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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the year ended December 31, 2010
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
COMMISSION FILE NUMBER 000-50667
 
INTERMOUNTAIN COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
 
         
Idaho     82-0499463  
(State or other jurisdiction of
incorporation or organization)
    (IRS Employer
Identification No.)
 
414 Church Street, Sandpoint, ID 83864
(Address of principal executive offices) (Zip code)
 
Registrant’s telephone number, including area code:
(208) 263-0505
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
None   None
(Title of each class)
  (Name of each exchange on which registered)
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value)
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 Smaller reporting company þ
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No þ
 
As of June 30, 2010, the aggregate market value of the common equity held by non-affiliates of the registrant, computed by reference to the average of the bid and asked prices on such date as reported on the OTC Bulletin Board, was $12,252,000.
 
The number of shares outstanding of the registrant’s Common Stock, no par value per share, as of February 28, 2011 was 8,406,578.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Specific portions of the registrant’s Proxy Statement for the 2011 Annual Meeting of Shareholders are incorporated by reference into Part III hereof.
 


 

 
TABLE OF CONTENTS
 
             
        Page
 
    CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS     3  
  BUSINESS     4  
  RISK FACTORS     31  
  UNRESOLVED STAFF COMMENTS     39  
  PROPERTIES     40  
  LEGAL PROCEEDINGS     42  
  [REMOVED AND RESERVED]     42  
 
PART II
  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     42  
  SELECTED FINANCIAL DATA     45  
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     46  
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     82  
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     85  
  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     85  
  CONTROLS AND PROCEDURES     85  
    MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING     85  
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     86  
  OTHER INFORMATION     87  
  DIRECTORS EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     87  
  EXECUTIVE COMPENSATION     87  
  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    87  
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     87  
  PRINCIPAL ACCOUNTING FEES AND SERVICES     87  
  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     88  
    89  
    90  
    F-1  
    F-2  
    F-3  
    F-4  
    F-7  
    F-8  
    F-10  
    F-18  
 EX-21
 EX-23
 EX-31.1
 EX-31.2
 EX-32
 EX-99.1
 EX-99.2


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PART I
 
Forward-Looking Statements
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans ,objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “will likely”, “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections titled “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as applicable, in this report, the following factors, among others, could cause actual results to differ materially from the anticipated results:
 
  •  further deterioration in economic conditions that could result in increased loan and lease losses;
 
  •  risks associated with concentrations in real estate-related loans;
 
  •  declines in real estate values supporting loan collateral;
 
  •  our ability to comply with the requirements of regulatory orders issued to us and/or our banking subsidiary;
 
  •  our ability to raise capital or incur debt on reasonable terms;
 
  •  regulatory limits on our subsidiary bank’s ability to pay dividends to the Company;
 
  •  applicable laws and regulations and legislative or regulatory changes, including the ultimate financial and operational burden of the recently enacted financial regulatory reform legislation and related regulations;
 
  •  inflation and interest rate levels, and market and monetary fluctuations;
 
  •  the risks associated with lending and potential adverse changes in credit quality;
 
  •  changes in market interest rates and spreads, which could adversely affect our net interest income and profitability;
 
  •  increased delinquency rates;
 
  •  trade, monetary and fiscal policies and laws, including interest rate and income tax policies of the federal government;
 
  •  the timely development and acceptance of new products and services of Intermountain;
 
  •  the willingness of customers to substitute competitors’ products and services for Intermountain’s products and services;
 
  •  technological and management changes;
 
  •  our ability to recruit and retain key management and staff;
 
  •  changes in estimates and assumptions used in financial accounting;
 
  •  the Company’s critical accounting policies and the implementation of such policies;
 
  •  growth and acquisition strategies;
 
  •  lower-than-expected revenue or cost savings or other issues in connection with mergers and acquisitions;
 
  •  changes in consumer spending, saving and borrowing habits;


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  •  the strength of the United States economy in general and the strength of the local economies in which Intermountain conducts its operations;
 
  •  our ability to attract new deposits and loans and leases;
 
  •  competitive market pricing factors;
 
  •  stability of funding sources and continued availability of borrowings;
 
  •  Intermountain’s success in gaining regulatory approvals, when required;
 
  •  results of regulatory examinations that could restrict growth;
 
  •  future legislative or administrative changes to the Troubled Asset Relief Program (“TARP”) Capital Purchase Program; and
 
  •  the impact of the Emergency Economic Stabilization Act of 2008 (“EESA”), the American Recovery and Reinvestment Act of 2009 (“ARRA”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and related rules and regulations on our business operations and competitiveness, including the impact of executive compensation restrictions, which may affect our ability to retain and recruit executives in competition with other firms who do not operate under those restrictions; and
 
  •  Intermountain’s success at managing the risks involved in the foregoing.
 
