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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 COMMISSION FILE NUMBER 000-50667
 INTERMOUNTAIN COMMUNITY BANCORP
 (Exact name of registrant as specified in its charter)
 Idaho
    
    82-0499463(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
Identification No.)
 414 Church Street, Sandpoint, ID 83864  (Address of principal executive offices) (Zip code)
 Registrants telephone number, including area code:
(208) 263-0505
 Securities registered pursuant to Section 12(b) of the Act:
 None
    
    None(Title of each class)
    
    (Name of each exchange on which registered)
 Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value)  (Title of class)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




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##### 



Intermountain Community Bancorp
 FORM 10-Q
For the Quarter Ended March 31, 2010
 TABLE OF CONTENTS
  
 PagePART I  Financial Information
    
    
    3Item 1  Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets for March 31, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009
    
    
    5Consolidated Statements of Comprehensive Income for the three months ended March 31, 2010 and 2009
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 4  Controls and Procedures
    
    
    42PART II  Other Information
    
    
    42Item 1  Legal Proceedings
    
    
    42Item 1A  Risk Factors
    
    
    42Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    52Item 3  Defaults Upon Senior Securities
    
    
    52Item 4  [Removed and Reserved]
    
    
    52Item 5  Other Information
    
    
    52Item 6  Exhibits
    
    
    52Signatures
    
    
    53EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I  Financial Information
 
 Item 1  Financial Statements  Intermountain Community Bancorp
 
 Consolidated Balance Sheets
(Unaudited)
 March 31,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands)ASSETSCash and cash equivalents:Interest-bearing
    
    $
    107,515
    
    
    $
    83,617Non-interest bearing and vault
    
    
    15,451
    
    
    
    19,572Restricted cash
    
    
    2,936
    
    
    
    2,508Available-for-sale securities, at fair value
    
    
    187,453
    
    
    
    181,784Held-to-maturity securities, at amortized cost
    
    
    15,153
    
    
    
    15,177Federal Home Loan Bank (FHLB) of Seattle stock, at cost
    
    
    2,310
    
    
    
    2,310Loans held for sale
    
    
    4,970
    
    
    
    6,574Loans receivable, net
    
    
    623,515
    
    
    
    655,602Accrued interest receivable
    
    
    4,812
    
    
    
    5,077Office properties and equipment, net
    
    
    41,761
    
    
    
    42,425Bank-owned life insurance
    
    
    8,488
    
    
    
    8,397Goodwill
    
    
    11,662
    
    
    
    11,662Other intangibles
    
    
    407
    
    
    
    439Other real estate owned (OREO)
    
    
    11,538
    
    
    
    11,538Prepaid expenses and other assets
    
    
    37,017
    
    
    
    32,962Total assets
    
    $
    1,074,988
    
    
    $
    1,079,644LIABILITIESDeposits
    
    $
    826,006
    
    
    $
    819,321Securities sold subject to repurchase agreements
    
    
    86,656
    
    
    
    95,233Advances from Federal Home Loan Bank
    
    
    49,000
    
    
    
    49,000Cashier checks issued and payable
    
    
    1,051
    
    
    
    1,113Accrued interest payable
    
    
    1,396
    
    
    
    1,211Other borrowings
    
    
    16,527
    
    
    
    16,527Accrued expenses and other liabilities
    
    
    9,732
    
    
    
    8,612Total liabilities
    
    
    990,368
    
    
    
    991,017Commitments and contingent liabilitiesSTOCKHOLDERS EQUITYCommon stock 300,000,000 shares authorized; 8,434,631
and 8,438,554 shares issued and 8,387,496 and 8,365,836
shares outstanding as of March 31, 2010 and December 31,
2009
    
    
    78,581
    
    
    
    78,569Preferred stock 1,000,000 shares authorized; 27,000
shares issued and outstanding as of March 31, 2010 and
December 31, 2009
    
    
    25,543
    
    
    
    25,461Accumulated other comprehensive loss, net of tax
    
    
    (4,212
    )
    
    
    (4,840
    )Retained deficit
    
    
    (15,292
    )
    
    
    (10,563
    )Total stockholders equity
    
    
    84,620
    
    
    
    88,627Total liabilities and stockholders equity
    
    $
    1,074,988
    
    
    $
    1,079,644
  3




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Intermountain Community Bancorp

Consolidated Statements of Operations
(Unaudited)
 Three Months EndedMarch 31,2010
    
    
    2009(Dollars in thousands,except per share data)Interest income:Loans
    
    $
    9,649
    
    
    $
    11,648Investments
    
    
    1,967
    
    
    
    2,699Total interest income
    
    
    11,616
    
    
    
    14,347Interest expense:Deposits
    
    
    2,390
    
    
    
    3,342Other borrowings
    
    
    807
    
    
    
    1,103Total interest expense
    
    
    3,197
    
    
    
    4,445Net interest income
    
    
    8,419
    
    
    
    9,902Provision for losses on loans
    
    
    (6,808
    )
    
    
    (2,770
    )Net interest income after provision for losses on loans
    
    
    1,611
    
    
    
    7,132Other income:Fees and service charges
    
    
    1,787
    
    
    
    1,669Loan related fee income
    
    
    493
    
    
    
    540Net gain on sale of securities
    
    
    53
    
    
    
    1,295Other-than-temporary impairment (OTTI) losses on investments (1)
    
    
    (19
    )
    
    
    (244
    )Bank-owned life insurance
    
    
    91
    
    
    
    90Other
    
    
    118
    
    
    
    163Total other income
    
    
    2,523
    
    
    
    3,513Operating expenses
    
    
    11,560
    
    
    
    10,772Loss before income taxes
    
    
    (7,426
    )
    
    
    (127
    )Income tax benefit
    
    
    3,117
    
    
    
    9Net loss
    
    
    (4,309
    )
    
    
    (118
    )Preferred stock dividend
    
    
    419
    
    
    
    414Net loss applicable to common stockholders
    
    $
    (4,728
    )
    
    $
    (532
    )Loss per share  basic
    
    $
    (0.56
    )
    
    $
    (0.06
    )Loss per share  diluted
    
    $
    (0.56
    )
    
    $
    (0.06
    )Weighted average common shares outstanding  basic
    
    
    8,372,315
    
    
    
    8,348,238Weighted average common shares outstanding  diluted
    
    
    8,372,315
    
    
    
    8,348,238
 
 (1)
    
    Total other-than-temporary impairment (OTTI) was
$0 for the  quarter ended March 31, 2010, with $19,000 reclassified
from other comprehensive income to the statement of operations.
Total OTTI for the  quarter ended March 31, 2009 was  $1,751,000,
with $244,000 recognized in the statement of operations and
$1,507,000 recognized in the statement of other comprehensive income.  4




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Intermountain Community Bancorp


Consolidated Statements of Cash Flows
(Unaudited)
 Three months endedMarch 31,2010
    
    
    2009(Dollars in thousands)Cash flows from operating activities:Net loss
    
    $
    (4,309
    )
    
    $
    (118
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation
    
    
    802
    
    
    
    945Stock-based compensation expense
    
    
    122
    
    
    
    93Net amortization of premiums (discounts) on securities
    
    
    769
    
    
    
    17Provisions for losses on loans
    
    
    6,808
    
    
    
    2,770Proceeds from sale of loans
    
    
    17,267
    
    
    
    27,545Originations of loans held for sale
    
    
    (15,474
    )
    
    
    (29,857
    )Amortization of core deposit intangibles
    
    
    32
    
    
    
    35(Gain) on sale of loans, investments, property and equipment
    
    
    (262
    )
    
    
    (1,595
    )Loss on sale of other real estate owned
    
    
    
    
    
    
    OTTI credit loss on available-for-sale investments
    
    
    19
    
    
    
    244Charge down on OREO
    
    
    777
    
    
    
    33Accretion of deferred gain on sale of branch property
    
    
    (4
    )
    
    
    (4
    )Net accretion of loan and deposit discounts and premiums
    
    
    (10
    )
    
    
    (16
    )Increase in cash surrender value of bank-owned life insurance
    
    
    (91
    )
    
    
    (90
    )Change in:Accrued interest receivable
    
    
    265
    
    
    
    239Prepaid expenses and other assets
    
    
    (4,413
    )
    
    
    (9,802
    )Accrued interest payable
    
    
    185
    
    
    
    (333
    )Accrued expenses and other liabilities
    
    
    970
    
    
    
    (1,356
    )Net cash provided by operating activities
    
    
    3,453
    
    
    
    (11,250
    )Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (26,128
    )
    
    
    (87,501
    )Proceeds from calls or maturities of available-for-sale securities
    
    
    6,309
    
    
    
    31,729Principal payments on mortgage-backed securities
    
    
    14,071
    
    
    
    7,091Proceeds from calls or maturities of held-to-maturity securities
    
    
    20
    
    
    
    Origination of loans, net principal payments
    
    
    22,827
    
    
    
    31,425Purchase of office properties and equipment
    
    
    (143
    )
    
    
    (274
    )Proceeds from sale of office properties and equipment
    
    
    6
    
    
    
    Net change in federal funds sold
    
    
    
    
    
    
    40,290Proceeds from sale of other real estate owned
    
    
    1,684
    
    
    
    183Net change in restricted cash
    
    
    (428
    )
    
    
    (2,168
    )Net cash (used in) investing activities
    
    
    18,218
    
    
    
    20,775Cash flows from financing activities:Net change in demand, money market and savings deposits
    
    $
    3,908
    
    
    $
    1,600Net change in certificates of deposit
    
    
    2,777
    
    
    
    19,274Net change in repurchase agreements
    
    
    (8,577
    )
    
    
    (32,494
    )Principal reduction of note payable
    
    
    
    
    
    
    (10
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    55Retirement of treasury stock
    
    
    (3
    )
    
    
    (7
    )Cash dividends paid to preferred stockholders
    
    
    
    
    
    
    (210
    )Net cash provided by (used in) financing activities
    
    
    (1,895
    )
    
    
    (11,792
    )Net change in cash and cash equivalents
    
    
    19,776
    
    
    
    (2,267
    )Cash and cash equivalents, beginning of period
    
    
    103,189
    
    
    
    22,907Cash and cash equivalents, end of period
    
    $
    122,965
    
    
    $
    20,640Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    3,012
    
    
    $
    4,871Income taxes
    
    
    
    
    
    
    Noncash investing and financing activities:Loans converted to other real estate owned
    
    
    2,461
    
    
    
    4,724
  5




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Intermountain Community Bancorp

Consolidated Statements of Comprehensive Income
(Unaudited)
 Three Months EndedMarch 31,2010
    
    
    2009(Dollars in thousands)Net loss
    
    $
    (4,309
    )
    
    $
    (118
    )Other comprehensive income (loss):Change in unrealized gains on investments, and mortgage
backed securities (MBS) available for sale, excluding
non-credit loss on impairment of securities
    
    
    615
    
    
    
    125Non-credit loss on impairment on available-for-sale debt
    
    
    19
    
    
    
    (1,507
    )Less deferred income tax provision (benefit)
    
    
    (251
    )
    
    
    547Change in fair value of qualifying cash flow hedge
    
    
    245
    
    
    
    104Net other comprehensive income (loss)
    
    
    628
    
    
    
    (731
    )Comprehensive loss
    
    $
    (3,681
    )
    
    $
    (849
    )
  6




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Intermountain Community Bancorp
Notes to Consolidated Financial Statements
(Unaudited)
 1.
    
    Basis of Presentation:The foregoing unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these
financial statements do not include all of the disclosures required by accounting principles
generally accepted in the United States of America for complete financial statements. These
unaudited interim consolidated financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 2009. In the opinion
of management, the unaudited interim consolidated financial statements furnished herein include
adjustments, all of which are of a normal recurring nature, necessary for a fair statement of
the results for the interim periods presented.The preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities known to exist as of the date the financial statements are published, and the
reported amounts of revenues and expenses during the reporting period. Uncertainties with
respect to such estimates and assumptions are inherent in the preparation of Intermountain
Community Bancorps (Intermountains or the Companys) consolidated financial statements;
accordingly, it is possible that the actual results could differ from these estimates and
assumptions, which could have a material effect on the reported amounts of Intermountains
consolidated financial position and results of operations.
 2.
    
    InvestmentsThe amortized cost and fair values of investments are as follows (in thousands):
 Available-for-SaleNon-CreditOTTIRecognized
    
    
    Gross
    
    
    GrossAmortized
    
    
    in OCI
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair Value/Cost
    
    
    (Losses)
    
    
    Gains
    
    
    Losses
    
    
    Carrying ValueMarch 31, 2010U.S. treasury securities and
obligations of U.S. government
agencies
    
    $
    46
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    46Residential mortgage-backed securities
    
    
    193,645
    
    
    
    (1,206
    )
    
    
    2,878
    
    
    
    (7,910
    )
    
    
    187,407$
    193,691
    
    
    $
    (1,206
    )
    
    $
    2,878
    
    
    $
    (7,910
    )
    
    $
    187,453December 31, 2009U.S. treasury securities and
obligations of U.S. government
agencies
    
    $
    51
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    51Residential mortgage-backed securities
    
    
    188,624
    
    
    
    (1,225
    )
    
    
    2,662
    
    
    
    (8,328
    )
    
    
    181,733$
    188,675
    
    
    $
    (1,225
    )
    
    $
    2,662
    
    
    $
    (8,328
    )
    
    $
    181,784
 Held-to-MaturityNon-CreditCarrying
    
    
    OTTIValue/
    
    
    Recognized
    
    
    Gross
    
    
    GrossAmortized
    
    
    in OCI
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    (Losses)
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMarch 31, 2010State and municipal securities
    
    $
    15,153
    
    
    $
    
    
    
    $
    291
    
    
    $
    (42
    )
    
    $
    15,402December 31, 2009State and municipal securities
    
    $
    15,177
    
    
    $
    
    
    
    $
    276
    
    
    $
    (56
    )
    
    $
    15,397
 7




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The following table summarizes the duration of Intermountains unrealized losses on
available-for-sale and held-to-maturity securities as of the dates indicated (in thousands).
 Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedMarch 31, 2010
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesState and municipal securities
    
    $
    
    
    
    $
    
    
    
    $
    3,210
    
    
    $
    42
    
    
    $
    3,210
    
    
    $
    42Residential mortgage-backed securities
    
    
    62,445
    
    
    
    1,926
    
    
    
    14,956
    
    
    
    5,984
    
    
    
    77,401
    
    
    
    7,910Total
    
    $
    62,445
    
    
    $
    1,926
    
    
    $
    18,166
    
    
    $
    6,026
    
    
    $
    80,611
    
    
    $
    7,952
 Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDecember 31, 2009
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesState and municipal securities
    
    $
    3,196
    
    
    $
    56
    
    
    $
    
    
    
    $
    
    
    
    $
    3,196
    
    
    $
    56Residential mortgage-backed securities
    
    
    49,464
    
    
    
    1,504
    
    
    
    24,124
    
    
    
    6,824
    
    
    
    73,588
    
    
    
    8,328Total
    
    $
    52,660
    
    
    $
    1,560
    
    
    $
    24,124
    
    
    $
    6,824
    
    
    $
    76,784
    
    
    $
    8,384
  Available-for-Sale
    
    
    Held-to-MaturityAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueOne year or less
    
    $
    
    
    
    $
    
    
    
    $
    635
    
    
    $
    641After one year through five years
    
    
    46
    
    
    
    46
    
    
    
    661
    
    
    
    690After five years through ten years
    
    
    
    
    
    
    
    
    
    
    2,429
    
    
    
    2,559After ten years
    
    
    
    
    
    
    
    
    
    
    11,428
    
    
    
    11,51246
    
    
    
    46
    
    
    
    15,153
    
    
    
    15,402Mortgage-backed securities
    
    
    193,645
    
    
    
    187,407
    
    
    
    
    
    
    
    $
    193,691
    
    
    $
    187,453
    
    
    $
    15,153
    
    
    $
    15,402
 Expected maturities may differ from contractual maturities because issuers may have the right
to call or prepay obligations with or without call or prepayment penalties.
 Intermountains investment portfolios are managed to provide and maintain liquidity; to
maintain a balance of high quality, diversified investments to minimize risk; to offset other
asset portfolio elements in managing interest rate risk; to provide collateral for pledging;
and to maximize returns. At March 31, 2010, 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. The unrealized losses on residential mortgage-backed securities
without OTTI were considered by management to be temporary in nature.
 At March 31, 2010, residential mortgage-backed securities included a security comprised of a
pool of mortgages with a remaining unpaid principal balance of $3.6 million. In March 2009, due
to the lack of an orderly market for the security and the declining national economic and
housing market, based on analytical modeling taking into consideration a range of factors
normally found in an orderly market, the Company recorded a $1.7 million OTTI on this security.
Based on the analysis of projected cash flows, $526,000 was charged to earnings as a credit
loss during 2009 and $1,225,000 was recognized in other comprehensive income. The Company
recorded an additional credit loss impairment of $19,000 for the three months ended March 31,
2010. However, the overall estimated market value on the security improved during this time,
reducing the net non-credit value impairment to $1,206,000. At this time, the Company
anticipates holding the security until its value is recovered or until maturity, and will
continue to adjust its net income and other comprehensive income to reflect potential future
credit loss impairments and the securitys market value. The Company calculated the credit loss
charges against earnings each quarter by subtracting the estimated present value of future cash
flows on the security from its amortized cost at the end of each period.
 See Note 11 Fair Value of Measurements for more information on the calculation of fair or
carrying value for the investment securities.
 8




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##### Table of Contents



3.
    
    Goodwill and Other Intangible Assets:
 Intermountain has goodwill and core deposit intangible assets which were recorded in connection
with business combinations. The Company performs a goodwill impairment analysis on an annual
basis as of December 31. Additionally, the Company performs a goodwill impairment evaluation on
an interim basis when events or circumstances indicate impairment potentially exists. A
significant amount of judgment is involved in determining if an indicator of impairment has
occurred. Such indicators may include, among others, a significant decline in our expected
future cash flows; a sustained, significant decline in our stock price and market
capitalization; a significant adverse change in legal factors or in the business climate;
adverse action or assessment by a regulator; and unanticipated competition. In response to the
significant turmoil in the equity market for financial institutions, the Company evaluated its
goodwill position at each quarter end during 2009 for potential impairment. The Company engaged
an independent consultant at December 31, 2009 to assist management in evaluating the carrying
value of goodwill. The evaluation followed the two-step process for evaluating impairment
required by accounting guidance. In Step 1, the Company evaluated whether an impairment of
goodwill existed at December 31, 2009. This evaluation was based on a comparison of the
estimated fair value of the Company in comparison to the book value of the Companys common
equity at December 31, 2009. In estimating the fair value of the Company, management used a
combination of discounted cash flow method and the market value approach. The discounted cash
flow modeling used estimates of future earnings and cash flows under the assumption that the
Company is sold to an independent company, resulting in changes to both its future financial
position and operating performance. In particular, the evaluation assumed reductions in
investments, borrowings and preferred stock on the balance sheet, and increases in earnings
resulting from improved net interest margins from asset deployment into higher-yielding loans,
lower credit costs in future years, and additional cost reductions from consolidation with
another company. The rate used to discount the cash flows was 14.5% and was based on the
modified Capital Asset Pricing Model, commonly used in valuations, which adds various risk and
size premiums to an assumed risk-free market interest rate. As part of its Step 1 analysis,
management also estimated the Companys fair value using commonly used market multiples against
tangible book value and deposits. The results of Step 1 indicated that a potential impairment
did exist at the end of 2009, requiring the Company to engage in Step 2 to determine the amount
of the impairment.
 The Step 2 evaluation requires the Company to calculate the implied fair value of its goodwill.
The implied fair value of goodwill is determined in the same manner as goodwill recognized in a
business combination. The estimated fair value of the Company is allocated to all of the
Companys assets and liabilities, including any unrecognized identifiable assets, as if the
Company had been acquired in a business combination and the estimated fair value of the Company
is the price paid to acquire it. Any excess of the estimated fair value of the Company as
calculated in Step 1 over the fair value of its net assets represents the implied fair value of
goodwill. If the carrying amount of goodwill is greater than the implied fair value of that
goodwill, an impairment loss would be recognized as a charge to earnings in an amount equal to
that excess. In conducting this analysis, management compared the interest rates, maturities,
durations and quality of its assets and liabilities against various market factors and made
adjustments to the carrying value to arrive at the fair value. The Step 2 analysis indicated
that the Companys fair value at December 31, 2009 exceeded the net fair value of its assets by
an amount greater than the carrying value of its goodwill. As a result, the Company determined
that no impairment existed in 2009. At March 31, 2010, the Company concluded there were no
triggering events that would require an interim impairment evaluation at March 31, 2010. As
this evaluation is based on changing market conditions and estimates of current and future
values and cash flows, no assurance can be given that an impairment of goodwill will not be
required in future periods.
 4.
    
    Advances from the Federal Home Loan Bank of Seattle:
 At March 31, 2010 and December 31, 2009 the Bank had a $10.0 million FHLB advance at 4.96% that
matures in September 2010, a $5.0 million FHLB advance at 0.86% that matures in September 2010,
a $5.0 million FHLB advance at 1.49% that matures in September 2011, a $25.0 million FHLB
advance at 2.06% that matures in October 2012 and a $4.0 million FHLB advance at 3.11% that
matures in September 2014. These notes totaled $49.0 million, and the Bank had the ability to
borrow an additional $64.4 million from the FHLB.
 Advances from FHLB Seattle are collateralized by certain qualifying loans. At December 31,
2009, Intermountain had the ability to borrow $121.6 million from FHLB Seattle, of which
$49.0 million was utilized for borrowing. The Bank also had a letter of credit agreement with
the FHLB at December 31, 2009 in the amount of $2.6 million, which was collateralized using the
same collateral. The Banks credit line with FHLB Seattle is limited to a percentage of its
total regulatory assets subject to collateralization requirements. Intermountain would be able
to borrow amounts in excess of this total from the FHLB Seattle with the placement of
additional available collateral.
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##### Table of Contents



5.
    
    Other Borrowings:
 The components of other borrowings are as follows (in thousands):
 March 31,
    
    
    December 31,2010
    
    
    2009Term note payable (1)
    
    $
    8,279
    
    
    $
    8,279Term note payable (2)
    
    
    8,248
    
    
    
    8,248Total other borrowings
    
    $
    16,527
    
    
    $
    16,527
 
 (1)
    
    In January 2003, the Company issued $8.0 million of Trust Preferred securities through its
subsidiary, Intermountain Statutory Trust I. The debt associated with these securities bears
interest on a variable basis tied to the 90-day LIBOR (London Inter-Bank Offering Rate) index
plus 3.25%, with interest only paid quarterly. The rate on this borrowing was 3.53% at March
31, 2010. The debt is callable by the Company quarterly and matures in March 2033. During the
third quarter of 2008, the Company entered into an interest rate swap contract with Pacific
Coast Bankers Bank. The purpose of the $8.2 million notional value swap is to convert the
variable rate payments made on our Trust Preferred I obligation to a series of fixed rate
payments for five years, as a hedging strategy to help manage the Companys interest-rate
risk. See Note A and B.(2)
    
    In March 2004, the Company issued $8.0 million of Trust Preferred securities through its
subsidiary, Intermountain Statutory Trust II. The debt associated with these securities bears
interest on a variable basis tied to the 90-day LIBOR index plus 2.8%, with interest only paid
quarterly. The rate on this borrowing was 3.05% at March 31, 2010. The debt is callable by the
Company quarterly and matures in April 2034. See Note A and B. A)
    
    Intermountains obligations under the above debentures issued by its subsidiaries
constitute a full and unconditional guarantee by Intermountain of the Statutory Trusts
obligations under the Trust Preferred Securities. In accordance with ASC 810, Consolidation,
(formerly FIN 46R, Consolidation of Variable Interest Entities), the trusts are not
consolidated and the debentures and related amounts are treated as debt of Intermountain.
 B)
    
    To conserve the liquid assets of the parent Company, the Companys Board of Directors has
decided to defer regularly scheduled interest payments on its outstanding Junior
Subordinated Debentures related to its Trust Preferred Securities (TRUPS Debentures)
beginning in December 2009. The Company is permitted to defer payments of interest on the
TRUPS Debentures for up to 20 consecutive quarterly periods without default. During the
deferral period, the Company may not pay any dividends or distributions on, or redeem,
purchase or acquire, or make a liquidation payment with respect to the Companys capital
stock, or make any payment of principal or interest on, or repay, repurchase or redeem any
debt securities of the Company that rank equally or junior to the TRUPS Debentures.
 6.
    
    Earnings Per Share:
 The following table presents the basic and diluted earnings per share computations (net loss
numbers in thousands):
 Three months EndedMarch 31,2010
    
    
    2009Numerator:Net loss  basic and diluted
    
    $
    (4,309
    )
    
    $
    (118
    )Preferred stock dividend
    
    
    419
    
    
    
    414Net loss applicable to common stockholders
    
    $
    (4,728
    )
    
    $
    (532
    )Denominator:Weighted average shares outstanding  basic
    
    
    8,372,315
    
    
    
    8,348,238Dilutive effect of common stock options, restricted stock awards
    
    
    
    
    
    
    Weighted average shares outstanding  diluted
    
    
    8,372,315
    
    
    
    8,348,238Loss per share  basic and diluted:Loss per share  basic
    
    $
    (0.56
    )
    
    $
    (0.06
    )Effect of dilutive common stock options
    
    
    
    
    
    
    Loss per share  diluted
    
    $
    (0.56
    )
    
    $
    (0.06
    )
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The weighted average number of potentially dilutive common shares excluded in calculating
diluted net income per common share due to the anti-dilutive effect is 254,683 and 230,428
shares for the three months ended March 31, 2010 and 2009, respectively. Common stock
equivalents were calculated using the treasury stock method.
 7.
    
    Operating Expenses:
 The following table details Intermountains components of total operating expenses in
thousands:
 Three months endedMarch 31,2010
    
    
    2009Salaries and employee benefits
    
    $
    5,832
    
    
    $
    5,706Occupancy expense
    
    
    1,828
    
    
    
    1,968Advertising
    
    
    222
    
    
    
    299Fees and service charges
    
    
    651
    
    
    
    598Printing, postage and supplies
    
    
    389
    
    
    
    361Legal and accounting
    
    
    324
    
    
    
    280FDIC Assessment
    
    
    469
    
    
    
    153OREO expense
    
    
    253
    
    
    
    116OREO valuation adjustments in the period (1)
    
    
    777
    
    
    
    33Other expense
    
    
    815
    
    
    
    1,258Total operating expenses
    
    $
    11,560
    
    
    $
    10,772
 
 (1)
    
    Amount includes chargedowns and gains/losses on sale of OREO Salaries and employee benefits expense increased $126,000 or 2.21%, over the three month period
last year as a result of $290,000 in severance costs associated with a staff reduction plan
implemented in the first quarter. The severance costs were offset by decreased staffing levels
and lower incentive compensation expense. Efforts to reduce compensation expense continue in
2010, as the Company has reduced additional staff, suspended salary increases for executives
and officers and reduced other compensation plans.
 Occupancy expenses decreased $140,000, or 7.1%, for the three month period ended March 31, 2010
compared to the same period one year ago. The decrease was comprised of a decrease in rent and
computer hardware and software expense as additional cost control measures have been
implemented. The Company expects these expenses to remain stable in 2010, as it has postponed
building expansion plans and limited new hardware and software purchases.
 The advertising expense decrease of $77,000 for the three month period compared to the same
period one year ago reflected reductions in general advertising and media expenses, as the need
for broad advertising in the current market has been limited. The $53,000 increase in fees and
service charges for the three month period ended March 31, 2010 compared to the same period one
year ago primarily reflected increased loan collection, repossession and liquidation expenses.
Printing, postage and supplies increased $28,000 for the three-month period in comparison to
last years total. The increase reflected timing of the payment of postage and supply expense
during the quarter, and is not anticipated to remain at higher levels in subsequent quarters.
Legal and accounting fees increased by $44,000 in comparison to the same three month period in
2009 as increasing legal expenses related to loan collection and compensation analysis were
partially offset by a reduction in consulting fees.
 FDIC expenses increased $316,000, or 206.5% for the three month period over the same period
last year as FDIC insurance premium rates have increased substantially over the same period one
year ago. OREO expense, related valuation adjustments and gain/loss on sale of OREO increased
$881,000 for the three month period over the same period last year. The Company has been
aggressively migrating problem assets into and out of OREO through the credit cycle, resulting
in a larger number of OREO properties outstanding during the period and a higher amount of
charge offs and gains/losses related to the sale of OREO properties than in the first quarter
of 2009. Other expenses decreased $443,000 or 35.2%, for the three month period over the same
period last year, reflecting decreases in telecommunications, computer services, training and
travel costs, and expense associated with funding the reserve for unfunded loan commitments.
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8.
    
    Income Taxes:
 Intermountain uses an estimate of future earnings and tax planning strategies to determine
whether or not the benefit of its net deferred tax asset will be realized. In conducting this
analysis, management has assumed economic conditions will continue to be very challenging in
2010, followed by gradual improvement in the ensuing years. These assumptions are in line with
both national and regional economic forecasts. As such, its estimates include credit losses
that are significantly elevated in 2010, but less so than those experienced in 2009, followed
by improvement in ensuing years as the economy improves and the Companys loan portfolio turns
over. It also assumes improving net interest margins beginning in 2011, and reductions in
operating expenses as credit costs abate and its other cost reduction strategies continue.
Based on these estimates and potential additional tax planning strategies that it could employ
to accelerate taxable income, the Company has determined that it is not required to establish a
valuation allowance for the deferred tax assets, as management believes it is more likely than
not that the net deferred tax asset will be realized principally through future reversals of
existing taxable temporary differences. Management further believes that future taxable income
will be sufficient to realize the benefits of the $10.1 million net operating loss carry
forward included in the net deferred tax asset. However, to the extent that this analysis is
based on estimates that are reliant on future economic conditions, management cannot assure
that valuation impairment on its tax asset will not be required in future periods.
 9.
    
    Stock-Based Compensation Plans:
 The Company utilized its stock to compensate employees and directors under the 1999 Director
Stock Option Plan, the 1999 Employee Plan and the 1988 Employee Plan (together the Stock
Option Plans). On January 14, 2009, the terms of the Amended and Restated 1999 Employee Stock Option and
Restricted Stock Plan and the 1999 Director Stock Option Plan expired. Upon recommendation of
management and approval of the Board of Directors, it was determined that, due to the economic
uncertainty, the Board would not seek to implement a new plan at this time. The 1988 Employee
Stock Option Plan was a predecessor plan to the Amended and Restated 1999 Employee Stock Option
and Restricted Stock Plan. Because each of these plans has expired, shares may no longer be
awarded under these plans. However, awards remain unexercised or unvested under these plans.
The Company did not grant options to purchase Intermountain common stock or restricted stock
during the three months ended March 31, 2010 or March 31, 2009.
 In 2003, stockholders approved a change to the 1999 Employee Option Plan to provide for the
granting of restricted stock awards. The Company granted restricted stock to directors and
employees beginning in 2005. The restricted stock vests 20% per year, over a five-year period.
The Company granted no restricted shares during either of the three months ended March 31, 2010
and 2009. For the three months ended March 31, 2010 and 2009, restricted stock expense totaled
$122,000 and $93,000, respectively. Total expense related to stock-based compensation recorded
in the three months ended March 31, 2010 and 2009 was $122,000 and $93,000, respectively.
 A summary of the changes in stock options outstanding for the three months ended March 31,
2010, is presented below:
 Three months ended March 31, 2010(dollars in thousands, except per share amounts)Weighted
    
    
    WeightedNumber
    
    
    Average
    
    
    Averageof
    
    
    Exercise
    
    
    RemainingShares
    
    
    Price
    
    
    Life (Years)Beginning Options Outstanding, Jan 1, 2010
    
    
    254,686
    
    
    $
    6.35Options Granted
    
    
    
    
    
    
    Exercises
    
    
    
    
    
    
    Forfeitures
    
    
    (12,526
    )
    
    
    7.85Ending options outstanding, March 31, 2010
    
    
    242,160
    
    
    
    6.27
    
    
    
    2.6Exercisable at March 31, 2010
    
    
    242,160
    
    
    $
    6.27
    
    
    
    2.6
 The total intrinsic value of options exercised during the three months ended March 31, 2010 and
2009 was $0 and $7,000, respectively. A summary of the Companys nonvested restricted shares
for the three months ended March 31, 2010, is presented below:
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##### Table of Contents



Weighted-AverageGrant-DateNonvested Shares
    
    Shares
    
    
    Fair ValueBalance at January 1, 2010
    
    
    72,718
    
    
    $
    15.71Granted
    
    
    
    
    
    
    Vested
    
    
    (23,439
    )
    
    
    18.65Forfeited
    
    
    (2,144
    )
    
    
    16.38Balance at March 31, 2010
    
    
    47,135
    
    
    $
    14.22
 10.
    
    Derivative Financial Instruments
 Management uses derivative financial instruments to protect against the risk of interest rate
movements on the value of certain assets and liabilities and on future cash flows. The
instruments that have been used by the Company include interest rate swaps and cash flow hedges
with indices that relate to the pricing of specific assets and liabilities.
 Derivative instruments have inherent risks, primarily market risk and credit risk. Market risk
is associated with changes in interest rates and credit risk relates to the risk that the
counterparty will fail to perform according to the terms of the agreement. The amounts
potentially subject to market and credit risks are the streams of interest payments under the
contracts and the market value of the derivative instrument which is determined based on the
interaction of the notional amount of the contract with the underlying instrument, and not the
notional principal amounts used to express the volume of the transactions. Management monitors
the market risk and credit risk associated with derivative financial instruments as part of its
overall Asset/Liability management process.
 In accordance with ASC 815, Derivatives and Hedging, the Company recognizes all derivative
financial instruments in the consolidated financial statements at fair value regardless of the
purpose or intent for holding the instrument. Derivative financial instruments are included in
other assets or other liabilities, as appropriate, on the Consolidated Balance Sheet. Changes
in the fair value of derivative financial instruments are either recognized periodically in
income or in stockholders equity as a component of other comprehensive income depending on
whether the derivative financial instrument qualifies for hedge accounting, and if so, whether
it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of
derivatives accounted for as fair value hedges are recorded in income in the same period and in
the same income statement line as changes in the fair values of the hedged items that relate to
the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as
cash flow hedges, to the extent they are effective hedges, are recorded as a component of other
comprehensive income, net of deferred taxes. Changes in fair values of derivative financial
instruments not qualifying as hedges pursuant to ASC 815 are reported in non-interest income.
Derivative contracts are valued by the counter party and are periodically validated by
management.
 Interest Rate Swaps  Designated as Cash Flow Hedges
 The tables below identify the Companys interest rate swaps at March 31, 2010 and December 31,
2009, which were entered into to hedge certain LIBOR-based trust preferred debentures and
designated as cash flow hedges pursuant to ASC 815 (dollars in thousands):
 March 31, 2010Receive Rate
    
    Pay Rate
    
    Type of HedgingMaturity Date
    
    Notional Amount
    
    Fair Value(Loss)
    
    (LIBOR)
    
    (Fixed)
    
    RelationshipPay Fixed, Receive Variable:October 2013
    
    $
    8,248
    
    
    $
    (806
    )
    
    
    0.25
    %
    
    
    4.58
    %
    
    Cash Flow
 December 31, 2009Receive Rate
    
    Pay Rate
    
    Type of HedgingMaturity Date
    
    Notional Amount
    
    Fair Value (Loss)
    
    (LIBOR)
    
    (Fixed)
    
    RelationshipPay Fixed, Receive Variable:October 2013
    
    $
    8,248
    
    
    $
    (678
    )
    
    
    0.28
    %
    
    
    4.58
    %
    
    Cash Flow
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The fair values, or unrealized losses, of $806,000 at March 31, 2010 and $678,000 at December
31, 2009 are included in other liabilities. The Company has begun to defer the interest
payments on the related Trust Preferred borrowing beginning with the January 2010 scheduled
remittance. A calculation of the effectiveness of the hedge was prepared. It was concluded
that although the hedge is effective, there is small amount of ineffectiveness due to the
delayed payments. The Company expensed $90,000 in interest expense in the three months ended
March 31, 2010 related to the ineffective portion of the hedge. The changes in fair value, net
of tax, are separately disclosed in the statement of changes in stockholders equity as a
component of comprehensive income. Net cash flows from these interest rate swaps are included
in interest expense on trust preferred debentures. The unrealized loss at March 31, 2010 is a
component of comprehensive income for March 31, 2010. At March 31, 2010, Intermountain had
$550,000 in pledged certificates of deposit and $492,000 in restricted cash as collateral for
the cash flow hedge. A rollfoward of the amounts in accumulated other comprehensive income
related to interest rate swaps designated as cash flow hedges follows:
 Three Months EndedMar 31, 2010
    
    
    Mar 31, 2009Unrealized loss at beginning of period
    
    $
    (678
    )
    
    $
    (985
    )Amount of loss recognized in other comprehensive income
    
    
    (128
    )
    
    
    104Unrealized loss at end of period
    
    $
    (806
    )
    
    $
    (881
    )
 Interest Rate Swaps  Not Designated as Hedging Instruments Under ASC 815
 The Company has purchased certain derivative products to allow the Company to effectively
convert a fixed rate loan to a variable rate payment stream. The Company economically hedges
derivative transactions by entering into offsetting derivatives executed with third parties
upon the origination of a fixed rate loan with a customer. Derivative transactions executed as
part of this program are not designated as ASC 815 hedge relationships and are, therefore,
marked to market through earnings each period. In most cases the derivatives have mirror-image
terms, which result in the positions changes in fair value offsetting completely through
earnings each period. However, to the extent that the derivatives are not a mirror-image,
changes in fair value will not completely offset, resulting in some earnings impact each
period. Changes in the fair value of these interest rate swaps are included in other
non-interest income. The following table summarizes these interest rate swaps as of March 31,
2010 and December 31, 2009 (in thousands):
 March 31, 2010
    
    
    December 31, 2009Notional
    
    
    
    
    
    
    NotionalAmount
    
    
    Fair Value Gain
    
    
    Amount
    
    
    Fair Value GainInterest rate swaps with third party financial institutions
    
    $
    2,559
    
    
    $
    31
    
    
    $
    2,559
    
    
    $
    57
 At March 31, 2010, loans receivable included $31,000 of derivative assets and other liabilities
included $0 of derivative assets related to these interest rate swap transactions. At March 31,
2010, the interest rate swaps had a maturity date of March 2019. At March 31, 2010,
Intermountain had $72,000 in restricted cash as collateral for the interest rate swaps.
 11.
    
    Fair Value Measurements
 Fair value is defined under ASC 820-10 as the price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal market for the asset or liability in
an orderly transaction between market participants on the measurement date. In support of this
principle ASC 820-10 establishes a fair value hierarchy that prioritizes the information used
to develop those assumptions. The fair value hierarchy is as follows:
 Level 1 inputs Unadjusted quoted process in active markets for identical assets or
liabilities that the entity has the ability to access at the measurement date.
 Level 2 inputs Inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. These might include quoted prices
for similar assets and liabilities in active markets, and inputs other than quoted prices that
are observable for the asset or liability, such as interest rates and yield curves that are
observable at commonly quoted intervals.
 Level 3 inputs Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities. Level 3 assets and
liabilities include financial instruments whose value is determined using
 14




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pricing models, discounted cash flow methodologies, or similar techniques, as well as
instruments for which the determination of fair values requires significant management judgment
or estimation.
 The following table presents information about the Companys assets measured at fair value on a
recurring basis as of March 31, 2010, and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine such fair value (in thousands).
 Fair Value MeasurementsAt March 31, 2010, UsingQuoted PricesIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    March 31, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available-for-Sale Securities:U.S. treasury securities and obligations of U.S. government agencies
    
    $
    46
    
    
    $
    
    
    
    $
    46
    
    
    $
    Residential mortgage backed securities (MBS)
    
    
    187,407
    
    
    
    
    
    
    
    157,411
    
    
    
    29,996Other Assets  Derivative
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    31Total Assets Measured at Fair Value
    
    $
    187,484
    
    
    $
    
    
    
    $
    157,457
    
    
    $
    30,027Other Liabilities  Derivatives
    
    $
    806
    
    
    $
    
    
    
    $
    
    
    
    $
    806
 Fair Value MeasurementsAt December 31, 2009 UsingQuoted PricesIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    Dec 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available-for-Sale Securities:U.S. treasury securities and obligations of U.S. government agencies
    
    $
    51
    
    
    $
    
    
    
    $
    51
    
    
    $
    Residential mortgage backed securities (MBS)
    
    
    181,733
    
    
    
    
    
    
    
    149,497
    
    
    
    32,236Other Assets  Derivative
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Total Assets Measured at Fair Value
    
    $
    181,841
    
    
    $
    
    
    
    $
    149,548
    
    
    $
    32,293Other Liabilities  Derivatives
    
    $
    678
    
    
    $
    
    
    
    $
    
    
    
    $
    678
  Fair Value Measurement Transfers- Assets
 Fair Value Measurements Using SignificantUnobservable Inputs ( Level 3)Description
    
    Residential MBS
    
    
    Derivatives
    
    
    TotalJanuary 1, 2010 Balance
    
    $
    32,236
    
    
    $
    57
    
    
    $
    32,293Total gains or losses (realized/unrealized)Included in earnings
    
    
    (19
    )
    
    
    (26
    )
    
    
    (45
    )Included in other comprehensive income
    
    
    911
    
    
    
    
    
    
    
    911Principal Payments
    
    
    (3,132
    )
    
    
    
    
    
    
    (3,132
    )Transfers in and /or out of Level 3
    
    
    
    
    
    
    
    
    
    
    March 31, 2010 Balance
    
    $
    29,996
    
    
    $
    31
    
    
    $
    30,027
 Fair Value Measurement Transfers- Liabilities
 Fair Value MeasurementsUsing Significant UnobservableInputs ( Level 3)Description
    
    DerivativesJanuary 1, 2010 Balance
    
    $
    678Total gains or losses (realized/unrealized)Included in earnings
    
    
    90Included in other comprehensive income
    
    
    38March 31, Balance
    
    $
    806
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##### Table of Contents



Fair Value MeasurementsAt March 31, 2010, UsingQuoted PricesIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    Mar 31, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Loans(1)
    
    $
    66,494
    
    
    $
    
    
    
    $
    
    
    
    $
    66,494OREO
    
    
    11,538
    
    
    
    
    
    
    
    
    
    
    
    11,538Total Assets Measured at Fair Value
    
    $
    78,032
    
    
    $
    
    
    
    $
    
    
    
    $
    78,032
 
 (1)
    
    Represents impaired loans, net, which are included in loans.   Securities
  Available for Sale Securities.
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##### Table of Contents




    
    The length of time and the extent to which the market value of the securities has been lower
than their cost;
    
    The financial condition and near-term prospects of the issuer or obligation, including
any specific events, which may influence the operations of the issuer or obligation such as
credit defaults and losses in mortgages underlying the security, changes in technology that
impair the earnings potential of the investment or the discontinuation of a segment of the
business that may affect the future earnings potential; and
    
    The intent and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in market value.
  Loans.
 Other Real Estate Owned.
 17




---



##### Table of Contents



Interest Rate Swaps.
    March 31, 2010
    
    
    December 31, 2009Carrying
    
    
    
    
    
    
    CarryingAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueFinancial assets:Cash, cash equivalents, restricted cash and federal funds sold
    
    $
    125,352
    
    
    $
    125,352
    
    
    $
    104,835
    
    
    $
    104,835Interest bearing certificates of deposit
    
    
    550
    
    
    
    550
    
    
    
    862
    
    
    
    862Available-for-sale securities
    
    
    187,453
    
    
    
    187,453
    
    
    
    181,784
    
    
    
    181,784Held-to-maturity securities
    
    
    15,153
    
    
    
    15,402
    
    
    
    15,177
    
    
    
    15,397Loans held for sale
    
    
    4,970
    
    
    
    4,970
    
    
    
    6,574
    
    
    
    6,574Loans receivable, net
    
    
    623,515
    
    
    
    635,935
    
    
    
    655,602
    
    
    
    683,300Accrued interest receivable
    
    
    4,812
    
    
    
    4,812
    
    
    
    5,077
    
    
    
    5,077BOLI
    
    
    8,488
    
    
    
    8,488
    
    
    
    8,397
    
    
    
    8,397Financial liabilities:Deposit liabilities
    
    
    826,006
    
    
    
    796,801
    
    
    
    819,321
    
    
    
    786,704Borrowings
    
    
    152,183
    
    
    
    151,065
    
    
    
    160,760
    
    
    
    160,469Accrued interest payable
    
    
    1,396
    
    
    
    1,396
    
    
    
    1,211
    
    
    
    1,211
  Cash, Cash Equivalents, Federal Funds and Certificates of Deposit
  Investments and BOLI
  18




---



##### Table of Contents



Loans Receivable and Loans Held For Sale
  Deposits
  Borrowings
  Accrued Interest
  12. Subsequent Events
  13. New Accounting Pronouncements
    
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 This report contains forward-looking statements. For a discussion about such statements,
including the risks and uncertainties inherent therein, see Forward-Looking Statements.
Managements Discussion and Analysis of Financial Condition and Results of
 19




---



##### Table of Contents



Operations should be read in conjunction with the Consolidated Financial Statements and Notes
presented elsewhere in this report and in Intermountains Form 10-K for the year ended December 31,
2009.
 General
 Overview & History
      Business Strategy & Opportunities
   
    
    A strong, loyal and low-cost deposit franchise with proven growth capabilities: 62% of
Intermountains deposits are in low-cost transaction accounts, resulting in a cost of funds
that has consistently been below its peer group. Intermountain has maintained this low-cost
deposit focus while growing since 1999 from the 8th ranked bank by deposit market share to
the 2nd in the core markets it serves (Source: FDIC and Federal Financial Institutions
Examination Council (FFIEC) Uniform Bank Performance Report (UBPR) data).
 20




---



##### Table of Contents




    
    A high net interest margin (3.57% for the quarter ended March 31, 2010) relative to peers
with opportunity for improvement in a future rising rate environment: Intermountain has
consistently maintained a higher net interest margin than its peer group (Source: UBPR
data), and has positioned its balance sheet to capitalize on the likelihood of future rising
market interest rates.
    
    A sophisticated, and increasingly effective, risk management system: Tempered by its
experiences during the current downturn, Intermountain has developed a refined credit loss
forecasting system, an integrated approach to credit, liquidity, capital and other risk
factors, and a well-seasoned credit administration function.
    
    An operational and compliance infrastructure built for future profitable growth: During
the past three years, Intermountain has focused on upgrading talent, technology and
operational processes to facilitate further balance sheet growth without corresponding
expense increases.
    
    A relatively young, but highly experienced, management team: The executive and senior
management team averages under 50 years old, but still generally exceeds 20 years in banking
experience, most of which has been in the Companys defined core and growth markets. The
current economic cycle has provided outstanding learning opportunities for the team, which
it is incorporating into current and future plans.
      21




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##### Table of Contents



Critical Accounting Policies
  Income Recognition.
 Allowance For Loan Losses.
     22




---



##### Table of Contents



Investments.
   Goodwill and Other Intangible Assets.
 Real Estate Owned.
 23




---



##### Table of Contents



Fair Value Measurements.
 Derivative Financial Instruments and Hedging Activities.
 Income Taxes.
 Results of Operations
 Overview
 24




---



##### Table of Contents



Net Interest Income
      25




---



##### Table of Contents



Provision for Losses on Loans & Credit Quality.
  March 31,2010
    
    
    2009(Dollars in thousands)Balance Beginning January 1
    
    $
    (16,608
    )
    
    $
    (16,433
    )Charge-OffsCommercial loans
    
    
    1,158
    
    
    
    264Commercial real estate loans
    
    
    1,071
    
    
    
    204Commercial construction loans
    
    
    61
    
    
    
    102Land and land development loans
    
    
    2,166
    
    
    
    991Agriculture loans
    
    
    183
    
    
    
    Multifamily loans
    
    
    8
    
    
    
    Residential loans
    
    
    566
    
    
    
    195Residential construction loans
    
    
    
    
    
    
    Consumer Loans
    
    
    189
    
    
    
    158Municipal Loans
    
    
    
    
    
    
    Total Charge-offs
    
    
    5,402
    
    
    
    1,914RecoveriesCommercial Loans
    
    
    (226
    )
    
    
    (71
    )Commercial real estate loans
    
    
    (1
    )
    
    
    Commercial construction loans
    
    
    
    
    
    
    Land and land development loans
    
    
    (2
    )
    
    
    Agriculture loans
    
    
    
    
    
    
    Multifamily loans
    
    
    
    
    
    
    Residential Loans
    
    
    (7
    )
    
    
    Residential construction loans
    
    
    
    
    
    
    Consumer Loans
    
    
    (47
    )
    
    
    (79
    )Municipal Loans
    
    
    
    
    
    
    Total Recoveries
    
    
    (283
    )
    
    
    (150
    )Net charge-offs
    
    
    5,119
    
    
    
    1,764Transfers
    
    
    
    
    
    
    Provision for losses on loans
    
    
    (6,808
    )
    
    
    (2,770
    )Sale of loans
    
    
    
    
    
    
    Balance at March 31
    
    $
    (18,297
    )
    
    $
    (17,439
    )Ratio of net charge-offs to average net loans (annualized)
    
    
    3.24
    %
    
    
    0.97
    %Allowance  Unfunded CommitmentsBalance Beginning January 1
    
    $
    (11
    )
    
    $
    (14
    )Adjustment
    
    
    (5
    )
    
    
    (353
    )Transfers
    
    
    
    
    
    
    Allowance  Unfunded Commitments at March 31
    
    $
    (16
    )
    
    $
    (367
    )
  26




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##### Table of Contents



Non-Accrual Trending
 March 31,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands)Non-accrual loans
    
    $
    22,791
    
    
    $
    18,468Non-accrual loans as a percentage of net loans receivable
    
    
    3.66
    %
    
    
    2.82
    %Total allowance related to non-accrual loans
    
    $
    3,340
    
    
    $
    965Interest income recorded on non-accrual loans
    
    $
    1,173
    
    
    $
    1,126
 Credit Quality Trending
 March 31,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands)Loans past due in excess of 90 days and still accruing
    
    $
    50
    
    
    $
    586Non-accrual loans
    
    
    22,791
    
    
    
    18,468Total non-performing loans
    
    
    22,841
    
    
    
    19,054OREO
    
    
    11,538
    
    
    
    11,538Total non-performing assets (NPAs)
    
    $
    34,379
    
    
    $
    30,592Classified loans(1)
    
    $
    71,076
    
    
    $
    77,176Troubled debt restructured loans(2)
    
    $
    3,201
    
    
    $
    4,604Non-accrual loans as a percentage of net loans receivable
    
    
    3.66
    %
    
    
    2.82
    %Total non-performing loans as a % of net loans receivable
    
    
    3.66
    %
    
    
    2.91
    %Total NPAs as a percentage of loans receivable(3)
    
    
    5.51
    %
    
    
    4.67
    %Allowance for loan losses (ALLL) as a percentage of non-performing loans
    
    
    80.1
    %
    
    
    87.2
    %Total NPAs as a % of total assets(3)
    
    
    3.20
    %
    
    
    2.83
    %Total NPAs as a % of tangible capital + ALLL (Texas Ratio)(3)
    
    
    37.84
    %
    
    
    32.85
    %Loan delinquency ratio (30 days and over)
    
    
    0.33
    %
    
    
    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. 27




---



##### Table of Contents



(2)
    
    Represents accruing restructured loans performing according to their
modified terms. Restructured loans that are not performing according
to their modified terms are included in non-accrual loans. No other
funds are available for disbursement on restructured loans.(3)
    
    NPAs include both nonperforming loans and OREO.    March 31, 2010
    
    
    Dec  31, 2009Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial
    
    $
    14,350
    
    
    
    20.2
    %
    
    $
    11,685
    
    
    
    15.1
    %Commercial real estate
    
    
    14,031
    
    
    
    19.7
    %
    
    
    12,409
    
    
    
    16.1
    %Commercial construction
    
    
    13,048
    
    
    
    18.4
    %
    
    
    15,554
    
    
    
    20.2
    %Land and land development loans
    
    
    12,215
    
    
    
    17.2
    %
    
    
    20,136
    
    
    
    26.1
    %Agriculture
    
    
    9,376
    
    
    
    13.2
    %
    
    
    9,637
    
    
    
    12.5
    %Multifamily
    
    
    561
    
    
    
    0.8
    %
    
    
    695
    
    
    
    0.9
    %Residential real estate
    
    
    5,924
    
    
    
    8.3
    %
    
    
    5,433
    
    
    
    7.0
    %Residential construction
    
    
    1,158
    
    
    
    1.6
    %
    
    
    1,165
    
    
    
    1.5
    %Consumer
    
    
    413
    
    
    
    0.6
    %
    
    
    462
    
    
    
    0.6
    %Municipal
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %Total classified loans
    
    $
    71,076
    
    
    
    100.0
    %
    
    $
    77,176
    
    
    
    100.0
    %
   28




---



##### Table of Contents



E. Oregon,
    
    
    
    
    
    
    
    
    
    
    % of LoanNorth Idaho 
    
    
    Magic
    
    
    
    
    
    
    SW Idaho
    
    
    
    
    
    
    
    
    
    
    Type to TotalNPAs by location
    
    Eastern
    
    
    Valley
    
    
    Greater
    
    
    Excluding
    
    
    
    
    
    
    
    
    
    
    Non-Performing3/31/2010
    
    Washington
    
    
    Idaho
    
    
    Boise Area
    
    
    Boise
    
    
    Other
    
    
    Total
    
    
    Assets(Dollars in thousands)Commercial loans
    
    $
    4,207
    
    
    $
    276
    
    
    $
    793
    
    
    $
    6
    
    
    $
    
    
    
    $
    5,282
    
    
    
    15.3
    %Commercial real estate loans
    
    
    3,751
    
    
    
    1,127
    
    
    
    1,383
    
    
    
    475
    
    
    
    30
    
    
    
    6,766
    
    
    
    19.7
    %Commercial construction loans
    
    
    2,006
    
    
    
    
    
    
    
    
    
    
    
    1,852
    
    
    
    
    
    
    
    3,858
    
    
    
    11.2
    %Land and land development loans
    
    
    6,144
    
    
    
    1,102
    
    
    
    1,872
    
    
    
    996
    
    
    
    2,875
    
    
    
    12,989
    
    
    
    37.8
    %Agriculture loans
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    170
    
    
    
    
    
    
    
    250
    
    
    
    0.7
    %Multifamily loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Residential real estate loans
    
    
    2,677
    
    
    
    182
    
    
    
    444
    
    
    
    357
    
    
    
    380
    
    
    
    4,040
    
    
    
    11.8
    %Residential construction loans
    
    
    1,173
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,173
    
    
    
    3.4
    %Consumer loans
    
    
    13
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    0.1
    %Total
    
    $
    19,971
    
    
    $
    2,695
    
    
    $
    4,572
    
    
    $
    3,856
    
    
    $
    3,285
    
    
    $
    34,379
    
    
    
    100.0
    %Percent of total NPAs
    
    
    58.1
    %
    
    
    7.8
    %
    
    
    13.3
    %
    
    
    11.2
    %
    
    
    9.6
    %
    
    
    100.0
    %Percent of NPAs to total loans in each region(1)
    
    
    5.5
    %
    
    
    5.3
    %
    
    
    6.0
    %
    
    
    3.2
    %
    
    
    10.7
    %
    
    
    5.4
    %
 
 (1)
    
    NPAs include both nonperforming loans and OREO. Nonperforming Asset Trending By Category
 March 31,
    
    
    December 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2009(Dollars in thousands)Commercial loans
    
    $
    5,282
    
    
    $
    2,653
    
    
    $
    4,225Commercial real estate loans
    
    
    6,766
    
    
    
    5,235
    
    
    
    731Commercial construction loans
    
    
    3,858
    
    
    
    3,133
    
    
    
    5,514Land and land development loans
    
    
    12,989
    
    
    
    14,055
    
    
    
    21,566Agriculture loans
    
    
    250
    
    
    
    834
    
    
    
    1,690Multifamily loans
    
    
    
    
    
    
    135
    
    
    
    Residential real estate loans
    
    
    4,040
    
    
    
    3,195
    
    
    
    3,482Residential construction loans
    
    
    1,173
    
    
    
    1,264
    
    
    
    986Consumer loans
    
    
    21
    
    
    
    88
    
    
    
    173Total NPAs by Categories
    
    $
    34,379
    
    
    $
    30,592
    
    
    $
    38,367
   29




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##### Table of Contents



Other Income.
   Consolidated Financial Statements
  Operating Expenses.
 30




---



##### Table of Contents



Income Tax Provision
  31




---



##### Table of Contents



Financial Position
 Assets
 Investments.
  Loans Receivable. Powered By Community
  March 31, 2010
    
    
    December 31, 2009Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial loans
    
    $
    132,137
    
    
    
    20.58
    
    
    $
    131,562
    
    
    
    19.57Commercial real estate loans
    
    
    175,591
    
    
    
    27.35
    
    
    
    172,726
    
    
    
    25.69Commercial construction
    
    
    39,663
    
    
    
    6.18
    
    
    
    45,581
    
    
    
    6.78Land and land development loans
    
    
    80,795
    
    
    
    12.59
    
    
    
    88,604
    
    
    
    13.18Agriculture loans
    
    
    94,883
    
    
    
    14.78
    
    
    
    110,256
    
    
    
    16.40Multifamily loans
    
    
    17,796
    
    
    
    2.77
    
    
    
    18,067
    
    
    
    2.69Residential real estate loans
    
    
    63,658
    
    
    
    9.92
    
    
    
    65,544
    
    
    
    9.75Residential construction loans
    
    
    15,533
    
    
    
    2.42
    
    
    
    16,626
    
    
    
    2.47Consumer loans
    
    
    17,068
    
    
    
    2.66
    
    
    
    18,287
    
    
    
    2.72Municipal loans
    
    
    4,812
    
    
    
    0.75
    
    
    
    5,061
    
    
    
    0.75Total loans
    
    
    641,936
    
    
    
    100.00
    
    
    
    672,314
    
    
    
    100.00Allowance for loan losses
    
    
    (18,297
    )
    
    
    
    
    
    
    (16,608
    )Deferred loan fees, net of direct origination costs
    
    
    (124
    )
    
    
    
    
    
    
    (104
    )Loans receivable, net
    
    $
    623,515
    
    
    
    
    
    
    $
    655,602Weighted average interest rate
    
    
    6.09
    %
    
    
    
    
    
    
    6.15
    %
 32




---



##### Table of Contents



Geographic Distribution
  E. Oregon,
    
    
    
    
    
    
    
    
    
    
    % of LoanNorth Idaho-
    
    
    Magic
    
    
    Greater
    
    
    SW Idaho,
    
    
    
    
    
    
    
    
    
    
    type toEastern
    
    
    Valley
    
    
    Boise
    
    
    excluding
    
    
    
    
    
    
    
    
    
    
    totalLoan Portfolio by Location
    
    Washington
    
    
    Idaho
    
    
    Area
    
    
    Boise
    
    
    Other
    
    
    Total
    
    
    loans(Dollars in thousands)Commercial loans
    
    $
    87,162
    
    
    $
    11,201
    
    
    $
    13,505
    
    
    $
    18,954
    
    
    $
    1,315
    
    
    $
    132,137
    
    
    
    20.6
    %Commercial real estate loans
    
    
    113,725
    
    
    
    15,797
    
    
    
    19,348
    
    
    
    14,919
    
    
    
    11,802
    
    
    
    175,591
    
    
    
    27.3
    %Commercial construction loans
    
    
    30,280
    
    
    
    889
    
    
    
    7,298
    
    
    
    430
    
    
    
    766
    
    
    
    39,663
    
    
    
    6.2
    %Land and land development loans
    
    
    57,534
    
    
    
    6,861
    
    
    
    11,029
    
    
    
    4,335
    
    
    
    1,036
    
    
    
    80,795
    
    
    
    12.6
    %Agriculture loans
    
    
    1,275
    
    
    
    7,087
    
    
    
    16,821
    
    
    
    66,828
    
    
    
    2,872
    
    
    
    94,883
    
    
    
    14.8
    %Multifamily loans
    
    
    9,065
    
    
    
    
    
    
    
    1,071
    
    
    
    
    
    
    
    7,660
    
    
    
    17,796
    
    
    
    2.8
    %Residential real estate loans
    
    
    40,865
    
    
    
    6,234
    
    
    
    3,834
    
    
    
    8,278
    
    
    
    4,447
    
    
    
    63,658
    
    
    
    9.9
    %Residential construction loans
    
    
    10,036
    
    
    
    604
    
    
    
    2,444
    
    
    
    2,344
    
    
    
    105
    
    
    
    15,533
    
    
    
    2.4
    %Consumer loans
    
    
    8,877
    
    
    
    1,928
    
    
    
    1,462
    
    
    
    4,166
    
    
    
    635
    
    
    
    17,068
    
    
    
    2.6
    %Municipal loans
    
    
    4,586
    
    
    
    226
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,812
    
    
    
    0.8
    %Total
    
    $
    363,405
    
    
    $
    50,827
    
    
    $
    76,812
    
    
    $
    120,254
    
    
    $
    30,638
    
    
    $
    641,936
    
    
    
    100.0
    %Percent of total loans in geographic area
    
    
    56.61
    %
    
    
    7.92
    %
    
    
    11.97
    %
    
    
    18.73
    %
    
    
    4.77
    %
    
    
    100.00
    %Percent of total loans where real estate
is the primary collateral
    
    
    72.00
    %
    
    
    65.13
    %
    
    
    61.67
    %
    
    
    42.26
    %
    
    
    84.95
    %
    
    
    65.26
    %
 33




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##### Table of Contents



Three months endedMarch 31,2010
    
    
    2009
    
    
    % Change(Dollars in thousands)Commercial
    
    $
    45,673
    
    
    $
    46,975
    
    
    
    (2.8
    )Commercial real estate
    
    
    27,426
    
    
    
    15,323
    
    
    
    79.0Residential real estate
    
    
    14,583
    
    
    
    28,287
    
    
    
    (48.4
    )Consumer
    
    
    1,095
    
    
    
    2,456
    
    
    
    (55.4
    )Municipal
    
    
    
    
    
    
    478
    
    
    
    (100.0
    )Total loans originated
    
    $
    88,777
    
    
    $
    93,519
    
    
    
    (5.1
    )
  Office Properties and Equipment.
 Other Real Estate Owned.
 34




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##### Table of Contents



Other Real Estate Owned Activity
 2010
    
    
    2009(Dollars in thousands)Balance, beginning of period, January 1
    
    $
    11,538
    
    
    $
    4,541Additions to OREO
    
    
    2,461
    
    
    
    4,724Proceeds from sale of OREO
    
    
    (1,684
    )
    
    
    (180
    )Valuation Adjustments in the period(1)
    
    
    (777
    )
    
    
    (33
    )Balance, end of period, March 31
    
    $
    11,538
    
    
    $
    9,052
 
 (1)
    
    Amount includes chargedowns and gains/losses on sale of OREO Intangible Assets.
 BOLI and All Other Assets
 Deposits
  March 31, 2010
    
    
    December 31, 2009Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Non-interest bearing demand accounts
    
    $
    160,174
    
    
    
    19.4
    
    
    $
    168,244
    
    
    
    20.5NOW and money market 0.0% to 4.65%
    
    
    351,117
    
    
    
    42.5
    
    
    
    340,070
    
    
    
    41.5Savings and IRA 0.0% to 5.75%
    
    
    78,554
    
    
    
    9.5
    
    
    
    77,623
    
    
    
    9.5Certificate of deposit accounts (CDs)
    
    
    93,140
    
    
    
    11.3
    
    
    
    86,381
    
    
    
    10.6Jumbo CDs
    
    
    83,727
    
    
    
    10.1
    
    
    
    82,249
    
    
    
    10.0Brokered CDs
    
    
    50,428
    
    
    
    6.1
    
    
    
    54,428
    
    
    
    6.6CDARS CDs to local customers
    
    
    8,866
    
    
    
    1.1
    
    
    
    10,326
    
    
    
    1.3Total deposits
    
    $
    826,006
    
    
    
    100.0
    
    
    $
    819,321
    
    
    
    100.0Weighted average interest rate on certificates of deposit
    
    
    
    
    
    
    2.47
    %
    
    
    
    
    
    
    2.52
    %Core Deposits as a percentage of total deposits (1)
    
    
    
    
    
    
    82.3
    %
    
    
    
    
    
    
    81.6
    %Deposits generated from the Companys market area as a % of total deposits
    
    
    
    
    
    
    93.9
    %
    
    
    
    
    
    
    93.4
    %
 
 (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).   35




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##### Table of Contents



Deposits by Location
    
    3/31/2010
    
    
    % of total depositsNorth Idaho  Eastern Washington
    
    $
    400,320
    
    
    
    48.5
    %Magic Valley Idaho
    
    
    69,523
    
    
    
    8.4
    %Greater Boise Area
    
    
    78,830
    
    
    
    9.5
    %Southwest Idaho  Oregon excluding Boise
    
    
    167,534
    
    
    
    20.3
    %Administration, Secured Savings
    
    
    109,799
    
    
    
    13.3
    %Total
    
    $
    826,006
    
    
    
    100.0
    %
  Borrowings
 Interest Rate Risk
    36




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Liquidity and Sources of Funds
    37




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##### Table of Contents



Capital Resources
       38




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Notes to Consolidated Financial Statements
   Well-CapitalizedActual
    
    Capital Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted assets):The Company
    
    $
    92,390
    
    
    
    12.08
    %
    
    $
    61,188
    
    
    
    8
    %
    
    $
    76,485
    
    
    
    10
    %Panhandle State Bank
    
    
    94,571
    
    
    
    12.36
    %
    
    
    61,189
    
    
    
    8
    %
    
    
    76,486
    
    
    
    10
    %Tier I capital (to risk-weighted assets):The Company
    
    
    82,721
    
    
    
    10.82
    %
    
    
    30,594
    
    
    
    4
    %
    
    
    45,891
    
    
    
    6
    %Panhandle State Bank
    
    
    84,902
    
    
    
    11.10
    %
    
    
    30,595
    
    
    
    4
    %
    
    
    45,892
    
    
    
    6
    %Tier I capital (to average assets):The Company
    
    
    82,721
    
    
    
    7.84
    %
    
    
    42,207
    
    
    
    4
    %
    
    
    52,759
    
    
    
    5
    %Panhandle State Bank
    
    
    84,902
    
    
    
    8.11
    %
    
    
    41,871
    
    
    
    4
    %
    
    
    52,338
    
    
    
    5
    %
   Off Balance Sheet Arrangements and Contractual Obligations
  39




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Tabular Disclosure of Contractual Obligations
  Payments Due by PeriodLess than
    
    
    1 to
    
    
    Over 3 to
    
    
    More thanTotal
    
    
    1 Year
    
    
    3 Years
    
    
    5 Years
    
    
    5 Years(in thousands)Long-term debt(1)
    
    $
    95,768
    
    
    $
    1,258
    
    
    $
    62,166
    
    
    $
    5,270
    
    
    $
    27,074Short-term debt
    
    
    72,061
    
    
    
    72,061
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations(2)
    
    
    14,836
    
    
    
    982
    
    
    
    1,854
    
    
    
    1,568
    
    
    
    10,432Direct financing obligations(3)
    
    
    35,360
    
    
    
    1,635
    
    
    
    4,905
    
    
    
    3,433
    
    
    
    25,387Total
    
    $
    218,025
    
    
    $
    75,936
    
    
    $
    68,925
    
    
    $
    10,271
    
    
    $
    62,893
 
 (1)
    
    Includes interest payments related to long-term debt agreements.(2)
    
    Excludes recurring accounts payable, accrued expenses and other liabilities, repurchase
agreements and customer deposits, all of which are recorded on the registrants balance sheet.
See Notes 4 and 5 of Notes to Consolidated Financial Statements.(3)
    
    Sandpoint Center Building lease payments related to direct financing transaction executed in
August 2009. New Accounting Pronouncements
    Forward-Looking Statements
 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 This report may contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not
limited to, statements about our plans, objectives, expectations and intentions that are not
historical facts, and other statements identified by words such as expects, anticipates,
intends, plans, believes,, will likely, should, projects, seeks, estimates or words
of similar meaning. These forward-looking
 40




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statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control. In addition, these
forward-looking statements are subject to assumptions with respect to future business strategies
and decisions that are subject to change. In addition to the factors set forth in the sections
titled Risk Factors, Business and Managements Discussion and Analysis of Financial Condition
and Results of Operations, as applicable, in this report, the following factors, among others,
could cause actual results to differ materially from the anticipated results:
 
    
    inflation and interest rate levels, and market and monetary fluctuations;
    
    the risks associated with lending and potential adverse changes in credit quality;
    
    changes in market interest rates and spreads, which could adversely affect our net
interest income and profitability;
    
    increased delinquency rates;
    
    trade, monetary and fiscal policies and laws, including interest rate and income tax
policies of the federal government;
    
    applicable laws and regulations and legislative or regulatory changes;
    
    the timely development and acceptance of new products and services of Intermountain;
    
    the willingness of customers to substitute competitors products and services for
Intermountains products and services;
    
    technological and management changes;
    
    our ability to recruit and retain key management and staff;
    
    changes in estimates and assumptions used in financial accounting;
    
    the Companys critical accounting policies and the implementation of such policies;
    
    growth and acquisition strategies;
    
    lower-than-expected revenue or cost savings or other issues in connection with mergers
and acquisitions;
    
    changes in consumer spending, saving and borrowing habits;
    
    the strength of the United States economy in general and the strength of the local
economies in which Intermountain conducts its operations;
    
    declines in real estate values supporting loan collateral;
    
    our ability to attract new deposits and loans and leases;
    
    competitive market pricing factors;
    
    further deterioration in economic conditions that could result in increased loan and
lease losses;
    
    risks associated with concentrations in real estate-related loans;
    
    stability of funding sources and continued availability of borrowings;
    
    Intermountains success in gaining regulatory approvals, when required;
    
    changes in legal or regulatory requirements or the results of regulatory examinations
that could restrict growth;
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##### Table of Contents




    
    our ability to comply with the requirements of regulatory orders issued to us and/or our
banking subsidiary;
    
    significant decline in the market value of the Company that could result in an impairment
of goodwill;
    
    our ability to raise capital or incur debt on reasonable terms;
    
    regulatory limits on our subsidiary banks ability to pay dividends to the Company;
    
    effectiveness of the Emergency Economic Stabilization Act of 2008 (EESA), the American
Recovery and Reinvestment Act of 2009 (ARRA), and other legislative and regulatory efforts
to help stabilize the U.S. financial markets;
    
    future legislative or administrative changes to the Troubled Asset Relief Program
(TARP) Capital Purchase Program enacted under EESA; and
    
    the impact of EESA and ARRA and related rules and regulations on our business operations
and competitiveness, including the impact of executive compensation restrictions, which may
affect our ability to retain and recruit executives in competition with other firms who do
not operate under those restrictions; and
    
    Intermountains success at managing the risks involved in the foregoing.
  
 Item 3  Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Changes in Internal Control over Financial Reporting
 
 PART II  Other Information
 
 Item 1  Legal Proceedings
  
 Item 1A. RISK FACTORS
 Our business exposes us to certain risks. The following is a discussion of what we currently
believe are the most significant risks and uncertainties that may affect our business, financial
condition or results of operations, or the value of our common stock.
 42




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We cannot accurately predict the effect of the current economic downturn on our future results of
operations or market price of our stock.
  The current economic downturn in the market areas we serve may continue to adversely impact our
earnings and could increase our credit risk associated with our loan portfolio.
  
    
    economic conditions may worsen, increasing the likelihood of credit defaults by
borrowers;
    
    loan collateral values, especially as they relate to commercial and residential real
estate, may decline further, thereby increasing the severity of loss in the event of loan
defaults;
    
    nonperforming assets and write-downs of assets underlying troubled credits could
adversely affect our earnings;
    
    demand for banking products and services may decline, including services for low cost and
non-interest-bearing deposits; and
    
    changes and volatility in interest rates may negatively impact the yields on earning
assets and the cost of interest-bearing liabilities.
 Our allowance for loan losses may not be adequate to cover actual loan losses, which could
adversely affect our earnings.
  We have recently entered into an informal agreement with our regulators to take steps to further
strengthen the Bank.
  43




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##### Table of Contents



We will pursue additional capital in the future, which could dilute the holders of our outstanding
common stock and may adversely affect the market price of our common stock.
  We incurred a significant loss over the last fiscal year and losses may continue in the future.
  Concentration in real estate loans and the deterioration in the real estate markets we serve could
require material increases in our allowance for loan losses and adversely affect our financial
condition and results of operations.
  Non-performing assets take significant time to resolve and adversely affect our results of
operations and financial condition.
  Our ability to receive dividends from our banking subsidiary accounts for most of our revenue and
could affect our liquidity and ability to pay dividends.
 44




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##### Table of Contents



A continued tightening of credit markets and liquidity risk could adversely affect our business,
financial condition and results of operations.
  The FDIC has increased insurance premiums and imposed special assessments to rebuild and maintain
the federal deposit insurance fund, and any additional future premium increases or special
assessments could have a material adverse effect on our business, financial condition and results
of operations.
     45




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##### Table of Contents



If the goodwill recorded in connection with acquisitions becomes impaired, it could have an
adverse impact on earnings and capital.
  We may be required, in the future, to recognize impairment with respect to investment securities,
including the FHLB stock we hold.
   Our ability to access markets for funding and acquire and retain customers could be adversely
affected by the deterioration of other financial institutions or if the financial service
industrys reputation is damaged further.
  Recent levels of market volatility were unprecedented and we cannot predict whether they will
return.
  46




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##### Table of Contents



We operate in a highly regulated environment and we cannot predict the effects of recent and
pending federal legislation.
    F luctuating interest rates could adversely affect our profitability.
  Fluctuations in interest rates on loans could adversely affect our business.
  We face strong competition from financial services companies and other companies that offer
banking services.
 47




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##### Table of Contents



We may not be able to successfully implement our internal growth strategy.
  Certain built-in losses could be limited if we experience an ownership change, as defined in the
Internal Revenue Code.
  Unexpected losses or our inability to successfully implement our tax planning strategies in future
reporting periods may require us to establish a valuation allowance against our deferred income
tax assets.
  48




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Changes in accounting standards could materially impact our financial statements.
  The Preferred Stock diminishes the net income available to our common shareholders and earnings
per common share.
   Holders of the Preferred Stock have certain voting rights that may adversely affect our common
shareholders, and the holders of the Preferred Stock may have interests different from our common
shareholders.
  
    
    any authorization or issuance of shares ranking senior to the Preferred Stock;
    
    any amendments to the rights of the Preferred Stock so as to adversely effect the rights,
preferences, privileges or voting power of the Preferred Stock; or
    
    consummation of any merger, share exchange or similar transaction unless the shares of
Preferred Stock remain outstanding, or if we are not the surviving entity in such
transaction, are converted into or exchanged for preference securities of the surviving
entity and the shares of Preferred Stock remaining outstanding or such preference securities
have the rights, preferences, privileges and voting power of the Preferred Stock.
  49




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Because of our participation in TARP, we are subject to restrictions on compensation paid to our
executives.
  
    
    ensuring that incentive compensation for senior executives does not encourage unnecessary
and excessive risks that threaten the value of Intermountain;
    
    a prohibition on cash incentive bonuses to our five most highly-compensated employees,
subject to limited exceptions;
    
    a prohibition on equity compensation awards to our five most highly-compensated employees
other than long-term restricted stock that cannot be sold, other than to pay related taxes,
until Treasury no longer holds the Series A Preferred Stock;
    
    a prohibition on any severance or change-in-control payments to our senior executive
officers and next five most highly-compensated employees;
    
    a required recovery or clawback of any bonus or incentive compensation paid to a senior
executive officer or any of the next twenty most highly compensated employees based on
financial or other performance criteria that are later proven to be materially inaccurate;
and
    
    an agreement not to deduct for tax purposes annual compensation in excess of $500,000 for
each senior executive officer.
  50




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Because of our participation in TARP, we are subject to restrictions on our ability to repurchase
our shares.
  Future acquisitions and expansion activities may disrupt our business and adversely affect our
operating results.
  We may not be able to replace key members of management or attract and retain qualified
relationship managers in the future.
  The market price of our stock can be volatile.
  We are subject to a variety of operational risks, including reputational risk, legal risk and
compliance risk, and the risk of fraud or theft by employees or outsiders, which may adversely
affect our business and results of operations.
    51




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Certain provisions in our Articles of Incorporation could make a third party acquisition of us
difficult.
  
    
    certain non-monetary factors that the board of directors may consider when evaluating a
takeover offer:
    
    a requirement that any plan of merger or share exchange that would result in a change in
control be approved by the affirmative vote of not less than 66 2/3% of the shares entitled
to vote (a level in excess of the requirement that would otherwise be imposed by Idaho law);
and
    
    division of the board of directors into three classes serving a staggered term of office,
with one class of directors elected each year for a three-year term.
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults Upon Senior Securities
  
 Item 4  [Removed and Reserved]
  
 Item 5  Other Information
  
  Exhibit No.
    
    Exhibit31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.32
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
 52




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Signatures
  INTERMOUNTAIN COMMUNITY BANCORP
(Registrant)May 14, 2010
    By:
    /s/ Curt HeckerDate
    
    Curt HeckerPresident and Chief Executive OfficerMay 14, 2010
    By:
    /s/ Doug WrightDate
    
    Doug WrightExecutive Vice President and Chief Financial
Officer 53