)
 
2,310

Net of tax amount
7,827

 
(5,530
)
 
9,507

 
(3,629
)
Total other comprehensive (loss) income, net of tax
(26,693
)
 
2,544

 
(24,580
)
 
10,566

Total Comprehensive (Loss) Income
$
(3,991
)
 
21,525

 
18,890

 
45,880





























See accompanying notes to unaudited condensed consolidated financial statements.

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

 
$
719

 
642,882

 
173,139

 
33,487

 
850,227

Comprehensive income

 

 

 
35,314

 
10,566

 
45,880

Cash dividends declared ($0.26 per share)

 

 

 
(18,700
)
 

 
(18,700
)
Stock issuances under stock incentive plans
16,313

 

 
233

 

 

 
233

Stock-based compensation and related taxes

 

 
(1,459
)
 

 

 
(1,459
)
Balance at June 30, 2012
71,931,386

 
$
719

 
641,656

 
189,753

 
44,053

 
876,181

Balance at December 31, 2012
71,937,222

 
$
719

 
641,737

 
210,531

 
47,962

 
900,949

Comprehensive income (loss)

 

 

 
43,470

 
(24,580
)
 
18,890

Cash dividends declared ($0.29 per share)

 

 

 
(21,152
)
 

 
(21,152
)
Stock issuances under stock incentive plans
172,422

 
2

 
2,653

 

 

 
2,655

Stock issued in connection with acquisition
1,455,256

 
15

 
28,275

 

 

 
28,290

Stock-based compensation and related taxes

 

 
(630
)
 

 

 
(630
)
Balance at June 30, 2013
73,564,900

 
$
736

 
672,035

 
232,849

 
23,382

 
929,002























See accompanying notes to unaudited condensed consolidated financial statements.

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Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
 
Six Months ended
(Dollars in thousands)
June 30,
2013
 
June 30,
2012
Operating Activities
 
 
 
Net income
$
43,470

 
35,314

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
3,178

 
16,550

Net amortization of investment securities premiums and discounts
39,846

 
29,212

Federal Home Loan Bank stock dividends

 
(5
)
Mortgage loans held for sale originated or acquired
(527,853
)
 
(500,694
)
Proceeds from sales of mortgage loans held for sale
616,180

 
547,893

Gain on sale of loans
(16,561
)
 
(14,335
)
Gain on sale of investments
(104
)
 

Stock-based compensation expense, net of tax benefits
607

 
236

Excess tax deficiencies from stock-based compensation
188

 

Depreciation of premises and equipment
4,742

 
4,943

Loss on sale of other real estate owned and writedown
987

 
6,814

Amortization of core deposit intangibles
991

 
1,087

Net increase in accrued interest receivable
(3,673
)
 
(2,147
)
Net decrease in other assets
1,584

 
1,001

Net decrease in accrued interest payable
(1,007
)
 
(749
)
Net increase in other liabilities
3,406

 
8,577

Net cash provided by operating activities
165,981

 
133,697

Investing Activities
 
 
 
Proceeds from sales, maturities and prepayments of investment securities, available-for-sale
1,165,981

 
871,472

Purchases of investment securities, available-for-sale
(1,224,241
)
 
(1,154,990
)
Principal collected on loans
513,255

 
441,318

Loans originated or acquired
(650,378
)
 
(478,541
)
Net addition of premises and equipment and other real estate owned
(3,167
)
 
(5,501
)
Proceeds from sale of other real estate owned
11,066

 
18,073

Net sale (purchase) of non-marketable equity securities
60

 
(671
)
Net cash received from acquisitions
12,123

 

Net cash used in investment activities
(175,301
)
 
(308,840
)
Financing Activities
 
 
 
Net (decrease) increase in deposits
(261,461
)
 
161,056

Net increase in securities sold under agreements to repurchase
10,516

 
208,141

Net increase (decrease) in Federal Home Loan Bank advances
214,965

 
(163,017
)
Net (decrease) increase in federal funds purchased and other borrowed funds
(1,471
)
 
50

Cash dividends paid
(10,099
)
 
(18,700
)
Excess tax deficiencies from stock-based compensation
(188
)
 

Proceeds from stock options exercised
2,474

 

Net cash (used in) provided by financing activities
(45,264
)
 
187,530

Net (decrease) increase in cash and cash equivalents
(54,584
)
 
12,387

Cash and cash equivalents at beginning of period
187,040

 
128,032

Cash and cash equivalents at end of period
$
132,456

 
140,419


See accompanying notes to unaudited condensed consolidated financial statements.

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Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows (Continued)
 
 
Six Months ended
(Dollars in thousands)
June 30,
2013
 
June 30,
2012
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
15,648

 
19,391

Cash paid during the period for income taxes
13,660

 
8,221

Sale and refinancing of other real estate owned
2,507

 
668

Transfer of loans to other real estate owned
9,889

 
16,372

Supplemental Disclosure of Non-Cash Investing Activities
 
 
 
Acquisitions
 
 
 
Fair value of common stock shares issued
$
28,290

 

Cash consideration for outstanding shares
11,025

 

Fair value of assets acquired
300,541

 

Liabilities assumed
261,226

 



































See accompanying notes to unaudited condensed consolidated financial statements.

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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 twelve divisions of its wholly-owned bank subsidiary, Glacier Bank (“Bank”). The Company offers a wide range of banking products and services, including transaction and savings deposits, real estate, commercial, agriculture and consumer loans, mortgage origination services, and retail brokerage services. The Company serves individuals, small to medium-sized businesses, community organizations and public entities.

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

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

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

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

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

On May 31, 2013, the Company completed its acquisition of Wheatland Bankshares, Inc. (“Wheatland”) and its wholly-owned subsidiary, First State Bank, a community bank based in Wheatland, Wyoming. The transaction was accounted for using the acquisition method, and the results of operations of First State Bank have been included in the Company’s consolidated financial statements as of the acquisition date.

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.


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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 June 30, 2013 and December 31, 2012:
 
 
June 30, 2013
 
December 31, 2012
(Dollars in thousands)
CDE (NMTC)
 
LIHTC
 
CDE (NMTC)
 
LIHTC
Assets
 
 
 
 
 
 
 
Loans receivable
$
35,840

 

 
35,480

 

Premises and equipment, net

 
13,745

 

 
16,066

Accrued interest receivable
113

 

 
117

 

Other assets
969

 
153

 
1,114

 
143

Total assets
$
36,922

 
13,898

 
36,711

 
16,209

Liabilities
 
 
 
 
 
 
 
Other borrowed funds
$
4,555

 
1,722

 
4,555

 
3,639

Accrued interest payable
4

 
5

 
4

 
6

Other liabilities
92

 
177

 
182

 
136

Total liabilities
$
4,651

 
1,904

 
4,741

 
3,781


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

Loans Receivable
Loans that are intended to be held-to-maturity are reported at the unpaid principal balance less net charge-offs and adjusted for deferred fees and costs on originated loans and unamortized premiums or discounts on acquired loans. Interest income is recognized using the interest method and includes discount accretion and premium amortization on acquired loans and net loan fees on originated loans which are amortized over the expected life of the loans using a method that approximates the level-yield interest method. The Company’s loan segments, which are based on the purpose of the loan, include residential real estate, commercial, and consumer loans. The Company’s loan classes, a further disaggregation of segments, include residential real estate loans (residential real estate segment), commercial real estate and other commercial loans (commercial segment), and home equity and other consumer loans (consumer segment).

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


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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 troubled debt restructurings (“TDR”), 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.

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

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.

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

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

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

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

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


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Table of Contents

Note 2. Investment Securities, Available-for-Sale

A comparison of the amortized cost and estimated fair value of the Company’s investment securities designated as available-for-sale is presented below.
 
 
June 30, 2013
 
Weighted
 
Amortized
 
Gross Unrealized
 
Fair
(Dollars in thousands)
Yield
 
Cost
 
Gains
 
Losses
 
Value
U.S. government sponsored enterprises
 
 
 
 
 
 
 
 
 
Maturing after one year through five years
2.27
%
 
$
12,840

 
270

 

 
13,110

Maturing after five years through ten years
1.71
%
 
40

 
1

 

 
41

 
2.27
%
 
12,880

 
271

 

 
13,151

State and local governments
 
 
 
 
 
 
 
 
 
Maturing within one year
2.02
%
 
5,066

 
41

 

 
5,107

Maturing after one year through five years
2.07
%
 
158,331

 
3,063

 
(265
)
 
161,129

Maturing after five years through ten years
3.11
%
 
55,026

 
904

 
(656
)
 
55,274

Maturing after ten years
4.53
%
 
1,089,519

 
44,313

 
(15,466
)
 
1,118,366

 
4.17
%
 
1,307,942

 
48,321

 
(16,387
)
 
1,339,876

Corporate bonds
 
 
 
 
 
 
 
 
 
Maturing within one year
2.06
%
 
64,391

 
630

 

 
65,021

Maturing after one year through five years
2.10
%
 
357,036

 
2,571

 
(3,173
)
 
356,434

Maturing after five years through ten years
2.27
%
 
21,635

 
53

 
(346
)
 
21,342

 
2.10
%
 
443,062

 
3,254

 
(3,519
)
 
442,797

Residential mortgage-backed securities
2.18
%
 
1,917,954

 
13,728

 
(6,129
)
 
1,925,553

Total investment securities
2.88
%
 
$
3,681,838

 
65,574

 
(26,035
)
 
3,721,377


13


Table of Contents

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

 
1

 

 
202

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

 
371

 

 
17,435

Maturing after five years through ten years
2.03
%
 
44

 
1

 

 
45

 
2.29
%
 
17,108

 
372

 

 
17,480

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

 
28

 
(2
)
 
4,314

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

 
4,142

 
(142
)
 
153,497

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

 
1,102

 
(99
)
 
39,349

Maturing after ten years
4.70
%
 
935,897

 
82,823

 
(1,362
)
 
1,017,358

 
4.29
%
 
1,128,028

 
88,095

 
(1,605
)
 
1,214,518

Corporate bonds
 
 
 
 
 
 
 
 
 
Maturing within one year
1.73
%
 
18,412

 
51

 

 
18,463

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

 
4,018

 
(238
)
 
253,807

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

 
381

 

 
16,525

 
2.19
%
 
284,583

 
4,450

 
(238
)
 
288,795

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

 

 

 
1,708

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

 
8,860

 
(4,607
)
 
2,160,302

Total investment securities
2.71
%
 
$
3,587,677

 
101,778

 
(6,450
)
 
3,683,005


Included in the residential mortgage-backed securities are $39,375,000 and $46,733,000 as of June 30, 2013 and December 31, 2012, respectively, of non-guaranteed private label whole loan mortgage-backed securities of which none of the underlying collateral is considered “subprime.”

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

The cost of each investment sold is determined by specific identification. Gain or loss on sale of investments consists of the following: 
 
Three Months ended
 
Six Months ended
(Dollars in thousands)
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
Gross proceeds
$
75,649

 

 
$
79,488

 

Less amortized cost
(75,408
)
 

 
(79,384
)
 

Net gain on sale of investments
$
241

 

 
$
104

 

Gross gain on sale of investments
$
256

 

 
$
256

 

Gross loss on sale of investments
(15
)
 

 
(152
)
 

Net gain on sale of investments
$
241

 

 
$
104

 


14


Table of Contents


Investments with an unrealized loss position are summarized as follows:
 
 
June 30, 2013
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
State and local governments
$
312,576

 
(15,987
)
 
10,434

 
(400
)
 
323,010

 
(16,387
)
Corporate bonds
211,592

 
(3,519
)
 

 

 
211,592

 
(3,519
)
Residential mortgage-backed securities
511,542

 
(6,086
)
 
15,991

 
(43
)
 
527,533

 
(6,129
)
Total temporarily impaired securities
$
1,035,710

 
(25,592
)
 
26,425

 
(443
)
 
1,062,135

 
(26,035
)
 
 
December 31, 2012
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
State and local governments
$
102,896

 
(1,531
)
 
4,533

 
(74
)
 
107,429

 
(1,605
)
Corporate bonds
41,856

 
(238
)
 

 

 
41,856

 
(238
)
Residential mortgage-backed securities
955,235

 
(4,041
)
 
62,905

 
(566
)
 
1,018,140

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

 
(5,810
)
 
67,438

 
(640
)
 
1,167,425

 
(6,450
)

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


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Table of Contents

Note 3. Loans Receivable, Net

The following schedules summarize the activity in the ALLL on a portfolio class basis:
  
 
Three Months ended June 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
130,835

 
15,411

 
73,335

 
22,481

 
10,833

 
8,775

Provision for loan losses
1,078

 
(509
)
 
520

 
1,880

 
(1,016
)
 
203

Charge-offs
(2,271
)
 
(172
)
 
(538
)
 
(594
)
 
(291
)
 
(676
)
Recoveries
1,241

 
67

 
568

 
349

 
100

 
157

Balance at end of period
$
130,883

 
14,797

 
73,885

 
24,116

 
9,626

 
8,459


 
Three Months ended June 30, 2012
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
136,586

 
19,003

 
73,240

 
22,444

 
13,364

 
8,535

Provision for loan losses
7,925

 
22

 
10,374

 
(1,255
)
 
(1,471
)
 
255

Charge-offs
(8,679
)
 
(953
)
 
(5,549
)
 
(887
)
 
(1,077
)
 
(213
)
Recoveries
1,627

 
67

 
1,033

 
268

 
88

 
171

Balance at end of period
$
137,459

 
18,139

 
79,098

 
20,570

 
10,904

 
8,748


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

 
15,482

 
74,398

 
21,567

 
10,659

 
8,748

Provision for loan losses
3,178

 
(486
)
 
(432
)
 
3,579

 
441

 
76

Charge-offs
(5,885
)
 
(349
)
 
(1,303
)
 
(1,752
)
 
(1,629
)
 
(852
)
Recoveries
2,736

 
150

 
1,222

 
722

 
155

 
487

Balance at end of period
$
130,883

 
14,797

 
73,885

 
24,116

 
9,626

 
8,459

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

 
17,227

 
76,920

 
20,833

 
13,616

 
8,920

Provision for loan losses
16,550

 
2,085

 
13,010

 
1,304

 
(470
)
 
621

Charge-offs
(19,737
)
 
(1,320
)
 
(12,534
)
 
(2,356
)
 
(2,358
)
 
(1,169
)
Recoveries
3,130

 
147

 
1,702

 
789

 
116

 
376

Balance at end of period
$
137,459

 
18,139

 
79,098

 
20,570

 
10,904

 
8,748



16


Table of Contents

The following schedules disclose the ALLL and loans receivable on a portfolio class basis:
 
 
June 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
11,382

 
1,026

 
6,100

 
3,553

 
24

 
679

Collectively evaluated for impairment
119,501

 
13,771

 
67,785

 
20,563

 
9,602

 
7,780

Total allowance for loan and lease losses
$
130,883

 
14,797

 
73,885

 
24,116

 
9,626

 
8,459

Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
192,573

 
24,719

 
117,836

 
36,705

 
8,432

 
4,881

Collectively evaluated for impairment
3,480,883

 
507,115

 
1,703,764

 
686,482

 
376,256

 
207,266

Total loans receivable
$
3,673,456

 
531,834

 
1,821,600

 
723,187

 
384,688

 
212,147

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

 
1,680

 
7,716

 
3,859

 
870

 
1,409

Collectively evaluated for impairment
115,320

 
13,802

 
66,682

 
17,708

 
9,789

 
7,339

Total allowance for loan and lease losses
$
130,854

 
15,482

 
74,398

 
21,567

 
10,659

 
8,748

Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
201,735

 
25,862

 
125,282

 
33,593

 
11,074

 
5,924

Collectively evaluated for impairment
3,195,690

 
490,605

 
1,530,226

 
589,804

 
392,851

 
192,204

Total loans receivable
$
3,397,425

 
516,467

 
1,655,508

 
623,397

 
403,925

 
198,128


Substantially all of the Company’s loan receivables are with customers in the Company’s geographic market areas. Although the Company has a diversified loan portfolio, a substantial portion of its customers’ ability to honor their obligations is dependent upon the economic performance in the Company’s market areas. Net deferred fees, costs, premiums, and discounts of $4,722,000 and $1,379,000 were included in the loans receivable balance at June 30, 2013 and December 31, 2012, respectively.


