IMCB-2013.9.30 Q3 10Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
o
 
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 000-50667
INTERMOUNTAIN COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
Idaho
 
82-0499463
(State or other jurisdiction of
 
(IRS Employer
incorporation or organization)
 
Identification No.)

414 Church Street, Sandpoint, ID 83864
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code:
(208) 263-0505

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. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company þ
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The number of shares outstanding of the registrant’s Voting Common Stock, no par value per share, as of November 8, 2013 was 2,603,606 and the number of outstanding shares of Non-Voting Common Stock, no par value per share, was 3,839,688.

Table of Contents

Intermountain Community Bancorp
FORM 10-Q
For the Quarter Ended September 30, 2013
TABLE OF CONTENTS
 
 
 
 
 
 
 
Item 4 —Mine Safety Disclosure
 EX-31.1
 EX-31.2
 EX-32
 EX-101

2
Table of Contents

PART I — Financial Information
Item - 1 Financial Statements
Intermountain Community Bancorp
Consolidated Balance Sheets
(Unaudited)
 
September 30,
2013
 
December 31,
2012
 
(Dollars in thousands)
ASSETS
 
 
 
Cash and cash equivalents:
 
 
 
Interest-bearing
$
17,795

 
$
53,403

Non-interest bearing and vault
7,972

 
13,536

Restricted cash
12,236

 
13,146

Available-for-sale securities, at fair value
265,000

 
280,169

Held-to-maturity securities, at amortized cost
26,241

 
14,826

Federal Home Loan Bank (“FHLB”) of Seattle stock, at cost
2,228

 
2,269

Loans held for sale
721

 
1,684

Loans receivable, net
520,239

 
520,768

Accrued interest receivable
4,310

 
4,320

Office properties and equipment, net
35,420

 
35,453

Bank-owned life insurance ("BOLI")
9,725

 
9,472

Other real estate owned (“OREO”)
4,236

 
4,951

Prepaid expenses and other assets
17,641

 
18,142

Total assets
$
923,764

 
$
972,139

LIABILITIES
 
 
 
Deposits
$
711,072

 
$
748,934

Securities sold subject to repurchase agreements
64,409

 
76,738

Advances from Federal Home Loan Bank
4,000

 
4,000

Unexercised stock warrant liability
1,004

 
828

Cashier checks issued and payable
3,174

 
2,024

Accrued interest payable
307

 
1,185

Other borrowings
16,527

 
16,527

Accrued expenses and other liabilities
8,321

 
7,469

Total liabilities
808,814

 
857,705

STOCKHOLDERS’ EQUITY
 
 
 
Common stock 30,000,000 shares authorized; 2,603,606 and 2,603,674 shares issued and 2,603,606,and 2,603,132 shares outstanding as of September 30, 2013 and December 31, 2012, respectively
96,358

 
96,368

Common stock - non-voting 10,000,000 shares authorized; 3,839,688 and 3,839,688 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively
31,941

 
31,941

Preferred stock, Series A, 27,000 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively; liquidation preference of $1,000 per share
26,894

 
26,527

Accumulated other comprehensive income (loss), net of tax
(331
)
 
3,529

Accumulated deficit
(39,912
)
 
(43,931
)
Total stockholders’ equity
114,950

 
114,434

Total liabilities and stockholders’ equity
$
923,764

 
$
972,139


The accompanying notes are an integral part of the consolidated financial statements.

3
Table of Contents

Intermountain Community Bancorp
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in thousands, except per share data)
Interest income:
 
 
 
 
 
 
 
Loans
$
6,802

 
$
7,031

 
$
20,406

 
$
21,157

Investments
1,517

 
1,896

 
4,689

 
6,016

Total interest income
8,319

 
8,927

 
25,095

 
27,173

Interest expense:
 
 
 
 
 
 
 
Deposits
471

 
736

 
1,542

 
2,302

Other borrowings
430

 
522

 
1,295

 
1,769

Total interest expense
901

 
1,258

 
2,837

 
4,071

Net interest income
7,418

 
7,669

 
22,258

 
23,102

Recovery of (provision for) losses on loans
82

 
(1,154
)
 
(344
)
 
(3,688
)
Net interest income after provision for losses on loans
7,500

 
6,515

 
21,914

 
19,414

Other income:
 
 
 
 
 
 
 
Fees and service charges
1,858

 
1,620

 
5,429

 
4,744

Loan related fee income
506

 
768

 
1,768

 
2,129

Net gain on sale of securities
180

 
—

 
384

 
585

Net gain (loss) on sale of other assets
(8
)
 
