##### 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 September 30, 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(State or other jurisdiction of 
incorporation or organization)
    
    82-0499463(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 September 30, 2010
 TABLE OF CONTENTS
 PART I  Financial InformationItem 1  Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets for September 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009
    
    
    5Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September
30, 2010 and 2009
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4  Controls and Procedures
    
    
    45PART II  Other InformationItem 1  Legal Proceedings
    
    
    45Item 1A  Risk Factors
    
    
    45Item 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
    
    
    53Item 6  Exhibits
    
    
    53Signatures
    
    
    54EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I  Financial Information
 
 Item 1  Financial StatementsIntermountain Community Bancorp
 
 Consolidated Balance Sheets
(Unaudited)
 September 30,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands)ASSETSCash and cash equivalents:Interest-bearing
    
    $
    92,355
    
    
    $
    83,617Non-interest bearing and vault
    
    
    13,378
    
    
    
    19,572Restricted cash
    
    
    3,523
    
    
    
    2,508Available-for-sale securities, at fair value
    
    
    176,065
    
    
    
    181,784Held-to-maturity securities, at amortized cost
    
    
    22,234
    
    
    
    15,177Federal Home Loan Bank (FHLB) of Seattle stock, at cost
    
    
    2,310
    
    
    
    2,310Loans held for sale
    
    
    3,067
    
    
    
    6,574Loans receivable, net
    
    
    592,598
    
    
    
    655,602Accrued interest receivable
    
    
    4,640
    
    
    
    5,077Office properties and equipment, net
    
    
    40,882
    
    
    
    42,425Bank-owned life insurance
    
    
    8,674
    
    
    
    8,397Goodwill
    
    
    
    
    
    
    11,662Other intangibles
    
    
    342
    
    
    
    439Other real estate owned (OREO)
    
    
    6,424
    
    
    
    11,538Prepaid expenses and other assets
    
    
    24,723
    
    
    
    32,962Total assets
    
    $
    991,215
    
    
    $
    1,079,644LIABILITIESDeposits
    
    $
    788,504
    
    
    $
    819,321Securities sold subject to repurchase agreements
    
    
    80,756
    
    
    
    95,233Advances from Federal Home Loan Bank
    
    
    34,000
    
    
    
    49,000Cashier checks issued and payable
    
    
    571
    
    
    
    1,113Accrued interest payable
    
    
    1,294
    
    
    
    1,211Other borrowings
    
    
    16,527
    
    
    
    16,527Accrued expenses and other liabilities
    
    
    9,261
    
    
    
    8,612Total liabilities
    
    
    930,913
    
    
    
    991,017Commitments and contingent liabilitiesSTOCKHOLDERS EQUITYCommon stock 300,000,000 shares authorized; 8,432,004
and 8,438,554 shares issued and 8,390,877 and 8,365,836
shares outstanding as of September 30, 2010 and December
31, 2009
    
    
    78,722
    
    
    
    78,569Preferred stock 1,000,000 shares authorized; 27,000
shares issued and outstanding as of September 30, 2010
and December 31, 2009
    
    
    25,709
    
    
    
    25,461Accumulated other comprehensive loss, net of tax
    
    
    (1,178
    )
    
    
    (4,840
    )Accumulated deficit
    
    
    (42,951
    )
    
    
    (10,563
    )Total stockholders equity
    
    
    60,302
    
    
    
    88,627Total liabilities and stockholders equity
    
    $
    991,215
    
    
    $
    1,079,644
  3




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##### Table of Contents



Intermountain Community Bancorp
 
 Consolidated Statements of Operations
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands,
    
    
    (Dollars in thousands,except per share data)
    
    
    except per share data)Interest income:Loans
    
    $
    9,563
    
    
    $
    11,051
    
    
    $
    29,026
    
    
    $
    34,403Investments
    
    
    2,174
    
    
    
    2,552
    
    
    
    5,926
    
    
    
    8,030Total interest income
    
    
    11,737
    
    
    
    13,603
    
    
    
    34,952
    
    
    
    42,433Interest expense:Deposits
    
    
    1,862
    
    
    
    3,022
    
    
    
    6,303
    
    
    
    9,609Other borrowings
    
    
    849
    
    
    
    920
    
    
    
    2,444
    
    
    
    3,049Total interest expense
    
    
    2,711
    
    
    
    3,942
    
    
    
    8,747
    
    
    
    12,658Net interest income
    
    
    9,026
    
    
    
    9,661
    
    
    
    26,205
    
    
    
    29,775Provision for losses on loans
    
    
    (10,058
    )
    
    
    (3,756
    )
    
    
    (21,780
    )
    
    
    (25,210
    )Net interest income (loss) after provision for losses on loans
    
    
    (1,032
    )
    
    
    5,905
    
    
    
    4,425
    
    
    
    4,565Other income:Fees and service charges
    
    
    1,898
    
    
    
    1,941
    
    
    
    5,733
    
    
    
    5,497Loan related fee income
    
    
    642
    
    
    
    624
    
    
    
    1,934
    
    
    
    1,828Net (loss) gain on sale of securities
    
    
    206
    
    
    
    500
    
    
    
    349
    
    
    
    1,795Other-than-temporary impairment (OTTI) losses on
investments (1)
    
    
    (349
    )
    
    
    (198
    )
    
    
    (605
    )
    
    
    (442
    )Bank-owned life insurance
    
    
    92
    
    
    
    91
    
    
    
    277
    
    
    
    271Other
    
    
    328
    
    
    
    149
    
    
    
    650
    
    
    
    376Total other income
    
    
    2,817
    
    
    
    3,107
    
    
    
    8,338
    
    
    
    9,325Operating expenses
    
    
    21,918
    
    
    
    12,956
    
    
    
    44,754
    
    
    
    36,395Loss before income tax benefit
    
    
    (20,133
    )
    
    
    (3,944
    )
    
    
    (31,991
    )
    
    
    (22,505
    )Income tax (provision) benefit
    
    
    (4,169
    )
    
    
    1,702
    
    
    
    882
    
    
    
    9,143Net loss
    
    
    (24,302
    )
    
    
    (2,242
    )
    
    
    (31,109
    )
    
    
    (13,362
    )Preferred stock dividend
    
    
    432
    
    
    
    416
    
    
    
    1,279
    
    
    
    1,245Net loss applicable to common stockholders
    
    $
    (24,734
    )
    
    $
    (2,658
    )
    
    $
    (32,388
    )
    
    $
    (14,607
    )Loss per share  basic
    
    $
    (2.95
    )
    
    $
    (0.32
    )
    
    $
    (3.86
    )
    
    $
    (1.75
    )Loss per share  diluted
    
    $
    (2.95
    )
    
    $
    (0.32
    )
    
    $
    (3.86
    )
    
    $
    (1.75
    )Weighted average common shares outstanding  basic
    
    
    8,390,877
    
    
    
    8,365,836
    
    
    
    8,383,841
    
    
    
    8,358,908Weighted average common shares outstanding  diluted
    
    
    8,390,877
    
    
    
    8,365,836
    
    
    
    8,383,841
    
    
    
    8,358,906
 
 (1)
    
    Consisting of $0, $0, $1,529,000 and $1,751,000 of total other-than-temporary impairment net
losses, net of ($349,000), ($198,000), $924,000 and $1,310,000 recognized in other
comprehensive income, for the three months ended September 30, 2010, and September 30, 2009
and nine months ended September 30, 2010 and September 30, 2009, respectively.  4




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Intermountain Community Bancorp
 
 Consolidated Statements of Cash Flows
(Unaudited)
 Nine months endedSeptember 30,2010
    
    
    2009(Dollars in thousands)Cash flows from operating activities:Net loss
    
    $
    (31,109
    )
    
    $
    (13,362
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation
    
    
    2,356
    
    
    
    2,587Stock-based compensation expense
    
    
    281
    
    
    
    272Net amortization of premiums on securities
    
    
    2,317
    
    
    
    507Provisions for losses on loans
    
    
    21,781
    
    
    
    25,210Goodwill Impairment
    
    
    11,662
    
    
    
    Deferred Tax Asset Valuation Allowance
    
    
    7,400
    
    
    
    Proceeds from sale of loans
    
    
    52,850
    
    
    
    70,320Originations of loans held for sale
    
    
    (48,062
    )
    
    
    (72,567
    )Amortization of core deposit intangibles
    
    
    97
    
    
    
    104(Gain) on sale of loans, investments, property and equipment
    
    
    (1,629
    )
    
    
    (2,584
    )(Gain) loss on sale of other real estate owned
    
    
    (299
    )
    
    
    254OTTI credit loss on available-for-sale investments
    
    
    605
    
    
    
    442Charge down on OREO
    
    
    2,593
    
    
    
    2,312Accretion of deferred gain on sale of branch property
    
    
    (11
    )
    
    
    (11
    )Net accretion of loan and deposit discounts and premiums
    
    
    (30
    )
    
    
    (53
    )Increase in cash surrender value of bank-owned life insurance
    
    
    (277
    )
    
    
    (271
    )Change in:Accrued interest receivable
    
    
    437
    
    
    
    (331
    )Prepaid expenses and other assets
    
    
    (1,242
    )
    
    
    (8,724
    )Accrued interest payable
    
    
    83
    
    
    
    (976
    )Accrued expenses and other liabilities
    
    
    (1,064
    )
    
    
    3,106Net cash provided by operating activities
    
    
    18,739
    
    
    
    6,235Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (45,706
    )
    
    
    (118,947
    )Proceeds from calls or maturities of available-for-sale securities
    
    
    15,338
    
    
    
    59,623Principal payments on mortgage-backed securities
    
    
    39,300
    
    
    
    28,741Purchases of held-to-maturity securities
    
    
    (7,927
    )
    
    
    (65
    )Proceeds from calls or maturities of held-to-maturity securities
    
    
    853
    
    
    
    2,420Origination of loans, net principal payments
    
    
    34,673
    
    
    
    13,409Purchase of office properties and equipment
    
    
    (852
    )
    
    
    (1,123
    )Proceeds from sale of office properties and equipment
    
    
    40
    
    
    
    Net change in federal funds sold
    
    
    
    
    
