10-K 1 gbci-12312014x10k.htm FORM 10-K GBCI-12.31.2014-10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________
FORM 10-K
______________________________________________________________________
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014 or
¨ 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)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
NASDAQ Global Select Market
(Title of each class)
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ý  Yes    ¨  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    ý  No
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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.    ý  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
The aggregate market value of the voting common equity held by non-affiliates of the Registrant at June 30, 2014 (the last business day of the most recent second quarter), was $2,087,026,461 (based on the average bid and ask price as quoted on the NASDAQ Global Select Market at the close of business on that date).
The number of shares of Registrant’s common stock outstanding on February 19, 2015 was 75,085,510. No preferred shares are issued or outstanding.
Document Incorporated by Reference
Portions of the 2015 Annual Meeting Proxy Statement dated March 20, 2015 are incorporated by reference into Part III of this Form 10-K.



TABLE OF CONTENTS

 

 
 
Page
PART I
 
 
 
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
PART II
 
 
 
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
 
 
 
 
 
 
 
Item 9
Item 9A
Item 9B
 
 
 
PART III
 
 
 
 
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
PART IV
 
 
 
 
 
Item 15
 
 
 
SIGNATURES
 





PART I
 
Item 1. Business

Glacier Bancorp, Inc. (“Company”), headquartered in Kalispell, Montana, is a Montana corporation incorporated in 2004 as a successor corporation to the Delaware corporation originally incorporated in 1990. The Company is a publicly-traded company and its common stock trades on the NASDAQ Global Select Market under the symbol GBCI. The Company provides commercial banking services from 129 locations in Montana, Idaho, Wyoming, Colorado, Utah and Washington through its wholly-owned bank subsidiary, Glacier Bank (“Bank”). The Company offers a wide range of banking products and services, including transaction and savings deposits, real estate, commercial, agriculture, and consumer loans and mortgage origination services. The Company serves individuals, small to medium-sized businesses, community organizations and public entities. For information regarding the Company’s lending, investment and funding activities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Subsidiaries
The Company includes the parent holding company and nine wholly-owned subsidiaries which consist of the Bank and eight non-bank subsidiaries. The eight non-bank subsidiaries include GBCI Other Real Estate Owned (“GORE”) and seven trust subsidiaries. The Company formed GORE to isolate certain foreclosed properties for administrative purposes and the remaining properties are currently held for sale. GORE is included in the Bank operating segment due to its insignificant activity. 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. As of December 31, 2014, none of the Company’s subsidiaries were engaged in any operations in foreign countries.

In 2012, the Company combined its multiple bank subsidiaries into a single bank subsidiary, Glacier Bank. The bank subsidiaries now operate as separate divisions within the Bank, using the same names and management teams as before the combination. Prior to the combination of the bank subsidiaries, the Company considered each of its bank subsidiaries, GORE, and the parent holding company to be its operating segments. Subsequent to the combination of the bank subsidiaries, the Company considered the Bank to be its sole operating segment.

The Company provides full service brokerage services (selling products such as stocks, bonds, mutual funds, limited partnerships, annuities and other insurance products) through Raymond James Financial Services, a non-affiliated company. The Company shares in the commissions generated, without devoting significant employee time to this portion of the business.

Recent and Pending Acquisitions
The Company’s strategy is to profitably grow its business through internal growth and selective acquisitions. The Company continues to look for profitable expansion opportunities in existing markets and new markets in the Rocky Mountain states. During the last five years, the Company has completed the following acquisitions:
FNBR Holding Corporation (“FNBR”) and its subsidiary, First National Bank of the Rockies, on August 31, 2014;
North Cascades Bancshares, Inc. (“NCBI”) and its subsidiary, North Cascades National Bank, on July 31, 2013; and
Wheatland Bankshares, Inc. (“Wheatland”) and its subsidiary, First State Bank, on May 31, 2013
 
On November 5, 2014, the Company announced the signing of a definitive agreement to acquire Montana Community Banks, Inc. (“Community”) and its wholly-owned subsidiary, Community Bank, Inc., a community bank based in Ronan, Montana. Community provides banking services to individuals and businesses in western Montana, with banking offices located in Missoula, Polson, Ronan and Pablo, Montana. As of December 31, 2014, Community had total assets of $175 million, gross loans of $93.0 million and total deposits of $150 million. All necessary regulatory approvals and waivers have been obtained and closing is anticipated to take place in the first quarter of 2015. The branches of Community will be merged into Glacier Bank and will become part of the Glacier Bank and First Security Bank of Missoula divisions.

Market Area
The Company and the Bank have 129 locations, of which 8 are loan or administration offices, in 45 counties within 6 states including Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The Company and the Bank have 55 locations in Montana, 27 locations in Idaho, 17 locations in Wyoming, 13 locations in Colorado, 4 locations in Utah and 13 locations in Washington.

The market area’s economic base primarily focuses on tourism, construction, mining, energy, manufacturing, agriculture, service industry, and health care. The tourism industry is highly influenced by national parks, ski resorts, significant lakes and rural scenic areas.


3



Competition
Commercial banking is a highly competitive business and operates in a rapidly changing environment. There are a large number of depository institutions including savings and loans, commercial banks, and credit unions in the markets in which the Company has offices. Competition is also increasing for deposit and lending services from internet-based competitors. Non-depository financial service institutions, primarily in the securities, insurance and retail industries, have also become competitors for retail savings, investment funds and lending activities. In addition to offering competitive interest rates, the principal methods used by the Bank to attract deposits include the offering of a variety of services including on-line banking, mobile banking and convenient office locations and business hours. The primary factors in competing for loans are interest rates and rate adjustment provisions, loan maturities, loan fees, and the quality of service to borrowers and brokers.

Based on the Federal Deposit Insurance Corporation (“FDIC”) summary of deposits survey as of June 30, 2014, the Bank has approximately 23 percent of the total FDIC insured deposits in the 13 counties that it services in Montana. In Idaho, the Bank has approximately 7 percent of the deposits in the 9 counties that it services. In Wyoming, the Bank has 26 percent of the deposits in the 8 counties it services. In Colorado, the Bank has 9 percent of the deposits in the 6 counties it services. In Utah, the Bank has 12 percent of the deposits in the 3 counties it services. In Washington, the Bank has 4 percent of the deposits in the 6 counties it services.

Employees
As of December 31, 2014, the Company and the Bank employed 2,030 persons, 1,827 of whom were employed full time and none of whom were represented by a collective bargaining group. The Company and the Bank provide their employees with a comprehensive benefit program, including health, dental and vision insurance, life and accident insurance, long-term disability coverage, vacation and sick leave, 401(k) plan, profit sharing plan and a stock-based compensation plan. The Company considers its employee relations to be excellent. See Note 13 in the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for detailed information regarding employee benefit plans and eligibility requirements.

Board of Directors and Committees
The Company’s Board of Directors (“Board”) has the ultimate authority and responsibility for overseeing risk management at the Company. Some aspects of risk oversight are fulfilled at the full Board level and the Board delegates other aspects of its risk oversight function to its committees. The Board has established, among others, an Audit Committee, a Compensation Committee, a Nominating/Corporate Governance Committee, Compliance Committee and a Risk Oversight Committee. Additional information regarding Board committees is set forth under the heading “Meetings and Committees of the Board of Directors - Committee Membership” in the Company’s 2015 Annual Meeting Proxy Statement and is incorporated herein by reference. The Bank’s Board of Directors presently consists of the same persons serving as Company directors.

Website Access
Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the Company’s website (www.glacierbancorp.com) as soon as reasonably practicable after the Company has filed the material with, or furnished it to, the United States Securities and Exchange Commission (“SEC”). Copies can also be obtained by accessing the SEC’s website (www.sec.gov).

Supervision and Regulation
The following discussion provides an overview of certain elements of the extensive regulatory framework applicable to the Company and the Bank. This regulatory framework is primarily designed for the protection of depositors, the federal Deposit Insurance Fund (“DIF”) and the banking system as a whole, rather than specifically for the protection of shareholders. Due to the breadth and growth of this regulatory framework, the costs of compliance continue to increase in order to monitor and satisfy these requirements.

To the extent that this section describes statutory and regulatory provisions, it does not purport to be complete and is qualified by reference to those provisions. These statutes and regulations, as well as related policies, continue to be subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to the Company, including the interpretation or implementation thereof cannot be predicted and could have a material effect on the Company’s business or operations. Numerous changes to the statutes, regulations or regulatory policies applicable to the Company have been made or proposed in recent years. Continued efforts to monitor and comply with new regulatory requirements add to the complexity and cost of the Company’s business.

The Company is subject to regulation and supervision by the Federal Reserve and regulation by the State of Montana as a Montana corporation. The Bank is subject to regulation and supervision by the Montana Department of Administration's Banking and Financial Institutions Division, the FDIC, and, with respect to branches of the Bank outside of Montana, applicable state regulators.


4



Federal Bank Holding Company Regulation
General. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended (“BHCA”), due to its ownership of the Bank. As a bank holding company, the Company is subject to regulation, supervision and examination by the Federal Reserve. In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to banking. The Company must also file reports with and provide additional information to the Federal Reserve.

Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before 1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5 percent of such shares; 2) acquiring all or substantially all of the assets of another bank or bank holding company; or 3) merging or consolidating with another bank holding company.

Holding Company Control of Non-banks. With some exceptions, the BHCA also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5 percent of the voting shares of any company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by federal statute, agency regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.

Transactions with Affiliates. Bank subsidiaries of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in securities, and on the use of securities as collateral for loans to any borrower. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) further extended the definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending and borrowing transactions as a covered transaction under the regulations. It also expands the scope of covered transactions required to be collateralized, requires collateral to be maintained at all times for covered transactions required to be collateralized, and places limits on acceptable collateral. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for payment of dividends, interest and operational expenses.

Tying Arrangements. The Company is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor the Bank may condition an extension of credit to a customer on either 1) a requirement that the customer obtain additional services provided by the Company or the Bank or 2) an agreement by the customer to refrain from obtaining other services from a competitor.

Support of Bank Subsidiaries. Under Federal Reserve policy and the Dodd-Frank Act, the Company is expected to act as a source of financial and managerial strength to the Bank. This means that the Company is required to commit, as necessary, capital and resources to support the Bank. Any capital loans a bank holding company makes to its bank subsidiaries are subordinate to deposits and to certain other indebtedness of the bank subsidiaries.

State Law Restrictions. As a Montana corporation, the Company is subject to certain limitations and restrictions under applicable Montana corporate law. For example, state law restrictions in Montana include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records and minutes, and observance of certain corporate formalities.