(7
)
 
(2
)
 
15

Other-than-temporary impairment (“OTTI”) losses on investments (1)
—

 
(34
)
 
(63
)
 
(357
)
Bank-owned life insurance
83

 
86

 
252

 
260

Fair value adjustment on cash flow hedge
89

 
(6
)
 
235

 
(300
)
Unexercised warrant liability fair value adjustment
(179
)
 
(49
)
 
(177
)
 
108

Other
(4
)
 
174

 
149

 
572

Total other income
2,525

 
2,552

 
7,975

 
7,756

Operating expenses:
 
 
 
 
 
 
 
Salaries and employee benefits
4,133

 
4,103

 
12,591

 
12,110

Occupancy
1,120

 
1,230

 
3,479

 
3,688

Technology
982

 
894

 
2,783

 
2,688

Advertising
194

 
178

 
488

 
459

Fees and service charges
88

 
141

 
267

 
466

Printing, postage and supplies
176

 
178

 
566

 
779

Legal and accounting
350

 
507

 
1,181

 
1,292

FDIC assessment
145

 
306

 
495

 
927

OREO operations
139

 
39

 
281

 
263

Other expenses
766

 
666

 
2,359

 
2,090

Total operating expenses
8,093

 
8,242

 
24,490

 
24,762

Net income before income taxes
1,932

 
825

 
5,399

 
2,408

Income tax expense
—

 
—

 
—

 
—

Net income
1,932

 
825

 
5,399

 
2,408

Preferred stock dividend
461

 
482

 
1,380

 
1,430

Net income applicable to common stockholders
$
1,471

 
$
343

 
$
4,019

 
$
978

Earnings per share — basic (1)
$
0.23

 
$
0.05

 
$
0.62

 
$
0.17

Earnings per share — diluted (1)
$
0.23

 
$
0.05

 
$
0.62

 
$
0.17

Weighted average common shares outstanding — basic (1)
6,443,294

 
6,441,986

 
6,443,193

 
5,593,487

Weighted average common shares outstanding — diluted (1)
6,497,886

 
6,458,227

 
6,488,094

 
5,610,026

(1)    Consisting of $0, $0, $0, and $7 of total other-than-temporary impairment net losses, net of $0, $(34), $0 and $(81) recognized in other comprehensive income, for the three and nine months ended September 30, 2013 and September 30, 2012, respectively.

The accompanying notes are an integral part of the consolidated financial statements.

4
Table of Contents

Intermountain Community Bancorp
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in thousands)
Net income
$
1,932

 
$
825

 
$
5,399

 
$
2,408

Other comprehensive income:
 
 
 
 
 
 
 
Change in unrealized gains/losses on investments, and mortgage backed securities (“MBS”) available for sale, excluding non-credit loss on impairment of securities
693

 
2,369

 
(6,070
)
 
1,929

Realized net losses (gains) reclassified from other comprehensive income
(180
)
 
—

 
(384
)
 
(585
)
Non-credit loss on impairment on available-for-sale debt securities
—

 
34

 
63

 
350

Less deferred income tax benefit (provision) on securities
203

 
(951
)
 
2,531

 
(671
)
Change in fair value of qualifying cash flow hedge, net of tax
—

 
—

 
—

 
330

Net other comprehensive income (loss)
716

 
1,452

 
(3,860
)
 
1,353

Comprehensive income (loss)
$
2,648

 
$
2,277

 
$
1,539

 
$
3,761

The accompanying notes are an integral part of the consolidated financial statements.


5
Table of Contents

Intermountain Community Bancorp
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2013
 
2012
 
(Dollars in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
5,399

 
$
2,408

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
1,778

 
1,993

Stock-based compensation expense
13

 
83

Net amortization of premiums on securities
4,747

 
4,143

Provisions for losses on loans
344

 
3,688

Amortization of core deposit intangibles
40

 
88

(Gain) on sale of loans, investments, property and equipment
(1,455
)
 
(1,842
)
Impact of hedge dedesignation and current fair value adjustment
(236
)
 
296

OTTI credit loss on available-for-sale investments
63

 
357

OREO valuation adjustments
31

 
(19
)
Accretion of deferred gain on sale of branch property
(11
)
 
(11
)
Net accretion of loan and deposit discounts and premiums
(5
)
 
(10
)
Increase in cash surrender value of bank-owned life insurance
(252
)
 
(260
)
Change in value of stock warrants
177

 
(108
)
Change in:
 
