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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-50667

INTERMOUNTAIN COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

Idaho		82-0499463
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

414 Church Street, Sandpoint, Idaho 83864
(Address of principal executive offices) (Zip Code)

(208) 263-0505
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ      No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o       No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

Class		Outstanding as of August 12, 2009
Common Stock (no par value)		8,365,836

 

 

Intermountain Community Bancorp

FORM 10-Q
For the Quarter Ended June 30, 2009

TABLE OF CONTENTS

PART I — Financial Information			3
Item 1 — Financial Statements (Unaudited)			3
Consolidated Balance Sheets for June 30, 2009 and December 31, 2008			3
Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008			4
Consolidated Statements of Cash Flows for the three and six months ended June 30, 2009 and 2008			5
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2009 and 2008			7
Notes to Consolidated Financial Statements			8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3 — Quantitative and Qualitative Disclosures About Market Risk			39
Item 4 — Controls and Procedures			39
PART II — Other Information			40
Item 1 — Legal Proceedings			40
Item 1A — Risk Factors			40
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3 — Defaults Upon Senior Securities			45
Item 4 — Submission of Matters to a Vote of Security Holders			45
Item 5 — Other Information			46
Item 6 — Exhibits			46
Signatures			47
EX-31.1
EX-31.2
EX-32

PART I — Financial Information

Item 1 — Financial Statements
Intermountain Community Bancorp

Consolidated Balance Sheets
(Unaudited)

		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
ASSETS
Cash and cash equivalents:
Interest-bearing		$	57,963			$	1,354
Non-interest bearing and vault			14,793				21,553
Restricted cash			4,264				468
Federal funds sold			3,585				71,450
Available-for-sale securities, at fair value			184,168				147,618
Held-to-maturity securities, at amortized cost			17,395				17,604
Federal Home Loan Bank of Seattle stock, at cost			2,310				2,310
Loans held for sale			4,453				933
Loans receivable, net			710,311				752,615
Accrued interest receivable			7,020				6,449
Office properties and equipment, net			42,860				44,296
Bank-owned life insurance			8,217				8,037
Goodwill			11,662				11,662
Other intangibles			507				576
Other real estate owned			13,650				4,541
Prepaid expenses and other assets			20,722				14,089
Total assets		$	1,103,880			$	1,105,555
LIABILITIES
Deposits		$	827,546			$	790,412
Securities sold subject to repurchase agreements			94,380				109,006
Advances from Federal Home Loan Bank			36,000				46,000
Cashier checks issued and payable			808				922
Accrued interest payable			1,574				2,275
Other borrowings			39,507				40,613
Accrued expenses and other liabilities			5,480				5,842
Total liabilities			1,005,295				995,070
Commitments and contingent liabilities
STOCKHOLDERS’ EQUITY
Common stock 29,040,000 shares authorized; 8,439,456 and 8,429,576 shares issued and 8,365,726 and 8,333,009 shares outstanding as of June 30, 2009 and December 31, 2008			78,391				78,261
Preferred stock 1,000,000 shares authorized; 27,000 shares issued and outstanding as of June 30, 2009 and December 31, 2008			25,303				25,149
Accumulated other comprehensive loss, net of tax			(6,170	)			(5,935	)
Retained earnings			1,061				13,010
Total stockholders’ equity			98,585				110,485
Total liabilities and stockholders’ equity		$	1,103,880			$	1,105,555

The accompanying notes are an integral part of the consolidated financial statements.

Intermountain Community Bancorp
Consolidated Statements of Operations
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Dollars in thousands, except per								(Dollars in thousands, except per
		share data)								share data)
Interest income:
Loans		$	11,703			$	13,942			$	23,351			$	28,960
Investments			2,780				1,899				5,479				4,082
Total interest income			14,483				15,841				28,830				33,042
Interest expense:
Deposits			3,245				3,275				6,588				7,304
Other borrowings			1,026				1,390				2,128				3,237
Total interest expense			4,271				4,665				8,716				10,541
Net interest income			10,212				11,176				20,114				22,501
Provision for losses on loans			(18,684	)			(2,140	)			(21,454	)			(2,398	)
Net interest income (loss) after provision for losses on loans			(8,472	)			9,036				(1,340	)			20,103
Other income:
Fees and service charges			1,886				2,342				3,555				4,346
Loan related fee income			663				385				1,204				791
Other-than-temporary impairment of investments (impairment loss of $244, consisting of $1,751 of total other-than- temporary impairment losses, net of $1,507 recognized in other comprehensive income, for the six months ended June 30, 2009)			—				—				(244	)			—
Bank-owned life insurance			90				81				180				156
Net gain on sale of securities			—				2,182				1,295				2,182
Other			66				241				228				535
Total other income			2,705				5,231				6,218				8,010
Operating expenses			12,667				10,635				23,438				21,894
Income (loss) before income taxes			(18,434	)			3,632				(18,560	)			6,219
Income tax( provision) benefit			7,432				(1,363	)			7,440				(2,296	)
Net income (loss)			(11,002	)			2,269				(11,120	)			3,923
Preferred stock dividend			415				—				829				—
Net income (loss) applicable to common stockholders		$	(11,417	)		$	2,269			$	(11,949	)		$	3,923
Earnings (loss) per share — basic		$	(1.37	)		$	0.27			$	(1.43	)		$	0.47
Earnings (loss) per share — diluted		$	(1.37	)		$	0.27			$	(1.43	)		$	0.46
Weighted average shares outstanding — basic			8,362,402				8,286,087				8,355,359				8,278,596
Weighted average shares outstanding — diluted			8,362,402				8,534,186				8,355,359				8,549,144

The accompanying notes are an integral part of the consolidated financial statements.

Intermountain Community Bancorp
Consolidated Statements of Cash Flows
(Unaudited)

		Six months ended
		June 30,
		2009				2008
		(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)		$	(11,120	)		$	3,923
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation			1,785				1,653
Stock-based compensation expense			182				(344	)
Net amortization of premiums (discounts) on securities			202				(113	)
Provisions for losses on loans			21,453				2,398
Amortization of core deposit intangibles			69				74
(Gain) on sale of loans, investments, property and equipment			(1,884	)			(2,496	)
(Gain) loss on sale of other real estate owned			100				(20	)
OTTI credit loss on available-for-sale investments			244				—
Charge down on OREO			1,150				—
Accretion of deferred gain on sale of branch property			(8	)			(9	)
Net accretion of loan and deposit discounts and premiums			(34	)			(9	)
Increase in cash surrender value of bank-owned life insurance			(180	)			(156	)
Change in:
Loans held for sale			(3,521	)			2,548
Accrued interest receivable			(571	)			1,890
Prepaid expenses and other assets			(6,371	)			(2,608	)
Accrued interest payable			(701	)			(899	)
Accrued expenses and other liabilities			(274	)			(1,627	)
Net cash provided (used in) operating activities			521				4,205
Cash flows from investing activities:
Purchases of available-for-sale securities			(87,501	)			(32,872	)
Purchases of FHLB Stock							(706	)
Proceeds from calls or maturities of available-for-sale securities			33,710				51,022
Principal payments on mortgage-backed securities			17,194				7,082
Purchases of held-to-maturity securities			(65	)			(127	)
Proceeds from calls or maturities of held-to-maturity securities			253				151
Origination of loans, net of principal payments			(45,987	)			(40,007	)
Proceeds from sale of loans			56,273				13,994
Purchase of office properties and equipment			(432	)			(4,999	)
Proceeds from sale of office properties and equipment			—				8
Net change in federal funds sold			67,865				(165	)
Proceeds from sale of other real estate owned			911				62
Net change in restricted cash			(3,796	)			3,661
Net cash provided by (used in) investing activities			38,425				(2,896	)

		Six months ended
		June 30,
		2009				2008
		(Dollars in thousands)
Cash flows from financing activities:
Net change in demand, money market and savings deposits		$	17,343			$	(19,988	)
Net change in certificates of deposit			19,791				3,782
Net change in repurchase agreements			(14,626	)			(13,807	)
Principal reduction of note payable			(961	)			(22	)
Payoff of credit line			(23,145	)			—
Proceeds from exercise of stock options			56				95
Retirement of treasury stock			(7	)			(193	)
Proceeds from other borrowings			23,000				28,657
Payoff of FHLB advances			(10,000	)			—
Cash dividends paid to preferred stockholders			(548	)			—
Net cash provided by (used in) financing activities			10,903				(1,476	)
Net change in cash and cash equivalents			49,849				(167	)
Cash and cash equivalents, beginning of period			22,907				27,000
Cash and cash equivalents, end of period		$	72,756			$	26,833
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	9,168			$	11,002
Income taxes			—				2,495
Noncash investing and financing activities:
Restricted stock issued			—				547
Accrual of liability for split dollar life insurance			—				389
Loans converted to other real estate owned			11,270				1,304

The accompanying notes are an integral part of the consolidated financial statements.