Federal and State Regulation of the Bank
General. Deposits in the Bank, a Montana state-chartered bank with branches in Montana, Colorado, Idaho, Utah, Washington and Wyoming, are insured by the FDIC. The Bank is subject to primary supervision, periodic examination and regulation of the FDIC and the Montana Department of Administration's Banking and Financial Institutions Division as the Bank’s primary regulators. These agencies have the authority to prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices. In addition, with respect to branches of the Bank outside of Montana, the Bank is subject to regulation and supervision by the applicable state banking regulators. The federal laws that apply to the Bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds, and the nature, amount of, and collateral for loans. Federal laws also regulate community reinvestment and insider credit transactions and impose safety and soundness standards.


5



Consumer Protection. Although the Bank is not supervised directly by the Consumer Financial Protection Bureau (“CFPB”), its consumer banking activities are subject to regulation by the CFPB. The Bank is subject to a variety of federal and state consumer protection laws and regulations that govern its relationship with consumers including laws and regulations that impose certain disclosure requirements and regulate the manner in which the Bank takes deposits, make and collect loans, and provide other services. In recent years, examination and enforcement by state and federal banking agencies for non-compliance with consumer protection laws and their implementing regulations have increased and become more intense. Failure to comply with these laws and regulations may subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.

Community Reinvestment. The Community Reinvestment Act of 1977 ("CRA") requires that, in connection with examinations of financial institutions within their jurisdiction, federal bank regulators must evaluate the record of financial institutions in meeting the credit needs of its local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those banks. A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions, and applications to open a branch or facility.

Insider Credit Transactions. Banks are also subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders, and their related interests. Extensions of credit 1) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are at least as stringent, as those prevailing at the time for comparable transactions with persons not related to the lending bank; and 2) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, regulatory enforcement actions, and other regulatory sanctions. The Dodd-Frank Act and federal regulations place additional restrictions on loans to insiders, and generally prohibits loans to senior officers other than for certain specified purposes.

Regulation of Management. Federal law 1) sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency; 2) places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and 3) generally prohibits management personnel of a bank from serving as directors or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.

Safety and Soundness Standards. Certain non-capital safety and soundness standards are also imposed upon banks. These standards cover, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security program must be designed to ensure the security and confidentiality of customer information, protect against unauthorized access to or use of such information and ensure the proper disposal of customer and consumer information. An institution that fails to meet these standards may be required to submit a compliance plan, or submit to regulatory sanctions.

Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) together with the Dodd-Frank Act, relaxed prior interstate branching restrictions under federal law by permitting, subject to regulatory approval, state and federally chartered commercial banks to establish branches in states where the laws permit banks chartered in such states to establish branches. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. Federal bank regulations prohibit banks from using their interstate branches primarily for deposit production and federal bank regulatory agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.


6



Dividends
A principal source of the Company’s cash is from dividends received from the Bank, which are subject to government regulation and limitation on the Bank’s ability to pay dividends. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. The Bank is subject to Montana state law and cannot declare a dividend greater than the previous two years' net earnings without providing notice to the state regulators. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. The third installment of the Basel Accords (“Basel III”) introduces additional limitations on a bank’s ability to issue dividends by requiring banks to maintain a common equity conservation buffer of at least an additional 2.5 percent of risk-weighted assets over the minimum required capital ratio to avoid restrictions on dividends, redemptions and executive bonus payments. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies which expresses the view that although no specific regulations restrict dividend payments by bank holding companies other than state corporate laws, a bank holding company should not pay cash dividends unless the company’s net income for the past year is sufficient to cover both the cash dividends and a prospective rate of earnings retention that is consistent with the bank holding company’s capital needs, asset quality and overall financial condition.

Capital Adequacy
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies. On July 2, 2013, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (“OCC”) approved a final rule (“Final Rule”) to establish a new comprehensive regulatory capital framework for all U.S. financial institutions and their holding companies. The phase-in period for the Final Rule began for the Bank on January 1, 2015, with full compliance with the Final Rule phased in by January 1, 2019. The Final Rule implements the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act and substantially amends the regulatory risk-based capital rules applicable to the Bank. Basel III refers to various documents released by the Basel Committee on Banking Supervision.

Effective January 1, 2015, Basel III:
Creates “Tier 1 Common Equity,” a new measure of regulatory capital closer to pure tangible common equity than the present Tier 1 definition;
Establishes a required minimum risk-based capital ratio for Tier 1 Common Equity at 4.5 percent and adds a 2.5 percent capital conservation buffer;
Increases the required Tier 1 risk-based capital ratio to 6.0 percent and the required Total risk-based capital ratio to 8.0 percent;
Increases the required leverage ratio to 4 percent; and
Allows for permanent grandfathering of non-qualifying instruments, such as trust preferred securities, issued prior to May 19, 2010 for depository institution holding companies with less than $15 billion in total assets as of year end 2009, subject to a limit of 25 percent of Tier 1 capital.

The new capital rules require the Bank to meet the capital conservation buffer requirement by 2019 in order to avoid constraints on capital distributions, such as dividends and equity repurchases, and certain bonus compensation for executive officers. These new capital rules also change the risk-weights of certain assets for purposes of the risk-based capital ratios and phases out certain instruments as qualifying capital. Mortgage servicing rights, certain deferred tax assets, and investments in unconsolidated subsidiaries over designated percentages of common stock will be deducted from capital, subject to a two-year transition period. In addition, Tier 1 capital will include accumulated other comprehensive income, which includes all unrealized gain and losses on available-for-sale debt and equity securities, subject to a two-year transition period. The Bank, as a non-advanced approaches banking organization, may make a one-time permanent election to continue to exclude these items. Management anticipates that it will elect the opt-out provision to reduce the impact of market volatility on its regulatory capital levels. Basel III also contains specific rules addressing the impact of merger and acquisition activity on the ability of a bank holding company to continue to benefit from the permanent grand-fathering of existing non-qualifying capital instruments in Tier 1 capital.

The application of the Final Rule may result in lower returns on invested capital, require the raising of additional capital or require regulatory action if the Bank were unable to comply with such requirements. In addition, management may be required to modify its business strategy due to the changes to the asset risk-weights for risk-based capital calculations and the requirement to meet the capital conservation buffers. The imposition of liquidity requirements in connection with Basel III could also cause the Bank to increase its holdings of liquid assets, change its business strategy, and make other changes to the terms of its funding. Management believes that, as of December 31, 2014, the Company would meet all capital adequacy requirements under the Basel III capital rules on a fully phased-in basis as if all such requirements were currently in effect.


7



Regulatory Oversight and Examination
The Federal Reserve conducts periodic inspections of bank holding companies. The supervisory objectives of the inspection program are to ascertain whether the financial strength of a bank holding company is maintained on an ongoing basis and to determine the effects or consequences of transactions between a bank holding company or its non-banking subsidiaries and its bank subsidiaries. For bank holding companies under $10 billion in assets, the inspection type and frequency varies depending on asset size, complexity of the organization, and the bank holding company’s rating at its last inspection.

Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of operations of a bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agency or may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised banks as frequently as deemed necessary based on the condition of the bank or as a result of certain triggering events.

The federal banking regulators have issued guidance on sound risk management practices for concentrations in commercial real estate lending. The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The banking regulators are directed to examine each bank’s exposure to commercial real estate loans that are dependent on cash flow from the real estate held as collateral and to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk. The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in evaluating capital adequacy and does not specifically limit a bank’s commercial real estate lending to a specified concentration level.

Corporate Governance and Accounting
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (“Act”) addresses, among other things, corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. Generally, the Act 1) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the SEC; 2) imposes specific and enhanced corporate disclosure requirements; 3) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; 4) requires companies to adopt and disclose information about corporate governance practices, including whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert;” and 5) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.

As a publicly reporting company, the Company is subject to the requirements of the Act and related rules and regulations issued by the SEC and NASDAQ. After enactment, the Company updated its policies and procedures to comply with the Act’s requirements and has found that such compliance, including compliance with Section 404 of the Act relating to the Company’s internal control over financial reporting, has resulted in significant additional expense for the Company. The Company will continue to incur additional expense in its ongoing compliance.

Anti-Terrorism
USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (“Patriot Act”). The Patriot Act, in relevant part, 1) prohibits banks from providing correspondent accounts directly to foreign shell banks; 2) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; 3) requires financial institutions to establish an anti-money-laundering compliance program; and 4) eliminates civil liability for persons who file suspicious activity reports. The Patriot Act also includes provisions providing the government with power to investigate terrorism, including expanded government access to bank account records. Bank regulators are directed to consider a holding company’s and bank’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications. The Company and the Bank have established compliance programs designed to comply with the Patriot Act requirements.


8



Financial Services Modernization
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLB Act”) brought about significant changes to the laws affecting banks and bank holding companies. Generally, the GLB Act 1) repeals historical restrictions on preventing banks from affiliating with securities firms; 2) provides a uniform framework for the activities of banks, savings institutions and their holding companies; 3) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; 4) provides an enhanced framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and 5) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. The Bank is subject to FDIC regulations implementing the privacy protection provisions of the GLB Act. These regulations require banks to disclose their privacy policy, including informing consumers of their information sharing practices and informing consumers of their rights to opt out of certain practices.

The Emergency Economic Stabilization Act of 2008
In response to market turmoil and financial crises affecting the overall banking system and financial markets in the United States, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3, 2008. EESA provides the U.S. Department of the Treasury with broad authority to implement certain actions intended to help restore stability and liquidity to the U.S. financial markets.

Deposit Insurance
The Bank's deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits and are subject to deposit insurance assessments by the FDIC designed to tie what banks pay for deposit insurance to the risks they pose. The Dodd-Frank Act redefined the assessment base used for calculating FDIC deposit insurance assessments by requiring the FDIC to determine deposit insurance assessments based on assets instead of deposits. Assessments are now based on the average consolidated total assets less average tangible equity capital of a financial institution. In addition, the Dodd-Frank Act raised the minimum designated reserve ratio (the FDIC is required to set the reserve ratio each year) of the DIF from 1.15 percent to 1.35 percent; requires that the DIF reserve ratio meet 1.35 percent by 2020; and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The FDIC has established a higher reserve ratio of 2 percent as a long-term goal beyond what is required by statute. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. The FDIC may also prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the DIF.

The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. Management is not aware of any existing circumstances which would result in termination of the deposit insurance of the Bank.

Insurance of Deposit Accounts. The EESA included a provision for a temporary increase from $100,000 to $250,000 per depositor in deposit insurance. The temporary increase was made permanent under the Dodd-Frank Act. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category. The EESA also temporarily raised the limit on federal deposit insurance coverage to an unlimited amount for non-interest or low-interest bearing demand deposits. Unlimited coverage for non-interest transaction accounts expired December 31, 2012.

The Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act significantly changed the bank regulatory structure and is affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, including the Company and the Bank. Some of the provisions of the Dodd-Frank Act that may impact the Company's business are summarized below.

The Dodd-Frank Act requires publicly traded companies to provide their shareholders with 1) a non-binding shareholder vote on executive compensation; 2) a non-binding shareholder vote on the frequency of such vote; 3) disclosure of “golden parachute” arrangements in connection with specified change in control transactions; and 4) a non-binding shareholder vote on golden parachute arrangements in connection with these change in control transactions. Except with respect to “smaller reporting companies” and participants in the Capital Purchase Program, the new rules applied to proxy statements relating to annual meetings of shareholders held after January 20, 2011. “Smaller reporting companies,” those with a public float of less than $75 million, are required to include the non-binding shareholder votes on executive compensation and the frequency thereof in proxy statements relating to annual meetings occurring on or after January 21, 2013.


9



The Dodd-Frank Act generally prohibits a depository institution from converting from a state to federal charter, or vice versa, while it is the subject to an enforcement action unless the depository institution seeks prior approval from its primary regulator and complies with specified procedures to ensure compliance with the enforcement action.

The Dodd-Frank Act repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

The Dodd-Frank Act established the CFPB and empowered it to exercise broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws. The Bank is subject to consumer protection regulations issued by the CFPB, but as a financial institution with assets of less than $10 billion, the Bank is generally not subject to supervision and examination by the CFPB. The CFPB has issued and continues to issue numerous regulations under which the Company will continue to incur additional expense in its ongoing compliance with the CFPB regulations, and the Dodd-Frank Act specifically.

Proposed Legislation
The economic and political environment of the past several years has led to a number of proposed legislative, governmental and regulatory initiatives that may significantly impact the banking industry. The CFPB, for example, has already signaled that it will propose additional regulations with respect to debt collection, overdraft protection, arbitration clauses, and mortgage servicing in 2015 which could change the competitive and operating environment in which the Bank operates. Other regulatory initiatives by federal and state banking agencies may also significantly impact the Bank’s business. The Bank cannot predict whether these or any other proposals will be enacted or the ultimate impact of any such initiatives on its operations, competitive situation, financial conditions, or results of operations.

Effects of Federal Government Monetary Policy
The Company’s earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on the Company or the Bank cannot be predicted with certainty.


Item 1A. Risk Factors

An investment in the Company’s common stock involves certain risks. The following is a discussion of the most significant risks and uncertainties that may affect the Company’s business, financial condition and future results.

Economic conditions in the market areas the Bank serves may adversely impact its earnings and could increase the credit risk associated with its loan portfolio and the value of its investment portfolio.
Substantially all of the Bank’s loans are to businesses and individuals in Montana, Idaho, Wyoming, Utah, Colorado and Washington, and a softening of the economies in these market areas could have a material adverse effect on its business, financial condition, results of operations and prospects. While both the national economy and local economies in which the Bank operates have improved, a future deterioration in the economy, whether nationally or in the markets it serves would have a negative impact on its business. Any softening in economic conditions could result in the following consequences, any of which could have an adverse impact, which could be material, on the Company’s business, financial condition, results of operations and prospects:
loan delinquencies may increase;
problem assets and foreclosures may increase;
collateral for loans made may decline further in value, in turn reducing customers’ borrowing power, reducing the value of assets and collateral associated with existing loans;
certain securities within the investment portfolio could become other than temporarily impaired, requiring a write-down through earnings to fair value, thereby reducing equity;
low cost or non-interest bearing deposits may decrease; and
demand for loan and other products and services may decrease.


10



The allowance for loan and lease losses may not be adequate to cover actual loan losses, which could adversely affect earnings.
The Bank maintains an allowance for loan and lease losses (“ALLL” or “allowance”) in an amount that it believes is adequate to provide for losses in the loan portfolio. While the Bank strives to carefully manage and monitor credit quality and to identify loans that may become non-performing, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as non-performing or potential problem loans. With respect to real estate loans and property taken in satisfaction of such loans (“other real estate owned” or “OREO”), the Bank can be required to recognize significant declines in the value of the underlying real estate collateral or OREO quite suddenly as values are updated through appraisals and evaluations (new or updated) performed in the normal course of monitoring the credit quality of the loans. There are many factors that can cause the value of real estate to decline, including declines in the general real estate market, changes in methodology applied by appraisers, and/or using a different appraiser than was used for the prior appraisal or evaluation. The Bank’s ability to recover on real estate loans by selling or disposing of the underlying real estate collateral is adversely impacted by declining values, which increases the likelihood the Bank will suffer losses on defaulted loans beyond the amounts provided for in the ALLL. This, in turn, could require material increases in the Bank’s provision for loan losses and ALLL. By closely monitoring credit quality, the Bank attempts to identify deteriorating loans before they become non-performing assets and adjust the ALLL accordingly. However, because future events are uncertain, and if difficult economic conditions continue or worsen, there may be loans that deteriorate to a non-performing status in an accelerated time frame. As a result, future additions to the ALLL may be necessary. Because the loan portfolio contains a number of loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in non-performing loans, requiring an increase to the ALLL. Additionally, future significant additions to the ALLL may be required based on changes in the mix of loans comprising the portfolio, changes in the financial condition of borrowers, which may result from changes in economic conditions, or changes in the assumptions used in determining the ALLL. Additionally, federal and state banking regulators, as an integral part of their supervisory function, periodically review the Bank’s loan portfolio and the adequacy of the ALLL. These regulatory authorities may require the Bank to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from the Bank’s judgments. Any increase in the ALLL could have an adverse effect, which could be material, on the Company’s financial condition and results of operations.

The Bank has a high concentration of loans secured by real estate, so any future deterioration in the real estate markets could require material increases in the ALLL and adversely affect the Company’s financial condition and results of operations.
The Bank has a high degree of concentration in loans secured by real estate. Any future deterioration in the real estate markets could adversely impact borrowers’ ability to repay loans secured by real estate and the value of real estate collateral, thereby increasing the credit risk associated with the loan portfolio. The Bank’s ability to recover on these loans by selling or disposing of the underlying real estate collateral would be adversely impacted by any decline in real estate values, which increases the likelihood that the Bank will suffer losses on defaulted loans secured by real estate beyond the amounts provided for in the ALLL. This, in turn, could require material increases in the ALLL which would adversely affect the Company’s financial condition and results of operations.

There can be no assurance the Company will be able to continue paying dividends on the common stock at recent levels.
The Company may not be able to continue paying quarterly dividends, and particularly special dividends which are carefully considered, commensurate with recent levels given that the ability to pay dividends on the Company’s common stock depends on a variety of factors. The payment of quarterly and special dividends is subject to government regulation in that regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. This is heavily based on the Company’s earnings and capital levels which currently are strong. Current guidance from the Federal Reserve provides, among other things, that dividends per share should not exceed earnings per share measured over the previous four fiscal quarters. The Bank is also subject to Montana state law and cannot declare a dividend greater than the previous two years’ net earnings without providing notice to the state. As a result, future dividends will generally depend on the sufficiency of earnings.

The Company may not be able to continue to grow organically or through acquisitions.
Historically, the Company has expanded through a combination of organic growth and acquisitions. If market and regulatory conditions remain challenging, the Company may be unable to grow organically or successfully complete or integrate potential future acquisitions. Furthermore, there can be no assurance that the Company can successfully complete such transactions, since they are subject to regulatory review and approval.

The FDIC has adopted a plan to increase the federal Deposit Insurance Fund, including additional future premium increases and special assessments.
The Dodd-Frank Act broadened the base for FDIC insurance assessments and assessments are now based on the average consolidated total assets less average tangible equity capital of a financial institution. In addition, the Dodd-Frank Act established 1.35 percent as the minimum Deposit Insurance Fund reserve ratio. The FDIC has determined that the fund reserve ratio should be 2.0 percent and has adopted a plan under which it will meet the statutory minimum fund reserve ratio of 1.35 percent by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum fund reserve ratio to 1.35 percent from the former statutory minimum of 1.15 percent. As a result, the deposit insurance assessments to be paid by the Bank could increase.


11



Despite the FDIC’s actions to restore the DIF, the DIF could suffer additional losses in the future due to failures of insured institutions. There could be additional significant deposit insurance premium increases, special assessments or prepayments in order to restore the insurance fund’s reserve ratio. Any significant premium increases or special assessments could have a material adverse effect on the Company’s financial condition and results of operations.

The Bank’s loan portfolio mix increases the exposure to credit risks tied to deteriorating conditions.
The loan portfolio contains a high percentage of commercial, commercial real estate, real estate acquisition and development loans in relation to the total loans and total assets. These types of loans have historically been viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about banks with a heavy concentration of commercial real estate loans. These types of loans also typically are larger than residential real estate loans and other commercial loans. Because the Bank’s loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or more of these loans may cause a significant increase in non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have a material adverse impact on results of operations and financial condition.

Non-performing assets could increase, which could adversely affect the Company’s results of operations and financial condition.
The Bank may experience increases in non-performing assets in the future. Non-performing assets (which include OREO) adversely affect the Company’s net income and financial condition in various ways. The Bank does not record interest income on non-accrual loans or OREO, thereby adversely affecting its income. When the Bank takes collateral in foreclosures and similar proceedings, it is required to mark the related asset to the then fair value of the collateral, less estimated cost to sell, which may result in a charge-off of the value of the asset and lead the Bank to increase the provision for loan losses. An increase in the level of non-performing assets also increases the Bank’s risk profile and may impact the capital levels its regulators believe are appropriate in light of such risks. Further decreases in the value of these assets, or the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond the Bank’s control, could adversely affect the Company’s business, results of operations and financial condition, perhaps materially. In addition to the carrying costs to maintain OREO, the resolution of non-performing assets increases the Bank’s loan administration costs generally, and requires significant commitments of time from management and the Company’s directors, which reduces the time they have to focus on profitably growing the Company’s business.

A decline in the fair value of the Bank’s investment portfolio could adversely affect earnings.
The fair value of the Bank’s investment securities could decline as a result of factors including changes in market interest rates, credit quality and credit ratings, lack of market liquidity and other economic conditions. An investment security is impaired if the fair value of the security is less than the carrying value. When a security is impaired, the Bank determines whether the impairment is temporary or other-than-temporary. If an impairment is determined to be other-than-temporary, an impairment loss is recognized by reducing the amortized cost only for the credit loss associated with the other-than-temporary loss with a corresponding charge to earnings for a like amount. Any such impairment charge would have an adverse effect, which could be material, on the Company’s results of operations and financial condition, including its capital.

