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IMCB > SEC Filings for IMCB > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for INTERMOUNTAIN COMMUNITY BANCORP

Form 10-Q for INTERMOUNTAIN COMMUNITY BANCORP


8-Aug-2014

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations This report contains forward-looking statements. For a discussion about such statements, including the risks and uncertainties inherent therein, see "Forward-Looking Statements." Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in Intermountain's Form 10-K for the year ended December 31, 2013.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains 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 our plans, objectives, expectations and intentions that are not historical facts, such as the statements in this report regarding expected or projected growth, asset quality and losses, other income and operating expenses, and other statements identified by words such as "expects," "anticipates," "intends," "plans," "believes," "will likely," "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 our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections titled "Risk Factors," "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", as applicable, in this report, the following factors, among others, could cause actual results to differ materially from the anticipated results:

deterioration in economic conditions that could result in increased loan and lease losses;

inflation and interest rate levels, and market and monetary fluctuations;

           changes in market interest rates and spreads, which could adversely
            affect our net interest income and profitability;


           trade, monetary and fiscal policies and laws, including interest rate
            and income tax policies of the federal government;

growth and acquisition strategies;

           applicable laws and regulations and legislative or regulatory
            changes, including the ultimate financial and operational burden of
            financial regulatory reform legislation;

our ability to attract new deposits and loans and leases;

competitive market pricing factors;

the effects of any adverse regulatory action;

our ability to raise capital or incur debt on reasonable terms;

the risks associated with lending and potential adverse changes in credit quality;

risks associated with concentrations in real estate-related loans;

declines in real estate values supporting loan collateral;

increased loan delinquency rates;

the timely development and acceptance of new products and services;

           the willingness of customers to substitute competitors' products and
            services for our products and services;


           consolidation in the financial services industry in our markets,
            resulting in the creation of larger financial institutions who may
            have greater resources that could change the competitive landscape;

technological changes;

our ability to recruit and retain key management and staff;

changes in estimates and assumptions used in financial accounting;

our critical accounting policies and the implementation of such policies;

potential interruption or breach in security of our systems;

lower-than-expected revenue or cost savings or other issues in connection with mergers and acquisitions;

changes in consumer spending, saving and borrowing habits;

           the strength of the United States economy in general and the strength
            of the local economies in which Intermountain conducts its
            operations;

stability of funding sources and continued availability of borrowings;

our success in gaining regulatory approvals, when required;


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results of regulatory examinations that could restrict growth; and

our success at managing the risks involved in the foregoing.

General (Overview & History)
Intermountain Community Bancorp ("Intermountain" or the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Panhandle State Bank ("PSB" or "Bank"), a wholly owned subsidiary of the Company, was first opened in 1981 to serve the local banking needs of Bonner County, Idaho. PSB is regulated by the Idaho Department of Finance, the State of Washington Department of Financial Institutions, the Oregon Division of Finance and Corporate Securities and by the Federal Deposit Insurance Corporation ("FDIC"), its primary federal regulator and the insurer of its deposits. Since opening in 1981, the Bank has continued to grow by opening additional branch offices throughout Idaho and has also expanded into the states of Oregon and Washington. Intermountain also operates Trust & Investment Services divisions, which provide investment, insurance, wealth management and trust services to its clients.
The slow pace of national and regional economic recovery has slowed the Company's growth over the past several years. In response, Company management shifted its priorities to improving asset quality, raising additional capital, maintaining a conservative balance sheet and improving the efficiency of its operations.
Intermountain continues to offer banking and financial services that fit the needs of the communities it serves. Lending activities include consumer, commercial, commercial real estate, construction, mortgage and agricultural loans. A full range of deposit services are available including checking, savings and money market accounts as well as various types of certificates of deposit. Trust and wealth management services, investment and insurance services, business cash management and electronic banking solutions round out the Company's product offerings.
Intermountain seeks to differentiate itself by attracting, retaining and motivating highly experienced employees who are local market leaders, and supporting them with advanced technology, training and compensation systems. This approach allows the Bank to provide local marketing and decision-making to respond quickly to customer opportunities and build leadership in its communities. Simultaneously, the Bank has focused on standardizing and centralizing administrative and operational functions to improve risk management, efficiency and the ability of the branches to serve customers effectively.
The Company's strengths include a strong, committed team of experienced banking officers, a loyal and low-cost deposit base, a sophisticated risk management system, and a strong operational and compliance infrastructure. These strengths will be integrated with those of Columbia (see "Recent Developments" below) to create additional opportunities in the Company's market upon successful completion of the merger.