 
 
Accrued interest receivable
10

 
(441
)
Prepaid expenses and other assets
2,968

 
1,848

Accrued interest payable and other liabilities
222

 
940

Accrued expenses and other cashiers checks
1,150

 
(215
)
Proceeds from sale of loans originated for sale
45,279

 
59,517

Loans originated for sale
(43,231
)
 
(57,774
)
Net cash provided by operating activities
17,031

 
14,681

Cash flows from investing activities:
 
 
 
Proceeds from redemption of FHLB Stock
41

 
21

Purchases of available-for-sale securities
(103,297
)
 
(125,156
)
Proceeds from sales, calls or maturities of available-for-sale securities
52,127

 
2,967

Principal payments on mortgage-backed securities
47,325

 
48,595

Purchases of held-to-maturity securities
(3,782
)
 
—

Proceeds from sales, calls or maturities of held-to-maturity securities
563

 
1,401

Origination of loans, net of principal payments
(223
)
 
(5,873
)
Purchase of office properties and equipment
(1,772
)
 
(349
)
Proceeds from sale of other real estate owned
1,097

 
2,628

Proceeds from sale of office properties and equipment
12

 
16

Net change in restricted cash
911

 
(10,043
)
Net cash used in investing activities
(6,998
)
 
(85,793
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of series B preferred stock, gross
—

 
32,460

Proceeds from issuance of common stock, gross
—

 
22,532

Proceeds from issuance of warrant, gross
—

 
1,007

Capital issuance costs
—

 
(5,651
)
Net change in demand, money market and savings deposits
(19,064
)
 
23,267

Net change in certificates of deposit
(18,798
)
 
(30,556
)
Net change in repurchase agreements
(12,329
)
 
(28,115
)
Retirement of treasury stock
(1
)
 
—

Payment of preferred stock dividend
(1,013
)
 
—

Net cash provided by (used in) financing activities
(51,205
)
 
14,944

Net change in cash and cash equivalents
(41,172
)
 
(56,168
)
Cash and cash equivalents, beginning of period
66,939

 
107,199

Cash and cash equivalents, end of period
$
25,767

 
$
51,031

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
3,714

 
$
3,926

Noncash investing and financing activities:
 
 
 
Loans converted to other real estate owned
$
413

 
$
1,595

Accrual of preferred stock dividend
$
—

 
$
1,148

Transfer from securities available-for-sale to securities held-to-maturity
$
8,234

 
$
—

The accompanying notes are an integral part of the consolidated financial statements.

6
Table of Contents

Intermountain Community Bancorp
Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation:
The foregoing unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2012. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Intermountain Community Bancorp’s (“Intermountain’s” or “the Company’s”) consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of Intermountain’s consolidated financial position and results of operations.
During the fourth quarter of 2012, the Company identified a misstatement related to the elimination of cash deposited by the parent company with the subsidiary bank. The misstatement increased the unrestricted cash and deposit balances in the Consolidated Balance Sheet and the amount of cash received from financing activities reported in the Consolidated Statement of Cash Flows for the quarters ended March 31, June 30 and September 30, 2012. In accordance with the SEC Staff Accounting Bulletin (SAB) No. 99, "Materiality," and SAB No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements," management evaluated the materiality of the error from qualitative and quantitative perspectives and concluded that the error was immaterial to these prior interim periods. Consequently, the Consolidated Balance Sheet and Consolidated Statement of Cash Flows contained in this Report have been revised for the nine months ended September 30, 2012. This change resulted in a corresponding decrease of $9.5 million from non-interest bearing and vault cash and deposit liabilities on the balance sheet and from cash flows from financing activities on the statement of cash flows. This change did not affect net income or shareholders' equity for any period.


2. Cash & Cash Equivalents:

The balances of the Company's cash and cash equivalents are as follows (in thousands):
 
9/30/2013
 
12/31/2012
Unrestricted interest-bearing cash and cash equivalents
$
17,795

 
$
53,403

Unrestricted non interest-bearing and vault cash
$
7,972

 
$
13,536

Restricted non-interest bearing cash
$
12,236

 
$
13,146

In September 2013 and December 2012, unrestricted interest bearing cash was deposited at the Federal Reserve ("FRB") and Federal Home Loan Bank of Seattle ("FHLB"). Unrestricted non-interest bearing cash includes overnight cash deposited at several of the Company's correspondent banks and balances kept in the vaults of its various offices. At September 30, 2013 restricted non-interest bearing cash consisted of the following:
•
$1.1 million in reserve balances to meet FRB reserve requirements;
•
$572,000 pledged to various correspondent banks to secure interest rate swap transactions and foreign currency exchange lines;
•
$1.1 million held at the Company's subsidiary Bank to be used for future tenant improvements of the Sandpoint Center, as required by the agreement executed to sell the Sandpoint Center in 2009;
•
$9.5 million held at the Company's subsidiary Bank as required by an intercompany agreement signed by the Company and the Bank as part of the Company's January 2012 capital raise, which represents a pledge of funds to the Bank to partially secure the loan made by the Bank to the third party who bought and subsequently leased the Sandpoint Center back to the Bank.

