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 incorporation or organization)		(IRS Employer Identification No.)

414 Church Street, Sandpoint, ID 83864
(Address of principal executive offices) (Zip code)

None		None
(Title of each class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value)
(Title of class)

     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). Yes o No o

     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 (Do not check if a smaller reporting company)		Smaller reporting company þ

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

     The number of shares outstanding of the registrant’s Common Stock, no par value per share, as of May 10, 2010 was 8,387,496.

 

 

Intermountain Community Bancorp

FORM 10-Q
For the Quarter Ended March 31, 2010

TABLE OF CONTENTS

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

PART I — Financial Information

Item 1 — Financial Statements
Intermountain Community Bancorp

Consolidated Balance Sheets
(Unaudited)

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

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

Intermountain Community Bancorp

Consolidated Statements of Operations
(Unaudited)

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

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

Intermountain Community Bancorp

Consolidated Statements of Cash Flows
(Unaudited)

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

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

Intermountain Community Bancorp

Consolidated Statements of Comprehensive Income
(Unaudited)

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

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

Intermountain Community Bancorp

Notes to Consolidated Financial Statements
(Unaudited)

1.		Basis of Presentation:
		The foregoing unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2009. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.
		The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Intermountain Community Bancorp’s (“Intermountain’s” or “the Company’s”) consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of Intermountain’s consolidated financial position and results of operations.

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

		Available-for-Sale
						Non-Credit
						OTTI
						Recognized				Gross				Gross
		Amortized				in OCI				Unrealized				Unrealized				Fair Value/
		Cost				(Losses)				Gains				Losses				Carrying Value
March 31, 2010
U.S. treasury securities and obligations of U.S. government agencies		$	46			$	—			$	—			$	—			$	46
Residential mortgage-backed securities			193,645				(1,206	)			2,878				(7,910	)			187,407
		$	193,691			$	(1,206	)		$	2,878			$	(7,910	)		$	187,453
December 31, 2009
U.S. treasury securities and obligations of U.S. government agencies		$	51			$	—			$	—			$	—			$	51
Residential mortgage-backed securities			188,624				(1,225	)			2,662				(8,328	)			181,733
		$	188,675			$	(1,225	)		$	2,662			$	(8,328	)		$	181,784

		Held-to-Maturity
						Non-Credit
		Carrying				OTTI
		Value/				Recognized				Gross				Gross
		Amortized				in OCI				Unrealized				Unrealized
		Cost				(Losses)				Gains				Losses				Fair Value
March 31, 2010
State and municipal securities		$	15,153			$	—			$	291			$	(42	)		$	15,402
December 31, 2009
State and municipal securities		$	15,177			$	—			$	276			$	(56	)		$	15,397

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
March 31, 2010		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
State and municipal securities		$	—			$	—			$	3,210			$	42			$	3,210			$	42
Residential mortgage-backed securities			62,445				1,926				14,956				5,984				77,401				7,910
Total		$	62,445			$	1,926			$	18,166			$	6,026			$	80,611			$	7,952

		Less Than 12 Months								12 Months or Longer								Total
						Unrealized								Unrealized								Unrealized
December 31, 2009		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
State and municipal securities		$	3,196			$	56			$	—			$	—			$	3,196			$	56
Residential mortgage-backed securities			49,464				1,504				24,124				6,824				73,588				8,328
Total		$	52,660			$	1,560			$	24,124			$	6,824			$	76,784			$	8,384

     At March 31, 2010, the amortized cost and fair value of available-for-sale and held-to-maturity debt securities, by contractual maturity, are as follows (in thousands):

		Available-for-Sale								Held-to-Maturity
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
One year or less		$	—			$	—			$	635			$	641
After one year through five years			46				46				661				690
After five years through ten years			—				—				2,429				2,559
After ten years			—				—				11,428				11,512
			46				46				15,153				15,402
Mortgage-backed securities			193,645				187,407				—				—
		$	193,691			$	187,453			$	15,153			$	15,402

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Intermountain’s investment portfolios are managed to provide and maintain liquidity; to maintain a balance of high quality, diversified investments to minimize risk; to offset other asset portfolio elements in managing interest rate risk; to provide collateral for pledging; and to maximize returns. At March 31, 2010, the Company does not intend to sell any of its available-for-sale securities that have a loss position and it is not likely that it will be required to sell the available-for-sale securities before the anticipated recovery of their remaining amortized cost. The unrealized losses on residential mortgage-backed securities without OTTI were considered by management to be temporary in nature.

At March 31, 2010, residential mortgage-backed securities included a security comprised of a pool of mortgages with a remaining unpaid principal balance of $3.6 million. In March 2009, due to the lack of an orderly market for the security and the declining national economic and housing market, based on analytical modeling taking into consideration a range of factors normally found in an orderly market, the Company recorded a $1.7 million OTTI on this security. Based on the analysis of projected cash flows, $526,000 was charged to earnings as a credit loss during 2009 and $1,225,000 was recognized in other comprehensive income. The Company recorded an additional credit loss impairment of $19,000 for the three months ended March 31, 2010. However, the overall estimated market value on the security improved during this time, reducing the net non-credit value impairment to $1,206,000. At this time, the Company anticipates holding the security until its value is recovered or until maturity, and will continue to adjust its net income and other comprehensive income to reflect potential future credit loss impairments and the security’s market value. The Company calculated the credit loss charges against earnings each quarter by subtracting the estimated present value of future cash flows on the security from its amortized cost at the end of each period.

See Note 11 “Fair Value of Measurements” for more information on the calculation of fair or carrying value for the investment securities.

3.

