Results of Operations
Overview
. Net income applicable to common shareholders improved to $10.1 million, or $1.55 per diluted share, for 2013, from $1.9 million, or $0.32 per diluted share, in 2012. 2013 results included a $6.1 million tax benefit resulting from the reversal of the Company's deferred tax asset valuation allowance. This reversal and a much lower loan loss provision in 2013 offset modest decreases in net interest income and other income, and a moderate increase in operating expense. Operating expenses were negatively impacted by higher costs related to equity compensation granted to raise key employee compensation levels to market, a valuation reserve established on the installment sale of the Company's one remaining other real estate owned (OREO) property, and one-time expenses related to significant upgrades to the Company's technology.
The annualized return on average assets (“ROAA”) was 1.25% for the year ended December 31, 2013, as compared to 0.39% in 2012, and the return on average common equity (“ROAE”) was 11.33% in 2013 and 2.75% in 2012.
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. Net interest income was $29.7 million and $30.8 million for 2013 and 2012, respectively. The decrease in net interest income from last year primarily reflects lower interest income on loans and investments resulting from declines in rate. Average loan volume increased $9.4 million from the prior period, but low market rates and intense competition for strong borrowers continued to pressure the Company's loan yields. Investment portfolio income was also down, as increases in average volumes were offset by rate reductions. 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 last year reflected lower average borrowing volumes and lower rates paid on those borrowings.
The net interest margin decreased moderately from 3.57% in 2012 to 3.50% in 2013 for the reasons noted above. The Company anticipates that low market rates, strong competition for borrowers and heavy loan refinance activity will continue to pressure net interest margin in 2014 and perhaps beyond. The current environment is particularly challenging, as low market rates tighten current spreads and reduce net interest income, but extending the duration of loans or investments creates relatively high degrees of extension and mark-to-market risk. In light of these conditions, management has taken a conservative stance in trying to maintain income while keeping asset duration relatively short. It has done so by continuing to balance the production and purchase of longer-term loans and investment securities with offsetting variable rate or short-term loans and securities. Other efforts to mitigate this situation include migrating cash and investments into the higher yielding loan portfolio, paying off higher rate liabilities and reducing rates on other interest-bearing liabilities.
The following table provides information on net interest income for the past two years, setting forth average balances of interest-earning assets and interest-bearing liabilities, the interest income earned and interest expense recorded thereon and the resulting average yield-cost ratios.
Average Balance Sheets and Analysis of Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2013
|
|
|
Average
Balance
|
|
Interest Income/
Expense
|
|
Average
Yield/Cost
|
|
|
(Dollars in thousands)
|
Loans receivable, net(1)
|
|
$
|
526,535
|
|
|
$
|
26,973
|
|
|
5.12
|
%
|
Securities(2)
|
|
293,205
|
|
|
6,291
|
|
|
2.15
|
%
|
Interest-bearing cash and cash equivalents
|
|
29,590
|
|
|
67
|
|
|
0.23
|
%
|
Total earning assets
|
|
849,330
|
|
|
33,331
|
|
|
3.92
|
%
|
Non interest-bearing cash and cash equivalents
|
|
18,713
|
|
|
|
|
|
|
|
Office property and equipment, net
|
|
35,410
|
|
|
|
|
|
|
|
Other assets
|
|
28,269
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
931,722
|
|
|
|
|
|
|
|
Time deposits of $100,000 or more
|
|
$
|
56,751
|
|
|
$
|
753
|
|
|
1.33
|
%
|
Other interest-bearing deposits
|
|
420,489
|
|
|
1,231
|
|
|
0.29
|
%
|
Short-term borrowings
|
|
77,249
|
|
|
680
|
|
|
0.88
|
%
|
Other borrowed funds
|
|
20,111
|
|
|
934
|
|
|
4.64
|
%
|
Total interest-bearing liabilities
|
|
574,600
|
|
|
3,598
|
|
|
0.63
|
%
|
Non interest-bearing deposits
|
|
232,088
|
|
|
|
|
|
|
|
Other liabilities
|
|
12,991
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
112,043
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
931,722
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
29,733
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
3.50
|
%
|
Average Balance Sheets and Analysis of Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2012
|
|
|
Average
Balance
|
|
Interest Income/
Expense
|
|
Average
Yield/Cost
|
|
|
(Dollars in thousands)
|
Loans receivable, net(1)
|
|
$
|
517,115
|
|
|
$
|
28,172
|
|
|
5.45
|
%
|
Securities(2)
|
|
289,653
|
|
|
7,574
|
|
|
2.61
|
%
|
Interest-bearing cash and cash equivalents
|
|
56,419
|
|
|
130
|
|
|
0.23
|
%
|
Total earning assets
|
|
863,187
|
|
|
35,876
|
|
|
4.16
|
%
|
Non interest-bearing cash and cash equivalents
|
|
18,275
|
|
|
|
|
|
|
|
Office property and equipment, net
|
|
36,598
|
|
|
|
|
|
|
|
Other assets
|
|
29,513
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
947,573
|
|
|
|
|
|
|
|
Time deposits of $100,000 or more
|
|
$
|
89,763
|
|
|
$
|
1,132
|
|
|
1.26
|
%
|
Other interest-bearing deposits
|
|
434,976
|
|
|
1,870
|
|
|
0.43
|
%
|
Short-term borrowings
|
|
82,145
|
|
|
1,072
|
|
|
1.30
|
%
|
Other borrowed funds
|
|
20,528
|
|
|
1,009
|
|
|
4.92
|
%
|
Total interest-bearing liabilities
|
|
627,412
|
|
|
5,083
|
|
|
0.81
|
%
|
Non interest-bearing deposits
|
|
198,511
|
|
|
|
|
|
|
|
Other liabilities
|
|
15,378
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
106,272
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
947,573
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
30,793
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
3.57
|
%
|
_______________________________________
|
|
(1)
|
Non-accrual loans are included in the average balance, but interest on such loans is not recognized in interest income.
|
|
|
(2)
|
Municipal interest income is not presented on a tax-equivalent basis, and represents a small portion of total interest income.
|
The following rate/volume analysis depicts the increase (decrease) in net interest income attributable to: (1) volume fluctuations (change in average balance multiplied by prior period rate); (2) interest rate fluctuations (change in rate multiplied by prior period average balance); and (3) volume/rate (changes in rate multiplied by changes in volume) when compared to the preceding year.
Changes Due to Volume and Rate 2013 versus 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Rate
|
|
Volume/ Rate
|
|
Total
|
|
|
(Dollars in thousands)
|
Loans receivable, net
|
|
$
|
513
|
|
|
$
|
(1,682
|
)
|
|
$
|
(30
|
)
|
|
$
|
(1,199
|
)
|
Securities
|
|
93
|
|
|
(1,359
|
)
|
|
(17
|
)
|
|
(1,283
|
)
|
Interest-bearing cash and cash equivalents
|
|
(62
|
)
|
|
(2
|
)
|
|
1
|
|
|
(63
|
)
|
Total interest income
|
|
544
|
|
|
(3,043
|
)
|
|
(46
|
)
|
|
(2,545
|
)
|
Time deposits of $100,000 or more
|
|
(416
|
)
|
|
58
|
|
|
(21
|
)
|
|
(379
|
)
|
Other interest-bearing deposits
|
|
(62
|
)
|
|
(596
|
)
|
|
20
|
|
|
(638
|
)
|
Short-term borrowings
|
|
(64
|
)
|
|
(348
|
)
|
|
21
|
|
|
(391
|
)
|
Other borrowed funds
|
|
(20
|
)
|
|
(56
|
)
|
|
—
|
|
|
(76
|
)
|
Total interest expense
|
|
(562
|
)
|
|
(942
|
)
|
|
20
|
|
|
(1,484
|
)
|
Net interest income
|
|
$
|
1,106
|
|
|
$
|
(2,101
|
)
|
|
$
|
(66
|
)
|
|
$
|
(1,061
|
)
|
Net Interest Income — 2013 Compared to 2012
The Company’s net interest income decreased to $29.7 million in 2013 from $30.8 million in 2012. The net interest income change attributable to volume changes was a favorable $1.1 million from 2012 as increases in average loans and securities and decreases in average deposits and Federal Home Loan Bank advances combined to offset decreases in average interest-bearing cash and increases in repurchase agreement balances. The favorable impacts of volume changes were more than offset, however, by a $2.1 million reduction resulting from unfavorable changes in rates. Lower rates for loans and investments resulted in about $3.0 million in reduced net interest income, and offset the $942,000 positive impact from lowering liability rates. The interplay between rate and volume factors resulted in a $66,000 decrease in net interest income for the period.
The yield on interest-earning assets decreased 0.24% in 2013 from 2012, while the cost of interest-bearing liabilities decreased 0.18% during the same period. As noted above, the overall earning-asset yield was impacted by continued decreases in both loan and investment yields, as low market rates, keen competition for quality loans, strong demand for fixed income securities and high prepayment speeds on mortgage-backed securities all put pressure on yield. Rates paid on interest bearing cash equivalents remained between 0.00% and 0.25% throughout 2013, meaning that the $29.6 million in average interest bearing cash equivalents balances earned only minimal income.
The yield on the Company’s loans, at 5.12%, was down 0.33% from the prior year for the reasons noted above. Interest reversals on non-accrual and other problem loans totaling $187,000 were much less of a factor than in prior years, as the Company continued to successfully improve the quality of the credit portfolio. Problem loans include loans charged off directly or transferred to OREO. The securities portfolio yield also decreased, although it partially recovered later in the year as rising market rates moderately improved yields and significantly lowered prepayments on mortgage-backed securities. Based on current and projected market rates for the next 18 months, the Company anticipates continued moderate improvement in investment yields, but continued pressure on loan yields. Management will seek to offset the negative impacts of this pressure by migrating cash into the higher-yielding investment and loan portfolios.
Offsetting some of the impact of lower interest income, the Company lowered its interest expense by $1.5 million or 29.2% in 2013. Overall, average interest-bearing liabilities decreased by $52.8 million as the reduction in assets created opportunities to pay down, release or convert higher cost interest-bearing liabilities. Active management strategies and low market rates reduced the average cost on its interest-bearing liabilities from 0.81% to 0.63% while maintaining its solid relationship-based deposit base. The overall cost of interest-bearing deposits decreased from 0.42% to 0.28% as a result of repricing both time and non-maturity deposits down during the year. Average non-interest bearing deposits increased by $33.6 million and total non interest bearing demand deposits comprise 29% of the average deposit portfolio. This compares favorably to the Company's peers and provides a low-cost funding source in any interest-rate environment. The cost of FHLB advances and other short-term borrowings decreased from 1.30% to 0.88%, and these volumes were also reduced as the Company paid off a $25 million FHLB advance late in 2012 that lowered 2013 average volumes. The average balance on other borrowed funds was relatively flat from 2012 to 2013, but the cost of the borrowings decreased from 4.92% to 4.64% as a swap on one of the Company's trust preferred obligations matured, lowering the effective interest expense on this instrument. Given its liquidity position and current market rates, the Company anticipates that it will continue to reduce interest expense in 2014 through lower CD pricing and the continued payoff of higher-rate wholesale funding.
Provision for Losses on Loans & 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, and underlying collateral values, as well as current and potential risks identified in the portfolio. See
Note 3
of the "Notes to Consolidated Financial Statements" for additional information on asset quality, loan portfolio trends and provision for loan loss trends.
The provision for losses on loans totaled $559,000 for the year ended December 31, 2013, compared to a provision of $4.3 million for the year ended December 31, 2012. Net chargeoffs in 2013 totaled $815,000, down significantly from the $9.1 million reported in 2012. The following table summarizes provision and loan loss allowance activity for the periods indicated.