Please take into account that forward-looking statements speak only as of the date of this report. We do not undertake any obligation to publicly correct or update any forward-looking statement whether as a result of new information, future events or otherwise.
 
Item 1.   BUSINESS
 
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 opened branches in Spokane Valley and downtown Spokane, Washington, respectively, and operates these branches under the name of Intermountain Community Bank of Washington. It also opened branches in Kellogg under the Panhandle State Bank name and Fruitland, Idaho under the Intermountain Community Bank name.


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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.
 
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.
 
The Company’s equity investments include Panhandle State Bank, as previously noted, and Intermountain Statutory Trust I and Intermountain Statutory Trust II, financing subsidiaries formed in January 2003 and March 2004, respectively. Each Trust has issued $8.0 million in preferred securities, the purchasers of which are entitled to receive cumulative cash dividends from the Trusts. The Company has issued junior subordinated debentures to the Trusts, and payments from these debentures are used to make the cash dividends to the holders of the Trusts’ preferred securities.
 
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 continues to work through the challenges of the current economic downturn, while positioning itself to prosper in the economy and markets of the future. Its strengths provide the foundation for future growth and profitability, and include the following:
 
  •  A strong, loyal and low-cost deposit franchise with proven growth capabilities: 64% of Intermountain’s deposits at December 31, 2010 are in low-cost transaction accounts, resulting in a cost of funds that has consistently been below its peer group. Intermountain has maintained this low-cost deposit focus while growing since 1999 from the 8th ranked bank by deposit market share to the 2nd in the core markets it serves (Source: FDIC Deposit Market Share and Federal Financial Institutions Examination Council (“FFIEC”) Uniform Bank Performance Report (“UBPR”) data).
 
  •  A high net interest margin (3.97% and 3.77% for the quarter and year ended December 31, 2010, respectively) relative to peers with opportunity for additional improvement if rates rise or the economy improves: Intermountain has consistently maintained a higher net interest margin than its peer group (Source: UBPR data), and believes it has positioned its balance sheet to protect against current challenges, and provide for opportunities to capitalize on the likelihood of future rising market interest rates.
 
  •  A sophisticated, and increasingly effective, risk management system: Tempered by its experiences during the current downturn, Intermountain has developed a refined credit loss forecasting system, an integrated approach to credit, liquidity, capital and other risk factors, and a well-seasoned credit administration function.
 
  •  An operational and compliance infrastructure built for future profitable growth: During the past several years, Intermountain has focused on upgrading talent, technology and operational processes to facilitate further balance sheet growth while simultaneously reducing the expenses associated with these upgrades.
 
  •  A young, but highly experienced, management team:  The executive and senior management team averages about 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.


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Management believes that the economic and financial crises of the past several years have fundamentally changed the future landscape for community banks. In a slower growth, more conservative environment, further consolidation of the industry is inevitable. Those banks and management teams with strong market positions, solid infrastructure, and staying power will be able to capitalize on the opportunities created by this changing environment. Management 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 it is increasingly well-positioned to succeed in the changing landscape.
 
Lending conditions are currently challenging, with low borrowing demand, tight underwriting standards and challenging appraisal conditions. However, 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. While loan rate competition is likely to increase in the short term as banks aggressively pursue high-quality customers, management also believes that credit spreads may widen in the long-term as more consolidation occurs. When combined with expected market rate hikes, 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 larger banks and smaller, more stressed competitors in its defined core and growth markets. Based on FDIC call report data, the Company has identified approximately $742.9 million in deposits at banks in its core markets that are exhibiting relatively high levels of distress, and another $781.7 million 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 Company to rapidly expand its total deposits. More immediately, management has taken strong steps to reduce its current deposit and borrowing rates, which will produce lower interest expense in future periods. It sees additional opportunities to decrease its cost of funds and interest expense by continuing to reprice down maturing CDs, lower transaction account interest rates, and pay off or replace higher rate wholesale funding vehicles.
 