Recent Developments
On July 23, 2014, the Company, jointly with Columbia Banking System, Inc., ("Columbia"), the holding company for Columbia State Bank, announced the signing of a definitive agreement and plan of merger ("Merger Agreement") whereby the Company and Columbia intend to merge in a transaction valued as of the date of signing at approximately $121.5 million. See Note 11 to the Consolidated Financial Statements for more information on the transaction.

Critical Accounting Policies
The accounting and reporting policies of Intermountain conform to Generally Accepted Accounting Principles ("GAAP") and to general practices within the banking industry. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Intermountain's management has identified the accounting policies described below as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of Intermountain's Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
Investments. Assets in the investment portfolio are initially recorded at cost, which includes any premiums and discounts. Intermountain amortizes premiums and discounts as an adjustment to interest income using the interest yield method over the life of the security. The cost of investment securities sold, and any resulting gain or loss, is based on the specific identification method. Management determines the appropriate classification of investment securities at the time of purchase. Held-to-maturity securities are those securities that Intermountain has the intent and ability to hold to maturity, and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to liquidity needs, changes in market interest rates, and asset-liability management strategies, among others. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses reported in stockholders' equity as a separate component of other comprehensive income, net of applicable deferred income taxes.


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During the quarter ended June 30, 2013, the Company transferred $8.5 million in securities from its available-for-sale portfolio to its held-to-maturity portfolio, based on management's intent and ability to hold these securities to maturity. This transfer was recorded at fair market value and the unrealized loss at the date of transfer continues to be reported as accumulated other comprehensive income, net of applicable deferred income taxes, and will be 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. Management evaluates investment securities for other-than-temporary declines in fair value on a periodic basis. If the fair value of an investment security falls below its amortized cost and the decline is deemed to be other-than-temporary, the security's fair value will be analyzed based on market conditions and expected cash flows on the investment security. The unrealized loss is considered an other-than-temporary impairment. The Company then calculates a credit loss charge against earnings by subtracting the estimated present value of estimated future cash flows on the security from its amortized cost. The other-than-temporary impairment less the credit loss charge against earnings is a component of other comprehensive income.
Allowance For Loan Losses. In general, determining the amount of the allowance for loan losses requires significant judgment and the use of estimates by management. This analysis is designed to determine an appropriate level and allocation of the allowance for losses among loan types and loan classifications by considering factors affecting loan losses, including: specific losses; levels and trends in impaired and nonperforming loans; historical bank and industry loan loss experience; current national and local economic conditions; volume, growth and composition of the portfolio; regulatory guidance; and other relevant factors. Management monitors the loan portfolio to evaluate the adequacy of the allowance. The allowance can increase or decrease based upon the results of management's analysis.
The amount of the allowance for the various loan types represents management's estimate of probable incurred losses inherent in the existing loan portfolio based upon historical bank and industry loan loss experience for each loan type. The allowance for loan losses related to impaired loans is based on the fair value of the collateral for collateral dependent loans, and on the present value of expected cash flows for non-collateral dependent loans. For collateral dependent loans, this evaluation requires management to make estimates of the value of the collateral and any associated holding and selling costs, and for non-collateral dependent loans, estimates on the timing and risk associated with the receipt of contractual cash flows.
Management believes the allowance for loan losses was adequate at June 30, 2014. While management uses available information to provide for loan losses, the ultimate collectability of a substantial portion of the loan portfolio and the need for future additions to the allowance will be based on changes in economic conditions and other relevant factors. A slowdown in economic activity could adversely affect cash flows for both commercial and individual borrowers, as a result of which the Company could experience increases in nonperforming assets, delinquencies and losses on loans. The allowance requires considerable judgment on the part of management, and material changes in the allowance can have a significant impact on the Company's financial position and results of operations.
Fair Value Measurements. ASC 820 "Fair Value Measurements" establishes a standard framework for measuring fair value in GAAP, clarifies the definition of "fair value" within that framework, and expands disclosures about the use of fair value measurements. A number of valuation techniques are used to determine the fair value of assets and liabilities in Intermountain's financial statements. These include quoted market prices for securities, interest rate swap valuations based upon the modeling of termination values adjusted for credit spreads with counterparties, and appraisals of real estate from independent licensed appraisers, among other valuation techniques. Fair value measurements for assets and liabilities where there exists limited or no observable market data are based primarily upon estimates, and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. Significant changes in the aggregate fair value of assets and liabilities required to be measured at fair value or for impairment will be recognized in the income statement under the framework established by GAAP. If impairment is determined, it could limit the ability of Intermountain's banking subsidiaries to pay dividends or make other payments to the Holding Company. See Note 9 to the Consolidated Financial Statements for more information on fair value measurements.
Income Taxes. Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company's income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized. The Company uses an estimate of future earnings, an evaluation of its loss carryback ability and tax planning strategies to determine whether or not the benefit of its net deferred tax asset may be realized. The analysis used to determine whether a valuation allowance is required and if so, the amount of the


