##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED March 31, 2009
 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
  Idaho
    
    82-0499463(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 414 Church Street, Sandpoint, Idaho 83864
  (208) 263-0505
  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
  Class
    
    Outstanding as of May 5, 2009Common Stock (no par value)
    
    8,361,693




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##### 



Intermountain Community Bancorp
 FORM 10-Q
For the Quarter Ended March 31, 2009
 TABLE OF CONTENTS
 PART I  Financial Information
    
    
    3Item 1  Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets for March 31, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008
    
    
    5Consolidated Statements of Comprehensive Income for the three March 31, 2009 and 2008
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4  Controls and Procedures
    
    
    35PART II  Other Information
    
    
    36Item 1  Legal Proceedings
    
    
    36Item 1A  Risk Factors
    
    
    36Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3  Defaults Upon Senior Securities
    
    
    40Item 4
 Submission of Matters to a Vote of Security Holders
    
    
    40Item 5  Other Information
    
    
    40Item 6  Exhibits
    
    
    41Signatures
    
    
    42EX-10.1EX-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 31,2009
    
    
    2008(Dollars in thousands)ASSETSCash and cash equivalents:Interest-bearing
    
    $
    4,904
    
    
    $
    1,354Non-interest bearing and vault
    
    
    15,736
    
    
    
    21,553Restricted cash
    
    
    2,636
    
    
    
    468Federal funds sold
    
    
    31,160
    
    
    
    71,450Available-for-sale securities, at fair value
    
    
    195,980
    
    
    
    147,618Held-to-maturity securities, at amortized cost
    
    
    17,575
    
    
    
    17,604Federal Home Loan Bank of Seattle stock, at cost
    
    
    2,310
    
    
    
    2,310Loans held for sale
    
    
    3,545
    
    
    
    933Loans receivable, net
    
    
    723,160
    
    
    
    752,615Accrued interest receivable
    
    
    6,210
    
    
    
    6,449Office properties and equipment, net
    
    
    43,625
    
    
    
    44,296Bank-owned life insurance
    
    
    8,127
    
    
    
    8,037Goodwill
    
    
    11,662
    
    
    
    11,662Other intangibles
    
    
    542
    
    
    
    576Other real estate owned
    
    
    9,052
    
    
    
    4,541Prepaid expenses and other assets
    
    
    14,901
    
    
    
    14,089Total assets
    
    $
    1,091,125
    
    
    $
    1,105,555LIABILITIESDeposits
    
    $
    811,286
    
    
    $
    790,412Securities sold subject to repurchase agreements
    
    
    76,512
    
    
    
    109,006Advances from Federal Home Loan Bank
    
    
    46,000
    
    
    
    46,000Cashier checks issued and payable
    
    
    779
    
    
    
    922Accrued interest payable
    
    
    1,942
    
    
    
    2,275Other borrowings
    
    
    40,603
    
    
    
    40,613Accrued expenses and other liabilities
    
    
    4,646
    
    
    
    5,842Total liabilities
    
    
    981,768
    
    
    
    995,070Commitments and contingent liabilitiesSTOCKHOLDERS EQUITYCommon stock 29,040,000 shares authorized;
8,439,875 and 8,429,576 shares issued and
8,361,472 and 8,333,009 shares outstanding as of
March 31, 2009 and December 31, 2008
    
    
    78,319
    
    
    
    78,261Preferred stock 1,000,000 shares authorized;
27,000 shares issued and outstanding as of March
31, 2009 and December 31, 2008
    
    
    25,226
    
    
    
    25,149Accumulated other comprehensive loss, net of tax
    
    
    (6,666
    )
    
    
    (5,935
    )Retained earnings
    
    
    12,478
    
    
    
    13,010Total stockholders equity
    
    
    109,357
    
    
    
    110,485Total liabilities and stockholders equity
    
    $
    1,091,125
    
    
    $
    1,105,555
  3




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##### Table of Contents



Intermountain Community Bancorp
Consolidated Statements of Operations
(Unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008(Dollars in thousands, except pershare data)Interest income:Loans
    
    $
    11,648
    
    
    $
    15,017Investments
    
    
    2,699
    
    
    
    2,184Total interest income
    
    
    14,347
    
    
    
    17,201Interest expense:Deposits
    
    
    3,342
    
    
    
    4,029Other borrowings
    
    
    1,103
    
    
    
    1,846Total interest expense
    
    
    4,445
    
    
    
    5,875Net interest income
    
    
    9,902
    
    
    
    11,326Provision for losses on loans
    
    
    (2,770
    )
    
    
    (258
    )Net interest income after provision for losses on loans
    
    
    7,132
    
    
    
    11,068Other income:Fees and service charges
    
    
    1,669
    
    
    
    1,765Loan related fee income
    
    
    540
    
    
    
    645Other-than-temporary impairment of investments
(impairment loss of $244, consisting of $1,751 of
total other-than-temporary impairment losses,
net of $1,507 recognized in other comprehensive
income, for the quarter ended March 31, 2009)
    
    
    (244
    )
    
    
    Bank-owned life insurance
    
    
    90
    
    
    
    74Net gain on sale of securities
    
    
    1,295
    
    
    
    Other
    
    
    163
    
    
    
    294Total other income
    
    
    3,513
    
    
    
    2,778Operating expenses
    
    
    10,772
    
    
    
    11,259Income (loss) before income taxes
    
    
    (127
    )
    
    
    2,587Income tax( provision) benefit
    
    
    9
    
    
    
    (933
    )Net income (loss)
    
    
    (118
    )
    
    
    1,654Preferred stock dividend
    
    
    414
    
    
    
    Net income (loss) applicable to common stockholders
    
    $
    (532
    )
    
    $
    1,654Earnings (loss) per share  basic
    
    $
    (0.06
    )
    
    $
    0.20Earnings (loss) per share  diluted
    
    $
    (0.06
    )
    
    $
    0.19Weighted average shares outstanding  basic
    
    
    8,348,238
    
    
    
    8,271,104Weighted average shares outstanding  diluted
    
    
    8,348,238
    
    
    
    8,564,618
  4




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Intermountain Community Bancorp
Consolidated Statements of Cash Flows
(Unaudited)
 Three months endedMarch 31,2009
    
    
    2008(Dollars in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (118
    )
    
    $
    1,654Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation
    
    
    945
    
    
    
    759Stock-based compensation expense
    
    
    93
    
    
    
    166Net amortization of premiums (discounts) on securities
    
    
    17
    
    
    
    (107
    )Provisions for losses on loans
    
    
    2,770
    
    
    
    258Amortization of core deposit intangibles
    
    
    35
    
    
    
    37(Gain) loss on sale of loans, investments, property and equipment
    
    
    (1,598
    )
    
    
    (152
    )(Gain) loss on sale of other real estate owned
    
    
    3
    
    
    
    (21
    )OTTI credit loss on available-for-sale investments
    
    
    244
    
    
    
    Accretion of deferred gain on sale of branch property
    
    
    (4
    )
    
    
    (4
    )Net accretion of loan and deposit discounts and premiums
    
    
    (16
    )
    
    
    (6
    )Increase in cash surrender value of bank-owned life insurance
    
    
    (90
    )
    
    
    (75
    )Change in:Loans held for sale
    
    
    (2,613
    )
    
    
    1,058Accrued interest receivable
    
    
    239
    
    
    
    1,308Prepaid expenses and other assets
    
    
    (9,802
    )
    
    
    (1,174
    )Accrued interest payable
    
    
    (333
    )
    
    
    (872
    )Accrued expenses and other liabilities
    
    
    (1,356
    )
    
    
    (1,227
    )Net cash provided (used in) operating activities
    
    
    (11,584
    )
    
    
    1,602Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (87,501
    )
    
    
    Proceeds from calls or maturities of available-for-sale securities
    
    
    31,729
    
    
    
    13,590Principal payments on mortgage-backed securities
    
    
    7,091
    
    
    
    3,033Proceeds from calls or maturities of held-to-maturity securities
    
    
    
    
    
    
    18Origination of loans, net of principal payments
    
    
    7,344
    
    
    
    2,406Proceeds from sale of loans
    
    
    24,384
    
    
    
    6,198Purchase of office properties and equipment
    
    
    (274
    )
    
    
    (3,369
    )Net change in federal funds sold
    
    
    40,290
    
    
    
    3,440Proceeds from sale of other real estate owned
    
    
    184
    
    
    
    62Improvements and other changes in other real estate owned
    
    
    30
    
    
    
    Net change in restricted cash
    
    
    (2,168
    )
    
    
    4,121Net cash provided by investing activities
    
    
    21,109
    
    
    
    29,499
 5




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##### Table of Contents



Three months endedMarch 31,2009
    
    
    2008(Dollars in thousands)Cash flows from financing activities:Net change in demand, money market and savings deposits
    
    $
    1,600
    
    
    $
    (22,079
    )Net change in certificates of deposit
    
    
    19,274
    
    
    
    (8,613
    )Net change in repurchase agreements
    
    
    (32,494
    )
    
    
    (19,121
    )Principal reduction of note payable
    
    
    (10
    )
    
    
    (13
    )Proceeds from exercise of stock options
    
    
    55
    
    
    
    24Retirement of treasury stock
    
    
    (7
    )
    
    
    (190
    )Proceeds from other borrowings
    
    
    
    
    
    
    18,417Cash dividends paid to preferred stockholders
    
    
    (210
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    11,792
    
    
    
    (31,575
    )Net change in cash and cash equivalents
    
    
    (2,267
    )
    
    
    (474
    )Cash and cash equivalents, beginning of period
    
    
    22,907
    
    
    
    27,000Cash and cash equivalents, end of period
    
    $
    20,640
    
    
    $
    26,526Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    4,871
    
    
    $
    6,080Income taxes
    
    
    
    
    
    
    375Noncash investing and financing activities:Restricted stock issued
    
    
    
    
    
    
    521Loans converted to other real estate owned
    
    
    4,724
    
    
    
    502
  6




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Intermountain Community Bancorp
Consolidated Statements of Comprehensive Income
(Unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008(Dollars in thousands)Net income (loss)
    
    $
    (118
    )
    
    $
    1,654Other comprehensive income (loss):Change in unrealized gains on investments, and MBS available for
sale, excluding non-credit loss on impairment of securities
    
    
    125
    
    
    
    1,231Non-credit loss on -impairment on available-for-sale debt securities
    
    
    (1,507
    )
    
    
    Less deferred income tax benefit (benefit)
    
    
    547
    
    
    
    (488
    )Change in fair value of qualifying cash flow hedge
    
    
    104
    
    
    
    Net other comprehensive income (loss)
    
    
    (731
    )
    
    
    743Comprehensive income (loss)
    
    $
    (849
    )
    
    $
    2,397
  7




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##### Table of Contents



Intermountain Community Bancorp
Notes to Consolidated Financial Statements
 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, 2008. 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-SaleGross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Fair Value/Amortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Carrying ValueMarch 31, 2009U.S. treasury securities and obligations of U.S. government agencies
    
    $
    2,065
    
    
    $
    2
    
    
    $
    
    
    
    $
    2,067Residential mortgage-backed securities
    
    
    202,011
    
    
    
    1,999
    
    
    
    (10,097
    )
    
    
    193,913$
    204,076
    
    
    $
    2,001
    
    
    $
    (10,097
    )
    
    $
    195,980December 31, 2008U.S. treasury securities and obligations of U.S. government agencies
    
    $
    7,569
    
    
    $
    48
    
    
    $
    
    
    
    $
    7,617Residential mortgage-backed securities
    
    
    148,244
    
    
    
    2,550
    
    
    
    (10,793
    )
    
    
    140,001$
    155,813
    
    
    $
    2,598
    
    
    $
    (10,793
    )
    
    $
    147,618
 Held-to-MaturityCarryingValue/
    
    Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    Fair ValueMarch 31, 2009State and municipal securities
    
    $
    17,575
    
    
    $
    109
    
    
    $
    (232
    )
    
    $
    17,453December 31, 2008State and municipal securities
    
    $
    17,604
    
    
    $
    70
    
    
    $
    (149
    )
    
    $
    17,525
  Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedMarch 31, 2009
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesState and municipal securities
    
    $
    5,875
    
    
    $
    231
    
    
    $
    215
    
    
    $
    1
    
    
    $
    6,090
    
    
    $
    232Residential mortgage-backed securities
    
    
    52,719
    
    
    
    1,851
    
    
    
    25,696
    
    
    
    8,246
    
    
    
    78,415
    
    
    
    10,097Total
    
    $
    58,594
    
    
    $
    2,082
    
    
    $
    25,911
    
    
    $
    8,247
    
    
    $
    84,505
    
    
    $
    10,329
 Less Than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDecember 31, 2008
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesState and municipal securities
    
    $
    5,453
    
    
    $
    147
    
    
    $
    762
    
    
    $
    2
    
    
    $
    6,215
    
    
    $
    149Residential mortgage-backed securities
    
    
    45,366
    
    
    
    5,708
    
    
    
    15,034
    
    
    
    5,085
    
    
    
    60,400
    
    
    
    10,793Total
    
    $
    50,819
    
    
    $
    5,855
    
    
    $
    15,796
    
    
    $
    5,087
    
    
    $
    66,615
    
    
    $
    10,942
 8




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##### Table of Contents



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, 2009, 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 other-than-temporary impairment loss were considered by management to be temporary in
nature.At March 31, 2009, residential mortgage-backed securities included a security comprised of a
pool of mortgages with a remaining unpaid balance of $4.2 million. Due to the lack of an orderly
market for the security and the declining national economic and housing market, its fair value
was determined to be $2.5 million at March 31, 2009 based on analytical modeling taking into
consideration a range of factors normally found in an orderly market. Of the $1.7 million
other-then-temporary impairment on this security, based on an analysis of projected cash flows,
$244,000 was charged to earnings as a credit loss and $1.5 million was recognized in other
comprehensive income. Impairment losses on securities charged to earnings in the three months
ended March 31, 2009 and 2008 were $244,000 and $0 respectively. See Note 9 Fair Value of
Financial Instruments for more information on the calculation of fair or carrying value for the
investment securities.A summary of the portion of impairment loss on debt securities recognized in earnings for which
a portion of the other-than-temporary impairment was not recognized follows:
 Balance at January 1, 2009
    
    $
    Amount of credit loss related to investment securities for which
an other-than-temporary impairment was not previously recognized
    
    
    244Balance of the amount related to credit losses on investment securities held at March 31,
2009 for which a portion of an other-than-temporary impairment was
recognized in other comprehensive income
    
    $
    244
 3.
    
    Advances from the Federal Home Loan Bank of Seattle:During September 2007, the Bank obtained two advances from the FHLB Seattle in the amounts of
$10.0 million and $14.0 million with interest only payable at 4.96% and 4.90% and maturities in
September 2010 and September 2009, respectively. During April 2008, the Bank obtained two
advances from the FHLB Seattle in the amounts of $5.0 million and $5.0 million with interest only
payable at 2.89% and 2.95% and maturities in April 2009. These two advances matured in April 2009
and the Bank did not renew them. During May 2008, the Bank obtained an advance from the FHLB
Seattle in the amount of $12.0 million with interest only payable at 2.88% which matures in
August 2009.Advances from FHLB Seattle are collateralized by certain qualifying loans. At March 31, 2009,
Intermountain had the ability to borrow $115.0 million from FHLB Seattle, of which $46.0 million
was utilized. 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.4.
    
    Other Borrowings:The components of other borrowings are as follows (in thousands):
 March 31,
    
    
    December 31,2009
    
    
    2008Term note payable (1)
    
    $
    8,279
    
    
    $
    8,279Term note payable (2)
    
    
    8,248
    
    
    
    8,248Term note payable (3)
    
    
    931
    
    
    
    941Term note payable (4)
    
    
    23,145
    
    
    
    23,145Total other borrowings
    
    $
    40,603
    
    
    $
    40,613
 
 (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 4.47% at March
31, 2009. 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. 9




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##### Table of Contents



(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 3.89% at March 31, 2009. The debt is callable by the
Company quarterly and matures in April 2034. See Note A.(3)
    
    In January 2006, the Company purchased land to build its new headquarters, the Sandpoint
Center in Sandpoint, Idaho. It entered into a Note Payable with the sellers of the property in
the amount of $1.13 million, with a fixed rate of 6.65%, payable in equal installments. The
note matures in February 2026. This note was paid off as part of the refinance of the
borrowing discussed in Foote 4, section (4) immediately below.(4)
    
    In March 2007, the Company entered into an additional borrowing agreement with Pacific Coast
Bankers Bank (PCBB) in the amount of $18.0 million and in December 2007 increased the amount
to $25.0 million. The borrowing agreement was a non-revolving line of credit with a variable
rate of interest tied to LIBOR and was collateralized by Bank stock and the Sandpoint Center.
This line was used primarily to fund the construction costs of the Companys new headquarters
building in Sandpoint. The balance at March 31, 2009 was $23.1 million at a fixed interest
rate of 7.0%. The borrowing had a maturity of January 2009 and was extended for 90 days with a
fixed rate of 7.0%. In May 2009, the company negotiated new loan facilities with Pacific Coast
Bankers Bank to refinance the existing holding company credit line into three longer-term,
amortizing loans. The loans are as follows: $9.0 million with a fixed interest rate of 7.0%
secured by the Sandpoint Center and Panhandle State Bank stock, $11.0 million with a variable
rate of 2.35% plus the rate on the $11.0 million 12-month certificate of deposit used to
secure this loan (the rate for the first year is 4.35%), and $3.0 million with a rate of 10%
secured by the Sandpoint Center and Panhandle State Bank stock. The amortization on all three
loans is 25 years and the maturity is May 2012. The Company anticipates repaying these loans
before maturity through the sale of the building. The $11.0 million purchase of the
certificate of deposit was funded by a dividend from the Bank to the holding company, and upon
pay off of the loan secured by this account, the funds will be available again for bank or
holding company purposes. Restrictive loan covenants that apply to all three loans include
maintaining minimum levels of total risk-based capital, restrictions on incurring additional
debt over $2.0 million at the holding company level without Pacific Coast Bankers Banks
consent, and requirements to provide financial and loan portfolio information on a periodic
basis. In addition, there are debt service and asset quality requirements that only apply to
the $3.0 million credit facility. See Item 5  Other Information for further discussion on
PCBB borrowing. 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 Financial
Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities (FIN No.
46R), the trusts are not consolidated and the debentures and related amounts are treated as
debt of Intermountain.
 5.
    
    Earnings Per Share:The following table presents the basic and diluted earnings per share computations:
 Three months Ended March 31,2009
    
    
    2008Numerator:Net income (loss)  basic and diluted
    
    $
    (118
    )
    
    $
    1,654Preferred stock dividend
    
    
    414
    
    
    
    Net Income (loss) applicable to commons stockholders
    
    $
    (532
    )
    
    $
    1,654Denominator:Weighted average shares outstanding  basic
    
    
    8,348,238
    
    
    
    8,271,104Dilutive effect of common stock options, restricted stock awards
    
    
    
    
    
    
    293,514Weighted average shares outstanding  diluted
    
    
    8,348,238
    
    
    
    8,564,618Earnings (loss) per share  basic and diluted:Earnings (loss) per share  basic
    
    $
    (0.06
    )
    
    $
    0.20Effect of dilutive common stock options
    
    
    
    
    
    
    (0.01
    )Earnings per share  diluted
    
    $
    (0.06
    )
    
    $
    0.19
 10




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##### Table of Contents



6.
    
    Operating Expenses:The following table details Intermountains components of total operating expenses:
 Three months endedMarch 31,2009
    
    
    2008(Dollars in thousands)Salaries and employee benefits
    
    $
    5,706
    
    
    $
    6,946Occupancy expense
    
    
    1,968
    
    
    
    1,652Advertising
    
    
    299
    
    
    
    266Fees and service charges
    
    
    598
    
    
    
    434Printing, postage and supplies
    
    
    361
    
    
    
    349Legal and accounting
    
    
    338
    
    
    
    448Other expense
    
    
    1,502
    
    
    
    1,164Total operating expenses
    
    $
    10,772
    
    
    $
    11,259
 Salaries and employee benefits expense decreased $1.2 million, or 17.9%, over the three month
period last year as a result of decreased staffing levels and lower incentive expense.Occupancy expenses increased $316,000, or 19.1%, for the three month period ended March 31, 2009
compared to the same period one year ago. These increases were comprised of additional building
expense from the Sandpoint Center which was opened in the second quarter of 2008 and additional
computer hardware and software purchased to enhance security, compliance and business continuity.The advertising expense increase of $33,000 reflected additional donations and community meeting
expenses associated with the Companys Powered by Communityinitiative. The $164,000 increase in
fees and service charges primarily reflected higher expenses for the Companys internet banking
services, as usage increased significantly. The slight increase in printing, postage and
supplies reflected fee increases and higher usage rates. Legal and accounting fees were
$109,000, or 24.4% lower than the same three month period in 2008 as a result of payments made
during 2008 to a consultant engaged to assist the Company in streamlining business processes.Other expenses increased $338,000, or 29.04%, for the three month period over the same period
last year. The increase in other expenses can be attributed to the reinstatement of FDIC
insurance fees industry-wide and increases in collection and other real-estate owned expenses
caused by the weakening credit environment and an additional $354,000 charge to increase the
Companys reserve for unfunded borrowing commitments.7.
    
    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). Options to purchase Intermountain common stock had been granted to employees and
directors under the Stock Option Plans at prices equal to the fair market value of the underlying
stock on the dates the options were granted. The options vest 20% per year, over a five-year
period, and expire in 10 years. For the three months ended March 31, 2009 and 2008, stock option
expense totaled $0 and $34,000, respectively. The Company did not have any remaining expense
related to the non-vested stock options outstanding at March 31, 2009.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, 2009.In 2003, shareholders 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 0 and 35,949 restricted shares with a grant date fair value of $0 and
$521,000 during the three months ended March 31, 2009 and 2008, respectively. For the three
months ended March 31, 2009 and 2008, restricted stock expense totaled $93,000 and $78,000,
respectively. Total expense related to stock-based compensation is comprised of restricted stock
expense for the three months ended March 31, 2009 and restricted stock expense, stock option
expense and expense related to the 2006-2008 Long-Term Incentive Plan (LTIP) for the three
months ended March 31, 2008. LTIP expense in 2008 was based on anticipated company performance
over a 3-year period and had a 5-year vesting period. During the three months ended March 31,
2009, the Company did not have a Long-Term Incentive Plan and therefore did not have expense
related to this portion of stock-based compensation. Total expense related to stock-based
compensation recorded in the three months ended March 31, 2009 and 2008 was $93,000 and $166,000,
respectively.A summary of the changes in stock options outstanding for the three months ended March 31, 2009
is presented below:
 Three months ended March 31, 2009(dollars in thousands, except per share amounts)Weighted
    
    WeightedNumber
    
    Average
    
    Averageof
    
    Exercise
    
    RemainingShares
    
    Price
    
    Life (Years)Beginning Options Outstanding, Jan 1, 2009
    
    
    325,482
    
    
    $
    6.00Options Granted
    
    
    
    
    
    
    Exercises
    
    
    (12,500
    )
    
    
    4.42Forfeitures
    
    
    (47,048
    )
    
    
    4.42Ending options outstanding, March 31, 2009
    
    
    265,934
    
    
    
    6.29
    
    
    
    3.4Exercisable at March 31, 2009
    
    
    260,666
    
    
    $
    6.15
    
    
    
    3.4
 11




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##### Table of Contents



The total intrinsic value of options exercised during the three months ended March 31, 2009 and
2008 was $7,000 and $43,000, respectively. A summary of the Companys nonvested restricted shares
for the three months ended March 31, 2009 is presented below:
 Weighted-AverageGrant-DateNonvested Shares
    
    Shares
    
    
    Fair ValueBalance at January 1, 2009
    
    
    96,567
    
    
    $
    16.06Granted
    
    
    
    
    
    
    Vested
    
    
    (17,649
    )
    
    
    18.07Forfeited
    
    
    (515
    )
    
    
    18.10Balance at March 31, 2009
    
    
    78,403
    
    
    $
    15.59
 As of March 31, 2009, there was $1.1 million of unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under this plan. This cost is expected to
be recognized over a weighted-average period of 3.3 years.8.
    
    Derivative Financial InstrumentsManagement 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 SFAS 133, 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 Statements of Condition. Changes in the fair
value of derivative financial instruments are either recognized periodically in income or in
shareholders 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 SFAS 133 are reported in non-interest income.
Derivative contracts are valued by a third party and are periodically validated by comparison
with valuations provided by the respective counterparties.Interest Rate Swaps  Designated as Cash Flow HedgesThe tables below identify the Companys interest rate swaps at March 31, 2009 and December 31,
2008, which were entered into to hedge certain LIBOR-based trust preferred debentures and
designated as cash flow hedges pursuant to SFAS 133 (dollars in thousands):
 March 31, 2009Fair Value Gain
    
    Receive Rate
    
    Pay Rate
    
    Type of HedgingMaturity Date
    
    Notional Amount
    
    (Loss)
    
    (LIBOR)
    
    (Fixed)
    
    RelationshipPay Fixed, Receive Variable:October 2013
    
    $
    8,248
    
    
    $
    (881
    )
    
    
    1.09
    %
    
    
    4.58
    %
    
    Cash Flow
 December 31, 2008Fair Value Gain
    
    Receive Rate
    
    Pay Rate
    
    Type of HedgingMaturity Date
    
    Notional Amount
    
    (Loss)
    
    (LIBOR)
    
    (Fixed)
    
    RelationshipPay Fixed, Receive Variable:October 2013
    
    $
    8,248
    
    
    $
    (985
    )
    
    
    4.75
    %
    
    
    4.58
    %
    
    Cash Flow
 12




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##### Table of Contents



The fair values, or unrealized losses, of $881,000 at March 31, 2009 and $985,000 at December 31,
2008 are included in other liabilities. These hedges were considered highly effective during the
quarter ended March 31, 2009, and none of the change in fair value of these derivatives was
attributed to hedge ineffectiveness. The changes in fair value, net of tax, are separately
disclosed in the statement of changes in shareholders 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, 2009 is a component of comprehensive
income for March 31, 2009. At March 31, 2009, Intermountain had $1.2 million in pledged
certificates of deposit 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 EndedMarch 31,
    
    
    March 31,2009
    
    
    2008Unrealized gain (loss) at beginning of period
    
    $
    (985
    )
    
    $
    Amount of gain (loss) recognized in other comprehensive income
    
    
    104
    
    
    $
    Unrealized gain (loss) at end of period
    
    $
    (881
    )
    
    $
    
 Interest Rate Swaps  Not Designated as Hedging Instruments Under SFAS 133
  March 31, 2009
    
    December 31, 2008Notional
    
    Fair Value
    
    Notional
    
    Fair Value GainAmount
    
    Gain (Loss)
    
    Amount
    
    (Loss)Interest rate swaps with third party financial institutions
    
    $
    1,559
    
    
    $
    (57
    )
    
    $
    
    
    
    $
    
 Due to this being a fair value hedge, at March 31, 2009, the value included in other assets
totaled $57,000, which offset the fair value loss. At December 31, 2008, other assets included
$0 of derivative assets and other liabilities included $0 million of derivative liabilities
related to this interest rate swap transaction. At March 31, 2009, the interest rate swaps had a
maturity date of March 2019. At March 31, 2009 Intermountain had $48,000 in restricted cash for
the interest rate swap.9.
    
    Fair Value MeasurementsFair value is defined under SFAS 157 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, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy is as follows:
 Level 1 inputs
 Level 2 inputs
 Level 3 inputs
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##### Table of Contents



The following table presents information about the Companys assets measured at fair value on a
recurring basis as of March 31, 2009, and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine such fair value (dollars in thousands).
 Fair Value MeasurementsAt March 31, 2009, UsingQuoted PricesIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    March 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available-for-Sale Securities:U.S. treasury securities and obligations of U.S. government agencies
    
    $
    2,067
    
    
    $
    
    
    
    $
    2,067
    
    
    $
    Residential mortgage backed securities
    
    
    193,913
    
    
    
    
    
    
    
    158,648
    
    
    
    35,265Other Assets  Derivative
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Total Assets Measured at Fair Value
    
    $
    196,037
    
    
    $
    
    
    
    $
    160,715
    
    
    $
    35,322Other Liabilities Derivatives
    
    $
    938
    
    
    $
    
    
    
    $
    
    
    
    $
    938
 Fair Value MeasurementsAt December 31, 2008, UsingQuoted PricesIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    March 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available-for-Sale Securities
    
    $
    147,618
    
    
    $
    
    
    
    $
    108,954
    
    
    $
    38,664Other Assets  Derivative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Assets Measured at Fair Value
    
    $
    147,618
    
    
    $
    
    
    
    $
    108,954
    
    
    $
    38,664Other Liabilities Derivatives
    
    $
    985
    
    
    $
    
    
    
    $
    
    
    
    $
    985
 Fair Value Measurement Transfers  Assets
 Fair Value Measurements Using SignificantUnobservable Inputs ( Level 3)Description
    
    Residential MBS
    
    
    Derivatives
    
    
    TotalJanuary 1, 2009 Balance
    
    $
    38,664
    
    
    $
    
    
    
    $
    38,664Total gains or losses (realized/unrealized)Included in earnings
    
    
    (244
    )
    
    
    57
    
    
    
    (187
    )Included in other comprehensive income
    
    
    (1,559
    )
    
    
    
    
    
    
    (1,559
    )Principal Payments
    
    
    (1,596
    )
    
    
    
    
    
    
    (1,596
    )Maturities and new purchases, net
    
    
    
    
    
    
    
    
    
    
    Transfers in and /or out of Level 3
    
    
    
    
    
    
    
    
    
    
    March 31, 2009 Balance
    
    $
    35,265
    
    
    $
    57
    
    
    $
    35,322
 Fair Value Measurement Transfers  Liabilities
 Fair Value MeasurementsUsing Significant UnobservableInputs (Level 3)Description
    
    DerivativesJanuary 1, 2009 Balance
    
    $
    985Total gains or losses (realized/unrealized)Included in earnings
    
    
    57Included in other comprehensive income
    
    
    (104
    )March 31, 2009 Balance
    
    $
    938
 14




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##### Table of Contents



Fair Value MeasurementsAt March 31, 2009, UsingQuoted PricesIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    March 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Loans(1)
    
    $
    35,181
    
    
    $
    
    
    
    $
    
    
    
    $
    35,181Other real estate owned
    
    
    9,052
    
    
    
    
    
    
    
    
    
    
    
    9,052Total Assets Measured at Fair Value
    
    $
    44,233
    
    
    $
    
    
    
    $
    
    
    
    $
    44,233
 
 (1)
    
    Represents collateral-dependent impaired loans, net, which are
included in loans.   Securities
  Available for Sale Securities.
   15




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##### Table of Contents



EITF
 
    
    The length of time and the extent to which the market value of the securities have been
less 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 holder 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.
 Interest Rate Swaps.
   16




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##### Table of Contents



10.
    
    New Accounting Pronouncements:In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, and Emerging Issues Task Force (EITF)
99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments(FSP FAS 115-2/124-2
and EITF 99-20-2). FSP FAS 115-2/124-2 and EITF 99-20-2 requires entities to separate an
other-than-temporary impairment of a debt security into two components when there are credit
related losses associated with the impaired debt security for which management asserts that it
does not have the intent to sell the security, and it is more likely than not that it will not be
required to sell the security before recovery of its cost basis. The amount of the
other-than-temporary impairment related to a credit loss is recognized in earnings, and the
amount of the other-than-temporary impairment related to other factors is recorded in other
comprehensive loss. FSP FAS 115-2/124-2 and EITF 99-20-2 are effective for periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The
Company did early adopt this FSP and it resulted in a portion of other-than-temporary impairment
being recorded in other comprehensive income instead of earnings in the amount of $1.5 million.
See Notes to Consolidated Financial Statements, notes 2 and 9 for more information on the
Companys investment securities and other-than-temporary impairment.On January 12, 2009, FASB issued FSP Emerging Issues Task Force (EITF) 99-20-1, Amendments to the
Impairment Guidance of EITF Issue No. 99-20(FSP EITF 99-20-1)..FSP EITF 99-20-1 addresses
certain practice issues in EITF No. 99-20, Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor
in Securitized Financial Assets, by making its other-than-temporary impairment assessment
guidance consistent with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. FSP EITF 99-20-1 removes the reference to the consideration of a market participants
estimates of cash flows in EITF 99-20, and instead requires an assessment of whether it is
probable, based on current information and events, that the holder of the security will be unable
to collect all amounts due according to the contractual terms. If it is probable that there has
been an adverse change in estimated cash flows, an other-than-temporary impairment is deemed to
exist, and a corresponding loss shall be recognized in earnings equal to the entire difference
between the investments carrying value and its fair value at the balance sheet date of the
reporting period for which the assessment is made. This FSP is effective for interim and annual
reporting periods ending after December 15, 2008, and shall be applied prospectively. FSP EITF
99-20-1 was further modified in April, 2009 by the issuance of FSP FAS 115-2/124-2 and EITF
99-20-2discussed above.See the discussion above for the cumulative impact on the Companys
consolidated financial statements.In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
that are Not Orderly(FSP FAS 157-4). The FSP provides additional guidance for estimating fair
value in accordance with SFAS No. 157, Fair Value Measurements. Under FSP FAS 157-4, if an
entity determines that there has been a significant decrease in the volume and level of activity
for the asset or the liability in relation to the normal market activity for the asset or
liability (or similar assets or liabilities), then transactions or quoted prices may not
accurately reflect fair value. In addition, if there is evidence that the transaction for the
asset or liability is not orderly, the entity shall place little, if any weight on that
transaction price as an indicator of fair value. FSP FAS 157-4 is effective for periods ending
after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The
Company did early adopt this FSP and it resulted in a portion of other-than-temporary impairment
being recorded in other comprehensive income in the amount of $1.5 million. See Notes to
Consolidated Financial Statements, notes 2 and 9 for more information on the Companys investment
securities and other-than-temporary impairment.In September 2006, the FASB issued Statement No. 157, Fair Value Measurements(SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS 157 establishes a fair value hierarchy about the assumptions
used to measure fair value and clarifies assumptions about risk and the effect of a restriction
on the sale or use of an asset. SFAS 157 is effective for fiscal years beginning after November
15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB
Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years.On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB
Statement No. 157, Fair Value Measurements, in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a financial asset when
the market for that financial asset is not active. The FSP is effective immediately, and includes
prior period financial statements that have not yet been issued, and therefore the Company is
subject to the provision of the FSP effective March 31, 2009. See Notes to Consolidated Financial
Statements, notes 2 and 9 for further discussion of the impact of SFAS No. 157 and the additional
guidance issued.In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1).This FSP requires
disclosures about fair value of financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. This FSP, which becomes effective for
interim reporting periods ending after June 15, 2009, allows early adoption for periods ending
after March 15, 2009, only if a
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##### Table of Contents



company also elects to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. The Company
will adopt this FSP for the period ended June 30, 2009. Its adoption is not expected to impact
the consolidated financial results of the Company, but will impact its disclosures in the Notes
to Consolidated Financial Statements.In December 2007, FASB issued SFAS No. 141 (revised), Business Combinations(SFAS No. 141(R)).
SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and financial effects
of the business combination. This statement applies prospectively to business combinations for
which the acquisition date is on or after January 1, 2009. The adoption of the SFAS No. 141(R)
for reporting as of March 31, 2009, had no affect on the Companys financial statements.In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting
and reporting standards that require that the ownership interests in subsidiaries held by parties
other than the parent be clearly identified, labeled, and presented in the consolidated statement
of financial position within equity, but separate from the parents equity; the amount of
consolidated net income attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income; and changes in a
parents ownership interest while the parent retains its controlling financial interest in its
subsidiary be accounted for consistently. SFAS 160 also requires that any retained noncontrolling
equity investment in the former subsidiary be initially measured at fair value when a subsidiary
is deconsolidated. SFAS 160 also sets forth the disclosure requirements to identify and
distinguish between the interests of the parent and the interests of the noncontrolling owners.
SFAS 160 applies to all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS 160
is effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is prohibited. SFAS 160 must be applied prospectively
as of the beginning of the fiscal year in which SFAS 160 is initially applied, except for the
presentation and disclosure requirements. The presentation and disclosure requirements are
applied retrospectively for all periods presented. The Corporation does not have a
noncontrolling interest in one or more subsidiaries. The adoption of the SFAS No. 160 for
reporting as of March 31, 2009, did not have a material impact on the Companys consolidated
financial statements.In May 2008, The FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 162). SFAS No. 162is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting principles to be used
in preparing financial statements that are presented in conformity with U.S. generally accepted
accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS No.
162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants
(AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. SAS 69 has been criticized because it
is directed to the auditor rather than the entity. SFAS No. 162 addresses these issues by
establishing that the GAAP hierarchy should be directed to entities because it is the entity (not
its auditor) that is responsible for selecting accounting principles for financial statements
that are presented in conformity with GAAP. The initial application of SFAS No. 162 will not have
an impact on the Companys financial statements.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities(SFAS 161). SFAS 161 requires specific disclosures regarding the location and
amounts of derivative instruments in the Companys financial statements, how derivative
instruments and related hedged items are accounted for, and how derivative instruments and
related hedged items affect the Companys financial position, financial performance, and cash
flows. SFAS 161 is effective for financial statements issued and for fiscal years and interim
periods after November 15, 2008. Early application was permitted. SFAS 161 impacts the Companys
disclosure, but not its accounting treatment for derivative instruments and related hedged items.
The Company adopted this guidance, effective first quarter 2009, and has complied with the
additional disclosure requirements. See Notes to Consolidated Financial Statements, note 8 for
additional information.In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-01,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF 03-6-01). This FSP addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and, therefore, need to be
included in the earnings allocation in computing earnings per share (EPS) under the two-class
method described in paragraphs 60 and 61 of FASB Statement No. 128 (SFAS 128), Earnings Per
Share.The guidance in this FSP applies to the calculation of EPS under SFAS 128 for share-based
payment awards with rights to dividends or dividend equivalents. Unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of EPS pursuant to
the two-class method. This Statement is effective for fiscal years beginning on or after December
15, 2008 and interim periods within those years. All prior-period EPS data presented shall be
adjusted retrospectively (including interim financial statements, summaries of earnings and
selected financial data) to conform with the provision of this FSP. The Company adopted FSP EITF
03-6-01on January 1, 2009. Adoption did not have a material effect on the Companys consolidated
financial statements.
 18




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##### Table of Contents



Determining Whether an
Instrument (or an Embedded Feature) Is Indexed to an Entitys Own Stock
 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 This report contains forward-looking statements. For a discussion about such statements,
including the risks and uncertainties inherent therein, see Forward-Looking Statements.
Managements Discussion and Analysis of Financial Condition and Results of Operations should be
read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in
this report and in Intermountains Form 10-K for the year ended December 31, 2008.
 General
       19




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Current Economic Challenges and Future Outlook
    
    
    Slowing loan demand, particularly from higher quality borrowers, as businesses and
consumers retrenched.
    
    Continued tight margins as the effects of the dramatic drop in market interest rates,
increasing levels of non accrual loans and the Companys shift of assets into more
conservative, but lower-yielding securities depressed asset yields and decreased the value
of the Companys large transaction funding base. However, lower deposit and borrowing costs
did create slight margin improvement during the first quarter.
    
    Higher non-performing loans and continuing levels of elevated credit losses, as general
credit conditions worsened, and the decline in real estate values accelerated in the
Companys markets.
    
    Continuing pressure on fee income, as weaker economic activity depressed revenues from a
broad range of fee categories, including trust and investment services, credit card related
fees and deposit account fees.
  Powered by
Community
   20




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Critical Accounting Policies
  Income Recognition.
 Allowance For Loan Losses.
     21




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##### Table of Contents



Investments.
  Consolidated Financial Statements
 Goodwill and Other Intangible Assets.
 Real Estate Owned.
  Fair Value Measurements.
 22




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##### Table of Contents



Consolidated Financial Statements
 Derivative Financial Instruments and Hedging Activities.
 Consolidated Financial Statements
 Intermountain Community Bancorp
Comparison of the Three month Periods Ended March 31, 2009 and 2008
 Results of Operations
 Overview
   Net Interest Income
   23




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##### Table of Contents



Provision for Losses on Loans.
    Three months ended March 31,2009
    
    
    2008(Dollars in thousands)Balance at January 1
    
    $
    16,433
    
    
    $
    11,761Provision for losses on loans
    
    
    2,770
    
    
    
    258Amounts written off, net of recoveries
    
    
    (1,764
    )
    
    
    (77
    )Allowance  loans, March 31
    
    
    17,439
    
    
    
    11,942Allowance  unfunded commitments, January 1
    
    
    14
    
    
    
    18Adjustment
    
    
    353
    
    
    
    (3
    )Allowance  unfunded commitments, March 31
    
    
    367
    
    
    
    15Total credit allowance including unfunded commitments
    
    $
    17,806
    
    
    $
    11,957
 24




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##### Table of Contents



Loan QualityMarch 31,
    
    
    Dec 31,2009
    
    
    2008(dollars in thousands)Loans past due in excess of 90 days and still accruing
    
    $
    709
    
    
    $
    913Non-accrual loans
    
    
    28,606
    
    
    
    26,365Total non-performing loans
    
    
    29,315
    
    
    
    27,278OREO
    
    
    9,052
    
    
    
    4,541Total non-performing assets (NPA)
    
    $
    38,367
    
    
    $
    31,819Classified loans
    
    $
    64,123
    
    
    $
    61,172Troubled debt restructured loans (1)
    
    $
    23,445
    
    
    $
    13,424(1)       Loans restructured and in compliance with modified terms;
excludes non-accrual loansNon-accrual loans as a percentage of net loans receivable
    
    
    3.96
    %
    
    
    3.50
    %Total non-performing loans as a % of net loans receivable
    
    
    4.05
    %
    
    
    3.62
    %Total NPA as a % of loans receivable
    
    
    5.31
    %
    
    
    4.23
    %Allowance for loan losses (ALLL) as a % of non-performing loans
    
    
    59.5
    %
    
    
    60.2
    %Total NPA as a % of total assets
    
    
    3.52
    %
    
    
    2.88
    %Total NPA as a % of tangible capital + ALLL (Texas Ratio)
    
    
    33.48
    %
    
    
    27.75
    %
  25




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Other Income.
 Consolidated Financial Statements
 Operating Expenses
      Income Tax Provision
 26




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##### Table of Contents



Financial Position
 Assets
 Investments.
 Consolidated Financial Statements
 Loans Receivable. Powered By Community
  March 31, 2009
    
    
    December 31, 2008Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial
    
    $
    220,130
    
    
    
    29.72
    
    
    $
    227,521
    
    
    
    29.58Commercial real estate
    
    
    394,806
    
    
    
    53.30
    
    
    
    409,461
    
    
    
    53.23Residential real estate
    
    
    98,234
    
    
    
    13.26
    
    
    
    103,937
    
    
    
    13.51Consumer
    
    
    22,350
    
    
    
    3.02
    
    
    
    23,245
    
    
    
    3.02Municipal
    
    
    5,153
    
    
    
    0.70
    
    
    
    5,109
    
    
    
    0.66Total loans receivable
    
    
    740,673
    
    
    
    100.00
    
    
    
    769,273
    
    
    
    100.00Net deferred origination fees
    
    
    (74
    )
    
    
    
    
    
    
    (225
    )Allowance for losses on loans
    
    
    (17,439
    )
    
    
    
    
    
    
    (16,433
    )Loans receivable, net
    
    $
    723,160
    
    
    
    
    
    
    $
    752,615Weighted average yield at end of period
    
    
    6.17
    %
    
    
    
    
    
    
    6.38
    %
 27




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##### Table of Contents



Three months endedMarch 31,2009
    
    
    2008
    
    
    % Change(Dollars in thousands)Commercial
    
    $
    46,975
    
    
    $
    57,899
    
    
    
    (18.9
    )Commercial real estate
    
    
    15,323
    
    
    
    59,759
    
    
    
    (74.4
    )Residential real estate
    
    
    28,287
    
    
    
    18,373
    
    
    
    54.0Consumer
    
    
    2,456
    
    
    
    3,104
    
    
    
    (20.9
    )Municipal
    
    
    478
    
    
    
    314
    
    
    
    52.2Total loans originated
    
    $
    93,519
    
    
    $
    139,449
    
    
    
    (32.9
    )
   Office Properties and Equipment.
 Other Real Estate Owned.
 BOLI and All Other Assets
 Deposits
  March 31, 2009
    
    
    December 31, 2008Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Demand
    
    $
    151,194
    
    
    
    18.6
    
    
    $
    154,265
    
    
    
    19.5NOW and money market 0.0% to 6.07%
    
    
    323,748
    
    
    
    39.9
    
    
    
    321,556
    
    
    
    40.7Savings and IRA 0.0% to 4.2%
    
    
    81,150
    
    
    
    10.0
    
    
    
    78,671
    
    
    
    10.0Certificate of deposit accounts
    
    
    255,194
    
    
    
    31.5
    
    
    
    235,920
    
    
    
    29.8Total deposits
    
    $
    811,286
    
    
    
    100.0
    
    
    $
    790,412
    
    
    
    100.0Weighted average interest rate on certificates of deposit
    
    
    
    
    
    
    3.04
    %
    
    
    
    
    
    
    3.22
    %
 28




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Borrowings
 Interest Rate Risk
       29




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Liquidity and Sources of Funds
       30




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##### Table of Contents



Capital Resources
         Well-CapitalizedActual
    
    Capital Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted assets):The Company
    
    $
    131,098
    
    
    
    14.67
    %
    
    $
    72,366
    
    
    
    8
    %
    
    $
    90,458
    
    
    
    10
    %Panhandle State Bank
    
    
    129,754
    
    
    
    14.52
    %
    
    
    71,506
    
    
    
    8
    %
    
    
    89,382
    
    
    
    10
    %Tier I capital (to risk-weighted assets):The Company
    
    
    119,848
    
    
    
    13.41
    %
    
    
    36,183
    
    
    
    4
    %
    
    
    54,275
    
    
    
    6
    %Panhandle State Bank
    
    
    118,504
    
    
    
    13.26
    %
    
    
    35,753
    
    
    
    4
    %
    
    
    53,629
    
    
    
    6
    %Tier I capital (to average assets):The Company
    
    
    119,848
    
    
    
    11.03
    %
    
    
    41,405
    
    
    
    4
    %
    
    
    51,757
    
    
    
    5
    %Panhandle State Bank
    
    
    118,504
    
    
    
    11.21
    %
    
    
    42,267
    
    
    
    4
    %
    
    
    52,834
    
    
    
    5
    %
 31




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##### Table of Contents



Off Balance Sheet Arrangements and Contractual Obligations
  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(Dollars in thousands)Long-term debt(1)
    
    $
    75,841
    
    
    $
    1,290
    
    
    $
    41,820
    
    
    $
    1,587
    
    
    $
    31,144Short-term debt
    
    
    106,174
    
    
    
    106,174
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations(2)
    
    
    13,766
    
    
    
    1,025
    
    
    
    1,476
    
    
    
    1,242
    
    
    
    10,023Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    195,781
    
    
    $
    108,489
    
    
    $
    43,296
    
    
    $
    2,829
    
    
    $
    41,167
 
 (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 3 and 4 of
Notes to Consolidated Financial Statements. Includes operating lease
payments for new leases executed in December 2006 for the sale
leaseback transactions for the previously owned Canyon Rim and Gooding
branches. The sale transaction was completed in January 2007 and the
leases commenced in January 2007. New Accounting Pronouncements
 EITF Recognition and Presentation of Other-Than-Temporary Impairments FSP FAS 115-2/124-2
and EITF 99-20-2 Notes to Consolidated Financial Statements
  32




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33




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Forward-Looking Statements
 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
   34




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##### Table of Contents




    
    the 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, which could adversely affect our net interest income
and profitability;
    
    increased delinquency rates;
    
    our success in managing risks involved in the foregoing:
    
    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;
    
    Intermountains success in gaining regulatory approvals, when required;
    
    technological and management changes;
    
    changes in estimates and assumptions;
    
    growth and acquisition strategies;
    
    the Companys critical accounting policies and the implementation of such policies;
    
    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; 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
 35




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##### Table of Contents



PART II  Other Information
 
 Item 1  Legal Proceedings
  
 Item 1A Risk Factors
 As a financial holding company, our earnings are dependent upon the performance of our bank as
well as on business, economic, and political conditions.
    A further downturn in the local economies or real estate markets could negatively impact our
banking business.
   The allowance for loan losses may be inadequate.
    36




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##### Table of Contents



Additional market concern over investment securities backed by mortgage loans could create losses
in the Companys investment portfolio
  We cannot predict the effect of the recently enacted federal rescue plans.
   Changes in market interest rates could adversely affect our earnings.
      37




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##### Table of Contents



The FDIC has increased insurance premiums to rebuild and maintain the federal deposit insurance
fund and we may separately incur state statutory assessments in the future.
   We may experience future goodwill impairment.
  We may not be able to successfully implement our internal growth strategy.
  There are risks associated with potential acquisitions.
  We may not be able to replace key members of management or attract and retain qualified
relationship managers in the future.
  We are expanding our lending activities in riskier areas.
  38




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##### Table of Contents



Our stock price can be volatile; we cannot predict how the national economic situation will affect
our stock price.
   Continued volatility in the subprime and prime mortgage markets could have additional negative
impacts on the Companys lending operations.
  A continued tightening of the credit markets may make it difficult to obtain adequate funding for
loan growth, which could adversely affect our earnings.
  We operate in a highly regulated environment and may be adversely affected by changes in federal
state and local laws and regulations.
  Negative publicity regarding the liquidity of financial institutions may have a negative impact on
Company operations
  Weak future operating performance may cause the Company to violate covenants or other requirements
of its borrowing facilities
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  39




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##### Table of Contents



Item 3  Defaults Upon Senior Securities
  Item 4  Submission of Matters to a Vote of Security Holders
  
 Item 5  Other Information
 Senior Secured Term Loan Facility
  Security for the Loans
  Maturity, Interest Rates and Fees
  Payments and Prepayments
  Covenants and Events of Default
   40




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##### Table of Contents



Item 6  Exhibits
 Exhibit No.
    
    Exhibit10.1
    
    Holding Company Loan Agreement dated May 8, 2009 between the Company and Pacific Coast Bankers Bank.31.1
    
    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.
 41




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##### Table of Contents



Signatures
  INTERMOUNTAIN COMMUNITY BANCORP 
                 
           (Registrant)May 14, 2009
    By:
    /s/ Curt HeckerDate
    
    Curt HeckerPresident and Chief Executive OfficerMay 14, 2009
    By:
    /s/ Doug WrightDate
    
    Doug WrightExecutive Vice President and Chief Financial Officer 42