Goodwill and Other Intangible Assets:

Intermountain has goodwill and core deposit intangible assets which were recorded in connection with business combinations. The Company performs a goodwill impairment analysis on an annual basis as of December 31. Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse action or assessment by a regulator; and unanticipated competition. In response to the significant turmoil in the equity market for financial institutions, the Company evaluated its goodwill position at each quarter end during 2009 for potential impairment. The Company engaged an independent consultant at December 31, 2009 to assist management in evaluating the carrying value of goodwill. The evaluation followed the two-step process for evaluating impairment required by accounting guidance. In Step 1, the Company evaluated whether an impairment of goodwill existed at December 31, 2009. This evaluation was based on a comparison of the estimated fair value of the Company in comparison to the book value of the Company’s common equity at December 31, 2009. In estimating the fair value of the Company, management used a combination of discounted cash flow method and the market value approach. The discounted cash flow modeling used estimates of future earnings and cash flows under the assumption that the Company is sold to an independent company, resulting in changes to both its future financial position and operating performance. In particular, the evaluation assumed reductions in investments, borrowings and preferred stock on the balance sheet, and increases in earnings resulting from improved net interest margins from asset deployment into higher-yielding loans, lower credit costs in future years, and additional cost reductions from consolidation with another company. The rate used to discount the cash flows was 14.5% and was based on the modified Capital Asset Pricing Model, commonly used in valuations, which adds various risk and size premiums to an assumed risk-free market interest rate. As part of its Step 1 analysis, management also estimated the Company’s fair value using commonly used market multiples against tangible book value and deposits. The results of Step 1 indicated that a potential impairment did exist at the end of 2009, requiring the Company to engage in Step 2 to determine the amount of the impairment.

The Step 2 evaluation requires the Company to calculate the implied fair value of its goodwill. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. The estimated fair value of the Company is allocated to all of the Company’s assets and liabilities, including any unrecognized identifiable assets, as if the Company had been acquired in a business combination and the estimated fair value of the Company is the price paid to acquire it. Any excess of the estimated fair value of the Company as calculated in Step 1 over the fair value of its net assets represents the implied fair value of goodwill. If the carrying amount of goodwill is greater than the implied fair value of that goodwill, an impairment loss would be recognized as a charge to earnings in an amount equal to that excess. In conducting this analysis, management compared the interest rates, maturities, durations and quality of its assets and liabilities against various market factors and made adjustments to the carrying value to arrive at the fair value. The Step 2 analysis indicated that the Company’s fair value at December 31, 2009 exceeded the net fair value of its assets by an amount greater than the carrying value of its goodwill. As a result, the Company determined that no impairment existed in 2009. At March 31, 2010, the Company concluded there were no triggering events that would require an interim impairment evaluation at March 31, 2010. As this evaluation is based on changing market conditions and estimates of current and future values and cash flows, no assurance can be given that an impairment of goodwill will not be required in future periods.

4.

Advances from the Federal Home Loan Bank of Seattle:

At March 31, 2010 and December 31, 2009 the Bank had a $10.0 million FHLB advance at 4.96% that matures in September 2010, a $5.0 million FHLB advance at 0.86% that matures in September 2010, a $5.0 million FHLB advance at 1.49% that matures in September 2011, a $25.0 million FHLB advance at 2.06% that matures in October 2012 and a $4.0 million FHLB advance at 3.11% that matures in September 2014. These notes totaled $49.0 million, and the Bank had the ability to borrow an additional $64.4 million from the FHLB.

Advances from FHLB Seattle are collateralized by certain qualifying loans. At December 31, 2009, Intermountain had the ability to borrow $121.6 million from FHLB Seattle, of which $49.0 million was utilized for borrowing. The Bank also had a letter of credit agreement with the FHLB at December 31, 2009 in the amount of $2.6 million, which was collateralized using the same collateral. The Bank’s credit line with FHLB Seattle is limited to a percentage of its total regulatory assets subject to collateralization requirements. Intermountain would be able to borrow amounts in excess of this total from the FHLB Seattle with the placement of additional available collateral.

5.

Other Borrowings:

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

		March 31,				December 31,
		2010				2009
Term note payable (1)		$	8,279			$	8,279
Term note payable (2)			8,248				8,248
Total other borrowings		$	16,527			$	16,527

A)

Intermountain’s obligations under the above debentures issued by its subsidiaries constitute a full and unconditional guarantee by Intermountain of the Statutory Trusts’ obligations under the Trust Preferred Securities. In accordance with ASC 810, Consolidation, (formerly FIN 46R, “Consolidation of Variable Interest Entities”), the trusts are not consolidated and the debentures and related amounts are treated as debt of Intermountain.

B)

To conserve the liquid assets of the parent Company, the Company’s Board of Directors has decided to defer regularly scheduled interest payments on its outstanding Junior Subordinated Debentures related to its Trust Preferred Securities (“TRUPS Debentures”) beginning in December 2009. The Company is permitted to defer payments of interest on the TRUPS Debentures for up to 20 consecutive quarterly periods without default. During the deferral period, the Company may not pay any dividends or distributions on, or redeem, purchase or acquire, or make a liquidation payment with respect to the Company’s capital stock, or make any payment of principal or interest on, or repay, repurchase or redeem any debt securities of the Company that rank equally or junior to the TRUPS Debentures.

6.

Earnings Per Share:

The following table presents the basic and diluted earnings per share computations (net loss numbers in thousands):

		Three months Ended
		March 31,
		2010				2009
Numerator:
Net loss — basic and diluted		$	(4,309	)		$	(118	)
Preferred stock dividend			419				414
Net loss applicable to common stockholders		$	(4,728	)		$	(532	)
Denominator:
Weighted average shares outstanding — basic			8,372,315				8,348,238
Dilutive effect of common stock options, restricted stock awards			—				—
Weighted average shares outstanding — diluted			8,372,315				8,348,238
Loss per share — basic and diluted:
Loss per share — basic		$	(0.56	)		$	(0.06	)
Effect of dilutive common stock options			—				—
Loss per share — diluted		$	(0.56	)		$	(0.06	)

The weighted average number of potentially dilutive common shares excluded in calculating diluted net income per common share due to the anti-dilutive effect is 254,683 and 230,428 shares for the three months ended March 31, 2010 and 2009, respectively. Common stock equivalents were calculated using the treasury stock method.

7.

Operating Expenses:

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

		Three months ended
		March 31,
		2010				2009
Salaries and employee benefits		$	5,832			$	5,706
Occupancy expense			1,828				1,968
Advertising			222				299
Fees and service charges			651				598
Printing, postage and supplies			389				361
Legal and accounting			324				280
FDIC Assessment			469				153
OREO expense			253				116
OREO valuation adjustments in the period (1)			777				33
Other expense			815				1,258
Total operating expenses		$	11,560			$	10,772

Salaries and employee benefits expense increased $126,000 or 2.21%, over the three month period last year as a result of $290,000 in severance costs associated with a staff reduction plan implemented in the first quarter. The severance costs were offset by decreased staffing levels and lower incentive compensation expense. Efforts to reduce compensation expense continue in 2010, as the Company has reduced additional staff, suspended salary increases for executives and officers and reduced other compensation plans.

