FEDERAL DEPOSIT INSURANCE CORPORATION
Washington D.C. 20429
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from (not applicable)
IDAHO INDEPENDENT BANK
(Exact name of registrant as specified in its charter)
Idaho 82-0454590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1260 W. Riverstone Drive
Coeur d'Alene, Idaho 83814
(Address of principal executive offices) (Zip Code)
208-765-3619
(Registrant's telephone number, including area code)
(not applicable)
(Former name, former address and former fiscal year
if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing
requirements for the past 90 days. YES X NO a
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in Rule 12b-2 of the Act).
Large Accelerated Filer a Accelerated Filer X a Non-Accelerated Filer a
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES NO X a
Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of the latest
practicable date.
Class Outstanding as of July 30, 2007
Common Stock, $5 Par Value 5,540,708 shares
1
Idaho Independent Bank
Form 10-Q
INDEX
PAGE NUMBER
Cover Page 1
Index 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets-June 30, 2007, and December 31, 2006 3
Statement of Income-Six Months Ended
June 30, 2007 and 2006 4
Statements of Income-Three Months Ended
June 30, 2007 and 2006 5
Statements of Changes in Shareholders’ Equity
and Comprehensive Income 6
Statements of Cash Flows-Six Months Ended
June 30, 2007 and 2006 7
Notes to Financial Statements 8-12
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-20
Item 3 Quantitative and Qualitative Disclosures about Market Risk 20-22
Item 4 Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 1A Risk Factors 22
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 22-23
Item 3 Defaults upon Senior Securities 23
Item 4 Submission of Matters to a Vote of the Security Holders 23-24
Item 5 Other Information 24
Item 6 Exhibits 24
Signature Page 25
2
ITEM 1. FINANCIAL INFORMATION
Idaho Independent Bank
Balance Sheets
(Unaudited)
(dollars in thousands)
June 30 December 31
2007 2006
ASSETS
Cash and due from banks $ 21,929 $ 21,555
Federal funds sold 15,371 22
Deposits held with other banks 19,784 18,687
Trading securities, at fair value 2,554 2,128
Securities available for sale, at fair value 22,353 18,416
Federal Home Loan Bank stock, at cost 958 958
Loans held for sale 7,107 5,481
Loans receivable 508,690 527,849
Less allowance for loan losses 10,286 9,882
Net loans 498,404 517,967
Premises and equipment, net of accumulated depreciation 15,575 13,519
Bank owned life insurance 9,959 9,760
Accrued interest receivable and other assets 6,605 6,569
TOTAL ASSETS $ 620,599 $ 615,062
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits $ 503,021 $ 484,611
Securities sold under agreements to repurchase, net 38,484 31,654
Notes payable 9,000 9,000
Other borrowed funds - 22,814
Accrued interest payable and other liabilities 6,986 9,714
TOTAL LIABILITIES 557,491 557,793
SHAREHOLDERS’ EQUITY:
Common stock, $5 par value; 20,000,000 shares authorized;
5,584,101 and 5,483,330 shares issued and outstanding at June 30,
2007, and December 31, 2006, respectively, net of treasury stock 30,585 29,742
Capital surplus 31,045 30,914
Retained earnings 8,850 1,799
Accumulated other comprehensive loss, net of tax (26) (22)
Treasury stock: June 30, 2007 – 532,921 shares;
December 31, 2006 – 465,166 shares (7,346) (5,164)
TOTAL SHAREHOLDERS' EQUITY 63,108 57,269
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 620,599 $ 615,062
See accompanying notes to financial statements
3
IDAHO INDEPENDENT BANK
Statements of Income
(Unaudited)
(dollars in thousands except per share data)
Six Months Ended June 30
2007 2006
Interest and Dividend Income
Loans receivable $ 24,207 $ 20,239
Federal funds sold 390 353
Securities available for sale 514 286
Deposits with other banks 505 203
Federal Home Loan Bank of Seattle dividends 2 -
TOTAL INTEREST INCOME 25,618 21,081
Interest Expense
Deposits 6,598 3,487
Securities sold under agreements to repurchase and
other borrowed funds 1,296 669
TOTAL INTEREST EXPENSE 7,894 4,156
NET INTEREST INCOME 17,724 16,925
Provision for loan losses 405 904
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 17,319 16,021
Noninterest Income
Service charges on deposits 551 557
Loan origination fees on loans sold 962 887
Other income 857 718
TOTAL NONINTEREST INCOME 2,370 2,162
Noninterest Expense
Salaries 5,899 5,439
Employee benefits 1,047 933
Occupancy expense 640 550
Depreciation, maintenance, and repairs 855 813
Supplies and postage 248 240
Advertising and business development 309 276
Data processing 614 652
Other operating expenses 782 597
TOTAL NONINTEREST EXPENSE 10,394 9,500
INCOME BEFORE INCOME TAXES 9,295 8,683
Income tax expense 3,714 3,424
NET INCOME $ 5,581 $ 5,259
Earnings per share, basic $ 1.00 $ 0.96
Earnings per share, assuming full dilution $ 0.93 $ 0.89
Weighted average shares outstanding, basic 5,548,423 5,475,224
Weighted average shares outstanding, assuming full dilution 6,022,223 5,936,230
See accompanying notes to financial statements
4
IDAHO INDEPENDENT BANK
Statements of Income
(Unaudited)
(dollars in thousands except per share data)
Three Months Ended June 30
2007 2006
Interest and Dividend Income
Loans receivable $ 12,267 $ 10,871
Federal funds sold 187 130
Securities available for sale 291 137
Deposits with other banks 262 106
Federal Home Loan Bank of Seattle dividends 1 -
TOTAL INTEREST INCOME 13,008 11,244
Interest Expense
Deposits 3,441 1,910
Securities sold under agreements to repurchase and
other borrowed funds 535 358
TOTAL INTEREST EXPENSE 3,976 2,268
NET INTEREST INCOME 9,032 8,976
Provision for loan losses 75 450
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,957 8,526
Noninterest Income
Service charges on deposits 289 302
Loan origination fees on loans sold 572 436
Other income 449 369
TOTAL NONINTEREST INCOME 1,310 1,107
Noninterest Expense
Salaries 2,972 2,694
Employee benefits 509 437
Occupancy expense 327 286
Depreciation, maintenance, and repairs 464 382
Supplies and postage 120 133
Advertising and business development 188 155
Data processing 307 329
Other operating expenses 427 312
TOTAL NONINTEREST EXPENSE 5,314 4,728
INCOME BEFORE INCOME TAXES 4,953 4,905
Income tax expense 1,977 1,947
NET INCOME $ 2,976 $ 2,958
Earnings per share, basic $ 0.53 $ 0.54
Earnings per share, assuming full dilution $ 0.50 $ 0.50
Weighted average shares outstanding, basic 5,590,327 5,475,714
Weighted average shares outstanding, assuming full dilution 6,001,466 5,949,494
See accompanying notes to financial statements
5
Idaho Independent Bank
Statements of Changes in Shareholders’ Equity and Comprehensive Income
($ In Thousands – Unaudited)
Shares of Other
Common Common Capital Treasury Retained Comprehensive Comprehensive
Stock Total Stock Surplus Stock Earnings Income (Loss) Income (Loss)
Six Months Ended June 30
2006
Balance at December 31, 2005 2,737,411 $ 46,301 $ 14,783 $ 34,962 $ (4,471) $ 1,109 $ (82)
Net income 5,259 5,259 $ 5,259
Issuance of 12,038 shares of common stock for
exercised stock options 12,038 198 60 138
Purchase of 11,067 shares of treasury stock (11,067) (548) (548)
Stock based compensation 43 43
Other comprehensive loss net of tax:
Net unrealized gain on securities available for sale 34 34 34
Comprehensive income $ 5,293
2,738,382 $ 51,287 $ 14,843 $ 35,143 $ (5,019) $ 6,368 $ (48)
2007
Balance at December 31, 2006 5,483,330 $ 57,269 $ 29,742 $ 30,914 $ (5,164) $ 1,799 $ (22)
Net income 5,581 5,581 $ 5,581
Issuance of 168,526 shares of common stock for
exercised stock options 168,526 835 843 (8)
Tax effect of exercised stock options 1,470 1,470
Purchase of 67,755 shares of treasury stock (67,755) (2,182) (2,182)
Stock based compensation 139 139
Other comprehensive loss net of tax:
Net unrealized loss on securities available for sale (4) (4) (4)
Comprehensive income $ 5,577
5,584,101 $ 63,108 $ 30,585 $ 31,045 $ (7,346) $ 8,850 $ (26)
See accompanying notes to financial statements