Trend Analysis of the Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
(Dollars in thousands)
|
Balance Beginning January 1
|
|
$
|
(7,943
|
)
|
|
$
|
(12,690
|
)
|
|
$
|
(12,455
|
)
|
|
$
|
(16,608
|
)
|
|
$
|
(16,433
|
)
|
Charge-Offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
407
|
|
|
2,649
|
|
|
1,366
|
|
|
10,603
|
|
|
5,037
|
|
Commercial real estate loans
|
|
703
|
|
|
4,548
|
|
|
2,594
|
|
|
5,610
|
|
|
3,194
|
|
Commercial construction loans
|
|
—
|
|
|
243
|
|
|
217
|
|
|
1,393
|
|
|
4,982
|
|
Land and land development loans
|
|
186
|
|
|
1,601
|
|
|
3,056
|
|
|
8,622
|
|
|
19,817
|
|
Agriculture loans
|
|
288
|
|
|
32
|
|
|
400
|
|
|
1,055
|
|
|
988
|
|
Multifamily loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
53
|
|
Residential loans
|
|
230
|
|
|
1,256
|
|
|
757
|
|
|
2,019
|
|
|
1,598
|
|
Residential construction loans
|
|
—
|
|
|
—
|
|
|
34
|
|
|
101
|
|
|
241
|
|
Consumer loans
|
|
246
|
|
|
422
|
|
|
624
|
|
|
490
|
|
|
1,001
|
|
Total Charge-offs
|
|
2,060
|
|
|
10,751
|
|
|
9,048
|
|
|
29,909
|
|
|
36,911
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
(738
|
)
|
|
(453
|
)
|
|
(755
|
)
|
|
(628
|
)
|
|
(144
|
)
|
Commercial real estate loans
|
|
(81
|
)
|
|
(466
|
)
|
|
(293
|
)
|
|
(311
|
)
|
|
—
|
|
Commercial construction loans
|
|
(15
|
)
|
|
(10
|
)
|
|
(3
|
)
|
|
(391
|
)
|
|
(1
|
)
|
Land and land development loans
|
|
(82
|
)
|
|
(283
|
)
|
|
(507
|
)
|
|
(175
|
)
|
|
(347
|
)
|
Agriculture loans
|
|
(65
|
)
|
|
(117
|
)
|
|
(103
|
)
|
|
(31
|
)
|
|
—
|
|
Residential loans
|
|
(91
|
)
|
|
(196
|
)
|
|
(157
|
)
|
|
(50
|
)
|
|
(9
|
)
|
Residential construction loans
|
|
(1
|
)
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer loans
|
|
(172
|
)
|
|
(166
|
)
|
|
(176
|
)
|
|
(158
|
)
|
|
(256
|
)
|
Total Recoveries
|
|
(1,245
|
)
|
|
(1,698
|
)
|
|
(1,994
|
)
|
|
(1,744
|
)
|
|
(757
|
)
|
Net Charge-offs
|
|
815
|
|
|
9,053
|
|
|
7,054
|
|
|
28,165
|
|
|
36,154
|
|
Provision for losses on loans
|
|
(559
|
)
|
|
(4,306
|
)
|
|
(7,289
|
)
|
|
(24,012
|
)
|
|
(36,329
|
)
|
Balance at end of period
|
|
$
|
(7,687
|
)
|
|
$
|
(7,943
|
)
|
|
$
|
(12,690
|
)
|
|
$
|
(12,455
|
)
|
|
$
|
(16,608
|
)
|
Ratio of net charge-offs to loans outstanding
|
|
0.16
|
%
|
|
1.71
|
%
|
|
1.37
|
%
|
|
4.89
|
%
|
|
5.38
|
%
|
Allowance — Unfunded Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Beginning January 1
|
|
$
|
(15
|
)
|
|
$
|
(13
|
)
|
|
$
|
(17
|
)
|
|
$
|
(11
|
)
|
|
$
|
(13
|
)
|
Adjustment
|
|
(1
|
)
|
|
(2
|
)
|
|
4
|
|
|
(6
|
)
|
|
2
|
|
Allowance — Unfunded Commitments at end of period
|
|
$
|
(16
|
)
|
|
$
|
(15
|
)
|
|
$
|
(13
|
)
|
|
$
|
(17
|
)
|
|
$
|
(11
|
)
|
The following tables provide additional information on the loan portfolio, non-accrual loans and the loan loss allowance assigned to each loan type for the two most recent years.
Allocation of the Allowance for Loan Losses
and Non-Accrual Loans Detail
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
Percent of
Loans to
Total Loans
|
|
Gross
Loans
|
|
Allowance
|
|
Non-Accrual
Loans
|
Commercial loans
|
|
21.8
|
%
|
|
$
|
113,736
|
|
|
$
|
1,819
|
|
|
$
|
1,431
|
|
Commercial real estate loans
|
|
34.7
|
%
|
|
181,207
|
|
|
2,455
|
|
|
167
|
|
Commercial construction loans
|
|
1.4
|
%
|
|
7,383
|
|
|
177
|
|
|
—
|
|
Land and land development loans
|
|
5.5
|
%
|
|
28,946
|
|
|
1,067
|
|
|
161
|
|
Agriculture loans
|
|
18.5
|
%
|
|
96,584
|
|
|
726
|
|
|
213
|
|
Multifamily loans
|
|
3.5
|
%
|
|
18,205
|
|
|
33
|
|
|
—
|
|
Residential real estate loans
|
|
11.3
|
%
|
|
59,172
|
|
|
1,192
|
|
|
693
|
|
Residential construction loans
|
|
0.5
|
%
|
|
2,531
|
|
|
56
|
|
|
—
|
|
Consumer loans
|
|
1.7
|
%
|
|
9,033
|
|
|
136
|
|
|
3
|
|
Municipal loans
|
|
1.1
|
%
|
|
5,964
|
|
|
26
|
|
|
—
|
|
Totals
|
|
100.0
|
%
|
|
$
|
522,761
|
|
|
$
|
7,687
|
|
|
$
|
2,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
Percent of
Loans to
Total Loans
|
|
Gross
Loans
|
|
Allowance
|
|
Non-Accrual
Loans
|
Commercial loans
|
|
23.0
|
%
|
|
$
|
121,307
|
|
|
$
|
2,156
|
|
|
$
|
4,042
|
|
Commercial real estate loans
|
|
35.4
|
%
|
|
186,844
|
|
|
2,762
|
|
|
1,716
|
|
Commercial construction loans
|
|
0.7
|
%
|
|
3,832
|
|
|
101
|
|
|
—
|
|
Land and land development loans
|
|
5.9
|
%
|
|
31,278
|
|
|
1,197
|
|
|
246
|
|
Agriculture loans
|
|
16.3
|
%
|
|
85,967
|
|
|
228
|
|
|
98
|
|
Multifamily loans
|
|
3.1
|
%
|
|
16,544
|
|
|
51
|
|
|
—
|
|
Residential real estate loans
|
|
11.4
|
%
|
|
60,020
|
|
|
1,144
|
|
|
423
|
|
Residential construction loans
|
|
0.2
|
%
|
|
940
|
|
|
24
|
|
|
—
|
|
Consumer loans
|
|
1.8
|
%
|
|
9,626
|
|
|
202
|
|
|
4
|
|
Municipal loans
|
|
2.3
|
%
|
|
12,267
|
|
|
78
|
|
|
—
|
|
Totals
|
|
100.0
|
%
|
|
$
|
528,625
|
|
|
$
|
7,943
|
|
|
$
|
6,529
|
|
The loan portfolio is segregated into impaired loans for which a specific reserve is calculated by management, and loans for which a reserve is calculated using an allowance model. The following table provides information on each of these categories.
Composition of the Loan Loss Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
(Dollars in thousands)
|
Collective Allocation
|
|
$
|
6,181
|
|
|
$
|
6,379
|
|
|
$
|
6,439
|
|
|
$
|
8,235
|
|
|
$
|
10,234
|
|
Impaired Allocation
|
|
1,506
|
|
|
1,564
|
|
|
6,251
|
|
|
4,220
|
|
|
6,374
|
|
Allowances for Loan Loss
|
|
$
|
7,687
|
|
|
$
|
7,943
|
|
|
$
|
12,690
|
|
|
$
|
12,455
|
|
|
$
|
16,608
|
|
For impaired loans with a specific reserve, management evaluates each loan and derives the reserve based on such factors as expected collectability, collateral value and guarantor support. For loans with reserves calculated by the model, the model
mathematically derives a base reserve allocation for each loan using probability of default and loss given default rates based on both historical company and regional industry experience. This base reserve allocation is then modified by management considering factors such as the current economic environment, portfolio delinquency trends, collateral valuation trends, quality of underwriting and quality of collection activities. The reserves derived from the model are reviewed and modified by management, then added to the reserve for specifically identified loans to produce the total reserve. Management believes that this methodology provides a reasonable, reliable and verifiable reserve calculation and is in compliance with regulatory and accounting guidance.
Local economic conditions stabilized and the quality of the Company's credit portfolio improved significantly in 2013 as the Company's aggressive resolution efforts paid dividends during the year in significant reductions in problem loans and loss exposure. Still, credit conditions remain uncertain and the Company continues to proactively manage its portfolio and allowance. The allowance ended the year at $7.7 million or 1.47% of total loans, as compared to 1.50% at the end of 2012. At December 31, 2013, the allowance for loan losses totaled 288.1% of non-performing loans (“NPLs”), up from 121.7% at year end 2012, as non-accrual loans declined significantly during the year.
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. The allocation for specifically impaired loans ("ASC 310-10-35") decreased modestly in 2013 as the Company continued to resolve its impaired credits, but at a slower pace than the significant gains made in prior years. 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. 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 of collateral 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.The allocation of the allowance to the non-specific loan pool ("ASC 450-20") also declined modestly from 2012, reflecting stabilized conditions in the rest of the Company's loan portfolio. In calculating the reserve for this pool, management evaluates both regional and loan-specific historical loss trends to develop its base reserve level on a loan-by-loan basis. The regional historical loss trends are based on data from 1992 to the present day and encompass several different economic and credit cycles. Management 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. The 2013 ending allowance reflected still uncertain market conditions, offset by conservative credit underwriting and management practices employed by the Company over the past few years.
General trending information with respect to non-performing loans, non-performing assets, and other key portfolio metrics is as follows (dollars in thousands):
Credit Quality Trending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
|
(In thousands)
|
Loans past due in excess of 90 days and still accruing
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
66
|
|
|
$
|
586
|
|
Non-accrual loans
|
|
2,668
|
|
|
6,529
|
|
|
9,292
|
|
|
11,451
|
|
|
18,468
|
|
Total non-performing loans (“NPLs”)
|
|
2,668
|
|
|
6,529
|
|
|
9,292
|
|
|
11,517
|
|
|
19,054
|
|
OREO
|
|
3,684
|
|
|
4,951
|
|
|
6,650
|
|
|
4,429
|
|
|
11,538
|
|
Total non-performing assets (“NPAs”)
|
|
$
|
6,352
|
|
|
$
|
11,480
|
|
|
$
|
15,942
|
|
|
$
|
15,946
|
|
|
$
|
30,592
|
|
Classified loans (1)
|
|
$
|
23,056
|
|
|
$
|
24,933
|
|
|
$
|
53,207
|
|
|
$
|
54,085
|
|
|
$
|
77,175
|
|
Troubled debt restructured loans (2)
|
|
$
|
10,047
|
|
|
$
|
6,719
|
|
|
$
|
7,236
|
|
|
$
|
5,455
|
|
|
$
|
4,604
|
|
Total allowance related to non-accrual loans
|
|
$
|
84
|
|
|
$
|
536
|
|
|
$
|
676
|
|
|
$
|
1,192
|
|
|
$
|
965
|
|
Interest income recorded on non-accrual loans (3)
|
|
$
|
187
|
|
|
$
|
424
|
|
|
$
|
716
|
|
|
$
|
848
|
|
|
$
|
1,126
|
|
Non-accrual loans as a percentage of net loans receivable
|
|
0.52
|
%
|
|
1.25
|
%
|
|
1.85
|
%
|
|
2.03
|
%
|
|
2.82
|
%
|
Total non-performing loans as a % of net loans receivable
|
|
0.52
|
%
|
|
1.25
|
%
|
|
1.85
|
%
|
|
2.04
|
%
|
|
2.91
|
%
|
Allowance for loan losses (“ALLL”) as a percentage of non-performing loans
|
|
288.1
|
%
|
|
121.7
|
%
|
|
136.6
|
%
|
|
108.1
|
%
|
|
87.2
|
%
|
Total NPAs as a % of total assets
|
|
0.68
|
%
|
|
1.18
|
%
|
|
1.71
|
%
|
|
1.59
|
%
|
|
2.83
|
%
|
Total NPAs as a % of tangible capital + ALLL (“Texas Ratio”)
|
|
6.25
|
%
|
|
9.39
|
%
|
|
21.51
|
%
|
|
22.30
|
%
|
|
32.85
|
%
|
Loan delinquency ratio (30 days and over)
|
|
0.24
|
%
|
|
0.13
|
%
|
|
0.28
|
%
|
|
0.55
|
%
|
|
1.06
|
%
|
_______________________________________
|
|
(1)
|
Classified loan totals are inclusive of non-performing loans and may also include troubled debt restructured loans, depending on the grading of these restructured loans.
|
|
|
(2)
|
Includes accruing restructured loans of $9.2 million and non-accruing restructured loans of $831,000. No other funds are available for disbursement on restructured loans.
|
|
|
(3)
|
Interest income on non-accrual loans based on year-to-date interest totals.
|
The $3.9 million decrease in non-accrual loans from December 31, 2012 to December 31, 2013 reflected ongoing workout efforts by the Company's special assets team. This team continued to migrate properties through the collections process and made steady progress in reducing overall levels of non-accrual loans through multiple management strategies, including borrower workout and individual note sales to local and regional investors. NPAs, which include other real estate owned ("OREO") properties decreased by $5.1 million, as the Company continued to successfully liquidate properties in 2013. These ratios compare favorably to the Company's peer groups, particularly in the northwest. Loan delinquencies (30 days or more past due) were up slightly from year end 2012, but still reflect strong performance in the general loan portfolio.