Occupancy expenses decreased $140,000, or 7.1%, for the three month period ended March 31, 2010 compared to the same period one year ago. The decrease was comprised of a decrease in rent and computer hardware and software expense as additional cost control measures have been implemented. The Company expects these expenses to remain stable in 2010, as it has postponed building expansion plans and limited new hardware and software purchases.

The advertising expense decrease of $77,000 for the three month period compared to the same period one year ago reflected reductions in general advertising and media expenses, as the need for broad advertising in the current market has been limited. The $53,000 increase in fees and service charges for the three month period ended March 31, 2010 compared to the same period one year ago primarily reflected increased loan collection, repossession and liquidation expenses. Printing, postage and supplies increased $28,000 for the three-month period in comparison to last year’s total. The increase reflected timing of the payment of postage and supply expense during the quarter, and is not anticipated to remain at higher levels in subsequent quarters. Legal and accounting fees increased by $44,000 in comparison to the same three month period in 2009 as increasing legal expenses related to loan collection and compensation analysis were partially offset by a reduction in consulting fees.

FDIC expenses increased $316,000, or 206.5% for the three month period over the same period last year as FDIC insurance premium rates have increased substantially over the same period one year ago. OREO expense, related valuation adjustments and gain/loss on sale of OREO increased $881,000 for the three month period over the same period last year. The Company has been aggressively migrating problem assets into and out of OREO through the credit cycle, resulting in a larger number of OREO properties outstanding during the period and a higher amount of charge offs and gains/losses related to the sale of OREO properties than in the first quarter of 2009. Other expenses decreased $443,000 or 35.2%, for the three month period over the same period last year, reflecting decreases in telecommunications, computer services, training and travel costs, and expense associated with funding the reserve for unfunded loan commitments.

8.

Income Taxes:

Intermountain uses an estimate of future earnings and tax planning strategies to determine whether or not the benefit of its net deferred tax asset will be realized. In conducting this analysis, management has assumed economic conditions will continue to be very challenging in 2010, followed by gradual improvement in the ensuing years. These assumptions are in line with both national and regional economic forecasts. As such, its estimates include credit losses that are significantly elevated in 2010, but less so than those experienced in 2009, followed by improvement in ensuing years as the economy improves and the Company’s loan portfolio turns over. It also assumes improving net interest margins beginning in 2011, and reductions in operating expenses as credit costs abate and its other cost reduction strategies continue. Based on these estimates and potential additional tax planning strategies that it could employ to accelerate taxable income, the Company has determined that it is not required to establish a valuation allowance for the deferred tax assets, as management believes it is more likely than not that the net deferred tax asset will be realized principally through future reversals of existing taxable temporary differences. Management further believes that future taxable income will be sufficient to realize the benefits of the $10.1 million net operating loss carry forward included in the net deferred tax asset. However, to the extent that this analysis is based on estimates that are reliant on future economic conditions, management cannot assure that valuation impairment on its tax asset will not be required in future periods.

9.

Stock-Based Compensation Plans:

The Company utilized its stock to compensate employees and directors under the 1999 Director Stock Option Plan, the 1999 Employee Plan and the 1988 Employee Plan (together the “Stock Option Plans”). On January 14, 2009, the terms of the Amended and Restated 1999 Employee Stock Option and Restricted Stock Plan and the 1999 Director Stock Option Plan expired. Upon recommendation of management and approval of the Board of Directors, it was determined that, due to the economic uncertainty, the Board would not seek to implement a new plan at this time. The 1988 Employee Stock Option Plan was a predecessor plan to the Amended and Restated 1999 Employee Stock Option and Restricted Stock Plan. Because each of these plans has expired, shares may no longer be awarded under these plans. However, awards remain unexercised or unvested under these plans. The Company did not grant options to purchase Intermountain common stock or restricted stock during the three months ended March 31, 2010 or March 31, 2009.

In 2003, stockholders approved a change to the 1999 Employee Option Plan to provide for the granting of restricted stock awards. The Company granted restricted stock to directors and employees beginning in 2005. The restricted stock vests 20% per year, over a five-year period. The Company granted no restricted shares during either of the three months ended March 31, 2010 and 2009. For the three months ended March 31, 2010 and 2009, restricted stock expense totaled $122,000 and $93,000, respectively. Total expense related to stock-based compensation recorded in the three months ended March 31, 2010 and 2009 was $122,000 and $93,000, respectively.

A summary of the changes in stock options outstanding for the three months ended March 31, 2010, is presented below:

		Three months ended March 31, 2010
		(dollars in thousands, except per share amounts)
						Weighted				Weighted
		Number				Average				Average
		of				Exercise				Remaining
		Shares				Price				Life (Years)
Beginning Options Outstanding, Jan 1, 2010			254,686			$	6.35
Options Granted			—				—
Exercises			—				—
Forfeitures			(12,526	)			7.85
Ending options outstanding, March 31, 2010			242,160				6.27				2.6
Exercisable at March 31, 2010			242,160			$	6.27				2.6

The total intrinsic value of options exercised during the three months ended March 31, 2010 and 2009 was $0 and $7,000, respectively. A summary of the Company’s nonvested restricted shares for the three months ended March 31, 2010, is presented below:

						Weighted-
						Average
						Grant-Date
Nonvested Shares		Shares				Fair Value
Balance at January 1, 2010			72,718			$	15.71
Granted			—				—
Vested			(23,439	)			18.65
Forfeited			(2,144	)			16.38
Balance at March 31, 2010			47,135			$	14.22

10.

Derivative Financial Instruments

Management uses derivative financial instruments to protect against the risk of interest rate movements on the value of certain assets and liabilities and on future cash flows. The instruments that have been used by the Company include interest rate swaps and cash flow hedges with indices that relate to the pricing of specific assets and liabilities.

Derivative instruments have inherent risks, primarily market risk and credit risk. Market risk is associated with changes in interest rates and credit risk relates to the risk that the counterparty will fail to perform according to the terms of the agreement. The amounts potentially subject to market and credit risks are the streams of interest payments under the contracts and the market value of the derivative instrument which is determined based on the interaction of the notional amount of the contract with the underlying instrument, and not the notional principal amounts used to express the volume of the transactions. Management monitors the market risk and credit risk associated with derivative financial instruments as part of its overall Asset/Liability management process.