17


Table of Contents

The following schedules disclose the impaired loans by portfolio class basis:
 
 
At or for the Three or Six Months ended June 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans with a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
57,021

 
6,975

 
24,857

 
21,191

 
318

 
3,680

Unpaid principal balance
58,739

 
7,199

 
25,954

 
21,298

 
321

 
3,967

Specific valuation allowance
11,382

 
1,026

 
6,100

 
3,553

 
24

 
679

Average balance - three months
56,118

 
6,865

 
24,411

 
20,856

 
460

 
3,526

Average balance - six months
58,331

 
7,021

 
26,139

 
20,972

 
758

 
3,441

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
135,552

 
17,744

 
92,979

 
15,514

 
8,114

 
1,201

Unpaid principal balance
154,815

 
18,846

 
107,676

 
17,731

 
9,318

 
1,244

Average balance - three months
137,096

 
17,967

 
95,185

 
13,816

 
8,466

 
1,662

Average balance - six months
137,722

 
18,154

 
95,352

 
13,340

 
8,883

 
1,993

Totals
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
192,573

 
24,719

 
117,836

 
36,705

 
8,432

 
4,881

Unpaid principal balance
213,554

 
26,045

 
133,630

 
39,029

 
9,639

 
5,211

Specific valuation allowance
11,382

 
1,026

 
6,100

 
3,553

 
24

 
679

Average balance - three months
193,214

 
24,832

 
119,596

 
34,672

 
8,926

 
5,188

Average balance - six months
196,053

 
25,175

 
121,491

 
34,312

 
9,641

 
5,434

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

 
7,334

 
29,595

 
21,205

 
1,354

 
3,271

Unpaid principal balance
70,261

 
7,459

 
36,887

 
21,278

 
1,362

 
3,275

Specific valuation allowance
15,534

 
1,680

 
7,716

 
3,859

 
870

 
1,409

Average balance
76,656

 
12,797

 
36,164

 
22,665

 
1,390

 
3,640

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

 
18,528

 
95,687

 
12,388

 
9,720

 
2,653

Unpaid principal balance
149,412

 
19,613

 
102,798

 
14,318

 
9,965

 
2,718

Average balance
162,505

 
16,034

 
111,554

 
19,733

 
11,993

 
3,191

Totals
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
201,735

 
25,862

 
125,282

 
33,593

 
11,074

 
5,924

Unpaid principal balance
219,673

 
27,072

 
139,685

 
35,596

 
11,327

 
5,993

Specific valuation allowance
15,534

 
1,680

 
7,716

 
3,859

 
870

 
1,409

Average balance
239,161

 
28,831

 
147,718

 
42,398

 
13,383

 
6,831


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


18


Table of Contents

The following is a loans receivable aging analysis on a portfolio class basis:
 
 
June 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Accruing loans 30-59 days past due
$
18,772

 
1,318

 
8,904

 
4,007

 
3,774

 
769

Accruing loans 60-89 days past due
3,290

 
965

 
1,382

 
297

 
385

 
261

Accruing loans 90 days or more past due
456

 
240

 

 
22

 
146

 
48

Non-accrual loans
89,355

 
12,149

 
53,400

 
12,568

 
9,303

 
1,935

Total past due and non-accrual loans
111,873

 
14,672

 
63,686

 
16,894

 
13,608

 
3,013

Current loans receivable
3,561,583

 
517,162

 
1,757,914

 
706,293

 
371,080

 
209,134

Total loans receivable
$
3,673,456

 
531,834

 
1,821,600

 
723,187

 
384,688

 
212,147

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

 
3,897

 
7,424

 
2,020

 
2,872

 
1,241

Accruing loans 60-89 days past due
9,643

 
1,870

 
3,745

 
645

 
2,980

 
403

Accruing loans 90 days or more past due
1,479

 
451

 
594

 
197

 
188

 
49

Non-accrual loans
96,933

 
14,237

 
55,687

 
13,200

 
11,241

 
2,568

Total past due and non-accrual loans
125,509

 
20,455

 
67,450

 
16,062

 
17,281

 
4,261

Current loans receivable
3,271,916

 
496,012

 
1,588,058

 
607,335

 
386,644

 
193,867

Total loans receivable
$
3,397,425

 
516,467

 
1,655,508

 
623,397

 
403,925

 
198,128



19


Table of Contents

The following is a summary of the TDRs that occurred during the periods presented and the TDRs that occurred within the previous twelve months that subsequently defaulted during the periods presented on a portfolio class basis:
 
 
Three Months ended June 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Troubled debt restructurings
 
 
 
 
 
 
 
 
 
 
 
Number of loans
18

 

 
4

 
10

 
2

 
2

Pre-modification recorded balance
$
2,645

 

 
1,340

 
1,067

 
160

 
78

Post-modification recorded balance
$
2,693

 

 
1,340

 
1,084

 
191

 
78

Troubled debt restructurings that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
5

 
1

 
2

 
2

 

 

Recorded balance
$
1,982

 
265

 
1,555

 
162

 

 


 
Three Months ended June 30, 2012
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Troubled debt restructurings
 
 
 
 
 
 
 
 
 
 
 
Number of loans
47

 
5

 
15

 
22

 
1

 
4

Pre-modification recorded balance
$
11,929

 
1,342

 
5,736

 
4,309

 
310

 
232

Post-modification recorded balance
$
10,650

 
1,342

 
4,444

 
4,322

 
310

 
232

Troubled debt restructurings that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
9

 

 
4

 
2

 
1

 
2

Recorded balance
$
3,127

 

 
2,077

 
531

 
442

 
77


 
Six Months ended June 30, 2013
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Troubled debt restructurings
 
 
 
 
 
 
 
 
 
 
 
Number of loans
42

 
7

 
13

 
17

 
2

 
3

Pre-modification recorded balance
$
9,160

 
1,623

 
4,656

 
2,572

 
160

 
149

Post-modification recorded balance
$
9,378

 
1,794

 
4,656

 
2,588

 
191

 
149

Troubled debt restructurings that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
10

 
1

 
5

 
3

 

 
1

Recorded balance
$
3,145

 
265

 
2,607

 
228

 

 
45



20


Table of Contents

 
Six Months ended June 30, 2012
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Troubled debt restructurings
 
 
 
 
 
 
 
 
 
 
 
Number of loans
103

 
8

 
40

 
41

 
7

 
7

Pre-modification recorded balance
$
28,455

 
1,701

 
16,846

 
8,432

 
1,095

 
381

Post-modification recorded balance
$
26,469

 
1,701

 
14,838

 
8,454

 
1,095

 
381

Troubled debt restructurings that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
20

 

 
11

 
5

 
2

 
2

Recorded balance
$
6,207

 

 
4,735

 
798

 
597

 
77


For the six months ended June 30, 2013 and 2012, the majority of TDRs occurring in most loan classes was a result of an extension of the maturity date which aggregated 48 percent and 31 percent, respectively, of total TDRs. For commercial real estate, the class with the largest dollar amount of TDRs, approximately 44 percent and 16 percent, respectively, was a result of an extension of the maturity date and 33 percent and 24 percent, respectively, was due to 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 table, the Company had TDRs with pre-modification loan balances of $12,505,000 and $24,390,000 for the six months ended June 30, 2013 and 2012, respectively, for which other real estate owned (“OREO”) was received in full or partial satisfaction of the loans. The majority of such TDRs for both periods was in commercial real estate.
 
Note 4. Goodwill

The Company performed its annual goodwill impairment test during the third quarter of 2012 and determined the fair value of the aggregated reporting units exceeded the carrying value, such that the Company’s goodwill was not considered impaired. Given there were no events or circumstances that occurred since the third quarter 2012 that would more-likely-than-not reduce the fair value of the aggregated reporting units below the carrying value, the Company did not perform interim testing at June 30, 2013. However, further adverse 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 9.
 
The following schedule discloses the changes in the carrying value of goodwill:
 
Three Months ended
 
Six Months ended
(Dollars in thousands)
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
Net carrying value at beginning of period
$
106,100

 
106,100

 
106,100

 
106,100

Acquisitions
13,409

 

 
13,409

 

Net carrying value at end of period
$
119,509

 
106,100

 
119,509

 
106,100


The gross carrying value of goodwill and the accumulated impairment charge consists of the following:
(Dollars in thousands)
June 30, 2013
 
December 31, 2012
 
 
 
 
Gross carrying value
$
159,668

 
146,259

 
 
 
 
Accumulated impairment charge
(40,159
)
 
(40,159
)
 
 
 
 
Net carrying value
$
119,509

 
106,100

 
 
 
 


21


Table of Contents

Note 5. Derivatives and Hedging Activities

As of June 30, 2013, 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.

The following table summarizes the fair value of the Company’s interest rate swap derivative financial instruments:
 
 
 
 
Fair Value
(Dollars in thousands)
Balance Sheet
Location
 
June 30,
2013
 
December 31,
2012
Interest rate swaps
Other liabilities
 
$
1,270

 
16,832


Pursuant to the interest rate swap agreements, the Company pledged collateral to the counterparties in the form of investment securities totaling $34,419,000 at June 30, 2013. There was $0 collateral pledged from the counterparties to the Company as of June 30, 2013. There is the possibility that the Company may need to pledge additional collateral in the future if there were further 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)
June 30, 2013
 
December 31, 2012
Unrealized gains on available-for-sale securities
$
39,539

 
95,328

Tax effect
(15,381
)
 
(37,083
)
Net of tax amount
24,158

 
58,245

Unrealized losses on derivatives used for cash flow hedges
(1,270
)
 
(16,832
)
Tax effect
494

 
6,549

Net of tax amount
(776
)
 
(10,283
)
Total accumulated other comprehensive income
$
23,382

 
47,962




22


Table of Contents

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, using the treasury stock method.

Basic and diluted earnings per share has been computed based on the following:
 
Three Months ended
 
Six Months ended
(Dollars in thousands, except per share data)
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
Net income available to common stockholders, basic and diluted
$
22,702

 
18,981

 
$
43,470

 
35,314

Average outstanding shares - basic
72,480,019

 
71,928,697

 
72,224,263

 
71,921,885

Add: dilutive stock options and awards
68,153

 
156

 
57,841

 
105

Average outstanding shares - diluted
72,548,172

 
71,928,853

 
72,282,104

 
71,921,990

Basic earnings per share
$
0.31

 
0.26

 
$
0.60

 
0.49

Diluted earnings per share
$
0.31

 
0.26

 
$
0.60

 
0.49


There were 74,159 and 945,063 options excluded from the diluted average outstanding share calculation for the six months ended June 30, 2013 and 2012, 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 six month periods ended June 30, 2013 and 2012.

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 June 30, 2013.

Investment securities: 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.


23


Table of Contents

Fair value determinations of investment securities are the responsibility of the Company’s corporate accounting department. The Company contracts with independent third party pricing vendors to generate fair value estimates 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. The Company makes independent inquiries of other knowledgeable parties in testing the reliability of the inputs, including consideration for illiquidity, credit risk, and cash flow estimates. In assessing credit risk, the Company reviews payment performance, collateral adequacy, credit rating histories, and issuers’ financial statements with follow-up discussion with issuers. For those markets determined to be inactive, the valuation techniques used are models for which management verifies 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 spot LIBOR curve 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 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 June 30, 2013
 
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
$
13,151

 

 
13,151

 

State and local governments
1,339,876

 

 
1,339,876

 

Corporate bonds
442,797

 

 
442,797

 

Residential mortgage-backed securities
1,925,553

 

 
1,925,553

 

Total assets measured at fair value on a recurring basis
$
3,721,377

 

 
3,721,377

 

Interest rate swaps
$
1,270

 

 
1,270

 

Total liabilities measured at fair value on a recurring basis
$
1,270

 

 
1,270

 



24


Table of Contents

 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Fair Value December 31, 2012
 
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 and federal agency
$
202

 

 
202

 

U.S. government sponsored enterprises
17,480

 

 
17,480

 

State and local governments
1,214,518

 

 
1,214,518

 

Corporate bonds
288,795

 

 
288,795

 

Collateralized debt obligations
1,708

 

 
1,708

 

Residential mortgage-backed securities
2,160,302

 

 
2,160,302

 

Total assets measured at fair value on a recurring basis
$
3,683,005

 

 
3,683,005

 

Interest rate swaps
$
16,832

 

 
16,832

 

Total liabilities measured at fair value on a recurring basis
$
16,832

 

 
16,832

 


Non-recurring Measurements
The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a non-recurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended June 30, 2013.

Other real estate owned: OREO is carried at the lower of fair value at acquisition date or estimated fair value, less estimated cost to sell. Estimated fair value of OREO is based on appraisals or evaluations (new or updated). OREO is classified within Level 3 of the fair value hierarchy.

Collateral-dependent impaired loans, net of ALLL: loans included in the Company’s loan portfolio for which it is probable that the Company will not collect all principal and interest due according to contractual terms are considered impaired. Estimated fair value of collateral-dependent impaired loans is based on the fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company’s credit departments review appraisals for OREO and collateral-dependent loans, giving consideration to the highest and best use of the collateral. The appraisal or evaluation (new or updated) is considered the starting point for determining fair value. The valuation techniques used in preparing appraisals or evaluations (new or updated) include the cost approach, income approach, sales comparison approach, or a combination of the preceding valuation techniques. The key inputs used to determine the fair value of the collateral-dependent loans and OREO include selling costs, discounted cash flow rate or capitalization rate, and adjustment to comparables. Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness. The Company also considers other factors and events in the environment that may affect the fair value. The appraisals or evaluations (new or updated) are reviewed at least quarterly and more frequently based on current market conditions, including deterioration in a borrower’s financial condition and when property values may be subject to significant volatility. After review and acceptance of the collateral appraisal or evaluation (new or updated), adjustments to the impaired loan or OREO may occur. The Company generally obtains appraisals or evaluations (new or updated) annually.


25


Table of Contents

The following schedules disclose the fair value measurement of assets with a recorded change during the period resulting from re-measuring the assets at fair value on a non-recurring basis:
 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Fair Value June 30, 2013
 
Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Other real estate owned
$
5,459

 

 

 
5,459

Collateral-dependent impaired loans, net of ALLL
19,039

 

 

 
19,039

Total assets measured at fair value on a non-recurring basis
$
24,498

 

 

 
24,498


 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Fair Value December 31, 2012
 
Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Other real estate owned
$
13,983

 

 

 
13,983

Collateral-dependent impaired loans, net of ALLL
22,966

 

 

 
22,966

Total assets measured at fair value on a non-recurring basis
$
36,949

 

 

 
36,949



26


Table of Contents

Non-recurring Measurements Using Significant Unobservable Inputs (Level 3)
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

 
Fair Value
 
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
June 30,
2013
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average) 1
Other real estate owned
$
5,459

 
Sales comparison approach
 
Selling costs
 
6.5% - 10.0% (7.3%)
 
 
 
 
 
Adjustment to comparables
 
0.0% - 10.0% (0.1%)
Collateral-dependent impaired loans, net of ALLL
$
928

 
Cost approach
 
Selling costs
 
0.0% - 20.0% (4.4%)
 
5,182

 
Income approach
 
Selling costs
 
8.0% - 8.0% (8.0%)
 
 
 
 
 
Discount rate
 
6.0% - 8.3% (7.2%)
 
8,515

 
Sales comparison approach
 
Selling costs
 
0.0% - 10.0% (7.9%)
 
 
 
 
 
Discount rate
 
0.0% - 5.0% (2.5%)
 
 
 
 
 
Adjustment to comparables
 
0.0% - 5.0% (0.2%)
 
4,414

 
Combined approach
 
Selling costs
 
8.0% - 10.0% (8.7%)
 
 
 
 
 
Discount rate
 
7.5% - 7.5% (7.5%)
 
 
 
 
 
Adjustment to comparables
 
0.0% - 36.0% (17.4%)
 
$
19,039

 
 
 
 
 
 
__________
1 The range for selling costs and adjustments to comparables indicate reductions to the fair value.

Fair Value of Financial Instruments
The following is a description of the methods used to estimate the fair value of all other assets and liabilities recognized at amounts other than fair value.