Management has undertaken significant efforts to improve its efficiency, and is confident that it can continue reducing its non-interest expenses. The last three years have been challenging as the Company 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. These improvements are now becoming increasingly apparent in the financial statements as the full impact of moves made in late 2009 and throughout 2010 register and credit operations costs begin to subside. In the future, management believes the infrastructure that has been built will allow the Company to expand its assets and revenues while tightly controlling its expense levels. When combined with lower anticipated credit costs, this should lead to rapid improvement in efficiency rates. During 2011, management will continue to focus on rationalizing its cost structure and restructuring organizational processes to deliver better service at lower costs.
 
Management believes that non-interest revenue growth may be challenging in the near-term because of new regulatory restrictions, particularly on overdraft and debit card 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 accounts and usage, pursuing other partners to work with on its secured savings credit card program, restructuring and enhancing its deposit and cash management service fees, and reducing waiver rates on current service fees.


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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, we believe that attractive acquisition opportunities within our footprint will soon appear and that Intermountain could be in a unique position to capitalize on them. Intermountain is the largest publicly traded bank holding company headquartered in Idaho, with branches located throughout the state 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.
 
Primary Market Area
 
The Company conducts its primary banking business through its bank subsidiary, Panhandle State Bank. The Bank maintains its main office in Sandpoint, Idaho and has 18 other branches. In addition to the main office, seven branch offices operate under the name of Panhandle State Bank. Eight branches are operated under the name Intermountain Community Bank, a division of Panhandle State Bank, and three branches operate under the name Magic Valley Bank, a division of Panhandle State Bank. Sixteen of the Company’s branches are located throughout Idaho in the cities of Bonners Ferry, Caldwell, Coeur d’Alene, Fruitland, Gooding, Kellogg, Nampa, Payette, Ponderay, Post Falls, Priest River, Rathdrum, Sandpoint, Twin Falls (2) and Weiser. One branch is located in Spokane Valley, Washington and one branch is located in downtown Spokane, Washington. In addition, the Company has one branch located in Ontario, Oregon. The Company focuses its banking and other services on individuals, professionals, and small to medium-sized businesses throughout its market area.
 
Based on asset size and deposits, Intermountain is the largest publicly traded bank holding company headquartered in Idaho. After two decades of almost uninterrupted economic and population growth, the Idaho economy continued to struggle in 2010. Population growth in the state was the 4th fastest of any state over the period from 2000 to 2010, increasing by 21 percent during this time period. Population growth slowed in 2009 and 2010, with total 2010 growth estimated at 1.4%. Based on U.S. Census Bureau estimates, the State is projected to sustain future population growth rates in excess of the national average for the next 10 years. Idaho experienced rapid employment growth during the period of 2000 to 2008 (14% versus U.S. 8%), sustained net job losses in 2009, and then rebounded slightly in 2010 (Source: Idaho Department of Labor). The unemployment rate at the end of 2010 was 9.5%, slightly above the national average of 9.4%. However, job losses appear to be moderating and longer-term prospects for the economy are still strong. The Idaho Department of Labor forecasts unemployment at about 8.5% by the end of 2011, with employment expected to rise between 14% and 16% between now and 2018. These prospects are based on a diverse economic base, including agriculture, health care, technology, light manufacturing, retirement, tourism, education and professional services segments, a low-cost of living and doing business, favorable state government policies, and a strong quality of life. The Oregon, Washington and California governments have all recently enacted unfriendly business policies, which should increase the attractiveness of doing business in Idaho. While Idaho faces difficult state budget issues as well, the conservative legislature has balanced the budget without increasing taxes or creating new burdensome business regulations.
 
Real estate valuations throughout the state have shown considerable variability, based on specific geographical location and type of property. In general, Idaho has experienced higher than average foreclosure rates over the past year, which is reflected in the price decline of 7.0% (Source: FDIC Third Quarter, 2010 State Profile). The Boise area has been hit harder than the rest of the State, with price declines on finished properties averaging 20% to 40% as a result of increasing unemployment earlier in the recession and substantial overbuilding. While the slowing economy has hurt other areas as well, the amount of available inventory was generally smaller, resulting in smaller price declines, mostly in the 10% to 30% range. Generally, residential land prices have dropped more throughout the state, as available residential supply far exceeded the demand for it. As such, price declines in land have ranged anywhere from 15% on the low end to 85% on the high end, depending on location (Source: Auble Idaho and Eastern Washington Real Estate Report). It appears that prices are approaching stabilization, with various areas, including Boise, southwest rural Idaho, and parts of north Idaho appearing to have bottomed out.
 