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allowance, is based on estimates of future taxable income and the effectiveness of future tax planning strategies. These estimates require significant management judgment about future economic conditions and Company performance. Note 10, "New Accounting Pronouncements" in the Notes to the Consolidated Financial Statements, discusses new accounting pronouncements adopted by Intermountain and the expected impact of accounting pronouncements recently issued or proposed, but not yet required to be adopted.

Results of Operations
Overview. Intermountain recorded net income applicable to common stockholders of $2.3 million, or $0.34 per diluted share for the six months ended June 30, 2014, compared with net income of $2.5 million, or $0.39 per diluted share for the six months ended June 30, 2013. The reduction in net income for the period indicated over the comparable period last year resulted from decreases in interest and other income and a higher tax provision, which offset lower interest and other operating expenses. For the quarter ended June 30, 2014, Intermountain recorded net income applicable to common stockholders of $1.3 million, or $0.19 per diluted share, compared with net income of $1.0 million, or $0.16 per diluted share, and $1.5 million, or $0.23 per diluted share for the quarters ended March 31, 2014 and June 30, 2013, respectively. Higher net interest income, a lower loan loss provision and higher other income offset higher operating expenses to produce the improvement over first quarter 2014 results. Stabilizing net interest income and a lower loan loss provision in the second quarter of 2014 were offset by lower other income and a higher tax provision in the comparative results from the same quarter last year.
The annualized return on average assets ("ROAA") was 0.50% for the six months ended June 30, 2014, as compared to 0.74% in the same period last year, and the annualized return on average common equity ("ROAE") was 4.81% in 2014 and 5.85% in 2013, respectively.
Net Interest Income. The most significant component of earnings for the Company is net interest income, which is the difference between interest income from the Company's loan and investment portfolios, and interest expense on deposits, repurchase agreements and other borrowings. During the six months ended June 30, 2014 and June 30, 2013, net interest income was $14.4 million and $14.9 million, respectively. The decrease in net interest income from last year reflects lower interest income on loans resulting primarily from declines in loan yields. Very low market rates and intense competition for strong borrowers continue to pressure both the Company's and its competitors' loan yields. Investment interest income was up, reflecting moderately higher investment yields and a significant reduction in premium amortization speeds on the Company's mortgage-backed securities portfolio. Interest expense on deposits continued to decrease as deposit rates declined in response to lower market rates, and CD volumes continued to contract. The decrease in interest expense on other borrowings from the same six-month period last year reflected lower rates paid, particularly on repurchase agreements.
Average interest-earning assets decreased by 2.4% to $831.5 million for the six months ended June 30, 2014 compared to $852.2 million for the six months ended June 30, 2013. Average loans increased $318,000 during this period, and average investments and interest-earning cash equivalents decreased by $21.0 million. This reduction reflected the use of cash and investments in late 2013 to redeem the Company's Capital Purchase Program ("CPP") preferred stock.
Average interest-bearing liabilities increased by $4.5 million, or 0.6%, for the six month period ended June 30, 2014 compared to June 30, 2013. Average deposit balances decreased $10.8 million, or 1.5%, average Federal Home Loan Bank ("FHLB") advances increased by $6.8 million, or 126.4%, and average other borrowings increased $8.5 million, or 9.4%. The decrease in deposits primarily reflects payoffs of higher rate retail CDs and the loss of savings balances associated with a terminated contract for secured credit cards. The increase in other borrowings resulted from the addition of a holding company loan used to redeem the Company's CPP preferred stock.
The net interest margin was 3.49% for the six months ended June 30, 2014 as compared to 3.51% in the comparable period of 2013. A decrease in the average yield on loans was offset by higher investment yields and lower deposit and borrowing costs.
The Company continues to operate in an unprecedented low rate environment, in which the Fed Funds target rate is less than 0.25% and the Federal Reserve continues to purchase mortgage assets to reduce longer rates. After increasing about 1% in the second quarter of 2013, yields on the 10-year US Treasury bond have retreated about 0.5% in the first six months of 2014, as global economic conditions have remained tepid and the Federal Reserve continues with a largely accommodative monetary policy. The Company's short-term variable rate loans are tied primarily to the national prime rate or the overnight or one-month London Interbank Offering Rate (LIBOR), which has not moved. In addition, excess industry liquidity and continuing strong competition for quality borrowers dampened any short-term impact higher long-term market rates had on the loan portfolio. Investment portfolio yields have improved slightly, although strong market liquidity and demand for fixed income investments continues to dampen performance. Relative stabilization of the net interest margin does appear to indicate that relative declines in asset yields are slowing.
Higher market rates could improve yields and earnings in the Company's loan and investment portfolios in future quarters by increasing yields on variable rate loans, and on new loans and investments added to the portfolio. Management also continues to