7
Table of Contents

At December 31, 2012, restricted cash consisted of $1.1 million to meet FRB reserve requirements, $572,000 to secure interest swap transactions, $877,000 deposited in escrow for the payment of deferred interest on the Company's Trust II debenture and foreign currency exchange lines, $1.1 million to fund future tenant improvements at the Sandpoint Center, and $9.5 million as required by the intercompany agreement discussed above.

3. Investments:

The amortized cost and fair values of investments are as follows (in thousands):
 
Available-for-Sale
 
Amortized
Cost
 
Cumulative Non-Credit
OTTI (Losses)
Recognized
in OCI
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value/
Carrying Value
September 30, 2013
 
 
 
 
 
 
 
 
 
Corporate Bonds
$
6,012

 
$
—

 
$
—

 
$
(14
)
 
$
5,998

State and municipal securities
50,376

 
—

 
610

 
(1,078
)
 
49,908

Mortgage-backed securities - Agency Pass Throughs
60,282

 
—

 
930

 
(789
)
 
60,423

Mortgage-backed securities - Agency CMO's
117,133

 
—

 
1,212

 
(1,226
)
 
117,119

SBA Pools
23,872

 
—

 
521

 
(39
)
 
24,354

Mortgage-backed securities - Non Agency CMO's (below investment grade)
7,614

 
(864
)
 
624

 
(176
)
 
7,198

 
$
265,289

 
$
(864
)
 
$
3,897

 
$
(3,322
)
 
$
265,000

December 31, 2012
 
 
 
 
 
 
 
 
 
State and municipal securities
$
60,984

 
$
—

 
$
2,823

 
$
(158
)
 
$
63,649

Mortgage-backed securities - Agency Pass Throughs
71,821

 
—

 
2,224

 
(652
)
 
73,393

Mortgage-backed securities - Agency CMO's
110,683

 
—

 
2,209

 
(328
)
 
112,564

SBA Pools
19,962

 
—

 
359

 
—

 
20,321

Mortgage-backed securities - Non Agency CMO's (below investment grade)
10,889

 
(1,661
)
 
1,401

 
(387
)
 
10,242

 
$
274,339

 
$
(1,661
)
 
$
9,016

 
$
(1,525
)
 
$
280,169

 
Held-to-Maturity
 
Carrying Value / Amortized Cost
 
Cumulative Non-Credit
OTTI (Losses)
Recognized
in OCI
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
September 30, 2013
 
 
 
 
 
 
 
 
 
State and municipal securities
$
26,241

 
$
—

 
$
1,237

 
$
(19
)
 
$
27,459

December 31, 2012
 
 
 
 
 
 
 
 
 
State and municipal securities
$
14,826

 
$
—

 
$
1,518

 
$
—

 
$
16,344



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Table of Contents

The following table summarizes the duration of Intermountain’s unrealized losses on available-for-sale and held-to-maturity securities as of the dates indicated (in thousands).

 
Less Than 12 Months
 
12 Months or Longer
 
Total
September 30, 2013
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate Bonds
$
3,998

 
$
(14
)
 
$
—

 
$
—

 
$
3,998

 
$
(14
)
Residential mortgage-back securities
65,571

 
(1,567
)
 
23,792

 
(624
)
 
89,363

 
(2,191
)
SBA Pools
4,420

 
(39
)
 
—

 
—

 
4,420

 
(39
)
State and municipal securities
30,949

 
(1,097
)
 
—

 
—

 
30,949

 
(1,097
)
Total
$
104,938

 
$
(2,717
)
 
$
23,792

 
$
(624
)
 
$
128,730

 
$
(3,341
)
December 31, 2012
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Residential mortgage-back securities
$
57,180

 
$
(785
)
 
$
11,408

 
$
(582
)
 
$
68,588

 
$
(1,367
)
State and municipal securities
12,019

 
(158
)
 