The Bank’s primary service area covers four distinct geographical regions. The north Idaho and eastern Washington region encompasses the four northernmost counties in Idaho, including Boundary County, Bonner County, Shoshone County and Kootenai County and Spokane County in eastern Washington. Bonner and Boundary Counties are heavily forested and contain numerous lakes. As such, the economies of these counties are primarily


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based on tourism, real estate development and natural resources, including logging, mining and agriculture. Bonner County has also experienced expansion in the areas of light industrial, commercial, retirement and retail development over the past ten years, and management believes both counties are likely to continue benefiting from Canadian spending and investment as the dollar has weakened against the Canadian currency. Shoshone County continues to experience expansion in the areas of residential and tourism development relating to the outdoor recreation industry in the area and has seen a strong resurgence in mining activity as mineral prices have rebounded. Kootenai County is more diverse than the other north Idaho counties, with light industrial, high-tech, commercial, retail, medical, tourism and real estate development all contributing to the economic base. It, along with Spokane County in Washington, should also benefit from additional Canadian investment.
 
In general, the northern Idaho and eastern Washington economy lagged the rest of the country and state in terms of feeling the impacts of the recession. In 2010, however, the recession caught up with the area. Unemployment rates in north Idaho have risen to an average exceeding 10% in December 2010, and real estate values have declined. However, the changes are not as dramatic throughout this region as in many other areas. Diversification, strengthening mining prices, less aggressive development in earlier periods, favorable business cost structures, continuing tourism activity and Canadian investment have helped cushion the downturns experienced in the real estate development, retail and service industries. Although the unemployment rates are high in north Idaho, they have historically been high, so the relative impact is not as significant. Spokane has weathered the jobs downturn better, with an unemployment rate of 9.1% in December 2010 (Washington State Employment Security Department Labor Market & Economic Analysis). Strength in health care, agri-business, private education, technology and transportation have buffered eastern Washington from harder shocks. Data on real estate activity is limited for much of this region, but it generally appears that residential home price declines have ranged from 5% to 25%, while lot prices are down 20% to 50% based on location. Commercial real estate activity and pricing has softened, although there is not a significant overhang of commercial properties in this region. Intermountain holds 56% of its loans and 48% of its deposits in this region.
 
The second region served by the Bank encompasses two counties in southwestern Idaho (Payette, and Washington) and one county in southeastern Oregon (Malheur). The economies of these counties are primarily based on agriculture and related or supporting businesses. A variety of crops are grown in the area including beans, onions, corn, apples, peaches, cherries and sugar beets. Livestock, including cattle, sheep and pigs, are also raised. Agriculture has been strong over the past several years, cushioning the impact of the downturn on these counties. Unemployment is historically high in this area, and stood at 10.5% in December 2010, but real estate values have held up much better, given the predominance of agricultural land in the region. Commercial real estate property is relatively limited and has not grown significantly. The Company holds 19% of its loans and 21% of its deposits in this region.
 
The third region, known as the greater Boise area, is comprised of two counties, Ada and Canyon. The cities of Boise, Nampa and Caldwell were hit hard because of excessive residential and commercial real estate development, volatility in the area’s high-tech industries, and reductions in other corporate and state and local government activity. Unemployment in the area was 9.9% in December 2010, but some forecasters expect improvement in 2011 as the area’s technology industry continues to recover. Real estate price declines have been the steepest of any in the Company’s market areas, ranging from 25% to 35% drops in finished residential home prices to 50% to 75% in bare land and subdivision developments. Although recent indicators, including real estate inventory levels and valuations may indicate a bottoming, the recovery is likely to be slow in these two counties. 11% of the Company’s loans and 10% of its deposits are in this region.
 
The fourth region served by the Bank encompasses two counties in south central Idaho (Twin Falls and Gooding), also known as the Magic Valley region. The economies of these counties are primarily based on agriculture and related or supporting businesses. A variety of crops are grown in the area including beans, peas, corn, hay, sugar beets and potatoes. Fish farms, dairies and beef cattle are also contributors to the local economy. Twin Falls County has experienced significant commercial growth over the past 10 years, and as a result, residential and commercial construction has been a much larger driver of the local economy. The area is also experiencing growth in light manufacturing and retail development.