6
Idaho Independent Bank
Statements of Cash Flows
(Unaudited)
(dollars in thousands)
Six Months Ended
June 30
2007 2006
Net cash flows from operating activities:
Net income $ 5,581 $ 5,259
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Provision for loan losses 405 904
Depreciation and amortization 732 652
Purchases of trading securities (235) (195)
Stock-based compensation 139 43
Amortization of investment premiums (discounts), net (21) 9
Originations of loans held for sale (52,443) (47,864)
Proceeds from sales of loans held for sale 50,816 47,151
Excess tax benefits from exercise of stock options (1,310) -
Increase in cash surrender value of life insurance (199) (183)
Change in:
Accrued interest receivable and other assets (34) 230
Accrued interest payable and other liabilities (1,448) 1,125
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,983 7,131
Cash flows from investing activities:
Net (increase) decrease in federal funds sold (15,349) 216
Net (increase) decrease in deposits held with other banks (1,097) 299
Securities available for sale:
Purchases (8,923) (2,000)
Proceeds from sales and maturities 5,000 7,910
Net (increase) decrease in loans 19,159 (51,881)
Purchases of premises and equipment (2,788) (464)
NET CASH USED IN INVESTING ACTIVITIES (3,998) (45,920)
Cash flows from financing activities:
Proceeds from exercise of stock options 835 198
Excess tax benefits from exercise of stock options 1,310 -
Purchases of treasury stock (2,182) (548)
Net increase (decrease) in securities sold under agreements to
repurchase and other borrowed funds (15,984) (6,402)
Net increase (decrease) in deposits 18,410 48,795
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,389 42,043
NET INCREASE IN CASH AND CASH EQUIVELANTS $ 374 $ 3,254
Cash and cash equivalents, beginning of period 21,555 21,807
Cash and cash equivalents, end of period $ 21,929 $ 25,061
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITES
Net change in unrealized loss from securities available for sale $ (7) $ 55
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 7,774 $ 4,030
Taxes $ 4,580 $ 2,290
See accompanying notes to financial statements
7
Idaho Independent Bank
Notes to Financial Statements
(1) Basis of Financial Statement Presentation
The foregoing unaudited interim financial statements of Idaho Independent Bank (the "Bank" or
"IIB") have been prepared in accordance with accounting principles generally accepted in the United States
of America and prevailing practices within the banking industry for interim financial information, and with
the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and
Exchange Commission.
The unaudited interim results of operations are not necessarily indicative of the results for any
future interim period or for the entire year. Accordingly, these interim financial statements do not include
all disclosures associated with annual financial statements, and should be read in conjunction with Idaho
Independent Bank’s filings with the Federal Deposit Insurance Corporation including but not limited to the
annual financial statements and accompanying notes included in Idaho Independent Bank's Annual Report
on Form 10-K.
In preparing the financial statements, management is required to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities as of the date of the Balance Sheet and
certain revenues and expenses for the period. Actual results could materially differ, either positively or
negatively, from those estimates. The unaudited interim financial statements reflect all adjustments that
are, in the opinion of management, necessary to fairly state the financial condition and results of operations
for the periods presented.
Material estimates that are particularly susceptible to significant change in the near-term include the
determination of the allowance for loan losses, the valuation of real estate acquired in connection with
foreclosures or in the satisfaction of loans, and recognition of deferred income tax assets and liabilities. In
connection with the determination of the allowance for loan losses and other real estate owned,
management generally obtains appraisals for significant properties.
Management believes that the allowance for loan losses is adequate. While management uses
currently available information to recognize losses on loans and other real estate (when owned), future
additions to the allowances may be necessary based on a number of factors, including changes in economic
conditions. In addition, various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance and write downs of other real estate owned based on their judgment of
information available to them at the time of their examination.
Deferred income tax benefits and liabilities are valued using current federal and state income tax
rates. Actual recognition of these deferred tax assets and liabilities will be affected by the actual tax rates
applicable when the assets and liabilities become current tax items.
(2) New Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement No.
159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of
FASB Statement No. 115, (“SFAS 159”). SFAS 159 provides companies with an option to report selected
financial assets and liabilities at fair value. Most of the provisions of this statement apply only to entities
that elect the fair value option. However, the amendment to FASB Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities, applies to all entities with available for sale and trading
8
securities. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for similar types of assets
and liabilities. This statement is effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. Early adoption was permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity made that election within the first 120 days of that fiscal
year and also elected to apply the provisions of FASB Statement No. 157, “Fair Value Measurements.”
Management did not elect to adopt early and believes these Statements will not have a material effect on
the Bank’s financial condition or results of operations.
(3) Earnings per share
Earnings per share are computed by dividing net income by the total weighted average number of
common shares outstanding and the additional dilutive effect of stock options outstanding during the
respective periods. The dilutive effect of stock options is determined using the treasury stock method. Per
share data has been restated to reflect the issuance of a two-for-one stock split affected through a 100%
share dividend on November 29, 2006.
(4) Treasury Stock
Treasury stock is recorded at cost. In the event of subsequent reissue, the treasury stock account
will be reduced by the cost of such stock on the average cost basis with any excess proceeds credited to
additional paid-in capital. Treasury stock is available for general corporate purposes.
Prior to 2007, the Board of Directors had approved stock buy-back plans authorizing the Bank to
acquire an aggregate amount of $6.0 million of its common stock. On April 17, 2007, the Bank completed
the purchase of common stock under these buyback plans.
On March 23, 2007, the Board of Directors approved the purchase of an additional $2.0 million of
the Bank’s common stock over a period of up to three years (the 2007 Buyback Plan), beginning with the
completion of the 2004 Buyback Plan. Accordingly, the Bank commenced the purchase of its common
stock under the 2007 Buyback Plan on April 17, 2007. On June 15, 2007, the Board of Directors approved
an amendment to the 2007 Buyback Plan that, subject to regulatory approval, which was subsequently
received, increased the amount that may be expended for the repurchase of common stock under the 2007
Buyback Plan from $2.0 million to $7.0 million. The three year term for repurchase of shares under the
2007 Buyback Plan remained unchanged. As of June 30, 2007, the Bank had repurchased $1.3 million of
its common stock under the 2007 Buyback Plan.