The following tables provide additional trending and geographical information on the Company’s NPAs:
Nonperforming Asset Trending By Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2013
|
|
September 30
2013
|
|
June 30
2013
|
|
March 31
2013
|
|
December 31
2012
|
|
|
(Dollars in thousands)
|
Commercial
|
|
$
|
1,431
|
|
|
$
|
1,066
|
|
|
$
|
1,417
|
|
|
$
|
1,573
|
|
|
$
|
4,042
|
|
Commercial real estate
|
|
167
|
|
|
261
|
|
|
2,728
|
|
|
2,910
|
|
|
1,716
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Land and land development
|
|
3,845
|
|
|
4,415
|
|
|
4,626
|
|
|
4,852
|
|
|
5,118
|
|
Agriculture
|
|
213
|
|
|
527
|
|
|
276
|
|
|
276
|
|
|
98
|
|
Residential real estate
|
|
693
|
|
|
814
|
|
|
173
|
|
|
186
|
|
|
502
|
|
Residential construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
3
|
|
|
3
|
|
|
91
|
|
|
4
|
|
|
4
|
|
Total NPAs by Categories
|
|
$
|
6,352
|
|
|
$
|
7,086
|
|
|
$
|
9,311
|
|
|
$
|
9,801
|
|
|
$
|
11,480
|
|
All major loan types experienced decreases from the prior year end, reflecting sales and collection activity. Land and land development loans still comprise the greatest proportion of NPA totals, primarily as a result of one large relationship. The majority of NPAs are in the North Idaho/Eastern Washington region, reflecting the Company's higher loan totals in these areas.
The Company has entered into an installment sales agreement to sell its final remaining OREO property over a five-year period. While the contract requires full payment of the balance recorded by the Company, because of the installment sales contract, accounting guidance requires the maintenance of the OREO balance on the Company's books and the establishment of a $539,000 valuation reserve against the balance. The Company anticipates recovery of this reserve over the five-year period.
All NPAs are reported at the Company’s best estimate of net realizable value. The Company has evaluated the borrowers and the collateral underlying these loans and determined the probability of recovery of the loans’ principal balance. Given the volatility in the current market, the Company continues to monitor these assets closely and revalue the collateral on a frequent and periodic basis. This re-evaluation may create the need for additional write-downs or additional loss reserves on these assets.
At December 31, 2013 and 2012, classified loans (loans with risk grades 6, 7 or 8) by loan type are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Classified Loans
|
|
2013
|
|
2012
|
Commercial loans
|
|
$
|
7,520
|
|
|
$
|
7,693
|
|
Commercial real estate loans
|
|
3,659
|
|
|
5,156
|
|
Land and land development loans
|
|
1,041
|
|
|
1,515
|
|
Agriculture loans
|
|
4,038
|
|
|
2,143
|
|
Multifamily loans
|
|
3,751
|
|
|
5,118
|
|
Residential real estate loans
|
|
2,960
|
|
|
3,045
|
|
Consumer loans
|
|
87
|
|
|
262
|
|
Total classified loans
|
|
$
|
23,056
|
|
|
$
|
24,932
|
|
Classified loans are loans for which management believes it may experience some problems in obtaining repayment under the contractual terms of the loan, and are inclusive of the Company’s non-accrual loans. However, categorizing a loan as classified does not necessarily mean that the Company will experience any or significant loss of expected principal or interest.
The Company reduced its classified loans by $1.9 million in 2013. The total balance of classified loans reached a peak of $96.2 million in July 2009, and has been reduced by 76.0% since then, as a result of the workout and disposition efforts of the Company’s special assets team. As a percentage of the Company’s net loans, classified loans reached a peak of 13.9% in November 2009, and have now dropped to 4.5% at the end of 2013.
Classified loan balances were lower in every loan segment except agriculture at the end of 2013. Agriculture loans increased modestly as higher input prices put pressure on several farming operations. The remaining classified loans also generally have
stronger borrowers, healthier collateral positions and/or stronger guarantors than prior classified balances that were heavily dominated by more speculative land and construction loans.
As with NPAs, the geographical distribution of the Company’s classified loans reflects the distribution of the Company’s loan portfolio and the relative recoveries of its various regions, with higher distributions in the “North Idaho/Eastern Washington” region, and decreased levels in southern Idaho.
Local economies and real estate valuations continued to improve in 2013, but at a relatively slow pace. As such, management believes that classified loans, non-performing assets, and credit losses will likely continue to decline in 2014. Given market volatility and future uncertainties, management cannot assure nor guarantee the accuracy of these future forecasts.
Management continues to focus its efforts on managing down the level of non-performing assets, classified loans and delinquencies. It uses a variety of analytical tools and an integrated stress testing program involving both qualitative and quantitative modeling to assess the current and projected state of its credit portfolio. The results of this program are integrated with the Company’s capital and liquidity modeling programs to manage and mitigate future risk in these areas as well.
Other Income
The following table details dollar amount and percentage changes of certain categories of other income for the two years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
% of
|
|
Percent
Change
|
|
2012
|
|
% of
|
|
|
Amount
|
|
Total
|
|
Prev. Yr
|
|
Amount
|
|
Total
|
|
|
(Dollars in thousands)
|
Fees and service charges
|
|
$
|
4,866
|
|
|
46
|
%
|
|
3
|
%
|
|
$
|
4,732
|
|
|
44
|
%
|
Commissions & fees from trust & investment advisory services
|
|
2,344
|
|
|
22
|
%
|
|
49
|
%
|
|
1,568
|
|
|
15
|
%
|
Loan related fee income
|
|
2,312
|
|
|
22
|
%
|
|
(23
|
)%
|
|
2,987
|
|
|
28
|
%
|
Net gain on sale of securities
|
|
301
|
|
|
3
|
%
|
|
(62
|
)%
|
|
794
|
|
|
7
|
%
|
Net gain (loss) on sale of other assets
|
|
1
|
|
|
—
|
%
|
|
(95
|
)%
|
|
19
|
|
|
—
|
%
|
Other-than-temporary credit impairment on investment securities
|
|
(63
|
)
|
|
(1
|
)%
|
|
(82
|
)%
|
|
(357
|
)
|
|
(3
|
)%
|
BOLI income
|
|
324
|
|
|
3
|
%
|
|
(6
|
)%
|
|
345
|
|
|
3
|
%
|
Hedge fair value adjustment
|
|
326
|
|
|
3
|
%
|
|
(200
|
)%
|
|
(326
|
)
|
|
(3
|
)%
|
Unexercised warrant liability fair value adjustment
|
|
(114
|
)
|
|
(1
|
)%
|
|
(163
|
)%
|
|
180
|
|
|
2
|
%
|
Other income
|
|
265
|
|
|
3
|
%
|
|
(66
|
)%
|
|
775
|
|
|
7
|
%
|
Total
|
|
$
|
10,562
|
|
|
100
|
%
|
|
(1
|
)%
|
|
$
|
10,717
|
|
|
100
|
%
|
Total other income was $10.6 million and $10.7 million for the twelve months ended December 31, 2013 and 2012, respectively, as higher trust and investment services income and a positive hedge fair value adjustment were offset by lower mortgage origination fees, securities gains, secured savings contract income and a negative unexercised warrant liability fair value adjustment.
Fees and service charges earned on deposit accounts continued to be the Company’s primary source of other income. Fees and service charges for the twelve month period ended December 31, 2013 totaled $4.9 million versus $4.7 million for the same period last year. Higher debit card and monthly deposit service fees offset a continued reduction in overdraft charges resulting from new federal regulations that came into effect in July 2010 and July 2011. The Company implemented new fee structures in mid-2012, which positively impacted fee levels for the full year in 2013. Fees from trust and investment services totaled $2.3 million in 2013, a 49.5% increase from 2012 as the Company continued to emphasize the development of this business.
Loan related fee income decreased by $675,000 for the twelve months ended December 31, 2013 compared to one year ago as mortgage origination activity declined as a result of higher mortgage rates, particularly in the latter half of the year. Loan servicing income increased moderately, as the loan volume that the Company services continues to increase. The Company anticipates lower mortgage origination activity to continue in 2014, as higher rates have dampened demand for refinances.
The Company recognized $301,000 in gains on the sale of securities, which helped offset moderate additional credit impairments on securities that are classified as other than temporarily impaired ("OTTI"). The two securities classified as OTTI were sold during 2013. The Company also recorded a positive $326,000 fair value adjustment related to a cash flow hedge on one of the Company's trust preferred obligations that matured in 2013. This reversed the negative adjustment in 2012, which resulted from the loss of hedge effectiveness on the instrument. Partially offsetting this positive adjustment was a $114,000 negative fair
value adjustment taken on the Company's unexercised warrant liability. This liability was created by the issuance of three-year warrants for 1,700,000 shares, and on a reverse-split adjusted basis, 170,000 shares, to investors as part of the Company's January 2012 capital raise and must be adjusted to fair value each quarter. As such, there are likely to be fluctuating adjustments in future periods.
Bank-owned life insurance (“BOLI”) income was down slightly from the prior year as BOLI yields declined and the Company did not purchase or liquidate BOLI assets. Other non-interest income totaled $265,000 for 2013, compared to $775,000 for the comparable prior period. The reductions reflect continued decreases in the Company's secured card contract income as this contract terminated in 2013.
The Company continues to pursue efforts to improve future non-interest income. It is particularly focused on expanding revenues from trust, investment and insurance services, where it has strong, experienced staff in place to generate both organic growth and manage potential acquisitions. It also is pursuing expanded card and payment-based revenue sources, but regulatory limitations may limit potential opportunities in these areas.
Operating Expenses
The following table details dollar amount and percentage changes of certain categories of other expense for the two years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Amount
|
|
% of Total
|
|
Percent Change Previous Year
|
|
2012 Amount
|
|
% of Total
|
|
|
(Dollars in thousands)
|
Salaries and employee benefits
|
|
$
|
17,619
|
|
|
52
|
%
|
|
8
|
%
|
|
$
|
16,291
|
|
|
48
|
%
|
Occupancy expense
|
|
4,640
|
|
|
14
|
%
|
|
(6
|
)%
|
|
4,911
|
|
|
15
|
%
|
Technology
|
|
3,718
|
|
|
11
|
%
|
|
4
|
%
|
|
3,583
|
|
|
11
|
%
|
Advertising
|
|
650
|
|
|
2
|
%
|
|
3
|
%
|
|
633
|
|
|
2
|
%
|
Fees and service charges
|
|
359
|
|
|
1
|
%
|
|
(40
|
)%
|
|
597
|
|
|
2
|
%
|
Printing, postage and supplies
|
|
727
|
|
|
2
|
%
|
|
(26
|
)%
|
|
987
|
|
|
3
|
%
|
Legal and accounting
|
|
1,709
|
|
|
5
|
%
|
|
(5
|
)%
|
|
1,796
|
|
|
5
|
%
|
FDIC assessment
|
|
627
|
|
|
2
|
%
|
|
(39
|
)%
|
|
1,024
|
|
|
3
|
%
|
OREO operations(1)
|
|
825
|
|
|
2
|
%
|
|
26
|
%
|
|
653
|
|
|
2
|
%
|
Other expense
|
|
3,209
|
|
|
9
|
%
|
|
8
|
%
|
|
2,958
|
|
|
9
|
%
|
Total
|
|
$
|
34,083
|
|
|
100
|
%
|
|
2
|
%
|
|
$
|
33,433
|
|
|
100
|
%
|
_______________________________________
|
|
(1)
|
Amount includes chargedowns and gains/losses on sale of OREO
|
Operating expense for the twelve months ended December 31, 2013 totaled $34.1 million, an increase of $650,000 over the same period one year ago.
At $17.6 million, compensation and benefits expense increased $1.3 million or 8.2% over 2012. 2013 results were impacted by $765,000 in expense associated with the issuance and immediate vesting of restricted stock for key employees to bring compensation levels to market. Merit increases and additional commission expense associated with the improvement in trust and investment service income comprised the rest of the increase from the prior year. The employee full time equivalent ("FTE") number was stable at 271 compared to 270 in the year before. Although the Company has largely completed its staff restructuring efforts, it continues to evaluate opportunities to improve staff efficiency while positioning itself for balance sheet growth.
Occupancy expenses decreased $271,000 from 2012, reflecting lower depreciation, software and rent expense. The Company continues to review asset and software purchases carefully, re-negotiate contracts, and implement energy and other resource conservation measures in its facilities. Technology expenses increased by $135,000 during the year as one-time expenses associated with implementing new core data- and item-processing contracts offset savings achieved by those systems in 2013. The Company anticipates significant savings in future years as these systems become fully functional and old contracts terminate.