—

 
—

 
12,019

 
(158
)
Total
$
69,199

 
$
(943
)
 
$
11,408

 
$
(582
)
 
$
80,607

 
$
(1,525
)

At September 30, 2013, the amortized cost and fair value of available-for-sale and held-to-maturity debt securities, by contractual maturity, are as follows (in thousands):

 
Available-for-Sale
 
Held-to-Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
One year or less
$
—

 
$
—

 
$
1,381

 
$
1,422

After one year through five years
3,567

 
3,578

 
2,619

 
2,691

After five years through ten years
6,716

 
6,607

 
18,127

 
19,002

After ten years
46,105

 
45,721

 
4,114

 
4,344

  Subtotal
56,388

 
55,906

 
26,241

 
27,459

Mortgage-backed securities
185,029

 
184,740

 
—

 
—

SBA Pools
23,872

 
24,354

 
—

 
—

  Total Securities
$
265,289

 
$
265,000

 
$
26,241

 
$
27,459


Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Intermountain’s investment portfolios are managed to provide and maintain liquidity; to maintain a balance of high quality, diversified investments to minimize risk; to offset other asset portfolio elements in managing interest rate risk; to provide collateral for pledging; and to maximize returns. At September 30, 2013, the Company does not intend to sell any of its available-for-sale securities that have a loss position and it is not likely that it will be required to sell the available-for-sale securities before the anticipated recovery of their remaining amortized cost or maturity date. The unrealized losses on residential mortgage-backed securities without other-than-temporary impairment (“OTTI”) were considered by management to be temporary in nature.


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Table of Contents

The following table presents the OTTI losses for the nine months ended September 30, 2013 and 2012:
 
2013
 
2012
 
Held To
Maturity
 
Available
For Sale
 
Held To
Maturity
 
Available
For Sale
Total other-than-temporary impairment losses
$
—

 
$
—

 
$
—

 
$
7

Portion of other-than-temporary impairment losses transferred from other comprehensive income (1)
—

 
63

 
—

 
350

Net impairment losses recognized in earnings (2)
$
—

 
$
63

 
$
—

 
$
357

_____________________________
(1)
Represents other-than-temporary impairment losses related to all other factors.
(2)
Represents other-than-temporary impairment losses related to credit losses.

The OTTI recognized on investment securities available for sale in 2013 relates to one non-agency collateralized mortgage obligation. Another security for which OTTI had been recognized in 2012 was sold in the first quarter of 2013. Each of these securities held various levels of credit subordination. These securities were valued by third-party pricing services using matrix or model pricing methodologies and were corroborated by broker indicative bids. We estimated the cash flows of the underlying collateral for each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity. Assumptions utilized vary from security to security, and are influenced by factors such as underlying loan interest rates, geographic location, borrower characteristics, vintage, and historical experience. We then used a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure. These cash flows were then discounted at the interest rate equal to the yield anticipated at the time the security was purchased. We review the actual collateral performance of these securities on a quarterly basis and update the inputs as appropriate to determine the projected cash flows.

On June 30, 2013, six securities with an amortized cost of $8,512,039 were transferred from the available-for-sale category to the held-to-maturity category of the portfolio. The fair market value of the securities at the time of transfer was $8,234,244. The unrealized loss of $277,795 will continue to be reported as a component of accumulated other comprehensive income, net of tax, and amortized over the remaining life of the securities as an adjustment to yield. Upon transfer to the held-to-maturity category, premium and discount accounts were adjusted to reflect the fair market value of the security. The resulting premiums and discounts will also be amortized as an adjustment to yield.

See Note 9 “Fair Value of Financial Instruments” for more information on the calculation of fair or carrying value for the investment securities.


10
Table of Contents

4. Loans and Allowance for Loan Losses:
The components of loans receivable are as follows (in thousands):
 
September 30, 2013
 
Loans
Receivable
 
%
 
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
Commercial
$
111,238

 
21.1
%
 
$
4,223

 
$
107,015

Commercial real estate
185,116

 
35.1

 
1,800

 
183,316

Commercial construction
6,305

 
1.2

 
—

 
6,305

Land and land development loans
34,172

 
6.5

 
2,856

 
31,316

Agriculture
97,453

 
18.4

 
5,081

 
92,372

Multifamily
15,802

 
3.0

 
—

 
15,802

Residential real estate
61,185

 
11.6

 
3,138

 
58,047

Residential construction
1,721

 
0.3

 
—

 
1,721

Consumer
9,084

 
1.7

 
63

 
9,021

Municipal
6,107

 
1.1

 
—

 
6,107

Total loans receivable
528,183

 
100.0
%
 
$
17,161

 
$
511,022

Allowance for loan losses
(8,030
)
 