(5) Stock Options
The Bank has issued stock options under several stock-based employee compensation plans, the
1993 Stock Option Plan, the 1997 Directors Stock Option Plan, and the 2004 Long-Term Equity Incentive
Plan. Prior to 2006, the Bank accounted for these Plans under recognition and measurement provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations, as permitted by FASB Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, (SFAS 123). Compensation costs related to stock options
granted at fair value under these plans were not recognized in the statements of income.
In December 2004, FASB issued SFAS 123 (revised 2004), Share-Based Payment, (SFAS 123R).
Effective January 1, 2006, the Bank adopted SFAS 123R using the modified-prospective-transition
method. Under this transition method, stock compensation costs recognized beginning January 1, 2006,
include: (a) compensation cost for all share-based payments granted prior to, but not vested, as of January
9
1, 2006, based on the fair value estimated in accordance with the original provisions of SFAS 123 as of the
grant date, and (b) compensation cost for all share-based payments granted on or subsequent to January 1,
2006, based on the fair value estimated in accordance with the provisions of SFAS 123R as of the grant
date.
The Bank's net income before income taxes for the six months ended June 30, 2007, was reduced
by $139,698 as a result of the adoption of SFAS 123R. This reduced reported basic and diluted earnings
per share for the six months by approximately $0.02 per share.
Prior to adopting SFAS 123R, the Bank presented all tax benefits of deductions resulting from the
exercise of stock options as operating cash flows in the consolidated statements of cash flows. SFAS 123R
requires the cash flows resulting from the actual tax benefits from tax deductions in excess of the estimated
tax to be classified as financing cash flows. The Bank has recognized gross tax benefits of $1.5 million
from the disposition of nonqualified and disqualifying incentive stock options in the first half of 2007.
Stock-based compensation costs are based on the estimated fair value of grants calculated as of the
grant date using the Black-Scholes option-pricing model. The fair value of stock options granted is
amortized as compensation expense on a straight-line basis over the vesting period of the options.
Compensation expense recognized is shown in the operating activities section of the statement of cash
flows.
The calculation of expected volatility used in the Black-Scholes model is based on historical
volatility observations. The expected term for use in the model was calculated based in part on an analysis
of historical exercises of stock options. The Bank bases the estimated risk-free rate on the U.S. Treasury
yield curve in effect at the time of grant. The Bank has not paid nor does it currently have any plans to pay
cash dividends, thus a 0% dividend yield has been assumed for the model.
SFAS 123R requires the Bank to estimate potential forfeitures of stock options and adjust
compensation cost accordingly. The Bank’s estimate of forfeitures will be adjusted over the requisite
service period to the extent that actual forfeitures differ, or are expected to differ from such estimates.
Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period
of change and will likely impact the amount of stock compensation to be recognized in future periods. As
of June 30, 2007, total stock compensation expense to be recognized for the remainder of 2007 through
2011 from the vesting of existing options is $0.4 million. The weighted average term for recognition of
future stock option expense is 1.5 years.
As of June 30, 2007, there were 765,951 shares of the Bank's common stock reserved for issuance
upon the exercise of outstanding options granted under the plans, and 243,303 shares of the Bank's
common stock remained available for future option grants under these plans. A summary of the Bank's
stock compensation activity with respect to the first six months of 2007 follows:
10
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic Value
Stock Options Shares Price Term (yrs) (in thousands)
Outstanding at December 31, 2006 939,110 $ 11.29
Granted - -
Exercised (168,526) 4.94
Forfeited (4,633) 18.89
Outstanding at June 30, 2007 765,951 $ 12.64 3.0 $ 12,539
Vested at June 30, 2007 697,439 $ 11.22 2.7 $ 12,373
The following is a summary of the intrinsic value of stock options exercised during the six months
ended June 30, 2007:
Six Months
Ending
June 30, 2007
Fair market value of stock acquired from option exercises $ 5,518,093
Proceeds from the exercise of options (834,372)
Instrinsic Value $ 4,683,721
The Board of Directors has authorized the payment of a cash bonus equal to the marginal amount of
the federal and state income taxes, Medicare taxes, and federal and state payroll taxes, if any, payable by
any officer or Director of the Bank by reason of the exercise of nonstatutory stock options to purchase
shares of the Bank’s common stock under the 1997 Directors Stock Option Plan and/or the 1993 Stock
Option Plan granted to such officer or Director prior to January 18, 2002. The maximum amount of the tax
payment bonus to an officer or Director cannot exceed the amount that would be payable if the market
value of the stock acquired upon exercise of the stock option at the time of exercise was $24.60 per share
subject to adjustment for stock dividends and stock splits paid subsequent to September 13, 2002. In the
case of the nonstatutory stock option granted under the 1997 Directors Stock Option Plan to Mr. Eiguren
on March 15, 2002, the Board of Directors has authorized the payment of a tax bonus, but the amount of
such bonus cannot exceed $6.28 per share, subject to adjustment for stock dividends and stock splits paid
subsequent to September 13, 2002.
As of June 30, 2007, the Bank had accrued $408,457 in anticipation of the approximate total
payments resulting from the future exercise of all nonstatutory options that are eligible for the tax bonus
payment. The accrued amount is based on current federal and state income tax rates, and as such, the
amount that will actually be paid when the options are exercised is uncertain at this time.
Nonstatutory options to purchase 91,788 shares of the Bank’s common stock that are eligible for the
tax bonus payment are presently exercisable, and the expiration dates of the options range from 2007 to
2012. During the first six months of 2007, there were 122,266 shares of such eligible nonstatutory stock
options exercised. The tax bonus payment from the exercise of these options will be paid in 2008. Under
current income tax law, the Bank will recognize a tax benefit from the exercise of nonstatutory stock
options. However, this benefit will be recognized in the year of exercise as an increase to the Bank’s
capital account and will not impact reported GAAP earnings. The amount of such tax benefit, if any, from
the exercise of all of the outstanding nonstatutory stock options cannot be reliably determined at this time.
11
(6) Income Taxes
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”). FIN 48 is an interpretation of FASB Statement No. 109, Accounting for Income Taxes,
and it seeks to reduce the diversity in practice associated with certain aspects of measurement and
recognition in accounting for income taxes. In addition, FIN 48 provides guidance on derecognition,
classification, interest and penalties, and accounting in interim periods; and requires expanded disclosure
with respect to the uncertainty inherent in income taxes. FIN 48 is effective as of the beginning of the
Bank’s 2007 fiscal year. The cumulative effect, if any, of applying FIN 48 is to be reported as an
adjustment to the opening balance of retained earnings in the year of adoption.