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Twin Falls’ strong agricultural base, along with its status as the commercial, medical, retail, retirement and services hub for the area has cushioned it somewhat from the impacts of the recession, resulting in a December 2010 unemployment rate of 8.4%. Several large commercial projects have also contributed to the economy over the past several years. With the completion of these projects, the next several years are likely to be slower for the area, but still better than many other areas that lack similar diversity. In addition, the region maintains a conservative character with little evidence of significant overbuilding or excess inventory. The Company has little exposure to the dairy industry, which has been the one significantly weaker sector in agriculture. Residential valuation declines have been relatively moderate, in the 5% to 20% range for homes and 20% to 50% range for development land. The Company has 8% of its loans and 9% of its deposits in the Magic Valley region.
 
As demonstrated by the loan and deposit totals in each market, Intermountain pursues a long-term strategy of balancing loan and deposit balances in each of its regions. As it enters new markets, it may lead with either a heavier emphasis on loans or deposits depending on specific market opportunities. Over the long-term, however, management believes that both Intermountain and the local markets are well-served by pursuing a balanced strategy and the discipline this requires.
 
Intermountain has also segmented its market area into core and growth markets to facilitate future planning activities. The Company defines its core market as including the four counties of northern Idaho listed above, Canyon, Payette and Washington Counties in southwestern Idaho, Malheur County in eastern Oregon, and Gooding and Magic Valley Counties in Southwest Idaho. Deposits in this market totaled $6.1 billion, of which Intermountain held $771 million or 13% (Source: FDIC Survey of Banking Institutions). The Company’s growth markets consist of Spokane County in Washington, and Ada County in Idaho (where Boise is located), as well as counties contiguous to its existing markets in north Idaho and eastern Washington. Deposits in Ada and Spokane County totaled $12.3 billion at June 30, 2010 and Intermountain held $39 million or 0.3% of deposits in this market at the time. The Company believes that it has significant future opportunities in these growth markets because of an established brand presence, strong market contacts in other banking institutions, and the presence of distressed competitors.
 
Competition
 
As noted previously, based on total asset size and deposit balances as of December 31, 2010, the Company continues to be the largest independent community bank headquartered in Idaho. The Company competes with a number of international banking groups, out-of-state banking companies, state-wide banking organizations, and several local community banks, as well as savings banks, savings and loans, credit unions and other non-bank competitors throughout its market area. Banks and similar financial institutions compete based on a number of factors, including price, customer service, convenience, technology, local market knowledge, operational efficiency, advertising and promotion, and reputation. In competing against other institutions, the Company focuses on delivering highly personalized customer service with an emphasis on local involvement and empowerment. It recruits, retains and motivates seasoned, knowledgeable bankers who have worked in the Company’s market areas for extended periods of time and supports them with current technology. Product offerings, pricing and location convenience are generally competitive with other banks in its market areas. The Company seeks to differentiate itself based on the high skill levels and local knowledge of its staff, combined with sophisticated relationship management and profit systems that pinpoint marketing and service opportunities.
 
The Company has employed these competitive tools to grow market share over the past ten years, since it began expanding beyond its Sandpoint, Idaho base. During this time period, the Company has grown from eighth overall in market share in its defined core markets to second, with a consolidated market share of 12.6%. Based on the June 2010 FDIC Survey of Banking Institutions, the Company is the market share leader in deposits in five of the eleven counties in which it operates. As noted previously, the Spokane and Boise market areas represent potential future growth markets for the Company, as total market deposits in these two counties exceed by a two-to-one margin the total market deposits in the Company’s core markets. The Company has a relatively small, but growing presence in Spokane County with strong local market talent. The Company does not have any branches in Ada County, which includes Boise, but has a number of key managers who came from or worked in the Boise area. The Company also sees opportunities in the Idaho and eastern Washington counties contiguous to its current service


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area, as they contain a number of smaller struggling competitors, and management is familiar with many of the bankers and customers in these markets.
 
As discussed above, the Company’s principal market area is divided into four separate regions based upon population and the presence of banking offices. In northern Idaho/eastern Washington, the primary competitors include US Bank, Wells Fargo, Washington Trust Bank, Sterling Savings Bank, Banner Bank and Bank of America, all large international or regional banks, and Idaho Independent Bank and Mountain West Bank, both community banks.
 
Primary competitors in the Company’s other regions in southwestern and south central Idaho and eastern Oregon include international or regional banks, US Bank, Wells Fargo, Key Bank, Bank of America, Banner Bank and Zions Bank, and community banks, Bank of the Cascades, Idaho Independent Bank, DL Evans Bank, First Federal Savings Bank and Farmers National Bank.
 