In accordance with ASC 815, Derivatives and Hedging, the Company recognizes all derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Derivative financial instruments are included in other assets or other liabilities, as appropriate, on the Consolidated Balance Sheet. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders’ equity as a component of other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income in the same period and in the same income statement line as changes in the fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent they are effective hedges, are recorded as a component of other comprehensive income, net of deferred taxes. Changes in fair values of derivative financial instruments not qualifying as hedges pursuant to ASC 815 are reported in non-interest income. Derivative contracts are valued by the counter party and are periodically validated by management.

Interest Rate Swaps — Designated as Cash Flow Hedges

The tables below identify the Company’s interest rate swaps at March 31, 2010 and December 31, 2009, which were entered into to hedge certain LIBOR-based trust preferred debentures and designated as cash flow hedges pursuant to ASC 815 (dollars in thousands):

March 31, 2010
										Receive Rate				Pay Rate				Type of Hedging
Maturity Date		Notional Amount				Fair Value(Loss)				(LIBOR)				(Fixed)				Relationship
Pay Fixed, Receive Variable:
October 2013		$	8,248			$	(806	)			0.25	%			4.58	%		Cash Flow

December 31, 2009
										Receive Rate				Pay Rate				Type of Hedging
Maturity Date		Notional Amount				Fair Value (Loss)				(LIBOR)				(Fixed)				Relationship
Pay Fixed, Receive Variable:
October 2013		$	8,248			$	(678	)			0.28	%			4.58	%		Cash Flow

The fair values, or unrealized losses, of $806,000 at March 31, 2010 and $678,000 at December 31, 2009 are included in other liabilities. The Company has begun to defer the interest payments on the related Trust Preferred borrowing beginning with the January 2010 scheduled remittance. A calculation of the effectiveness of the hedge was prepared. It was concluded that although the hedge is effective, there is small amount of ineffectiveness due to the delayed payments. The Company expensed $90,000 in interest expense in the three months ended March 31, 2010 related to the ineffective portion of the hedge. The changes in fair value, net of tax, are separately disclosed in the statement of changes in stockholders’ equity as a component of comprehensive income. Net cash flows from these interest rate swaps are included in interest expense on trust preferred debentures. The unrealized loss at March 31, 2010 is a component of comprehensive income for March 31, 2010. At March 31, 2010, Intermountain had $550,000 in pledged certificates of deposit and $492,000 in restricted cash as collateral for the cash flow hedge. A rollfoward of the amounts in accumulated other comprehensive income related to interest rate swaps designated as cash flow hedges follows:

		Three Months Ended
		Mar 31, 2010				Mar 31, 2009
Unrealized loss at beginning of period		$	(678	)		$	(985	)
Amount of loss recognized in other comprehensive income			(128	)			104
Unrealized loss at end of period		$	(806	)		$	(881	)

Interest Rate Swaps — Not Designated as Hedging Instruments Under ASC 815

The Company has purchased certain derivative products to allow the Company to effectively convert a fixed rate loan to a variable rate payment stream. The Company economically hedges derivative transactions by entering into offsetting derivatives executed with third parties upon the origination of a fixed rate loan with a customer. Derivative transactions executed as part of this program are not designated as ASC 815 hedge relationships and are, therefore, marked to market through earnings each period. In most cases the derivatives have mirror-image terms, which result in the positions’ changes in fair value offsetting completely through earnings each period. However, to the extent that the derivatives are not a mirror-image, changes in fair value will not completely offset, resulting in some earnings impact each period. Changes in the fair value of these interest rate swaps are included in other non-interest income. The following table summarizes these interest rate swaps as of March 31, 2010 and December 31, 2009 (in thousands):

		March 31, 2010								December 31, 2009
		Notional								Notional
		Amount				Fair Value Gain				Amount				Fair Value Gain
Interest rate swaps with third party financial institutions		$	2,559			$	31			$	2,559			$	57

At March 31, 2010, loans receivable included $31,000 of derivative assets and other liabilities included $0 of derivative assets related to these interest rate swap transactions. At March 31, 2010, the interest rate swaps had a maturity date of March 2019. At March 31, 2010, Intermountain had $72,000 in restricted cash as collateral for the interest rate swaps.

11.

Fair Value Measurements

Fair value is defined under ASC 820-10 as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. In support of this principle ASC 820-10 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

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

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

Level 3 inputs — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using

pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation.

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of March 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands).

						Fair Value Measurements
						At March 31, 2010, Using
						Quoted Prices
						In Active				Other				Significant
						Markets for				Observable				Unobservable
		Fair Value				Identical Assets				Inputs				Inputs
Description		March 31, 2010				(Level 1)				(Level 2)				(Level 3)
Available-for-Sale Securities:
U.S. treasury securities and obligations of U.S. government agencies		$	46			$	—			$	46			$	—
Residential mortgage backed securities (“MBS”)			187,407				—				157,411				29,996
Other Assets — Derivative			31				—				—				31
Total Assets Measured at Fair Value		$	187,484			$	—			$	157,457			$	30,027
Other Liabilities — Derivatives		$	806			$	—			$	—			$	806

		Fair Value Measurements
		At December 31, 2009 Using
						Quoted Prices
						In Active				Other				Significant
						Markets for				Observable				Unobservable
		Fair Value				Identical Assets				Inputs				Inputs
Description		Dec 31, 2009				(Level 1)				(Level 2)				(Level 3)
Available-for-Sale Securities:
U.S. treasury securities and obligations of U.S. government agencies		$	51			$	—			$	51			$	—
Residential mortgage backed securities (“MBS”)			181,733				—				149,497				32,236
Other Assets — Derivative			57				—				—				57
Total Assets Measured at Fair Value		$	181,841			$	—			$	149,548			$	32,293
Other Liabilities — Derivatives		$	678			$	—			$	—			$	678

     The changes in Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2010 are summarized as follows (in thousands):