Advertising expenses were up slightly in 2013, reflecting more aggressive marketing efforts in the Company's local markets. Lower collection fees and bank service charges resulted in lower fees and service charges in 2013 and savings associated with the new item-processing contract lowered printing and postage expenses. The Company anticipates further savings in both of these areas in the future.
Legal and accounting fees declined moderately over last year, and are expected to decrease further in future years as the Company has resolved many of its more complex legal and accounting issues over the past few years. The reduction in FDIC assessment expense reflects a lower rate paid by the Bank based on its financial performance and changes in the FDIC assessment formula itself.
OREO expense increased moderately as the Company established a $539,000 valuation adjustment on the installment sale of its last remaining OREO property. The Company anticipates recovery of this allowance over a five-year period and does not anticipate significant additional OREO expense in the near future.
Other expenses increased $251,000 from 2012, largely from increased operating losses associated with debit card and internet banking fraud activity in 2013. In response to increasing national and regional fraud threats, the Company introduced a number of new tools in the latter part of the year to reduce its exposures, and will continue to evaluate and develop additional safeguards in 2014. Other expenses in this category, including insurance, telecommunications, armored car and travel expenses were either flat or down for the year. The Company continues to evaluate opportunities for additional expense reduction in many of the categories included in this line item, and anticipates further reductions in 2014.
Annualized operating expense as a percentage of average assets was 3.63% and 3.49% for 2013 and 2012, respectively. The Company’s efficiency ratio (noninterest expense divided by the sum of net interest income and noninterest income) was 84.6% for 2013, compared to 80.5% in 2012. Both 2013 numbers were impacted by the unusual expenses in compensation, technology and OREO operations noted above. With economic conditions likely to remain challenging in the near future, the Company continues to develop and implement additional efficiency and cost-cutting efforts. Management anticipates that as it completes its current initiatives, the efficiency and expense ratios will improve. Stabilization and improvement in economic conditions in the future should also improve efficiency, as the Company grows its asset base, net interest income rebounds and credit-related costs subside further.
Income Tax Provision
.
The Company reversed its remaining deferred tax asset valuation allowance in 2013, resulting in a tax benefit of $6.1 million for the year. This compared to an $8,000 tax benefit recorded in 2012. The effective tax rates were (108.2%) for 2013 and 0.0% for 2012. The Company held a net deferred tax asset of $21.7 million at December 31, 2013, as compared to a net deferred tax asset of $12.3 million at the end of 2012. The increase in the net deferred tax asset reflects the reversal of the valuation allowance and the impacts of a decrease in the unrealized market value of the Company's investment securities.
At December 31, 2013, Intermountain assessed whether it was more likely than not that it would realize the benefits of its deferred tax asset. It determined that the positive evidence associated with a three-year cumulative positive income, improving national and regional economic conditions, significantly reduced credit and other balance sheet risk, and improving Company performance offset the negative evidence of losses in 2009 and 2010. Intermountain used an estimate of future earnings, future reversals of taxable temporary difference, and tax planning strategies to determine whether it is more likely than not that the benefit of the deferred tax asset would be realized. In estimating the future earnings, management assumed moderately improving economic conditions. As such, its estimates included continued lower credit losses in 2014 and ensuing years as the Company’s loan portfolio continues to turn over. It also assumed: (1) a compressed but stable net interest margin in 2014, with gradual improvement in future years, as the Company is able to convert some of its cash position to higher yielding instruments; (2) stable other income as increased trust and investment income offsets reductions in mortgage origination income; and (3) stable operating expenses as continued cost reduction strategies offset inflationary increases.
At December 31, 2012, Intermountain assessed whether it was more likely than not that it would realize the benefits of its deferred tax asset. Intermountain determined at that time that the negative evidence associated with a three-year cumulative loss for the period ended December 31, 2011, and challenging economic conditions continued to outweigh the positive evidence. Therefore, Intermountain maintained a valuation allowance of $8.5 million against its deferred tax asset at December 31, 2012.
The Company also considered the effects of Internal Revenue Code Section 382 in its analysis of its deferred tax assets and valuation allowance. The Company experienced an ownership change as defined in Section 382, that resulted from the capital raise that occurred in 2012. As a result, the net operating losses are subject to an annual limitation. Based on its analysis, the limitation will only affect the timing of when the net operating losses will be utilized, and the Company believes that it will be able to recover all of its tax benefit from the net operating loss carryforward position in the 20-year carryforward period, even given the Section 382 limitations. As with other future estimates, the Company cannot guarantee these future results, however. The Company analyzes the deferred tax asset on a quarterly basis and may establish a new allowance at some future time depending on actual results and estimates of future profitability.
Financial Position
Assets
. At December 31, 2013, Intermountain’s assets were $939.6 million, down $32.5 million from $972.1 million at December 31, 2012. The decrease from last year represents the use of cash and marketable securities to redeem the CPP preferred stock and to pay down higher cost liabilities, including brokered and higher rate retail CDs.
Fed Funds Sold & Cash Equivalents.
The Bank held $44.9 million in interest-bearing cash equivalents at December 31, 2013, with the bulk of it deposited at the Federal Reserve. This compares to $53.4 million in interest-bearing cash equivalents at December 31, 2012, as funds were deployed to pay down liability balances and redeem the Company's CPP preferred stock in 2013. In 2012 and 2013, excess funds were held at the Federal Reserve as opposed to Fed Funds Sold at a correspondent bank as there was a higher yield on the excess funds at the Federal Reserve.
Non-interest bearing and restricted cash totaled $20.2 million at December 31, 2013, compared to $26.7 million at December 31, 2012. As with interest-bearing cash above, the decrease reflects the use of cash to pay down liabilities.
Investments.
Intermountain’s investment portfolio at December 31, 2013 was $279.9 million, a decrease of $15.1 million from the December 31, 2012 balance of $295.0 million. The decrease was primarily due to the sale of available-for-sale securities to redeem the Company's CPP preferred stock. Securities purchases totaled $124.4 million in 2013, but were offset by sales of $67.5 million, and principal payments on mortgage-backed securities and other adjustments of 58.2 million. The sales generated $301,000 in net pre-tax gains. As of December 31, 2013, the balance of the unrealized loss on investment securities, net of federal income taxes, was $1.2 million, compared to an unrealized gain at December 31, 2012 of $3.5 million. The decrease reflected the negative impact on the value of the portfolio resulting from an approximate one percent increase in market interest rates during 2013.
During 2013, the Company held, but sold two residential MBS that were determined to have other than temporary impairments. At the time of sale, impairment for these two securities totaled $3.5 million, of which $1.9 million, including $63,000 in 2013, had been recorded as credit loss impairment in income and the remainder in other comprehensive income. The Company calculated the credit loss charges against earnings by subtracting the estimated present value of future cash flows on the securities from their amortized cost less the total of previous credit loss impairment at the end of each period.
Given continued challenging market conditions for fixed income securities in 2013, the Company focused on maintaining high credit quality and moderate duration. Opportunities to prudently pick up yield were limited in 2013, and the Company used a modified barbell strategy in which it balanced purchases of longer-term municipal and agency securities with shorter term and floating rate investments. The average duration of the available for sale and the held-to-maturity portfolios was approximately 3.9 years and 4.9 years, respectively on December 31, 2013, compared to 3.6 years and 4.8 years, respectively on December 31, 2012. The average duration differs from the investment’s contractual maturity as average duration takes into account estimated prepayments. Reinvestment rates are moderately higher than a year ago but will likely remain low at least through 2014. However, higher mortgage rates have significantly reduced refinancing activity and prepayment speeds on the Company's mortgage-backed holdings, resulting in slower premium amortization and a resulting increase in yield. Moderately higher reinvestment rates and slower premium amortization should improve investment portfolio performance moderately in 2014.
The following tables display investment securities balances and repricing information for the total portfolio:
Investment Portfolio Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value as of December 31,
|
|
2013 Amount
|
|
Percent Change Previous Year
|
|
2012 Amount
|
|
|
(Dollars in thousands)
|
U.S. treasury securities and obligations of government agencies
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
Corporate bonds
|
|
3,915
|
|
|
—
|
%
|
|
—
|
|
Mortgage-backed securities & collateralized mortgage obligations (“CMOs”)
|
|
170,857
|
|
|
(12.9
|
)%
|
|
196,200
|
|
SBA Pools
|
|
26,827
|
|
|
24.3
|
%
|
|
20,320
|
|
State and municipal bonds
|
|
78,325
|
|
|
(0.2
|
)%
|
|
78,475
|
|
Total
|
|
$
|
279,924
|
|
|
(5.1
|
)%
|
|
$
|
294,995
|
|
Available-for-Sale
|
|
251,638
|
|
|
(10.2
|
)%
|
|
280,169
|
|
Held-to-Maturity
|
|
28,286
|
|
|
90.8
|
%
|
|
14,826
|
|
Total
|
|
$
|
279,924
|
|
|
(5.1
|
)%
|
|
$
|
294,995
|
|
Investments held as of December 31, 2013
Mature as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
One to
Five Years
|
|
Five to
Ten Years
|
|
Over
Ten Years
|
|
Total
|
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
|
(Dollars in thousands)
|
U.S. treasury securities and obligations of government agencies
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
Corporate bonds
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
3,915
|
|
|
1.25
|
%
|
|
—
|
|
|
—
|
%
|
|
3,915
|
|
|
1.25
|
%
|
Mortgage-backed securities & CMOs
|
|
—
|
|
|
—
|
%
|
|
7,369
|
|
|
4.27
|
%
|
|
25,106
|
|
|
2.29
|
%
|
|
138,382
|
|
|
1.99
|
%
|
|
170,857
|
|
|
2.14
|
%
|
SBA Pools
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
10,769
|
|
|
1.87
|
%
|
|
16,058
|
|
|
1.96
|
%
|
|
26,827
|
|
|
1.62
|
%
|
State and municipal bonds (tax — equivalent)
|
|
1,379
|
|
|
6.07
|
%
|
|
4,177
|
|
|
6.37
|
%
|
|
20,632
|
|
|
3.84
|
%
|
|
52,137
|
|
|
4.84
|
%
|
|
78,325
|
|
|
4.68
|
%
|
Total
|
|
$
|
1,379
|
|
|
6.07
|
%
|
|
$
|
11,546
|
|
|
5.03
|
%
|
|
$
|
60,422
|
|
|
2.70
|
%
|
|
$
|
206,577
|
|
|
2.70
|
%
|
|
$
|
279,924
|
|
|
2.82
|
%
|
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 risk-adjusted returns. At December 31, 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. However, unforeseen changes in credit risk or other types of portfolio risk could cause management to change its position and sell individual securities on a case-by-case basis.
See
Note 17
“
Fair Value of Financial Instruments
” in the Company’s Consolidated Financial Statements for more information on the calculation of fair or carrying value for the investment securities.
Loans Receivable.
At December 31, 2013 net loans receivable totaled $514.8 million, down $5.9 million from $520.8 million at December 31, 2012. Growth in agricultural, multi-family and commercial construction loans were offset by decreases in commercial, commercial real estate, land development and municipal loans.
Distribution and Concentration by Loan Type
The following table sets forth the composition of Intermountain’s loan portfolio at the dates indicated. Loan balances exclude deferred loan origination costs and fees and allowances for loan losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
(Dollars in thousands)
|
Commercial loans
|
$
|
113,736
|
|
|
21.8
|
%
|
|
$
|
121,307
|
|
|
23.0
|
%
|
Commercial real estate loans
|
181,207
|
|
|
34.7
|
%
|
|
186,844
|
|
|
35.4
|
%
|
Commercial construction loans
|
7,383
|
|
|
1.4
|
%
|
|
3,832
|
|
|
0.7
|
%
|
Land and land development loans
|
28,946
|
|
|
5.5
|
%
|
|
31,278
|
|
|
5.9
|
%
|
Agriculture loans
|
96,584
|
|
|
18.5
|
%
|
|
85,967
|
|
|
16.3
|
%
|
Multifamily loans
|
18,205
|
|
|
3.5
|
%
|
|
16,544
|
|
|
3.1
|
%
|
Residential real estate loans
|
59,172
|
|
|
11.3
|
%
|
|
60,020
|
|
|
11.3
|
%
|
Residential construction loans
|
2,531
|
|
|
0.5
|
%
|
|
940
|
|
|
0.2
|
%
|
Consumer loans
|
9,033
|
|
|
1.7
|
%
|
|
9,626
|
|
|
1.8
|
%
|
Municipal loans
|
5,964
|
|
|
1.1
|
%
|
|
12,267
|
|
|
2.3
|
%
|
Total loans
|
522,761
|
|
|
100.0
|
%
|
|
528,625
|
|
|
100.0
|
%
|
Allowance for loan losses
|
(7,687
|
)
|
|
|
|
(7,943
|
)
|
|
|
Deferred loan fees, net of direct origination costs
|
(240
|
)
|
|
|
|
86
|
|
|
|
Loans receivable, net
|
$
|
514,834
|
|
|
|
|
$
|
520,768
|
|
|
|
Weighted average interest rate
|
5.14
|
%
|
|
|
|
5.28
|
%
|
|
|
The increases in agricultural, multi-family, and commercial and residential construction loans reflect improved opportunities for loan origination in these areas based on economic conditions, while the decreases in commercial and commercial real estate loans reflect the payoff of several larger participation loans and highly competitive conditions for new originations. The decrease in municipal loans reflects the payoff of one large municipal project.