Cash and cash equivalents: fair value is estimated at book value.

Loans held for sale: fair value is estimated at book value.

Loans receivable, net of ALLL: fair value is estimated by discounting the future cash flows using the rates at which similar notes would be written for the same remaining maturities. The market rates used are based on current rates the Company would impose for similar loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of the loans along with local economic and market conditions. Estimated fair value of impaired loans is based on the fair value of the collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate). All impaired loans are classified as Level 3 and all other loans are classified as Level 2 within the hierarchy.

Accrued interest receivable: fair value is estimated at book value.

Non-marketable equity securities: fair value is estimated at book value due to restrictions that limit the sale or transfer of such securities.

Deposits: fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities. The market rates used were obtained from a knowledgeable independent third party and reviewed by the Company. The rates were the average of current rates offered by the Company’s local competitors. The estimated fair value of demand, NOW, savings, and money market deposits is the book value since rates are regularly adjusted to market rates and transactions are executed at book value daily. Therefore, such deposits are classified in Level 1 of the valuation hierarchy. Certificate accounts and wholesale deposits are classified as Level 2 within the hierarchy.


27


Table of Contents

Federal Home Loan Bank (“FHLB”) advances: fair value of non-callable FHLB advances is estimated by discounting the future cash flows using rates of similar advances with similar maturities. Such rates were obtained from current rates offered by FHLB. The estimated fair value of callable FHLB advances was obtained from FHLB and the model was reviewed by the Company, including discussions with FHLB.

Securities sold under agreements to repurchase (“repurchase agreements”) and other borrowed funds: fair value of term repurchase agreements and other term borrowings is estimated based on current repurchase rates and borrowing rates currently available to the Company for repurchases and borrowings with similar terms and maturities. The estimated fair value for overnight repurchase agreements and other borrowings is book value.

Subordinated debentures: fair value of the subordinated debt is estimated by discounting the estimated future cash flows using current estimated market rates. The market rates used were averages of currently traded trust preferred securities with similar characteristics to the Company’s issuances and obtained from an independent third party.

Accrued interest payable: fair value is estimated at book value.

Off-balance sheet financial instruments: commitments to extend credit and letters of credit represent the principal categories of off-balance sheet financial instruments. Rates for these commitments are set at time of loan closing, such that no adjustment is necessary to reflect these commitments at market value. The Company has an insignificant amount of off-balance sheet financial instruments.

The following schedules present the carrying amounts, estimated fair values and the level within the fair value hierarchy of the Company’s financial instruments:
 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Carrying Amount June 30, 2013
 
Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
132,456

 
132,456

 

 

Investment securities, available-for-sale
3,721,377

 

 
3,721,377

 

Loans held for sale
95,495

 
95,495

 

 

Loans receivable, net of ALLL
3,542,573

 

 
3,457,402

 
181,191

Accrued interest receivable
43,593

 
43,593

 

 

Non-marketable equity securities
49,752

 

 
49,752

 

Total financial assets
$
7,585,246

 
271,544

 
7,228,531

 
181,191

Financial liabilities
 
 
 
 
 
 
 
Deposits
$
5,358,197

 
3,813,660

 
1,610,300

 

FHLB advances
1,217,445

 

 
1,237,320

 

Repurchase agreements and other borrowed funds
308,513

 

 
308,513

 

Subordinated debentures
125,490

 

 
78,062

 

Accrued interest payable
3,824

 
3,824

 

 

Interest rate swaps
1,270

 

 
1,270

 

Total financial liabilities
$
7,014,739

 
3,817,484

 
3,235,465

 



28


Table of Contents

 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Carrying Amount December 31, 2012
 
Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
187,040

 
187,040

 

 

Investment securities, available-for-sale
3,683,005

 

 
3,683,005

 

Loans held for sale
145,501

 
145,501

 

 

Loans receivable, net of ALLL
3,266,571

 

 
3,184,987

 
186,201

Accrued interest receivable
37,770

 
37,770

 

 

Non-marketable equity securities
48,812

 

 
48,812

 

Total financial assets
$
7,368,699

 
370,311

 
6,916,804

 
186,201

Financial liabilities
 
 
 
 
 
 
 
Deposits
$
5,364,461

 
3,585,126

 
1,789,134

 

FHLB advances
997,013

 

 
1,027,101

 

Repurchase agreements and other borrowed funds
299,540

 

 
299,540

 

Subordinated debentures
125,418

 

 
70,895

 

Accrued interest payable
4,675

 
4,675

 

 

Interest rate swaps
16,832

 

 
16,832

 

Total financial liabilities
$
6,807,939

 
3,589,801

 
3,203,502

 


Note 9. Mergers and Acquisitions

On May 31, 2013, the Company acquired 100 percent of the outstanding common stock of Wheatland and its wholly-owned subsidiary, First State Bank, a community bank based in Wheatland, Wyoming. First State Bank provides community banking services to individuals and businesses from banking offices in Wheatland, Torrington and Guernsey, Wyoming. As a result of the acquisition, the Company will increase its presence in the State of Wyoming and will further diversify its loan, customer and deposit base with First State Bank’s strong commitment to agriculture. First State Bank will operate as a division of the Bank under the name “First State Bank, division of Glacier Bank.”

The Wheatland acquisition was valued at $39,315,000 and resulted in the Company issuing 1,455,256 shares of its common stock and $11,025,000 in cash in exchange for all of Wheatland’s outstanding common stock shares. The fair value of the Company’s common stock shares issued was determined on the basis of the closing market price of the Company’s common stock shares on the May 31, 2013 acquisition date.


29


Table of Contents

The assets and liabilities of Wheatland were recorded on the Company’s consolidated statements of financial condition at their estimated fair values as of the May 31, 2013 acquisition date, and Wheatland’s results of operations have been included in the Company’s consolidated statements of operations since that date. The following table summarizes the fair value of the net assets that the Company acquired from Wheatland:
(Dollars in thousands)
May 31,
2013
Assets
 
Cash and cash equivalents
$
23,148

Investment securities, available-for-sale
75,643

Loans receivable
171,199

Goodwill and core deposit intangible
15,488

Accrued income and other assets
15,063

Total assets
300,541

Liabilities
 
Deposits
255,197

Federal Home Loan Bank advances
5,467

Accrued expenses and other liabilities
562

Total liabilities
261,226

Purchase price
$
39,315


The excess of the purchase price over tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Wheatland. None of the goodwill is deductible for income tax purposes as the acquisition is accounted for as a tax-free exchange. The following table discloses the calculation of the purchase price and the resulting goodwill relating to the Wheatland acquisition:
(Dollars in thousands)
May 31,
2013
Purchase price
 
Fair value of Company common stock shares issued
$
28,290

Cash consideration for outstanding shares
11,025

Total purchase price
39,315

Fair value of net assets acquired
 
Tangible assets acquired
285,053

Core deposit intangible asset acquired
2,079

Liabilities assumed
(261,226
)
Total fair value of net assets acquired
25,906

Goodwill recognized
$
13,409


The fair value of the assets acquired includes loans with a fair value of $171,199,000. The gross principal and contractual interest due under the contracts is $176,698,000, all of which is expected to be collectible.

The Company incurred $571,000 of Wheatland third-party acquisition-related costs during the six month period ended June 30, 2013. The expenses are included in other expense in the Company's consolidated statements of operations.


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Table of Contents

Total income consisting of net interest income and non-interest income of the acquired operations of Wheatland was approximately $1,145,000 and net income was approximately $311,000 from May 31, 2013 to June 30, 2013. The following unaudited pro forma summary presents consolidated information of the Company as if the Wheatland acquisition had occurred on January 1, 2012:

 
Six Months ended
(Dollars in thousands)
June 30,
2013
 
June 30,
2012
Net interest income and non-interest income
$
156,182

 
161,328

Net income
44,655

 
36,959


Note 10. Subsequent Event

On July 31, 2013, the Company acquired 100 percent of the outstanding common stock of North Cascades Bankshares, Inc. (“NCBI”) and its wholly-owned subsidiary, North Cascades National Bank, a community bank based in Chelan, Washington. North Cascades National Bank provides community banking services to individuals and businesses in central Washington, with banking offices located in Chelan, Wenatchee, East Wenatchee, Omak, Brewster, Twisp, Okanogan, Grand Coulee and Waterville, Washington. The acquisition expands the Company’s market into central Washington and further diversifies the Company’s loan, customer and deposit base due to the region’s solid economic base of agriculture, fruit processing and tourism. North Cascades National Bank will operate as a division of the Bank under the name “North Cascades Bank, division of Glacier Bank.”

The NCBI acquisition was valued at $30,581,000 and resulted in the Company issuing 687,876 shares of its common stock and $13,838,000 in cash in exchange for all of NCBI's outstanding common stock shares. The fair value of the Company's common stock shares issued was determined on the basis of the closing market price of the Company's common stock shares on the July 31, 2013 acquisition date.

As of July 31, 2013, the book value of NCBI’s total assets was $326,703,000. The initial accounting for the NCBI acquisition has not been completed because the fair value of loans, deposits and numerous other items has not yet been determined.


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Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to provide a more comprehensive review of the Glacier Bancorp, Inc.’s (“Company”) operating results and financial condition than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”

FORWARD-LOOKING STATEMENTS

This Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about management’s plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections titled “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as applicable, in this report and the Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Annual Report”), the following factors, among others, could cause actual results to differ materially from the anticipated results:
the risks associated with lending and potential adverse changes of the credit quality of loans in the Company’s portfolio, including as a result of a slow recovery in the housing and real estate markets in its geographic areas;
increased loan delinquency rates;
the risks presented by a slow economic recovery and the current sequestration, which could adversely affect credit quality, loan collateral values, other real estate owned values, investment values, liquidity and capital levels, dividends and loan originations;
changes in market interest rates, which could adversely affect the Company’s net interest income and profitability;
legislative or regulatory changes that adversely affect the Company’s business, ability to complete pending or prospective future acquisitions, limit certain sources of revenue, or increase cost of operations;
costs or difficulties related to the completion and integration of acquisitions;
the goodwill the Company has recorded in connection with acquisitions could become additionally impaired, which may have an adverse impact on earnings and capital;
reduced demand for banking products and services;
the risks presented by public stock market volatility, which could adversely affect the market price of the Company’s common stock and the ability to raise additional capital in the future;
competition from other financial services companies in the Company’s markets;
dependence on the CEO, senior management team and Presidents of its bank divisions;
potential interruption or breach in security of the Company’s systems; and
the Company’s success in managing risks involved in the foregoing.

Please take into account that forward-looking statements speak only as of the date of this Form 10-Q. The Company does not undertake any obligation to publicly correct or update any forward-looking statement if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statement.


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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Recent Acquisitions
On May 31, 2013, the Company completed the acquisition of Wheatland Bankshares, Inc. and its wholly-owned subsidiary, First State Bank, which has community bank offices in Wheatland, Torrington, and Guernsey, Wyoming. First State Bank will operate as a division of Glacier Bank under the name “First State Bank, division of Glacier Bank.” Cash of $11.0 million and 1,455,256 shares of the Company's common stock were issued in the acquisition which resulted in $13.4 million of goodwill. The Company incurred $571 thousand of legal and professional expenses in connection with the acquisition. The Company's results of operations and financial condition include the acquisition of First State Bank from the May 31, 2013 acquisition date.

On July 31, 2013, the Company completed the acquisition of North Cascades Bancshares, Inc. and its wholly-owned subsidiary, North Cascades National Bank, which has community bank offices in Chelan, Wenatchee, East Wenatchee, Omak, Brewster, Twisp, Okanogan, Grand Coulee and Waterville, Washington. North Cascades National Bank will operate as a division of Glacier Bank under the name “North Cascades Bank, division of Glacier Bank.” Cash of $13.8 million and 687,876 shares of the Company's common stock were issued in the acquisition.

Financial Condition Analysis

Assets
The following table summarizes the asset balances as of the dates indicated, and the amount of change from December 31, 2012 and June 30, 2012
 
 
 
 
 
 
 
$ Change from
 
$ Change from
(Dollars in thousands)
June 30,
2013
 
December 31,
2012
 
June 30,
2012
 
December 31,
2012
 
June 30,
2012
Cash and cash equivalents
$
132,456

 
187,040

 
140,419

 
(54,584
)
 
(7,963
)
Investment securities, available-for-sale
3,721,377

 
3,683,005

 
3,404,282

 
38,372

 
317,095

Loans receivable
 
 
 
 
 
 
 
 
 
Residential real estate
531,834

 
516,467

 
525,551

 
15,367

 
6,283

Commercial
2,544,787

 
2,278,905

 
2,293,876

 
265,882

 
250,911

Consumer and other
596,835

 
602,053

 
625,769

 
(5,218
)
 
(28,934
)
Loans receivable
3,673,456

 
3,397,425

 
3,445,196

 
276,031

 
228,260

Allowance for loan and lease losses
(130,883
)
 
(130,854
)
 
(137,459
)
 
(29
)
 
6,576

Loans receivable, net
3,542,573

 
3,266,571

 
3,307,737

 
276,002

 
234,836

Other assets
600,410

 
610,824

 
581,664

 
(10,414
)
 
18,746

Total assets
$
7,996,816

 
7,747,440

 
7,434,102

 
249,376

 
562,714


Excluding retained investment securities of $21.6 million from the acquisition of First State Bank, investment securities increased $41.7 million, or 1 percent, during the current quarter and increased $16.8 million, or less than 1 percent, from December 31, 2012. The Company continued to purchase investment securities during the current quarter primarily to offset principal payments. The investment securities purchased during the current quarter included U.S. agency mortgage-backed securities, U.S. agency collateralized mortgage obligations (“CMO”), corporate and municipal bonds. The investment securities represent 47 percent of total assets at June 30, 2013, compared to 48 percent at December 31, 2012 and 46 percent at June 30, 2012.

Excluding the loans receivable of $171.2 million from the acquisition of First State Bank, the loan portfolio increased $98.4 million, or 3 percent, during the current quarter and increased $57.1 million, or 2 percent, from the prior year second quarter. Excluding the acquisition, all loan categories increased during the current quarter with the largest increase in commercial loans, which increased $93.0 million, or 4 percent. Excluding the acquisition, commercial loans was the one loan category that increased from the prior year second quarter, which increased $106.7 million, or 5 percent, while consumer and other loans decreased $42.8 million, or 7 percent, and residential real estate loans decreased $6.9 million, or 1 percent, from the prior year second quarter. The decreases in consumer and other loans was primarily attributable to customers paying off home equity lines of credit.