Concurrent with the Bank’s loan growth over the last two years, the investment portfolio has decreased from 41 percent of total assets at December 31, 2013 to 35 percent of total assets at December 31, 2014. While the Bank believes that the terms of such investments have been kept relatively short, the Bank is subject to elevated interest rate risk exposure if rates were to increase sharply. Further, the change in the mix of the Bank’s assets to more investment securities presents a different type of asset quality risk than the loan portfolio. In addition, in connection with the ongoing monitoring of its investment portfolio, the Bank reclassified obligations of state and local government securities with a fair value of approximately $485 million, inclusive of a net unrealized gain of $4.6 million, from available-for-sale (“AFS”) classification to held-to-maturity (“HTM”) classification. The reclassification occurred on January 1, 2014 and changed the allocation of the Bank’s entire investment portfolio from 100 percent AFS to approximately 85 percent AFS and 15 percent HTM. At December 31, 2014, the investment portfolio consisted of 82 percent AFS and 18 percent HTM. The future impact of this reclassification, if any, on the Company’s financial condition and results of operations will depend on interest rate environments and other factors which are not estimable at this time. While the Company believes a relatively conservative management approach has been applied to the investment portfolio, there is always potential loss exposure under changing economic conditions.



12



Fluctuating interest rates can adversely affect profitability.
The Bank’s profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest earned on loans, investment securities and other interest earning assets and interest paid on deposits, borrowings, and other interest bearing liabilities. Because of the differences in maturities and repricing characteristics of interest earning assets and interest bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest earning assets and interest paid on interest bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect the Bank’s interest rate spread, and, in turn, profitability. The Bank seeks to manage its interest rate risk within well established policies and guidelines. Generally, the Bank seeks an asset and liability structure that insulates net interest income from large deviations attributable to changes in market rates. However, the Bank’s structures and practices to manage interest rate risk may not be effective in a highly volatile rate environment.

Interest rate swaps expose the Bank to certain risks, and may not be effective in mitigating exposure to changes in interest rates.
The Bank has entered into interest rate swap agreements in order to manage a portion of the interest rate volatility risk. The Bank anticipates that it may enter into additional interest rate swaps. These swap agreements involve other risks, such as the risk that the counterparty may fail to honor its obligations under these arrangements, leaving the Bank vulnerable to interest rate movements. The Bank’s current interest rate swap agreements include bilateral collateral agreements whereby the net fair value position is collateralized by the party in a net liability position. The bilateral collateral agreements reduce the Bank’s counterparty risk exposure. There can be no assurance that these arrangements will be effective in reducing the Bank’s exposure to changes in interest rates.

If goodwill recorded in connection with acquisitions becomes additionally impaired, it could have an adverse impact on earnings and capital.
Accounting standards require the Company to account for acquisitions using the acquisition method of accounting. Under acquisition accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), goodwill is not amortized but rather is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. The Company's goodwill was not considered impaired as of December 31, 2014 and 2013; however, there can be no assurance that future evaluations of goodwill will not result in findings of additional impairment and write-downs, which could be material. While a non-cash item, additional impairment of goodwill could have a material adverse effect on the Company’s business, financial condition and results of operations. Furthermore, additional impairment of goodwill could subject the Company to regulatory limitations, including the ability to pay dividends on its common stock.

Growth through future acquisitions could, in some circumstances, adversely affect profitability or other performance measures.
During 2014 and in prior years, the Company has been active in acquisitions and may in the future engage in selected acquisitions of additional financial institutions. There are risks associated with any such acquisitions that could adversely affect profitability and other performance measures. These risks include, among other things, incorrectly assessing the asset quality of a financial institution being acquired, discovering compliance or regulatory issues after the acquisition, encountering greater than anticipated cost and use of management time associated with integrating acquired businesses into the Company’s operations, and being unable to profitably deploy funds acquired in an acquisition. The Company may not be able to continue to grow through acquisitions, and if it does, there is a risk of negative impacts of such acquisitions on the Company’s operating results and financial condition.

The Company anticipates that it might issue capital stock in connection with future acquisitions. Acquisitions and related issuances of stock may have a dilutive effect on earnings per share and the percentage ownership of current shareholders.

The Company’s business is heavily dependent on the services of members of the senior management team and proposed changes could have an impact the Company.
The Company believes its success to date has been substantially dependent on the members of the executive management team, in particular the Chief Executive Officer (“CEO”). The unexpected loss of any of these persons could have an adverse effect on the Company’s business and future growth prospects. Fortunately, the Company has a decentralized management style with separate Presidents for its Bank divisions. Notwithstanding the foregoing, the CEO has been critical to the Company’s success. As previously announced, the Company is engaged in a search process for management succession at the CEO level. Finding the right person to fit the Company’s unique culture and ensuring a smooth transition, which the Company’s CEO has agreed to be an integral part of, is important to ensure the continued success of the Company.


13



Competition in the Bank’s market areas may limit future success.
Commercial banking is a highly competitive business and a consolidating industry. The Bank competes with other commercial banks, savings and loans, credit unions, finance, insurance and other non-depository companies operating in its market areas. The Bank is subject to substantial competition for loans and deposits from other financial institutions. Some of its competitors are not subject to the same degree of regulation and restriction as the Bank. Some of the Bank’s competitors have greater financial resources than the Bank. If the Bank is unable to effectively compete in its market areas, the Bank’s business, results of operations and prospects could be adversely affected.

A failure in or breach of the Bank’s operational or security systems, or those of the Bank’s third party service providers, including as a result of cyber attacks, could disrupt business, result in the disclosure or misuse of confidential or proprietary information, damage the Company’s reputation, increase costs and cause losses.
The Bank’s operations rely heavily on the secure processing, storage and transmission of confidential and other information on its computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in the Bank’s online banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and integrity of the Bank’s systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber attacks, electronic fraudulent activity or attempted theft of financial assets. The Bank cannot assure that any such failures, interruption or security breaches will not occur, or if they do occur, that they will be adequately addressed. While the Bank has certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. The Bank may be required to expend significant additional resources in the future to modify and enhance its protective measures.

Additionally, the Bank faces the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate its business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, the Bank’s operational systems.

Any failures, interruptions or security breaches in the Bank’s information systems could damage its reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose the Company to civil litigation, regulatory fines or losses not covered by insurance.

The Company and the Bank operate in a highly regulated environment and changes or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect the Company.
The Company and the Bank are subject to extensive regulation, supervision and examination by federal and state banking regulators. In addition, as a publicly-traded company, the Company is subject to regulation by the SEC. Any change in applicable regulations or federal, state or local legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on the Company and its operations. Changes in laws and regulations may also increase expenses by imposing additional fees or taxes or restrictions on operations. Additional legislation and regulations that could significantly affect powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on the Company’s financial condition and results of operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to the Company’s reputation, all of which could adversely affect the Company’s business, financial condition or results of operations.

Regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and bank holding companies in the performance of their supervisory and enforcement duties. Existing and proposed federal and state laws and regulations restrict, limit and govern all aspects of the Company’s activities and may affect the ability to expand its business over time, may result in an increase in the Company’s compliance costs, and may affect its ability to attract and retain qualified executive officers and employees. Recently, these powers have been utilized more frequently due to the challenging national, regional and local economic conditions. The exercise of regulatory authority may have a negative impact on the Company’s financial condition and results of operations, including limiting the types of financial services and products the Company may offer or increasing the ability of non-banks to offer competing financial services and products. Additionally, the Company’s business is affected significantly by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve.

The Company cannot accurately predict the full effects of recent legislation or the various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets and on the Company. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions could materially and adversely affect the Company’s business, financial condition, results of operations, and the trading price of the Company’s common stock.


14



The Company has various anti-takeover measures that could impede a takeover.
The Company’s articles of incorporation include certain provisions that could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest, merger or otherwise. These provisions include a requirement that any “Business Combination” (as defined in the articles of incorporation) be approved by at least 80 percent of the voting power of the then outstanding shares, unless it is either approved by the Company’s Board or certain price and procedural requirements are satisfied. In addition, the authorization of preferred stock, which is intended primarily as a financing tool and not as a defensive measure against takeovers, may potentially be used by management to make more difficult uninvited attempts to acquire control of the Company. These provisions may have the effect of lengthening the time required to acquire control of the Company through a tender offer, proxy contest or otherwise, and may deter any potentially unfriendly offers or other efforts to obtain control of the Company. This could deprive the Company’s shareholders of opportunities to realize a premium for their common stock in the Company, even in circumstances where such action is favored by a majority of the Company’s shareholders.
 
The impact of Basel III is still uncertain.
The adoption of Basel III established, among other things, a new common equity Tier 1 minimum capital requirement (4.5 percent of risk-weighted assets), increased the minimum Tier 1 capital to risk-based assets requirement (from 4.0 percent to 6.0 percent of risk-weighted assets) and assigns a higher risk weight (150 percent) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The Final Rule also requires the Bank to meet the capital conservation buffer requirements of an additional 2.5 percent of common equity Tier 1 capital in order to avoid constraints on capital distributions and certain bonus compensation for executive officers. The Final Rule became effective on January 1, 2015 with the capital conservation buffer requirement phased in beginning January 1, 2016 and ending January 1, 2019.

The application of the Final Rule may result in lower returns on invested capital, require the raising of additional capital or require regulatory action if the Bank were unable to comply with such requirements. In addition, management may be required to modify its business strategy due to the changes to the asset risk-weights for risk-based capital calculations and the requirement to meet the capital conservation buffers. The imposition of liquidity requirements in connection with Basel III could also cause the Bank to increase its holdings of liquid assets, change its business strategy, and make other changes to the terms of its funding. If the Bank were unable to meet the capital conservation buffer requirements required in 2016, the Company’s ability to pay dividends to stockholders may also be limited.


Item 1B. Unresolved Staff Comments

None
 

Item 2. Properties

The following schedule provides information on the Company’s 129 properties as of December 31, 2014:
 
(Dollars in thousands)
Properties
Leased
 
Properties
Owned
 
Net Book
Value
Montana
6

 
49

 
$
76,324

Idaho
10

 
17

 
22,497

Wyoming
3

 
14

 
17,841

Colorado
1

 
12

 
12,754

Utah
1

 
3

 
2,353

Washington
3

 
10

 
6,075

 
24

 
105

 
$
137,844


The Company believes that all of its facilities are well maintained, generally adequate and suitable for the current operations of its business, as well as fully utilized. In the normal course of business, new locations and facility upgrades occur as needed.