The current commercial portfolio is diversified by industry with a variety of small business customers that have held up relatively well during the economic downturn and subsequent slow recovery. As challenging economic conditions continue, however, the Company continues to experience some stress in this portfolio. Most of the commercial credits are smaller, however, and Intermountain carries a higher proportion of SBA and USDA guaranteed loans than many of its peers, reducing the overall risk in this portfolio. Commercial customers continue to watch economic conditions very closely, but have recently shown more optimism and stronger borrowing demand. Quality commercial borrowers are highly sought after, however, resulting in keen competition and competitive pricing for these customers.
The following table provides additional information on the Company’s commercial real estate portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate by Property Types
|
|
December 31, 2013
|
|
December 31, 2012
|
|
|
(Dollars in thousands)
|
Condominiums
|
|
$
|
4,225
|
|
|
2.1
|
%
|
|
$
|
2,976
|
|
|
1.5
|
%
|
Office
|
|
41,485
|
|
|
20.8
|
%
|
|
47,118
|
|
|
23.2
|
%
|
Industrial warehouse
|
|
30,899
|
|
|
15.5
|
%
|
|
29,727
|
|
|
14.6
|
%
|
Storage units
|
|
5,542
|
|
|
2.8
|
%
|
|
6,500
|
|
|
3.1
|
%
|
Retail
|
|
28,587
|
|
|
14.3
|
%
|
|
20,485
|
|
|
10.1
|
%
|
Restaurants
|
|
3,987
|
|
|
2.0
|
%
|
|
4,093
|
|
|
2.0
|
%
|
Land and land development
|
|
3,797
|
|
|
1.9
|
%
|
|
2,860
|
|
|
1.4
|
%
|
Other commercial
|
|
8,896
|
|
|
4.5
|
%
|
|
11,998
|
|
|
5.9
|
%
|
Health care
|
|
26,021
|
|
|
13.0
|
%
|
|
24,418
|
|
|
12.0
|
%
|
Religious facilities
|
|
1,433
|
|
|
0.7
|
%
|
|
1,575
|
|
|
0.8
|
%
|
Gas stations & convenience stores
|
|
4,169
|
|
|
2.1
|
%
|
|
4,874
|
|
|
2.4
|
%
|
Auto R/E (car lot, wash, repair)
|
|
2,249
|
|
|
1.1
|
%
|
|
2,325
|
|
|
1.1
|
%
|
Hotel/Motel
|
|
437
|
|
|
0.2
|
%
|
|
527
|
|
|
0.3
|
%
|
Miscellaneous
|
|
19,480
|
|
|
9.9
|
%
|
|
27,368
|
|
|
13.5
|
%
|
Total Commercial Real Estate loans
|
|
181,207
|
|
|
90.9
|
%
|
|
186,844
|
|
|
91.9
|
%
|
Multifamily
|
|
18,205
|
|
|
9.1
|
%
|
|
16,544
|
|
|
8.1
|
%
|
Total Commercial Real Estate and Multifamily Loans
|
|
$
|
199,412
|
|
|
100.0
|
%
|
|
$
|
203,388
|
|
|
100.0
|
%
|
Management has focused over the past several years on shifting the mix of the loan portfolio away from a relatively high concentration in residential construction, acquisition and development loans to a more balanced mix of commercial, agriculture, commercial real estate, and residential real estate loans. It has done this through a combination of more conservative underwriting practices on construction and land development lending, limited marketing, and aggressive resolution and disposal of loans in these categories. After the aggressive reduction efforts of the last few years, the land development and construction loan components pose much lower concentration risk for the total loan portfolio, and may provide an opportunity for limited and prudent growth. The borrowers that remain in these categories are much stronger, real estate valuations are lower, and underwriting and structuring is much tighter.
The commercial real estate portfolio is also well-diversified and consists of a mix of owner and non-owner occupied properties, with relatively few true non-owner-occupied investment properties. The Company has lower concentrations in this segment than most of its peers, and has underwritten these properties cautiously. In particular, it has limited exposure to speculative investment office buildings and retail strip malls, two of the higher risk segments in this category. While tough economic conditions continue to heighten the risk in this portfolio, it continues to perform well with relatively low delinquency and loss rates. The Company believes it has some opportunity to increase prudent lending in this area, but again competition is keen for these borrowers. In particular, the Company has remained cautious about offering long-term fixed rate loans at relatively low rates in this interest-rate environment.
Most agricultural markets continue to perform relatively well, although 2013 was not as strong a year for farmers as the few prior years. As production costs increase, borrowing activity may increase in this sector. The combination of the potential for reductions in commodity prices, increasing input costs, and water concerns may increase future risk in this sector, and the Company is conducting additional evaluation and stress-testing to plan for and mitigate this risk.
The residential and consumer portfolios consist primarily of first and second mortgage loans, unsecured loans to individuals, and auto, boat and RV loans. These portfolios have generally performed well with limited delinquencies and defaults, although the Company has seen some pressure on its home equity portfolio. While these loans have generally been underwritten with relatively conservative loan-to-values and strong debt-to-income ratios, the continued sluggish economy and lower home prices have resulted in some losses in this loan type.
Participation loans where Intermountain purchased part of the loan and was not the lead bank totaled $12.2 million at December 31, 2013. $3.8 million of the total is a condominium project in Boise that is currently classified, but is being managed very closely, and for which no loss is expected. The remaining loans are all within the Company’s footprint and management believes they do not present significant risk at this time.
Economic conditions and property values have stabilized in most of the Company's markets, but remain susceptible to changing global and national economic uncertainties. Management believes that its underwriting standards and aggressive identification and management of credit problems are having a positive impact on its credit portfolios. Losses are projected to continue at relatively low levels in 2014.
Geographic Distribution
As of
December 31, 2013
, the Company’s loan portfolio by loan type and geographical market area was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Idaho —
Eastern
|
|
Magic
Valley
|
|
Greater
Boise
|
|
E. Oregon,
SW Idaho,
excluding
|
|
|
|
|
|
% of Loan
type to
total
|
Loan Portfolio by Location
|
Washington
|
|
Idaho
|
|
Area
|
|
Boise
|
|
Other
|
|
Total
|
|
loans
|
|
(Dollars in thousands)
|
Commercial loans
|
$
|
80,582
|
|
|
$
|
4,602
|
|
|
$
|
9,745
|
|
|
$
|
18,013
|
|
|
$
|
794
|
|
|
$
|
113,736
|
|
|
21.8
|
%
|
Commercial real estate loans
|
128,248
|
|
|
9,862
|
|
|
9,299
|
|
|
15,465
|
|
|
18,333
|
|
|
181,207
|
|
|
34.7
|
%
|
Commercial construction loans
|
7,028
|
|
|
—
|
|
|
317
|
|
|
—
|
|
|
38
|
|
|
7,383
|
|
|
1.4
|
%
|
Land and land development loans
|
20,397
|
|
|
1,378
|
|
|
5,344
|
|
|
1,203
|
|
|
624
|
|
|
28,946
|
|
|
5.5
|
%
|
Agriculture loans
|
2,003
|
|
|
3,440
|
|
|
26,143
|
|
|
61,034
|
|
|
3,964
|
|
|
96,584
|
|
|
18.5
|
%
|
Multifamily loans
|
12,431
|
|
|
149
|
|
|
4,420
|
|
|
30
|
|
|
1,175
|
|
|
18,205
|
|
|
3.5
|
%
|
Residential real estate loans
|
42,141
|
|
|
3,365
|
|
|
4,244
|
|
|
7,046
|
|
|
2,376
|
|
|
59,172
|
|
|
11.3
|
%
|
Residential construction loans
|
2,337
|
|
|
—
|
|
|
77
|
|
|
117
|
|
|
—
|
|
|
2,531
|
|
|
0.5
|
%
|
Consumer loans
|
5,400
|
|
|
1,149
|
|
|
730
|
|
|
1,506
|
|
|
248
|
|
|
9,033
|
|
|
1.7
|
%
|
Municipal loans
|
4,627
|
|
|
1,337
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,964
|
|
|
1.1
|
%
|
Total
|
$
|
305,194
|
|
|
$
|
25,282
|
|
|
$
|
60,319
|
|
|
$
|
104,414
|
|
|
$
|
27,552
|
|
|
$
|
522,761
|
|
|
100.0
|
%
|
Percent of total loans in geographic area
|
58.4
|
%
|
|
4.8
|
%
|
|
11.5
|
%
|
|
20.0
|
%
|
|
5.3
|
%
|
|
100.0
|
%
|
|
|
Percent of total loans where real estate is the primary collateral
|
70.1
|
%
|
|
62.7
|
%
|
|
52.1
|
%
|
|
39.6
|
%
|
|
85.8
|
%
|
|
62.4
|
%
|
|
|
As of
December 31, 2012
, the Company’s loan portfolio by loan type and geographical market area was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Idaho —
Eastern
|
|
Magic
Valley
|
|
Greater
Boise
|
|
E. Oregon,
SW Idaho,
excluding
|
|
|
|
|
|
% of Loan
type to
total
|
Loan Portfolio by Location
|
Washington
|
|
Idaho
|
|
Area
|
|
Boise
|
|
Other
|
|
Total
|
|
loans
|
|
(Dollars in thousands)
|
Commercial loans
|
$
|
87,387
|
|
|
$
|
4,606
|
|
|
$
|
9,252
|
|
|
$
|
13,852
|
|
|
$
|
6,210
|
|
|
$
|
121,307
|
|
|
23.0
|
%
|
Commercial real estate loans
|
123,451
|
|
|
11,330
|
|
|
10,651
|
|
|
18,895
|
|
|
22,517
|
|
|
186,844
|
|
|
35.4
|
%
|
Commercial construction loans
|
503
|
|
|
—
|
|
|
2,819
|
|
|
—
|
|
|
510
|
|
|
3,832
|
|
|
0.7
|
%
|
Land and land development loans
|
20,710
|
|
|
1,748
|
|
|
6,298
|
|
|
1,500
|
|
|
1,022
|
|
|
31,278
|
|
|
5.9
|
%
|
Agriculture loans
|
1,670
|
|
|
3,269
|
|
|
16,886
|
|
|
60,479
|
|
|
3,663
|
|
|
85,967
|
|
|
16.3
|
%
|
Multifamily loans
|
10,396
|
|
|
151
|
|
|
5,947
|
|
|
30
|
|
|
20
|
|
|
16,544
|
|
|
3.1
|
%
|
Residential real estate loans
|
41,624
|
|
|
3,734
|
|
|
3,808
|
|
|
7,083
|
|
|
3,771
|
|
|
60,020
|
|
|
11.3
|
%
|
Residential construction loans
|
387
|
|
|
—
|
|
|
240
|
|
|
313
|
|
|
—
|
|
|
940
|
|
|
0.2
|
%
|
Consumer loans
|
5,716
|
|
|
1,026
|
|
|
517
|
|
|
2,053
|
|
|
314
|
|
|
9,626
|
|
|
1.8
|
%
|
Municipal loans
|
10,880
|
|
|
1,387
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,267
|
|
|
2.3
|
%
|
Total
|
$
|
302,724
|
|
|
$
|
27,251
|
|
|
$
|
56,418
|
|
|
$
|
104,205
|
|
|
$
|
38,027
|
|
|
$
|
528,625
|
|
|
100.0
|
%
|
Percent of total loans in geographic area
|
57.3
|
%
|
|
5.2
|
%
|
|
10.7
|
%
|
|
19.7
|
%
|
|
7.1
|
%
|
|
100.0
|
%
|
|
|
Percent of total loans where real estate is the primary collateral
|
65.5
|
%
|
|
67.4
|
%
|
|
54.5
|
%
|
|
43.3
|
%
|
|
74.8
|
%
|
|
60.7
|
%
|
|
|
As indicated, 58.4% of the Company’s loans are in northern Idaho and eastern Washington, with the next highest percentage in the rural markets of southwest Idaho outside of Boise. Economic trends and real estate valuations are showing consistent improvement in all the Company's markets now, after a four-year decline. The southwest Idaho and Magic Valley markets are largely agricultural areas which have not seen levels of price appreciation or depreciation as steep as other areas over the last few years. The “Other” category noted above largely represents loans made to local borrowers where the collateral is located outside the Company’s communities. The mix in this category is relatively diverse, with the highest proportions in Oregon, Washington, California, Nevada and Arizona, but no single state comprising more than 2.8% of the total loan portfolio.