The Bank believes that it has appropriate support for the income tax positions taken and to be taken
on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an
assessment of many factors including past experience and interpretations of tax law. Accordingly,
adoption on January 1, 2007, did not have a material effect on the Bank’s financial statements. The Bank
recognizes interest and penalties accrued, if any, related to unrecognized tax benefits in income tax
expense.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Bank's audited financial statements
and related notes to those statements under the heading "Financial Statements and Supplementary Data" in
Idaho Independent Bank's Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Forward-Looking Statement Disclosure
Statements contained herein concerning future performance, developments or events, expectations
for earnings, growth and market forecasts, and any other guidance for future periods constitute forward-
looking statements within the meaning of the Private Securities Reform Act of 1995, and as such, are
subject to a number of risks and uncertainties that might cause actual results to differ materially from
expectations or our stated objectives. Factors that could cause actual results to differ materially include
but are not limited to: changes in regional or general economic conditions; changes in interest rates,
deposit flows, demand for loans, real estate values, competition, or loan delinquency rates; changes in
accounting principles, practices, policies, or guidelines; changes in legislation or regulations; changes in
the regulatory environment; changes in monetary policy of the Federal Reserve Bank; changes in fiscal
policy of the Federal government; changes in other economic, competitive, governmental, regulatory and
technological factors affecting operations, pricing, products, and services; material unforeseen changes in
the liquidity, results of operations, or financial condition of the Bank’s customers; and other risks detailed
from time to time in the Bank’s filings with the Federal Deposit Insurance Corporation. Accordingly,
these factors should be considered in evaluating forward-looking statements, and undue reliance should
not be placed on such statements. The Bank undertakes no responsibility to update or revise any forward-
looking statements.
Significant Accounting Policies
Significant accounting policies and estimates relating to the Bank's allowance for loan losses are
discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, under Note 1
to the Annual Financial Statements - "Summary of Significant Accounting Policies." That note highlights
estimates the Bank makes that involve uncertainty or potential for substantial change. There have not been
12
any material changes in our critical accounting policies and estimates relating to our allowance for loan
losses as compared to that contained in our disclosure in the Bank's Annual Report on Form 10-K for the
fiscal year ended December 31, 2006.
GENERAL
Idaho Independent Bank (the "Bank" or "IIB") is an Idaho state-chartered, full-service, commercial
bank that focuses on small to medium-sized businesses and professionals and retail customers. The Bank
is subject to competition from a variety of traditional and nontraditional financial service providers both
within and outside Idaho. The Bank offers its customers a wide range of deposit products; cash
management services; nondeposit investment products; commercial, residential, and consumer loans; and
other traditional banking products and services. The Bank is subject to regulation by certain federal and
state agencies and undergoes periodic examinations by those regulatory authorities. The Bank's deposits
are insured by the Federal Deposit Insurance Corporation, subject to regulatory limits.
OVERVIEW
The Bank's net income is derived primarily from net interest income, which is the difference
between interest earned on its loan and investment portfolios and its cost of funds, primarily interest paid
on deposits and borrowings.
Total assets increased $5.5 million, or 0.9%, to $620.6 million at June 30, 2007, from $615.1
million at December 31, 2006. However, during the three months ended June 30, 2007, total assets
decreased $13.0 million, or 2.1% from the balance at March 31, 2007. By comparison, total assets
increased $48.5 million and $9.8 million, or 9.5% and 1.8%, during the first half and second quarter of
2006. Deposits increased to $503.0 million at June 30, 2007, from $484.6 million at December 31, 2006,
and $474.9 million at June 30, 2006, an increase of $18.4 million and $28.1 million, or 3.8% and 5.9 % for
the six and twelve months ended June 30, 2007, respectively. Repurchase agreements increased to $38.5
million at June 30, 2007, from $31.7 million at December 31, 2006. By comparison, repurchase
agreements were $16.4 million at June 30, 2006. Stockholders’ equity was $63.1 million at June 30, 2007,
increasing $5.8 million, or 10.2%, from $57.3 million at the end of 2006.
FINANCIAL CONDITION
Investments. Total investments, consisting primarily of federal funds sold, investment securities,
deposits with other banks, and stock in the Federal Home Loan Bank of Seattle ("FHLB"), totaled $61.0
million, or 9.8% of total assets, at June 30, 2007, compared to $40.2 million, or 6.5% of total assets, at
December 31, 2006 and $85.8 million, or 13.5% of total assets at March 31, 2007. At June 30, 2007, the
Bank's securities available for sale consisted of $20.5 million in U.S. Government Agencies, $1.4 million
in Idaho Municipal Obligations, and $0.5 million in a Community Reinvestment Act (CRA) qualified
mutual fund. In addition, an unrealized loss of $0.04 million was recorded at June 30, 2007. Total
investments increased $20.8 million when compared to December 31, 2006, largely as a result of a decline
in total loans plus deposit growth during the first half of 2007.
Loans. Total loans, including loans held for sale, were $515.8 million at June 30, 2007, a decrease
of $17.5 million, or 3.3%, compared to $533.3 million at December 31, 2006. The decrease in total loans
as of the end of the first half of 2007 was largely due to programmed repayments on loans plus continued
slowing of economic activity in the Bank's primary markets.
Loans held for sale are residential real estate loans to be sold into the secondary market, and as
such, are loans funded but not yet sold to various sources. These loans are typically sold on a servicing-
13
released basis, meaning the Bank does not retain mortgage-servicing responsibilities or the income
associated therewith. At June 30, 2007, loans held for sale totaled $7.1 million, an increase of $1.6
million, or 29.7%, from the total at December 31, 2006.
The following table sets forth the composition of the Bank's loan portfolio:
June 30 December 31
2007 2006
(in thousands)
(in thousands)
Commercial $ 84,407 $ 90,252
Agricultural 1,001 1,162
Real estate 285,140 294,747
Real estate construction 104,196 108,891
Consumer 33,884 33,039
Other 465 292
Total Loans 509,093 528,383
Net deferred loan fees (403) (534)
Reserve for loan losses (10,266) (9,857)
Reserve for overdraft losses (20) (25)
$ 498,404 $ 517,967
Commercial loans primarily consist of loans to businesses for various purposes, including but not
limited to, revolving lines of credit, equipment loans, and letters of credit. These loans generally have
short maturities, adjustable or fixed rates, and are either unsecured or secured by inventory, accounts
receivable, equipment, real estate, or a combination thereof.
Real estate loans include various types of loans in which the Bank holds real property as collateral
including land and land development loans. Real estate loans held in the Bank's portfolio typically have
maturities and amortization schedules ranging from one to twenty-five years.
Construction loans are typically made to individuals and/or contractors to construct single-family
residences and commercial buildings. These loans generally have maturities of one to twenty-four months.
Consumer loans are primarily unsecured, automobile, residential construction, or home equity
loans. Consumer loans generally have maturities of ten years or less and have variable or fixed interest
rates. Other consumer loans consist of personal lines of credit and bankcard advances. Personal lines of
credit and home equity lines generally have maturities from one to ten years and variable interest rates.
Bankcard payments are generally due monthly and bear interest at rates that vary from time-to-time.
Deposits and Borrowings. Total deposits increased by $18.4 million, or 3.8%, at June 30, 2007,
compared to December 31, 2006. The increase was primarily in savings and certificates of deposit. Total
deposits at June 30, 2007, reflect significantly higher balances than the average for the month due to higher
month-end activity in commercial accounts.
The Bank's borrowings, consisting of repurchase agreements and fixed-rate notes and overnight
advances from the Federal Home Loan Bank of Seattle, decreased $16.0 million from the total at December
31, 2006, or 25.2%, and was the result of a decrease of $22.8 million in borrowings from the Federal Home
loan Bank of Seattle, partially offset by an increase of $6.8 million in repurchase agreements. Repurchase
agreements increased from $31.7 million at December 31, 2006, to $38.5 million at June 30, 2007. The
increase largely reflected the Bank’s increase in holdings of securities that are held as collateral for
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repurchase agreements. Interest rates paid by the Bank on repurchase agreements range from 0.25% to
2.50% below the federal funds rate. The average interest rate paid on repurchase agreements during the
months of June 2007 and December 2006 was 4.36% and 4.31%, respectively. The slight rate increase
reflects the change in mix toward accounts that paid a lower spread from the target federal funds rate.