For additional information regarding the Company’s premises and equipment and lease obligations, see Note 5 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”


15



Item 3. 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 4. Mine Safety Disclosures

Not Applicable


PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities

The Company’s stock trades on the NASDAQ Global Select Market under the symbol: GBCI. As of December 31, 2014, there were approximately 1,729 shareholders of record for the Company’s common stock. The market range of high and low closing prices for the Company’s common stock for the periods indicated are shown below:
 
 
2014
 
2013
 
High
 
Low
 
High
 
Low
First quarter
$
30.27

 
25.35

 
18.98

 
15.19

Second quarter
29.55

 
24.88

 
22.43

 
17.44

Third quarter
28.93

 
25.86

 
25.05

 
22.59

Fourth quarter
29.57

 
24.74

 
30.87

 
24.23


The following table summarizes the Company’s dividends declared per quarter for the periods indicated:

 
2014
 
2013
First quarter
$
0.16

 
0.14

Second quarter
0.17

 
0.15

Third quarter
0.17

 
0.15

Fourth quarter
0.18

 
0.16

Special
0.30

 

Total
$
0.98

 
0.60


Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations. Information regarding the regulation considerations is set forth under the heading “Supervision and Regulation” in “Item 1. Business.”

Unregistered Securities
There have been no securities of the Company sold within the last three years which were not registered under the Securities Act.

Issuer Stock Purchases
The Company made no stock repurchases during 2014.


16



Equity Compensation Plan Information
The Company currently maintains the 2005 Employee Stock Incentive Plan which was approved by the shareholders and provides for the issuance of stock-based compensation to officers, other employees and directors.

The following table sets forth information regarding outstanding options and shares reserved for future issuance as of December 31, 2014:
Plan Category
 
Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
 
Number of Shares Remaining
Available for Future
Issuance Under Equity
Compensation Plans
(Excluding Shares
Reflected in Column (a))
(c)
Equity compensation plans approved by the shareholders
 
1,000

 
$
16.73

 
4,022,452


There are no equity compensation plans that have not been approved by the shareholders. For additional information on outstanding stock options and non-vested restricted stock awards, see Note 12 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

Stock Performance Graphs
The following graphs compare the yearly cumulative total return of the Company’s common stock over both a five-year and ten-year measurement period with the yearly cumulative total return on the stocks included in 1) the Russell 2000 Index; and 2) the SNL Bank Index comprised of banks and bank holding companies with total assets between $5 billion and $10 billion. Each of the cumulative total returns are computed assuming the reinvestment of dividends at the frequency with which dividends were paid during the applicable years.



17





Item 6. Selected Financial Data

The following financial data of the Company is derived from the Company’s historical audited financial statements and related notes. The information set forth below should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K.

 
 
 
 
 
 
 
 
 
 
 
Compounded Annual
Growth Rate
 
December 31,
 
1-Year
2014/2013
 
5-Year
2014/2010
(Dollars in thousands, except per share data)
2014
 
2013
 
2012
 
2011
 
2010
 
Selected Statements of Financial Condition Information
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
8,306,507

 
$
7,884,350

 
$
7,747,440

 
$
7,187,906

 
$
6,759,287

 
5.4
 %
 
6.1
 %
Investment securities
2,908,425

 
3,222,829

 
3,683,005

 
3,126,743

 
2,395,847

 
(9.8
)%
 
15.0
 %
Loans receivable, net
4,358,342

 
3,932,487

 
3,266,571

 
3,328,619

 
3,612,182

 
10.8
 %
 
2.1
 %
Allowance for loan and lease losses
(129,753
)
 
(130,351
)
 
(130,854
)
 
(137,516
)
 
(137,107
)
 
(0.5
)%
 
(1.9
)%
Goodwill and intangibles
140,606

 
139,218

 
112,274

 
114,384

 
157,016

 
1.0
 %
 
(2.6
)%
Deposits
6,345,212

 
5,579,967

 
5,364,461

 
4,821,213

 
4,521,902

 
13.7
 %
 
9.1
 %
Federal Home Loan Bank advances
296,944

 
840,182

 
997,013

 
1,069,046

 
965,141

 
(64.7
)%
 
(17.8
)%
Securities sold under agreements to repurchase and other borrowed funds
404,418

 
321,781

 
299,540

 
268,638

 
269,408

 
25.7
 %
 
(2.2
)%
Stockholders’ equity
1,028,047

 
963,250

 
900,949

 
850,227

 
838,204

 
6.7
 %
 
8.4
 %
Equity per share
13.70

 
12.95

 
12.52

 
11.82

 
11.66

 
5.8
 %
 
4.2
 %
Equity as a percentage of total assets
12.38
%
 
12.22
%
 
11.63
%
 
11.83
%
 
12.40
%
 
1.3
 %
 
2.2
 %
 
 
 
 
 
 
 
 
 
 
 
Compounded Annual
Growth Rate
 
Years ended December 31,
 
1-Year
2014/2013
 
5-Year
2014/2010
(Dollars in thousands, except per share data)
2014
 
2013
 
2012
 
2011
 
2010
 
Summary Statements of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
299,919

 
$
263,576

 
$
253,757

 
$
280,109

 
$
288,402

 
13.8
 %
 
(0.2
)%
Interest expense
26,966

 
28,758

 
35,714

 
44,494

 
53,634

 
(6.2
)%
 
(14.0
)%
Net interest income
272,953

 
234,818

 
218,043

 
235,615

 
234,768

 
16.2
 %
 
2.2
 %
Provision for loan losses
1,912

 
6,887

 
21,525

 
64,500

 
84,693

 
(72.2
)%
 
(56.6
)%
Non-interest income
90,302

 
93,047

 
91,496

 
78,199

 
87,546

 
(3.0
)%
 
0.9
 %
Non-interest expense 1
212,679

 
195,317

 
193,421

 
191,965

 
187,948

 
8.9
 %
 
4.7
 %
Income before income taxes 1
148,664

 
125,661

 
94,593

 
57,349

 
49,673

 
18.3
 %
 
31.1
 %
Income tax expense 1
35,909

 
30,017

 
19,077

 
7,265

 
7,343

 
19.6
 %
 
55.2
 %
Net income 1
$
112,755

 
$
95,644

 
$
75,516

 
$
50,084

 
$
42,330

 
17.9
 %
 
26.8
 %
Basic earnings per share 1
$
1.51

 
$
1.31

 
$
1.05

 
$
0.70

 
$
0.61

 
15.3
 %
 
21.9
 %
Diluted earnings per share 1
$
1.51

 
$
1.31

 
$
1.05

 
$
0.70

 
$
0.61

 
15.3
 %
 
21.9
 %
Dividends declared per share 2
$
0.98

 
$
0.60

 
$
0.53

 
$
0.52

 
$
0.52

 
63.3
 %
 
13.5
 %

 
At or for the Years ended December 31,
 
(Dollars in thousands)
2014
 
2013
 
2012
 
2011
 
2010
 
Selected Ratios and Other Data
 
 
 
 
 
 
 
 
 
 
Return on average assets 1
1.42
%
 
1.23
%
 
1.01
%
 
0.72
%
 
0.67
%
 
Return on average equity 1
11.11
%
 
10.22
%
 
8.54
%
 
5.78
%
 
5.18
%
 
Dividend payout ratio 1
64.90
%
 
45.80
%
 
50.48
%
 
74.29
%
 
85.25
%
 
Average equity to average asset ratio
12.81
%
 
11.99
%
 
11.84
%
 
12.39
%
 
12.96
%
 
Total capital (to risk-weighted assets)
18.93
%
 
18.97
%
 
20.09
%
 
20.27
%
 
19.51
%
 
Tier 1 capital (to risk-weighted assets)
17.67
%
 
17.70
%
 
18.82
%
 
18.99
%
 
18.24
%
 
Tier 1 capital (to average assets)
12.45
%
 
12.11
%
 
11.31
%
 
11.81
%
 
12.71
%
 
Net interest margin on average earning assets (tax-equivalent)
3.98
%
 
3.48
%
 
3.37
%
 
3.89
%
 
4.21
%
 
Efficiency ratio 3
54.31
%
 
54.51
%
 
54.02
%
 
51.34
%
 
51.35
%
 
Allowance for loan and lease losses as a percent of loans
2.89
%
 
3.21
%
 
3.85
%
 
3.97
%
 
3.66
%
 
Allowance for loan and lease losses as a percent of nonperforming loans
209
%
 
158
%
 
133
%
 
102
%
 
70
%
 
Non-performing assets as a percentage of subsidiary assets
1.08
%
 
1.39
%
 
1.87
%
 
2.92
%
 
3.91
%
 
Non-performing assets
$
89,900

 
109,420

 
143,527

 
213,456

 
270,521

 
Loans originated and acquired
$
2,404,299

 
2,477,804

 
2,237,977

 
1,650,418

 
1,935,311

 
Number of full time equivalent employees
1,943

 
1,837

 
1,677

 
1,653

 
1,674

 
Number of locations
129

 
118

 
108

 
106

 
105

 
__________
1 Excludes 2011 goodwill impairment charge of $32.6 million ($40.2 million pre-tax). For additional information on the goodwill impairment charge, see the “Non-GAAP Financial Measures” section below.
2 Includes a 2014 special dividend declared of $0.30 per share.
3 Non-interest expense before OREO expenses, core deposit intangibles amortization, goodwill impairment charges, and non-recurring expense items as a percentage of tax-equivalent net interest income and non-interest income, excluding gains or losses on sale of investments, OREO income, and non-recurring income items.


18



Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, this Form 10-K contains certain non-GAAP financial measures. The Company believes that providing these non-GAAP financial measures provides investors with information useful in understanding the Company’s financial performance, performance trends, and financial position. While the Company uses these non-GAAP measures in its analysis of the Company’s performance, this information should not be considered an alternative to measurements required by GAAP. 
 
Year ended December 31, 2011
  
Goodwill
Impairment Charge,
(Dollars in thousands, except per share data)
GAAP
 
Net of Tax
 
Non-GAAP
Non-interest expense
$
232,124

 
(40,159
)
 
191,965

Income before income taxes
$
17,190

 
40,159

 
57,349

Income tax (benefit) expense
$
(281
)
 
7,546

 
7,265

Net income
$
17,471

 
32,613

 
50,084

Basic earnings per share
$
0.24

 
0.46

 
0.70

Diluted earnings per share
$
0.24

 
0.46

 
0.70

Return on average assets
0.25
%
 
0.47
 %
 
0.72
%
Return on average equity
2.04
%
 
3.74
 %
 
5.78
%
Dividend payout ratio
216.67
%
 
(142.38
)%
 
74.29
%



19



Item 7. 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 Company’s 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 “Item 8. Financial Statements and Supplementary Data.”