Fair Value Measurement Transfers- Assets

		Fair Value Measurements Using Significant
		Unobservable Inputs ( Level 3)
Description		Residential MBS				Derivatives				Total
January 1, 2010 Balance		$	32,236			$	57			$	32,293
Total gains or losses (realized/unrealized)
Included in earnings			(19	)			(26	)			(45	)
Included in other comprehensive income			911				—				911
Principal Payments			(3,132	)			—				(3,132	)
Transfers in and /or out of Level 3			—				—				—
March 31, 2010 Balance		$	29,996			$	31			$	30,027

Fair Value Measurement Transfers- Liabilities

		Fair Value Measurements
		Using Significant Unobservable
		Inputs ( Level 3)
Description		Derivatives
January 1, 2010 Balance		$	678
Total gains or losses (realized/unrealized)
Included in earnings			90
Included in other comprehensive income			38
March 31, Balance		$	806

     The table below presents a portion of the Company’s loans measured at fair value on a nonrecurring basis as of March 31, 2010, because they are impaired loans and the Company’s OREO, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

		Fair Value Measurements
		At March 31, 2010, Using
						Quoted Prices
						In Active				Other				Significant
						Markets for				Observable				Unobservable
		Fair Value				Identical Assets				Inputs				Inputs
Description		Mar 31, 2010				(Level 1)				(Level 2)				(Level 3)
Loans(1)		$	66,494			$	—			$	—			$	66,494
OREO			11,538				—				—				11,538
Total Assets Measured at Fair Value		$	78,032			$	—			$	—			$	78,032

     Impaired loans are valued based on either the estimated fair value of the cash flows to be received or the fair value of the underlying collateral supporting the loan less selling costs. Real estate collateral on these loans and the Company’s other real estate owned (“OREO”) is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. Management reviews these valuations and makes additional valuation adjustments, as necessary, including subtracting estimated costs of liquidating the collateral or selling the OREO. The related nonrecurring fair value measurement adjustments have been classified as Level 3 because of the significant assumptions required to estimate future cash flows on these loans, and the rapidly changing and uncertain collateral values underlying the loans. Extreme volatility and the lack of relevant and current sales data in the Company’s market areas for various types of collateral create additional uncertainties and require the use of multiple sources and management judgment to make adjustments.

     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 $157.4 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 $30.0 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 March 31, 2010. This is evidenced by a significant widening in the bid-ask spread for these types of securities and the limited volume of actual trades made. As a result, less reliance can be placed on easily observable market data, 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 March 31, 2010 measurement date. These securities are valued using Level 3 inputs.

     In valuing these securities, the Company utilized the same independent pricing service as for its other available-for-sale securities and internally validated these measurements. In addition, it utilized a second pricing service that specializes in whole-loan collateralized mortgage obligation valuation and another market source to derive independent valuations and used this data to evaluate

and adjust the original values derived. In addition to the observable market-based input including dealer quotes, market spreads, live trading levels and execution data, both services also employed a present-value income model that considered the nature and timing of the cash flows and the relative risk of receiving the anticipated cash flows as agreed. The discount rates used were based on a risk-free rate, adjusted by a risk premium for each security. In accordance with the requirements of ASC 820-10, the Company has determined that the risk-adjusted discount rates utilized appropriately reflect the Company’s best estimate of the assumptions that market participants would use in pricing the assets in a current transaction to sell the asset at the measurement date. Risks include nonperformance risk (that is, default risk and collateral value risk) and liquidity risk (that is, the compensation that a market participant receives for buying an asset that is difficult to sell under current market conditions). To the extent possible, the pricing services and the Company validated the results from these models with independently observable data.

     In evaluating securities in the investment portfolio for OTTI, the Company evaluated the following factors:

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

     Based on the factors above, the Company has determined that one security comprised of a pool of mortgages was subject to OTTI as of March 31, 2009. During 2009, the Company recorded an OTTI of $1,751,000 on this security. Of the total $1,751,000 OTTI, $526,000 was related to credit losses and was a charge against earnings. The remaining $1,225,000 reflected non-credit value impairment and was charged against the Company’s other comprehensive income and reported capital on the balance sheet. The Company conducted a similar analysis on the estimated cash flows in the first quarter of 2010, and as a result of this analysis, recorded additional credit loss impairments of $19,000 against earnings. 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 calculates the credit loss charge against earnings by subtracting the estimated present value of estimated future cash flows on the security from its amortized cost.

     Loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for impaired loans when establishing the allowance for credit losses. Such amounts are generally based on either the estimated fair value of the cash flows to be received or the fair value of the underlying collateral supporting the loan less selling costs. Real estate collateral on these loans and the Company’s OREO is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. Management reviews these valuations and makes additional valuation adjustments, as necessary, including subtracting estimated costs of liquidating the collateral or selling the OREO. The related nonrecurring fair value measurement adjustments have generally been classified as Level 3 because of the significant assumptions required to estimate future cash flows on these loans, and the rapidly changing and uncertain collateral values underlying the loans. Extreme volatility and the lack of relevant and current sales data in the Company’s market areas for various types of collateral create additional uncertainties and require the use of multiple sources and management judgment to make adjustments. Loans subject to nonrecurring fair value measurement were $66.5 million at March 31, 2010 all of which were classified as Level 3.

     Other Real Estate Owned. At the applicable foreclosure date, OREO is recorded at fair value of the real estate, less the estimated costs to sell the real estate. Subsequently, OREO is carried at the lower of cost or net realizable value (fair value less estimated selling costs), and is periodically assessed for impairment based on fair value at the reporting date. Fair value is determined from external appraisals and other valuations using judgments and estimates of external professionals. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3. The Company’s OREO at March 31, 2010 totaled $11.5 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 5 — 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 March 31, 2010, it was a liability with a fair value of $806,000.

     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 March 31, 2010, it was an asset with a fair value of $5,000. 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 March 31, 2010, it was an asset with a fair value of $26,000.

     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 March 31, 2010 based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values.

     The estimated fair value of the financial instruments as of March 31, 2010 and December 31, 2009, are as follows (in thousands):

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

     The methods and assumptions used to estimate the fair values of each class of financial instruments are as follows:

Cash, Cash Equivalents, Federal Funds and Certificates of Deposit

     The carrying value of cash, cash equivalents, federal funds sold and certificates of deposit approximates fair value due to the relatively short-term nature of these instruments.

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.

12. Subsequent Events

     Intermountain performed an evaluation of subsequent events through the date this report was filed with the Securities and Exchange Commission.