Participation loans where Intermountain purchased part of the loan and was not the lead bank totaled $12.2 million at December 31, 2013. $3.8 million of the total is a condominium project in Boise that is currently classified, but is being managed very closely, and for which no loss is expected. The remaining loans are all within the Company’s footprint and management believes they do not present significant risk at this time.
Classification of Loans and Problem Loans
The Bank is required under applicable law and regulations to review its loans on a regular basis and to classify them as “satisfactory,” “special mention,” “substandard,” “doubtful” or “loss.” A loan which possesses no apparent weakness or deficiency is designated “satisfactory.” A loan which possesses weaknesses or deficiencies deserving close attention is designated as “special mention.” A loan is generally classified as “substandard” if it possesses a well-defined weakness and the Bank will likely sustain some loss if the weaknesses or deficiencies are not corrected. A loan is classified as “doubtful” if a probable loss of principal and/or interest exists but the amount of the loss, if any, is subject to the outcome of future events which are undeterminable at the time of classification. It is a transitional category, and once the amount of the loss is determined, this amount is charged off and the remaining balance of the loan would most likely be classified as “substandard.” The typical duration of a loan in the “doubtful” category would be one to two months. If a loan is classified as “loss,” the Bank either establishes a specific valuation allowance equal to the amount classified as loss or charges off such amount.
As of December 31, 2013, the risk grades range from cash equivalent secured loans (Risk Grade “1”) to “loss” (Risk Grade “8”). Risk Grades “3”, “5”, “6”, “7” and “8” closely reflect the FDIC’s definitions for “satisfactory,” “special mention,”
“substandard”, “doubtful” and “loss”, respectively. Risk Grade “4” is an internally designated “watch” category. At December 31, 2013, the Company had $1.9 million in the special mention, $23.1 million in the substandard and $0 in the doubtful and loss loan categories. At December 31, 2012, the Company had $0 million in the special mention, $24.9 million in the substandard and $0 in the doubtful and loss loan categories.
Overall, classified loans (loans with risk grades 6, 7, or 8) decreased from $24.9 million at the end of 2012 to $23.1 million at the end of 2013. The decrease reflected additional workout and problem loan reduction efforts in 2013.
Non-accrual loans are those loans that have become delinquent for more than 90 days (unless well-secured and in the process of collection). Placement of loans on non-accrual status does not necessarily mean that the outstanding loan principal will not be collected, but rather that timely collection of principal and interest is in question. Total non-accrual loans decreased from $6.5 million at December 31, 2012 to $2.7 million at the end of 2013. When a loan is placed on non-accrual status, interest accrued but not received is reversed. The amount of interest income which was reversed from income in fiscal years 2013 and 2012 on non-accrual and other problem loans was approximately $187,000 and $440,000, respectively. A non-accrual loan may be restored to accrual status if it is brought current and has performed in accordance with contractual terms for a reasonable period of time, and the collectability of the total contractual principal and interest is no longer in doubt.
Troubled debt restructure loans ("TDRs") are those loans that have been modified in response to distressed borrower conditions. TDRs totaled $10.1 million at year end 2013 versus $6.7 million at the end of the prior year. The increase reflects additional modifications to loans made in 2013 to improve chances of collection on these loans, without corresponding payoffs of prior TDR loans. Under accounting guidance, once a loan is identified as a TDR until it payoffs, regardless of borrower condition or performance.
Loan Maturity and Repricing Information
The following table details loan maturity and repricing information for fixed and variable rate loans.
Maturity and Repricing for the Bank’s
Loan Portfolio at December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Repricing
|
|
Fixed Rate
|
|
Variable Rate
|
|
Total Loans
|
|
|
(Dollars in thousands)
|
0-90 days
|
|
$
|
13,360
|
|
|
$
|
124,773
|
|
|
$
|
138,133
|
|
91-365 days
|
|
29,566
|
|
|
26,711
|
|
|
56,277
|
|
1 year-5 years
|
|
85,242
|
|
|
56,309
|
|
|
141,551
|
|
5 years or more
|
|
161,343
|
|
|
25,457
|
|
|
186,800
|
|
Total
|
|
$
|
289,511
|
|
|
$
|
233,250
|
|
|
$
|
522,761
|
|
The Company has traditionally maintained a high level of variable rate loans as part of its overall balance sheet management approach. The significant unanticipated decrease in market rates experienced during the economic downturn and financial turmoil of the past several years impacted these loans negatively and created additional pressure on the Company’s asset yields and net interest margin. The imposition of floors had offset some of this negative impact, although these have been under pressure as well, given strong competition for quality borrowers. When rates rise, however, these loans will adjust upward and improve interest income.
The following table sets forth the composition of Intermountain’s loan originations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
% Change
|
|
(Dollars in thousands)
|
Commercial loans
|
|
$
|
40,767
|
|
|
$
|
61,664
|
|
|
(33.9
|
)%
|
Commercial real estate loans
|
|
34,459
|
|
|
34,895
|
|
|
(1.2
|
)%
|
Commercial construction loans
|
|
12,698
|
|
|
3,149
|
|
|
303.2
|
%
|
Land and land development loans
|
|
6,860
|
|
|
4,711
|
|
|
45.6
|
%
|
Agriculture loans
|
|
38,945
|
|
|
49,803
|
|
|
(21.8
|
)%
|
Multifamily loans
|
|
11,700
|
|
|
1,361
|
|
|
759.7
|
%
|
Residential real estate loans
|
|
66,157
|
|
|
91,026
|
|
|
(27.3
|
)%
|
Residential construction loans
|
|
4,203
|
|
|
2,230
|
|
|
88.5
|
%
|
Consumer
|
|
3,097
|
|
|
2,313
|
|
|
33.9
|
%
|
Municipal
|
|
763
|
|
|
3,846
|
|
|
(80.2
|
)%
|
Total loans originated (1)
|
|
$
|
219,649
|
|
|
$
|
254,998
|
|
|
(13.9
|
)%
|
|
|
|
|
|
|
|
Renewed Loans (1)
|
|
$
|
182,230
|
|
|
$
|
189,548
|
|
|
|
Overall, 2013 origination activity continues to reflect the muted borrowing demand from virtually all sectors in the current environment, as commercial borrowers remain cautious and agricultural customers experience strong cash flows, reducing their borrowing needs. Activity is strongest in the real estate sectors, as record low interest rates spur purchase activity and encourage stronger borrowers to expand. Overall origination activity is likely to improve from earlier totals as the economy rebounds, but will still be under pressure from slow employment growth and aggressive industry competition for strong borrowers. Residential real estate activity has also slowed, as higher mortgage rates have significantly reduced refinance activity. The Company has chosen not to extend duration on low-priced commercial real estate loans, purchase loan pools or pursue participation loans in order to maintain a more conservative credit and interest-rate risk position. Management believes that those banks that have low-cost funding structures and pursue loan growth through strong relationship networks will perform relatively better in the long run.
Office Properties and Equipment.
Office properties and equipment decreased $417,000 to $35.0 million at December 31, 2013 from the prior year end as the reduction from depreciation continues to exceed new assets purchased.
Other Real Estate Owned.
Other real estate owned decreased by $1.3 million to $3.7 million at December 31, 2013. The
Company sold seven properties totaling $1.1 million in 2013, had net valuation adjustments of $34,000, added a valuation reserve on the installment sale of one property for $539,000, and added three properties totaling $413,000. In addition, the Company has entered into an installment sales agreement to sell its final remaining OREO property over a five-year period. While the contract requires full payment of the balance recorded by the Company, because of the installment sales contract, accounting guidance requires the maintenance of the OREO balance on the Company's books and the establishment of a $539,000 valuation reserve against the balance. The Company anticipates recovery of this reserve over the five-year period.
Overall, the Company’s current OREO portfolio is lower than most of its peer group and management anticipates additional reductions in the coming year. The following table details OREO activity during 2013 and 2012.
Other Real Estate Owned Activity
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
OREO, gross:
|
(Dollars in thousands)
|
Balance, beginning of period, January 1
|
$
|
4,951
|
|
|
$
|
6,650
|
|
Additions to OREO
|
413
|
|
|
1,864
|
|
Proceeds from sale of OREO
|
(1,107
|
)
|
|
(3,391
|
)
|
Valuation Adjustments in the period(1)
|
(34
|
)
|
|
(172
|
)
|
Balance, end of period, December 31
|
$
|
4,223
|
|
|
$
|
4,951
|
|
Allowance, OREO:
|
|
|
|
Balance, beginning of period, January 1
|
—
|
|
|
—
|
|
Provision
|
539
|
|
|
—
|
|
Balance, end of period, December 31
|
539
|
|
|
—
|
|
OREO, net:
|
3,684
|
|
|
4,951
|
|
_____________________________
|
|
(1)
|
Amount includes chargedowns and gains/losses on sale of OREO
|
Deferred Tax Asset.
At December 31, 2013, the Company’s net deferred tax asset totaled $21.7 million compared to $12.3 million at December 31, 2012. The increase reflects the reversal of the valuation allowance discussed in the "Income Tax Provision" section above and the impacts of a decrease in the unrealized market value of the Company's investment securities.
BOLI and Other Assets.
Bank-owned life insurance (“BOLI”) and other assets decreased to $19.4 million at December, 2013 from $23.5 million at year end, 2012. The decrease primarily reflected lower prepaid expenses, as in 2013, the FDIC returned the balance of the prepaid assessments the Company had previously remitted.
Deposits
. Total deposits decreased $42.9 million to $706.1 million at December 31, 2013 from $748.9 million at December 31, 2012. The following table sets forth the composition of Intermountain’s deposits at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
Amount
|
|
% of total deposits
|
|
Amount
|
|
% of total deposits
|
|
(Dollars in thousands)
|
Non-interest bearing demand accounts
|
$
|
235,793
|
|
|
33.4
|
%
|
|
$
|
254,979
|
|
|
34.0
|
%
|
Interest bearing demand accounts 0.0% to 0.48%
|
102,629
|
|
|
14.6
|
%
|
|
99,623
|
|
|
13.3
|
%
|
Money market 0.0% to 2.0%
|
215,458
|
|
|
30.5
|
%
|
|
213,155
|
|
|
28.5
|
%
|
Savings and IRA 0.0% to 4.91%
|
68,555
|
|
|
9.7
|
%
|
|
75,788
|
|
|
10.1
|
%
|
Certificate of deposit accounts (CDs)
|
34,178
|
|
|
4.8
|
%
|
|
43,535
|
|
|
5.8
|
%
|
Jumbo CDs
|
49,437
|
|
|
7.0
|
%
|
|
56,228
|
|
|
7.5
|
%
|
Brokered CDs
|
—
|
|
|
—
|
%
|
|
5,200
|
|
|
0.7
|
%
|
CDARS CDs to local customers
|
—
|
|
|
—
|
%
|
|
426
|
|
|
0.1
|
%
|
Total deposits
|
$
|
706,050
|
|
|
100.0
|
%
|
|
$
|
748,934
|
|
|
100.0
|
%
|
Weighted average interest rate on certificates of deposit
|
|
|
1.19
|
%
|
|
|
|
1.28
|
%
|
Core Deposits as a percentage of total deposits (1)
|
|
|
93.0
|
%
|
|
|
|
91.7
|
%
|
Deposits generated from the Company’s market area as a % of total deposits
|
|
|
100.0
|
%
|
|
|
|
99.3
|
%
|
_____________________________
|
|
(1)
|
Core deposits consist of non-interest bearing checking, money market checking, savings accounts, and certificate of deposit accounts of less than $100,000 (excluding public deposits).
|
The decrease in non-interest bearing demand deposits from prior year end reflects some unusual municipal and business deposit activity related to uncertainty over federal government tax and spending policies at the end of 2012 that was not repeated in 2013, and the movement of some municipal funds into repurchase agreements in 2013 as the FDIC ended its unlimited guarantee on non-interest bearing balances. Interest-bearing demand and money market account balances were up moderately, while the decrease in savings account balances from last year reflects the termination of a third party contract under which the Company
held savings balances to secure credit cards. The Company continues to redeem higher cost CD funding and has no brokered or other wholesale CDs outstanding. Non-interest bearing demand deposits comprised 33.4% of the deposit portfolio and overall, low-cost transaction deposits represented 78.4% of the deposit portfolio at December 31, 2013.