The Bank borrowed $9.0 million from the Federal Home Loan Bank of Seattle on February 20,
2005, consisting of a $5.0 million 10-year note bearing interest at 4.79% per annum, and a $4.0 million 15-
year note bearing interest at 5.08% per annum. Both notes require the payment of interest monthly, with
the principal due upon maturity. The 10-year note matures on February 20, 2015, and the 15-year note
matures on February 21, 2020.
The following table sets forth the average balances for each major category of deposits, the percent
of total deposits for each category, and the average interest rate paid during the months of June 2007 and
December 2006.
Month of June 2007 Month of December 2006
Average Average
Balance Percent Weighted Balance Percent Weighted
Amount of Average Amount of Average
(thousands) Total Rate (thousands) Total Rate
Interest-bearing
transaction accounts $ 79,880 16.13% 1.68% $ 82,470 17.03% 2.19%
Certificates of deposit 136,500 27.57% 5.07% 114,633 23.68% 4.84%
Savings accounts 144,312 29.15% 3.61% 134,940 27.87% 3.28%
Noninterest-bearing
demand accounts 134,438 27.15% 0.00% 152,127 31.42% 0.00%
$ 495,130 100.00% $ 484,170 100.00%
The Bank, through its membership in the Federal Home Loan Bank of Seattle, has access to a
variety of borrowing alternatives. In addition, the Bank has credit lines established with correspondent
banks.
ASSET QUALITY
The definition of nonperforming assets includes nonperforming loans and other real estate owned
("OREO"). Nonperforming loans are generally defined as nonaccrual loans and loans past due 90 days or
more, but still accruing interest. Under certain circumstances, the Bank may restructure the terms of a loan
as a concession to a borrower. OREO includes real estate acquired through foreclosure proceedings and
real estate acquired through acceptance of a deed in lieu of foreclosure.
Nonperforming Assets. At June 30, 2007, the Bank had no nonperforming assets, compared to a
total of $2.8 million at December 31, 2006. The Bank received payment in the first half of 2007 for the
nonperforming assets held at December 31, 2006. The Bank evaluates the underlying collateral of any
nonperforming loan and continues to pursue the collection of interest and principal on these loans.
Nonperforming assets may increase as the Bank’s loan portfolio continues to grow and mature, or if
economic conditions worsen, or other factors adversely impact performance.
Delinquencies. At June 30, 2007, there were four loans totaling an aggregate of $3.0 million that
were 60 to 89 days past due that continued to accrue interest. As with nonperforming loans, management
believes it likely that the level of delinquent loans will increase as the Bank's loan portfolio grows and
15
matures, or if economic conditions worsen.
The following table sets forth information regarding nonperforming assets and loans 90 days past
due that continue to accrue interest at the dates indicated.
June 30 December 31
2007 2006
(in thousands)
Loans accounted for on a nonaccrual basis $ - $ 2,784
Loans past due 90 days or more but still accruing - -
Total nonperforming loans - 2,784
Other real estate owned - -
Total nonperforming assets $ - $ 2,784
Nonperforming assets as a percent of total loans 0.00% 0.52%
Nonperforming assets as a percent of total assets 0.00% 0.45%
Delinquent loans 60-89 days past due as a
percent of total loans 0.59% 0.00%
Allowance for Loan Losses. During the first half of 2007, the Bank made provisions to the
allowance for loan losses account, including allowance for overdraft losses totaling $405,000, had $6,659
in charge-offs, and received $6,055 in recoveries of previously charged-off loans, bringing the balance in
the allowance to $10.3 million, compared to $9.9 million at December 31, 2006. The allowance, expressed
as a percentage of total loans, including loans held for sale, was 1.99% as of June 30, 2007, compared to
1.87% at December 31, 2006.
Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is
based upon management's evaluation of the amounts required to meet estimated charge-offs in the loan
portfolio after weighing various factors. Among these factors are the risk characteristics of the loan
portfolio, including concentrations within the portfolio, the quality and size of individual loans, the level of
nonaccrual loans, current economic conditions, trends in delinquencies and charge-offs, and the value of
underlying collateral, all of which can change frequently. Based on this evaluation, the Bank believes that
the allowance for loan losses, as of June 30, 2007, was adequate.
While management evaluates currently available information in establishing the allowance for loan
losses, future adjustments to the allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review a financial institution's allowance for loan losses and
carrying amounts of other real estate owned. Such agencies may require the financial institution to
recognize additions to the allowance based on their judgment and information available to them at the time
of their examination.
RESULTS OF OPERATIONS
The Bank's operating results depend primarily on its "net interest income," or the difference
between its interest income and its cost of funds, and on the quality of its assets. Interest income depends
on the average amount of interest-earning assets outstanding during the period and the interest earned
thereon. The Bank's cost of funds is a function of the average amount of deposits and borrowed money
outstanding during the period and the interest paid thereon. The quality of assets further influences the
amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan
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losses.
Three and six months ended June 30, 2007
Overview. The Bank reported net income for the three and six months ended June 30, 2007, of $3.0
and $5.6 million, as compared to $3.0 million and $5.3 million for the three and six months ended June 30,
2006. Basic and diluted earnings per common share were $1.00 and $0.93, respectively, for the first six
months of 2007, compared to $0.96 and $0.89, respectively, for the first six months of 2006. Per share data
for the six months ended June 30, 2006, has been restated to reflect the two-for-one stock split effected
through a 100% share dividend on November 29, 2006.
The Bank reported an annualized return on average assets of 1.82% and an annualized return on
average equity of 18.71% for the first six months of 2007, compared to an annualized return on average
assets of 2.01% and an annualized return on average equity of 21.75% for the first six months of 2006.
Net Interest Income. For the three and six months ended June 30, 2007, net interest income was
$9.0 and $17.7 million respectively, compared to $9.0 million and $16.9 million for the second quarter and
first six months of 2006. The increase in net interest income for the first six months of 2007, when
compared to the first six months of 2006, was $0.8 million, or an increase of 4.7%, and was primarily due
to higher earning asset balances, and overall higher levels of prevailing interest rates. Average earning
assets for the first six months of 2007 increased $93.1 million to $579.3 million, an increase of 19.1%
compared to the first six months of 2006. Compared to the first quarter of 2007, second quarter 2007
monthly average earning assets decreased by $2.8 million, or 0.5%. Average total loans, including loans
held for sale, for the six months ended June 30, 2007, increased $78.8 million, or 17.8%, when compared
to the average for the six months ended June 30, 2006. Total investments increased $14.3 million, or
33.4%, when comparing average balances for the first six months of 2007 to average balances for the first
six months of 2006. Average interest-bearing liabilities for the six months ending June 30, 2007, were
$410.0 million, which was 36.4% higher than the average for the six months ending June 30, 2006.
Average noninterest-bearing demand deposits for the first six months of 2007 were $137.0 million, a
decrease of $32.0 million, or 18.9%, compared to the first six months of 2006.