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations in the forward-looking statements, including those set forth in this Annual Report on Form 10-K, or the documents incorporated by reference:
the risks associated with lending and potential adverse changes of the credit quality of loans in the Company’s portfolio;
the risks presented by the lingering economic recovery which could adversely affect credit quality, loan collateral values, OREO 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 or grow the Company through acquisitions;
consolidation in the financial services industry in the Company’s markets resulting in the creation of larger financial institutions who may have greater resources could change the competitive landscape;
dependence on the CEO, the senior management team and the Presidents of the 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.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in “Item 1A. Risk Factors.” Please take into account that forward-looking statements speak only as of the date of this Annual Report on Form 10-K (or documents incorporated by reference, if applicable). 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.


20



MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2014 COMPARED TO DECEMBER 31, 2013

Highlights and Overview
During the current year, the Company completed the acquisition of FNBR and its subsidiary, First National Bank of the Rockies, which has ten community banking offices in Grand Junction, Steamboat Springs, Meeker, Rangely, Craig, Hayden, and Oak Creek, Colorado. As a result of the FNBR acquisition, the Company has increased its presence in northwestern Colorado and the branches were merged into Glacier Bank and became a part of the Bank of the San Juans division. During the current year, the Company also successfully completed the system conversion for this acquisition, as well as the NCBI and Wheatland acquisitions.

For the second consecutive year, the Company experienced organic loan growth. Excluding acquisitions, loans receivable increased $288 million, or 7 percent, during the current year, with the primary increase in commercial loans which increased $245 million from the prior year end. The increase in the loan portfolio allowed the Company to continue to reduce its lower yielding investment portfolio during the current year. Excluding the acquisitions and wholesale deposits, the Company’s non-interest bearing deposits increased $178 million, or 13 percent, during the current year while interest bearing deposits increased $234 million, or 6 percent. Tangible stockholders’ equity increased $63.4 million, or $0.75 per share, as a result of stock issued in connection with the current year acquisition, earnings retention and an increase in accumulated other comprehensive income. The Company increased its quarterly dividend twice during 2014 from $0.16 per share to $0.18 per share and declared a special dividend of $0.30 per share for a record dividend of $0.98 per share for 2014 compared to $0.60 per share for 2013.

The Company achieved its 2014 goal of reducing its non-performing assets below $90 million and ended the year at $89.9 million which was a decrease of $19.5 million or, 18 percent, from the prior year end. The improvement in credit quality was also reflected in a decrease of the provision for loan losses of $5.0 million during the current year and a decrease in OREO expenses of $4.6 million.

The Company had record earnings of $113 million for 2014, which was an increase of $17.1 million, or 18 percent over the 2013 net income of $95.6 million. Diluted earnings per share for 2014 was $1.51, an increase of $0.20, or 15 percent, from the prior year diluted earnings per share of $1.31. The net income improvement for 2014 over 2013 was principally due to an increase in interest income from investment securities and the commercial loan portfolio.

The current year $36.3 million increase in interest income was the result of an $18.5 million increase in interest income on investment securities and an $18.2 million increase in commercial loan interest income. The increased yields on investment securities was primarily driven by a decrease in premium amortization (net of discount accretion) on the investment portfolio (“premium amortization”) which was significantly higher in 2013 and had stabilized by the fourth quarter of 2013 and throughout 2014. The increase in interest income on the commercial loan portfolio was primarily attributable to an increase in the volume of commercial loans as the local economies continue to recover from the recession.

The Company’s net interest margin as a percentage of earning assets, on a tax-equivalent basis, of 3.98 percent for the current year increased 50 basis points over the prior year net interest margin of 3.48 percent. The increase was primarily attributed to higher yielding investment securities driven by a decrease in premium amortization and a shift in earning assets to the higher yielding loan portfolio; such changes resulted in a 47 basis points increase in the yield on earning assets. The Company also benefited from a 3 basis points decrease in the total cost of funding as the Company continued to focus on increasing low cost deposit balances, including non-interest bearing deposits.

Looking forward, the Company’s future performance will depend on many factors including economic conditions in the markets the Company serves, interest rate changes, increasing competition for deposits and loans, loan quality and growth, the impact and successful integration of acquisitions, and regulatory burden.

21



Acquisitions
On August 31, 2014, the Company completed the acquisition of FNBR and its subsidiary, First National Bank of the Rockies. The Company incurred $552 thousand of legal and professional expenses in connection with the acquisition during 2014. A bargain purchase gain of $680 thousand resulted from the acquisition which was based on the estimated fair value of the assets acquired and liabilities assumed. On July 31, 2013, the Company completed the acquisition of NCBI and its subsidiary, North Cascades National Bank. On May 31, 2013, the Company completed the acquisition of Wheatland and its subsidiary, First State Bank. The Company’s results of operations and financial condition include the acquisitions of FNBR, NCBI and Wheatland from the acquisition dates. The following table provides information on the fair value of selected classifications of assets and liabilities acquired:

 
FNBR
 
NCBI
 
Wheatland
(Dollars in thousands)
August 31,
2014
 
July 31,
2013
 
May 31,
2013
Total assets
$
349,167

 
330,028

 
300,541

Investment securities
157,018

 
48,058

 
75,643

Loans receivable
137,488

 
215,986

 
171,199

Non-interest bearing deposits
80,037

 
76,105

 
30,758

Interest bearing deposits
229,604

 
218,875

 
224,439

Federal Home Loan Bank advances

 

 
5,467


Financial Condition Analysis

Assets
The following table summarizes the Company’s assets as of the dates indicated: 

(Dollars in thousands)
December 31, 2014
 
December 31, 2013
 
$ Change
 
% Change
Cash and cash equivalents
$
442,409

 
$
155,657

 
$
286,752

 
184
 %
Investment securities, available-for-sale
2,387,428

 
3,222,829

 
(835,401
)
 
(26
)%
Investment securities, held-to-maturity
520,997

 

 
520,997

 
n/m

Total investment securities
2,908,425

 
3,222,829

 
(314,404
)
 
(10
)%
Loans receivable
 
 
 
 
 
 

Residential real estate
611,463

 
577,589

 
33,874

 
6
 %
Commercial
3,263,448

 
2,901,283

 
362,165

 
12
 %
Consumer and other
613,184

 
583,966

 
29,218

 
5
 %
Loans receivable
4,488,095

 
4,062,838

 
425,257

 
10
 %
Allowance for loan and lease losses
(129,753
)
 
(130,351
)
 
598

 
 %
Loans receivable, net
4,358,342

 
3,932,487

 
425,855

 
11
 %
Other assets
597,331

 
573,377

 
23,954

 
4
 %
Total assets
$
8,306,507

 
$
7,884,350

 
$
422,157

 
5
 %
_______
n/m - not measurable

Total investment securities decreased $314 million, or 10 percent, from December 31, 2013. The Company implemented a strategy in 2013 to reduce the overall size of this portfolio and with the growth in the loan portfolio, the Company had the opportunity to retain higher yielding loans to offset the decrease in the lower yielding investment securities. At December 31, 2014, investment securities represented 35 percent of total assets, compared to 41 percent at December 31, 2013 and 48 percent at December 31, 2012.


22



Excluding the loans receivable from the FNBR acquisition, the loan portfolio increased $288 million, or 7 percent, since December 31, 2013. Excluding the acquisition, all loan categories experienced growth during 2014 with the largest category in commercial loans which increased $245 million from the prior year. As the local markets continue to recover, opportunities for continued loan growth are available, albeit competition for good quality loans remains strong.

Liabilities
The following table summarizes the liability balances as of the dates indicated, and the amount of change from December 31, 2013
(Dollars in thousands)
December 31, 2014
 
December 31, 2013
 
$ Change
 
% Change
Non-interest bearing deposits
$
1,632,403

 
$
1,374,419

 
$
257,984

 
19
 %
Interest bearing deposits
4,712,809

 
4,205,548

 
507,261

 
12
 %
Securities sold under agreements to repurchase
397,107

 
313,394

 
83,713

 
27
 %
Federal Home Loan Bank advances
296,944

 
840,182

 
(543,238
)
 
(65
)%
Other borrowed funds
7,311

 
8,387

 
(1,076
)
 
(13
)%
Subordinated debentures
125,705

 
125,562

 
143

 
 %
Other liabilities
106,181

 
53,608

 
52,573

 
98
 %
Total liabilities
$
7,278,460

 
$
6,921,100

 
$
357,360

 
5
 %

Excluding the FNBR acquisition, non-interest bearing deposits increased $178 million, or 13 percent, from December 31, 2013. Interest bearing deposits of $4.713 billion at December 31, 2014 included $249 million of wholesale deposits (i.e., brokered deposits classified as NOW, money market deposits and certificate accounts). Excluding the acquisition and an increase of $44.1 million in wholesale deposits, interest bearing deposits at December 31, 2014 increased $234 million, or 6 percent, from a year ago. In addition to the increase in deposit balances, the Company has benefited from a higher than expected increase in the number of checking accounts during the current year. Federal Home Loan Bank (“FHLB”) advances of $297 million at December 31, 2014 decreased $543 million, or 65 percent, from December 31, 2013 as the need for borrowings continued to decrease.

Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of the dates indicated and the amount of change from December 31, 2013
(Dollars in thousands, except per share data)
December 31, 2014
 
December 31, 2013
 
$ Change
 
% Change
Common equity
$
1,010,303

 
$
953,605

 
$
56,698

 
6
 %
Accumulated other comprehensive income
17,744

 
9,645

 
8,099

 
84
 %
Total stockholders’ equity
1,028,047

 
963,250

 
64,797

 
7
 %
Goodwill and core deposit intangible, net
(140,606
)
 
(139,218
)
 
(1,388
)
 
1
 %
Tangible stockholders’ equity
$
887,441

 
$
824,032

 
$
63,409

 
8
 %
Stockholders’ equity to total assets
12.38
%
 
12.22
%
 
 
 
1
 %
Tangible stockholders’ equity to total tangible assets
10.87
%
 
10.64
%
 
 
 
2
 %
Book value per common share
$
13.70

 
$
12.95

 
$
0.75

 
6
 %
Tangible book value per common share
$
11.83

 
$
11.08

 
$
0.75

 
7
 %
Market price per share at end of period
$
27.77

 
$
29.79

 
$
(2.02
)
 
(7
)%

Tangible stockholders’ equity increased $63.4 million from a year ago as the result of earnings retention, stock issued in connection with the FNBR acquisition, and an increase in accumulated other comprehensive income. Tangible book value per common share of $11.83 increased $0.75 per share from the prior year fourth quarter.