The Company’s strong local, core funding base, high percentage of checking, money market and savings balances and careful management of its brokered CD funding provide lower-cost, more reliable funding to the Company than many of its peers and add to the liquidity strength of the Bank. Maintaining the local funding base at a reasonable cost remains a critical priority for the Company’s management and production staff.
Deposits by location are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
% of total deposits
|
|
December 31, 2012
|
|
% of total deposits
|
|
Deposits by Location
|
North Idaho — Eastern Washington
|
$
|
359,655
|
|
|
51.1
|
%
|
|
$
|
372,772
|
|
|
49.9
|
%
|
|
Magic Valley Idaho
|
65,634
|
|
|
9.3
|
%
|
|
72,254
|
|
|
9.6
|
%
|
|
Greater Boise Area
|
70,182
|
|
|
9.9
|
%
|
|
67,585
|
|
|
9.0
|
%
|
|
Southwest Idaho — Oregon, excluding Boise
|
167,496
|
|
|
23.7
|
%
|
|
172,509
|
|
|
23.0
|
%
|
|
Administration, Secured Savings
|
43,083
|
|
|
6.0
|
%
|
|
63,814
|
|
|
8.5
|
%
|
|
Total
|
$
|
706,050
|
|
|
100.0
|
%
|
|
$
|
748,934
|
|
|
100.0
|
%
|
|
The Company attempts to, and has been successful in balancing loan and deposit balances in each of the market areas it serves. Northern Idaho and eastern Washington deposits currently exceed those in the Company’s southern Idaho and eastern Oregon markets, reflecting the longer presence it has had in these markets. The Company’s deposit market share has grown significantly over the past ten years, and it now ranks third in overall market share in its core markets.
The following table details re-pricing information for the Bank’s time deposits with minimum balance of $100,000 at December 31, 2013 (in thousands):
|
|
|
|
|
Maturities/Repricing
|
|
Less than three months
|
$
|
5,700
|
|
Three to six months
|
6,447
|
|
Six to twelve months
|
11,594
|
|
Over twelve months
|
29,903
|
|
|
$
|
53,644
|
|
By repricing its portfolio, the Company succeeded in lowering the 2013 interest cost on its deposits by 0.14%. This resulted in overall liability interest costs to the Bank being 0.25% below the average of its peer group as of December 31, 2013 (Source: FFIEC Uniform Bank Performance Report ("UBPR") for December 31, 2013). Given the current compressed market rate environment, management believes that this improvement and its overall competitive standing positions the Company comparatively well for future periods.
Borrowings
. Deposit accounts are Intermountain’s primary source of funds. Intermountain also relies upon advances from the Federal Home Loan Bank of Seattle ("FHLB"), repurchase agreements and other borrowings to supplement its funding, reduce its overall cost of funds, and to meet deposit withdrawal requirements. These borrowings totaled $127.3 million and $97.3 million at December 31, 2013 and December 31, 2012, respectively. The increase from 2012 primarily reflects increased repurchase balances from local customers who shifted money into these accounts when the FDIC ended its unlimited guarantee of non-interest bearing balances at the end of 2012. In addition, the Company secured a loan with a remaining balance of $6.9 million at year end 2013 as part of its repurchase of the $27 million in CPP preferred stock. The loan carries an interest rate of 90-day LIBOR + 4.0% (4.24% at year end), matures November 19, 2018, and requires monthly principal payments of $59,000 plus accrued interest.
As part of the Company’s funds management and liquidity plan, the Bank has arranged to have short-term and long-term borrowing facilities available. The short-term and overnight facilities are federal funds purchasing lines as reciprocal arrangements to the federal funds selling agreements in place with various correspondent banks. At December 31, 2013, the Bank had overnight unsecured credit lines of $45.0 million available. For additional long and short-term funding needs, the Bank has credit available from the Federal Home Loan Bank of Seattle (“FHLB”), limited to a percentage of its total regulatory assets and subject to collateralization requirements and a blanket pledge agreement. It also has a “Borrower in Custody” line set up with the Federal Reserve Bank, subject to collateralization requirements.
At December 31, 2013, the Bank had a $4.0 million FHLB advance at 3.11% that matures in September 2014 and the ability to borrow an additional $125.9 million from the FHLB.
The Bank has the ability to borrow up to $25.0 million on a short term basis from the Federal Reserve Bank under the Borrower in Custody program, utilizing commercial loans as collateral. At December 31, 2013, the Bank had no borrowings outstanding under this line.
Securities sold under agreements to repurchase, which are classified as other secured borrowings, generally are short-term agreements. These agreements are treated as financing transactions and the obligations to repurchase securities sold are reflected as a liability in the consolidated financial statements. The dollar amount of securities underlying the agreements remains in the applicable asset account. All of the Company's current repurchase agreements are with municipal customers in its local markets and mature on a daily basis. These agreements had a weighted average interest rate of 0.16% and 0.32% at December 31, 2013 and 2012, respectively. The average balances of securities sold subject to repurchase agreements were $73.6 million and $63.4 million during the years ended December 31, 2013 and 2012, respectively. The maximum amount outstanding at any month end during these same periods was $99.9 million and $77.5 million, respectively. At December 31, 2013 and 2012, the Company pledged as collateral certain investment securities with aggregate amortized costs of $102.1 million and $76.5 million, respectively. These investment securities had market values of $102.2 million and $76.9 million, at December 31, 2013 and 2012, respectively.
In January 2003 the, Company issued $8.0 million of Trust Preferred securities through its subsidiary, Intermountain Statutory Trust I. Approximately $7.0 million was subsequently transferred to the capital account of Panhandle State Bank for capitalizing the Ontario branch acquisition. The debt associated with these securities bears interest on a variable basis tied to the 90-day LIBOR index plus 3.25% with interest payable quarterly. The debt was callable by the Company in March 2008, continues to be callable, and matures in March 2033.
In March 2004, the Company issued $8.0 million of additional Trust Preferred securities through a second subsidiary, Intermountain Statutory Trust II. This debt was callable by the Company starting in April 2009, bears interest on a variable basis tied to the 90-day LIBOR index plus 2.8%, and matures in April 2034. In July of 2008, the Company entered into a cash flow swap transaction with Pacific Coast Bankers Bank, by which the Company effectively paid a fixed rate on these securities of 7.38% until maturity in October 2013. Funds received from this borrowing were used to support planned expansion activities during 2004, including the Snake River Bancorp acquisition.
Interest Rate Risk
The results of operations for financial institutions may be materially and adversely affected by changes in prevailing economic conditions, including rapid changes in interest rates, declines in real estate market values and the monetary and fiscal policies of the federal government. Like all financial institutions, Intermountain’s net interest income and its NPV (the net present value of financial assets, liabilities and off-balance sheet contracts), are subject to fluctuations in interest rates. Intermountain utilizes various tools to assess and manage interest rate risk, including an internal income simulation model that seeks to estimate the impact of various rate changes on the net interest income and net income of the bank. This model is validated by comparing results against various third-party estimations. Currently, the model and third-party estimates indicate that Intermountain’s interest rate profile is neutral to slightly asset-sensitive. An asset-sensitive bank generally sees improved net interest income and net income in a rising rate environment, as its assets reprice more rapidly and/or to a greater degree than its liabilities. The opposite is true in a falling interest rate environment. When market rates fall, an asset-sensitive bank tends to see declining income. The Company has become less asset-sensitive over the preceding year, as many of its variable-rate loans have hit contractual floors and the duration of its liability portfolio has shortened.
The current highly unusual market and rate conditions have heightened interest rate risk for the Company and most other financial institutions. Continued very low market rates, keen competition for quality borrowers, and high demand for fixed income securities is negatively impacting net interest income and could continue to do so for a relatively long period of time. In addition, market values on the Company's available-for-sale securities portfolio are susceptible to potentially large negative impacts in the future should market rates increase, as they did in the second and fourth quarters of 2013.
To minimize the long-term impact of fluctuating interest rates on net interest income, Intermountain promotes a loan pricing policy of utilizing variable interest rate structures that associates loan rates to Intermountain’s internal cost of funds and to the nationally recognized prime or London Interbank Offered (“LIBOR”) lending rates. While this strategy has had adverse impacts in the current unusually low rate environment, the approach historically has contributed to a relatively consistent interest rate spread over the long-term and reduces pressure from borrowers to renegotiate loan terms during periods of falling interest rates. Intermountain currently maintains over fifty percent of its loan portfolio in variable interest rate assets.
Additionally, the extent to which borrowers prepay loans is affected by prevailing interest rates. When interest rates increase, borrowers are less likely to prepay loans. When interest rates decrease, borrowers are generally more likely to prepay loans. Prepayment speeds have been unusually high over the past few years and particularly in 2012 and early 2013, as borrowers refinanced into lower rates, paid down debt to improve their financial position, or liquidated assets as part of problem loan work-out strategies. Prepayments may affect the levels of loans retained in an institution’s portfolio, as well as its net interest income. Prepayments on loans and mortgage-backed securities are likely to slow from the rapid pace of the past couple years as market rates increased about one percent in 2013.
On the liability side, Intermountain generally seeks to manage its interest rate risk exposure by maintaining a relatively high percentage of non-interest bearing demand deposits, interest-bearing demand deposits, savings and money market accounts. These instruments tend to lag changes in market rates and may afford the Bank more protection in increasing interest rate environments than other short-term borrowings, but can also be changed relatively quickly in a declining rate environment. The Bank utilizes various deposit pricing strategies and other borrowing sources to manage its rate risk. As noted above, the duration of the Company’s liabilities has shortened considerably over the past two years, as customers have preferred shorter-term deposit products and the Company has not replaced longer-term brokered and wholesale funding instruments as they have come due. This presents some additional risk in a rising rate environment. The Company is evaluating various alternatives to mitigate this risk, including the assumption of some longer-term fixed wholesale funding and the use of off-balance sheet interest rate swaps and caps.
Intermountain maintains an asset and liability management program intended to manage net interest income through interest rate cycles and to protect its income by controlling its exposure to changing interest rates. As part of this program, Intermountain uses a simulation model designed to measure the sensitivity of net interest income and net income to changes in interest rates. This simulation model is designed to enable Intermountain to generate a forecast of net interest income and net income given various interest rate forecasts and alternative strategies. The model is also designed to measure the anticipated impact that prepayment risk, basis risk, customer maturity preferences, volumes of new business and changes in the relationship between long-term and short-term interest rates have on the performance of the Company. The following table represents the estimated sensitivity of the Company’s net interest income as of December 31, 2013 and 2012 compared to the established policy limits:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
2012
|
|
|
12 Month Cumulative% effect on NII
|
|
Policy Limit %
|
|
12/31/2013
|
|
Policy Limit %
|
|
12/31/2012
|
+100bp
|
|
+5.0 to -3.0%
|
|
0.60%
|
|
+3.0 to -3.0%
|
|
(0.43)%
|
+300bp
|
|
+10.0 to -8.0%
|
|
3.54%
|
|
+8.0 to -8.0%
|
|
2.85%
|
−100bp
|
|
+5.0 to -3.0%
|
|
(4.50)%
|
|
+3.0 to -3.0%
|
|
(3.25)%
|
–300bp
|
|
+10.0 to -8.0%
|
|
N/A
|
|
+8.0 to -8.0%
|
|
N/A
|
|
|
|
|
|
|
|
|
|
24 Month Cumulative% effect on NII
|
|
Policy Limit %
|
|
12/31/2013
|
|
Policy Limit %
|
|
12/31/2012
|
+100bp
|
|
+8.0% to -6.0%
|
|
1.95%
|
|
+8.0 to -6.0%
|
|
1.17%
|
+300bp
|
|
+20.0% to -15.0%
|
|
5.39%
|
|
+20.0% to -15.0%
|
|
6.13%
|
−100bp
|
|
+8.0% to -6.0%
|
|
(7.13)%
|
|
+8.0 to -6.0%
|
|
(6.22)%
|
–300bp
|
|
+20.0% to -15.0%
|
|
N/A
|
|
+20.0% to -15.0%
|
|
N/A
|
The results of modeling indicate that the estimated impact of changing rates on net interest income in a 100 and 300 basis point upward adjustment are within the guidelines established by management. The estimated impact of changing rates on net interest income in a 100 basis point downward adjustment in market interest rates is just outside of the Company's guidelines over both a 12-month and 24-month period. A 300 basis point decrease in rates is not considered feasible at this time. The impacts of changing rates on the Company's modeled economic value of equity ("EVE") are within the Company's guidelines for both rising and falling rates. The Company has chosen not to take action to resolve the falling rate guideline exceptions, because of the current low level of market rates and the negative impact actions it could take would have on its exposure to rising rates.