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Table of Contents

Liabilities
The following table summarizes the liability balances as of the dates indicated, and the amount of change from December 31, 2012 and June 30, 2012

 
 
 
 
 
 
 
$ Change from
 
$ Change from
(Dollars in thousands)
June 30,
2013
 
December 31,
2012
 
June 30,
2012
 
December 31,
2012
 
June 30,
2012
Non-interest bearing deposits
$
1,236,104

 
1,191,933

 
1,066,662

 
44,171

 
169,442

Interest bearing deposits
4,122,093

 
4,172,528

 
3,915,607

 
(50,435
)
 
206,486

Repurchase agreements
300,024

 
289,508

 
466,784

 
10,516

 
(166,760
)
Federal Home Loan Bank advances
1,217,445

 
997,013

 
906,029

 
220,432

 
311,416

Other borrowed funds
8,489

 
10,032

 
9,973

 
(1,543
)
 
(1,484
)
Subordinated debentures
125,490

 
125,418

 
125,347

 
72

 
143

Other liabilities
58,169

 
60,059

 
67,519

 
(1,890
)
 
(9,350
)
Total liabilities
$
7,067,814

 
6,846,491

 
6,557,921

 
221,323

 
509,893


Non-interest bearing deposits of $1.236 billion increased $44.2 million, or 4 percent, from December 31, 2012 and increased $169 million, or 16 percent, from June 30, 2012. Excluding non-interest bearing deposits of $30.8 million from the First State Bank acquisition, non-interest bearing deposits at June 30, 2013 increased $13.4 million, or 1 percent, since December 31, 2012 and increased $139 million, or 13 percent, since June 30, 2012.

Interest bearing deposits of $4.122 billion at June 30, 2013 included $372 million of wholesale deposits (i.e., brokered deposits classified as NOW, money market deposit and certificate accounts). Excluding interest bearing deposits of $224 million from the First State Bank acquisition, interest bearing deposits at June 30, 2013 decreased $275 million, or 7 percent, since December 31, 2012 and was primarily a result of a decrease of $262 million in wholesale deposits. Excluding the acquisition, interest bearing deposits at June 30, 2013 decreased $18.0 million, or less than 1 percent, from June 30, 2012 and included a decrease of $97.6 million in wholesale deposits.

Securities sold under agreements to repurchase (“repurchase agreements”) of $300 million at June 30, 2013 decreased $167 million, or 36 percent, from the prior year second quarter and was primarily due to a decrease of $185 million in wholesale repurchase agreements. Federal Home Loan Bank (“FHLB”) advances increased $220 million from the prior year end and increased $311 million since the prior year second quarter as a result of decreased brokered deposits or wholesale repurchase agreements and the increased need for funding.


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Table of Contents

Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of the dates indicated, and the amount of change from December 31, 2012 and June 30, 2012

 
 
 
 
 
 
 
$ Change from
 
$ Change from
(Dollars in thousands, except per share data)
June 30,
2013
 
December 31,
2012
 
June 30,
2012
 
December 31,
2012
 
June 30,
2012
Common equity
$
905,620

 
852,987

 
832,128

 
52,633

 
73,492

Accumulated other comprehensive income
23,382

 
47,962

 
44,053

 
(24,580
)
 
(20,671
)
Total stockholders’ equity
929,002

 
900,949

 
876,181

 
28,053

 
52,821

Goodwill and core deposit intangible, net
(126,771
)
 
(112,274
)
 
(113,297
)
 
(14,497
)
 
(13,474
)
Tangible stockholders’ equity
$
802,231

 
788,675

 
762,884

 
13,556

 
39,347

Stockholders’ equity to total assets
11.62
%
 
11.63
%
 
11.79
%
 
 
 
 
Tangible stockholders’ equity to total tangible assets
10.19
%
 
10.33
%
 
10.42
%
 
 
 
 
Book value per common share
$
12.63

 
12.52

 
12.18

 
0.11

 
0.45

Tangible book value per common share
$
10.91

 
10.96

 
10.61

 
(0.05
)
 
0.30

Market price per share at end of period
$
22.19

 
14.71

 
15.46

 
7.48

 
6.73


Tangible stockholders' equity of $802 million increased $13.6 million, or 2 percent, from the prior year end as a result of stock issued in connection with the acquisition of First State Bank and an increase in earnings retention which was offset by the decrease in accumulated other comprehensive income. Tangible book value per common share of $10.91 decreased $0.05 per share from the prior year end as a result of the increased stock issued from the acquisition.

On June 27, 2013, the Company's Board of Directors declared a cash dividend of $0.15 per share, payable July 18, 2013 to shareholders of record on July 9, 2013. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations.

Operating Results for Three Months Ended June 30, 2013 
Compared to March 31, 2013 and June 30, 2012

Performance Summary 
 
Three Months ended
(Dollars in thousands, except per share data)
June 30,
2013
 
March 31,
2013
 
June 30,
2012
Net income
$
22,702

 
20,768

 
18,981

Diluted earnings per share
$
0.31

 
0.29

 
0.26

Return on average assets (annualized)
1.17
%
 
1.11
%
 
1.04
%
Return on average equity (annualized)
9.78
%
 
9.20
%
 
8.69
%

The Company reported net income for the current quarter of $22.7 million, an increase of $3.7 million, or 20 percent, from the $19.0 million of net income for the prior year second quarter. Diluted earnings per share for the current quarter was $0.31 per share, an increase of $0.05, or 19 percent, from the prior year second quarter diluted earnings per share of $0.26.


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Table of Contents

Income Summary
The following tables summarize revenue for the periods indicated, including the amount and percentage change from March 31, 2013 and June 30, 2012
 
Three Months ended
 
 
(Dollars in thousands)
June 30,
2013
 
March 31,
2013
 
June 30,
2012
 
 
Net interest income
 
 
 
 
 
 
 
Interest income
$
62,151

 
57,955

 
64,192

 
 
Interest expense
7,185

 
7,458

 
9,044

 
 
Total net interest income
54,966

 
50,497

 
55,148

 
 
Non-interest income
 
 
 
 
 
 
 
Service charges, loan fees, and other fees
12,971

 
11,675

 
12,404

 
 
Gain on sale of loans
7,472

 
9,089

 
7,522

 
 
Gain (loss) on sale of investments
241

 
(137
)
 

 
 
Other income
2,538

 
2,323

 
1,865

 
 
Total non-interest income
23,222

 
22,950

 
21,791

 
 
 
$
78,188

 
73,447

 
76,939

 
 
Net interest margin (tax-equivalent)
3.30
%
 
3.14
%
 
3.49
%
 
 
 
 
$ Change from
 
$ Change from
 
% Change from
 
% Change from
(Dollars in thousands)
March 31,
2013
 
June 30,
2012
 
March 31,
2013
 
June 30,
2012
Net interest income
 
 
 
 
 
 
 
Interest income
$
4,196

 
$
(2,041
)
 
7
 %
 
(3
)%
Interest expense
(273
)
 
(1,859
)
 
(4
)%
 
(21
)%
Total net interest income
4,469

 
(182
)
 
9
 %
 
 %
Non-interest income
 
 
 
 
 
 
 
Service charges, loan fees, and other fees
1,296

 
567

 
11
 %
 
5
 %
Gain on sale of loans
(1,617
)
 
(50
)
 
(18
)%
 
(1
)%
Gain (loss) on sale of investments
378

 
241

 
(276
)%
 
n/m

Other income
215

 
673

 
9
 %
 
36
 %
Total non-interest income
272

 
1,431

 
1
 %
 
7
 %
 
$
4,741

 
$
1,249

 
6
 %
 
2
 %
__________
n/m - not measurable


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Table of Contents

Net Interest Income
The current quarter net interest income of $55.0 million increased $4.5 million, or 9 percent, over the prior quarter and decreased $182 thousand, or less than 1 percent, over the prior year second quarter. The current quarter interest income of $62.2 million increased $4.2 million, or 7 percent, over the prior quarter primarily as a result of the increase in interest income on the commercial loans and the increase in interest income on the investment portfolio. The current quarter increase in interest income on the investment portfolio was primarily a result of a decrease in premium amortization (net of discount accretion) on the investment securities (“premium amortization”). The Company has experienced a decrease in premium amortization for a second consecutive quarter, which has been a benefit to the Company compared to the significant increases experienced during the preceding seven quarters. Included in the current quarter interest income was $18.4 million of premium amortization on investment securities compared to $21.4 million in the prior quarter. The current quarter decrease in premium amortization on investment securities was $3.0 million during the current quarter compared to a decrease of $1.9 million in premium amortization in the prior quarter.

The current quarter interest expense of $7.2 million decreased 273 thousand, or 4 percent, from the prior quarter and decreased $1.9 million, or 21 percent, from the prior year second quarter. The cost of total funding (including non-interest bearing deposits) for the current quarter was 43 basis points compared to 46 basis points for the prior quarter and 57 basis points for the prior year second quarter. 

The current quarter net interest margin as a percentage of earning assets, on a tax-equivalent basis, was 3.30 percent, an increase of 16 basis points from the prior quarter net interest margin of 3.14 percent. Consistent with the prior quarter increase in the net interest margin, the increase during the current quarter was primarily attributable to the increased yield on the investment securities which was driven by a decrease in the premium amortization. Of the 33 basis points increase in yield on the investment securities in the current quarter, 34 basis points was due to the decrease in premium amortization. The premium amortization in the current quarter accounted for a 103 basis points reduction in the net interest margin compared to a 123 basis points reduction in the prior quarter and 94 basis points reduction in the net interest margin in the prior year second quarter.

Non-interest Income
Non-interest income for the current quarter totaled $23.2 million, an increase of $272 thousand over the prior quarter and an increase of $1.4 million over the same quarter last year. Service charge fee income increased $1.3 million, or 11 percent, from the prior quarter as a result of seasonal activity. Service charge fee income increased $567 thousand, or 5 percent, from the prior year second quarter. Although refinance activity remained historically elevated, gain of $7.5 million on the sale of loans for the current quarter decreased $1.6 million, or 18 percent, from the prior quarter as the Company has started to experience a slowing of refinance activity. Gain on sale of loans for the current quarter decreased $50 thousand, or 66 basis points, from the prior year second quarter. Other income of $2.5 million for the current quarter increased $673 thousand, or 36 percent, from the prior year second quarter primarily as a result of increases in income related to other real estate owned. Included in other income was operating revenue of $93 thousand from other real estate owned and gain of $622 thousand on the sales of other real estate owned, which totaled $715 thousand for the current quarter compared to $726 thousand for the prior quarter and $414 thousand for the prior year second quarter.


37


Table of Contents

Non-interest Expense
The following tables summarize non-interest expense for the periods indicated, including the amount and percentage change from March 31, 2013 and June 30, 2012:
 
 
Three Months ended
 
 
(Dollars in thousands)
June 30,
2013
 
March 31,
2013
 
June 30,
2012
 
 
Compensation and employee benefits
$
24,917

 
24,577

 
23,684

 
 
Occupancy and equipment
5,906

 
5,825

 
5,825

 
 
Advertising and promotions
1,621

 
1,548

 
1,713

 
 
Outsourced data processing
813

 
825

 
788

 
 
Other real estate owned
2,968

 
884

 
2,199

 
 
Federal Deposit Insurance Corporation premiums
1,154

 
1,304

 
1,300

 
 
Core deposit intangibles amortization
505

 
486

 
535

 
 
Other expense
10,597

 
7,985

 
10,146

 
 
Total non-interest expense
$
48,481

 
43,434

 
46,190

 
 
 
 
$ Change from
 
$ Change from
 
% Change from
 
% Change from
(Dollars in thousands)
March 31,
2013
 
June 30,
2012
 
March 31,
2013
 
June 30,
2012
Compensation and employee benefits
$
340

 
$
1,233

 
1
 %
 
5
 %
Occupancy and equipment
81

 
81

 
1
 %
 
1
 %
Advertising and promotions
73

 
(92
)
 
5
 %
 
(5
)%
Outsourced data processing
(12
)
 
25

 
(1
)%
 
3
 %
Other real estate owned
2,084

 
769

 
236
 %
 
35
 %
Federal Deposit Insurance Corporation premiums
(150
)
 
(146
)
 
(12
)%
 
(11
)%
Core deposit intangibles amortization
19

 
(30
)
 
4
 %
 
(6
)%
Other expense
2,612

 
451

 
33
 %
 
4
 %
Total non-interest expense
$
5,047

 
$
2,291

 
12
 %
 
5
 %

Non-interest expense of $48.5 million for the current quarter increased by $5.0 million, or 12 percent, from the prior quarter and increased by $2.3 million, or 5 percent, from the prior year second quarter. Compensation and employee benefits increased by $340 thousand, or 1 percent, from the prior quarter and increased $1.2 million, or 5 percent, from the prior year second quarter as a result of the First State Bank acquisition and annual salary increases. Other real estate owned expense increased $2.1 million, or 236 percent, from the prior quarter and increased $769 thousand, or 35 percent, from the prior year second quarter. The current quarter other real estate owned expense of $3.0 million included $1.2 million of operating expense, $1.7 million of fair value write-downs, and $67 thousand of loss on sale of other real estate owned. Other real estate owned expense will fluctuate as the Company continues to work through non-performing loans and dispose of foreclosed properties. Other expense increased by $2.6 million, or 33 percent, from the prior quarter primarily from legal and professional expenses associated with the acquisition and expenses connected with New Market Tax Credit investments.


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Table of Contents

Efficiency Ratio
The efficiency ratio for the current quarter was 56 percent compared to 54 percent for the prior year second quarter. The increase in the efficiency ratio was primarily driven by the increase in non-interest expense.

Provision for Loan Losses 
The following table summarizes the provision for loan losses, net charge-offs and select ratios relating to the provision for loan losses for the previous eight quarters:
(Dollars in thousands)
Provision
for Loan
Losses
 
Net
Charge-Offs
 
ALLL
as a Percent
of Loans
 
Accruing
Loans 30-89
Days Past Due
as a Percent of
Loans
 
Non-Performing
Assets to
Total Sub-sidiary Assets
Second quarter 2013
$
1,078

 
$
1,030

 
3.56
%
 
0.60
%
 
1.64
%
First quarter 2013
2,100

 
2,119

 
3.84
%
 
0.95
%
 
1.79
%
Fourth quarter 2012
2,275

 
8,081

 
3.85
%
 
0.80
%
 
1.87
%
Third quarter 2012
2,700

 
3,499

 
4.01
%
 
0.83
%
 
2.33
%
Second quarter 2012
7,925

 
7,052

 
3.99
%
 
1.41
%
 
2.69
%
First quarter 2012
8,625

 
9,555

 
3.98
%
 
1.24
%
 
2.91
%
Fourth quarter 2011
8,675

 
9,252

 
3.97
%
 
1.42
%
 
2.92
%
Third quarter 2011
17,175

 
18,877

 
3.92
%
 
0.60
%
 
3.49
%

The Company continued to experience another quarter of decreases in net charged-off loans with the improved credit quality. Net charged-off loans of $1.0 million during the current quarter decreased $1.1 million, or 51 percent, compared to the prior quarter and decreased $6.0 million, or 85 percent, from the prior year second quarter. The current quarter provision for loan losses of $1.1 million decreased $1.0 million from the prior quarter and decreased $6.8 million from the prior year second quarter. Loan portfolio growth, composition, average loan size, credit quality considerations, and other environmental factors will continue to determine the level of provision for loan loss expense. 

The determination of the allowance for loan and lease losses (“ALLL” or “allowance”) and the related provision for loan losses is a critical accounting estimate that involves management’s judgments about current environmental factors which affect loan losses, such factors including economic conditions, changes in collateral values, net charge-offs, and other factors discussed below in “Additional Management’s Discussion and Analysis.”