23



Results of Operations

Performance Summary
 
Years ended
(Dollars in thousands, except per share data)
December 31,
2014
 
December 31,
2013
Net income
$
112,755

 
95,644

Diluted earnings per share
$
1.51

 
1.31

Return on average assets (annualized)
1.42
%
 
1.23
%
Return on average equity (annualized)
11.11
%
 
10.22
%

Net income for the year ended December 31, 2014 was $112.8 million, an increase of $17.2 million, or 18 percent, from the $95.6 million of net income for the same period the prior year. Diluted earnings per share for the current year was $1.51 per share, an increase of $0.20 per share, or 15 percent, from the diluted earnings per share in the prior year.
 
Income Summary
The following table summarizes revenue for the periods indicated, including the amount and percentage change from December 31, 2013

 
Years ended
 
$ Change
 
% Change
(Dollars in thousands)
December 31,
2014
 
December 31,
2013
 
Net interest income
 
 
 
 
 
 
 
Interest income
$
299,919

 
$
263,576

 
$
36,343

 
14
 %
Interest expense
26,966

 
28,758

 
(1,792
)
 
(6
)%
Total net interest income
272,953

 
234,818

 
38,135

 
16
 %
Non-interest income
 
 
 
 
 
 
 
Service charges, loan fees, and other fees
58,785

 
54,460

 
4,325

 
8
 %
Gain on sale of loans
19,797

 
28,517

 
(8,720
)
 
(31
)%
Loss on sale of investments
(188
)
 
(299
)
 
111

 
(37
)%
Other income
11,908

 
10,369

 
1,539

 
15
 %
Total non-interest income
90,302

 
93,047

 
(2,745
)
 
(3
)%
 
$
363,255

 
$
327,865

 
$
35,390

 
11
 %
Net interest margin (tax-equivalent)
3.98
%
 
3.48
%
 
 
 
 

Net Interest Income
Interest income for 2014 increased $36.3 million, or 14 percent, from the prior year and was principally due to the decrease in premium amortization on investment securities and increased income from commercial loans. Interest income on investment securities benefited from a reduction of $36.6 million in premium amortization during the current year compared to the prior year. Current year interest income on commercial loans increased $18.2 million, or 14 percent, from the prior year and was primarily the result of an increase in the volume of commercial loans.

Interest expense for the current year decreased $1.8 million, or 6 percent, from the prior year and was primarily attributable to the decreases in interest rates on certificate of deposits and lower volume of borrowings, such benefit partially offset by the increased costs associated with an interest rate swap undertaken to reduce the Company’s sensitivity to rising interest rates. The interest rate swap with a notional amount of $160 million had a three year deferred start with the interest expense accrual period beginning in October 2014 and scheduled to end in October 2021. The total funding cost (including non-interest bearing deposits) for the current year was 39 basis points compared to 42 basis points for the prior year. 


24



The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for 2014 was 3.98 percent, a 50 basis points increase from the net interest margin of 3.48 percent for 2013. The increase in the net interest margin was due to the increased yield on the investment portfolio combined with the shift in earning assets to the higher yielding loan portfolio. The premium amortization for 2014 accounted for a 40 basis points reduction in the net interest margin, compared to an 89 basis points reduction in the net interest margin for the same period last year.

Non-interest Income
Non-interest income of $90.3 million for 2014 decreased $2.7 million, or 3 percent, over last year. Service charges and other fees of $58.8 million for the current year increased $4.3 million, or 8 percent, from the prior year and was primarily the result of an increase in the number of deposit accounts. Gain of $19.8 million on the sale of residential loans for 2014 decreased $8.7 million, or 31 percent, from 2013 as a consequence of the slowdown in refinance activity. Current year other income of $11.9 million, increased $1.5 million, or 15 percent, from the prior year as a result of a current year bargain purchase gain, proceeds from a bank owned life insurance policy, and other income which was partially offset by the decrease in OREO income. Included in other income was operating revenue of $204 thousand from OREO and gain of $2.1 million from the sale of OREO, a combined total of $2.3 million for the current year compared to $3.5 million for the prior year.

Non-interest Expense
The following table summarizes non-interest expense for the periods indicated, including the amount and percentage change from December 31, 2013
 
Years ended
 
$ Change
 
% Change
(Dollars in thousands)
December 31,
2014
 
December 31,
2013
 
Compensation and employee benefits
$
118,571

 
$
104,221

 
$
14,350

 
14
 %
Occupancy and equipment
27,498

 
24,875

 
2,623

 
11
 %
Advertising and promotions
7,912

 
6,913

 
999

 
14
 %
Data processing
6,607

 
4,493

 
2,114

 
47
 %
Other real estate owned
2,568

 
7,196

 
(4,628
)
 
(64
)%
Regulatory assessments and insurance
5,064

 
6,362

 
(1,298
)
 
(20
)%
Core deposit intangible amortization
2,811

 
2,401

 
410

 
17
 %
Other expense
41,648

 
38,856

 
2,792

 
7
 %
Total non-interest expense
$
212,679

 
$
195,317

 
$
17,362

 
9
 %

Compensation and employee benefits for 2014 increased $14.4 million, or 14 percent, from last year due to the increased number of employees from the recently acquired banks, additional benefit costs and annual salary increases. Occupancy and equipment expense for 2014 increased $2.6 million, or 11 percent, over the prior year as a result of recent bank acquisitions and increases in equipment expense related to additional information and technology infrastructure. Current year advertising and promotions increased $999 thousand from the prior year primarily from the FNBR acquisition and recent marketing promotions at a number of the Bank divisions. Data processing expense for 2014 increased $2.1 million, or 47 percent, from the prior year as a result of the acquired banks’ outsourced data processing expense, conversion related expenses and general increases in data processing expense. OREO expense of $2.6 million in 2014 decreased $4.6 million, or 64 percent, from last year. OREO expense for the 2014 included $1.4 million of operating expenses, $691 thousand of fair value write-downs, and $442 thousand of loss on sale of OREO. Other expense for the current year increased by $2.8 million, or 7 percent, from the prior year primarily from increases in employee expenses from the recently acquired banks and increases in consulting and advisory services.

Efficiency Ratio
The efficiency ratio was 54.31 percent for 2014 and 54.51 percent for 2013. The improvement in the efficiency ratio was the result of the increase in net interest income from the shift in earning assets from investment securities to the higher yielding loans and decreases in premium amortization on the investment portfolio. Such increases in net interest income outpaced the increase in non-interest expense from compensation expense and the decrease in non-interest income driven by the decrease in refinance activity.


25



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
Fourth quarter 2014
$
191

 
$
1,070

 
2.89
%
 
0.58
%
 
1.08
%
Third quarter 2014
360

 
364

 
2.93
%
 
0.39
%
 
1.21
%
Second quarter 2014
239

 
332

 
3.11
%
 
0.44
%
 
1.30
%
First quarter 2014
1,122

 
744

 
3.20
%
 
1.05
%
 
1.37
%
Fourth quarter 2013
1,802

 
2,216

 
3.21
%
 
0.79
%
 
1.39
%
Third quarter 2013
1,907

 
2,025

 
3.27
%
 
0.66
%
 
1.56
%
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
%

The provision for loan losses was $1.9 million for 2014, a decrease of $5.0 million, or 72 percent, from the prior year. Net charged-off loans during 2014 was $2.5 million, a decrease of $4.9 million from 2013.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2013 COMPARED TO DECEMBER 31, 2012

Income Summary
The following table summarizes revenue for the periods indicated, including the amount and percentage change from December 31, 2012

 
Years ended
 
$ Change
 
% Change
(Dollars in thousands)
December 31,
2013
 
December 31,
2012
 
Net interest income
 
 
 
 
 
 
 
Interest income
$
263,576

 
$
253,757

 
$
9,819

 
4
 %
Interest expense
28,758

 
35,714

 
(6,956
)
 
(19
)%
Total net interest income
234,818

 
218,043

 
16,775

 
8
 %
Non-interest income
 
 
 
 
 
 
 
Service charges, loan fees, and other fees
54,460

 
49,706

 
4,754

 
10
 %
Gain on sale of loans
28,517

 
32,227

 
(3,710
)
 
(12
)%
Loss on sale of investments
(299
)
 

 
(299
)
 
n/m

Other income
10,369

 
9,563

 
806

 
8
 %
Total non-interest income
93,047

 
91,496

 
1,551

 
2
 %
 
$
327,865

 
$
309,539

 
$
18,326

 
6
 %
Net interest margin (tax-equivalent)
3.48
%
 
3.37
%
 
 
 
 
_______
n/m - not measurable


26



Net Interest Income
Net interest income for 2013 increased $16.8 million, or 8 percent, over the prior year. Interest income for 2013 increased $9.8 million, or 4 percent, from the prior year and was principally due to the increased volume of commercial loans in addition to the decrease in premium amortization on investment securities, which were partially reduced by a decrease in yields within the loan portfolio. During 2013, the Company experienced four consecutive quarters of decreases in premium amortization, compared to significant increases experienced during the preceding seven quarters. Interest income was reduced by $64.1 million in premium amortization on investment securities during 2013 which was a decrease of $7.9 million from the prior year. Interest expense for 2013 decreased $7.0 million, or 19 percent, from the prior year and was primarily attributable to the decreases in interest rates on interest bearing deposits and borrowings.  The total funding cost (including non-interest bearing deposits) for 2013 was 42 basis points compared to 55 basis points for the prior year.

The net interest margin, on a tax-equivalent basis, for 2013 was 3.48 percent, an 11 basis points increase from the net interest margin of 3.37 percent for 2012. The net interest margin was benefited by the decreased interest rates on deposits and borrowings. The net interest margin was further supported by the continued shift in earning assets from investment securities to the higher yielding loan portfolio and the increased yield on the investment portfolio. The increased yields on investment securities was driven by lower premium amortization on investment securities. The premium amortization for 2013 accounted for a 90 basis points reduction in the net interest margin, which was a decrease of 14 basis points compared to the 104 basis points reduction in the net interest margin for the prior year.

Non-interest Income
Non-interest income of $93.0 million for 2013 increased $1.6 million, or 2 percent, over the prior year. Service charge fee income increased $4.8 million, or 10 percent, from the prior year which was driven by increases in the number of deposit accounts and changes in internal deposit processing. Gains of $28.5 million on the sale of loans for 2013 decreased $3.7 million, or 12 percent, from the prior year. The Company experienced a slowdown in refinance activity during 2013 as mortgage rates moved up, although, the decrease in gain on sale of loans was more than offset by the decrease in premium amortization on investment securities, both of which were attributable to the continuing slowdown of refinance activity. Other income for 2013 increased $806 thousand, or 8 percent, over the the prior year. Included in other income was operating revenue of $400 thousand from OREO and gains of $3.1 million on the sale of OREO, which combined totaled $3.5 million for 2013 compared to $2.4 million for the prior year.