The Bank's net interest margin for the first six months of 2007 was 6.18% compared to a net
interest margin of 7.03% for the first six months of 2006. The decrease of 85 basis points in the net
interest margin compared to the first six months of 2006 was due to a decrease in demand deposits, in both
dollar amounts and as a percentage of total deposits, and a shift toward higher interest earning certificates
and borrowings. Average demand deposits declined $32.0 million from the first half of 2006, and made up
27.9% of total average deposits in the Bank, compared to 38.7% for the first half of 2006. A significant
portion of the decline in demand deposits was related to lower balances being maintained by customers of
the Bank whose business is tied to real estate activity in our markets.
Interest Income, Investments. For the three and six months ended June 30, 2007, total investment
income was $0.7 million and $1.4 million, compared to $0.4 million and $0.8 million for the first three and
six months of 2006. Interest income from investments was higher than the first half of 2006 because of
higher balances and rates. The average investment in U.S. Government Agencies for the first half of 2007
was $18.9 million, compared to $14.1 million for the first half of 2006. The average balance of Deposits
Held with Other Banks increased from $8.5 million for the first half of 2006 to $18.6 million for the first
half of 2007. The yield earned on investments was 5.02% for the first half of 2007, compared to 4.05% for
the first half of 2006.
The Bank's investments at June 30, 2007, were comprised of overnight federal funds sold to
domestic banks, U.S. government agencies, tax exempt Idaho and municipal bonds, other domestic bank
17
certificates of deposit, investment in a mutual fund that assists the Bank in meeting some of its obligations
under the Community Reinvestment Act, and investments held in a trust for payment of future deferred
compensation. The Bank has purchased certificates of deposit issued by other banks in an effort to obtain a
higher yield than can be realized on other investments of like maturity. All purchased certificates are for
amounts of $100,000 or less, and as such, are covered by FDIC insurance. The certificates generally mature
within three years. The Bank's investments within its fixed income portfolio generally carry maturities of
five years or less, as the Bank believes this composition is appropriate during the current interest rate
environment.
Interest Income, Loans. Interest from loans was $12.3 million and $24.2 million for the three and
six months ended June 30, 2007, and represented a yield on total loans of 9.27% for the first half of 2007.
This compares to $10.9 million and $20.2 million for the three and six months ended June 30, 2006. The
yield on loans for the first six months of 2006 was 9.17%. Interest income on loans for the first six months
of 2007 consisted of $4.0 million of commercial loan interest, $16.9 million of commercial real estate
interest, $3.2 million of consumer loan interest, and $0.1 million of residential real estate interest income.
The Bank also recognized $16,501 of tax-exempt interest on loans made to Idaho municipalities
(“OIMOS”). The yields recognized on the various loan categories during the first six months of 2007 were
9.61% for commercial loans, 9.33% for commercial real estate loans, 8.75% for consumer and home equity
loans, and 6.23% for residential real estate loans. The taxable equivalent yield on OIMOS was 11.67%.
Interest Expense. Interest expense from deposits and borrowings increased $1.7 million and $3.7
million to $4.0 million and $7.9 million for the three and six months ended June 30, 2007, from $2.3
million and $4.2 million for the same periods during 2006. The average rate paid for interest-bearing
liabilities increased 109 basis points from 2.79% for the first six months of 2006 to 3.88% for the first six
months of 2007. Liability costs are dependent on a number of factors, including the mix of liabilities,
general economic conditions, national and local interest rates, competition, interest rate tiers offered, and
the Bank's cash flow needs. Average costs for the various components of interest-bearing liabilities
changed when compared to the first half of 2006 as follows: NOW accounts increased 93 basis points to
2.29%, money market accounts increased 73 basis points to 3.74%, savings deposits increased 199 basis
points to 3.01%, certificates of deposit increased 116 basis points to 5.01%, and borrowings increased 54
basis points to 4.67%. Average borrowings, composed of repurchase agreements and borrowings from
correspondent banks and the FHLB, totaled $55.5 million for the first six months of 2007, compared to
$32.7 million one year ago. The average balance of all interest-bearing liabilities increased $109.3 million
from $300.7 million for the first six months of 2006 to $410.0 million for the first six months of 2007.
Average noninterest-bearing demand deposits decreased $17.7 million from $152.1 million in December
2006 to $134.4 million in June 2007. The decline in demand deposits reflects the slowdown in real estate
activity in the Bank’s primary markets, resulting in lower deposit balances being maintained by the Bank’s
commercial customers with ties to the local real estate markets.
Provision for Loan Losses. Provision for loan loss expense was $0.4 million for the first six
months of 2007, compared to $0.9 million for the same period of 2006. The provision for year-to-date
2007 has been made primarily to correspond with the Bank's loan activity, which is less than 2006, and the
estimated level of risk in the portfolio. When determining the provision, management evaluates several
factors, including new loan originations, actual and estimated charge-offs, and the risk characteristics of the
loan portfolio. See also the discussion under "-Allowance for Loan Losses."
Noninterest Income. Total noninterest income for the second quarter and first half of 2007,
increased $0.2, to $1.3 million and $2.4 million, compared to the second quarter and first half of 2006. Fee
income from sold real estate loans increased slightly, plus income from other sources, primarily debit and
credit card income and rent income resulted in the increase.
18
Noninterest Expense. Noninterest expense for the three and six months ended June 30, 2007,
increased $0.6 million and $0.9 million, or 12.4% and 9.5%, to $5.3 million and $10.4 million, compared
to $4.7 million and $9.5 million for the first three and six months of 2006. Specifically, compared to the
first half of 2006, the Bank experienced increases of 8.5% for salaries and wages, 12.2% for employee
benefits, 3.2% in supplies and postage, 16.4% in occupancy expenses, 11.9% for advertising and related
business development expenses, 5.2% for depreciation, maintenance, and repair expenses, and 31.0% for
other operating expenses. Data processing expense decreased 5.8% compared to the first six months of
2006. The growth of the Bank in the past year plus higher FDIC and other insurance premiums were the
main reasons for the increases in other noninterest expenses.
Income Tax Expense. The Bank recorded income tax expense of $3.7 million for the first six
months of 2007, compared to $3.4 million for the same period of 2006. This represents an estimated
effective tax rate of approximately 33.0% for federal income taxes and 7.0% for state income taxes during
2007 compared to an estimated tax rate of 32.1% for federal income taxes and 7.3% for state income taxes
in 2006. Federal tax rates have been reduced from statutory rates primarily to reflect the deduction for state
income taxes and the effect of non-taxable income from municipal investments and Bank Owned Life
Insurance. State income tax rates have been reduced from statutory rates primarily in recognition of tax-
exempt investments and anticipated investment tax credits. Tax rates increased from the first three months
of 2006 because of the increased earnings this year that are taxed at a higher rate bracket, plus increasing
non-deductible interest expense related to higher interest rates and the Bank's holdings of non-taxable
investments.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Liquidity is defined as the ability to meet current and future financial obligations of a
short-term nature. The Bank further defines liquidity as the ability to respond to the needs of depositors
and borrowers as well as to earnings enhancement opportunities in a changing marketplace. Primary
sources of liquidity consist of deposit inflows, loan payments, borrowed funds, cash flows from investment
securities, and the possible sale of loans and investment securities from the available for sale portfolio.
These sources fund the Bank's lending and investment activities.