Operating Results for Six Months ended June 30, 2013
Compared to June 30, 2012

Performance Summary
 
Six Months ended
(Dollars in thousands, except per share data)
June 30,
2013
 
June 30,
2012
Net income
$
43,470

 
35,314

Diluted earnings per share
$
0.60

 
0.49

Return on average assets (annualized)
1.14
%
 
0.97
%
Return on average equity (annualized)
9.49
%
 
8.14
%

Net income for the six months ended June 30, 2013 was $43.5 million, an increase of $8.2 million, from the $35.3 million of net income for the prior year first six months. Diluted earnings per share for the first six months of the current year was $0.60 per share, an increase of $0.11, or 22 percent, from the diluted earnings per share in the prior year first six months.

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Table of Contents


Revenue Summary
The following table summarizes revenue for the periods indicated, including the amount and percentage change from June 30, 2012:
 
Six Months ended
 
 
 
 
(Dollars in thousands)
June 30,
2013
 
June 30,
2012
 
$ Change
 
% Change
Net interest income
 
 
 
 
 
 
 
Interest income
$
120,106

 
$
132,076

 
$
(11,970
)
 
(9
)%
Interest expense
14,643

 
18,642

 
(3,999
)
 
(21
)%
Total net interest income
105,463

 
113,434

 
(7,971
)
 
(7
)%
Non-interest income
 
 
 
 
 
 
 
Service charges, loan fees, and other fees
24,646

 
23,842

 
804

 
3
 %
Gain on sale of loans
16,561

 
14,335

 
2,226

 
16
 %
Gain on sale of investments
104

 

 
104

 
n/m

Other income
4,861

 
3,952

 
909

 
23
 %
Total non-interest income
46,172

 
42,129

 
4,043

 
10
 %
 
$
151,635

 
$
155,563

 
$
(3,928
)
 
(3
)%
Net interest margin (tax-equivalent)
3.23
%
 
3.61
%
 
 
 
 
__________
n/m - not measurable

Net Interest Income
Net interest income for the first six months of the current year decreased $8.0 million, or 7 percent, over the same period last year. Interest income decreased $12.0 million, or 9 percent, while interest expense decreased $4.0 million, or 21 percent, from the first six months of 2012 and was principally due to the increase in premium amortization on investment securities and the reduction of yields on loan balances. Interest income was reduced by $39.8 million in premium amortization on investment securities which was an increase of $10.6 million from the first six months of the prior year. The decrease in interest expense during the current year was primarily attributable to the decreases in interest rates on interest bearing deposits and borrowings.  The funding cost (including non-interest bearing deposits) for the first six months of 2013 was 44 basis points compared to 59 basis points for the first six months 2012. 

The net interest margin, on a tax-equivalent basis, for the first six months of 2013 was 3.23 percent, a 38 basis points reduction from the net interest margin of 3.61 percent for the first six months of 2012. The reduction was attributable to a lower yield on loans and higher premium amortization on investment securities, both of which outpaced the reduction in funding cost. The premium amortization for the first six months of 2013 accounted for a 111 basis points reduction in the net interest margin which was an increase of 24 basis points compared to the 87 basis points reduction in the net interest margin for the same period last year. 

Non-interest Income
Non-interest income of $46.2 million for the first six months of 2013 increased $4.0 million, or 10 percent, over the same period last year. Gain on sale of loans for the first six months of 2013 increased $2.2 million, or 16 percent, from the first six months of 2012 as a result of greater refinance volume, which has recently started to slow down, and loan origination activity. Other income for the first six months of 2013 increased $909 thousand, or 23 percent, over the first six months of 2012. Included in other income was operating revenue of $155 thousand from other real estate owned and gains of $1.3 million on the sale of other real estate owned, which aggregated $1.4 million for the first six months of 2013 compared to $942 thousand for the same period in the prior year.


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Table of Contents

Non-interest Expense Summary
The following table summarizes non-interest expense for the periods indicated, including the amount and percentage change from June 30, 2012:
 
Six Months ended
 
 
 
 
(Dollars in thousands)
June 30,
2013
 
June 30,
2012
 
$ Change
 
% Change
Compensation and employee benefits
$
49,494

 
$
47,244

 
$
2,250

 
5
 %
Occupancy and equipment
11,731

 
11,793

 
(62
)
 
(1
)%
Advertising and promotions
3,169

 
3,115

 
54

 
2
 %
Outsourced data processing
1,638

 
1,634

 
4

 
 %
Other real estate owned
3,852

 
9,021

 
(5,169
)
 
(57
)%
Federal Deposit Insurance Corporation premiums
2,458

 
3,012

 
(554
)
 
(18
)%
Core deposit intangibles amortization
991

 
1,087

 
(96
)
 
(9
)%
Other expense
18,582

 
18,329

 
253

 
1
 %
Total non-interest expense
$
91,915

 
$
95,235

 
$
(3,320
)
 
(3
)%

Compensation and employee benefits for the first six months of 2013 increased $2.3 million, or 5 percent. Other real estate owned expense of $3.9 million in the first six months of 2013 decreased $5.2 million, or 57 percent, from the first six months of the prior year. The other real estate owned expense for the first six months of 2013 included $1.6 million of operating expenses, $2.0 million of fair value write-downs, and $302 thousand of loss on sale of other real estate owned.  

Efficiency Ratio
The efficiency ratio was 55 percent for the first six months of 2013 and 53 percent for the first six months of 2012. Although there was an increase in non-interest income from the first six months of the prior year, it was not enough to offset the decrease in net interest income which resulted in the increase in the efficiency ratio.

Provision for loan losses
The provision for loan losses was $3.2 million for the first six months of 2013, a decrease of $13.4 million, or 81 percent, from the same period in the prior year. Net charged-off loans during the first half of 2013 was $3.2 million, a decrease of $13.5 million from the first six months of 2012.


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Table of Contents

ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS

Lending Activity and Practices
The Company focuses its lending activities primarily on the following types of loans: 1) first-mortgage, conventional loans secured by residential properties, particularly single-family, 2) commercial lending that concentrates on targeted businesses, and 3) installment lending for consumer purposes (e.g., auto, home equity, etc.). Supplemental information regarding the Company’s loan portfolio and credit quality based on regulatory classification is provided in the section captioned “Loans by Regulatory Classification” included in “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The regulatory classification of loans is based primarily on the type of collateral for the loans. Loan information included in “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on the Company’s loan segments and classes which is based on the purpose of the loan, unless otherwise noted as a regulatory classification.

The following table summarizes the Company’s loan portfolio as of the dates indicated:

 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Residential real estate loans
$
531,834

 
15
 %
 
$
516,467

 
16
 %
 
$
525,551

 
16
 %
Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Real estate
1,821,600

 
52
 %
 
1,655,508

 
51
 %
 
1,651,690

 
50
 %
Other commercial
723,187

 
20
 %
 
623,397

 
19
 %
 
642,186

 
19
 %
Total
2,544,787

 
72
 %
 
2,278,905

 
70
 %
 
2,293,876

 
69
 %
Consumer and other loans
 
 
 
 
 
 
 
 
 
 
 
Home equity
384,688

 
11
 %
 
403,925

 
12
 %
 
422,249

 
13
 %
Other consumer
212,147

 
6
 %
 
198,128

 
6
 %
 
203,520

 
6
 %
Total
596,835

 
17
 %
 
602,053

 
18
 %
 
625,769

 
19
 %
Loans receivable
3,673,456

 
104
 %
 
3,397,425

 
104
 %
 
3,445,196

 
104
 %
Allowance for loan and lease losses
(130,883
)
 
(4
)%
 
(130,854
)
 
(4
)%
 
(137,459
)
 
(4
)%
Loans receivable, net
$
3,542,573

 
100
 %
 
$
3,266,571

 
100
 %
 
$
3,307,737

 
100
 %


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Table of Contents

Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated:
 
 
At or for the Six Months ended
 
At or for the Year ended
 
At or for the Six Months ended
(Dollars in thousands)
June 30,
2013
 
December 31,
2012
 
June 30,
2012
Other real estate owned
$
40,713

 
45,115

 
69,170

Accruing loans 90 days or more past due
 
 
 
 
 
Residential real estate
240

 
451

 
421

Commercial
22

 
791

 
2,527

Consumer and other
194

 
237

 
319

Total
456

 
1,479

 
3,267

Non-accrual loans
 
 
 
 
 
Residential real estate
12,149

 
14,237

 
19,835

Commercial
65,968

 
68,887

 
92,693

Consumer and other
11,238

 
13,809

 
13,935

Total
89,355

 
96,933

 
126,463

Total non-performing assets 1
$
130,524

 
143,527

 
198,900

Non-performing assets as a percentage of subsidiary assets
1.64
%
 
1.87
%
 
2.69
%
Allowance for loan and lease losses as a percentage of non-performing loans
146
%
 
133
%
 
106
%
Accruing loans 30-89 days past due
$
22,062

 
27,097

 
48,707

Troubled debt restructurings not included in non-performing assets
$
80,453

 
100,151

 
88,483

Interest income 2
$
2,244

 
5,161

 
3,392

 __________
1 
As of June 30, 2013, non-performing assets have not been reduced by U.S. government guarantees of $2.9 million.
2 
Amounts represent estimated interest income that would have been recognized on loans accounted for on a non-accrual basis as of the end of each period had such loans performed pursuant to contractual terms.

During the first half of 2013, the Company continued to maintained the positive trend of reducing non-performing assets that was established throughout 2012. Non-performing assets at June 30, 2013 were $131 million, a decrease of $4.9 million, or 4 percent, during the current quarter and a decrease of $68.4 million, or 34 percent, from a year ago. The largest category of non-performing assets was the land, lot and other construction category, a regulatory classification, which was $57.9 million, or 44 percent, of the non-performing assets at June 30, 2013. Included in this category was $26.0 million of land development loans and $15.6 million in unimproved land loans at June 30, 2013. The Company has continued to reduce the land, lot and other construction category over the prior two and one-half years. This category of non-performing assets was further reduced by $4.4 million, or 7 percent, during the current quarter. The Company's early stage delinquencies (accruing loans 30-89 days past due) of $22.1 million at June 30, 2013 decreased $10.2 million, or 32 percent, from the prior quarter and decreased $26.6 million, or 55 percent, from the prior year second quarter early stage delinquencies.


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Table of Contents

Most of the Company’s non-performing assets are secured by real estate, and based on the most current information available to management, including updated appraisals or evaluations (new or updated), the Company believes the value of the underlying real estate collateral is adequate to minimize significant charge-offs or loss to the Company. The Company evaluates the level of its non-performing assets, the values of the underlying real estate and other collateral, and related trends in net charge-offs in determining the adequacy of the ALLL. Through pro-active credit administration, the Company works closely with its borrowers to seek favorable resolution to the extent possible, thereby attempting to minimize net charge-offs or losses to the Company. Throughout the past year, the Company has maintained an adequate allowance while working to reduce non-performing assets. The improvement in the credit quality ratios over the past year is a product of this effort.

For non-performing construction loans involving residential structures, the percentage of completion exceeds 95 percent at June 30, 2013. For non-performing construction loans involving commercial structures, the percentage of completion ranges from projects not started to projects completed at June 30, 2013. During the construction loan term, all construction loan collateral properties are inspected at least monthly, or more frequently as needed, until completion. Draws on construction loans are predicated upon the results of the inspection and advanced based upon a percentage of completion basis versus original budget percentages. When construction loans become non-performing and the associated project is not complete, the Company on a case-by-case basis makes the decision to advance additional funds or to initiate collection/foreclosure proceedings. Such decision includes obtaining “as-is” and “at completion” appraisals for consideration of potential increases or decreases in the collateral’s value. The Company also considers the increased costs of monitoring progress to completion, and the related collection/holding period costs should collateral ownership be transferred to the Company. With very limited exception, the Company does not disburse additional funds on non-performing loans. Instead, the Company has proceeded to collection and foreclosure actions in order to reduce the Company’s exposure to loss on such loans.

Construction loans, a regulatory classification, accounted for 39 percent of the Company’s non-accrual loans as of June 30, 2013. Land, lot and other construction loans, a regulatory classification, were 95 percent of the non-accrual construction loans. Of the Company’s $34.7 million of non-accrual construction loans at June 30, 2013, 96 percent of such loans had collateral properties securing the loans in Western Montana and Idaho. With locations and operations in the contiguous northern Rocky Mountain states of Idaho and Montana, the geography and economies of each of these geographic areas are predominantly tied to real estate development given the sprawling abundance of timbered valleys and mountainous terrain with significant lakes, streams and watershed areas. Consistent with the general economic downturn, the market for upscale primary, secondary and other housing as well as the associated construction and building industries have stalled after years of significant growth. As the housing market (rental and owner-occupied) and related industries continue to recover from the downturn, the Company continues to reduce its exposure to loss in the land, lot and other construction loan portfolio.

For additional information on accounting policies relating to non-performing assets and impaired loans, see Note 1 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

Impaired Loans
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).

Impaired loans were $193 million and $202 million as of June 30, 2013 and December 31, 2012, respectively. The ALLL includes specific valuation allowances of $11.4 million and $15.5 million of impaired loans as of June 30, 2013 and December 31, 2012, respectively. Of the total impaired loans at June 30, 2013, there were 31 significant commercial real estate and other commercial loans that accounted for $84.4 million, or 44 percent, of the impaired loans. The 31 loans were collateralized by 143 percent of the loan value, the majority of which had appraisals or evaluations (new or updated) during the last year, such appraisals reviewed at least quarterly taking into account current market conditions. Of the total impaired loans at June 30, 2013, there were 138 loans aggregating $101 million, or 52 percent, whereby the borrowers had more than one impaired loan. The amount of impaired loans that have had partial charge-offs during the year for which the Company continues to have concern about the collectability of the remaining loan balance was $2.2 million. Of these loans, there were charge-offs of $994 thousand during 2013.


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Table of Contents

Restructured Loans
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 had TDR loans of $126 million and $151 million as of June 30, 2013 and December 31, 2012, respectively. The Company’s TDR loans are considered impaired loans of which $45.4 million and $50.9 million as of June 30, 2013 and December 31, 2012, respectively, are designated as non-accrual.

Each restructured debt is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service the debt as modified. The Company discourages the use of the multiple loan strategy when restructuring loans regardless of whether or not the notes are TDR loans. The Company does not have any commercial TDR loans as of June 30, 2013 that have repayment dates extended at or near the original maturity date for which the Company has not classified as impaired. At June 30, 2013, the Company has TDR loans of $38.3 million that are in non-accrual status or that have had partial charge-offs during the year, the borrowers of which continue to have $31.9 million in other loans that are on accrual status.

Other Real Estate Owned
The loan book value prior to the acquisition and transfer of the loan into other real estate owned (“OREO”) during 2013 was $12.5 million of which $2.6 million was residential real estate, $7.2 million was commercial, and $2.7 million was consumer loans. The fair value of the loan collateral acquired in foreclosure during 2013 was $9.9 million of which $2.5 million was residential real estate, $5.5 million was commercial, and $1.9 million was consumer loans. The following table sets forth the changes in OREO for the periods indicated:
 
 
Six Months ended
 
Year ended
 
Six Months ended
(Dollars in thousands)
June 30,
2013
 
December 31,
2012
 
June 30,
2012
Balance at beginning of period
$
45,115

 
78,354

 
78,354

Acquisitions
190

 

 

Additions
9,889

 
27,536

 
16,372

Capital improvements
79

 

 

Write-downs
(1,971
)
 
(13,258
)
 
(6,653
)
Sales
(12,589
)
 
(47,517
)
 
(18,903
)
Balance at end of period
$
40,713

 
45,115

 
69,170


Allowance for Loan and Lease 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 ALLL methodology is designed to reasonably estimate the probable loan and lease losses within the Company’s loan portfolio. Accordingly, the ALLL is maintained within a range of estimated losses. The determination of the ALLL, including the provision for loan losses and net charge-offs, is a critical accounting estimate that involves management’s judgments about all known relevant internal and external environmental factors that affect loan losses, including the credit risk inherent in the loan portfolio, economic conditions nationally and in the local markets in which the Company operates, changes in collateral values, delinquencies, non-performing assets and net charge-offs.