The severe economic downturn and additional regulatory changes are altering Intermountain’s competitive landscape. Many non-FDIC insured competitors, including residential mortgage brokers, commercial finance operations, and commercial real estate mortgage brokers have exited the market, a trend which is likely to continue over the next several years. Additional bank failures and significant consolidation of the banking industry are forecasted as well. These events will likely present both opportunities and challenges to Intermountain. Previous sections have highlighted various opportunities that may arise, such as improved credit structuring and pricing, additional growth through attracting strong employees and customers from disaffected institutions, and potential acquisition opportunities. Potential challenges include stronger remaining competitors, additional regulatory constraints, and additional credit losses created by market disruption and significant levels of disposition of loan collateral at depressed prices.
 
Services Provided
 
Lending Activities
 
The Bank offers and encourages applications for a variety of secured and unsecured loans to help meet the needs of its communities, dependent upon the Bank’s financial condition and size, regulatory restrictions, local economic conditions and consistency with safe and sound operating practices. While specific credit programs may vary from time to time, based on Bank policies and market conditions, the Bank makes every effort to encourage applications for the following credit services throughout its communities.
 
Commercial Loans.  The Bank offers a wide range of loans and open-end credit arrangements to businesses of small and moderate size, from small sole proprietorships to larger corporate entities, with purposes ranging from working capital and inventory acquisition to equipment purchases and business expansion. The Bank also participates in the Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) financing programs. Operating loans or lines of credit typically carry annual maturities. Straight maturity notes are also available, in which the maturities match the anticipated receipt of specifically identified repayment sources. Term loans for purposes such as equipment purchases, expansion, term working capital, and other purposes generally carry terms that match the borrower’s cash flow capacity and/or collateral life, typically with maturities of three years or longer. Risk is controlled by applying sound, consistent underwriting guidelines, concentrating on relationship loans as opposed to transaction type loans, and requiring sound alternative repayment sources, such as collateral or strong guarantor support. While underwriting guidelines vary, depending on the type of loan, in general businesses are required to maintain a minimum 1.25 debt service coverage ratio (“DSC”). Loan-to-value (“LTV”) guidelines generally range from a low of 40% on illiquid equipment and inventory to a high of 75% of liquidation value on easily convertible accounts receivable, inventory or equipment. Government guaranty programs are also utilized when appropriate, and are currently being emphasized, given favorable changes made by the federal government to the programs and the difficult credit environment.
 
The Bank also offers loans for agricultural and ranching purposes. These include expansion loans, short-term working capital loans, equipment loans, cattle or livestock loans, and real estate loans on a limited basis. Terms are generally up to one year for operating loans or lines of credit and up to seven years for term loans. As with other business loans, sound underwriting is applied by a staff of lending and credit personnel seasoned in this line of


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lending. Underwriting guidelines for agricultural credit lines depend on the type of loan and collateral, but generally require a minimum DSC of 1.25, and hard collateral coverage (collateral other than the crops being grown) of greater than 50% of peak borrowing. Term equipment loans generally require a minimum 1.25 DSC and maximum 75% liquidation LTV. Government guaranteed programs are utilized whenever appropriate and available. Agricultural real estate loans are considered for financially sound borrowers with strong financial and management histories. Many of the Company’s agricultural customers are third or fourth generation family farmers with strong real estate equity and limited real estate debt.
 
Real Estate Loans.  For consumers, the Bank offers first mortgage loans to purchase or refinance homes, home improvement loans and home equity loans and credit lines. Conforming first mortgage loans are offered with up to 30-year maturities, while typical maturities for second mortgages (home improvement and home equity loans and lines) are as stated below under “Consumer Loans.” First mortgage loans are underwritten with the intention to sell the loans on the secondary market, so guidelines generally reflect secondary market standards. Lot acquisition and construction loans are also offered to consumer customers with typical terms up to 36 months (interest only loans are also available) and up to 12 months (with six months’ extension), respectively, and are underwritten to both secondary market standards and with a solid take-out mortgage loan approval required.
 
Loans for purchase, construction, rehabilitation or repurchase of commercial and industrial properties are also available through the Bank. Commercial real estate loans are generally confined to owner-occupied properties unless there is a strong customer relationship or sound business project justifying otherwise. Non-owner occupied commercial real estate loans are restricted to borrowers with established track records and the ability to fund potential project cash flow shortfalls from other income sources or liquid assets. Project due diligence is conducted by the Bank, to help provide for adequate contingencies, collateral and/or government guaranties. General underwriting requirements for owner-occupied loans require a minimum DSC of 1.25 and a maximum LTV of 75%. For non-owner occupied loans, a minimum global DSC of 1.25 is required, excluding rents on the subject property, and the LTV maximum is generally less than 75%, depending on the type of property.
 