 
 
 
 
 
Deferred loan fees, net of direct origination costs
86

 
 
 
 
 
 
Loans receivable, net
$
520,239

 
 
 
 
 
 
Weighted average interest rate
5.22
%
 
 
 
 
 
 

 
December 31, 2012
 
Loans
Receivable
 
%
 
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
Commercial
$
121,307

 
23.0
%
 
$
6,133

 
$
115,174

Commercial real estate
186,844

 
35.4

 
3,373

 
183,471

Commercial construction
3,832

 
0.7

 
—

 
3,832

Land and land development loans
31,278

 
5.9

 
2,023

 
29,255

Agriculture
85,967

 
16.3

 
2,134

 
83,833

Multifamily
16,544

 
3.1

 
—

 
16,544

Residential real estate
60,020

 
11.3

 
2,362

 
57,658

Residential construction
940

 
0.2

 
—

 
940

Consumer
9,626

 
1.8

 
168

 
9,458

Municipal
12,267

 
2.3

 
—

 
12,267

Total loans receivable
528,625

 
100.0
%
 
$
16,193

 
$
512,432

Allowance for loan losses
(7,943
)
 
 
 
 
 
 
Deferred loan fees, net of direct origination costs
86

 
 
 
 
 
 
Loans receivable, net
$
520,768

 
 
 
 
 
 
Weighted average interest rate
5.28
%
 
 
 
 
 
 


11
Table of Contents

The components of the allowance for loan loss by types are as follows (in thousands):
 
September 30, 2013
 
Total
Allowance
 
Individually
Evaluated
Allowance
 
Collectively
Evaluated
Allowance
Commercial
$
1,764

 
$
210

 
$
1,554

Commercial real estate
2,514

 
273

 
2,241

Commercial construction
154

 
—

 
154

Land and land development loans
1,206

 
282

 
924

Agriculture
928

 
288

 
640

Multifamily
35

 
—

 
35

Residential real estate
1,255

 
552

 
703

Residential construction
38

 
—

 
38

Consumer
107

 
19

 
88

Municipal
29

 
—

 
29

Total
$
8,030

 
$
1,624

 
$
6,406


 
December 31, 2012
 
Total
Allowance
 
Individually
Evaluated
Allowance
 
Collectively
Evaluated
Allowance
Commercial
$
2,156

 
$
628

 
$
1,528

Commercial real estate
2,762

 
267

 
2,495

Commercial construction
101

 
—

 
101

Land and land development loans
1,197

 
114

 
1,083

Agriculture
228

 
10

 
218

Multifamily
51

 
—

 
51

Residential real estate
1,144

 
458

 
686

Residential construction
24

 
—

 
24

Consumer
202

 
87

 
115

Municipal
78

 
—

 
78

Total
$
7,943

 
$
1,564

 
$
6,379


A summary of current, past due and nonaccrual loans as of September 30, 2013 is as follows, (in thousands):

 
Current
 
30-89 Days
Past Due
 
90 Days or More
Past Due
and Accruing
 
Nonaccrual
 
Total
Commercial
$
109,190

 
$
982

 
$
42

 
$
1,024

 
$
111,238

Commercial real estate
184,710

 
145

 
—

 
261

 
185,116

Commercial construction
6,305

 
—

 
—

 
—

 
6,305

Land and land development loans
33,724

 
256

 
—

 
192

 
34,172

Agriculture
96,852

 
74

 
—

 
527

 
97,453

Multifamily
15,802

 
—

 
—

 
—

 
15,802

Residential real estate
60,275

 
109

 
—

 
801

 
61,185

Residential construction
1,721

 
—

 
—

 
—

 
1,721

Consumer
9,078

 
3

 
—

 
3

 
9,084

Municipal
6,107

 
—

 
—

 
—

 
6,107

Total
$
523,764

 
$
1,569

 
$
42

 
$
2,808

 
$
528,183



12
Table of Contents

A summary of current, past due and nonaccrual loans as of December 31, 2012 is as follows, (in thousands):