Although the Company continues to actively monitor economic trends, soft economic conditions combined with potential declines in the values of real estate that collateralize most of the Company’s loan portfolio may adversely affect the credit risk and potential for loss to the Company.

The ALLL evaluation is well documented and approved by the Company’s Board of Directors. In addition, the policy and procedures for determining the balance of the ALLL are reviewed annually by the Company’s Board of Directors, the internal audit department, independent credit reviewers and state and federal bank regulatory agencies.


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Table of Contents

At the end of each quarter, the Company analyzes its loan portfolio and maintains an ALLL at a level that is appropriate and determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The allowance consists of a specific valuation allowance component and a general valuation allowance component. The specific valuation allowance component relates to loans that are determined to be impaired. A specific valuation allowance is established when the fair value of a collateral-dependent loan or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate) is lower than the carrying value of the impaired loan. The general valuation allowance component relates to probable credit losses inherent in the balance of the loan portfolio based on prior loss experience, adjusted for changes in trends and conditions of qualitative or environmental factors.

The Glacier Bank (“Bank”) divisions’ credit administration reviews their respective loan portfolios to determine which loans are impaired and estimates the specific valuation allowance. The impaired loans and related specific valuation allowance are then provided to the Company’s credit administration for further review and approval. The Company’s credit administration also determines the estimated general valuation and reviews and approves the overall ALLL for the Company. The credit administration of the Company exercises significant judgment when evaluating the effect of applicable qualitative or environmental factors on the Company’s historical loss experience for loans not identified as impaired. Quantification of the impact upon the Company’s ALLL is inherently subjective as data for any factor may not be directly applicable, consistently relevant, or reasonably available for management to determine the precise impact of a factor on the collectability of the Company’s unimpaired loan portfolio as of each evaluation date. The Company’s credit administration documents its conclusions and rationale for changes that occur in each applicable factor’s weight (i.e., measurement) and ensures that such changes are directionally consistent based on the underlying current trends and conditions for the factor. To have directional consistency, the provision for loan losses and credit quality should generally move in the same direction.

The Company’s model of twelve bank divisions with separate management teams provides substantial local oversight to the lending and credit management function. The Company’s business model affords multiple reviews of larger loans before credit is extended, a significant benefit in mitigating and managing the Company’s credit risk. The geographic dispersion of the market areas in which the Company operates further mitigates the risk of credit loss. While this process is intended to limit credit exposure, there can be no assurance that further problem credits will not arise and additional loan losses incurred, particularly in periods of rapid economic downturns.

The primary responsibility for credit risk assessment and identification of problem loans rests with the loan officer of the account. This continuous process of identifying impaired loans is necessary to support management’s evaluation of the ALLL adequacy. An independent loan review function verifying credit risk ratings evaluates the loan officer and management’s evaluation of the loan portfolio credit quality. The loan review function also assesses the evaluation process and provides an independent analysis of the adequacy of the ALLL.

No assurance can be given that the Company will not, in any particular period, sustain losses that are significant relative to the ALLL amount, or that subsequent evaluations of the loan portfolio applying management’s judgment about then current factors, including economic and regulatory developments, will not require significant changes in the ALLL. Under such circumstances, this could result in enhanced provisions for loan losses.

The following table summarizes the allocation of the ALLL as of the dates indicated:

 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
(Dollars in thousands)
ALLL
 
Percent of ALLL in
Category
 
Percent of
Loans in
Category
 
ALLL
 
Percent
of  ALLL in
Category
 
Percent
of Loans in
Category
 
ALLL
 
Percent
of  ALLL in
Category
 
Percent
of Loans in
Category
Residential real estate
$
14,797

 
11
%
 
14
%
 
$
15,482

 
12
%
 
15
%
 
$
18,139

 
13
%
 
15
%
Commercial real estate
73,885

 
57
%
 
50
%
 
74,398

 
57
%
 
49
%
 
79,098

 
58
%
 
48
%
Other commercial
24,116

 
18
%
 
20
%
 
21,567

 
16
%
 
18
%
 
20,570

 
15
%
 
19
%
Home equity
9,626

 
7
%
 
10
%
 
10,659

 
8
%
 
12
%
 
10,904

 
8
%
 
12
%
Other consumer
8,459

 
7
%
 
6
%
 
8,748

 
7
%
 
6
%
 
8,748

 
6
%
 
6
%
Totals
$
130,883

 
100
%
 
100
%
 
$
130,854

 
100
%
 
100
%
 
$
137,459

 
100
%
 
100
%


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Table of Contents

The following table summarizes the ALLL experience for the periods indicated:
 
 
Six Months ended
 
Year ended
 
Six Months ended
(Dollars in thousands)
June 30,
2013
 
December 31,
2012
 
June 30,
2012
Balance at beginning of period
$
130,854

 
137,516

 
137,516

Provision for loan losses
3,178

 
21,525

 
16,550

Charge-offs
 
 
 
 
 
Residential real estate
(349
)
 
(5,267
)
 
(1,320
)
Commercial loans
(3,055
)
 
(21,578
)
 
(14,890
)
Consumer and other loans
(2,481
)
 
(7,827
)
 
(3,527
)
Total charge-offs
(5,885
)
 
(34,672
)
 
(19,737
)
Recoveries
 
 
 
 
 
Residential real estate
150

 
643

 
147

Commercial loans
1,944

 
4,088

 
2,491

Consumer and other loans
642

 
1,754

 
492

Total recoveries
2,736

 
6,485

 
3,130

Charge-offs, net of recoveries
(3,149
)
 
(28,187
)
 
(16,607
)
Balance at end of period
$
130,883

 
130,854

 
137,459

Allowance for loan and lease losses as a percentage of total loans
3.56
%
 
3.85
%
 
3.99
%
Net charge-offs as a percentage of total loans
0.09
%
 
0.83
%
 
0.48
%

At June 30, 2013, the allowance was $131 million, a decrease of $6.6 million from a year ago. The allowance was 3.56 percent of total loans outstanding at June 30, 2013, a decrease of 28 basis points from 3.84 percent at March 31, 2013, of which 17 basis points was attributable to loans being recorded at fair value from the First State Bank acquisition, resulting in no allowance being carried over. The allowance was 146 percent of non-performing loans at June 31, 2013, an increase from 133 percent at December 31, 2012 and an increase from 106 percent at June 30, 2012.

The Company’s allowance of $131 million is considered adequate to absorb losses from any class of its loan portfolio. For the periods ended June 30, 2013 and 2012, the Company believes the allowance is commensurate with the risk in the Company’s loan portfolio and is directionally consistent with the change in the quality of the Company’s loan portfolio.

When applied to the Company’s historical loss experience, the qualitative or environmental factors result in the provision for loan losses being recorded in the period in which the loss has probably occurred. When the loss is confirmed at a later date, a charge-off is recorded. During 2013, the provision for loan losses exceeded loan charge-offs, net of recoveries, by $29 thousand. During the same period in 2012, loan charge-offs, net of recoveries, exceeded the provision for loan losses by $57 thousand.

The Company provides commercial services to individuals, small to medium size businesses, community organizations and public entities from 110 locations, including 102 branches, across Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The Rocky Mountain states in which the Company operates has diverse economies and markets that are tied to commodities (crops, livestock, minerals, oil and natural gas), tourism, real estate and land development and an assortment of industries, both manufacturing and service-related. Thus, the changes in the global, national, and local economies are not uniform across the Company’s geographic locations.


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Table of Contents

Although there continues to be heightened uncertainty in the economic environment, there was notable improvements during the last year compared to the past several years. There was steady growth in the housing permits, housing starts, and completions for new privately owned units during the last year in Montana, Idaho, Colorado and Utah in relation to the US national statistics. There was improvement in single family residential real estate construction and sales for all of the Company’s market areas. Single family residential collateral values in Idaho, Wyoming and Montana stabilized (with some improvement in isolated markets in which the Company operates) compared to the prior year and prior 5 year historical trends. There was a steady decline in the number of foreclosures initiated in 2012 for Montana, Idaho, and Wyoming. The unemployment rates for the states in which the Company conducts operations were generally lower compared to the national unemployment rate. The national unemployment rate increased steadily from 5.0 in the first part of 2008 to a range of 7.8 to 10.0 during 2009 through 2012 and has declined to 7.6 in June of 2013. Agricultural price declines in livestock and grain in 2009 have recovered significantly and remain strong. While prices for oil have held strong, prices for natural gas continue to remain weak (due to excess supply) especially when compared to the exceptionally high price levels of natural gas during 2008. The tourism industry and related lodging continues to be a source of strength for the locations where the Company’s market areas have national parks and similar recreational areas in the market areas served.

In evaluating the need for a specific or general valuation allowance for impaired and unimpaired loans, respectively, within the Company’s construction loan portfolio (i.e., regulatory classification), including residential construction and land, lot and other construction loans, the credit risk related to such loans was considered in the ongoing monitoring of such loans, including assessments based on current information, including appraisals or evaluations (new or updated) of the underlying collateral, expected cash flows and the timing thereof, as well as the estimated cost to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the construction loan. Construction loans are 12 percent of the Company’s total loan portfolio and account for 39 percent of the Company’s non-accrual loans at June 30, 2013. Collateral securing construction loans includes residential buildings (e.g., single/multi-family and condominiums), commercial buildings, and associated land (multi-acre parcels and individual lots, with and without shorelines).

The Company’s allowance consisted of the following components as of the dates indicated:
 
(Dollars in thousands)
June 30,
2013
 
December 31,
2012
 
June 30,
2012
Specific valuation allowance
$
11,382

 
15,534

 
19,208

General valuation allowance
119,501

 
115,320

 
118,251

Total ALLL
$
130,883

 
130,854

 
137,459


The ALLL as a percentage of loans decreased 29 basis points from December 31, 2012 to June 30, 2013, of which 12 basis points were due to $171 million of loans receivable from the First State Bank acquisition which were recorded at fair value with no ALLL being carried over. During 2013, the ALLL decreased by $29 thousand, the net result of a $4.2 million decrease in the specific valuation allowance and a $4.2 million increase in the general valuation allowance. The decrease in the specific valuation allowance since the prior year end was primarily due to the decrease in loans with a specific valuation allowance of $9.2 million. Further supporting the ALLL were the following trends:
Non-accrual construction loans (i.e., residential construction and land, lot and other construction, each a regulatory classification) were $34.7 million, or 39 percent, of the $89.4 million of non-accrual loans at June 30, 2013, a decrease of $4.5 million from the prior year end and decrease of $25.7 million from June 30, 2012. Non-accrual construction loans accounted for 40 percent of the $96.9 million of non-accrual loans at year end 2012 and 48 percent of the $126 million of non-accrual loans at June 30, 2012.
Non-performing loans as a percent of total loans decreased to 2.44 percent at June 30, 2013 as compared to 2.90 percent and 3.77 percent at year end 2012 and June 30, 2012, respectively.
Impaired loans as a percent of total loans decreased to 5.24 percent at June 30, 2013 as compared to 5.94 percent and 6.91 percent at year end 2012 and June 30, 2012, respectively.
Charge-offs, net of recoveries, in 2013 were $3.1 million, a $13.5 million decrease from the same period in 2012.
Excluding the First State Bank acquisition, the loan portfolio increased $105 million from the prior year end.

For additional information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see Note 3 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

48


Table of Contents

Loans by Regulatory Classification
Supplemental information regarding identification of the Company’s loan portfolio and credit quality based on regulatory classification is provided in the following tables. The regulatory classification of loans is based primarily on the type of collateral for the loans. There may be differences when compared to loan tables and loan amounts appearing elsewhere which reflect the Company’s internal loan segments and classes which are based on the purpose of the loan.

The following table summarizes the Company’s loan portfolio by regulatory classification:
 
Loans Receivable, by Loan Type
 
%  Change
from
 
%  Change
from
(Dollars in thousands)
June 30,
2013
 
December 31,
2012
 
June 30,
2012
 
December 31,
2012
 
June 30,
2012
Custom and owner occupied construction
$
35,529

 
40,327

 
39,052

 
(12
)%
 
(9
)%
Pre-sold and spec construction
36,967

 
34,970

 
49,638

 
6
 %
 
(26
)%
Total residential construction
72,496

 
75,297

 
88,690

 
(4
)%
 
(18
)%
Land development
77,080

 
80,132

 
93,361

 
(4
)%
 
(17
)%
Consumer land or lots
100,549

 
104,229

 
114,475

 
(4
)%
 
(12
)%
Unimproved land
50,492

 
53,459

 
59,548

 
(6
)%
 
(15
)%
Developed lots for operative builders
15,105

 
16,675

 
21,101

 
(9
)%
 
(28
)%
Commercial lots
16,987

 
19,654

 
25,035

 
(14
)%
 
(32
)%
Other construction
90,735

 
56,109

 
32,079

 
62
 %
 
183
 %
Total land, lot, and other construction
350,948

 
330,258

 
345,599

 
6
 %
 
2
 %
Owner occupied
753,692

 
710,161

 
701,078

 
6
 %
 
8
 %
Non-owner occupied
475,991

 
452,966

 
444,419

 
5
 %
 
7
 %
Total commercial real estate
1,229,683

 
1,163,127

 
1,145,497

 
6
 %
 
7
 %
Commercial and industrial
470,178

 
420,459

 
413,908

 
12
 %
 
14
 %
1st lien
718,793

 
738,854

 
690,638

 
(3
)%
 
4
 %
Junior lien
77,359

 
82,083

 
87,544

 
(6
)%
 
(12
)%
Total 1-4 family
796,152

 
820,937

 
778,182

 
(3
)%
 
2
 %
Home equity lines of credit
304,859

 
319,779

 
338,459

 
(5
)%
 
(10
)%
Other consumer
123,947

 
109,019

 
109,043

 
14
 %
 
14
 %
Total consumer
428,806

 
428,798

 
447,502

 
 %
 
(4
)%
Agriculture
238,136

 
145,890

 
162,534

 
63
 %
 
47
 %
Other
182,552

 
158,160

 
151,726

 
15
 %
 
20
 %
Total loans receivable, including loans held for sale
3,768,951

 
3,542,926

 
3,533,638

 
6
 %
 
7
 %
Less loans held for sale 1
(95,495
)
 
(145,501
)
 
(88,442
)
 
(34
)%
 
8
 %
Total loans receivable
$
3,673,456

 
3,397,425

 
3,445,196

 
8
 %
 
7
 %
__________
1  Loans held for sale are primarily 1st lien 1-4 family loans.


49


Table of Contents

The following tables summarize selected information identified by regulatory classification on the Company’s non-performing assets.
 