With current housing market conditions, the Bank has drastically curtailed residential land acquisition, development or builder loans, and has significantly reduced its concentrations of these types of loans.
 
Consumer Loans.  The Bank offers a variety of consumer loans, including personal loans, motor vehicle loans, boat loans, recreational vehicle loans, home improvement loans, home equity loans, open-end credit lines, both secured and unsecured, and overdraft protection credit lines. The Bank’s terms and underwriting on these loans are consistent with what is offered by competing community banks and credit unions, which generally require sufficient verified and documented disposable income, solid credit histories, and equity in the collateral. Generally, underwriting guidelines include a maximum debt to income of 40%, credit scores exceeding 700, and maximum LTVs ranging from 80% on home equity loans and lines to 50% to 90% on other types of consumer collateral. Loans for the purchase of new autos typically range up to 60 months. Loans for the purchase of smaller RV’s, pleasure crafts and used vehicles range up to 60 months. Loans for the purchase of larger RV’s and larger pleasure crafts, mobile homes, and home equity loans range up to 120 months (180 months if credit factors and value warrant). Unsecured loans are usually limited to two years, except for credit lines, which may be open-ended but are reviewed by the Bank periodically. Relationship lending is emphasized, which, along with credit control practices, minimizes risk in this type of lending.
 
Municipal Financing.  Operating and term loans and leases are available to municipal entities, many of which qualify for financing on a tax-exempt basis. Operating loans are generally restricted by law to the duration of one fiscal year. Term loans and leases, which under certain circumstances can extend beyond one year, typically range up to five years. Municipal financing is restricted to loans with sound purposes and with established tax bases or other revenue to adequately support repayment.
 
Deposit Services
 
The Bank offers the full range of retail deposit services typically available in most banks and savings and loan associations, including checking accounts, savings accounts, money market accounts and various types of certificates of deposit. The transaction accounts and certificates of deposit are tailored to the Bank’s primary market area at rates competitive with those offered in the area. All deposit accounts are insured by the FDIC to the


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maximum amount permitted by law. The Bank also offers a number of business-oriented deposit accounts, including various types of FDIC-insured checking, savings, money market and time deposit accounts, and non-FDIC insured alternatives including reverse repurchase agreements and sweep accounts. Its deposit product offerings are generally competitive with both large and small direct competitors and provide strong opportunities for fee income generation through direct service charges, transaction fee income, and fees associated with related services (see “Other Services” below).
 
Investment Services
 
The Bank provides non-FDIC insured investment services through its division, Trust and Investment Services. Products offered to its customers include annuities, equity and fixed income securities, mutual funds, insurance products and brokerage services. The Bank offers these products in a manner consistent with the principles of prudent and safe banking and in compliance with applicable laws, rules, regulations and regulatory guidelines. The Bank earns fees for providing these services, either on a per-product basis or through a percentage of the balances invested. The Bank is also authorized to provide investment management services through the Trust & Wealth Management Department to clients in all fifty states.
 
Trust & Wealth Management Services
 
The Bank provides trust and wealth management services to its higher net worth customers to assist them in investment, tax and estate planning and to serve as their trustee or other fiduciary. The Bank offers these services in a manner consistent with the principles of prudent and safe banking and in compliance with applicable laws, rules, regulations and regulatory guidelines. The Bank earns fees for managing client assets and providing trust services. The Company is one of the few smaller banking institutions in the northwest to offer in-house trust services, and activity and income from these services has increased continuously since its beginning in 2006. The Bank’s Trust & Wealth Management Department operates under a Trust Charter through the FDIC and the Idaho Department of Finance. Due to the reciprocity arrangements with the states of Oregon and Washington applicable to the Bank’s general banking business, the Bank is authorized to provide fiduciary services and to serve as a fiduciary in relationships located or sited in any of those three states. The Bank is also authorized to provide investment management services through the Trust & Wealth Management Department to clients in all fifty states.
 