 
Current
 
30-89 Days
Past Due
 
90 Days or More
Past Due
and Accruing
 
Nonaccrual
 
Total
Commercial
$
117,096

 
$
169

 
$
—

 
$
4,042

 
$
121,307

Commercial real estate
185,128

 
—

 
—

 
1,716

 
186,844

Commercial construction
3,832

 
—

 
—

 
—

 
3,832

Land and land development loans
31,032

 
—

 
—

 
246

 
31,278

Agriculture
85,835

 
34

 
—

 
98

 
85,967

Multifamily
16,544

 
—

 
—

 
—

 
16,544

Residential real estate
59,158

 
439

 
—

 
423

 
60,020

Residential construction
940

 
—

 
—

 
—

 
940

Consumer
9,577

 
45

 
—

 
4

 
9,626

Municipal
12,267

 
—

 
—

 
—

 
12,267

Total
$
521,409

 
$
687

 
$
—

 
$
6,529

 
$
528,625


The following table provides a summary of Troubled Debt Restructurings ("TDR") outstanding at period end by performing status, (in thousands).

 
September 30, 2013
 
December 31, 2012
 
Nonaccrual
 
Accrual
 
Total
 
Nonaccrual
 
Accrual
 
Total
Commercial
$
40

 
$
1,530

 
$
1,570

 
$
1,900

 
$
277

 
$
2,177

Commercial real estate
—

 
738

 
738

 
1,463

 
956

 
2,419

Land and land development loans
48

 
2,472

 
2,520

 
—

 
1,327

 
1,327

Agriculture
—

 
3,241

 
3,241

 
—

 
291


291

Residential real estate
—

 
1,152

 
1,152

 
—

 
417

 
417

Consumer
—

 
11

 
11

 
—

 
88

 
88

Total
$
88

 
$
9,144

 
$
9,232

 
$
3,363

 
$
3,356

 
$
6,719


The Company's loans that were modified in the three and nine month period ended September 30, 2013 and 2012 and considered a TDR are as follows (dollars in thousands):
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
Number
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
 
Number
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
Commercial
6

 
$
258

 
$
258

 
12

 
$
1,415

 
$
1,415

Commercial real estate
1

 
48

 
48

 
5

 
439

 
439

Land and land development loans
—

 
—

 
—

 
4

 
1,685

 
1,685

Agriculture
—

 
—

 
—

 
4

 
1,216

 
1,215

Residential real estate
—

 
—

 
—

 
3

 
265

 
208

Consumer
—

 
—

 
—

 
—

 
—

 
—

 
7

 
$
306

 
$
306

 
28

 
$
5,020

 
$
4,962


13
Table of Contents

 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
 
Number
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
 
Number
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
Commercial
—

 
$
—

 
$
—

 
1

 
$
75

 
$
75

Commercial real estate
—

 
—

 
—

 
1

 
100

 
100

Land and land development loans
1

 
38

 
38

 
1

 
38

 
38

Agriculture
—

 
—

 
—

 
1

 
110

 
110

Residential real estate
—

 
—

 
—

 
—

 
—

 
—

Residential construction
—

 
—

 
—

 
—

 
—

 
—

Consumer
—

 
—

 
—

 
—

 
—

 
—

 
1

 
$
38

 
$
38

 
4

 
$
323

 
$
323


The balances below provide information as to how the loans were modified as TDRs during the three and nine months ended September 30, 2013 and 2012, (in thousands).
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
Adjusted Interest Rate Only
 
Other*
 
Adjusted Interest Rate Only
 
Other*
Commercial
$
—

 
$
258

 
$
—

 
$
1,415

Commercial real estate
48

 
—

 
48

 
391

Land and land development loans
—

 
—

 
1,386

 
299

Agriculture
—

 
—

 
851

 
364

Residential real estate
—

 
—

 
188

 
20

Consumer
—

 
—

 
—

 
—

 
$
48

 
$
258

 
$
2,473

 
$
2,489

(*) Other includes term or principal concessions or a combination of concessions, including interest rates.
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2012
 
Adjusted Interest Rate Only
 
Other*
 
Adjusted Interest Rate Only
 
Other*
Commercial
$
—

 
$
—

 
$
75

 
$
—

Commercial real estate
—

 
—

 
—

 
100

Land and land development loans
38

 
—

 
38

 
—

Agriculture
—

 
—

 
110

 
—

 
$
38

 
$
—

 
$
223

 
$
100

(*) Other includes term or principal concessions or a combination of concessions, including interest rates.

As of September 30, 2013, the Company had specific reserves of $531,000 on TDRs, and there were no TDRs in default.

The allowance for loan losses and reserve for unfunded commitments are maintained at levels considered adequate by management to provide for probable loan losses as of the reporting dates. The allowance for loan losses and reserve for unfunded commitments are based on management’s assessment of various factors affecting the loan portfolio, including problem loans, business conditions and loss experience, and an overall evaluation of the quality of the underlying collateral. Changes in the allowance for loan losses and the reserve for unfunded commitments during the three and nine month periods ended September 30, 2013 and 2012 are as follows:


14
Table of Contents

 
Allowance for Loan Losses
for the three months ended September 30, 2013
 
Balance,
Beginning of
Quarter
 
Charge-Offs
Jul 1 through Sept 30, 2013
 
Recoveries
Jul 1 through Sept 30, 2013
 
Provision
 
Balance,
End of
Quarter
 
(Dollars in thousands)
Commercial
$
1,900

 
$
(37
)
 
$
151

 
$
(250
)
 
$
1,764

Commercial real estate
2,736

 
—

 
49

 
(271
)
 
2,514

Commercial construction
231

 
—

 
—

 
(77
)
 
154

Land and land development loans
956

 
(49
)
 
7

 
292

 
1,206

Agriculture
692

 
—

 
12

 
224

 
928

Multifamily
54

 
—

 
—

 
(19
)
 
35

Residential real estate
1,195

 
(40
)
 
11

 
89

 
1,255

Residential construction
44

 
—

 
1

 
(7
)
 
38

Consumer
203

 
(81
)
 
46

 
(61
)
 
107

Municipal
31

 
—

 
—

 
(2
)
 
29

Allowance for loan losses
$
8,042

 
$
(207
)
 
$
277

 
$
(82
)
 
$
8,030


 
Allowance for Loan Losses
for the nine months ended September 30, 2013
 
Balance,
Beginning of
Year
 
Charge-Offs
Jan 1 through Sept 30, 2013
 
Recoveries
Jan 1 through Sept 30, 2013
 
Provision
 
Balance,
End of
Period
 
(Dollars in thousands)
Commercial
$
2,156

 
$
(258
)
 
$
639

 
$
(773
)
 
$
1,764

Commercial real estate
2,762

 
(614
)
 
76

 
290

 
2,514

Commercial construction
101

 
—

 
15

 
38

 
154

Land and land development loans
1,197

 
(186
)
 
71

 
124

 
1,206

Agriculture
228

 
—

 
53

 
647

 
928

Multifamily
51

 
—

 
—

 
(16
)
 
35

Residential real estate
1,144

 
(80
)
 
81

 
110

 
1,255

Residential construction
24

 
—

 
1

 
13

 
38

Consumer
202

 
(191
)
 
136

 
(40
)
 
107

Municipal
78

 
—

 
—

 
(49
)
 
29

Allowance for loan losses
$
7,943

 
$
(1,329
)
 
$
1,072

 
$
344

 
$
8,030





15
Table of Contents

 
Allowance for Loan Losses
for the three months ended September 30, 2012
 
Balance,
Beginning of
Quarter
 
Charge-Offs
Jul 1 through Sept 30, 2012
 
Recoveries
Jul 1 through Sept 30, 2012
 
Provision
 
Balance,
End of
Quarter
 
(Dollars in thousands)
Commercial
$
2,429

 
$
(403
)
 
$
39

 
$
1,008

 
$
3,073

Commercial real estate
4,032

 
(1,577
)
 
239

 
34

 
2,728

Commercial construction
94

 
—

 
3

 
(30
)
 
67

Land and land development loans
1,565

 
(64
)
 
7

 
146

 
1,654

Agriculture
207

 
—

 
23

 
(43
)
 
187

Multifamily
57

 
—

 
—

 
(1
)
 
56

Residential real estate
1,601

 
(506
)
 
12

 
(65
)
 
1,042

Residential construction
4

 
—

 
—

 
9

 
13

Consumer
201

 
(100
)
 
27

 
70

 
198

Municipal
43

 
—

 
—

 
27

 
70

Allowances for loan losses
$
10,233

 
$
(2,650
)
 
$
350

 
$
1,155

 
$
9,088


 
Allowance for Loan Losses
for the nine months ended September 30, 2012
 
Balance,
Beginning of
Year
 
Charge-Offs
Jan 1 through Sept 30, 2012
 
Recoveries
Jan 1 through Sept 30, 2012
 
Provision
 
Balance,
End of
Period
 
(Dollars in thousands)
Commercial
$
2,817

 
$
(2,160
)
 
$
369

 
$
2,047

 
$
3,073

Commercial real estate
4,880

 
(3,555
)
 
453

 
950

 
2,728

Commercial construction
500