 
Non-performing Assets, by Loan Type
 
Non-
Accruing
Loans
 
Accruing
Loans 90  Days
or More Past Due
 
Other
Real Estate
Owned
(Dollars in thousands)
June 30,
2013
 
December 31,
2012
 
June 30,
2012
 
June 30,
2013
 
June 30,
2013
 
June 30,
2013
Custom and owner occupied construction
$
1,291

 
1,343

 
2,914

 
1,291

 

 

Pre-sold and spec construction
1,319

 
1,603

 
7,473

 
571

 

 
748

Total residential construction
2,610

 
2,946

 
10,387

 
1,862

 

 
748

Land development
26,004

 
31,471

 
47,154

 
15,591

 

 
10,413

Consumer land or lots
5,475

 
6,459

 
9,728

 
2,138

 

 
3,337

Unimproved land
15,611

 
19,121

 
28,914

 
13,259

 

 
2,352

Developed lots for operative builders
2,093

 
2,393

 
6,932

 
1,356

 

 
737

Commercial lots
3,185

 
1,959

 
2,581

 
318

 

 
2,867

Other construction
5,532

 
5,105

 
5,124

 
189

 

 
5,343

Total land, lot and other construction
57,900

 
66,508

 
100,433

 
32,851

 

 
25,049

Owner occupied
16,503

 
15,662

 
18,210

 
11,897

 

 
4,606

Non-owner occupied
5,091

 
4,621

 
3,509

 
3,525

 

 
1,566

Total commercial real estate
21,594

 
20,283

 
21,719

 
15,422

 

 
6,172

Commercial and industrial
7,103

 
5,970

 
8,077

 
7,030

 
22

 
51

1st lien
22,543

 
25,739

 
34,285

 
17,646

 
297

 
4,600

Junior lien
5,819

 
6,660

 
8,861

 
5,716

 

 
103

Total 1-4 family
28,362

 
32,399

 
43,146

 
23,362

 
297

 
4,703

Home equity lines of credit
6,107

 
8,041

 
6,939

 
5,483

 
90

 
534

Other consumer
449

 
441

 
405

 
244

 
47

 
158

Total consumer
6,556

 
8,482

 
7,344

 
5,727

 
137

 
692

Agriculture
6,146

 
6,686

 
7,541

 
3,101

 

 
3,045

Other
253

 
253

 
253

 

 

 
253

Total
$
130,524

 
143,527

 
198,900

 
89,355

 
456

 
40,713


50


Table of Contents

 
Accruing 30-89 Days Delinquent Loans,  by Loan Type
 
%  Change
from
 
%  Change
from
(Dollars in thousands)
June 30,
2013
 
December 31,
2012
 
June 30,
2012
 
December 31,
2012
 
June 30,
2012
Custom and owner occupied construction
$

 
$
5

 
$

 
(100
)%
 
n/m

Pre-sold and spec construction

 
893

 
968

 
(100
)%
 
(100
)%
Total residential construction

 
898

 
968

 
(100
)%
 
(100
)%
Land development

 
191

 
460

 
(100
)%
 
(100
)%
Consumer land or lots
338

 
762

 
1,650

 
(56
)%
 
(80
)%
Unimproved land
341

 
422

 
1,129

 
(19
)%
 
(70
)%
Developed lots for operative builders
146

 
422

 
199

 
(65
)%
 
(27
)%
Commercial lots

 
11

 

 
(100
)%
 
n/m

Total land, lot and other construction
825

 
1,808

 
3,438

 
(54
)%
 
(76
)%
Owner occupied
7,297

 
5,523

 
10,943

 
32
 %
 
(33
)%
Non-owner occupied
2,247

 
2,802

 
950

 
(20
)%
 
137
 %
Total commercial real estate
9,544

 
8,325

 
11,893

 
15
 %
 
(20
)%
Commercial and industrial
3,844

 
1,905

 
20,847

 
102
 %
 
(82
)%
1st lien
2,807

 
7,352

 
7,220

 
(62
)%
 
(61
)%
Junior lien
980

 
732

 
880

 
34
 %
 
11
 %
Total 1-4 family
3,787

 
8,084

 
8,100

 
(53
)%
 
(53
)%
Home equity lines of credit
3,138

 
4,164

 
2,541

 
(25
)%
 
23
 %
Other consumer
755

 
1,001

 
698

 
(25
)%
 
8
 %
Total consumer
3,893

 
5,165

 
3,239

 
(25
)%
 
20
 %
Agriculture
169

 
912

 
222

 
(81
)%
 
(24
)%
Total
$
22,062

 
$
27,097

 
$
48,707

 
(19
)%
 
(55
)%
__________
n/m - not measurable


51


Table of Contents

The following table summarizes net charge-offs at the dates indicated, including identification by regulatory classification:

 
Net Charge-Offs (Recoveries), Year-to-Date
Period Ending, By Loan Type
 
Charge-Offs
 
Recoveries
(Dollars in thousands)
June 30,
2013
 
December 31,
2012
 
June 30,
2012
 
June 30,
2013
 
June 30,
2013
Custom and owner occupied construction
$
(1
)
 
24

 

 

 
1

Pre-sold and spec construction
(16
)
 
2,489

 
2,393

 

 
16

Total residential construction
(17
)
 
2,513

 
2,393

 

 
17

Land development
(76
)
 
3,035

 
2,706

 
247

 
323

Consumer land or lots
290

 
4,003

 
1,957

 
580

 
290

Unimproved land
233

 
636

 
517

 
256

 
23

Developed lots for operative builders
(11
)
 
1,802

 
1,201

 
73

 
84

Commercial lots
251

 
362

 
(81
)
 
254

 
3

Other construction
(128
)
 

 

 

 
128

Total land, lot and other construction
559

 
9,838

 
6,300

 
1,410

 
851

Owner occupied
(306
)
 
1,312

 
1,318

 
407

 
713

Non-owner occupied
268

 
597

 
189

 
288

 
20

Total commercial real estate
(38
)
 
1,909

 
1,507

 
695

 
733

Commercial and industrial
823

 
2,651

 
819

 
1,374

 
551

1st lien
287

 
5,257

 
2,122

 
412

 
125

Junior lien
56

 
3,464

 
2,441

 
160

 
104

Total 1-4 family
343

 
8,721

 
4,563

 
572

 
229

Home equity lines of credit
1,346

 
2,124

 
807

 
1,466

 
120

Other consumer
141

 
262

 
32

 
344

 
203

Total consumer
1,487

 
2,386

 
839

 
1,810

 
323

Agriculture
21

 
125

 
94

 
21

 

Other
(29
)
 
44

 
92

 
3

 
32

Total
$
3,149

 
28,187

 
16,607

 
5,885

 
2,736



52


Table of Contents

Investment Activity
The Company’s investment securities are generally classified as available-for-sale and are carried at estimated fair value with unrealized gains or losses, net of tax, reflected as an adjustment to stockholders’ equity. Investment securities designated as available-for-sale are summarized below:

 
June 30, 2013
 
December 31, 2012
 
June 30, 2012
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
U.S. government and federal agency
$

 
%
 
$
202

 
%
 
$
205

 
%
U.S. government sponsored enterprises
13,151

 
%
 
17,480

 
%
 
25,488

 
1
%
State and local governments
1,339,876

 
36
%
 
1,214,518

 
33
%
 
1,193,080

 
35
%
Corporate bonds
442,797

 
12
%
 
288,795

 
8
%
 
159,926

 
5
%
Collateralized debt obligations

 
%
 
1,708

 
%
 
2,734

 
%
Residential mortgage-backed securities
1,925,553

 
52
%
 
2,160,302

 
59
%
 
2,022,849

 
59
%
Total investment securities, available-for-sale
$
3,721,377

 
100
%
 
$
3,683,005

 
100
%
 
$
3,404,282

 
100
%

The Company’s investment portfolio is primarily comprised of residential mortgage-backed securities and state and local government securities which are largely exempt from federal income tax. The Company uses the maximum federal statutory rate of 35 percent in calculating its tax-equivalent yield. The residential mortgage-backed securities are typically short weighted-average life U.S. government agency CMOs and provide the Company with on-going liquidity as scheduled and pre-paid principal payments are made on the securities. It has generally been the Company’s policy to maintain a liquid portfolio above policy limits.

For additional investment activity information, see Note 2 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

Other-Than-Temporary Impairment on Securities Analysis
Non-marketable equity securities owned at June 30, 2013 primarily consisted of stock issued by the FHLB of Seattle, such shares measured at cost in recognition of the transferability restrictions imposed by the issuers. Other non-marketable equity securities include Federal Agriculture Mortgage Corporation and Bankers' Bank of the West Bancorporation, Inc.

With respect to FHLB stock, the Company evaluates such stock for other-than-temporary impairment. Such evaluation takes into consideration 1) FHLB deficiency, if any, in meeting applicable regulatory capital targets, including risk-based capital requirements, 2) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the time period for any such decline, 3) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, 4) the impact of legislative and regulatory changes on the FHLB, and 5) the liquidity position of the FHLB.

Based on the Company's analysis of its impaired non-marketable equity securities as of June 30, 2013, the Company determined that none of such securities had other-than-temporary impairment.

In evaluating debt securities for other-than-temporary impairment losses, management assesses whether the Company intends to sell the security or if it is more-likely-than-not that the Company will be required to sell the debt security. In so doing, management considers contractual constraints, liquidity, capital, asset / liability management and securities portfolio objectives.

For debt securities with limited or inactive markets, the impact of macroeconomic conditions in the U.S. upon fair value estimates includes higher risk-adjusted discount rates and changes in credit ratings provided by nationally recognized credit rating agencies, (e.g., Moody's, Standard and Poor's, and Fitch). In connection with changing macroeconomic conditions affecting the U.S. economy, on June 10, 2013, Standard and Poor's reaffirmed its AA+ rating of U.S. government long term debt but with an improved outlook of stable from negative. On July 18, 2013, Moody's also upgraded its outlook to stable from negative while maintaining its Aaa rating on U.S. government long-term debt. Fitch continues to maintain its AAA long-term debt rating of the U.S. though with a negative outlook. Standard and Poor's, Moody's and Fitch have similar credit ratings and outlooks with respect to certain long-term debt instruments issued by Fannie Mae, Freddie Mac and other U.S. government agencies linked to the long-term U.S. debt.


53


Table of Contents

The following table separates investments with an unrealized loss position at June 30, 2013 into two categories: investments purchased prior to 2013 and those purchased during 2013. Of those investments purchased prior to 2013, the fair market value and unrealized loss at December 31, 2012 is also presented.

 
June 30, 2013
 
December 31, 2012
(Dollars in thousands)
Fair Value
 
Unrealized
Loss
 
Unrealized
Loss as a
Percent of
Fair Value
 
Fair Value
 
Unrealized
Loss
 
Unrealized
Loss as a
Percent of
Fair Value
Temporarily impaired securities purchased prior to 2013
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
194,152

 
$
(7,891
)
 
(4
)%
 
$
202,994

 
$
225

 
 %
Corporate bonds
38,180

 
(460
)
 
(1
)%
 
39,532

 
191

 
 %
Residential mortgage-backed securities
119,316

 
(437
)
 
 %
 
206,627

 
(1,720
)
 
(1
)%
Total
$
351,648

 
$
(8,788
)
 
(2
)%
 
$
449,153

 
$
(1,304
)
 
 %
Temporarily impaired securities purchased during 2013
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
128,858

 
$
(8,496
)
 
(7
)%
 
 
 
 
 
 
Corporate bonds
173,412

 
(3,059
)
 
(2
)%
 
 
 
 
 
 
Residential mortgage-backed securities
408,217

 
(5,692
)
 
(1
)%
 
 
 
 
 
 
Total
$
710,487

 
$
(17,247
)
 
(2
)%
 
 
 
 
 
 
Temporarily impaired securities
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
323,010

 
$
(16,387
)
 
(5
)%
 
 
 
 
 
 
Corporate bonds
211,592

 
(3,519
)
 
(2
)%
 
 
 
 
 
 
Residential mortgage-backed securities
527,533

 
(6,129
)
 
(1
)%
 
 
 
 
 
 
Total
$
1,062,135

 
$
(26,035
)
 
(2
)%
 
 
 
 
 
 

With respect to severity, the following table provides the number of securities and amount of unrealized loss in the various ranges of unrealized loss as a percent of book value at June 30, 2013:
(Dollars in thousands)
Number of
Debt
Securities
 
Unrealized
Loss
Greater than 15.0%
1

 
$
(15
)
10.1% to 15.0%
5

 
(1,500
)
5.1% to 10.0%
94

 
(11,504
)
0.1% to 5.0%
336

 
(13,016
)
Total
436

 
$
(26,035
)

With respect to the duration of the impaired debt securities, the Company identified 26 securities which have been continuously impaired for the twelve months ending June 30, 2013. The valuation history of such securities in the prior year(s) was also reviewed to determine the number of months in prior year(s) in which the identified securities was in an unrealized loss position.


54


Table of Contents

The following table provides details of the 26 securities which have been continuously impaired for the twelve months ended June 30, 2013, including the most notable loss for any one bond in each category.

(Dollars in thousands)
Number of
Debt
Securities
 
Unrealized
Loss for
12 Months
Or More
 
Most
Notable
Loss
State and local governments
18

 
$
(400
)
 
(122
)
Residential mortgage-backed securities
8

 
(43
)
 
(15
)
Total
26

 
$
(443
)
 
 

Of the 8 residential mortgage-backed securities, 5 have underlying collateral consisting of U.S. government guaranteed mortgages (e.g., FNMA) and U.S. government sponsored enterprise (e.g., FHLMC) guaranteed mortgages. Each of the 3 remaining residential mortgage-backed securities have underlying non-guaranteed private label whole loan collateral of 30-year fixed rate residential mortgages considered to be “Prime”. The Company engages a third-party to perform detailed analysis for other-than-temporary impairment of such securities. Such analysis takes into consideration original and current data for the tranche and CMO structure, the non-guaranteed classification of each CMO tranche, current and deal inception credit ratings, credit support (protection) afforded the tranche through the subordination of other tranches in the CMO structure, the nature of the collateral (e.g., Prime or Alt-A) underlying each CMO tranche, and realized cash flows since purchase.

Based on the Company's analysis of its impaired debt securities as of June 30, 2013, the Company determined that none of such securities had other-than-temporary impairment.

Sources of Funds
The Company’s deposits have traditionally been the principal source of funds for use in lending and other business purposes. The Company has a number of different deposit programs designed to attract both short-term and long-term deposits from the general public by providing a wide selection of accounts and rates. These programs include non-interest bearing demand accounts, interest bearing checking, regular statement savings, money market deposit accounts, and fixed rate certificates of deposit with maturities ranging from three months to five years, negotiated-rate jumbo certificates, and individual retirement accounts. In addition, the Company obtains wholesale deposits through various programs and are classified as NOW accounts, money market deposit accounts and certificate accounts.

The Company also obtains funds from repayment of loans and investment securities, repurchase agreements, advances from the FHLB, other borrowings, and sale of loans and investment securities. Loan repayments are a relatively stable source of funds, while interest bearing deposit inflows and outflows are significantly influenced by general interest rate levels and market conditions. Borrowings and advances may be used on a short-term basis to compensate for reductions in normal sources of funds such as deposit inflows at less than projected levels. Borrowings also may be used on a long-term basis to support expanded activities and to match maturities of longer-term assets.


55


Table of Contents

Short-term borrowings
A critical component of the Company’s liquidity and capital resources is access to short-term borrowings to fund its operations. Short-term borrowings are accompanied by increased risks managed by the Asset Liability Committee (“ALCO”) such as rate increases or unfavorable change in terms which would make it more costly to obtain future short-term borrowings. The Company’s short-term borrowing sources include FHLB advances, federal funds purchased and retail and wholesale repurchase agreements. The Company also has access to the short-term discount window borrowing programs (i.e., primary credit) of the Federal Reserve Bank. FHLB advances and certain other short-term borrowings may be extended as long-term borrowings to decrease certain risks such as liquidity or interest rate risk; however, the reduction in risks are weighed against the increased cost of funds.