Intermountain Community Bancorp
Consolidated Statements of Comprehensive Income
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Dollars in thousands)								(Dollars in thousands)
Net income (loss)		$	(11,002	)		$	2,269			$	(11,120	)		$	3,923
Other comprehensive income (loss):
Change in unrealized gains on investments, and MBS available for sale, excluding non-credit loss on impairment of securities			464				(5,792	)			589				(4,561	)
Non-credit loss on -impairment on available-for-sale debt securities			—				—				(1,507	)			—
Less deferred income tax provision (benefit)			(183	)			2,294				364				1,806
Change in fair value of qualifying cash flow hedge			215				—				319				—
Net other comprehensive income (loss)			496				(3,498	)			(235	)			(2,755	)
Comprehensive income (loss)		$	(10,506	)		$	(1,229	)		$	(11,355	)		$	1,168

The accompanying notes are an integral part of the consolidated financial statements.

Intermountain Community Bancorp
Notes to Consolidated Financial Statements

1.

Basis of Presentation:

The foregoing unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Intermountain Community Bancorp’s (“Intermountain’s” or “the Company’s” ) consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of Intermountain’s consolidated financial position and results of operations.

2.

Investments

The amortized cost and fair values of investments are as follows (in thousands):

		Available-for-Sale
						Non-Credit
						OTTI
						Recognized				Gross				Gross
		Amortized				in OCI				Unrealized				Unrealized				Fair Value/
		Cost				(Losses)				Gains				Losses				Carrying Value
June 30, 2009
U.S. treasury securities and obligations of U.S. government agencies		$	60			$	—			$	1			$	—			$	61
Residential mortgage-backed securities			193,220				(1,507	)			2,163				(9,769	)			184,107
		$	193,280			$	(1,507	)		$	2,164			$	(9,769	)		$	184,168
December 31, 2008
U.S. treasury securities and obligations of U.S. government agencies		$	7,569			$	—			$	48			$	—			$	7,617
Residential mortgage-backed securities			148,244				—				2,550				(10,793	)			140,001
		$	155,813			$	—			$	2,598			$	(10,793	)		$	147,618

		Held-to-Maturity
						Non-Credit
		Carrying				OTTI
		Value/				Recognized				Gross				Gross
		Amortized				in OCI				Unrealized				Unrealized
		Cost				(Losses)				Gains				Losses				Fair Value
June 30, 2009
State and municipal securities		$	17,395			$	—			$	160			$	(18	)		$	17,537
December 31, 2008
State and municipal securities		$	17,604			$	—			$	70			$	(149	)		$	17,525

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								Total
						Unrealized								Unrealized								Unrealized
June 30, 2009		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
State and municipal securities		$	1,327			$	18			$	—			$	—			$	1,327			$	18
Residential mortgage-backed securities			13,632				1,575				46,936				8,194				60,568				9,769
Total		$	14,959			$	1,593			$	46,936			$	8,194			$	61,895			$	9,787

		Less Than 12 Months								12 Months or Longer								Total
						Unrealized								Unrealized								Unrealized
December 31, 2008		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
State and municipal securities		$	5,453			$	147			$	762			$	2			$	6,215			$	149
Residential mortgage-backed securities			45,366				5,708				15,034				5,085				60,400				10,793
Total		$	50,819			$	5,855			$	15,796			$	5,087			$	66,615			$	10,942

     At June 30, 2009, the amortized cost and fair value of available-for-sale and held-to-maturity debt securities, by contractual maturity, follows (in thousands):

		Available-for-Sale								Held-to-Maturity
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
One year or less		$	—			$	—			$	1,012			$	1,013
After one year through five years			22				22				1,094				1,120
After five years through ten years			38				39				2,328				2,420
After ten years			—				—				12,961				12,984
			60				61				17,395				17,537
Mortgage-backed securities			193,220				184,107				—				—
		$	193,280			$	184,168			$	17,395			$	17,537

		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 June 30, 2009, the Company does not intend to sell any of its available-for-sale securities that have a loss position and it is not likely that it will be required to sell the available-for-sale securities before the anticipated recovery of their remaining amortized cost. The unrealized losses on residential mortgage-backed securities without other-than-temporary impairment were considered by management to be temporary in nature.
		At March 31, 2009, residential mortgage-backed securities included a security comprised of a pool of mortgages with a remaining unpaid balance of $4.2 million. Due to the lack of an orderly market for the security and the declining national economic and housing market, its fair value was determined to be $2.5 million at March 31, 2009 based on analytical modeling taking into consideration a range of factors normally found in an orderly market. Of the $1.7 million other-then-temporary impairment on this security, based on an analysis of projected cash flows, $244,000 was charged to earnings as a credit loss and $1.5 million was recognized in other comprehensive income. Impairment loss on securities charged to earnings in the three months ended March 31, 2009 was $244,000. An analysis of the portfolio for this quarter indicated no additional OTTI to this or any other security within the portfolio.
		See Note 9 “Fair Value of Measurements” for more information on the calculation of fair or carrying value for the investment securities.

3.

Advances from the Federal Home Loan Bank of Seattle:

During September 2007, the Bank obtained two advances from the FHLB Seattle in the amounts of $10.0 million and $14.0 million with interest only payable at 4.96% and 4.90% and maturities in September 2010 and September 2009, respectively. During May 2008, the Bank obtained an advance from the FHLB Seattle in the amount of $12.0 million with interest only payable at 2.88% which matures in August 2009. During April 2008, the Bank obtained two advances from the FHLB Seattle in the amounts of $5.0 million and $5.0 million with interest only payable at 2.89% and 2.95% and maturities in April 2009. The advances matured in April 2009 and were not renewed.

Advances from FHLB Seattle are collateralized by certain qualifying loans. At June 30, 2009, Intermountain had the ability to borrow $113.9 million from FHLB Seattle, of which $36.0 million was utilized. The Bank’s credit line with FHLB Seattle is limited to a percentage of its total regulatory assets subject to collateralization requirements. Intermountain would be able to borrow amounts in excess of this total from the FHLB Seattle with the placement of additional available collateral.

4.

Other Borrowings:

The components of other borrowings are as follows (in thousands):

		June 30,				December 31,
		2009				2008
Term note payable (1)		$	8,279			$	8,279
Term note payable (2)			8,248				8,248
Term note payable (3)			—				941
Term note payable (4)			—				23,145
Term note payable (5)			22,980				—
Total other borrowings		$	39,507			$	40,613

5.

Earnings Per Share:

The following table presents the basic and diluted earnings per share computations:

		Three months Ended June 30,								Six months Ended June 30,
		2009				2008				2009				2008
Numerator:
Net income (loss) — basic and diluted		$	(11,002	)		$	2,269			$	(11,120	)		$	3,923
Preferred stock dividend			415				—				829				—
Net Income (loss) applicable to commons stockholders		$	(11,417	)		$	2,269			$	(11,949	)		$	3,923
Denominator:
Weighted average shares outstanding — basic			8,362,402				8,286,087				8,355,359				8,278,596
Dilutive effect of common stock options, restricted stock awards			—				248,099				—				270,548
Weighted average shares outstanding — diluted			8,362,402				8,534,186				8,355,359				8,549,144
Earnings (loss) per share — basic and diluted:
Earnings (loss) per share — basic		$	(1.37	)		$	0.27			$	(1.43	)		$	0.47
Effect of dilutive common stock options			—				—				—				(0.01	)
Earnings (loss) per share — diluted		$	(1.37	)		$	0.27			$	(1.43	)		$	0.46

The weighted average number of potentially dilutive common shares excluded in calculating diluted net income per common share due to the anti-dilutive effect is 285,200 and 54,249 shares for the three months ended June 30, 2009 and 2008, respectively. The weighted average number of potentially dilutive common shares excluded in calculating diluted net income per common share due to the anti-dilutive effect is 212,735 and 75,823 shares for the six months years ended June 30, 2009 and 2008, respectively. Common stock equivalents were calculated using the treasury stock method.