Management monitors liquidity targets and develops strategies and tactics to meet these targets. In
general, the Bank seeks to maintain flexibility with a liquidity target of 10% to 30% of deposits and short-
term liabilities. At June 30, 2007, cash, federal funds sold, and investments were 15.1% of deposits and
short-term liabilities, as compared to 11.3% at December 31, 2006, and 13.1% at June 30, 2006. The Bank
is a member of the Federal Home Loan Bank of Seattle, and as such, has access to borrowings from that
institution in addition to the current notes outstanding. Also, the Bank maintains overnight federal funds
lines with correspondent banks that total over $30 million. Borrowings of overnight federal funds are
subject to availability.
The Bank’s liquidity fluctuates depending on the mix of deposit and loan balances. In addition, a
significant portion of demand account balances are related to loan activity the Bank is experiencing and
may further decline over time if interest rates continue to increase and/or if loan volumes continue to
decline. If and when this occurs, the Bank’s liquidity and net interest margin may be negatively impacted.
However, management believes that the Bank has adequate liquidity and resources to meet its
commitments.
Capital Resources. Total shareholders' equity of the Bank at June 30, 2007, was $63.1 million,
compared to $57.3 million at December 31, 2006. The increase of $5.8 million since December 31, 2006,
was comprised of the Bank's net income for the first half of 2007 of $5.6 million, less the purchase of
67,755 shares of treasury stock totaling $2.2 million, the addition of $0.8 million of capital resulting from
19
the issuance of common stock upon the exercise of stock option grants, an increase of $1.5 million from
the tax benefit of exercised stock options, and an increase of $0.1 million related to recognition of stock
option expense. The Bank also recorded an unrealized gain of $4,296 for the six months ending June 30,
2007, on the market value of the Bank's investment securities.
The Bank is subject to Federal Deposit Insurance Corporation regulations regarding capital
requirements. These regulations require banks to maintain minimum capital levels for capital adequacy
purposes and higher capital levels to be considered "well capitalized." At June 30, 2007, the Bank's Tier 1
leverage capital ratio was 10.22%. The Bank is also subject to risk-based capital measures. The risk-based
capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets
by assigning balance sheet assets and off-balance sheet items to a broad range of risk categories.
According to these standards, the Bank had a Tier 1 risk-adjusted capital ratio of 10.97% and a total risk-
adjusted capital ratio of 12.22% at June 30, 2007. The minimum Tier 1 leverage, Tier 1 risk-adjusted, and
total risk-adjusted capital ratios necessary to be classified for regulatory purposes as a "well capitalized"
institution are 5.0%, 6.0%, and 10.0%, respectively. The Bank, therefore, is considered to be "well
capitalized.” The Bank's actual and required capital amounts and ratios are listed in the following table.
Minimum Required Minimum Required
For Capital To be Considered
Actual Adequacy Purposes "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
At June 30, 2007:
Tier 1 capital (to average assets) $ 63,126 10.22% $ 24,710 4.00% $ 30,888 5.00%
Tier 1 capital (to risk-weighted assets) $ 63,126 10.97% $ 23,017 4.00% $ 34,526 6.00%
Total capital (to risk-weighted assets) $ 70,359 12.23% $ 46,034 8.00% $ 57,543 10.00%
At December 31, 2006:
Tier 1 capital (to average assets) $ 57,285 9.69% $ 23,649 4.00% $ 29,559 5.00%
Tier 1 capital (to risk-weighted assets) $ 57,285 9.65% $ 23,745 4.00% $ 35,617 6.00%
Total capital (to risk-weighted assets) $ 64,739 10.90% $ 47,515 8.00% $ 59,394 10.00%
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To a large extent, much of the Bank's operating strategies focus on asset/liability management. The
purpose of its Funds Management Policy is to provide stable net interest income growth while maintaining
both adequate liquidity and protection of the Bank's earnings from undue interest rate risk. The Funds
Management Policy is also designed to maintain an appropriate balance between rate-sensitive assets and
rate-sensitive liabilities in order to maximize interest rate spreads. The strategy of the Bank has been to
maintain, to the extent reasonably possible, a balanced position between assets and liabilities. Generally,
the Bank attempts to maintain liquid assets of 10% to 30% of net deposits and short-term liabilities in order
to meet current period funding requirements and an adequate ratio of interest income to average earning
assets.
20
The following table sets forth the estimated maturity or repricing, and the resulting interest
sensitivity gap, of the Bank's interest-earning assets and interest-bearing liabilities at June 30, 2007. The
amounts in the table are derived from internal data of the Bank and could be significantly affected by
external factors such as changes in prepayment assumptions, early withdrawals of deposits, and
competition.
Three
Less Than Months to One to Over
Three Less Than Five Five Cumulative
Months One Year Years Years Total
(dollars in thousands)
Interest-earning assets:
Total loans $ 415,526 $ 25,264 $ 65,867 $ 12,140 $ 518,797
Federal funds 15,371 - - - 15,371
Investment securities,
including certificates 11,212 21,920 9,966 - 43,098
Total interest-earning assets $ 442,109 $ 47,184 $ 75,833 $ 12,140 $ 577,266
Interest-bearing liabilities:
Savings and NOW accounts $ 225,069 $ - $ - $ - $ 225,069
Certificates of deposit and
individual retirement accounts 41,873 81,218 13,597 2 136,690
Daily investments 38,484 - - - 38,484
Other borrowed funds - - - 9,000 9,000
Total interest-bearing liabilities $ 305,426 $ 81,218 $ 13,597 $ 9,002 $ 409,243
Interest sensitivity gap $ 136,683 $ (34,034) $ 62,236 $ 3,138 $ 168,023
Cumulative interest sensitivity gap $ 136,683 $ 102,649 $ 164,885 $ 168,023 $ 168,023
Shareholders' equity $ 63,108
Total interest-earning assets $ 577,266
Cumulative interest sensitivity gap as a
percentage of total interest-earning assets 23.68% 17.78% 28.56% 29.11%
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities and periods to repricing, they
may react differently to changes in market interest rates. Also, interest rates on assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates on other assets and liabilities
may follow changes in market interest rates. Additionally, certain assets have features that restrict changes
in the interest rates of such assets, both on a short-term basis and over the lives of such assets. The gap
table presented above is based on stated maturities and anticipated repricing dates and does not take into
account prepayment or withdrawal assumptions. In the event of a change in market interest rates,
prepayments and early withdrawals could cause a significant deviation from the stated maturities and
repricings.
According to the traditional banking industry static gap table set forth above, the Bank was asset
sensitive with a cumulative one-year gap of $102.6 million, or 17.8% of interest-earning assets, at June 30,
2007. Overall, the Bank is also asset sensitive with a cumulative gap of $168.0 million, or 29.1% of
21
interest-earning assets. Based upon the Bank's mix of deposits, loans, and investments, increases in interest
rates would be expected to result in an increase in the Bank's net interest margin. Conversely, a decline in
rates would be expected to result in a decrease in the Bank's margin.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Bank's management, with the participation of the Bank's Principal Executive Officer and
Principal Financial Officer, has evaluated the effectiveness of the Bank's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based on such evaluation, the Bank's Principal
Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the
Bank's disclosure controls and procedures are effective in recording, processing, summarizing, and
reporting, on a timely basis, information required to be disclosed by the Bank in the reports that it files or
submits under the Securities Exchange Act of 1934.