    
    71,450Proceeds from sale of other real estate owned
    
    
    9,400
    
    
    
    2,583Net change in restricted cash
    
    
    (1,015
    )
    
    
    (6,515
    )Net cash provided by investing activities
    
    
    44,104
    
    
    
    51,576Cash flows from financing activities:Net change in demand, money market and savings deposits
    
    $
    (9,045
    )
    
    $
    19,683Net change in certificates of deposit
    
    
    (21,773
    )
    
    
    28,570Net change in repurchase agreements
    
    
    (14,477
    )
    
    
    (38,513
    )Principal reduction of note payable
    
    
    
    
    
    
    (23,941
    )Payoff of credit line
    
    
    
    
    
    
    (23,145
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    56Retirement of treasury stock
    
    
    (4
    )
    
    
    (7
    )Proceeds from other borrowings
    
    
    
    
    
    
    23,000Proceeds from FHLB borrowings
    
    
    
    
    
    
    14,000Payoff of FHLB advances
    
    
    (15,000
    )
    
    
    (36,000
    )Cash dividends paid to preferred stockholders
    
    
    
    
    
    
    (885
    )Net cash provided by (used in) financing activities
    
    
    (60,299
    )
    
    
    (37,182
    )Net change in cash and cash equivalents
    
    
    2,544
    
    
    
    20,629Cash and cash equivalents, beginning of period
    
    
    103,189
    
    
    
    22,907Cash and cash equivalents, end of period
    
    $
    105,733
    
    
    $
    43,536Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    8,664
    
    
    $
    12,497Income taxes, net of tax refunds received
    
    
    (7,144
    )
    
    
    Noncash investing and financing activities:Loans converted to other real estate owned
    
    
    6,581
    
    
    
    15,004Accrual of preferred stock dividend
    
    
    1,032
    
    
    
    173
  5




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Intermountain Community Bancorp
 
 Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Net loss
    
    $
    (24,302
    )
    
    $
    (2,242
    )
    
    $
    (31,109
    )
    
    $
    (13,362
    )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
    
    
    1,789
    
    
    
    2,421
    
    
    
    6,695
    
    
    
    3,010Non-credit loss on impairment of available-for-sale debt securities
    
    
    349
    
    
    
    198
    
    
    
    (924
    )
    
    
    (1,310
    )Less deferred income tax provision (benefit)
    
    
    (846
    )
    
    
    (1,037
    )
    
    
    (2,285
    )
    
    
    (672
    )Change in fair value of qualifying cash flow hedge
    
    
    5
    
    
    
    (75
    )
    
    
    176
    
    
    
    244Net other comprehensive income
    
    
    1,297
    
    
    
    1,507
    
    
    
    3,662
    
    
    
    1,272Comprehensive loss
    
    $
    (23,005
    )
    
    $
    (735
    )
    
    $
    (27,447
    )
    
    $
    (12,090
    )
  6




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##### Table of Contents



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.
    
    Investments:
 The 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 ValueSeptember 30, 2010U.S. treasury securities and
obligations of U.S. government
agencies
    
    $
    4,024
    
    
    $
    
    
    
    $
    12
    
    
    $
    
    
    
    $
    4,036Residential mortgage-backed securities
    
    
    173,161
    
    
    
    (2,149
    )
    
    
    3,991
    
    
    
    (2,974
    )
    
    
    172,029$
    177,185
    
    
    $
    (2,149
    )
    
    $
    4,003
    
    
    $
    (2,974
    )
    
    $
    176,065December 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 ValueSeptember 30, 2010State and municipal securities
    
    $
    22,234
    
    
    $
    
    
    
    $
    857
    
    
    $
    (13
    )
    
    $
    23,078December 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
    
    
    
    
    
    
    UnrealizedSeptember 30, 2010
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesState and municipal securities
    
    $
    
    
    
    $
    
    
    
    $
    1,538
    
    
    $
    13
    
    
    $
    1,538
    
    
    $
    13Residential mortgage-backed securities
    
    
    8,670
    
    
    
    111
    
    
    
    107,720
    
    
    
    2,863
    
    
    
    116,390
    
    
    
    2,974Total
    
    $
    8,670
    
    
    $
    111
    
    
    $
    109,258
    
    
    $
    2,876
    
    
    $
    117,928
    
    
    $
    2,987
 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
 At September 30, 2010, the amortized cost and fair value of available-for-sale and
held-to-maturity debt securities, by contractual maturity, are as
follows (in thousands):
 Available-for-Sale
    
    
    Held-to-MaturityAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueOne year or less
    
    $
    
    
    
    $
    
    
    
    $
    297
    
    
    $
    304After one year through five years
    
    
    36
    
    
    
    36
    
    
    
    708
    
    
    
    763After five years through ten years
    
    
    3,988
    
    
    
    4,000
    
    
    
    4,383
    
    
    
    4,602After ten years
    
    
    
    
    
    
    
    
    
    
    16,846
    
    
    
    17,409Subtotal
    
    
    4,024
    
    
    
    4,036
    
    
    
    22,234
    
    
    
    23,078Mortgage-backed securities
    
    
    173,161
    
    
    
    172,029
    
    
    
    
    
    
    
    Total Securities
    
    $
    177,185
    
    
    $
    176,065
    
    
    $
    22,234
    
    
    $
    23,078
 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 September 30, 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 or maturity date. The unrealized losses on residential mortgage-backed
securities without OTTI were considered by management to be temporary in nature.At September 30, 2010, residential mortgage-backed securities included two securities comprised
of a pool of mortgages with a combined remaining unpaid balance of $10.7 million. Due to the lack
of an orderly market for the securities, their fair value was determined to be $8.2 million at
September 30, 2010 based on analytical modeling taking into consideration a range of factors
normally found in an orderly market. Based on an analysis of projected cash flows, a total of
$1.1 million has been charged to earnings as a credit loss, including $526,000 in 2009 and
$605,000 in the first nine months of 2010. The remaining $2.1 million was recognized in other
comprehensive income in 2009 and 2010. Charges to income could occur in future periods due to a
change in managements intent to hold the investments to maturity, a change in managements
assessment of credit risk, or a change in regulatory or accounting requirements.See Note 13 Fair Value of Measurements for more information on the calculation of fair or
carrying value for the investment securities.
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3.
    
    Loans and Allowance for Loan Losses:
 The components of loans receivable are as follows:
 September 30, 2010
    
    
    December 31, 2009Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial loans
    
    $
    132,608
    
    
    
    21.85
    
    
    $
    131,562
    
    
    
    19.57Commercial real estate loans
    
    
    175,993
    
    
    
    29.00
    
    
    
    172,726
    
    
    
    25.69Commercial construction loans
    
    
    22,051
    
    
    
    3.63
    
    
    
    45,581
    
    
    
    6.78Land and land development loans
    
    
    67,846
    
    
    
    11.18
    
    
    
    88,604
    
    
    
    13.18Agriculture loans
    
    
    93,786
    
    
    
    15.45
    
    
    
    110,256
    
    
    
    16.40Multifamily loans
    
    
    27,048
    
    
    
    4.46
    
    
    
    18,067
    
    
    
    2.69Residential real estate loans
    
    
    62,482
    
    
    
    10.29
    
    
    
    65,544
    
    
    
    9.75Residential construction loans
    
    
    4,994
    
    
    
    0.82
    
    
    
    16,626
    
    
    
    2.47Consumer loans
    
    
    14,810
    
    
    
    2.44
    
    
    
    18,287
    
    
    
    2.72Municipal loans
    
    
    5,298
    
    
    
    0.88
    
    
    
    5,061
    
    
    
    0.75Total loans
    
    
    606,916
    
    
    
    100.00
    
    
    
    672,314
    
    
    
    100.00Allowance for loan losses
    
    
    (14,334
    )
    
    
    
    
    
    
    (16,608
    )Deferred loan fees, net of direct origination costs
    
    
    16
    
    
    
    
    
    
    
    (104
    )Loans receivable, net
    
    $
    592,598
    
    
    
    
    
    
    $
    655,602
 The allowance for loan losses and reserve for unfunded commitments are maintained at levels
considered adequate by management to provide for probable loan losses as of the Consolidated
Balance Sheet reporting dates. The allowance for loan losses and reserve for unfunded commitments
are based on managements assessment of various factors affecting the loan portfolio, including
problem loans, business conditions and loss experience, and an overall evaluation of the quality
of the underlying collateral. Changes in the allowance for loan losses and the reserve for
unfunded commitments during the three and nine months ended September 30, 2010 and 2009 were as
follows:
  Three months ended September 30,
    
    
    Nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)Balance Beginning January 1
    
    $
    (13,742
    )
    
    $
    (24,300
    )
    
    $
    (16,608
    )
    
    $
    (16,433
    )Charge-offs
    
    
    9,807
    
    
    
    10,565
    
    
    
    24,956
    
    
    
    24,420Recoveries
    
    
    (341
    )
    
    
    (122
    )
    
    
    (902
    )
    
    
    (390
    )Transfers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Provision for losses on loans
    
    
    (10,058
    )
    
    
    (3,756
    )
    
    
    (21,780
    )
    
    
    (25,210
    )Balance at September 30
    
    $
    (14,334
    )
    
    $
    (17,613
    )
    
    $
    (14,334
    )
    
    $
    (17,613
    )Allowance  Unfunded Commitments Balance Beginning January 1
    
    $
    (18
    )
    
    $
    (365
    )
    
    $
    (11
    )
    
    $
    (14
    )Adjustment
    
    
    2
    
    
    
    187
    
    
    
    (5
    )
    
    
    (164
    )Transfers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allowance  Unfunded Commitments at September 30
    
    $
    (16
    )
    
    $
    (178
    )
    
    $
    (16
    )
    
    $
    (178
    )
 September 30,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands)Impaired loans without a specific allowance for loan losses
    
    $
    29,893
    
    
    $
    39,001Impaired loans with a specific allowance for loan losses
    
    
    18,427
    
    
    
    18,719Total impaired loans
    
    $
    48,320
    
    
    $
    57,720
 A summary of non-performing assets and
classified loans at the dates indicated is a follows:
 September 30,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands)Loans past due in excess of 90 days and still accruing
    
    $
    532
    
    
    $
    586Non-accrual loans
    
    
    15,832
    
    
    
    18,468Total non-performing loans
    
    
    16,364
    
    
    
    19,054Other real estate owned (OREO)
    
    
    6,424
    
    
    
    11,538Total non-performing assets (NPAs)
    
    $
    22,788
    
    
    $
    30,592Classified loans (1)
    
    $
    62,410
    
    
    $
    77,175
 
 (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. Classified loans included non-performing loans and performing substandard loans where management
believes that the loans may
not return principal and interest per their original contractual terms. A loan that is
classified may not necessarily result in a loss.
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4.
    