6.

Operating Expenses:

The following table details Intermountain’s components of total operating expenses in thousands:

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Salaries and employee benefits		$	5,653			$	5,530			$	11,358			$	12,476
Occupancy expense			1,808				1,938				3,776				3,591
Advertising			344				426				643				691
Fees and service charges			630				535				1,229				969
Printing, postage and supplies			293				360				653				708
Legal and accounting			435				488				773				936
Other expense			3,504				1,358				5,006				2,523
Total operating expenses		$	12,667			$	10,635			$	23,438			$	21,894

		Salaries and employee benefits expense decreased $1.1 million or 9.0%, over the six month period last year as a result of decreased staffing levels and lower incentive compensation expense. Second quarter salaries and employee benefits expense increased $123,000, or 2.2% compared to the same quarter one year ago, a comparison which is impacted by the reversal of $640,000 in executive compensation expense in the second quarter of 2008 related to the termination of an executive bonus plan. Efforts to control compensation expense continue in 2009, as the Company has suspended salary increases for executives and officers, maintained a hiring freeze and reduced other compensation plans.
		Occupancy expenses increased $185,000, or 5.2%, for the six month period ended June 30, 2009 compared to the same period one year ago. The increase was comprised of an increase in depreciation expense on the Sandpoint Center which the Company occupied in April 2008. Occupancy expenses decreased $130,000, or 6.7%, for the three month period ended June 30, 2009 compared to the same period one year ago. The decrease was comprised of a decrease in computer hardware and software expenses as additional cost control measures have been implemented. The Company expects these expenses to continue declining in 2009, as it has postponed building expansion plans, limited new hardware and software purchases, and begun leasing out excess space in its Company headquarters building.
		The advertising expense decrease of $48,000 for the six month period and $82,000 for the three month period ended June 30, 2009 compared to the same period one year ago reflected reductions in general advertising offset by additional donations and community service expenses associated with the Company’s Powered by Community initiative. The $260,000 increase in fees and service charges

		for the six month period and $95,000 increase for the three-month period ended June 30, 2009 compared to the same period one year ago primarily reflected higher expenses for the Company’s internet banking services, as usage increased significantly. Printing, postage and supplies decreased $55,000 for the six-month period and $67,000 for the second quarter, in comparison to last year’s totals. The decrease reflected efficiencies gained in statement and other printing, and tighter control over supplies expense. Legal and accounting fees decreased by $163,000, or 17.4% in comparison to the same six month period in 2008 as a result of payments made during 2008 to a consultant engaged to assist the Company in streamlining business processes. Legal and accounting fees decreased by $53,000, or 10.9% in comparison to the same three month period in 2008 for the same reason.
		Other expenses increased $2.5 million or 98.5%, for the six month period over the same period last year. The increase primarily consists of $1.2 million in additional FDIC insurance expense and $1.2 million additional expense related to the Company’s Other Real Estate Owned (“OREO”). Of the $1.2 million of increased FDIC insurance, $475,000 represents the accrual of the FDIC’s special assessment to be paid on September 30, 2009. The OREO increase is a combination of additional property write-downs to reflect updated valuations and other carrying expenses. Other expenses increased $2.1 million or 158.0%, for the three month period over the same period last year. The increases reflect a $1.1 million increase in FDIC insurance expense from the same period one year ago, and $1.1 million in OREO write-downs and expense for the three months ended June 30, 2009 compared to last year.

7.

Stock-Based Compensation Plans:

		The Company utilized its stock to compensate employees and directors under the 1999 Director Stock Option Plan, the 1999 Employee Plan and the 1988 Employee Plan (together the “Stock Option Plans”). Options to purchase Intermountain common stock had been granted to employees and directors under the Stock Option Plans at prices equal to the fair market value of the underlying stock on the dates the options were granted. The options vest 20% per year, over a five-year period, and expire in 10 years. For the six months ended June 30, 2009 and 2008, stock option expense totaled $0 and $68,000, respectively. The Company did not have any remaining expense related to the non-vested stock options outstanding at June 30, 2009.
		On January 14, 2009, the terms of the Amended and Restated 1999 Employee Stock Option and Restricted Stock Plan and the 1999 Director Stock Option Plan expired. Upon recommendation of management and approval of the Board of Directors, it was determined that, due to the economic uncertainty, the Board would not seek to implement a new plan at this time. The 1988 Employee Stock Option Plan was a predecessor plan to the Amended and Restated 1999 Employee Stock Option and Restricted Stock Plan. Because each of these plans has expired, shares may no longer be awarded under these plans. However, awards remain unexercised or unvested under these plans. The Company did not grant options to purchase Intermountain common stock or restricted stock during the six months ended June 30, 2009.
		In 2003, shareholders approved a change to the 1999 Employee Option Plan to provide for the granting of restricted stock awards. The Company granted restricted stock to directors and employees beginning in 2005. The restricted stock vests 20% per year, over a five-year period. The Company granted 0 and 37,949 restricted shares with a grant date fair value of $0 and $547,000 during the six months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008, restricted stock expense totaled $182,000 and $163,000, respectively. Total expense related to stock-based compensation is comprised of restricted stock expense for the six months ended June 30, 2009 and restricted stock expense, stock option expense and expense related to the 2006-2008 Long-Term Incentive Plan (“LTIP”) for the six months ended June 30, 2008. LTIP expense in 2008 was based on anticipated company performance over a 3-year period and had a 5-year vesting period. During the six months ended June 30, 2008, the Company reversed $640,000 in accrued incentives related to the LTIP as it appeared that asset growth and ROE targets required by the plan would not be met by the end of the incentive accrual period. During the six months ended June 30, 2009, the Company did not have a Long-Term Incentive Plan and therefore did not have expense related to this portion of stock-based compensation. Total expense related to stock-based compensation recorded in the six months ended June 30, 2009 and 2008 was $182,000 and ($344,000), respectively.
		A summary of the changes in stock options outstanding for the six months ended June 30, 2009 is presented below:

		Six months ended June 30, 2009
		(dollars in thousands, except per share amounts)
						Weighted				Weighted
		Number				Average				Average
		of				Exercise				Remaining
		Shares				Price				Life (Years)
Beginning Options Outstanding, Jan 1, 2009			325,482			$	6.00
Options Granted			—				—
Exercises			(12,721	)			4.41
Forfeitures			(47,048	)			4.42
Ending options outstanding, June 30, 2009			265,713				6.29				3.2
Exercisable at June 30, 2009			262,263			$	6.20				3.2

The total intrinsic value of options exercised during the six months ended June 30, 2009 and 2008 was $7,000 and $96,000, respectively. A summary of the Company’s nonvested restricted shares for the six months ended June 30, 2009 is presented below:

						Weighted-
						Average
						Grant-Date
Nonvested Shares		Shares				Fair Value
Balance at January 1, 2009			96,567			$	16.06
Granted			—				—
Vested			(21,803	)			17.14
Forfeited			(1,034	)			18.00
Balance at June 30, 2009			73,730			$	15.71

As of June 30, 2009, there was $1.0 million of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under this plan. This cost is expected to be recognized over a weighted-average period of 3.1 years.