13. New Accounting Pronouncements:

In May 2009, the FASB issued guidance on subsequent events that standardizes accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In February 2010, the FASB amended its guidance on subsequent events. As a public reporting company, the Company is required to evaluate subsequent events through the date its financial statements are issued. The adoption of these rules did not have a material impact on its consolidated financial statements.

In June 2009, the FASB issued standards on accounting for transfers of financial assets, removing the concept of qualifying special-purpose entities as an accounting criteria that had provided an exception to consolidation, and provided additional guidance on requirements for consolidation. This guidance became effective for the Company on January 1, 2010, and did not have a material impact on its consolidated financial statements.

In January 2010, the FASB issued guidance on considerations related to implementation of fair value measurement disclosures. This update to the codification specifically addresses: 1) transfers between levels 1, 2 and 3 of the fair value hierarchy; 2) level of disaggregation of derivative contracts for fair value measurement disclosures; and 3) disclosures about fair value measurement inputs and valuation techniques. This guidance became effective for the Company on March 31, 2010, and did not have a material impact on its consolidated financial statements.

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

     This report contains forward-looking statements. For a discussion about such statements, including the risks and uncertainties inherent therein, see “Forward-Looking Statements.” Management’s Discussion and Analysis of Financial Condition and Results of

Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in Intermountain’s Form 10-K for the year ended December 31, 2009.

General

Overview & History

     Intermountain Community Bancorp (“Intermountain” or the “Company”) is a bank 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 and has also expanded into the states of Oregon and Washington. 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 continued to open branches under the Intermountain Community and Panhandle State Bank names.

     In 2006, Intermountain also opened a Trust & Wealth Management division, and purchased a small investment company, Premier Alliance. The combined unit now operates as Intermountain’s Trust & Investment Services division. 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, 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 product offerings.

Business Strategy & Opportunities

     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 focused on standardizing and centralizing administrative and operational functions to improve risk management, efficiency and the ability of the branches to serve customers effectively.

     Intermountain is positioning itself to prosper in the new economy arising from the prolonged economic downturn. Its strengths provide the foundation for growth and profitability in the future. These include the following:

•

A strong, loyal and low-cost deposit franchise with proven growth capabilities: 62% of Intermountain’s deposits are in low-cost transaction accounts, resulting in a cost of funds that has consistently been below its peer group. Intermountain has maintained this low-cost deposit focus while growing since 1999 from the 8th ranked bank by deposit market share to the 2nd in the core markets it serves (Source: FDIC and Federal Financial Institutions Examination Council (“FFIEC”) Uniform Bank Performance Report (“UBPR”) data).

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

     Management anticipates that banking in the future will be similar in some ways to the past, and very different in other ways. It has defined potential opportunities in terms of prospects within the Company’s core markets of north, southwest rural, and south central Idaho, and within its growth markets of Spokane, Boise, and contiguous eastern Washington and northern Idaho counties. While it cannot guarantee that it will pursue, or be successful in pursuing opportunities in this new environment, it believes the following represent potential prospects.

     In respect to lending, a return to more conservative credit management, underwriting and structuring and the exit of a number of distressed competitors may lead to better pricing opportunities and lower future credit risk for the Company. Management is responding by diversifying its current portfolio and positioning for prudent growth opportunities. It believes these prospects will include pursuing attractive mid-market commercial credits in its markets, originating commercial real estate loans to strong borrowers at lower real estate prices, originating and seasoning mortgage loans to strong borrowers at conservative loan-to-values in rural and smaller suburban areas not well-served by current secondary market appraisal standards, expanding and diversifying its agricultural portfolio, and expanding its already strong government-guaranteed loan marketing efforts. Management also believes that credit spreads may generally be wider, and when combined with the Company’s high proportion of variable rate loans, should lead to improved asset yields in the future.

     We believe deposit growth and pricing will continue to be a cornerstone of the Company’s success. As demonstrated by its past successes, the growth of low-cost core deposits has always been a focus. Management will continue this core focus, while pursuing opportunities to gain additional market share from stressed competitors in its defined core and growth markets. Based on FDIC call report data, the Company has identified approximately $1 billion in deposits at banks in its core markets that are exhibiting relatively high levels of distress, and another $3 billion in its growth markets. When combined with potential organic growth, a relatively small capture of these distressed deposits over the next few years could allow the Bank to double its total deposits.

     The Company also sees additional opportunities in improving its efficiency. The last three years have been challenging for the Company as it first sought to build operational infrastructure for a larger institution, then faced very significant credit-related costs. These costs masked underlying improvement in operating expenses. In the future, management believes the infrastructure that has been built will allow the Company to expand its assets and revenues to a great extent without corresponding increases in expenses. When combined with lower anticipated credit costs, this could lead to relatively rapid improvement in efficiency for the Company. During 2010, it will continue to focus on rationalizing its cost structure and has already made significant expense reduction moves, including reducing staff and executing additional outsourcing contracts.

     Management believes that non-interest revenue growth may be challenging in the near-term because of new regulatory restrictions, particularly on overdraft income. However, it continues to take steps to expand and diversify its revenue sources. These include expanding its trust and investment service opportunities to both new and existing customers, increasing debit and credit card revenues, pursuing other partners to work with on its secured savings credit card program, and reorganizing and enhancing its mortgage banking operation.

     In addition to the above, management believes that disruption and consolidation in the market may lead to other opportunities as well. Subject to regulatory and capital constraints, management believes that attractive acquisition opportunities within its footprint may begin to appear and that Intermountain may be in a unique position to capitalize on them. Intermountain is the largest publicly traded bank holding company headquartered in Idaho, and has existing branches in Washington and Oregon, which may help facilitate future transactions. Even if these opportunities are not available, large disruptions create potential opportunities to attract strong new employees and customers.

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 or because of other borrower or loan indications, 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 may be restored to accrual status if it is brought current and 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 March 31, 2010. 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’ fair value will be analyzed based on market conditions and expected cash flows on the investment security. The Company calculates a credit loss charge against earnings by subtracting the estimated present value of estimated future cash flows on the security from its amortized cost. At March 31, 2010, residential mortgage-backed securities included a security comprised of a pool of mortgages with a remaining unpaid balance of $3.6 million. Due to the lack of an orderly market for the security, its fair value was determined to be $2.1 million at March 31, 2010 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, a total of $545,000 has been charged to earnings as a credit loss, including $526,000 in 2009 and $19,000 in the first quarter of 2010. The remaining $1.2 million was recognized in other comprehensive income. 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, GAAP requires 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 interim evaluations of the carrying value of goodwill in each quarter of 2009, including the quarter ended December 31, 2009. As a result of this analysis, no impairment existed as of December 31, 2009. Major assumptions used in determining impairment were projected 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 March 31, 2010, the carrying value of the Company’s goodwill and core deposit intangible was $11.7 million and $407,000, respectively. At March 31, 2010, the Company concluded there were no triggering events that would require interim evaluation at March 31, 2010. As this evaluation is based on changing market conditions and estimates of current and future values and cash flows, no assurance can be given that an impairment of goodwill will not be required in future periods. See Part II — Other Information, Section 1A. Risk Factors.

     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, OREO is recorded at fair value of the real estate, less the estimated

costs to sell the real estate. Subsequently, OREO is carried at the lower of cost or fair value, and is periodically re-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 OREO for impairment in value on a periodic basis and 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. ASC 820 “Fair Value Measurements” (formerly 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 11 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.

     Income Taxes. Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized. The Company uses an estimate of future earnings, an evaluation of its loss carryback ability and tax planning strategies to determine whether or not the benefit of its net deferred tax asset will be realized. The analysis used to determine whether a valuation allowance is required and if so, the amount of the allowance, is based on estimates of future taxable income and the effectiveness of future tax planning strategies. These estimates require significant management judgment about future economic conditions and Company performance. Further deterioration in economic conditions or Company performance could require the establishment of a valuation allowance and a resulting charge against the earnings of the Company in future periods. See Part II — Other Information, Section 1A. Risk Factors.

Results of Operations

     Overview. Intermountain recorded a net loss applicable to common stockholders of $4.7 million, or $0.56 per diluted share for the three months ended March 31, 2010, compared with a net loss applicable to common stockholders of $9.0 million or $1.07 per diluted share for the fourth quarter of 2009 and a net loss applicable to common stockholders of $532,000 or $0.06 per diluted share, for the three months ended March 31, 2009. The smaller loss over the sequential quarter reflects improved net interest income, lower operating expenses, and a smaller loan loss provision. In comparison to first quarter 2009, the higher net loss in 2010 reflects lower net interest and non-interest income, and higher operating and loan loss provision expenses.

     The annualized return on average assets (“ROAA”) was -1.62%, -3.17% , and -0.04% for the three months ended March 31, 2010, December 31, 2009 and March 31, 2009, respectively. The annualized return on average common equity (“ROAE”) was -31.37%, -52.53%, and -2.55% for the three months ended March 31, 2010, December 31, 2009 and March 31, 2009, respectively.

     While substantially better than fourth quarter 2009 results, the Company’s first quarter results continue to reflect challenging economic and credit conditions, pressuring both revenue and expense streams. In response to this environment, management continues to focus on strong balance sheet management, particularly in improving asset quality, and maintaining conservative capital and liquidity levels. Some of its actions, including the maintenance of excess funds in relatively low-yielding cash equivalent and investment securities, the reduction in its loan portfolio, and the maintenance of elevated loss reserves have negatively impacted earnings to common stockholders in the short-term. However, these actions provide a foundation from which we expect to recover and grow when economic conditions improve. In addition, the Company expects that its strong focus on balancing local deposit growth with reducing funding costs will enhance future opportunities when rates increase and the lending environment improves.

     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 on deposits, repurchase agreements and other borrowings. During the three months ended March 31, 2010, December 31, 2009 and March 31, 2009, net interest income was $8.4 million, $7.9 million, and $9.9 million, respectively. The increase in net interest income from the prior quarter primarily reflects a reduction in interest reversals and foregone interest on loans that were placed on non-accrual status or written down. This was partially offset by lower yields and higher amortization of premiums on securities, as prepayment speeds on the Company’s existing mortgage-backed securities portfolio increased temporarily, reflecting decisions by FNMA and FHLMC to pay off all defaulted mortgages over a several-month period beginning in the first quarter. The comparison against results from first quarter last year reflects the impacts of an overall reduction in earning assets, a more conservative, lower-yielding asset mix, and the lag effect of lower market rates on the Company’s earning assets.

     Average interest-earning assets decreased by 3.9% to $957.3 million for the three months ended March 31, 2010, compared to $996.0 million for the three months ended March 31, 2009. The decrease was driven by a reduction of $97.1 million or 12.9% in average loans, offset by an increase in average investments and cash of $58.4 million or 24.1% over the three month period in 2009. 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 deposit growth and the Company’s decision to place the additional funding in short-term investments and cash equivalents to enhance liquidity.

     Average interest-bearing liabilities increased by 0.7% or $6.7 million for the three month period ended March 31, 2010 compared to March 31, 2009. This included a $28.0 million or 3.5% growth in average deposits, offset by a $21.3 million or 12.0% decrease in FHLB advances and other borrowings. Increases in average deposits from first quarter last year reflected deposit growth from the Bank’s local markets as branch staff successfully acquired additional customer balances.

     Net interest margin was 3.57% for the three months ended March 31, 2010, a 0.37% increase from the three months ended December 31, 2009 and a 0.46% decrease from the same period last year, The improvement from year end reflected lower funding costs and lower levels of foregone interest on nonaccrual loans in the first quarter, while comparative results from a year ago continued to be negatively impacted by lower market interest rates, and the shift to a more conservative asset mix.

     The Company has continued to focus on lowering its cost of funds, even as deposit balances increased from year end and from the first quarter of the prior year. The cost of funds on interest-bearing liabilities dropped from 1.86% in first quarter 2009 to 1.33% for the most recent quarter. Intermountain has sought to manage liability costs carefully, and its cost of funds continues to be at the low end of its peer group. As a result of these efforts and continuing stronger asset yields, the Company’s net interest margin remains well above average for its peer group.

     Given current economic conditions, the Company believes that non-accrual loans and conservative asset management will continue to negatively impact the net interest margin at least through the balance of 2010. However, declining funding costs and stabilizing market interest rates should offset some of these impacts. 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 totaled $6.8 million for the three months ended March 31, 2010, compared to a provision of $11.1 million for the three months ended December 31, 2009, and $2.8 million for the three months ended March 31, 2009. The following table summarizes provision and loan loss allowance activity for the periods indicated.