The following table provides information relating to short-term borrowings which consists of borrowings that mature within one year at period end: 
 
At or for the Six Months ended
 
At or for the Year ended
(Dollars in thousands)
June 30,
2013
 
December 31,
2012
Repurchase agreements
 
 
 
Amount outstanding at end of period
$
300,024

 
289,508

Weighted interest rate on outstanding amount
0.29
%
 
0.32
%
Maximum outstanding at any month-end
$
312,505

 
466,784

Average balance
$
289,911

 
354,324

Weighted average interest rate
0.30
%
 
0.37
%
FHLB advances
 
 
 
Amount outstanding at end of period
$
939,109

 
720,000

Weighted interest rate on outstanding amount
0.24
%
 
0.28
%
Maximum outstanding at any month-end
$
939,109

 
792,018

Average balance
$
684,707

 
719,762

Weighted average interest rate
0.26
%
 
0.50
%

Contractual Obligations and Off-Balance Sheet Arrangements
The Company has outstanding debt obligations, the largest aggregate amount of which were FHLB advances. In the normal course of business, there may be various outstanding commitments to obtain funding, such as brokered deposits, and to extend credit, such as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements. The Company does not anticipate any material losses as a result of these transactions.

Liquidity Risk
Liquidity risk is the possibility that the Company will not be able to fund present and future obligations as they come due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost. The objective of liquidity management is to maintain cash flows adequate to meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and corporate operating expenses. Effective liquidity management entails three elements:
1.
Assessing on an ongoing basis, the current and expected future needs for funds, and ensuring that sufficient funds or access to funds exist to meet those needs at the appropriate time.
2.
Providing for an adequate cushion of liquidity to meet unanticipated cash flow needs that may arise from potential adverse circumstances ranging from high probability/low severity events to low probability/high severity.
3.
Balancing the benefits between providing for adequate liquidity to mitigate potential adverse events and the cost of that liquidity.


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Table of Contents

The following table identifies certain liquidity sources and capacity available to the Company at June 30, 2013

(Dollars in thousands)
June 30,
2013
FHLB advances
 
Borrowing capacity
$
1,462,204

Amount utilized
(1,217,445
)
Amount available
$
244,759

Federal Reserve Bank discount window
 
Borrowing capacity
$
595,443

Amount utilized

Amount available
$
595,443

Unsecured lines of credit available
$
130,000

Unencumbered investment securities
 
U.S. government sponsored enterprises
$
13,151

State and local governments
1,028,230

Corporate bonds
442,797

Residential mortgage-backed securities
594,562

Total unencumbered securities
$
2,078,740


The Company has a wide range of versatility in managing the liquidity and asset/liability mix. The Company’s ALCO committee meets regularly to assess liquidity risk, among other matters. The Company monitors liquidity and contingency funding alternatives through management reports of liquid assets (e.g., investment securities), both unencumbered and pledged, as well as borrowing capacity, both secured and unsecured.

Capital Resources
Maintaining capital strength continues to be a long-term objective. Abundant capital is necessary to sustain growth, provide protection against unanticipated declines in asset values, and to safeguard the funds of depositors. Capital is also a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities. Taking these considerations into account, the Company may, as it has done in the past, decide to utilize a portion of its strong capital position to repurchase shares of its outstanding common stock, from time to time, depending on market price and other relevant considerations.

The Federal Reserve Board has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. The Company and the Bank were considered well capitalized by their respective regulators as of June 30, 2013 and 2012. There are no conditions or events after June 30, 2013 that management believes have changed the Company’s or the Bank’s risk-based capital category.


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Table of Contents

The following table illustrates the Federal Reserve Board’s capital adequacy guidelines and the Company’s compliance with those guidelines as of June 30, 2013.
 
(Dollars in thousands)
Tier 1 Capital
 
Total
Capital
 
Tier 1 Leverage
Capital
Total stockholders’ equity
$
929,002

 
929,002

 
929,002

Less:
 
 
 
 
 
Goodwill and intangibles
(126,771
)
 
(126,771
)
 
(126,771
)
Net unrealized gains on investment securities and change in fair value of derivatives used for cash flow hedges
(23,382
)
 
(23,382
)
 
(23,382
)
Plus:
 
 
 
 
 
Allowance for loan and lease losses

 
62,905

 

Subordinated debentures
124,500

 
124,500

 
124,500

Total regulatory capital
$
903,349

 
966,254

 
903,349

Risk-weighted assets
$
4,964,271

 
4,964,271

 
 
Total adjusted average assets
 
 
 
 
$
7,623,699

Capital ratio
18.20
%
 
19.46
%
 
11.85
%
Regulatory “well capitalized” requirement
6.00
%
 
10.00
%
 
 
Excess over “well capitalized” requirement
12.20
%
 
9.46
%
 
 

In addition to the primary and contingent liquidity sources available, the Company has the capacity to issue 117,187,500 shares of common stock of which 73,564,900 has been issued as of June 30, 2013. The Company also has the capacity to issue 1,000,000 shares of preferred stock of which none has been issued as of June 30, 2013.

Federal and State Income Taxes
The Company files a consolidated federal income tax return, using the accrual method of accounting. All required tax returns have been timely filed. Financial institutions are subject to the provisions of the Internal Revenue Code of 1986, as amended, in the same general manner as other corporations.

Under Montana, Idaho, Colorado and Utah law, financial institutions are subject to a corporation income tax, which incorporates or is substantially similar to applicable provisions of the Internal Revenue Code. The corporation income tax is imposed on federal taxable income, subject to certain adjustments. State taxes are incurred at the rate of 6.75 percent in Montana, 7.6 percent in Idaho, 5 percent in Utah and 4.63 percent in Colorado. Wyoming and Washington do not impose a corporate-level income tax.

The Company has equity investments in Certified Development Entities which have received allocations of New Markets Tax Credits (“NMTC”). Administered by the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are claimed over a seven-year credit allowance period. The Company also has equity investments in Low-Income Housing Tax Credits which are indirect federal subsidies used to finance the development of affordable rental housing for low-income households. The federal income tax credits are claimed over a ten-year credit allowance period. The Company has investments in Qualified Zone Academy and Qualified School Construction bonds whereby the Company receives quarterly federal income tax credits in lieu of taxable interest income until the bonds mature. The federal income tax credits on these bonds are subject to federal and state income tax.


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Table of Contents

Following is a list of expected federal income tax credits to be received in the years indicated.
 
(Dollars in thousands)
New
Markets
Tax Credits
 
Low-Income
Housing
Tax Credits
 
Investment
Securities
Tax Credits
 
Total
2013
$
2,775

 
1,270

 
930

 
4,975

2014
2,850

 
1,270

 
908

 
5,028

2015
2,850

 
1,175

 
883

 
4,908

2016
1,014

 
1,175

 
858

 
3,047

2017
450

 
1,060

 
782

 
2,292

Thereafter

 
3,082

 
4,456

 
7,538

 
$
9,939

 
9,032

 
8,817

 
27,788


Income tax expense for the six months ended June 30, 2013 and 2012 was $13.1 million and $8.5 million, respectively. The Company’s effective tax rate for the six months ended June 30, 2013 and 2012 was 23.1 percent and 19.3 percent, respectively. The primary reason for the low effective rates are the amount of tax-exempt investment income and federal tax credits. The tax-exempt income was $20.4 million and $19.0 million for the six months ended June 30, 2013 and 2012, respectively. The federal tax credit benefits were $2.3 million and $2.2 million for the six months ended June 30, 2013 and 2012, respectively. The Company continues to hold its investments in select municipal securities and variable interest entities whereby the Company receives federal tax credits.

Average Balance Sheet
The following schedule provides 1) the total dollar amount of interest and dividend income of the Company for earning assets and the average yield; 2) the total dollar amount of interest expense on interest bearing liabilities and the average rate; 3) net interest and dividend income and interest rate spread; and 4) net interest margin (tax-equivalent).

 

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Table of Contents

 
Three Months ended
 
Six Months ended
 
June 30, 2013
 
June 30, 2013
(Dollars in thousands)
Average
Balance
 
Interest &
Dividends
 
Average
Yield/
Rate
 
Average
Balance
 
Interest &
Dividends
 
Average
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Residential real estate loans
$
594,543

 
$
7,026

 
4.73
%
 
$
606,133

 
$
14,286

 
4.71
%
Commercial loans
2,381,231

 
29,865

 
5.03
%
 
2,326,455

 
58,497

 
5.07
%
Consumer and other loans
587,728

 
7,909

 
5.40
%
 
587,581

 
15,773

 
5.41
%
Total loans 1
3,563,502

 
44,800

 
5.04
%
 
3,520,169

 
88,556

 
5.07
%
Tax-exempt investment securities 2
1,025,295

 
15,229

 
5.94
%
 
992,693

 
29,379

 
5.92
%
Taxable investment securities 3
2,696,142

 
7,174

 
1.06
%
 
2,691,461

 
11,946

 
0.89
%
Total earning assets
7,284,939

 
67,203

 
3.70
%
 
7,204,323

 
129,881

 
3.64
%
Goodwill and intangibles
116,356

 
 
 
 
 
114,208

 
 
 
 
Non-earning assets
349,175

 
 
 
 
 
349,088

 
 
 
 
Total assets
$
7,750,470

 
 
 
 
 
$
7,667,619

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
$
1,177,041

 
$

 
%
 
$
1,159,210

 
$

 
%
NOW accounts
969,412

 
285

 
0.12
%
 
967,616

 
558

 
0.12
%
Savings accounts
513,840

 
58

 
0.05
%
 
504,957

 
131

 
0.05
%
Money market deposit accounts
999,353

 
497

 
0.20
%
 
998,227

 
1,011

 
0.20
%
Certificate accounts
1,120,206

 
2,292

 
0.82
%
 
1,101,274

 
4,719

 
0.86
%
Wholesale deposits 4
552,539

 
342

 
0.25
%
 
565,790

 
767

 
0.27
%
FHLB advances
1,001,899

 
2,648

 
1.06
%
 
961,997

 
5,299

 
1.11
%
Repurchase agreements, federal funds purchased and other borrowed funds
424,246

 
1,063

 
1.00
%
 
425,960

 
2,158

 
1.02
%
Total interest bearing liabilities
6,758,536

 
7,185

 
0.43
%
 
6,685,031

 
14,643

 
0.44
%
Other liabilities
60,553

 
 
 
 
 
59,168

 
 
 
 
Total liabilities
6,819,089

 
 
 
 
 
6,744,199

 
 
 
 
Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Common stock
725

 
 
 
 
 
722

 
 
 
 
Paid-in capital
651,939

 
 
 
 
 
646,995

 
 
 
 
Retained earnings
233,104

 
 
 
 
 
226,806

 
 
 
 
Accumulated other comprehensive income
45,613

 
 
 
 
 
48,897

 
 
 
 
Total stockholders’ equity
931,381

 
 
 
 
 
923,420

 
 
 
 
Total liabilities and stockholders’ equity
$
7,750,470

 
 
 
 
 
$
7,667,619

 
 
 
 
Net interest income (tax-equivalent)
 
 
$
60,018

 
 
 
 
 
$
115,238

 
 
Net interest spread (tax-equivalent)
 
 
 
 
3.27
%
 
 
 
 
 
3.20
%
Net interest margin (tax-equivalent)
 
 
 
 
3.30
%
 
 
 
 
 
3.23
%
 
__________
1 
Total loans are gross of the allowance for loan and lease losses, net of unearned income and include loans held for sale. Non-accrual loans were included in the average volume for the entire period.
2 
Includes tax effect of $4.7 million and $9.0 million on tax-exempt investment security income for the three and six months ended June 30, 2013, respectively.
3 
Includes tax effect of $379 thousand and $760 thousand on investment security tax credits for the three and six months ended June 30, 2013, respectively.
4 
Wholesale deposits include brokered deposits classified as NOW, money market deposit and certificate accounts.


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Table of Contents

Rate/Volume Analysis
Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company’s interest earning assets and interest bearing liabilities (“Volume”) and the yields earned and rates paid on such assets and liabilities (“Rate”). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate. 

 
Six Months ended June 30,
 
2013 vs. 2012
 
Increase (Decrease) Due to:
(Dollars in thousands)
Volume
 
Rate
 
Net
Interest income
 
 
 
 
 
Residential real estate loans
$
481

 
(1,474
)
 
(993
)
Commercial loans
1,105

 
(4,079
)
 
(2,974
)
Consumer and other loans
(1,309
)
 
(901
)
 
(2,210
)
Investment securities (tax-equivalent)
5,371

 
(10,565
)
 
(5,194
)
Total interest income
5,648

 
(17,019
)
 
(11,371
)
Interest expense
 
 
 
 
 
NOW accounts
105

 
(271
)
 
(166
)
Savings accounts
28

 
(73
)
 
(45
)
Money market deposit accounts
161

 
(326
)
 
(165
)
Certificate accounts
242

 
(1,822
)
 
(1,580
)
Wholesale deposits
(141
)
 
(280
)
 
(421
)
FHLB advances
(292
)
 
(1,008
)
 
(1,300
)
Repurchase agreements, federal funds purchased and other borrowed funds
(242
)
 
(80
)
 
(322
)
Total interest expense
(139
)
 
(3,860
)
 
(3,999
)
Net interest income (tax-equivalent)
$
5,787

 
(13,159
)
 
(7,372
)

Net interest income (tax-equivalent) decreased $7.4 million for the six months ended June 30, 2013 compared to the same period in 2012. The decrease in interest income was driven primarily by the premium amortization (net of discount accretion) on investment securities and reduced interest rates on the loan portfolio. Although, the Company was able to lower interest expense by reducing deposit and borrowing interest rates, it was not enough to offset the reduction in interest income.

Effect of inflation and changing prices
GAAP often requires the measurement of financial position and operating results in terms of historical dollars, without consideration for change in relative purchasing power over time due to inflation. Virtually all assets of the Company are monetary in nature; therefore, interest rates generally have a more significant impact on a company’s performance than does the effect of inflation.



61


Table of Contents

Item 3.
Quantitative and Qualitative Disclosure about Market Risk

The Company believes there have not been any material changes in information about the Company’s market risk than was provided in the 2012 Annual Report.


Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(c)) as of the date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.

Changes in Internal Controls
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second quarter 2013, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.


PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings

The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company.


Item 1A. Risk Factors

The Company believes there have been no material changes from risk factors previously disclosed in the 2012 Annual Report. The risks and uncertainties described in the 2012 Annual Report should be carefully reviewed. These are not the only risks and uncertainties that the Company faces. Additional risks and uncertainties that the Company does not currently know about or that the Company currently believes are immaterial, or that the Company has not predicted, may also harm its business operations or adversely affect the Company. If any of these risks or uncertainties actually occurs, the Company’s business, financial condition, operating results or liquidity could be adversely affected.


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

(a)
Not Applicable

(b)
Not Applicable

(c)
Not Applicable


Item 3.
Defaults upon Senior Securities

(a)
Not Applicable

(b)
Not Applicable



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Table of Contents

Item 4.
Mine Safety Disclosures

Not Applicable


Item 5.
Other Information

(a)
Not Applicable

(b)
Not Applicable


Item 6. Exhibits
 
Exhibit 31.1 -
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

Exhibit 31.2 -
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

Exhibit 32 -
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002

Exhibit 101 -
The following financial information from Glacier Bancorp, Inc's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 is formatted in XBRL: (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.


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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 8, 2013.

 
GLACIER BANCORP, INC.
 
 
/s/ Michael J. Blodnick

 
Michael J. Blodnick

 
President and CEO

 
/s/ Ron J. Copher

 
Ron J. Copher

 
Executive Vice President and CFO




64