Changes in Internal Control over Financial Reporting
There was no change in the Bank's internal control over financial reporting that occurred during the
fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially
affect, the Bank's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Bank is a party, or to which any of its property
is subject, other than ordinary, routine litigation incidental to the business of banking. No material loss is
expected from any such pending legal proceedings.
ITEM 1A. RISK FACTORS
You should carefully consider the risks and uncertainties we describe both in this Report and in the
Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, before deciding to
invest in, or retain, shares of the Bank’s common stock. These are not the only risks and uncertainties that
we face. Additional risks and uncertainties that we do not currently know about or that we currently
believe are immaterial, or that we have not predicted, may also harm our business operations or adversely
affect us. If any of these risks or uncertainties actually occur, our business, financial condition, operating
results, or liquidity could be materially harmed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) During the six months ended June 30, 2007, the Bank issued 168,526 shares of its Common
Stock to employees and/or Directors who exercised stock options previously granted to them under the
Bank’s existing Stock Option Plans. A total of $0.8 million was paid to the Bank upon the exercise of the
stock options. No underwriters were involved in the transactions. The Bank claims the exemption from
registration available under Section 3(a)(2) of the Securities Act of 1933 for shares of its Common Stock
issued upon the exercise of the options described under this Item 2.
22
(b) Not applicable.
(c) On March 23, 2007, the Board of Directors of the Bank authorized the repurchase of an
additional $2.0 million of the Bank’s common stock over a period of up to three years (the “2007 Buyback
Plan”) to commence upon the completion of the purchase of shares under the 2004 Buyback Plan. On
April 17, 2007, the Bank completed the purchase of common stock under the 2004 Buyback Plan and
commenced the 2007 Buyback Plan.
On June 15, 2007, the Board of Directors of the Bank authorized an amendment to the 2007
Buyback Plan increasing the maximum purchase of the Bank’s common stock under the 2007 Buyback
Plan by $5.0 million to a total of $7.0 million, subject to regulatory approval, which was subsequently
received. The 2007 Buyback Plan allows for the purchase of the Bank’s common stock through April 17,
2010. As of June 30, 2007, the Bank had purchased $1.3 million of its common stock under the 2007
Buyback Plan.
The following table summarizes the Bank's purchases of its common stock for the second quarter of
2007:
Total Number Maximum Dollar
of Shares Purchased Value of Shares that
Total Number Average Price as Part of Publicly may yet be
of Shares Paid Announced Purchased Under
Period Purchased Per Share Plans or Programs the Plans or Programs
April 1-30 10,446 $31.72 10,446 $1,670,763
May 1-31 18,419 $31.28 18,419 $1,094,618
June 1-30 14,333 $30.75 14,333 $5,653,885 (1)
Total 43,198
(1) Includes authorization to purchase an additional $5,000,000 of the Bank’s common stock under
the 2007 Buyback Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Bank (“the Annual Meeting”) was held on May 18,
2007. The following matters were submitted to a vote of the shareholders of the Bank at the Annual
Meeting and received the required vote for election or approval, as the case may be, as follows:
(1) Fixing the number of Directors at nine (9)
Votes For Votes Against Abstaining
4,790,722 2,564 39,190
Approximate broker non-votes: 0
23
(2) Election of Directors - the following Directors were elected:
Votes Votes
Nominee For Against
Arthur Brown 4,692,495 139,981
Rod B. Colwell 4,762,393 70,083
Michael J. Coughlin 4,692,495 139,981
Roy L. Eiguren 4,724,435 108,041
Jack W. Gustavel 4,762,393 70,083
Kurt R. Gustavel 4,761,707 70,769
Terry L. Gustavel 4,747,039 85,437
Jerald J. Jaeger 4,691,752 140,724
Gary L. Mahn 4,747,039 85,437
Approximate broker non-votes: 0
(3) Ratifying the appointment of Moss Adams LLP as independent auditors:
Votes For Votes Against Abstaining
4,815,647 15,891 938
Approximate broker non-votes: 0
(4) Amend Article Fourth of the Bank’s Restated Articles of Incorporation to increase the
number of authorized shares of common stock to 20,000,000 shares:
Votes For Votes Against Abstaining
4,521,227 285,858 25,341
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The exhibits filed as part of this report are listed on the Exhibit Index at page E-1.
24
IDAHO INDEPENDENT BANK
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Idaho Independent Bank
8/7/07 /s/ JACK W. GUSTAVEL a
(Date) Jack W. Gustavel
Chairman and Chief Executive Officer
8/7/07 /s/ PAUL H. MONTREUIL a
(Date) Paul H. Montreuil
Senior Vice President and Cashier
25
EXHIBIT INDEX
Exhibit No. Exhibit
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934.
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934.
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section
1350.
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section
1350.
E-1
Exhibit 31.1
IDAHO INDEPENDENT BANK
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jack W. Gustavel, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Idaho Independent Bank;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations, and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant, and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant is made known to us by others within
the entity, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such disclosure
controls and procedures to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluations; and
d) Disclosed in this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
E-2
5. The registrant's other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of
internal controls over financial reporting which are reasonably likely to adversely
affect the registrant's ability to record, process, summarize, and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal control over financial
reporting.
Date: 8/7/07 a
/s/ JACK W. GUSTAVEL L
Jack W. Gustavel
Chairman and Chief Executive Officer
E-3
Exhibit 31.2
IDAHO INDEPENDENT BANK
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Paul H. Montreuil, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Idaho Independent Bank;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations, and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15(d) and 15(f)) for the registrant, and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant is made known to us by others within
the entity, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such disclosure
controls and procedures to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluations; and
d) Disclosed in this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
E-4
5. The registrant's other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant's auditors and the
audit committee of registrant's board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of
internal controls over financial reporting which are reasonably likely to adversely
affect the registrant's ability to record, process, summarize, and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal control over financial
reporting.
Date: 8/7/07 a
/s/ PAUL H. MONTREUIL a
Paul H. Montreuil
Senior Vice President and Cashier
E-5
Exhibit 32.1
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Idaho Independent Bank (the "Company") for
the period ended June 30, 2007, as filed with the Federal Deposit Insurance Corporation on the date hereof
(the "Report"), I, Jack W. Gustavel, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1) the Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities
Exchange Act of 1934, as amended; and
2) the information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ JACK W. GUSTAVEL L
Jack W. Gustavel
Chairman and Chief Executive Officer
Idaho Independent Bank
August 7, 2007
This certification accompanies each Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by the Sarbanes-Oxley Act of 2002, be deemed filed for purposes of §18 of the Securities Exchange Act of
1934, as amended.
E-6
Exhibit 32.2
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Idaho Independent Bank (the "Company") for
the period ended June 30, 2007, as filed with the Federal Deposit Insurance Corporation on the date hereof
(the "Report"), I, Paul H. Montreuil, Senior Vice President and Cashier (principal financial officer) of the
Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1) the Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities
Exchange Act of 1934, as amended; and
2) the information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ PAUL H. MONTREUIL L
Paul H. Montreuil
Senior Vice President and Cashier
Idaho Independent Bank
August 7, 2007
This certification accompanies each Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by the Sarbanes-Oxley Act of 2002, be deemed filed for purposes of §18 of the Securities Exchange Act of
1934, as amended.
E-7