The continuing low level of market rates, and particularly the Federal Funds target range of between 0.00 and 0.25% is unprecedented. This has created significant challenges for interest rate risk management over the past several years, and is reflected in the significant reduction in net interest income during this period. Given the unusual current market rate conditions and the potential for either a prolonged low-rate environment or rapidly rising rates at some point in the future, Company management continues to refine and expand its interest rate risk modeling, and is responding to the results by proactively managing both its on-balance sheet and off-balance sheet positions. Based on the results of its continuing evaluations, management believes that its interest rate risk position is relatively neutral, but that current economic and market conditions heighten overall interest rate risk for both the Company and the industry as a whole.
Intermountain is continuing to pursue strategies to manage the level of its interest rate risk while increasing its long-term net interest income and net income: 1) through the origination and retention of a diversified mix of variable and fixed-rate consumer, business, commercial real estate, and residential loans which generally have higher yields than alternative investments; 2) by prudently managing its investment portfolio to provide relative earnings stability in the face of changing rate environments; and 3) by increasing the level of its core deposits, which are generally a lower-cost, less rate-sensitive funding source than wholesale borrowings. There can be no assurance that Intermountain will be successful implementing any of these strategies or that, if these strategies are implemented, they will have the intended effect of reducing interest rate risk or increasing net interest income.
Liquidity and Sources of Funds
As a financial institution, Intermountain’s primary sources of funds from assets include the collection of loan principal and interest payments, cash flows from various investment securities, and sales of loans, investments or other assets. Liability financing sources consist primarily of customer deposits, repurchase obligations with local customers, advances from FHLB Seattle and correspondent bank borrowings.
The combined impact of liability and other asset changes resulted in an overall decrease of $14.1 million in the Company’s unrestricted cash position from December 31, 2012 to December 31, 2013.
Deposits decreased to $706.1 million at December 31, 2013 from $748.9 million at December 31, 2012, as decreases in non-interest bearing demand, savings and CD balances offset increases in interest-bearing demand and money market balances. The decrease from last December reflects additional planned reductions in higher-cost brokered and retail CDs, the release of savings balances from the termination of a contract to maintain savings balances securing credit cards held by another company, and tax and operating payments made by clients. The Company also repurchased $27 million in CPP preferred stock in 2013.
Partially offsetting these cash reductions, repurchase agreements increased by $23.2 million and investments available-for-sale decreased $15.1 million. The increase in repurchase agreements reflected the movement of funds by local municipal customers from non-interest bearing demand deposits into repurchase accounts as a result of the termination of the FDIC's unlimited guarantee on non-interest bearing deposits at December 31, 2012. The decrease in investments available-for-sale of $15.1 million resulted from sales made to fund the preferred stock repurchase.
During the year ended December 31, 2013, cash provided by investing activities consisted primarily of sales of investment securities and principal payments on mortgage-back securities, which more than offset purchases of available-for-sale and held-to maturity investment securities. During the same period, cash used by financing activities consisted primarily of decreases in checking, savings and CD deposit balances and the preferred stock repurchase, offset by increases in repurchase agreements.
Securities sold subject to repurchase agreements totaled $99.9 million at December 31, 2013. These borrowings are required to be collateralized by investments with a market value exceeding the face value of the borrowings. Under certain circumstances, Intermountain could be required to pledge additional securities or reduce the borrowings.
Intermountain’s credit line with FHLB Seattle provides for borrowings up to a percentage of its total assets subject to general collateralization requirements. At December 31, 2013, the Company’s FHLB Seattle credit line represented a total borrowing capacity of approximately $130.8 million, of which $4.9 million was being utilized. Additional collateralized funding availability at the Federal Reserve totaled $25.0 million. Both of these collateral secured lines could be expanded more with the placement of additional collateral. Overnight-unsecured borrowing lines have been established at US Bank, Wells Fargo Bank, and Pacific Coast Bankers Bank (“PCBB”). At December 31, 2013, the Company had approximately $45.0 million of overnight funding available from its unsecured correspondent banking sources.
Intermountain and its subsidiary Bank maintain an active liquidity monitoring and management plan, and have worked aggressively over the past several years to expand sources of alternative liquidity. Given continuing volatile economic conditions, the Bank has taken additional protective measures to enhance liquidity, including issuance of new capital, movement of funds into more liquid assets and increased emphasis on relationship deposit-gathering efforts. Because of its relatively low reliance on non-core funding sources and the additional efforts undertaken to improve liquidity discussed above, management believes that the subsidiary Bank’s current liquidity risk is moderate and manageable.
Management continues to monitor its liquidity position carefully and conducts periodic stress tests to evaluate future potential liquidity concerns in the subsidiary Bank. It has established contingency plans for potential liquidity shortfalls. Longer term, the Company intends to fund asset growth primarily with core deposit growth, and it has initiated a number of organizational changes and programs to spur this growth when needed.
Liquidity for the parent Company depends substantially on dividends from the Bank. The other primary sources of liquidity for the parent Company are capital or borrowings. Management projects that available resources will be sufficient to meet the parent Company’s projected funding needs.
Capital Resources
Intermountain’s total stockholders’ equity was $94.0 million at December 31, 2013, compared with $114.4 million at December 31, 2012, as the repurchase of $27.0 million in CPP preferred stock and the negative impact of higher market rates on the value of the Company's investment portfolio offset improved earnings. Stockholders’ equity and tangible stockholders' equity were 10.01% of total assets at December 31, 2013 and 11.8% at December 31, 2012, respectively. Tangible common equity as a percentage of tangible assets was 10.0% at December 31, 2013 and 9.0% for December 31, 2012.
At December 31, 2013, Intermountain had unrealized losses of $1.2 million, net of related income taxes, on investments classified as available-for-sale, as compared to unrealized gains of $3.5 million, net of related income taxes, on investments classified as available-for-sale at December 31, 2012. The change from an unrealized gain on investments to an unrealized loss during this time period reflected the negative impact of an approximately one percent increase in market interest rates on the value of the Company's securities portfolio.
During 2012, the Company conducted two separate successful capital raises, issuing a mix of voting and non-voting stock and warrants. See Note 12 in the Notes to Consolidated Financial Statements for additional information on these raises. The Company has used the $50.3 million net proceeds after expenses from both offerings to strengthen its balance sheet, reinvest in its communities and for other general corporate purposes, including the redemption of the Series A Preferred Stock held by the U.S. Treasury as part of the TARP Capital Purchase Program.
On December 19, 2008, the Company entered into a definitive agreement with the U.S. Treasury. Pursuant to this Agreement, the Company sold 27,000 shares of Series A Preferred Stock, no par value, having a liquidation amount equal to $1,000 per share, including a warrant (“The Warrant”) to purchase 653,226 shares, and on a reverse-split adjusted basis, 65,323 shares of the Company’s common stock, no par value, to the U.S. Treasury. The Warrant has a 10-year term and has an exercise price, subject to anti-dilution adjustments, equal to $62.00 per share of common stock on a reverse-split adjusted basis.
The Series A Preferred Stock qualified as Tier 1 capital and provided for cumulative dividends at a rate of 5% per year, for the first five years, and 9% per year thereafter. As noted above, this Preferred Stock was redeemed in November, 2013, but the warrants remain outstanding.
The Company executed a 10-for-1 reverse stock split, effective October 5, 2012, which reduced the number of voting and non-voting common shares outstanding and shares that would be issued if the outstanding warrants are exercised.
Intermountain issued and has outstanding $16.5 million of Trust Preferred Securities. The indenture governing the Trust Preferred Securities limits the ability of Intermountain under certain circumstances to pay dividends or to make other capital distributions. The Trust Preferred Securities are treated as debt of Intermountain. These Trust Preferred Securities can be called for redemption by the Company at 100% of the aggregate principal plus accrued and unpaid interest. See Note 8 of “Notes to Consolidated Financial Statements.”
Intermountain and the Bank are required by applicable regulations to maintain certain minimum capital levels and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier I capital to average assets. Intermountain and the Bank plan to maintain their capital resources and regulatory capital ratios through the retention of earnings and the management of the level and mix of assets. At December 31, 2013, Intermountain exceeded the minimum published regulatory capital requirements to be considered “well-capitalized” pursuant to Federal Financial Institutions Examination Council “FFIEC” regulations. The Company has also evaluated its projected capital position in relation to new higher capital standards issued by federal regulators in 2013, but effective over a phased time period from 2015 through 2020. Based on its initial evaluation, the Company would continue to meet the new higher requirements to be considered "well capitalized" after full phase-in. As with other future estimates, the Company cannot guarantee these future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Capital
Requirements
|
|
Published
Well-Capitalized
Requirements
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in thousands)
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets):
|
|
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|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
The Company
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$
|
98,462
|
|
|
16.92
|
%
|
|
$
|
46,543
|
|
|
8
|
%
|
|
$
|
58,179
|
|
|
10
|
%
|
Panhandle State Bank
|
|
98,807
|
|
|
16.95
|
%
|
|
46,627
|
|
|
8
|
%
|
|
58,284
|
|
|
10
|
%
|
Tier I capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
91,184
|
|
|
15.67
|
%
|
|
23,272
|
|
|
4
|
%
|
|
34,907
|
|
|
6
|
%
|
Panhandle State Bank
|
|
91,516
|
|
|
15.70
|
%
|
|
23,314
|
|
|
4
|
%
|
|
34,970
|
|
|
6
|
%
|
Tier I capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
91,184
|
|
|
10.06
|
%
|
|
36,259
|
|
|
4
|
%
|
|
45,323
|
|
|
5
|
%
|
Panhandle State Bank
|
|
91,516
|
|
|
10.06
|
%
|
|
36,371
|
|
|
4
|
%
|
|
45,464
|
|
|
5
|
%
|
As of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
124,058
|
|
|
20.51
|
%
|
|
48,399
|
|
|
8
|
%
|
|
60,499
|
|
|
10
|
%
|
Panhandle State Bank
|
|
115,418
|
|
|
19.07
|
%
|
|
48,409
|
|
|
8
|
%
|
|
60,511
|
|
|
10
|
%
|
Tier I capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
116,491
|
|
|
19.26
|
%
|
|
24,200
|
|
|
4
|
%
|
|
36,299
|
|
|
6
|
%
|
Panhandle State Bank
|
|
107,849
|
|
|
17.82
|
%
|
|
24,204
|
|
|
4
|
%
|
|
36,307
|
|
|
6
|
%
|
Tier I capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
116,491
|
|
|
12.54
|
%
|
|
37,160
|
|
|
4
|
%
|
|
46,451
|
|
|
5
|
%
|
Panhandle State Bank
|
|
107,849
|
|
|
11.60
|
%
|
|
37,197
|
|
|
4
|
%
|
|
46,497
|
|
|
5
|
%
|
Off Balance Sheet Arrangements and Contractual Obligations
The Company, in the conduct of ordinary business operations routinely enters into contracts for services. These contracts may require payment for services to be provided in the future and may also contain penalty clauses for the early termination of the contracts. The Company is also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Management does not believe that these off-balance sheet arrangements have a material current effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, but there is no assurance that such arrangements will not have a future effect.
Inflation
Substantially all of the assets and liabilities of the Company are monetary. Therefore, inflation has a less significant impact on the Company than does the fluctuation in market interest rates. Inflation can lead to accelerated growth in non-interest expenses and may be a contributor to interest rate changes, both of which may impact net earnings. Inflation, as measured by the Consumer Price Index, has been generally benign since 2008 as relatively weak global economic conditions have reduced pricing pressure on both goods and services. Inflation may increase at higher rates in future years, as global demand recovers and the large U.S. budget and trade deficits may eventually weaken the dollar. The effects of inflation have not had a material direct impact on the Company over the past several years.
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.
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 December 31, 2013. 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 further 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 17
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 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.
At December 31, 2013, Intermountain assessed whether it was more likely than not that it would realize the benefits of its deferred tax asset. It determined that the positive evidence associated with a three-year cumulative positive income, improving national and regional economic conditions, significantly reduced credit and other balance sheet risk, and improving Company performance offset the negative evidence of losses in 2009 and 2010. The Company analyzes the deferred tax asset on a quarterly basis and may establish a new allowance at some future time depending on actual results and estimates of future profitability.
The valuation allowance analysis also considered the impact of Internal Revenue Code Section 382 limitations on the amount of tax benefit from net operating loss carryforwards that the Company can utilize annually, because of the level of investment by several of the larger investors in the Company's 2012 capital raise. These limitations impact the amount and timing of the tax benefit that can be recognized annually. Based on its analysis, the Company believes that it will be able to recapture all of its tax benefit from the net operating loss carryforward position in the 20-year carryforward period, even given the Section 382 limitations. As with other future estimates, the Company cannot guarantee these future results, however. See the "Income Tax Provision" section above for additional information.
For additional information on the Company's accounting policies, see the “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.
New Accounting Pronouncements
“Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements” in the Notes to the Consolidated Financial Statements, which is included in Item 8 of this Report, 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.