8. 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 SFAS 133, the Company recognizes all derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Derivative financial instruments are included in other assets or other liabilities, as appropriate, on the Consolidated Balance Sheet. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders’ equity as a component of other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income in the same period and in the same income statement line as changes in the fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent they are effective hedges, are recorded as a component of other comprehensive income, net of deferred taxes. Changes in fair values of derivative financial instruments not qualifying as hedges pursuant to SFAS 133 are reported in non-interest income. Derivative contracts are valued by the counter party and are periodically validated by management.
		Interest Rate Swaps — Designated as Cash Flow Hedges
		The tables below identify the Company’s interest rate swaps at June 30, 2009 and December 31, 2008, which were entered into to hedge certain LIBOR-based trust preferred debentures and designated as cash flow hedges pursuant to SFAS 133 (dollars in thousands):

June 30, 2009

Fair Value Gain

Receive Rate

Pay Rate

Type of Hedging

Maturity Date

Notional Amount

(Loss)

(LIBOR)

(Fixed)

Relationship

Pay Fixed, Receive Variable:

October 2013

$

8,248

$

(666

)

1.13

%

4.58

%

Cash Flow

December 31, 2008

Fair Value Gain

Receive Rate

Pay Rate

Type of Hedging

Maturity Date

Notional Amount

(Loss)

(LIBOR)

(Fixed)

Relationship

Pay Fixed, Receive Variable:

October 2013

$

8,248

$

(985

)

4.75

%

4.58

%

Cash Flow

		The fair values, or unrealized losses, of $666,000 at June 30, 2009 and $985,000 at December 31, 2008 are included in other liabilities. These hedges were considered highly effective during the quarter ended June 30, 2009, and none of the change in fair value of these derivatives was attributed to hedge ineffectiveness. The changes in fair value, net of tax, are separately disclosed in the statement of changes in shareholders’ equity as a component of comprehensive income. Net cash flows from these interest rate swaps are included in interest expense on trust preferred debentures. The unrealized loss at June 30, 2009 is a component of comprehensive income for June 30, 2009. At June 30, 2009, Intermountain had $742,000 in pledged certificates of deposit and $50,000 in restricted cash as collateral for the cash flow hedge.
		A rollfoward of the amounts in accumulated other comprehensive income related to interest rate swaps designated as cash flow hedges follows:

		Six Months Ended
		June 30,				June 30,
		2009				2008
Unrealized gain (loss) at beginning of period		$	(985	)		$	—
Amount of gain (loss) recognized in other comprehensive income			319				—
Unrealized gain (loss) at end of period		$	(666	)		$	—

		Interest Rate Swaps — Not Designated as Hedging Instruments Under SFAS 133
		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 SFAS 133 hedge relationships and are, therefore, marked to market through earnings each period. In most cases the derivatives have mirror-image terms, which result in the positions’ changes in fair value offsetting completely through earnings each period. However, to the extent that the derivatives are not a mirror-image, changes in fair value will not completely offset, resulting in some earnings impact each period. Changes in the fair value of these interest rate swaps are included in other non-interest income. The following table summarizes these interest rate swaps as of June 30, 2009 and December 31, 2008 (dollars in thousands):

		June 30, 2009								December 31, 2008
		Notional				Fair Value Gain				Notional				Fair Value Gain
		Amount				(Loss)				Amount				(Loss)
Interest rate swaps with third party financial institutions		$	2,559			$	45			$	—			$	—

Because these are fair value hedges, at June 30, 2009, the loss in fair value included in loans receivable totaled $45,000, which was offset by the fair value hedge gain. At December 31, 2008, other assets included $0 of derivative assets and other liabilities included $0 of derivative liabilities related to these interest rate swap transactions, because they were executed in 2009. At June 30, 2009, the interest rate swaps had a maturity date of March 2019. At June 30, 2009 Intermountain had $72,000 in restricted cash for the interest rate swap.

9.

Fair Value Measurements

Fair value is defined under SFAS 157 as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

     Level 1 inputs — Unadjusted quoted process in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

     Level 2 inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

     Level 3 inputs — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using 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 June 30, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (dollars in thousands).

						Fair Value Measurements
						At June 30, 2009, Using
						Quoted Prices
						In Active				Other				Significant
						Markets for				Observable				Unobservable
		Fair Value				Identical Assets				Inputs				Inputs
Description		June 30, 2009				(Level 1)				(Level 2)				(Level 3)
Available-for-Sale Securities:
U.S. treasury securities and obligations of U.S. government agencies		$	61			$	—			$	61			$	—
Residential mortgage backed securities (MBS)			184,107				—				150,815				33,292
Other Assets — Derivative			45				—				—				45
Total Assets Measured at Fair Value		$	184,213			$	—			$	150,876			$	33,337
Other Liabilities — Derivatives		$	711			$	—			$	—			$	711

		Fair Value Measurements
		At December 31, 2008, Using
						Quoted Prices
						In Active				Other				Significant
						Markets for				Observable				Unobservable
		Fair Value				Identical Assets				Inputs				Inputs
Description		June 30, 2009				(Level 1)				(Level 2)				(Level 3)
Available-for-Sale Securities		$	147,618			$	—			$	108,954			$	38,664
Other Assets — Derivative			—				—				—				—
Total Assets Measured at Fair Value		$	147,618			$	—			$	108,954			$	38,664
Other Liabilities — Derivatives		$	985			$	—			$	—			$	985

Fair Value Measurement Transfers- Assets

		Fair Value Measurements Using Significant
		Unobservable Inputs ( Level 3)
Description		Residential MBS				Derivatives				Total
January 1, 2009 Balance		$	38,664			$	—			$	38,664
Total gains or losses (realized/unrealized)
Included in earnings			(244	)			45				(199	)
Included in other comprehensive income			(1,022	)			—				(1,022	)
Principal Payments			(4,106	)			—				(4,106	)
Transfers in and /or out of Level 3			—				—				—
June 30, 2009 Balance		$	33,292			$	45			$	33,337

Fair Value Measurement Transfers- Liabilities

		Fair Value Measurements
		Using Significant Unobservable
		Inputs ( Level 3)
Description		Derivatives
January 1, 2009 Balance		$	985
Total gains or losses (realized/unrealized)
Included in earnings			45
Included in other comprehensive income			(319	)
June 30, 2009 Balance		$	711

     The table below presents a portion of the Company’s loans measured at fair value on a nonrecurring basis as of June 30, 2009, because they are impaired collateral-dependent loans and the Company’s other real estate owned (“OREO”), aggregated by the level in the fair value hierarchy within which those measurements fall (dollars in thousands).

		Fair Value Measurements
		At June 30, 2009, Using
						Quoted Prices
						In Active				Other				Significant
						Markets for				Observable				Unobservable
		Fair Value				Identical Assets				Inputs				Inputs
Description		June 30, 2009				(Level 1)				(Level 2)				(Level 3)
Loans(1)		$	43,817			$	—			$	—			$	43,817
Other real estate owned			13,650				—				—				13,650
Total Assets Measured at Fair Value		$	57,467			$	—			$	—			$	57,467

     Collateral dependent loans that are deemed to be impaired are valued based upon the net realizable value, fair value less estimated selling costs, of the underlying collateral, as is the Company’s OREO. While appraisals or other independent estimates of value do exist for this collateral, the uncertain and volatile market conditions require potential adjustments in value. As such, these loans and OREO are categorized as level 3.

     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 $150.9 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 $33.3 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 June 30, 2009. 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, 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 June 30, 2009 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 Statement No. 157, 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.

     Using joint guidance from the SEC Office of the Chief Accountant and FASB staff issued October 10, 2008 as FSP FAS 157-3 and additional guidance issued on April 9, 2009 as FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-1, and Emerging Issues Task Force (EITF) 99-20-2, which provided further clarification on fair value accounting, the Company also evaluated these and other securities in the investment portfolio for “Other-than-temporary Impairment.” In conducting this evaluation, the Company evaluated the following factors:

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

     Based on the factors above, the Company has determined that one security comprised of a pool of mortgages was subject to “Other-than-Temporary Impairment,” (“OTTI”) as of March 31, 2009. During the first quarter, the Company recorded an OTTI of $1,751,000 on this security. Of the total $1,751,000 OTTI, $244,000 was related to credit losses, and under newly issued accounting guidance in FSP FAS 115-2/124-2 and EITF 99-20-0, is a charge against earnings. The remaining $1,507,000 reflects non-credit value impairment and was charged against the Company’s other comprehensive income and reported capital on the balance sheet. At this time, the Company anticipates holding the security until its value is recovered or maturity, and will continue to adjust its other comprehensive income and capital position to reflect the security’s current market value. The Company calculated the credit loss charge against earnings by subtracting the estimated present value of estimated future cash flows on the security from its amortized cost per the guidelines provided in EITF 99-20. The Company conducted a similar analysis on the estimated cash flows in June, 2009 and as a result of this analysis, did not record additional OTTI adjustments in the second quarter of 2009.

     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 collateral-dependent loans calculated in accordance with SFAS No. 114 when establishing the allowance for credit losses. Such amounts are generally based on 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 generally been classified as Level 3 because of the volatility and the uncertainty in the current markets. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. Loans subject to nonrecurring fair value measurement were $43.8 million at June 30, 2009, of which $43.8 million were classified as Level 3.

     Other Real Estate Owned. At the applicable foreclosure date, other real estate owned is recorded at fair value of the real estate, less the costs to sell the real estate. Subsequently, other real estate owned, 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 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 June 30, 2009 totaled $13.7 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 4 — 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 June 30, 2009, it was a liability with a fair value of $666,000.

     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 June 30, 2009, it was a liability with a fair value of $17,000. 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 June 30, 2009, it was a liability with a fair value of $28,000.

     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 June 30, 2009 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 June 30, 2009 and December 31, 2008, are as follows (in thousands):

		June 30, 2009								December 31, 2008
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
Financial assets:
Cash, cash equivalents, restricted cash and federal funds sold		$	68,863			$	68,863			$	93,653			$	93,653
Interest bearing certificates of deposit			11,742				11,742				1,172				1,172
Available-for-sale securities			184,168				184,168				147,618				147,618
Held-to-maturity securities			17,395				17,537				17,604				17,525
Loans held for sale			4,453				4,453				933				933
Loans receivable, net			710,311				721,670				752,615				754,772
Accrued interest receivable			7,020				7,020				6,449				6,449
BOLI			8,217				8,217				8,037				8,037
Financial liabilities:
Deposit liabilities			827,546				795,004				790,412				777,710
Other borrowed funds			169,887				166,919				195,619				193,747
Accrued interest payable			1,574				1,574				2,275				2,275

     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.

 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.

10.

Subsequent Events

Intermountain performed an evaluation of subsequent events through August 14, 2009, the date upon which Intermountain’s quarterly report on Form 10-Q was filed with the Securities and Exchange Commission. No subsequent events were identified that would have required a change to the financial statements or disclosure in the notes to the financial statements.

11.

New Accounting Pronouncements:

		Fair Value Measurements and Impairments of Securities. On April 9, 2009, the FASB issued three FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidelines for making fair value measurements more consistent with the principles presented in FASB Statement No. 157, Fair Value Measurements. FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.
		FSP FAS 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.
		FSP FAS 107-1 and APB 28-1 relate to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.
		FSP FAS 115-2 and FAS 124-2 on other-than-temporary impairments are intended to bring greater consistency to the timing of impairment recognition, and provide greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. The measure of impairment in comprehensive income remains at fair value. The FSP also requires increased and timelier disclosures sought by investors regarding expected cash flows, credit losses, and an aging of securities with unrealized losses.
		The FSPs are effective for interim and annual periods ending after June 15, 2009, but entities may early adopt the FSPs for the interim and annual periods ending after March 15, 2009. The Company did early adopt the FSPs effective January 1, 2009 and it resulted in a portion of other-than-temporary impairment being recorded in other comprehensive income instead of earnings in the amount of $1.5 million for the three months ended March 31, 2009.
		On January 12, 2009, FASB issued FSP Emerging Issues Task Force (EITF) 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (“FSP EITF 99-20-1”). FSP EITF 99-20-1 addresses certain practice issues in EITF No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, by making its other-than-temporary impairment assessment guidance consistent with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. FSP EITF 99-20-1 removes the reference to the consideration of a market participant’s estimates of cash flows in EITF 99-20, and instead requires an assessment of whether it is probable, based on current information and events, that the holder of the security will be unable to collect all amounts due according to the contractual terms. If it is probable that there has been an adverse change in estimated cash flows, an other-than-temporary impairment is deemed to exist, and a corresponding loss shall be recognized in earnings equal to the entire difference between the investment’s carrying value and its fair value at the balance sheet date of the reporting period for which the assessment is made. This FSP is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. FSP EITF 99-20-1 was further modified in April 2009 by the issuance of FSP FAS 115-2/124-2 and EITF 99-20-2 discussed above. See the discussion above for the cumulative impact on the Company’s consolidated financial statements.
		On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP FAS 157-3”). The FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective immediately, and includes prior period financial statements that have not yet been issued, and therefore the Company is subject to the provision of the FSP effective June 30, 2009. See Notes to Consolidated Financial Statements, notes 2 and 9 for further discussion of the impact of SFAS No. 157 and the additional guidance issued.

		In December 2007, FASB issued SFAS No. 141 (revised), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The adoption of the SFAS No. 141(R) for reporting as of June 30, 2009, had no affect on the Company’s financial statements.
		In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS 160 also requires that any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value when a subsidiary is deconsolidated. SFAS 160 also sets forth the disclosure requirements to identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 must be applied prospectively as of the beginning of the fiscal year in which SFAS 160 is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements are applied retrospectively for all periods presented. The Company does not have a noncontrolling interest in one or more subsidiaries. The adoption of the SFAS No. 160 for reporting as of June 30, 2009, did not have a material impact on the Company’s consolidated financial statements.
		In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires specific disclosures regarding the location and amounts of derivative instruments in the Company’s financial statements, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect the Company’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued and for fiscal years and interim periods after November 15, 2008. Early application was permitted. SFAS 161 impacts the Company’s disclosure, but not its accounting treatment for derivative instruments and related hedged items. The Company adopted this guidance, effective first quarter 2009, and has complied with the additional disclosure requirements. See Notes to Consolidated Financial Statements, note 8 for additional information.
		In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”). SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for nongovernmental entities. Prior to the issuance of SFAS No. 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS 69 has been criticized because it is directed to the auditor rather than the entity. SFAS No. 162 addresses these issues by establishing that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The initial application of SFAS No. 162 will not have an impact on the Company’s financial statements.
		In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS 165 sets forth (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This pronouncement was effective for the period ended June 30, 2009 and did not have a significant impact on the Company’s financial statements, although it did affect the Company’s disclosures.
		In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — an Amendment of FASB Statement No. 140 (“SFAS 166”). SFAS 166 was issued to improve the information a reporting entity provides in its financial statements about a transfer of financial assets, including the effect of a transfer on an entity’s financial position, financial performance and cash flows

		and the transferor’s continuing involvement in the transferred assets. SFAS 166 eliminates the concept of a qualifying special-purpose entity and changes the guidance for evaluation for consolidation. This pronouncement is effective January 1, 2010 and is not expected to have a significant impact on the Company’s financial statements.
		In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 was issued to amend previous guidance to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. The pronouncement is effective January 1, 2010 and is not expected to have a significant impact on the Company’s financial statements.
		In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Principles, a Replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 was issued and established the FASB Accounting Standards Codification (“Codification”) as the source of authoritative U. S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities. Rules and interpretative releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All non-grandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. The pronouncement and the Codification will be effective in the period ending September 30, 2009 and is not expected to have a significant impact on the Company’s financial statements.
		In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-01, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-01”). This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128 (“SFAS 128”), “Earnings Per Share”. The guidance in this FSP applies to the calculation of EPS under SFAS 128 for share-based payment awards with rights to dividends or dividend equivalents. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This statement is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings and selected financial data) to conform with the provision of this FSP. The Company adopted FSP EITF 03-6-01 on January 1, 2009. Adoption did not have a material effect on the Company’s consolidated financial statements.
		In June 2008, the Emerging Issues Task Force (“EITF”) issued EITF 07-05, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-05”). EITF 07-05 supersedes prior guidance that defines the meaning of the phrase ‘indexed to an entity’s own stock’ and revises the criteria to be used to determine if an equity-linked instrument, including embedded features, can be classified within shareholder’s equity. EITF 07-05 is effective for fiscal years beginning after December 15, 2008. The Company adopted EITF 07-05 effective with the first quarter of fiscal 2009 and adoption did not have a material effect on the Company’s consolidated financial statements.

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This report contains forward-looking statements. For a discussion about such statements, including the risks and uncertainties inherent therein, see “Forward-Looking Statements.” Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in Intermountain’s Form 10-K for the year ended December 31, 2008.

General

     Intermountain Community Bancorp (“Intermountain” or the “Company”) is a financial holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was formed as Panhandle Bancorp in October 1997 under the laws of the State of Idaho in connection with a holding company reorganization of Panhandle State Bank (the “Bank”) that was approved by the shareholders on November 19, 1997 and became effective on January 27, 1998. In June 2000, Panhandle Bancorp changed its name to Intermountain Community Bancorp.

     Panhandle State Bank, a wholly owned subsidiary of the Company, was first opened in 1981 to serve the local banking needs of Bonner County, Idaho. Panhandle State Bank is regulated by the Idaho Department of Finance, the State of Washington Department of Financial Institutions, the Oregon Division of Finance and Corporate Securities and by the Federal Deposit Insurance Corporation (“FDIC”), its primary federal regulator and the insurer of its deposits.

     Since opening in 1981, the Bank has continued to grow by opening additional branch offices throughout Idaho. During 1999, the Bank opened its first branch under the name of Intermountain Community Bank, a division of Panhandle State Bank, in Payette, Idaho. Over the next several years, the Bank continued to open branches under both the Intermountain Community Bank and Panhandle State Bank names. In January 2003, the Bank acquired a branch office from Household Bank F.S.B. located in Ontario, Oregon, which is now operating under the Intermountain Community Bank name. In 2004, Intermountain acquired Snake River Bancorp, Inc. (“Snake River”) and its subsidiary bank, Magic Valley Bank, and the Bank now operates three branches under the Magic Valley Bank name in south central Idaho. In 2005 and 2006, the Company opened branches in Spokane Valley and downtown Spokane, Washington, respectively, and operates these branches under the name of Intermountain Community Bank of Washington. It also opened branches in Kellogg, which operates under the name of Panhandle State Bank and Fruitland, Idaho, which operates under the name of Intermountain Community Bank.

     In 2006, Intermountain opened a Trust & Wealth division, and purchased a small investment company, Premier Alliance, which now operates as Intermountain Community Investment Services (ICI). The acquisition and development of these services improves the Company’s ability to provide a full-range of financial services to its targeted customers. In 2007, the Company relocated its Spokane Valley office to a larger facility housing retail, commercial, and mortgage banking functions and administrative staff. In the second quarter of 2008, the Bank completed the Sandpoint Center, its new corporate headquarters, and relocated the Sandpoint branch and administrative staff into the building.

     Intermountain offers banking and financial services that fit the needs of the communities it serves. Lending activities include consumer, commercial, commercial real estate, commercial and residential construction, mortgage and agricultural loans. A full range of deposit services are available including checking, savings and money market accounts as well as various types of certificates of deposit. Trust and wealth management services, investment and insurance services, and business cash management solutions round out the Company’s financial offerings.

     Intermountain seeks to differentiate itself by attracting, retaining and motivating highly experienced employees who are local market leaders, and supporting them with advanced technology, training and compensation systems. This approach allows the Bank to provide local marketing and decision-making to respond quickly to customer opportunities and build leadership in its communities. Simultaneously, the Bank has more recently focused on standardizing and centralizing administrative and operational functions to improve efficiency and the ability of the branches to serve customers effectively.

Current Economic Challenges and Future Outlook

     The deep economic downturn continued to present significant challenges for community and regional banks during the second quarter. Generally, unemployment rates increased rapidly, real estate valuations fell, and borrower defaults and foreclosures grew steadily higher. These conditions had a particularly harsh impact on community banks like ours that rely on lending to local businesses and consumers for the majority of revenue and profit. That said, there were some signs that the economy may be close to or has already begun improving. Second quarter results showed stabilization in many areas and even some improvement in a few key indicators, including stock prices, home sales, leading economic indicators, manufacturing surveys and consumer confidence surveys. These indicators present a glimmer of hope, but should not distract from the challenges still facing our industry. Projected continued increases in unemployment and softer business and commercial real estate markets will challenge financial institutions for the next several quarters. In this environment, balance sheet management, and in particular, strong capital and liquidity management, are critical.

     With the exception of the Boise-Nampa-Caldwell MSA, the Idaho, eastern Washington and eastern Oregon economies continue to weather the current storm better than many other parts of the country. These markets have experienced increases in unemployment rates and lower real estate valuations, but the impacts have been relatively muted in comparison to other areas. In contrast, the Boise area has been hit hard by a combination of rapidly increasing unemployment and excessive commercial and residential real estate inventory. As a result, many institutions operating in this market have recognized substantial losses.

     Over the longer-term, we continue to have a positive outlook about the region’s economic future, including the Boise area’s. The region’s relative economic diversity, low cost of living, attractive, low-cost business climate, and desirable quality of life should soften the worst impacts of the ongoing recession and lead to a faster, stronger recovery than in many other areas.

     Company performance during the second quarter reflected the challenges facing the economy and financial industry. In particular, the Company experienced the following:

	•		Substantially higher credit losses and provisions for loan losses, to reflect higher default rates, declining collateral valuations, and aggressive problem loan identification, workout and liquidation efforts
	•		Slowing loan demand, particularly from higher quality borrowers, as businesses and consumers continued to retrench
	•		Continuing pressure on fee income, as weaker economic activity depressed revenues from a broad range of fee categories, including trust and investment services and credit card related fees

     Company management continues to respond to the market conditions by reducing balance sheet risk, improving control over controllable expenses and engaging in extensive customer communication, marketing and education efforts. The Company has been particularly successful in garnering deposit growth while simultaneously reducing funding costs in a highly competitive deposit environment.

     We anticipate that both the national and regional economy will continue to be challenging in the near future. As such, we do not anticipate a rapid return to high levels of industry or Company profitability for the next few quarters. We continue to believe, however, that long-term opportunities will arise for institutions that position themselves to capitalize on them, and we are taking such steps. In particular, we continue to hold strong regulatory capital, liquidity and loss reserve levels, we’re stepping up our deposit-gathering efforts, and we’re increasing our already strong leadership positions in the communities we serve. Through our corporate-wide initiative, Powered by Community, we are engaging in extensive leadership, community development and educational efforts designed to foster economic growth in our communities and create business development opportunities for the Bank. We also continue to focus on improving our internal business processes, with the joint goal of enhancing our customers’ experience and reducing costs. Initiatives already implemented have improved our deposit volumes and customer experience metrics while simultaneously resulting in decreased compensation costs. A number of additional initiatives are scheduled for implementation through the balance of this year.

     In this environment, the most significant perceived risks to the Company are additional credit portfolio deterioration, potential liquidity pressures and human resources risk. The ongoing recession and increasing unemployment rates will undoubtedly continue to have a negative impact on the credit portfolio during the coming year, leading to elevated customer default levels. Relative loss levels will also be high, as collateral values remain pressured. Management has responded to the credit pressures by adding to the Company’s loan loss reserve, maintaining strong capital levels, tightening underwriting and loan pricing standards, and shifting additional resources to assist in this area. The Company’s best talent is focused on managing our credit portfolio through this very challenging period.

     Liquidity risk for the Company could arise from the inability of the Bank to meet its short-term obligations, particularly deposit withdrawals by customers, reductions in repurchase agreement balances by municipal customers, and restrictions on brokered certificates of deposit or other borrowing facilities. Company management has implemented a number of actions to reduce liquidity exposure, including: (1) enhancing its liquidity monitoring system; (2) maintaining a high level of liquid cash instruments and marketable or pledgeable securities on its balance sheet; (3) enhancing its deposit-gathering efforts; (4) communicating frequently and openly with both internal staff and external customers about the financial position, management strategy and future outlook for the Bank; (5) participating in the U.S. Treasury’s Capital Purchase Program; and (6) expanding its access to other liquidity sources, including the Federal Home Loan Bank, the Federal Reserve, and additional CD brokers. These actions have strengthened the Company’s current on- and off-balance sheet liquidity considerably and positioned it well to face the ongoing economic challenges.

     Given the Company’s internal moves to reduce staffing levels and compensation expense, the risk of losing critical human resources may be higher now, although the overall job market is less competitive. In addressing this risk, management focuses on developing a culture that promotes, retains and attracts high quality individuals. While muted in the short-term, our compensation and reward systems also contribute directly to maintaining and enhancing this culture, and we encourage strong participation among all employees in establishing and implementing the Bank’s business plans.

Critical Accounting Policies

     The accounting and reporting policies of Intermountain conform to Generally Accepted Accounting Principles (“GAAP”) and to general practices within the banking industry. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Intermountain’s management has identified the accounting policies described below as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of Intermountain’s Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     Income Recognition. Intermountain recognizes interest income by methods that conform to general accounting practices within the banking industry. In the event management believes collection of all or a portion of contractual interest on a loan has become doubtful, which generally occurs after the loan is 90 days past due, Intermountain discontinues the accrual of interest and reverses any previously accrued interest recognized in income deemed uncollectible. Interest received on nonperforming loans is included in income only if recovery of the principal is reasonably assured. A nonperforming loan is restored to accrual status when it is brought current or when brought to 90 days or less delinquent, has performed in accordance with contractual terms for a reasonable period of time, and the collectability of the total contractual principal and interest is no longer in doubt.

     Allowance For Loan Losses. In general, determining the amount of the allowance for loan losses requires significant judgment and the use of estimates by management. This analysis is designed to determine an appropriate level and allocation of the allowance for losses among loan types and loan classifications by considering factors affecting loan losses, including: specific losses; levels and trends in impaired and nonperforming loans; historical bank and industry loan loss experience; current national and local economic conditions;

volume, growth and composition of the portfolio; regulatory guidance; and other relevant factors. Management monitors the loan portfolio to evaluate the adequacy of the allowance. The allowance can increase or decrease based upon the results of management’s analysis.

     The amount of the allowance for the various loan types represents management’s estimate of probable incurred losses inherent in the existing loan portfolio based upon historical bank and industry loan loss experience for each loan type. The allowance for loan losses related to impaired loans is based on the fair value of the collateral for collateral dependent loans, and on the present value of expected cash flows for non-collateral dependent loans. For collateral dependent loans, this evaluation requires management to make estimates of the value of the collateral and any associated holding and selling costs, and for non-collateral dependent loans, estimates on the timing and risk associated with the receipt of contractual cash flows.

     Individual loan reviews are based upon specific quantitative and qualitative criteria, including the size of the loan, loan quality classifications, value of collateral, repayment ability of borrowers, and historical experience factors. The historical experience factors utilized are based upon past loss experience, trends in losses and delinquencies, the growth of loans in particular markets and industries, and known changes in economic conditions in the particular lending markets. Allowances for homogeneous loans (such as residential mortgage loans, personal loans, etc.) are collectively evaluated based upon historical bank and industry loan loss experience, trends in losses and delinquencies, growth of loans in particular markets, and known changes in economic conditions in each particular lending market.

     Management believes the allowance for loan losses was adequate at June 30, 2009. While management uses available information to provide for loan losses, the ultimate collectability of a substantial portion of the loan portfolio and the need for future additions to the allowance will be based on changes in economic conditions and other relevant factors. A further slowdown in economic activity could adversely affect cash flows for both commercial and individual borrowers, as a result of which the Company could experience increases in nonperforming assets, delinquencies and losses on loans.

     A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with the Bank’s commitment to lend funds under existing agreements such as letters or lines of credit. Management determines the adequacy of the reserve for unfunded commitments based upon reviews of individual credit facilities, current economic conditions, the risk characteristics of the various categories of commitments and other relevant factors. The reserve is based on estimates, and ultimate losses may vary from the current estimates. These estimates are evaluated on a regular basis and, as adjustments become necessary, they are recognized in earnings in the periods in which they become known through charges to other non-interest expense. Draws on unfunded commitments that are considered uncollectible at the time funds are advanced are charged to the reserve for unfunded commitments. Provisions for unfunded commitment losses, and recoveries on commitment advances previously charged-off, are added to the reserve for unfunded commitments, which is included in the accrued expenses and other liabilities section of the Consolidated Statements of Financial Condition.

     Investments. Assets in the investment portfolio are initially recorded at cost, which includes any premiums and discounts. Intermountain amortizes premiums and discounts as an adjustment to interest income using the interest yield method over the life of the security. The cost of investment securities sold, and any resulting gain or loss, is based on the specific identification method.

     Management determines the appropriate classification of investment securities at the time of purchase. Held-to-maturity securities are those securities that Intermountain has the intent and ability to hold to maturity, and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to liquidity needs, changes in market interest rates, and asset-liability management strategies, among others. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses reported in stockholders’ equity as a separate component of other comprehensive income, net of applicable deferred income taxes.

     Management evaluates investment securities for other-than-temporary declines in fair value on a periodic basis. If the fair value of investment securities falls below their amortized cost and the decline is deemed to be other-than-temporary, the securities will be written down to current market value and the write down will be deducted from earnings. At March 31,2009, residential mortgage-backed securities included a security comprised of a pool of mortgages with a remaining unpaid balance of $4.2 million. Due to the lack of an orderly market for the security, its fair value was determined to be $2.5 million at March 31, 2009 based on analytical modeling taking into consideration a range of factors normally found in an orderly market. Of the $1.7 million unrealized loss on the security, based on an analysis of projected cash flows, $244,000 was charged to earnings as a credit loss and $1.5 million was recognized in other comprehensive income. Impairment losses on securities charged to earnings in the three months ended June 30, 2009 and 2008 were $0 and $0, respectively. See Notes to Consolidated Financial Statements, notes 2 and 9 for more information on the other-than-temporary impairment and the calculation of fair or carrying value for the investment securities. 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.

     Goodwill and Other Intangible Assets. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. Intermountain’s goodwill relates to value inherent in the banking business and the value is

dependent upon Intermountain’s ability to provide quality, cost-effective services in a competitive market place. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. Goodwill is not amortized, but is subjected to impairment analysis each December. In addition, generally accepted accounting principles require an impairment analysis to be conducted any time a “triggering event” occurs in relation to goodwill. Management believes that the significant market disruption in the financial sector and the declining market valuations experienced over the past year created a “triggering event.” As such, management conducted an interim evaluation of the carrying value of goodwill in June 2009. As a result of this analysis, no impairment was considered necessary as of June 30, 2009. Major assumptions used in determining impairment were increases in future income, sales multiples in determining terminal value and the discount rate applied to future cash flows. However, future events could cause management to conclude that Intermountain’s goodwill is impaired, which would result in the recording of an impairment loss. Any resulting impairment loss could have a material adverse impact on Intermountain’s financial condition and results of operations. Other intangible assets consisting of core-deposit intangibles with definite lives are amortized over the estimated life of the acquired depositor relationships. At June 30, 2009, the carrying value of the Company’s goodwill and core deposit intangible was $11.7 million and $507,000, respectively.

     Real Estate Owned. Property acquired through foreclosure of defaulted mortgage loans is carried at the lower of cost or fair value less estimated costs to sell. At the applicable foreclosure date, other real estate owned is recorded at fair value of the real estate, less the costs to sell the real estate. Subsequently, other real estate owned, is carried at the lower of cost or fair value, is periodically assessed for impairment based on fair value at the reporting date. Development and improvement costs relating to the property are capitalized to the extent they are deemed to be recoverable.

     Intermountain reviews its real estate owned for impairment in value whenever events or circumstances indicate that the carrying value of the property may not be recoverable. In performing the review, if expected future undiscounted cash flow from the use of the property or the fair value, less selling costs, from the disposition of the property is less than its carrying value, a loss is recognized. Because of rapid declines in real estate values in the current distressed environment, management has increased the frequency and intensity of its valuation analysis on its OREO properties. As a result of this analysis, carrying values on some of these properties have been reduced, and it is reasonably possible that the carrying values could be reduced again in the near term.

     Fair Value Measurements. Effective January 1, 2008, Intermountain adopted SFAS 157, “Fair Value Measurements”. SFAS 157 establishes a standard framework for measuring fair value in GAAP, clarifies the definition of “fair value” within that framework, and expands disclosures about the use of fair value measurements. A number of valuation techniques are used to determine the fair value of assets and liabilities in Intermountain’s financial statements. These include quoted market prices for securities, interest rate swap valuations based upon the modeling of termination values adjusted for credit spreads with counterparties and appraisals of real estate from independent licensed appraisers, among other valuation techniques. Fair value measurements for assets and liabilities where there exists limited or no observable market data are based primarily upon estimates, and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. Significant changes in the aggregate fair value of assets and liabilities required to be measured at fair value or for impairment will be recognized in the income statement under the framework established by GAAP. If impairment is determined, it could limit the ability of Intermountain’s banking subsidiaries to pay dividends or make other payments to the Holding Company. See Note 9 to the Consolidated Financial Statements for more information on fair value measurements.

     Derivative Financial Instruments and Hedging Activities. In various aspects of its business, the Company uses derivative financial instruments to modify its exposure to changes in interest rates and market prices for other financial instruments. Many of these derivative financial instruments are designated as hedges for financial accounting purposes. Intermountain’s hedge accounting policy requires the assessment of hedge effectiveness, identification of similar hedged item groupings, and measurement of changes in the fair value of hedged items. If, in the future, the derivative financial instruments identified as hedges no longer qualify for hedge accounting treatment, changes in the fair value of these hedged items would be recognized in current period earnings, and the impact on the consolidated results of operations and reported earnings could be significant.

     For more information on derivative financial instruments and hedge accounting, see Note 8 to the Consolidated Financial Statements.

Results of Operations

     Overview. Intermountain recorded a net loss to common shareholders of $11.4 million, or $1.37 per diluted share for the three months ended June 30, 2009, compared with a net loss of $532,000 or $0.06 per diluted share for the first quarter of 2009 and net income of $2.3 million or $0.27 per diluted share, for the three months ended June 30, 2008. Intermountain recorded a net loss to common shareholders of $11.9 million, or $1.43 per diluted share, for the six months ended June 30, 2009, compared with net income of $3.9 million, or $0.46 per diluted share, for the six months ended June 30, 2008. The decline in earnings over both the three months and six months ended June 30, 2008 primarily reflected increased provisions for loan losses. The provision totaled $18.7 million compared to $2.1 million for the

comparative three month periods and $21.5 million and $2.4 million for the comparative six month periods, as the Company added to its reserve for loan losses and adjusted real estate loan and property valuations down to reflect continuing declines in its local markets.

     The annualized return on average assets (“ROA”) was -4.02 %, -0.04% and 0.88% for the three months ended June 30, 2009, March 31, 2009 and June 30, 2008, respectively, and -2.04% and 0.76% for the six months ended June 30, 2009 and 2008, respectively.  The annualized return on average equity (“ROE”) was -58.2%, -2.5% and 10.0% for the three months ended June 30, 2009, March 31, 2009 and June 30, 2008, respectively, and -29.8% and 8.7% for the six months ended June 30, 2009 and 2008, respectively.

     The Company’s 2009 second quarter and year-to-date results clearly reflect increasingly difficult economic and credit conditions, which have put pressure on both revenue and expense streams. In response to this adverse environment, management continues to focus on maintaining a strong balance sheet with high levels of liquidity, capital and loss reserves to protect its shareholders and customers. Some of its actions, including the maintenance of excess funds in relatively low-yielding cash equivalent and investment securities, the acquisition of additional capital as part of the U.S. Treasury’s Capital Purchase Program, and the funding of higher loan loss reserves will hurt earnings to common shareholders in the short-term, but provide a foundation from which we expect to recover and grow when economic conditions improve. In addition, the Company expects that it’s strong focus on low-cost deposit growth will enhance future opportunities when rates increase and higher levels of customer borrowing demand return.

     Net Interest Income. The most significant component of earnings for the Company is net interest income, which is the difference between interest income from the Company’s loan and investment portfolios, and interest expense from deposits, repurchase agreements and other borrowings. During the three months ended June 30, 2009, March 31, 2009 and June 30, 2008, net interest income was $10.2 million, $9.9 million, and $11.2 million, respectively. During the six months ended June 30, 2009 and 2008, net interest income was $20.1 million and $22.5 million, respectively. While net interest income remains lower than a year ago, trends over the last couple quarters have been positive, as asset yields have stabilized and funding costs continue to decrease.

     Average interest-earning assets increased by 6.2% to $995.5 million for the three months ended June 30, 2009, compared to $937.7 million for the three months ended June 30, 2008.  The growth was driven by increases in average investments and cash of $88.2 million or 56.6% over the three month period in 2008, offset by a decrease of $30.4 million or 3.9% in average loans. For the six months ended June 30, 2009, average interest-earning assets increased 6.4%, or $59.8 million compared to the same period in 2008. During this period, average loans decreased $20.9 million while investments and cash increased $80.8 million. Loan volumes continued to reflect paydowns and write-downs of existing loan balances, and a downturn in loan originations caused by the slowing economy, lower demand and tighter underwriting standards. The increase in investments and cash resulted from strong core deposit growth and the Company’s decision to place the additional funding in short-term investments and cash equivalents to create additional liquidity.

     Average interest-bearing liabilities increased by 5.4% or $50.2 million, including $95.1 million (13.2%) growth in average deposits and $44.9 million (22.3%) decrease in other borrowings for the three month period ended June 30, 2009 compared to June 30, 2008. For the six months ended June 30, 2009, average interest-bearing liabilities increased 5.3% or $48.7 million compared to the six months ended June 30, 2008, fueled by growth in average deposits of $76.1 million, or 10.5%. Increases in average deposits compared to both prior periods primarily reflected core deposit growth from the bank’s local markets as branch staff successfully acquired additional customer balances. Average Federal Home Loan Bank advances decreased by $8.0 million, or 17.5%, for the three months ended June 30, 2009, compared to the three months ended June 30, 2008. The decrease in average Federal Home Loan Bank advances offset increases in deposits.

     The positive impacts of increases in earning assets over the past year were more than offset by declines in the net interest margin. Net interest spread during the three months ended June 30, 2009, March 31, 2009, and June 30, 2008 equaled 4.08%, 3.98%, and 4.76%, respectively. Net interest margin was 4.11% for the three months ended June 30, 2009, an 0.08% increase from the three months ended March 31, 2009 and a 0.68% decrease from the same period last year. Net interest margins for the six months ended June 30, 2009 and June 30, 2008 were 4.07% and 4.83%, respectively. Factors impacting the comparative spread and margin results from 2008 include:

	•		As market rates dropped over the last 21 months, changes in the Company’s funding rates lagged changes in yields on loans and investments;
	•		The Company has shifted to a more conservative asset mix with higher relative balances of lower-yielding investments and cash equivalents; and
	•		The Company has experienced higher levels of non-performing loans, which have resulted in a reduction in margin of 0.27% for the 3-month comparative period and 0.19% for the six-month comparative period.

     However, recent trends are more positive. Even with the impacts of non-accrual loans and the conservative asset mix, asset yields stabilized in the first half of 2009, while deposit and borrowing rates continued to decline, producing the 10 basis points improvement from the prior quarter.

     Given the current low level of market interest rates, the Company believes that the net interest margin will generally stabilize or increase as rates on interest earning assets remain steady or increase and rates on borrowings and deposits continue to decrease. As such,

management is focusing on building a balance sheet and core customer base to sustain the current margin, and prepare for resumption of more normal economic and rate conditions in the future.

     Provision for Losses on Loans & Credit Quality. Management’s policy is to establish valuation allowances for estimated losses by charging corresponding provisions against income. This evaluation is based upon management’s assessment of various factors including, but not limited to, current and anticipated future economic trends, historical loan losses, delinquencies, underlying collateral values, as well as current and potential risks identified in the portfolio.

     The provision for losses on loans increased to $18.7 million for the three months ended June 30, 2009, compared to a provision of $2.8 million for the three months ended March 31, 2009, and $2.1 million for the three months ended June 30, 2008. Net charge offs for the three months ended June 30, 2009 totaled $11.8 million compared to $1.8 million for the three months ended March 31, 2009, and $1.2 million for the three months ended June 30, 2008. Net charge offs for the six months ended June 30, 2009 totaled $13.6 million compared to $1.3 million for the same period in 2008. Annualized net charge-offs to average net loans increased to 6.31% for the three months ended June 30, 2009 compared to 0.96% for the three months ended March 31, 2009 and increased from 0.61% for the three months ended June 30, 2008. The elevated chargeoff and provision levels in the second quarter reflect continuing challenges in the Company’s residential real estate construction and land development loan portfolio, particularly in its southwestern Idaho markets. The Company wrote-down balances on several larger troubled real estate loans to reflect rapidly declining real estate valuations, and liquidated several large loans. For the six month period ended, June 30, 2009, seven loans comprised 56.3% or $7.7 million of the net charge offs. While weak economic conditions in the broader economy are impacting the Company’s commercial and consumer portfolios, credit performance in these other portfolios has been relatively stable.

     The loan loss allowance to total loans ratio increased to 3.31% at June 30, 2009, compared to 2.35% at March 31, 2009 and 1.62% at June 30, 2008, respectively. Management believes this level of loan loss allowance is adequate for the balance and the mix of the loan portfolio at this time.

The following table summarizes loan loss allowance activity for the periods indicated.

		Six months ended June 30,
		2009				2008
		(Dollars in thousands)
Balance at January 1		$	16,433			$	11,761
Provision for losses on loans			21,454				2,398
Amounts written off, net of recoveries			(13,587	)			(1,266	)
Allowance — loans, June 30			24,300				12,893
Allowance — unfunded commitments, January 1			14				18
Adjustment			351				(10	)
Allowance — unfunded commitments, June 30			365				8
Total credit allowance including unfunded commitments		$	24,665			$	12,901