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work diligently to redeploy cash assets into higher yielding loans and investments, and in particular is now focused on more rapid expansion of the loan portfolio to offset some of the pressure on yields. The Company also continues to focus on lowering its overall cost of funds, while maintaining transaction deposit balances from core relationship customers. The cost on interest-bearing liabilities dropped from 0.48% for the first six months of 2013 to 0.39% for the same period in 2014, reflecting a 0.07% drop in average deposit rates to 0.23% and a 0.42% drop in repurchase and other borrowing average rates to 1.37%. Management believes that some opportunities still remain to further lower funding costs. However, given the already low level of market rates and the Company's cost of funds, any future gains are likely to be less than those already experienced.
Provision for Loan Losses & Credit Quality. Management's policy is to establish valuation allowances for estimated losses by charging corresponding provisions against income. This evaluation is based upon management's assessment of various factors including, but not limited to, current and anticipated future economic trends, historical loan losses, delinquencies, underlying collateral values, and current and potential risks identified in the portfolio. The provision for loan losses totaled $99,000 for the six months ended June 30, 2014, compared to a provision of $426,000 for the comparable period last year. Lower provision costs reflect continued improvements in the quality of the Company's loan portfolio. For more information on provision and loan loss allowance activity for the periods indicated, see Note 4 to the Consolidated Financial Statements, "Loans and Allowance for Loan Losses."

Net chargeoffs declined to $104,000 in the first six months of 2014, compared to $327,000 in the first six months of 2013. In general, portfolio losses are no longer concentrated in any particular industry or loan type, as prior efforts to reduce exposure in construction, land development and commercial real estate loans have decreased the exposure in these segments considerably. The Company continues to resolve or liquidate its problem loans aggressively, particularly those with higher loss exposures, and now believes that the risk of future large losses is significantly reduced. The loan loss allowance to total loans ratio was 1.46% at June 30, 2014, compared to 1.52% at June 30, 2013. At the end of June 2014, the allowance for loan losses totaled 224.7% of non-performing loans compared to 167.6% at June 30, 2013. The increase in this coverage ratio reflects the reduction of non-performing loans over the prior period.

Given current economic uncertainty, management continues to evaluate and adjust the loan loss allowance carefully and frequently to reflect the most current information available concerning the Company's markets and loan portfolio. In its evaluation, management considers current economic and borrower conditions in both the pool of loans subject to specific impairment, and the pool subject to a more generalized allowance based on historical and other factors. When a loan is characterized as impaired, the Company performs a specific evaluation of the loan, focusing on potential future cash flows likely to be generated by the loan, current collateral values underlying the loan, and other factors such as government guarantees or guarantor support that may impact repayment. Based on this evaluation, it sets aside a specific reserve for this loan and/or charges down the loan to its net realizable value (selling price less estimated closing costs) if it is unlikely that the Company will receive any cash flow beyond the amount obtained from liquidation of the collateral. If the loan continues to be impaired, management periodically re-evaluates the loan for additional potential impairment, and charges it down or adds to reserves if appropriate. On the pool of loans not subject to specific impairment, management evaluates regional, bank and loan-specific historical loss trends to develop its base reserve level on a loan-by-loan basis. It then modifies those reserves by considering the risk grade of the loan, current economic conditions, the recent trend of defaults, trends in collateral values, underwriting and other loan management considerations, and unique market-specific factors such as water shortages or other natural phenomena.

General trending information with respect to non-performing loans, non-performing assets, and other key portfolio metrics is as follows (dollars in thousands):


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                            Credit Quality Trending
                                             6/30/2014     3/31/2014      12/31/2013      6/30/2013
                                                             (Dollars in thousands)
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