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

     Net chargeoffs totaled $5.1 million in the first quarter, compared to $11.1 million in the fourth quarter and $1.8 million in first quarter, 2009. Chargeoffs continued to be centered in the bank’s commercial, commercial real estate and development portfolio, although the balances remaining and overall risk exposure in this segment have now decreased significantly. The overall risk exposure has decreased due to the decrease in loan balances in these categories and slight improvement in the performance of these loan categories. The loan loss allowance to total loans ratio was 2.85% at March 31, 2010, compared to 2.47% at December 31, 2009 and 2.35% at March 31, 2009, respectively. At the end of the quarter, the allowance for loan losses totaled 80.1% of nonperforming loans compared to 87.2% at year end 2009 and 59.5% of nonperforming loans at March 31, 2009.

     Given the current distressed and volatile credit environment, management continues to evaluate and adjust the loan loss allowance carefully and frequently to reflect the most current information available concerning the Company’s markets and loan portfolio. In its evaluation, management considers current economic and borrower conditions in both the pool of loans subject to specific impairment, and the pool subject to a more generalized allowance based on historical and other factors. When a loan is characterized as impaired, the Company performs a specific evaluation of the loan, focusing on potential future cash flows likely to be generated by the loan, current collateral values underlying the loan, and other factors such as government guarantees or guarantor support that may impact repayment. Based on this evaluation, it sets aside a specific reserve for this loan and/or charges down the loan to its net realizable value (selling price less estimated closing costs) if it is unlikely that the Company will receive any cash flow beyond the amount obtained from liquidation of the collateral. If the loan continues to be impaired, management periodically re-evaluates the loan for additional potential impairment, and charges it down or adds to reserves if appropriate. Since late 2008, banking regulators have increased pressure on banks, including the Bank, to charge off loans more rapidly than had previously been encouraged. On the pool of loans not subject to specific impairment, management evaluates both regional and loan-specific historical loss trends to develop its base reserve level on a loan-by-loan basis. It then modifies those reserves by considering the risk grade of the loan, current economic conditions, the recent trend of defaults, trends in collateral values, underwriting and other loan management considerations, and unique market-specific factors such as water shortages or other natural phenomena. Given the continuing high level of problem assets, uncertain economic conditions, and regulatory pressure, it is reasonably likely that the Company’s reserve levels will remain higher than those it maintained prior to 2008 for a sustained period of time.

     Information with respect to non-performing loans, classified loans, troubled debt restructures, non-performing assets, and loan delinquencies is as follows:

Non-Accrual Trending

		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Non-accrual loans		$	22,791			$	18,468
Non-accrual loans as a percentage of net loans receivable			3.66	%			2.82	%
Total allowance related to non-accrual loans		$	3,340			$	965
Interest income recorded on non-accrual loans		$	1,173			$	1,126

Credit Quality Trending

		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Loans past due in excess of 90 days and still accruing		$	50			$	586
Non-accrual loans			22,791				18,468
Total non-performing loans			22,841				19,054
OREO			11,538				11,538
Total non-performing assets (“NPAs”)		$	34,379			$	30,592
Classified loans(1)		$	71,076			$	77,176
Troubled debt restructured loans(2)		$	3,201			$	4,604
Non-accrual loans as a percentage of net loans receivable			3.66	%			2.82	%
Total non-performing loans as a % of net loans receivable			3.66	%			2.91	%
Total NPAs as a percentage of loans receivable(3)			5.51	%			4.67	%
Allowance for loan losses (“ALLL”) as a percentage of non-performing loans			80.1	%			87.2	%
Total NPAs as a % of total assets(3)			3.20	%			2.83	%
Total NPAs as a % of tangible capital + ALLL (“Texas Ratio”)(3)			37.84	%			32.85	%
Loan delinquency ratio (30 days and over)			0.33	%			1.06	%

     The $22.8 million balance in non-accrual loans as of March 31, 2010 consists primarily of a mix of land development, commercial real estate, commercial and residential loans. Prior periods reflected higher levels of construction and land development loans, but many of these have now been resolved or foreclosed. As the economic downturn continues, the Company has experienced some increase in non-performing commercial, residential and commercial real estate loans, but the growth has been moderate, particularly in comparison to the construction and development portfolio. Non-performing loans are carried on the Company’s financial statements at the net realizable value that management anticipates receiving on the loans. The Company has evaluated the borrowers and the collateral underlying these loans and determined the probability of recovery of the loans’ principal balance. Given the volatility in the current market, the Company continues to monitor these assets closely and reevaluate the expected cash flows and collateral values on a frequent and periodic basis. This re-evaluation may create the need for additional write-downs or additional loss reserves on these assets. The balance of non-accrual loans was $18.5 million as of December 31, 2009.

     After peaking in mid-2009 at $96.2 million, the Company’s internally classified loans have dropped significantly to $77.2 million at December 31, 2009 and $71.1 million at March 31, 2010 as a result of aggressive workout and disposition efforts by the Company’s special assets team. Classified loans are loans for which management believes it may experience some problems in obtaining repayment under the contractual terms of the loan, and are inclusive of the Company’s non-accrual loans. However, categorizing a loan as classified does not necessarily mean that the Company will experience any or significant loss of expected principal or interest.

     At March 31, 2010, and December 31, 2009 classified loans (loans with risk grades 6, 7 or 8) by loan type are as follows (in thousands):

		March 31, 2010								Dec 31, 2009
		Amount				%				Amount				%
						(Dollars in thousands)
Commercial		$	14,350				20.2	%		$	11,685				15.1	%
Commercial real estate			14,031				19.7	%			12,409				16.1	%
Commercial construction			13,048				18.4	%			15,554				20.2	%
Land and land development loans			12,215				17.2	%			20,136				26.1	%
Agriculture			9,376				13.2	%			9,637				12.5	%
Multifamily			561				0.8	%			695				0.9	%
Residential real estate			5,924				8.3	%			5,433				7.0	%
Residential construction			1,158				1.6	%			1,165				1.5	%
Consumer			413				0.6	%			462				0.6	%
Municipal			—				—	%			—				—	%
Total classified loans		$	71,076				100.0	%		$	77,176				100.0	%