    Other Real Estate Owned:
 At the applicable foreclosure date, OREO is recorded at the fair value of the real estate, less
the estimated costs to sell the real estate. The carrying value of OREO is regularly evaluated
and, if necessary, the carrying value is reduced to net realizable value. The following table
presents OREO for the periods presented:
 Three Months Ended
    
    
    Nine Months EndedSeptember, 2010
    
    
    September, 2009
    
    
    September, 2010
    
    
    September, 2009(Dollars in thousands)Balance, beginning of period
    
    $
    8,754
    
    
    $
    13,650
    
    
    $
    11,538
    
    
    $
    4,541Additions to OREO
    
    
    1,653
    
    
    
    3,733
    
    
    
    6,581
    
    
    
    15,004Proceeds from sale of OREO
    
    
    (3,584
    )
    
    
    (1,826
    )
    
    
    (9,400
    )
    
    
    (2,838
    )Valuation Adjustments in the period (1)
    
    
    (399
    )
    
    
    (1,162
    )
    
    
    (2,295
    )
    
    
    (2,312
    )Balance, end of period, September 30
    
    $
    6,424
    
    
    $
    14,395
    
    
    $
    6,424
    
    
    $
    14,395
 
 (1)
    
    Amount includes chargedowns and gains/losses on sale of OREO 5.
    
    Goodwill and Other Intangible Assets:
 During the three months ended September 30, 2010, Intermountain recorded a goodwill impairment
charge of $11.7 million, reducing the balance of goodwill to zero, as compared to the December
31, 2009 balance of $11.7 million. Goodwill represents the difference between the value of
consideration paid and the fair value of the net assets received in a business combination.
Intermountain records impairment losses as charges to noninterest expense and adjustments to the
carrying value of goodwill. Goodwill is tested for impairment on an annual basis, or more
frequently as events occur, or as current circumstances and conditions warrant. 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 might exist 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. The results of Step 1 indicated that a potential
for impairment did exist at the end of 2009, requiring the Company to engage in Step 2 to
determine the amount of the impairment, if any.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. 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 September 30, 2010, the Company concluded there was a triggering event related to continuing
depressed economic conditions and ongoing losses incurred by the Company. As a result,
Intermountain performed a goodwill impairment evaluation using current information.
In completing its goodwill impairment analysis, the Company used tangible common equity
multiples and core deposit metrics from recent transactions to estimate the fair value of the
company at September 30, 2010. For Step 1, the fair value of the company was less than the common
book value of the Company prior to any goodwill adjustments, indicating a potential impairment.
Under accounting guidance, a Step 2 analysis is required . In the Step 2 analysis, the fair value
of the Companys assets and liabilities was determined, using discounted cash flows based on the
cash flow characteristics of the assets and liabilities and prevailing market interest rates. The
fair value of the liabilities was subtracted from the fair value of the assets resulting in the
fair value of the net assets. This was then reduced by the value of the preferred stock to derive
the sum of the fair value of net assets supported by common equity. Since this number was higher
at September 30, 2010 than the fair value of the Company calculated in Step 1, there was no excess
company value that could be allocated to goodwill, resulting in a full impairment of the Companys
goodwill.As of September 30, 2010, the Company had other intangible assets related to acquired depository
relationships of $342,000, as compared to $439,000 as of December 31, 2009. Other intangible
assets are periodically assessed for impairment when certain triggering events occur that
indicate the possibility of impairment. No impairment is considered to exist at this time.
 6.
    
    Advances from the Federal Home Loan Bank of Seattle:
 At September 30, 2010 the Companys banking subsidiary, Panhandle State Bank (the Bank) had 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
 10




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FHLB advance at 3.11% that matures in September 2014. These notes totaled $34.0 million, and the
Bank had the ability to borrow an additional $84.5 million from the FHLB. At December 31, 2009 the
Bank had a total of $49.0 million in FHLB advances, consisting of a $10.0 million FHLB advance at
4.96% that matured in September 2010, a $5.0 million FHLB advance at 0.86% that matured 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. In addition, the Bank also had a letter of credit agreement
with the FHLB at September 30, 2010 and December 31, 2009 in the amount of $2.6 million.Advances from FHLB Seattle are collateralized by certain qualifying loans. At September 30, 2010,
Intermountain had the ability to borrow $121.1 million from FHLB Seattle, of which $34.0 million
was utilized for borrowing, and $2.6 million was utilized to secure a letter of credit agreement.
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.
 7.
    
    Other Borrowings:
 The components of other borrowings are
as follows (in thousands):
 September
    
    
    December 31,30, 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 3.54% at
September 30, 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 at 4.58% 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 3.33% at September 30, 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 debentures issued to the trusts referred to above
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.
 11




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8.
    
    Earnings Per Share:
 The following table presents the basic and diluted earnings per share computations (numbers in
thousands):
 Three months Ended September 30,
    
    
    Nine months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net loss  basic and diluted
    
    $
    (24,302
    )
    
    $
    (2,242
    )
    
    $
    (31,109
    )
    
    $
    (13,362
    )Preferred stock dividend
    
    
    432
    
    
    
    416
    
    
    
    1,279
    
    
    
    1,245Net loss applicable to commons stockholders
    
    $
    (24,734
    )
    
    $
    (2,658
    )
    
    $
    (32,388
    )
    
    $
    (14,607
    )Denominator:Weighted average shares outstanding  basic
    
    
    8,390,877
    
    
    
    8,365,836
    
    
    
    8,383,841
    
    
    
    8,358,908Dilutive effect of common stock options,
restricted stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding  diluted
    
    
    8,390,877
    
    
    
    8,365,836
    
    
    
    8,383,841
    
    
    
    8,358,908Loss per share  basic and diluted:Loss per share  basic
    
    $
    (2.95
    )
    
    $
    (0.32
    )
    
    $
    (3.86
    )
    
    $
    (1.75
    )Effect of dilutive common stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss per share  diluted
    
    $
    (2.95
    )
    
    $
    (0.32
    )
    
    $
    (3.86
    )
    
    $
    (1.75
    )Anti-dilutive securities not included in diluted
earnings per share:Common stock options
    
    
    242,157
    
    
    
    265,710
    
    
    
    242,157
    
    
    
    260,879Common stock warrant
    
    
    1,586,277
    
    
    
    904,467
    
    
    
    2,221,804
    
    
    
    492,426Restricted shares
    
    
    134,376
    
    
    
    17,389
    
    
    
    183,902
    
    
    
    6,530Total anti-dilutive shares
    
    
    1,962,810
    
    
    
    1,187,566
    
    
    
    2,647,863
    
    
    
    759,835
 Common stock equivalents were calculated using the treasury stock method.
 9.
    
    Operating Expenses:
 The following table details
Intermountains components of total operating expenses in
thousands:
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Salaries and employee benefits
    
    $
    4,942
    
    
    $
    5,673
    
    
    $
    15,862
    
    
    $
    17,031Occupancy expense
    
    
    1,853
    
    
    
    1,814
    
    
    
    5,470
    
    
    
    5,590Advertising
    
    
    279
    
    
    
    366
    
    
    
    774
    
    
    
    1,010Fees and service charges
    
    
    678
    
    
    
    919
    
    
    
    2,027
    
    
    
    2,148Printing, postage and supplies
    
    
    323
    
    
    
    375
    
    
    
    1,037
    
    
    
    1,028Legal and accounting
    
    
    302
    
    
    
    456
    
    
    
    963
    
    
    
    1,099FDIC Assessment
    
    
    502
    
    
    
    393
    
    
    
    1,442
    
    
    
    1,803OREO operations
    
    
    562
    
    
    
    1,663
    
    
    
    2,971
    
    
    
    3,098Goodwill impairment
    
    
    11,662
    
    
    
    
    
    
    
    11,662
    
    
    
    Other expense
    
    
    815
    
    
    
    1,297
    
    
    
    2,546
    
    
    
    3,588Total operating expenses
    
    $
    21,918
    
    
    $
    12,956
    
    
    $
    44,754
    
    
    $
    36,395
 Salaries and employee benefits expense decreased $1.2 million or 6.9%, over the nine month period
last year as a result of planned staff reductions implemented throughout 2010. The nine month
2010 total includes $452,000 in severance costs. For the quarter ended September 30, 2010 salary
and benefit expenses decreased $731,000, or 12.9% as compared to the same quarter last year.
Decreased staffing levels and lower incentive compensation expense more than offset the severance
payments noted above and increases in unemployment insurance premiums. 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. The employee
full time equivalent (FTE) number at September 2010 totaled 356 which was reduced by 56 FTEs,
or 13.6% from September 2009.Occupancy expenses decreased $120,000, or 2.1%, for the nine month period ended September 30,
2010 compared to the same period one year ago and increased $39,000 or 2.1% from the third
quarter, 2009. The year-to-date decrease was comprised of decreases in overall rent costs and
reduced computer hardware and software expense as additional cost control measures have been
implemented. The quarterly increase is primarily the result of a one-time backdated rent payment
increase per the lease agreement on one of its facilities. The Company expects these expenses to
continue declining in 2010 in comparison to prior periods, as it has postponed building expansion
plans, consolidated administrative operations and managed its hardware and software purchases
carefully.The advertising expense decrease of $236,000 for the nine month period compared to the same period
one year ago is a result of reductions in general advertising and media expenses, as the need for
broad advertising in the current market has been limited. The $121,000 decrease in fees and service
charges for the nine month period ended September 30, 2010
compared to the same period
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one year ago is primarily comprised of decreases in loan collection, repossession and
liquidation expenses, with particularly large reductions in the third quarter of this year versus
the prior year comparable quarter. Printing, postage and supplies increased $9,000 for the
nine-month period in comparison to last years total. The increase reflected timing of the
payment of postage and supply expense during the quarter. Additional outsourcing activities are
expected to result in improvements in these areas over the next several months. Legal and
accounting fees decreased by $136,000 in comparison to the same nine month period in 2009 as the
Company reduced expenditures on outside legal and consulting services related to loan collection
and regulatory compliance.The $361,000 decrease in FDIC expenses for the nine month period ended September 30, 2010 over
last year primarily reflects the special FDIC assessment that was paid in September 2009 with no
similar assessment in 2010. The $109,000 increase in FDIC expenses for the three month period
ended September 30, 2010 over last year reflects the higher FDIC insurance premium rate for 2010
compared to the same period one year ago. OREO operations, related valuation adjustments and
gain/loss on sale of OREO decreased by $127,000 for the nine month period over the same period
last year. The reduction was $1.1 million or 66.2% in the third quarter compared to the same
period last year, as OREO levels have reduced substantially since last year and property
valuation adjustments and losses on sale are significantly lower. The Company recorded a goodwill
impairment of $11.7 million for the nine and three months ended September 30, 2010 as discussed
in Footnote 5 above.Other expenses decreased $1.0 million, or 29.0%, for the nine 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. The
Company also recorded a $426,000 charge related to the sale of the Sandpoint center in the nine
months ended September 30, 2009.
 10.
    
    Income Taxes:
 Intermountain uses an estimate of future earnings, and an evaluation of its loss carryback
ability and tax planning strategies to determine whether or not the benefit of its net deferred
tax asset will be realized. At September 30, 2010, Intermountain assessed whether it was more
likely than not that it would realize the benefits of its deferred tax asset. Intermountain
determined that the negative evidence associated with a projected three-year cumulative loss for
the period ending December 31, 2010, and continued depressed economic conditions outweighed the
positive evidence. Therefore, Intermountain established a valuation allowance of $7.4 million
against its deferred tax asset. The company analyzes the deferred tax asset on a quarterly basis
and may recapture a portion or all of this allowance depending on future profitability. After
recording the valuation allowance, Intermountain had a net deferred tax asset of $15.3 million as
of September 30, 2010, compared to a net deferred tax asset of $16.9 million as of December 31,
2009.
 11.
    
    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 nine months ended September 30, 2010 or September 30, 2009.
 In 2003, stockholders approved a change to the 1999 Employee Stock 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 nine months ended September 30,
2010 and 2009. For the nine months ended September 30, 2010 and 2009, restricted stock expense
totaled $281,000 and $272,000, respectively. Total expense related to stock-based compensation
recorded in the nine months ended September 30, 2010 and 2009 was $281,000 and $272,000,
respectively.
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##### Table of Contents



A summary of the changes in stock options outstanding for the nine months ended September 30,
2010, is presented below:
 Nine months ended September 30, 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, September 30, 2010
    
    
    242,160
    
    
    
    6.27
    
    
    
    2.1Exercisable at September 30, 2010
    
    
    242,160
    
    
    $
    6.27
    
    
    
    2.1
 The total intrinsic value of options exercised during the nine months ended September 30, 2010
and 2009 was $0 and $7,000, respectively. A summary of the Companys nonvested restricted shares
for the nine months ended September 30, 2010, is presented below:
 Weighted-AverageGrant-DateNonvested Shares
    
    Shares
    
    
    Fair ValueBalance at January 1, 2010
    
    
    72,718
    
    
    $
    15.71Granted
    
    
    
    
    
    
    Vested
    
    
    (27,409
    )
    
    
    17.90Forfeited
    
    
    (4,182
    )
    
    
    15.61Balance at September 30, 2010
    
    
    41,127
    
    
    $
    14.27
 12.
    
    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.
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##### Table of Contents



Interest Rate Swaps  Designated as Cash Flow Hedges
 The tables below identify the Companys interest rate swaps at September 30, 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):
 September 30, 2010Receive Rate
    
    Pay Rate
    
    Type of HedgingMaturity Date
    
    Notional Amount
    
    Fair Value (Loss)
    
    (LIBOR)
    
    (Fixed)
    
    RelationshipPay Fixed, Receive Variable:October 2013
    
    $
    8,248
    
    
    $
    (1,005
    )
    
    
    0.53
    %
    
    
    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
 The fair values, or unrealized losses, of $1.0 million at September 30, 2010 and $678,000 at
December 31, 2009 are included in other liabilities. The Company has deferred the interest
payments on the related Trust Preferred borrowing beginning with the January 2010 scheduled
remittance. As a result of the deferred interest payments, a calculation of the effectiveness of
the hedge was prepared. It was concluded that although the hedge is generally effective, there is
a small amount of ineffectiveness due to the delayed payments. The Company expensed $175,000 in
interest expense in the nine months ended September 30, 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 (loss). Net cash flows
from these interest rate swaps are included in interest expense on trust preferred debentures.
The unrealized loss at September 30, 2010 is a component of comprehensive income (loss) for
September 30, 2010. At September 30, 2010, Intermountain had $1.0 million in restricted cash and
$190,000 in Pacific Coast Bankers Bank stock as collateral for the cash flow hedge. The following
table provides a reconciliation of cash flow hedges measured at fair value during the periods
indicated (in thousands):
 Nine months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009Unrealized loss at beginning of period
    
    $
    (678
    )
    
    $
    (985
    )Amount of gross loss recognized in earnings (loss)
    
    
    (175
    )
    
    
    Amount of gross loss recognized in other comprehensive income (loss)
    
    
    (152
    )
    
    
    244Unrealized loss at end of period
    
    $
    (1,005
    )
    
    $
    (741
    )
 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 to the
underlying transaction being hedged, 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
September 30, 2010 and December 31, 2009 (in thousands):
 September 30, 2010
    
    
    December 31, 2009Notional
    
    
    
    
    
    
    NotionalAmount
    
    
    Fair Value (Loss)
    
    
    Amount
    
    
    Fair Value GainInterest rate swaps with third party financial institutions
    
    $
    2,559
    
    
    $
    (176
    )
    
    $
    2,559
    
    
    $
    57
 At September 30, 2010, loans receivable included ($176,000) of derivative assets and other
liabilities included $0 of derivative assets related to these interest rate swap transactions. At
September 30, 2010, the interest rate swaps had a maturity date of March 2019. At September 30,
2010, Intermountain had $72,000 in restricted cash as collateral for the interest rate swaps.
 13.
    
    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 prices in active markets for identical assets or
liabilities that the entity has the ability to access at the measurement date.
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##### Table of Contents



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 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 September 30, 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 September 30, 2010, UsingQuoted PricesIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    September 30, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available-for-Sale Securities:U.S. treasury securities and obligations of U.S. government agencies
    
    $
    4,036
    
    
    $
    
    
    
    $
    4,036
    
    
    $
    Residential mortgage backed securities (MBS)
    
    
    172,029
    
    
    
    
    
    
    
    140,723
    
    
    
    31,306Other Assets  Derivative
    
    
    (176
    )
    
    
    
    
    
    
    
    
    
    
    (176
    )Total Assets Measured at Fair Value
    
    $
    175,889
    
    
    $
    
    
    
    $
    144,759
    
    
    $
    31,130Other Liabilities  Derivatives
    
    $
    1,005
    
    
    $
    
    
    
    $
    
    
    
    $
    1,005
 Fair Value MeasurementsAt December 31, 2009 UsingQuoted PricesIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    December 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
 The changes in Level 3 assets and liabilities measured at fair value on a recurring basis as
of September 30, 2010 are summarized as follows (in thousands):
 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
    
    
    (605
    )
    
    
    (233
    )
    
    
    (838
    )Included in other comprehensive income
    
    
    7,379
    
    
    
    
    
    
    
    7,379Principal Payments
    
    
    (3,603
    )
    
    
    
    
    
    
    (3,603
    )Sales of Securities
    
    
    (2,565
    )
    
    
    
    
    
    
    (2,565
    )Transfers in and /or out of Level 3
    
    
    
    
    
    
    
    
    
    
    September 30, 2010 Balance
    
    $
    32,842
    
    
    $
    (176
    )
    
    $
    32,666
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##### Table of Contents



Fair Value MeasurementsUsing Significant UnobservableInputs ( Level 3)Description
    
    DerivativesJanuary 1, 2010 Balance
    
    $
    678Total gains or losses (realized/unrealized) included in earnings
    
    
    175Included in other comprehensive income
    
    
    152September 30, 2010 Balance
    
    $
    1,005
 Intermountain may be required, from time to time, to measure certain other financial assets at
fair value on a non-recurring basis. The following table presents the carrying value for these
financial assets as of September 30, 2010 (in thousands):
 Fair Value MeasurementsAt September 30, 2010, UsingQuoted PricesIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    September 30, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Loans(1)
    
    $
    41,961
    
    
    $
    
    
    
    $
    
    
    
    $
    41,961OREO
    
    
    6,424
    
    
    
    
    
    
    
    
    
    
    
    6,424Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Deferred Tax Asset, net of valuation
    
    
    15,318
    
    
    
    
    
    
    
    
    
    
    
    15,318Total Assets Measured at Fair Value
    
    $
    63,703
    
    
    $
    
    
    
    $
    
    
    
    $
    63,703
 
 (1)
    
    Represents impaired loans, net, which are included in loans. Impaired loans are valued based on either the estimated fair value of the cash flows to be
received or the fair value of the underlying collateral supporting the loan less selling costs.
Real estate collateral on these loans and the Companys other real estate owned (OREO) is
typically valued using appraisals or other indications of value based on recent comparable sales
of similar properties or assumptions generally observable in the marketplace. Management reviews
these valuations and makes additional valuation adjustments, as necessary, including subtracting
estimated costs of liquidating the collateral or selling the OREO. The related nonrecurring fair
value measurement adjustments have been classified as Level 3 because of the significant
assumptions required to estimate future cash flows on these loans, and the rapidly changing and
uncertain collateral values underlying the loans. Extreme volatility and the lack of relevant and
current sales data in the Companys market areas for various types of collateral create
additional uncertainties and require the use of multiple sources and management judgment to make
adjustments. Goodwill and Net Deferred Tax Asset are presented at fair value, net of impairment
charges. The goodwill and net deferred tax asset impairments were based on fair value analysis
of Level 3 inputs.
 The following is a further description of the principal valuation methods used by the
Company to estimate the fair values of its financial instruments.
 Securities
 The fair values of securities, other than those categorized as level 3 described above, are
based principally on market prices and dealer quotes. Certain fair values are estimated using
pricing models or are based on comparisons to market prices of similar securities. The fair value
of stock in the FHLB equals its carrying amount since such stock is only redeemable at its par
value.
 Available for Sale Securities.Securities totaling $144.8 million classified as available
for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company
obtained fair value measurements from an independent pricing service and internally validated
these measurements. The fair value measurements consider observable data that may include dealer
quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade
execution data, market consensus, prepayment speeds, credit information and the bonds terms and
conditions, among other things.
 The available for sale portfolio also includes $31.3 million in super senior or senior
tranche collateralized mortgage obligations not backed by a government or other agency guarantee.
These securities are collateralized by fixed rate prime or Alt A mortgages, are structured to
provide credit support to the senior tranches, and are carefully analyzed and monitored by
management. Because of disruptions in the current market for mortgage-backed securities and
collateralized mortgage obligations, an active market did not exist for these securities at
September 30, 2010. This is evidenced by a significant widening in the bid-ask spread for these
types of securities and the limited volume of actual trades made. As a result, less reliance can
be placed on easily observable market data,
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##### Table of Contents



such as pricing on transactions involving similar types of securities, in determining their
current fair value. As such, significant adjustments were required to determine the fair value at
the September 30, 2010 measurement date. These securities are valued using Level 3 inputs.
 In valuing these securities, the Company utilized the same independent pricing service as
for its other available-for-sale securities and internally validated these measurements. In
addition, it utilized a second pricing service that specializes in whole-loan collateralized
mortgage obligation valuation and another market source to derive independent valuations and used
this data to evaluate and adjust the original values derived. In addition to the observable
market-based input including dealer quotes, market spreads, live trading levels and execution
data, both services also employed a present-value income model that considered the nature and
timing of the cash flows and the relative risk of receiving the anticipated cash flows as agreed.
The discount rates used were based on a risk-free rate, adjusted by a risk premium for each
security. In accordance with the requirements of ASC 820-10, the Company has determined that the
risk-adjusted discount rates utilized appropriately reflect the Companys best estimate of the
assumptions that market participants would use in pricing the assets in a current transaction to
sell the asset at the measurement date. Risks include nonperformance risk (that is, default risk
and collateral value risk) and liquidity risk (that is, the compensation that a market
participant receives for buying an asset that is difficult to sell under current market
conditions). To the extent possible, the pricing services and the Company validated the results
from these models with independently observable data.
 In evaluating securities in the investment portfolio for OTTI, the Company evaluated the
following factors:
 
    
    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.
 Based on the factors above, the Company has determined that two securities comprised of a
pool of mortgages were subject to OTTI as of September 30, 2010. During 2009, the Company
recorded an OTTI of $1,751,000 on one security. Of the total $1,751,000 OTTI, $526,000 was
related to credit losses and was a charge against earnings. The remaining $1,225,000 reflected
non-credit value impairment and was charged against the Companys other comprehensive income
(loss) and reported capital on the balance sheet. The Company conducted a similar analysis on the
estimated cash flows in the first, second, and third quarters of 2010, and as a result of these
analyses, recorded additional credit loss impairments of $19,000, $144,000 and $174,000 against
earnings for the first, second and third quarter of 2010, respectively. During second quarter
2010, the Company recorded an OTTI of $1,529,000 on an additional security. Of the total
$1,529,000 OTTI, $92,000 was related to credit losses and was a charge against earnings. The
remaining $1,437,000 reflected non-credit value impairment and was charged against the Companys
other comprehensive income and reported capital on the balance sheet. The company recorded a
$175,000 related to credit losses during the third quarter of 2010. At this time, the Company
anticipates holding the securities until their value is recovered or maturity, and will continue
to adjust its other comprehensive income and capital position to reflect the securities current
market value. The Company calculates the credit loss charge against earnings by subtracting the
estimated present value of estimated future cash flows on the security from its amortized cost.
 Loans.Loans are generally not recorded at fair value on a recurring basis. Periodically,
the Company records nonrecurring adjustments to the carrying value of loans based on fair value
measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring
adjustments also include certain impairment amounts for impaired loans when establishing the
allowance for credit losses. Such amounts are generally based on either the estimated fair value
of the cash flows to be received or the fair value of the underlying collateral supporting the
loan less selling costs. Real estate collateral on these loans and the Companys OREO is
typically valued using appraisals or other indications of value based on recent comparable sales
of similar properties or assumptions generally observable in the marketplace. Management reviews
these valuations and makes additional valuation adjustments, as necessary, including subtracting
estimated costs of liquidating the collateral or selling the OREO. The related nonrecurring fair
value measurement adjustments have generally been classified as Level 3 because of the
significant assumptions required estimating future cash flows on these loans, and the rapidly
changing and uncertain collateral values underlying the loans. Extreme volatility and the lack of
relevant and current sales data in the Companys market areas for various types of collateral
create additional uncertainties and require the use of multiple sources and management judgment
to make adjustments. Loans subject to nonrecurring fair value measurement were $42.0 million at
September 30, 2010 all of which were classified as Level 3.
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##### Table of Contents



Other Real Estate Owned.At the applicable foreclosure date, OREO is recorded at fair value
of the real estate, less the estimated costs to sell the real estate. Subsequently, OREO is
carried at the lower of cost or net realizable value (fair value less estimated selling costs),
and is periodically assessed for impairment based on fair value at the reporting date. Fair value
is determined from external appraisals and other valuations using judgments and estimates of
external professionals. Many of these inputs are not observable and, accordingly, these
measurements are classified as Level 3. The Companys OREO at September 30, 2010 totaled $6.4
million, all of which was classified as Level 3.
 Interest Rate Swaps.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 the Trust Preferred I obligation (see
Note 7  Other Borrowings) to a series of fixed rate payments for five years, as a hedging
strategy to help manage the Companys interest-rate risk. This contract is carried as an asset or
liability at fair value, and as of September 30, 2010, it was a liability with a fair value of
$1.0 million.
 During the first quarter of 2009, the Company entered into an interest rate swap contract
with Pacific Coast Bankers Bank. The purpose of the $1.6 million notional value swap is to
convert the fixed rate payments earned on a loan receivable to a series of variable rate payments
for ten years, as a hedging strategy to help manage the Companys interest-rate risk. This
contract is carried as an asset or liability at fair value, and as of September 30, 2010, it was
an asset with a fair value of ($114,000). During the second quarter of 2009, the Company entered
into an interest rate swap contract with Pacific Coast Bankers Bank. The purpose of the $1.0
million notional value swap is to convert the fixed rate payments earned on a loan receivable to
a series of variable rate payments for ten years, as a hedging strategy to help manage the
Companys interest-rate risk. This contract is carried as an asset or liability at fair value,
and as of September 30, 2010, it was an asset with a fair value of ($62,000).
 Intermountain is required to disclose the estimated fair value of financial instruments,
both assets and liabilities on and off the balance sheet, for which it is practicable to estimate
fair value. These fair value estimates are made at September 30, 2010 based on relevant market
information and information about the financial instruments. Fair value estimates are intended to
represent the price an asset could be sold at or the price a liability could be settled for.
However, given there is no active market or observable market transactions for many of the
Companys financial instruments, the Company has made estimates of many of these fair values
which are subjective in nature, involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could significantly affect
the estimated values.
 The estimated fair value of the financial instruments as of September 30, 2010 and December
31, 2009, are as follows (in thousands):
 September 30, 2010
    
    
    December 31, 2009Carrying
    
    
    
    
    
    
    CarryingAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueFinancial assets:Cash, cash equivalents, restricted cash and federal funds sold
    
    $
    109,256
    
    
    $
    109,256
    
    
    $
    104,835
    
    
    $
    104,835Interest bearing certificates of deposit
    
    
    
    
    
    
    
    
    
    
    862
    
    
    
    862Available-for-sale securities
    
    
    176,065
    
    
    
    176,065
    
    
    
    181,784
    
    
    
    181,784Held-to-maturity securities
    
    
    22,234
    
    
    
    23,078
    
    
    
    15,177
    
    
    
    15,397Loans held for sale
    
    
    3,067
    
    
    
    3,067
    
    
    
    6,574
    
    
    
    6,574Loans receivable, net
    
    
    592,598
    
    
    
    609,788
    
    
    
    655,602
    
    
    
    683,300Accrued interest receivable
    
    
    4,640
    
    
    
    4,640
    
    
    
    5,077
    
    
    
    5,077BOLI
    
    
    8,674
    
    
    
    8,674
    
    
    
    8,397
    
    
    
    8,397Financial liabilities:Deposit liabilities
    
    
    788,504
    
    
    
    779,121
    
    
    
    819,321
    
    
    
    786,704Borrowings
    
    
    131,283
    
    
    
    132,051
    
    
    
    160,760
    
    
    
    160,469Accrued interest payable
    
    
    1,294
    
    
    
    1,294
    
    
    
    1,211
    
    
    
    1,211
 The methods and assumptions used to estimate the fair values of each class of financial
instruments are as follows:
 Cash, Cash Equivalents, Federal Funds and Certificates of Deposit
 The carrying value of cash, cash equivalents, federal funds sold and certificates of deposit
approximates fair value due to the relatively short-term nature of these instruments.
 19




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##### Table of Contents



Investments and BOLI
 See the discussion above regarding the fair values of investment securities. The fair value
of BOLI is equal to the cash surrender value of the life insurance policies.
 Loans Receivable and Loans Held For Sale
 The fair value of performing mortgage loans, commercial real estate, construction, consumer
and commercial loans is estimated by discounting the cash flows using interest rates that
consider the interest rate risk inherent in the loans and current economic and lending
conditions. Non-accrual loans are assumed to be carried at their current fair value and therefore
are not adjusted.
 Deposits
 The fair values for deposits subject to immediate withdrawal such as interest and
non-interest bearing checking, savings and money market deposit accounts are discounted using
market rates for replacement dollars and using industry statistics for decay/maturity dates. The
carrying amounts for variable-rate certificates of deposit and other time deposits approximate
their fair value at the reporting date. Fair values for fixed-rate certificates of deposit are
estimated by discounting future cash flows using interest rates currently offered on time
deposits with similar remaining maturities.
 Borrowings
 The carrying amounts of short-term borrowings under repurchase agreements approximate their
fair values due to the relatively short period of time between the origination of the instruments
and their expected payment. The fair value of long-term FHLB Seattle advances and other long-term
borrowings is estimated using discounted cash flow analyses based on the Companys current
incremental borrowing rates for similar types of borrowing arrangements with similar remaining
terms.
 Accrued Interest
 The carrying amounts of accrued interest payable and receivable approximate their fair value.
 14.
    
    Subsequent Events:
 Intermountain performed an evaluation of subsequent events through the date this report was
filed with the Securities and Exchange Commission.
 15.
    
    New Accounting Pronouncements:
 In June 2009, the Financial Accounting Standards Board (the FASB) issued Accounting
Standards Update (ASU) 2009-16, Accounting for Transfers of Financial Assets. This standard
removes the concept of qualifying special-purpose entities as an accounting criteria that had
provided an exception to consolidation, provided additional guidance on requirements for
consolidation, and is an update to codification topic 860. This guidance became effective for
Intermountain on January 1, 2010, and did not have a material impact on its consolidated
financial statements.In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures.
This guidance is related to implementation of fair value measurement disclosures. This update to
the codification topic 820 specifically addresses: 1) transfers between levels 1, 2 and 3 of the
fair value hierarchy; 2) level of disaggregation of derivative contracts for fair value
measurement disclosures; and 3) disclosures about fair value measurement inputs and valuation
techniques. This guidance became effective for the Company on March 31, 2010, and did not have a
material impact on its consolidated financial statements.In February 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and
Disclosure Requirements, that standardizes accounting for and disclosures of events that occur
after the balance sheet date but before financial statements are issued or are available to be
issued, and was an update to codification topic 855. As a public reporting company, Intermountain
is required to evaluate subsequent events through the date its financial statements are issued.
The adoption of these rules did not have a material impact on the Companys consolidated
financial statements.
 20




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##### Table of Contents



In April 2010, the FASB issued ASU 2010-18, Effect of a Loan Modification When the Loan Is
Part of a Pool That Is Accounted
for as a Single Asset. This update addresses modifications of loans that are accounted for
within a pool by specifying that a troubled debt restructuring would not result in the removal of
those loans from the pool for impairment analysis purposes. This guidance was effective for
Intermountain as of September 30, 2010. Intermountain does not currently have any loans for which
this guidance would be applicable.In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses. This update amends codification topic
310 on receivables to improve the disclosures that an entity provides about the credit quality of
its financing receivables and the related allowance for credit losses. As a result of these
amendments, an entity is required to disaggregate by portfolio segment or class certain existing
disclosures and provide certain new disclosures about its financing receivables and related
allowance for credit losses. This guidance is being phased in, with the new disclosure
requirements for period end balances effective as of December 31, 2010, and the new disclosure
requirements for activity during the reporting period are effective March 31, 2011.
 
 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, 2009.
 General
 Overview & History
      21




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##### Table of Contents



Business Strategy & Opportunities
   
    
    A strong, loyal and low-cost deposit franchise with proven growth capabilities: 64% of
Intermountains deposits at September 30, 2010 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).
    
    A high net interest margin (3.85% for the quarter ended September 30, 2010) relative to
peers with opportunity for additional improvement if rates rise or the economy improves:
Intermountain has consistently maintained a higher net interest margin than its peer group
(Source: UBPR data), and has positioned its balance sheet to protect against current
challenges, and provide for opportunities 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.
    22




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Critical Accounting Policies
  Income Recognition.
 Allowance For Loan Losses.
  23




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Investments.
   Goodwill and Other Intangible Assets.
 24




---



##### Table of Contents



Other Real Estate Owned.
  Fair Value Measurements.
 Derivative Financial Instruments and Hedging Activities.
 Income Taxes.
 25




---



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Results of Operations
 Overview
    26




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Three months Ended
    
    
    Nine months EndedSeptember 30
    
    
    September 302010
    
    
    2009
    
    
    2010
    
    
    2009Loss before income tax benefit
    
    $
    (20,133
    )
    
    $
    (3,944
    )
    
    $
    (31,991
    )
    
    $
    (22,505
    )Less Goodwill Impairment
    
    
    11,662
    
    
    
    
    
    
    
    11,662
    
    
    
    Total loss before income tax
benefit, excluding
Goodwill
Impairment
    
    $
    (8,471)
    
    
    $
    (3,944)
    
    
    $
    (20,329)
    
    
    $
    (22,505)
    Net Interest Income
    27




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##### Table of Contents



Provision for Losses on Loans & Credit Quality.
  September 30,2010
    
    
    2009(Dollars in thousands)Balance Beginning January 1
    
    $
    (16,608
    )
    
    $
    (16,433
    )Charge-OffsCommercial loans
    
    
    9,011
    
    
    
    3,488Commercial real estate loans
    
    
    4,444
    
    
    
    1,210Commercial construction loans
    
    
    1,203
    
    
    
    1,082Land and land development loans
    
    
    7,640
    
    
    
    15,654Agriculture loans
    
    
    725
    
    
    
    909Multifamily loans
    
    
    16
    
    
    
    53Residential loans
    
    
    1,429
    
    
    
    1,076Residential construction loans
    
    
    93
    
    
    
    241Consumer loans
    
    
    395
    
    
    
    707Municipal loans
    
    
    
    
    
    
    Total Charge-offs
    
    
    24,956
    
    
    
    24,420RecoveriesCommercial loans
    
    
    (360
    )
    
    
    (92
    )Commercial real estate loans
    
    
    (271
    )
    
    
    Commercial construction loans
    
    
    (10
    )
    
    
    (1
    )Land and land development loans
    
    
    (77
    )
    
    
    (57
    )Agriculture loans
    
    
    (11
    )
    
    
    (32
    )Multifamily loans
    
    
    
    
    
    
    Residential loans
    
    
    (35
    )
    
    
    (3
    )Residential construction loans
    
    
    
    
    
    
    Consumer loans
    
    
    (138
    )
    
    
    (205
    )Municipal loans
    
    
    
    
    
    
    Total Recoveries
    
    
    (902
    )
    
    
    (390
    )Net charge-offs
    
    
    24,054
    
    
    
    24,030Transfers
    
    
    
    
    
    
    Provision for losses on loans
    
    
    (21,780
    )
    
    
    (25,210
    )Sale of loans
    
    
    
    
    
    
    Balance at September 30
    
    $
    (14,334
    )
    
    $
    (17,613
    )Ratio of net charge-offs to average net loans (QTD annualized)
    
    
    6.10
    %
    
    
    5.84
    %Allowance  Unfunded Commitments Balance Beginning January 1
    
    $
    (11
    )
    
    $
    (14
    )Adjustment
    
    
    (5
    )
    
    
    (164
    )Transfers
    
    
    
    
    
    
    Allowance  Unfunded Commitments at September 30
    
    $
    (16
    )
    
    $
    (178
    )
 28




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Credit Quality Trending
 September 30,
    
    
    June 30,
    
    
    December 31,
    
    
    September 30,2010
    
    
    2010
    
    
    2009
    
    
    2009(Dollars in thousands)Loans past due in excess of 90 days and still accruing
    
    $
    532
    
    
    $
    
    
    
    $
    586
    
    
    $
    471Non-accrual loans
    
    
    15,832
    
    
    
    17,765
    
    
    
    18,468
    
    
    
    21,858Total non-performing loans
    
    
    16,364
    
    
    
    17,765
    
    
    
    19,054
    
    
    
    22,329OREO
    
    
    6,424
    
    
    
    8,754
    
    
    
    11,538
    
    
    
    14,395Total non-performing assets (NPAs)
    
    $
    22,788
    
    
    $
    26,519
    
    
    $
    30,592
    
    
    $
    36,724Classified loans (1)
    
    $
    62,410
    
    
    $
    59,775
    
    
    $
    77,175
    
    
    $
    93,768Troubled debt restructured loans (2)
    
    $
    1,236
    
    
    $
    2,562
    
    
    $
    4,604
    
    
    $
    38,063Total allowance related to non-accrual loans
    
    $
    1,505
    
    
    $
    1,503
    
    
    $
    965
    
    
    $
    608Interest income recorded on non-accrual loans
    
    $
    666
    
    
    $
    353
    
    
    $
    1,126
    
    
    $
    1,493Non-accrual loans as a percentage of net loans receivable
    
    
    2.67
    %
    
    
    2.85
    %
    
    
    2.82
    %
    
    
    3.13
    %Total non-performing loans as a % of net loans receivable
    
    
    2.76
    %
    
    
    2.85
    %
    
    
    2.91
    %
    
    
    3.19
    %Allowance for loan losses (ALLL) as a percentage of
non-performing loans
    
    
    87.6
    %
    
    
    77.4
    %
    
    
    87.2
    %
    
    
    78.9
    %Total NPAs as a % of total assets (3)
    
    
    2.30
    %
    
    
    2.49
    %
    
    
    2.83
    %
    
    
    3.47
    %Total NPAs as a % of tangible capital + ALLL (Texas Ratio) (3)
    
    
    30.67
    %
    
    
    31.09
    %
    
    
    32.85
    %
    
    
    35.63
    %Loan delinquency ratio (30 days and over)
    
    
    0.69
    %
    
    
    0.50
    %
    
    
    1.06
    %
    
    
    1.48
    %
 29




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##### Table of Contents



(1)
    
    Classified loan totals are inclusive of non-performing loans and may also include troubled
debt restructured loans, depending on the grading of these restructured loans.(2)
    
    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.    September 30, 2010
    
    
    Dec 31, 2009Amount
    
    
    % of Total
    
    
    Amount
    
    
    % of Total(Dollars in thousands)Commercial loans
    
    $
    18,525
    
    
    
    29.7
    
    
    $
    11,685
    
    
    
    15.1Commercial real estate loans
    
    
    15,086
    
    
    
    24.1
    
    
    
    12,409
    
    
    
    16.1Commercial construction loans
    
    
    9,020
    
    
    
    14.5
    
    
    
    15,554
    
    
    
    20.2Land and land development loans
    
    
    9,876
    
    
    
    15.8
    
    
    
    20,136
    
    
    
    26.1Agriculture loans
    
    
    3,235
    
    
    
    5.2
    
    
    
    9,637
    
    
    
    12.5Multifamily loans
    
    
    112
    
    
    
    0.2
    
    
    
    695
    
    
    
    0.9Residential real estate loans
    
    
    5,146
    
    
    
    8.2
    
    
    
    5,433
    
    
    
    7.0Residential construction loans
    
    
    681
    
    
    
    1.1
    
    
    
    1,165
    
    
    
    1.5Consumer loans
    
    
    729
    
    
    
    1.2
    
    
    
    461
    
    
    
    0.6Municipal loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total classified loans
    
    $
    62,410
    
    
    
    100.0
    
    
    $
    77,175
    
    
    
    100.0
   30




---



##### Table of Contents



E. Oregon,
    
    
    
    
    
    
    
    
    
    
    % of LoanNorth Idaho 
    
    
    Magic
    
    
    
    
    
    
    SW Idaho
    
    
    
    
    
    
    
    
    
    
    Type to TotalNPAs by location
    
    Eastern
    
    
    Valley
    
    
    Greater
    
    
    Excluding
    
    
    
    
    
    
    
    
    
    
    Non-PerformingSeptember 30, 2010
    
    Washington
    
    
    Idaho
    
    
    Boise Area
    
    
    Boise
    
    
    Other
    
    
    Total
    
    
    Assets(Dollars in thousands)Commercial loans
    
    $
    2,541
    
    
    $
    1,241
    
    
    $
    141
    
    
    $
    430
    
    
    $
    41
    
    
    $
    4,394
    
    
    
    19.2
    %Commercial real estate loans
    
    
    1,580
    
    
    
    286
    
    
    
    431
    
    
    
    337
    
    
    
    2,248
    
    
    
    4,882
    
    
    
    21.4
    %Commercial construction loans
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    1,198
    
    
    
    
    
    
    
    1,662
    
    
    
    7.3
    %Land and land development loans
    
    
    3,481
    
    
    
    107
    
    
    
    1,374
    
    
    
    342
    
    
    
    1,962
    
    
    
    7,266
    
    
    
    31.9
    %Agriculture loans
    
    
    
    
    
    
    
    
    
    
    506
    
    
    
    24
    
    
    
    404
    
    
    
    934
    
    
    
    4.1
    %Multifamily loans
    
    
    
    
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    112
    
    
    
    0.5
    %Residential real estate loans
    
    
    2,572
    
    
    
    279
    
    
    
    348
    
    
    
    188
    
    
    
    137
    
    
    
    3,524
    
    
    
    15.5
    %Residential construction loans
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    0.0
    %Consumer loans
    
    
    5
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    0.1
    %Total
    
    $
    10,645
    
    
    $
    1,920
    
    
    $
    2,912
    
    
    $
    2,519
    
    
    $
    4,792
    
    
    $
    22,788
    
    
    
    100.0
    %Percent of total NPAs
    
    
    46.7
    %
    
    
    8.4
    %
    
    
    12.8
    %
    
    
    11.1
    %
    
    
    21.0
    %
    
    
    100.0
    %Percent of NPAs to total loans
in each region (1)
    
    
    3.1
    %
    
    
    3.8
    %
    
    
    4.0
    %
    
    
    2.2
    %
    
    
    16.3
    %
    
    
    3.8
    %
 
 (1)
    
    NPAs include both nonperforming loans and OREO. Nonperforming Asset Trending By Category
 September 30,
    
    
    June 30,
    
    
    December 31,
    
    
    September 30,2010
    
    
    2010
    
    
    2009
    
    
    2009(Dollars in thousands)Commercial loans
    
    $
    4,394
    
    
    $
    3,364
    
    
    $
    2,653
    
    
    $
    3,537Commercial real estate loans
    
    
    4,882
    
    
    
    4,760
    
    
    
    5,235
    
    
    
    4,113Commercial construction loans
    
    
    1,662
    
    
    
    1,931
    
    
    
    3,133
    
    
    
    7,292Land and land development loans
    
    
    7,266
    
    
    
    11,625
    
    
    
    14,055
    
    
    
    14,566Agriculture loans
    
    
    934
    
    
    
    524
    
    
    
    834
    
    
    
    940Multifamily loans
    
    
    112
    
    
    
    112
    
    
    
    135
    
    
    
    188Residential real estate loans
    
    
    3,524
    
    
    
    3,982
    
    
    
    3,195
    
    
    
    4,582Residential construction loans
    
    
    2
    
    
    
    193
    
    
    
    1,264
    
    
    
    1,403Consumer loans
    
    
    12
    
    
    
    28
    
    
    
    88
    
    
    
    103Total NPAs by Categories
    
    $
    22,788
    
    
    $
    26,519
    
    
    $
    30,592
    
    
    $
    36,724
   31




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Other Income.
   Consolidated Financial Statements
  Operating Expenses.
 32




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33




---



##### Table of Contents



Income Tax Provision
  Financial Position
 Assets
 Investments.
  34




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Loans Receivable. Powered By Community
  September 30, 2010
    
    
    December 31, 2009Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial loans
    
    $
    132,608
    
    
    
    21.85
    
    
    $
    131,562
    
    
    
    19.57Commercial real estate loans
    
    
    175,993
    
    
    
    29.00
    
    
    
    172,726
    
    
    
    25.69Commercial construction loans
    
    
    22,051
    
    
    
    3.63
    
    
    
    45,581
    
    
    
    6.78Land and land development loans
    
    
    67,846
    
    
    
    11.18
    
    
    
    88,604
    
    
    
    13.18Agriculture loans
    
    
    93,786
    
    
    
    15.45
    
    
    
    110,256
    
    
    
    16.40Multifamily loans
    
    
    27,048
    
    
    
    4.46
    
    
    
    18,067
    
    
    
    2.69Residential real estate loans
    
    
    62,482
    
    
    
    10.29
    
    
    
    65,544
    
    
    
    9.75Residential construction loans
    
    
    4,994
    
    
    
    0.82
    
    
    
    16,626
    
    
    
    2.47Consumer loans
    
    
    14,810
    
    
    
    2.44
    
    
    
    18,287
    
    
    
    2.72Municipal loans
    
    
    5,298
    
    
    
    0.88
    
    
    
    5,061
    
    
    
    0.75Total loans
    
    
    606,916
    
    
    
    100.00
    
    
    
    672,314
    
    
    
    100.00Allowance for loan losses
    
    
    (14,334
    )
    
    
    
    
    
    
    (16,608
    )Deferred loan fees, net of direct origination costs
    
    
    16
    
    
    
    
    
    
    
    (104
    )Loans receivable, net
    
    $
    592,598
    
    
    
    
    
    
    $
    655,602Weighted average interest rate
    
    
    6.13
    %
    
    
    
    
    
    
    6.15
    %
   35




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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
    
    $
    84,687
    
    
    $
    11,043
    
    
    $
    13,478
    
    
    $
    20,944
    
    
    $
    2,456
    
    
    $
    132,608
    
    
    
    21.8
    %Commercial real
estate loans
    
    
    117,088
    
    
    
    15,270
    
    
    
    17,101
    
    
    
    16,851
    
    
    
    9,682
    
    
    
    175,992
    
    
    
    29.0
    %Commercial
construction loans
    
    
    9,825
    
    
    
    2,287
    
    
    
    8,143
    
    
    
    1,198
    
    
    
    597
    
    
    
    22,050
    
    
    
    3.6
    %Land and land
development loans
    
    
    50,570
    
    
    
    4,578
    
    
    
    7,642
    
    
    
    2,376
    
    
    
    2,681
    
    
    
    67,847
    
    
    
    11.2
    %Agriculture loans
    
    
    1,699
    
    
    
    9,010
    
    
    
    19,663
    
    
    
    61,258
    
    
    
    2,157
    
    
    
    93,787
    
    
    
    15.5
    %Multifamily loans
    
    
    18,657
    
    
    
    
    
    
    
    843
    
    
    
    
    
    
    
    7,548
    
    
    
    27,048
    
    
    
    4.5
    %Residential real
estate loans
    
    
    40,648
    
    
    
    6,087
    
    
    
    4,155
    
    
    
    7,790
    
    
    
    3,803
    
    
    
    62,483
    
    
    
    10.3
    %Residential
construction loans
    
    
    3,623
    
    
    
    228
    
    
    
    242
    
    
    
    901
    
    
    
    
    
    
    
    4,994
    
    
    
    0.8
    %Consumer loans
    
    
    8,011
    
    
    
    1,677
    
    
    
    1,209
    
    
    
    3,355
    
    
    
    557
    
    
    
    14,809
    
    
    
    2.4
    %Municipal loans
    
    
    5,212
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,298
    
    
    
    0.9
    %Total
    
    $
    340,020
    
    
    $
    50,266
    
    
    $
    72,476
    
    
    $
    114,673
    
    
    $
    29,481
    
    
    $
    606,916
    
    
    
    100.0
    %Percent of total
loans in geographic
area
    
    
    56.02
    %
    
    
    8.28
    %
    
    
    11.94
    %
    
    
    18.89
    %
    
    
    4.87
    %
    
    
    100.00
    %Percent of total
loans where real
estate is the
primary collateral
    
    
    70.80
    %
    
    
    62.52
    %
    
    
    55.78
    %
    
    
    39.04
    %
    
    
    83.33
    %
    
    
    62.93
    %
  36




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(Dollars in thousands)Commercial loans
    
    $
    21,600
    
    
    $
    37,187
    
    
    
    (41.9
    )
    
    $
    101,638
    
    
    $
    123,843
    
    
    
    (17.9
    )Commercial real estate loans
    
    
    14,832
    
    
    
    46,432
    
    
    
    (68.1
    )
    
    
    50,558
    
    
    
    97,497
    
    
    
    (48.1
    )Residential real estate loans
    
    
    13,623
    
    
    
    25,697
    
    
    
    (47.0
    )
    
    
    38,656
    
    
    
    92,524
    
    
    
    (58.2
    )Consumer loans
    
    
    2,893
    
    
    
    2,196
    
    
    
    31.7
    
    
    
    5,240
    
    
    
    7,113
    
    
    
    (26.3
    )Municipal loans
    
    
    262
    
    
    
    336
    
    
    
    (22.2
    )
    
    
    1,095
    
    
    
    1,033
    
    
    
    6.1Total loans originated
    
    $
    53,210
    
    
    $
    111,848
    
    
    
    (54.4
    )
    
    $
    197,187
    
    
    $
    322,010
    
    
    
    (38.8
    )
  Office Properties and Equipment.
 Other Real Estate Owned.
 Other Real Estate Owned Activity
 2010
    
    
    2009(Dollars in thousands)Balance, beginning of period, January 1
    
    $
    11,538
    
    
    $
    4,541Additions to OREO
    
    
    6,581
    
    
    
    15,004Proceeds from sale of OREO
    
    
    (9,400
    )
    
    
    (2,838
    )Valuation Adjustments in the period(1)
    
    
    (2,295
    )
    
    
    (2,312
    )Balance, end of period, September 30
    
    $
    6,424
    
    
    $
    14,395
 
 (1)
    
    Amount includes chargedowns and gains/losses on sale of OREO Intangible Assets.
 37




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##### Table of Contents



BOLI and All Other Assets
 Deposits
  September 30, 2010
    
    
    December 31, 2009Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Non-interest bearing demand accounts
    
    $
    163,597
    
    
    
    20.8
    
    
    $
    168,244
    
    
    
    20.5NOW and money market 0.0% to 4.65%
    
    
    337,523
    
    
    
    42.8
    
    
    
    340,070
    
    
    
    41.5Savings and IRA 0.0% to 5.75%
    
    
    75,772
    
    
    
    9.6
    
    
    
    77,623
    
    
    
    9.5Certificate of deposit accounts (CDs)
    
    
    80,779
    
    
    
    10.2
    
    
    
    86,381
    
    
    
    10.6Jumbo CDs
    
    
    77,600
    
    
    
    9.8
    
    
    
    82,249
    
    
    
    10.0Brokered CDs
    
    
    40,899
    
    
    
    5.2
    
    
    
    54,428
    
    
    
    6.6CDARS CDs to local customers
    
    
    12,334
    
    
    
    1.6
    
    
    
    10,326
    
    
    
    1.3Total deposits
    
    $
    788,504
    
    
    
    100.0
    
    
    $
    819,321
    
    
    
    100.0Weighted average interest rate on certificates of
deposit
    
    
    
    
    
    
    1.75
    %
    
    
    
    
    
    
    2.52
    %Core Deposits as a percentage of total deposits (1)
    
    
    
    
    
    
    82.8
    %
    
    
    
    
    
    
    81.6
    %Deposits generated from the Companys market area
as a % of total deposits
    
    
    
    
    
    
    94.8
    %
    
    
    
    
    
    
    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).   September 30,
    
    
    % of total
    
    
    December 31,
    
    
    % of total
    
    
    September 30,
    
    
    % of totalDeposits by Location
    
    2010
    
    
    deposits
    
    
    2009
    
    
    deposits
    
    
    2009
    
    
    depositsNorth Idaho  Eastern Washington
    
    $
    379,133
    
    
    
    48.1
    
    
    $
    402,620
    
    
    
    49.1
    
    
    $
    383,826
    
    
    
    45.8Magic Valley Idaho
    
    
    68,842
    
    
    
    8.7
    
    
    
    69,430
    
    
    
    8.5
    
    
    
    67,480
    
    
    
    8.0Greater Boise Area
    
    
    80,107
    
    
    
    10.2
    
    
    
    77,291
    
    
    
    9.4
    
    
    
    70,371
    
    
    
    8.4Southwest Idaho  Oregon, excluding Boise
    
    
    163,718
    
    
    
    20.7
    
    
    
    158,919
    
    
    
    19.4
    
    
    
    158,511
    
    
    
    18.9Administration, Secured Savings
    
    
    96,704
    
    
    
    12.3
    
    
    
    111,061
    
    
    
    13.6
    
    
    
    158,477
    
    
    
    18.9Total
    
    $
    788,504
    
    
    
    100.0
    
    
    $
    819,321
    
    
    
    100.0
    
    
    $
    838,665
    
    
    
    100.0
 38




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Borrowings
 Interest Rate Risk
      39




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##### Table of Contents



Liquidity and Sources of Funds
        40




---



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Capital Resources
     Notes to Consolidated Financial Statements
  41




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##### Table of Contents



Well-CapitalizedActual
    
    Capital Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted assets):The Company
    
    $
    78,554
    
    
    
    11.04
    %
    
    $
    56,921
    
    
    
    8
    %
    
    $
    71,151
    
    
    
    10
    %Panhandle State Bank
    
    
    82,106
    
    
    
    11.54
    %
    
    
    56,922
    
    
    
    8
    %
    
    
    71,153
    
    
    
    10
    %Tier I capital (to risk-weighted assets):The Company
    
    
    69,593
    
    
    
    9.78
    %
    
    
    28,460
    
    
    
    4
    %
    
    
    42,691
    
    
    
    6
    %Panhandle State Bank
    
    
    73,145
    
    
    
    10.28
    %
    
    
    28,461
    
    
    
    4
    %
    
    
    42,692
    
    
    
    6
    %Tier I capital (to average assets):The Company
    
    
    69,593
    
    
    
    6.78
    %
    
    
    41,031
    
    
    
    4
    %
    
    
    51,289
    
    
    
    5
    %Panhandle State Bank
    
    
    73,145
    
    
    
    7.14
    %
    
    
    40,993
    
    
    
    4
    %
    
    
    51,241
    
    
    
    5
    %
   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(in thousands)Long-term debt(1)
    
    $
    90,039
    
    
    $
    1,208
    
    
    $
    56,898
    
    
    $
    5,253
    
    
    $
    26,680Short-term debt
    
    
    55,828
    
    
    
    55,828
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    59
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations(2)
    
    
    13,987
    
    
    
    1,038
    
    
    
    1,787
    
    
    
    1,578
    
    
    
    9,584Direct financing obligations(3)
    
    
    35,360
    
    
    
    1,635
    
    
    
    3,270
    
    
    
    3,352
    
    
    
    27,103Total
    
    $
    195,273
    
    
    $
    59,768
    
    
    $
    61,955
    
    
    $
    10,183
    
    
    $
    63,367
 
 (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. 42




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New Accounting Pronouncements
      Forward-Looking Statements
 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to,
statements about our plans, objectives, expectations and intentions that are not historical facts,
and other statements identified by words such as expects, anticipates, intends, plans,
believes,, will likely, should, projects, seeks, estimates or words of similar meaning.
These forward-looking statements are based on current beliefs and expectations of management and
are inherently subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond our control. In addition, these forward-looking statements
are subject to assumptions with respect to future business strategies and decisions that are
subject to change. In addition to the factors set forth in the sections titled Risk Factors,
Business and Managements Discussion and Analysis of Financial Condition and Results of
Operations, as applicable, in this report and in our Annual Report on Form 10-K for the year ended
December 31, 2009, the
 43




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following factors, among others, could cause actual results to differ materially from the
anticipated results:
 
    
    further deterioration in economic conditions that could result in increased loan and
lease losses;
    
    risks associated with concentrations in real estate-related loans;
    
    declines in real estate values supporting loan collateral;
    
    our ability to comply with the requirements of regulatory orders issued to us and/or our
banking subsidiary;
    
    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;
    
    applicable laws and regulations and legislative or regulatory changes, including the
ultimate financial and operational burden of the recently enacted financial regulatory
reform legislation and related regulations;
    
    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;
    
    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;
    
    our ability to attract new deposits and loans and leases;
    
    competitive market pricing factors;
    
    stability of funding sources and continued availability of borrowings;
    
    Intermountains success in gaining regulatory approvals, when required;
 44




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##### Table of Contents




    
    results of regulatory examinations that could restrict growth;
    
    future legislative or administrative changes to the Troubled Asset Relief Program
(TARP) Capital Purchase Program; 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.
 The continued challenging economic environment could have a material adverse effect on our future
results of operations or market price of our stock.
  
    
    economic conditions may worsen, increasing the likelihood of credit defaults by
borrowers;
 45




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##### Table of Contents




    
    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 entered into an informal agreement with our regulators to take steps to further strengthen
the Bank.
  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.
  46




---



##### Table of Contents



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.
   47




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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.
     We may be required, in the future, to recognize impairment with respect to investment securities,
including the FHLB stock we hold.
  48




---



##### Table of Contents



Recent levels of market volatility were unprecedented and we cannot predict whether they will
return.
  We operate in a highly regulated environment and we cannot predict the effects of recent and
pending federal legislation.
     49




---



##### Table of Contents



Fluctuating 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.
  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 higher valuation allowance against our deferred
income tax assets.
 50




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##### Table of Contents



Changes in accounting standards could materially impact our financial statements.
  The Preferred Stock diminishes the net income available to our common stockholders and earnings
per common share.
   Holders of the Preferred Stock have certain voting rights that may adversely affect our common
stockholders, and the holders of the Preferred Stock may have interests different from our common
stockholders.
  51




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##### Table of Contents




    
    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 affect 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.
  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.
  
 Item 2   Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3   Defaults Upon Senior Securities
  
 Item 4   [Removed and Reserved]
 52




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##### Table of Contents



Item 5   Other Information
  
 Item 6   Exhibits
 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.
 53




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Signatures
  INTERMOUNTAIN COMMUNITY BANCORP
(Registrant)November 12, 2010
    By:
    /s/ Curt HeckerDate
    
    Curt HeckerPresident and Chief Executive OfficerNovember 12, 2010
    By:
    /s/ Doug WrightDate
    
    Doug WrightExecutive Vice President and Chief Financial Officer 54