Non-interest Expense
The following table summarizes non-interest expense for the periods indicated, including the amount and percentage change from December 31, 2012:
 
Years ended
 
$ Change
 
% Change
(Dollars in thousands)
December 31,
2013
 
December 31,
2012
 
Compensation and employee benefits
$
104,221

 
$
95,373

 
$
8,848

 
9
 %
Occupancy and equipment
24,875

 
23,837

 
1,038

 
4
 %
Advertising and promotions
6,913

 
6,413

 
500

 
8
 %
Data processing
4,493

 
3,324

 
1,169

 
35
 %
Other real estate owned
7,196

 
18,964

 
(11,768
)
 
(62
)%
Regulatory assessments and insurance
6,362

 
7,313

 
(951
)
 
(13
)%
Core deposit intangible amortization
2,401

 
2,110

 
291

 
14
 %
Other expense
38,856

 
36,087

 
2,769

 
8
 %
Total non-interest expense
$
195,317

 
$
193,421

 
$
1,896

 
1
 %

Compensation and employee benefits for 2013 increased $8.8 million, or 9 percent, from the prior year. The increase in compensation and employee benefits from the prior year was primarily due to the acquisitions of Wheatland and NCBI and increases in benefit expense and annual merit raises. Outsourced data processing expense increased $1.2 million, or 35 percent, from the prior year primarily from the acquired banks’ outsourced data processing expense. OREO expense of $7.2 million in 2013 decreased $11.8 million, or 62 percent, from the prior year. The OREO expense for 2013 included $2.7 million of operating expenses, $3.6 million of fair value write-downs, and $880 thousand of loss on sale of OREO. Other expense for 2013 increased by $2.8 million, or 8 percent, from the prior year and was attributable to the legal and professional expenses associated with the acquisitions, debit card fraud losses and deposit account losses.


27



Efficiency Ratio
The efficiency ratio was 54.51 percent for 2013 and 54.02 percent for 2012. Although there was an increase in net interest income during 2013 over the prior year, it was not enough to offset the increase in non-interest expense, excluding OREO expense, resulting in the increased efficiency ratio.

Provision for Loan Losses
The provision for loan losses was $6.9 million for 2013, a decrease of $14.6 million, or 68 percent, from the same period in the prior year. Net charged-off loans during 2013 were $7.4 million, a decrease of $20.8 million from the prior year. Such provision and net charge-off decreases were driven by the continued increase in credit quality that has continued over the prior three years.

ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS

Investment Activity
On January 1, 2014, the Company redesignated state and local government securities with a fair value of approximately $485 million, inclusive of a net unrealized gain of $4.6 million, from available-for-sale classification to held-to-maturity classification. Investment securities classified as available-for-sale are carried at estimated fair value and investment securities classified as held-to-maturity are carried at amortized cost. Unrealized gains or losses, net of tax, on available-for-sale securities are reflected as an adjustment to other comprehensive income. The Company’s investment securities are summarized below:

 
December 31, 2014
 
December 31, 2013
 
December 31, 2012
 
December 31, 2011
 
December 31, 2010
(Dollars in thousands)
Carrying Amount
 
Percent
 
Carrying Amount
 
Percent
 
Carrying Amount
 
Percent
 
Carrying Amount
 
Percent
 
Carrying Amount
 
Percent
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$
44

 
%
 
$

 
%
 
$
202

 
%
 
$
208

 
%
 
$
211

 
%
U.S. government sponsored enterprises
21,945

 
1
%
 
10,628

 
%
 
17,480

 
%
 
31,155

 
1
%
 
41,518

 
2
%
State and local governments
997,969

 
34
%
 
1,385,078

 
43
%
 
1,214,518

 
33
%
 
1,064,655

 
34
%
 
657,421

 
27
%
Corporate bonds
314,854

 
11
%
 
442,501

 
14
%
 
288,795

 
8
%
 
62,237

 
2
%
 

 
%
Collateralized debt obligations

 
%
 

 
%
 
1,708

 
%
 
5,366

 
%
 
6,595

 
%
Residential mortgage-backed securities
1,052,616

 
36
%
 
1,384,622

 
43
%
 
2,160,302

 
59
%
 
1,963,122

 
63
%
 
1,690,102

 
71
%
Total available-for-sale
2,387,428

 
82
%
 
3,222,829

 
100
%
 
3,683,005

 
100
%
 
3,126,743

 
100
%
 
2,395,847

 
100
%
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and local governments
520,997

 
18
%
 

 
%
 

 
%
 

 
%
 

 
%
Total held-to-maturity
520,997

 
18
%
 

 
%
 

 
%
 

 
%
 

 
%
Total investment securities
$
2,908,425

 
100
%
 
$
3,222,829

 
100
%
 
$
3,683,005

 
100
%
 
$
3,126,743

 
100
%
 
$
2,395,847

 
100
%

The Company’s investment portfolio is primarily comprised of state and local government securities and residential mortgage-backed securities. State and local government securities are largely exempt from federal income tax and the maximum federal statutory rate of 35 percent is used in calculating the Company’s tax-equivalent yields on the tax-exempt securities. Residential mortgage-backed securities are typically short, weighted-average life U.S. agency collateralized mortgage obligations that provide the Company with ongoing liquidity as scheduled and pre-paid principal is received on the securities.


28



State and local government securities carry different risks that are not as prevalent in other security types. The Company evaluates the investment grade quality of its securities in accordance with regulatory guidance. Investment grade securities are those where the issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment. An issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely payment of principal and interest are expected. In assessing credit risk, the Company may use credit ratings from Nationally Recognized Statistical Rating Organizations (“NRSRO” entities such as Standard and Poor's [“S&P”] and Moody’s) as support for the evaluation; however, they are not solely relied upon. There have been no significant differences in the Company’s internal evaluation of the creditworthiness of any issuer when compared with the ratings assigned by the NRSROs. The following table stratifies the state and local government securities by the associated NRSRO ratings. The highest issued rating was used to categorize the securities in the table for those securities where the NRSRO ratings were not at the same level.

 
December 31, 2014
 
December 31, 2013
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
S&P: AAA / Moody’s: Aaa
$
363,840

 
374,870

 
306,536

 
302,106

S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3
868,990

 
908,334

 
817,227

 
824,287

S&P: A+, A, A- / Moody’s: A1, A2, A3
233,751

 
248,592

 
234,188

 
239,087

S&P: BBB+, BBB, BBB- / Moody’s: Baa1, Baa2, Baa3

 

 
1,555

 
1,556

Not rated by either entity
16,781

 
17,119

 
17,841

 
18,042

Below investment grade

 

 

 

Total
$
1,483,362

 
1,548,915

 
1,377,347

 
1,385,078


State and local government securities largely consist of both taxable and tax-exempt general obligation and revenue bonds. The following table stratifies the state and local government securities by the associated security type.

 
December 31, 2014
 
December 31, 2013
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
General obligation - unlimited
$
765,710

 
803,152

 
702,641

 
709,719

General obligation - limited
271,428

 
284,865

 
251,109

 
255,493

Revenue
391,902

 
405,104

 
365,890

 
362,665

Certificate of participation
35,610

 
36,823

 
39,674

 
39,492

Other
18,712

 
18,971

 
18,033

 
17,709

Total
$
1,483,362

 
1,548,915

 
1,377,347

 
1,385,078


The following table outlines the five states in which the Company owns the highest concentrations of state and local government securities.

 
December 31, 2014
 
December 31, 2013
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Texas
$
208,129

 
216,483

 
155,237

 
155,974

Washington
150,691

 
159,259

 
114,740

 
117,394

Michigan
115,564

 
121,535

 
118,542

 
120,385

California
109,057

 
112,367

 
111,766

 
110,267

Pennsylvania
107,261

 
110,444

 
113,085

 
113,656

All other states
792,660

 
828,827

 
763,977

 
767,402

Total
$
1,483,362

 
1,548,915

 
1,377,347

 
1,385,078



29



The following table presents the carrying amount and weighted-average yield of available-for-sale and held-to-maturity investment securities by contractual maturity at December 31, 2014. Weighted-average yields are based upon the amortized cost of securities and are calculated using the interest method which takes into consideration premium amortization, discount accretion and mortgage-backed securities’ prepayment provisions. Weighted-average yields on tax-exempt investment securities exclude the federal income tax benefit.

 
One Year or Less
 
After One through Five Years
 
After Five through Ten Years
 
After Ten Years
 
Residential Mortgage-Backed Securities
 
Total
(Dollars in thousands)
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$

 
%
 
$
14

 
1.58
%
 
$
30

 
1.85
%
 
$

 
%
 
$

 
%
 
$
44

 
1.76
%
U.S. government sponsored enterprises
8,152

 
2.38
%
 
787

 
1.99
%
 
13,006

 
2.04
%
 

 
%
 

 
%
 
21,945

 
2.16
%
State and local governments
37,835

 
1.96
%
 
135,486

 
2.15
%
 
80,320

 
3.33
%
 
744,328

 
4.20
%
 

 
%
 
997,969

 
3.76
%
Corporate bonds
80,792

 
2.21
%
 
234,062

 
2.05
%
 

 
%
 

 
%
 

 
%
 
314,854

 
2.09
%
Residential mortgage-backed securities

 
%
 

 
%
 

 
%
 

 
%
 
1,052,616

 
2.31
%
 
1,052,616

 
2.31
%
Total available-for-sale
126,779

 
2.14
%
 
370,349

 
2.08
%
 
93,356

 
3.14
%
 
744,328

 
4.20
%
 
1,052,616

 
2.31
%
 
2,387,428

 
2.87
%
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and local governments

 
%
 

 
%
 
188

 
2.47
%
 
520,809

 
4.37
%
 

 
%
 
520,997

 
4.37
%
Total held-to-maturity

 
%
 

 
%
 
188

 
2.47
%
 
520,809

 
4.37
%
 

 
%
 
520,997

 
4.37
%
Total investment securities
$
126,779

 
2.14
%
 
$
370,349

 
2.08
%
 
$
93,544

 
3.14
%
 
$
1,265,137

 
4.27
%
 
$
1,052,616

 
2.31
%
 
$
2,908,425

 
3.15
%

Interest income from investment securities consisted of the following: