IMCB-2014.3.31 Q1 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 March 31, 2014
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 May 7, 2014 was 2,861,214 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 March 31, 2014
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)
 
March 31, 2014
 
December 31, 2013
 
(Dollars in thousands)
ASSETS
 
 
 
Cash and cash equivalents:
 
 
 
Interest-bearing
$
16,712

 
$
44,946

Non-interest bearing and vault
10,122

 
7,851

Total cash and cash equivalents
26,834

 
52,797

Restricted cash
10,747

 
12,333

Available-for-sale securities, at fair value
261,097

 
251,638

Held-to-maturity securities, at amortized cost
26,174

 
28,286

Federal Home Loan Bank (“FHLB”) of Seattle stock, at cost
2,167

 
2,187

Loans held for sale
628

 
614

Loans receivable, net
507,000

 
514,834

Accrued interest receivable
4,028

 
4,170

Office properties and equipment, net
34,232

 
34,685

Deferred tax asset, net
20,963

 
21,655

Bank-owned life insurance ("BOLI")
9,876

 
9,797

Other real estate owned (“OREO”)
3,768

 
3,684

Prepaid expenses and other assets
2,936

 
2,968

Total assets
$
910,450

 
$
939,648

LIABILITIES
 
 
 
Deposits:
 
 
 
Interest bearing deposits
$
473,473

 
$
470,257

Noninterest bearing deposits
237,077

 
235,793

Total deposits
710,550

 
706,050

Securities sold subject to repurchase agreements
64,720

 
99,888

Advances from Federal Home Loan Bank
4,000

 
4,000

Unexercised stock warrant liability
1,048

 
942

Cashier checks issued and payable
2,959

 
3,620

Accrued interest payable
219

 
219

Other borrowings
23,235

 
23,410

Accrued expenses and other liabilities
7,828

 
7,507

Total liabilities
814,559

 
845,636

STOCKHOLDERS’ EQUITY
 
 
 
Common stock 30,000,000 authorized; 2,701,214 and 2,701,214 shares issued and 2,651,214 and 2,651,214 shares outstanding as of March 31, 2014 and December 31, 2013, respectively
97,180

 
97,087

Common stock - non-voting 10,000,000 shares authorized; 3,839,688 and 3,839,688 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively
31,941

 
31,941

Accumulated other comprehensive loss, net of tax
(431
)
 
(1,182
)
Accumulated deficit
(32,799
)
 
(33,834
)
Total stockholders’ equity
95,891

 
94,012

Total liabilities and stockholders’ equity
$
910,450

 
$
939,648

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

3
Table of Contents

Intermountain Community Bancorp
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(Dollars in thousands, except per share data)
Interest income:
 
 
 
Loans
$
6,114

 
$
6,735

Investments and cash equivalents
1,642

 
1,593

Total interest income
7,756

 
8,328

Interest expense:
 
 
 
Deposits
424

 
561

Other borrowings
358

 
424

Total interest expense
782

 
985

Net interest income
6,974

 
7,343

Provision for loan loss
(103
)
 
(179
)
Net interest income after provision for loan losses
6,871

 
7,164

Other income:
 
 
 
Fees and service charges
1,122

 
1,079

Commissions & fees from trust & investment advisory services
541

 
527

Loan related fee income
305

 
611

Net gain on sale of securities
5

 
40

Net gain on sale of other assets
4

 
4

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

 
(42
)
Bank-owned life insurance
79

 
84

Fair value adjustment on cash flow hedge
—

 
67

Unexercised warrant liability fair value adjustment
(106
)
 
56

Other
48

 
113

Total other income
1,998

 
2,539

Operating expenses:
 
 
 
Salaries and employee benefits
3,876

 
4,175

Occupancy
1,181

 
1,185

Technology
822

 
876

Advertising
149

 
113

Fees and service charges
90

 
93

Printing, postage and supplies
175

 
217

Legal and accounting
403

 
349

FDIC assessment
146

 
186

OREO operations
(63
)
 
111

Other expenses
656

 
873

Total operating expenses
7,435

 
8,178

Net income before income taxes
1,434

 
1,525

Income tax expense
(400
)
 
—

Net income
1,034

 
1,525

Preferred stock dividend
—

 
458

Net income applicable to common stockholders
$
1,034

 
$
1,067

Earnings per share — basic
$
0.16

 
$
0.17

Earnings per share — diluted
$
0.16

 
$
0.16

Weighted average common shares outstanding — basic
6,540,902

 
6,442,988

Weighted average common shares outstanding — diluted
6,606,489

 
6,480,024

(1)    Consisting of $0 and $0 of total other-than-temporary impairment net losses, net of $0 and $(42) recognized in other comprehensive income, for the three months ended March 31, 2014 and 2013, 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
(Unaudited)

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(Dollars in thousands)
Net income
$
1,034

 
$
1,525

Other comprehensive income (loss):
 
 
 
Change in unrealized gains/losses on investments, and mortgage backed securities (“MBS”) available for sale, excluding non-credit loss on impairment of securities
1,249

 
495

Realized net gains reclassified from other comprehensive income
(5
)
 
(40
)
Non-credit loss on impairment on available-for-sale debt securities
—

 
42

Less deferred income tax provision on securities
(493
)
 
(197
)
Net other comprehensive income
751

 
300

Comprehensive income
$
1,785

 
$
1,825

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)
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(Dollars in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
1,034

 
$
1,525

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
569

 
605

Stock-based compensation expense
93

 
13

Net amortization of premiums on securities
1,314

 
1,697

Provision for loan losses
103

 
179

Amortization of core deposit intangibles
12

 
17

(Gain) on sale of loans, investments, property and equipment
(163
)
 
(369
)
Impact of hedge dedesignation and current fair value adjustment
—

 
69

OTTI credit loss on available-for-sale investments
—

 
42

OREO valuation adjustments
—

 
26

Accretion of deferred gain on sale of branch property
(4
)
 
(4
)
Net accretion of loan and deposit discounts and premiums
—

 
(3
)
Increase in cash surrender value of bank-owned life insurance
(79
)
 
(84
)
Change in value of stock warrants
106

 
(56
)
Change in:
 
 
 
Accrued interest receivable
142

 
269

Prepaid expenses and other assets
203

 
366

Accrued interest payable and other liabilities
325

 
(440
)
Accrued expenses and other cashiers checks
(661
)
 
743

Proceeds from sale of loans originated for sale
6,934

 
13,711

Loans originated for sale
(6,792
)
 
(13,721
)
Net cash provided by operating activities
3,136

 
4,585

Cash flows from investing activities:
 
 
 
Proceeds from redemption of FHLB Stock
20

 
21

Purchases of available-for-sale securities
(28,680
)
 
(23,575
)
Proceeds from sales, calls or maturities of available-for-sale securities
11,229

 
2,003

Principal payments on mortgage-backed securities
8,023

 
17,778

Purchases of held-to-maturity securities
(870
)
 
—

Proceeds from sales, calls or maturities of held-to-maturity securities
2,885

 
24

Origination of loans, net of principal payments
7,647

 
21,444

Purchase of office properties and equipment and software
(100
)
 
(384
)
Proceeds from sale of other real estate owned
—

 
656

Proceeds from sale of office properties and equipment
3

 
—

Net change in restricted cash
1,586

 
868

Net cash provided by investing activities
1,743

 
18,835

Cash flows from financing activities:
 
 
 
Net change in demand, money market and savings deposits
5,744

 
(16,214
)
Net change in certificates of deposit
(1,243
)
 
(13,253
)
Net change in repurchase agreements
(35,168
)
 
(10,581
)
Payments on borrowings
(175
)
 
—

Retirement of treasury stock
—

 
(1
)
Payment of preferred stock dividend
—

 
(338
)
Net cash used in financing activities
(30,842
)
 
(40,387
)
Net change in cash and cash equivalents
(25,963
)
 
(16,967
)
Cash and cash equivalents, beginning of period
52,797

 
66,938

Cash and cash equivalents, end of period
$
26,834

 
$
49,971

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
783

 
$
1,833

Noncash investing and financing activities:
 
 
 
Loans converted to other real estate owned
$
84

 
$
394

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, 2013. 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.


2. Cash & Cash Equivalents:

The balances of the Company's cash and cash equivalents are as follows (in thousands):
 
3/31/2014
 
12/31/2013
Unrestricted interest-bearing cash and cash equivalents
$
16,712

 
$
44,946

Unrestricted non interest-bearing and vault cash
$
10,122

 
$
7,851

Restricted non-interest bearing cash
$
10,747

 
$
12,333

At March 31, 2014 and December 31, 2013, 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 March 31, 2014 restricted non-interest bearing cash consisted of the following:
•
At March 31, 2014, no reserve balance was required at the FRB; a $1.6 million reserve balance was required to meet FRB reserve requirements on December 31, 2013;
•
At both March 31, 2014 and December 31, 2013, $172,000 was pledged to various correspondent banks to secure interest rate swap transactions and foreign currency exchange lines;
•
At both March 31, 2014 and December 31, 2013, $1.1 million was 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;
•
At both March 31, 2014 and December 31, 2013, $9.5 million was 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.

3. Investments:

The amortized cost and fair values of investments are as follows (in thousands):

7
Table of Contents

 
Available-for-Sale
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value/
Carrying Value
March 31, 2014
 
 
 
 
 
 
 
Corporate Bonds
$
4,000

 
$
—

 
$
(19
)
 
$
3,981

State and municipal securities
60,636

 
1,088

 
(967
)
 
60,757

Mortgage-backed securities - Agency Pass Throughs
48,171

 
820

 
(382
)
 
48,609

Mortgage-backed securities - Agency CMO's
118,655

 
617

 
(1,695
)
 
117,577

SBA Pools
25,620

 
363

 
(29
)
 
25,954

Mortgage-backed securities - Non Agency CMO's (investment grade)
1,965

 
—

 
(173
)
 
1,792

Mortgage-backed securities - Non Agency CMO's (below investment grade)
2,514

 
25

 
(112
)
 
2,427

 
$
261,561

 
$
2,913

 
$
(3,377
)
 
$
261,097

December 31, 2013
 
 
 
 
 
 
 
Corporate Bonds
$
4,000

 
$
—

 
$
(85
)
 
$
3,915

State and municipal securities
$
51,335

 
$
469

 
$
(1,765
)
 
$
50,039

Mortgage-backed securities - Agency Pass Throughs
52,104

 
768

 
(499
)
 
52,373

Mortgage-backed securities - Agency CMO's
114,704

 
849

 
(1,542
)
 
114,011

SBA Pools
26,518

 
355

 
(46
)
 
26,827

Mortgage-backed securities - Non Agency CMO's (investment grade)
2,025

 
—

 
(65
)
 
1,960

Mortgage-backed securities - Non Agency CMO's (below investment grade)
2,654

 
31

 
(172
)
 
2,513

 
$
253,340

 
$
2,472

 
$
(4,174
)
 
$
251,638

 
Held-to-Maturity
 
Carrying Value / Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
March 31, 2014
 
 
 
 
 
 
 
State and municipal securities
$
26,174

 
$
918

 
$
(24
)
 
$
27,068

December 31, 2013
 
 
 
 
 
 
 
State and municipal securities
$
28,286

 
$
857

 
$
(119
)
 
$
29,024



8
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
March 31, 2014
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate Bonds
$
1,981

 
$
(19
)
 
$
—

 
$
—

 
$
1,981

 
$
(19
)
Residential mortgage-back securities
72,701

 
(1,919
)
 
15,196

 
(443
)
 
87,897

 
(2,362
)
SBA Pools
2,745

 
(3
)
 
4,130

 
(26
)
 
6,875

 
(29
)
State and municipal securities
30,134

 
(840
)
 
2,162

 
(151
)
 
32,296

 
(991
)
Total
$
107,561

 
$
(2,781
)
 
$
21,488

 
$
(620
)
 
$
129,049

 
$
(3,401
)
December 31, 2013
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Corporate bonds
$
3,915

 
$
(85
)
 
$
—

 
$
—

 
$
3,915

 
$
(85
)
Mortgage-backed securities & CMO's
$
69,297

 
$
(1,709
)
 
$
20,657

 
$
(569
)
 
$
89,954

 
$
(2,278
)
SBA Pools
7,206

 
(46
)
 
—

 
—

 
7,206

 
(46
)
State and municipal securities
36,615

 
(1,760
)
 
1,586

 
(124
)
 
38,201

 
(1,884
)
Total
$
117,033

 
$
(3,600
)
 
$
22,243

 
$
(693
)
 
$
139,276

 
$
(4,293
)

At March 31, 2014, 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
$
—

 
$
—

 
$
1,372

 
$
1,390

After one year through five years
1,537

 
1,555

 
3,956

 
4,109

After five years through ten years
7,271

 
7,125

 
14,945

 
15,408

After ten years
55,828

 
56,057

 
5,901

 
6,161

  Subtotal
64,636

 
64,737

 
26,174

 
27,068

Mortgage-backed securities
171,305

 
170,406

 
—

 
—

SBA Pools
25,620

 
25,954

 
—

 
—

  Total Securities
$
261,561

 
$
261,097

 
$
26,174

 
$
27,068


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 March 31, 2014, 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.


9
Table of Contents

The following table presents the OTTI losses for the three months ended March 31, 2014 and 2013:
 
2014
 
2013
 
Held To
Maturity
 
Available
For Sale
 
Held To
Maturity
 
Available
For Sale
Total other-than-temporary impairment losses
$
—

 
$
—

 
$
—

 
$
—

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

 
—

 
—

 
42

Net impairment losses recognized in earnings (2)
$
—

 
$
—

 
$
—

 
$
42


(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, that was sold in the fourth quarter of 2013. This security held various levels of credit subordination. This security was 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 this 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 the 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 reviewed the actual collateral performance of this security on a quarterly basis and updated 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
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4. Loans and Allowance for Loan Losses:
The components of loans receivable are as follows (in thousands):
 
March 31, 2014
 
Loans
Receivable
 
%
 
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
Commercial
$
110,879

 
21.5
%
 
$
5,258

 
$
105,621

Commercial real estate
174,371

 
33.9

 
2,824

 
171,547

Commercial construction
15,230

 
3.0

 
—

 
15,230

Land and land development loans
30,695

 
6.0

 
2,255

 
28,440

Agriculture
94,809

 
18.4

 
2,983

 
91,826

Multifamily
14,529

 
2.8

 
—

 
14,529

Residential real estate
58,333

 
11.3

 
3,321

 
55,012

Residential construction
1,533

 
0.3

 
—

 
1,533

Consumer
8,672

 
1.7

 
32

 
8,640

Municipal
5,928

 
1.1

 
—

 
5,928

Total loans receivable
514,979

 
100.0
%
 
$
16,673

 
$
498,306

Allowance for loan losses
(7,779
)
 
 
 
 
 
 
Deferred loan fees, net of direct origination costs
(200
)
 
 
 
 
 
 
Loans receivable, net
$
507,000

 
 
 
 
 
 
Weighted average interest rate
5.10
%
 
 
 
 
 
 

 
December 31, 2013
 
Loans
Receivable
 
%
 
Individually
Evaluated for
Impairment
 
Collectively
Evaluated for
Impairment
Commercial
$
113,736

 
21.8
%
 
$
4,713

 
$
109,023

Commercial real estate
181,207

 
34.7

 
3,128

 
178,079

Commercial construction
7,383

 
1.4

 
—

 
7,383

Land and land development loans
28,946

 
5.5

 
2,487

 
26,459

Agriculture
96,584

 
18.5

 
2,868

 
93,716

Multifamily
18,205

 
3.5

 
—

 
18,205

Residential real estate
59,172

 
11.3

 
3,157

 
56,015

Residential construction
2,531

 
0.5

 
—

 
2,531

Consumer
9,033

 
1.7

 
33

 
9,000

Municipal
5,964

 
1.1

 
—

 
5,964

Total loans receivable
522,761

 
100.0
%
 
$
16,386

 
$
506,375

Allowance for loan losses
(7,687
)
 
 
 
 
 
 
Deferred loan fees, net of direct origination costs
(240
)
 
 
 
 
 
 
Loans receivable, net
$
514,834

 
 
 
 
 
 
Weighted average interest rate
5.14
%
 
 
 
 
 
 


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Table of Contents

The components of the allowance for loan loss by types are as follows (in thousands):
 
March 31, 2014
 
December 31, 2013
 
Total
Allowance
 
Individually
Evaluated
Allowance
 
Collectively
Evaluated
Allowance
 
Total
Allowance
 
Individually
Evaluated
Allowance
 
Collectively
Evaluated
Allowance
Commercial
$
1,838

 
$
469

 
$
1,369

 
$
1,819

 
$
398

 
$
1,421

Commercial real estate
2,370

 
330

 
2,040

 
2,455

 
332

 
2,123

Commercial construction
340

 
—

 
340

 
177

 
—

 
177

Land and land development loans
888

 
78

 
810

 
1,067

 
257

 
810

Agriculture
754

 
28

 
726

 
726

 
17

 
709

Multifamily
31

 
—

 
31

 
33

 
—

 
33

Residential real estate
1,402

 
728

 
674

 
1,192

 
495

 
697

Residential construction
34

 
—

 
34

 
56

 
—

 
56

Consumer
98

 
10

 
88

 
136

 
7

 
129

Municipal
24

 
—

 
24

 
26

 
—

 
26

Total
$
7,779

 
$
1,643

 
$
6,136

 
$
7,687

 
$
1,506

 
$
6,181


A summary of current, past due and nonaccrual loans as of March 31, 2014 is as follows, (in thousands):

 
Current
 
30-89 Days
Past Due
 
90 Days or More
Past Due
and Accruing
 
Nonaccrual
 
Total
Commercial
$
107,660

 
$
253

 
$
—

 
$
2,966

 
$
110,879

Commercial real estate
174,273

 
19

 
—

 
79

 
174,371

Commercial construction
15,230

 
—

 
—

 
—

 
15,230

Land and land development loans
30,538

 
—

 
—

 
157

 
30,695

Agriculture
94,196

 
2

 
—

 
611

 
94,809

Multifamily
14,529

 
—

 
—

 
—

 
14,529

Residential real estate
57,077

 
554

 
—

 
702

 
58,333

Residential construction
1,533

 
—

 
—

 
—

 
1,533

Consumer
8,635

 
34

 
—

 
3

 
8,672

Municipal
5,928

 
—

 
—

 
—

 
5,928

Total
$
509,599

 
$
862

 
$
—

 
$
4,518

 
$
514,979


A summary of current, past due and nonaccrual loans as of December 31, 2013 is as follows, (in thousands):

 
Current
 
30-89 Days
Past Due
 
90 Days or More
Past Due
and Accruing
 
Nonaccrual
 
Total
Commercial
$
111,353

 
$
952

 
$
—

 
$
1,431

 
$
113,736

Commercial real estate
181,028

 
12

 
—

 
167

 
181,207

Commercial construction
7,383

 
—

 
—

 
—

 
7,383

Land and land development loans
28,776

 
9

 
—

 
161

 
28,946

Agriculture
96,320

 
51

 
—

 
213

 
96,584

Multifamily
18,205

 
—

 
—

 
—

 
18,205

Residential real estate
58,238

 
241

 
—

 
693

 
59,172

Residential construction
2,531

 
—

 
—

 
—

 
2,531

Consumer
9,028

 
2

 
—

 
3

 
9,033

Municipal
5,964

 
—

 
—

 
—

 
5,964

Total
$
518,826

 
$
1,267

 
$
—

 
$
2,668

 
$
522,761


12
Table of Contents


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

 
March 31, 2014
 
December 31, 2013
 
Nonaccrual
 
Accrual
 
Total
 
Nonaccrual
 
Accrual
 
Total
Commercial
$
233

 
$
1,940

 
$
2,173

 
$
249

 
$
1,590

 
$
1,839

Commercial real estate
37

 
2,008

 
2,045

 
38

 
1,931

 
1,969

Land and land development loans
44

 
1,907

 
1,951

 
46

 
2,063

 
2,109

Agriculture
—

 
2,065

 
2,065

 
—

 
2,483


2,483

Residential real estate
496

 
1,129

 
1,625

 
498

 
1,140

 
1,638

Consumer
—

 
7

 
7

 
—

 
9

 
9

Total
$
810

 
$
9,056

 
$
9,866

 
$
831

 
$
9,216

 
$
10,047


The Company's loans that were modified in the three-month period ended March 31, 2014 and 2013 and considered a TDR are as follows (dollars in thousands):
 
Three Months Ended March 31, 2014
 
Three Months Ended March 31, 2013
 
Number
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
 
Number
 
Pre-Modification Recorded Investment
 
Post-Modification Recorded Investment
Commercial
7

 
$
425

 
$
417

 
4

 
$
263

 
$
263

Land and land development loans
—

 
—

 
—

 
2

 
153

 
153

Agriculture
—

 
—

 
—

 
4

 
1,216

 
1,216

Consumer
—

 
—

 
—

 
1

 
90

 
90

 
7

 
$
425

 
$
417

 
11

 
$
1,722

 
$
1,722


The balances below provide information as to how the loans were modified as TDRs during the three months ended March 31, 2014 and 2013, (in thousands).
 
Three Months Ended March 31, 2014
 
Three months ended March 31, 2013
 
Adjusted Interest Rate Only
 
Other*
 
Adjusted Interest Rate Only
 
Other*
Commercial
$
111

 
$
306

 
$
—

 
$
263

Land and land development loans
—

 
—

 
36

 
117

Agriculture
—

 
—

 
852

 
364

Consumer
—

 
—

 
—

 
90

 
$
111

 
$
306

 
$
888

 
$
834

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

As of March 31, 2014, the Company had specific reserves of $693,000 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-month periods ended March 31, 2014 and 2013 are as follows:


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Table of Contents

 
Allowance for Loan Losses
for the three months ended March 31, 2014
 
Balance,
Beginning of
Quarter
 
Charge-Offs
Jan 1 through Mar 31, 2014
 
Recoveries
Jan 1 through Mar 31, 2014
 
Provision
 
Balance,
End of
Quarter
 
(Dollars in thousands)
Commercial
$
1,819

 
$
(71
)
 
$
43

 
$
47

 
$
1,838

Commercial real estate
2,455

 
(1
)
 
3

 
(87
)
 
2,370

Commercial construction
177

 
—

 
—

 
163

 
340

Land and land development loans
1,067

 
—

 
6

 
(185
)
 
888

Agriculture
726

 
—

 
12

 
16

 
754

Multifamily
33

 
—

 
—

 
(2
)
 
31

Residential real estate
1,192

 
(19
)
 
24

 
205

 
1,402

Residential construction
56

 
—

 
2

 
(24
)
 
34

Consumer
136

 
(42
)
 
32

 
(28
)
 
98

Municipal
26

 
—

 
—

 
(2
)
 
24

Allowance for loan losses
$
7,687

 
$
(133
)
 
$
122

 
$
103

 
$
7,779



 
Allowance for Loan Losses
for the three months ended March 31, 2013
 
Balance,
Beginning of
Quarter
 
Charge-Offs
Jan 1 through Mar 31, 2013
 
Recoveries
Jan 1 through Mar 31, 2013
 
Provision
 
Balance,
End of
Quarter
 
(Dollars in thousands)
Commercial
$
2,156

 
$
(89
)
 
$
178

 
$
(482
)
 
$
1,763

Commercial real estate
2,762

 
(566
)
 
6

 
612

 
2,814

Commercial construction
101

 
—

 
2

 
114

 
217

Land and land development loans
1,197

 
(7
)
 
15

 
5

 
1,210

Agriculture
228

 
—

 
19

 
(6
)
 
241

Multifamily
51

 
—

 
—

 
4

 
55

Residential real estate
1,144

 
—

 
25

 
(66
)
 
1,103

Residential construction
24

 
—

 
—

 
11

 
35

Consumer
202

 
(65
)
 
38

 
31

 
206

Municipal
78

 
—

 
—

 
(44
)
 
34

Allowances for loan losses
$
7,943

 
$
(727
)
 
$
283

 
$
179

 
$
7,678



Allowance for Unfunded Commitments

 
Three Months Ended March 31,
 
2014
 
2013
Beginning of period
$
16

 
$
15

Adjustment
1

 
2

Allowance — Unfunded Commitments at end of period
$
17

 
$
17


Management's policy is to charge off loans or portions of loans as soon as an identifiable loss amount can be determined from evidence obtained, such as current cash flow information, updated appraisals or similar real estate evaluations, equipment, inventory or similar collateral evaluations, accepted offers on loan sales or negotiated discounts, and/or guarantor asset valuations. In situations where problem loans are dependent on collateral liquidation for repayment, management obtains updated independent valuations, such as appraisals or broker opinions, generally no less frequently than once every twelve months and more frequently for larger or more troubled loans. In the time period between these independent valuations, the Company monitors market conditions for

14
Table of Contents

any significant event or events that would materially change the valuations, and updates them as appropriate. If the valuations suggest an increase in collateral values, the Company does not recover prior amounts charged off until the assets are actually sold and the increase realized. However, if the updated valuations suggest additional loss, the Company charges off the additional amount.

The following tables summarize impaired loans:
 
Impaired Loans
 
March 31, 2014
 
December 31, 2013
 
Recorded
Investment
 
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Principal
Balance
 
Related
Allowance
 
(Dollars in thousands)
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
1,622

 
$
1,681

 
$
469

 
$
1,742

 
$
1,896

 
$
398

Commercial real estate
1,109

 
1,141

 
330

 
1,133

 
1,165

 
332

Land and land development loans
632

 
636

 
78

 
843

 
848

 
257

Agriculture
442

 
442

 
28

 
375

 
375

 
17

Residential real estate
1,321

 
1,322

 
728

 
1,094

 
1,095

 
495

Consumer
11

 
13

 
10

 
8

 
10

 
7

Total
$
5,137

 
$
5,235

 
$
1,643

 
$
5,195

 
$
5,389

 
$
1,506

Without an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
3,636

 
$
4,592

 
$
—

 
$
2,971

 
$
3,780

 
$
—

Commercial real estate
1,715

 
2,054

 
—

 
1,995

 
2,377

 
—

Land and land development loans
1,623

 
1,782

 
—

 
1,644

 
1,799

 
—

Agriculture
2,541

 
2,575

 
—

 
2,493

 
2,524

 
—

Residential real estate
2,000

 
2,232

 
—

 
2,063

 
2,277

 
—

Consumer
21

 
38

 
—

 
25

 
43

 
—

Total
$
11,536

 
$
13,273

 
$
—

 
$
11,191

 
$
12,800

 
$
—

Total:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
5,258

 
$
6,273

 
$
469

 
$
4,713

 
$
5,676

 
$
398

Commercial real estate
2,824

 
3,195

 
330

 
3,128

 
3,542

 
332

Land and land development loans
2,255

 
2,418

 
78

 
2,487

 
2,647

 
257

Agriculture
2,983

 
3,017

 
28

 
2,868

 
2,899

 
17

Residential real estate
3,321

 
3,554

 
728

 
3,157

 
3,372

 
495

Consumer
32

 
51

 
10

 
33

 
53

 
7

Total
$
16,673

 
$
18,508

 
$
1,643

 
$
16,386

 
$
18,189

 
$
1,506









15
Table of Contents

 
Impaired Loans
 
Three Months Ended March 31, 2014
 
Three Months Ended March 31, 2013
 
Average
Recorded
Investment
 
Interest Income
Recognized (*)
 
Average
Recorded
Investment
 
Interest Income
Recognized (*)
 
(Dollars in thousands)
With an allowance recorded:
 
 
 
 
 
 
 
Commercial
$
1,682

 
$
30

 
$
1,360

 
$
115

Commercial real estate
1,121

 
20

 
1,329

 
25

Land and land development loans
737

 
14

 
1,609

 
28

Agriculture
409

 
16

 
23

 
2

Residential real estate
1,207

 
25

 
978

 
15

Consumer
10

 
1

 
142

 
3

Total
$
5,166

 
$
106

 
$
5,441

 
$
188

Without an allowance recorded:
 
 
 
 
 
 
 

Commercial
$
3,303

 
$
203

 
$
3,439

 
$
207

Commercial real estate
1,855

 
107

 
2,847

 
160

Land and land development loans
1,634

 
25

 
380

 
22

Agriculture
2,517

 
57

 
2,316

 
111

Residential real estate
2,032

 
53

 
1,373

 
46

Consumer
23

 
1

 
36

 
1

Total
$
11,364

 
$
446

 
$
10,391

 
$
547

Total:
 
 
 
 
 
 
 

Commercial
$
4,985

 
$
233

 
$
4,799

 
$
322

Commercial real estate
2,976

 
127

 
4,176

 
185

Land and land development loans
2,371

 
39

 
1,989

 
50

Agriculture
2,926

 
73

 
2,339

 
113

Residential real estate
3,239

 
78

 
2,351

 
61

Consumer
33

 
2

 
178

 
4

Total
$
16,530

 
$
552

 
$
15,832

 
735

(*) Interest Income on individually impaired loans is calculated using the cash-basis method, using year to date interest on loans outstanding at March 31.

Loan Risk Characteristics

The following is a recap of the risk characteristics associated with each of the Company's major loan portfolio segments.

Commercial Loans: Although the impacts of the soft recovery continue to heighten risk in the commercial portfolio, management does not consider the portfolio to present “concentration risk” at this time. Management believes there is adequate diversification by type, industry, and geography to mitigate excessive risk. The commercial portfolio includes a mix of term loan facilities and operating loans and lines made to a variety of different business types in the markets it serves. The Company utilizes SBA, USDA and other government-assisted or guaranteed financing programs whenever advantageous to further mitigate risk in this area. With the exception of the agricultural portfolio discussed in more detail below, there is no other significant concentration of industry types in its loan portfolio, and no dominant employer or industry across all the markets it serves. Underwriting focuses on the evaluation of potential future cash flows to cover debt requirements, sufficient collateral margins to buffer against devaluations, credit history of the business and its principals, and additional support from willing and capable guarantors.

Commercial Real Estate Loans: Recovering economic conditions and stabilizing commercial property values have reduced risk in this segment from prior recent quarters. In comparison to its national peer group, the Company has less overall exposure to commercial real estate and a stronger mix of owner-occupied (where the borrower occupies and operates in at least part of the building) versus non-owner occupied loans. The loans represented in this category are spread across the Company's footprint, and there are no significant concentrations by industry type or borrower. The most significant property types represented in the portfolio

16
Table of Contents

are office 22.4%, industrial 16.3%, health care 13.7% and retail 14.2%. The other 33.4% is a mix of property types with smaller concentrations, including religious facilities, auto-related properties, restaurants, convenience stores, storage units, motels and commercial investment land.

While 70.3% of the Company's commercial real estate portfolio is in its Northern Idaho/Eastern Washington region, this region is a large and diverse region with differing local economies and real estate markets. Given this diversity, and the diversity of property types and industries represented, management does not believe that this concentration represents a significant concentration risk.

Non-owner occupied commercial real estate loans are made only to projects with strong debt-service-coverage and lower loan-to-value ratios and/or to borrowers with established track records and the ability to fund potential project cash flow shortfalls from other income sources or liquid assets. Project due diligence is conducted by the Bank, to help provide for adequate contingencies, collateral and/or government guaranties. The Company has largely avoided speculative financing of investment properties, particularly of the types most vulnerable in the recent downturn, including investment office buildings and retail strip developments. Management believes geographic, borrower and property-type diversification, and prudent underwriting and monitoring standards applied by seasoned commercial lenders mitigate concentration risk in this segment.

Construction and Development Loans: After the aggressive reduction efforts of the past few years, the land development and commercial construction loan components pose much lower concentration risk for the total loan portfolio, and now total $45.9 million, or 9.0% of the loan portfolio. The substantial portfolio reduction, combined with stabilizing real estate values, has reduced risk in this portfolio to a level where it no longer represents a significant concentration risk.

Agricultural Loans: The agricultural portfolio represents a larger percentage of the loans in the Bank's southern Idaho region. At the end of the period, agricultural loans and agricultural real estate loans totaled $94.8 million or 18.4% of the total loan portfolio. The agricultural portfolio consists of loans secured by livestock, crops and real estate. Agriculture has typically been a cyclical industry with periods of both strong and weak performance. Current conditions remain strong but may weaken in the next few years because of rising input costs, weaker commodity prices, and potential water shortages. To mitigate credit risk, specific underwriting is applied to retain only borrowers that have proven track records in the agricultural industry. Many of Intermountain's agricultural borrowers are third or fourth generation farmers and ranchers with limited real estate debt, which reduces overall debt coverage requirements and provides extra flexibility and collateral for equipment and operating borrowing needs. In addition, the Bank has hired senior lenders with significant experience in agricultural lending to administer these loans. Further mitigation is provided through frequent collateral inspections, adherence to farm operating budgets, and annual or more frequent review of financial performance.

Multifamily: The multifamily segment comprises $14.5 million or 2.8% of the total loan portfolio at the end of the period. This portfolio represents relatively low risk for the Company, as a result of the strong current market for multifamily properties and low vacancy rates across the Company's footprint.

Residential Real Estate, Residential Construction and Consumer: Residential real estate, residential construction and consumer loans total $68.5 million or 13.3% of the total loan portfolio. Management does not believe they represent significant concentration risk. However, continuing soft employment conditions and reduced home equity is putting pressure on some borrowers in this portfolio.

Municipal loans: Municipal loans comprise $5.9 million or 1.1% of the total loan portfolio. The small size of the portfolio and careful underwriting of the loans within it limit overall concentration risk in this segment.

Credit quality indicators

The risk grade analyses included as part of the Company's credit quality indicators for loans and leases are developed through review of individual borrowers on an ongoing basis. Each loan is evaluated at the time of origination and each subsequent renewal. Loans with principal balances exceeding $500,000 are evaluated on a more frequent basis. Trigger events (such as loan delinquencies, customer contact, and significant collateral devaluation) also require an updated credit quality review. Loans with risk grades four through eight are evaluated at least annually with more frequent evaluations often done as borrower, collateral or market conditions change. In situations where problem loans are dependent on collateral liquidation for repayment, management obtains updated independent valuations, generally no less frequently than once every twelve months and more frequently for larger or more troubled loans.


17
Table of Contents

Other measurements used to assess credit quality, including delinquency statistics, nonaccrual and OREO levels, net chargeoff activity, and classified asset trends, are updated and evaluated monthly.

These risk grades are defined as follows:
     
Satisfactory — A satisfactory rated loan is not adversely classified because it does not display any of the characteristics for adverse classification.

Watch — A watch loan has a solid but vulnerable repayment source. There is loss exposure only if the primary repayment source and collateral experience prolonged deterioration. Loans in this risk grade category are subject to frequent review and change due to the increased vulnerability of repayment sources and collateral valuations.

 Special mention — A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification.

 Substandard — A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

 Doubtful — A loan classified doubtful has all the weaknesses inherent in a loan classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values.

Loss — Loans classified loss are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted. This classification does not necessarily mean that the