Other Services
 
Other consumer-oriented services include automated teller machines (“ATMs”), debit cards, safe deposit boxes, internet and phone banking services, savings bonds, and VISA/Mastercard credit cards. The Bank is a member of the Star, Plus, Exchange, Interlink and Accell ATM networks. New consumer products and services introduced over the past several years include electronic statements, mobile-phone banking access, identity theft protection, Certificate of Deposit Account Registry Service (“CDARS”) certificates of deposit, and EZ Points, a debit and credit card rewards program.
 
The Company also offers numerous business services that improve its customers’ operations. Its Business Smart Online product allows companies to manage their financial operations efficiently from any location, including originating ACH entries for payroll, outgoing tax and other payments, and incoming collections. The system also allows transfers of funds to and from various accounts and operating credit lines. Intermountain’s Business Advantage service improves cash flow and accounts receivable collection activities. Credit card acceptance, remote deposit capture, night deposit and concentration account services make it more convenient for businesses to receive and deposit funds quickly, and the Company’s Check Collect service assists them in collecting on returned checks. Intermountain’s positive pay and credit card monitoring services help reduce fraud, and its employee benefits program enhances business customers’ existing benefits programs by providing valuable banking services to their employees at a reduced cost. These services are generally superior to those offered by similar sized and smaller institutions and competitive with those offered by larger institutions. They provide additional fee income to Intermountain, and management is currently evaluating and adjusting pricing on these services to enhance future revenue.


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Loan Portfolio
 
The loan portfolio is the largest component of earning assets, and is comprised of net loans receivable and loans held for sale. In 2010, net loans receivable, which includes loans the Company generally intends to keep until repayment or maturity, decreased by 14.1% or $92.4 million. The majority of the decline was in land and land development loans, down $27.6 million, commercial construction loans, down $27.6 million, agricultural loans, down $22.9 million, and residential construction loans, down $13.4 million. Loans held for sale, primarily residential real estate loans originated for sale in the secondary market, decreased by $3.1 million.
 
During the past several years, the Company continued to respond to the effects of the economic downturn by tightening underwriting standards and aggressively resolving problem loans through workouts with borrowers, refinances from other sources, and/or collateral liquidation. The Company tightened standards so that new funding for residential land, subdivision and development, and speculative residential construction lending has generally ceased. Any future lending in this area would require relatively low loan-to-value ratios and significant outside support from the borrowers. Management also changed underwriting standards on both owner and non-owner occupied commercial real estate loans to require additional hard equity, lower LTVs, and higher DSC ratios, and as part of its underwriting process, subjects commercial real estate loan requests to stress testing using various scenarios. Commercial and consumer standards were also tightened to reflect tougher economic conditions and generally reduced borrower strength.
 
Overall demand for commercial and commercial real estate loans softened, leading to relatively static balances in these types as well. The decrease in agricultural loans reflected the very strong year that area farmers had in 2010, which reduced the overall need to borrow and sped up the timing of repayment on their annual operating lines. In a difficult economic climate, the Bank continues to pursue quality loans using conservative underwriting and control practices, and is expanding its emphasis on SBA, USDA and other financing assistance programs.
 
The Company has also responded to declining economic conditions by more aggressively monitoring and managing its existing loan portfolio, and adding expertise and resources to these efforts. Additional steps the Company has taken include developing a weekly senior management review of all credit requests over $250,000, continuing to centralize credit approval and monitoring functions, increasing the staffing and scope of its internal credit review team, hiring a highly experienced external review team to evaluate the Company’s portfolio, and conducting more rigorous annual evaluations of its home equity credit line portfolio. Bank lending staff continues to utilize relationship pricing models and other techniques to manage interest rate risk and increase customer profitability.
 
The Company’s average loan yield increased from 5.92% in 2009 to 6.01% in 2010 as the Federal Reserve maintained the target fed funds rate at about 0.23%. Other market rates, including the Wall Street Journal prime lending rate, the London Interbank Offered Rate (“LIBOR”) and Federal Home Loan Bank Advance rates also remained low, pressuring the Company’s loan yields in 2010. In addition, the reversal of interest on non-accrual and charged off loans, totaling $794,000 in 2010, compared to $1.9 million in 2009 had an impact on loan yields, reducing the overall loan yield by 0.08% in 2010, compared to 0.26% in 2009.
 
Loan Portfolio Concentrations
 
The Bank continuously monitors concentrations of loan categories in regards to industries, loan types and market areas. Concentration guidelines are established and then approved by the Board of Directors at least annually, and are reviewed by management and the Board monthly. Circumstances affecting industries and market areas involved in loan concentrations are reviewed as to their impact as they occur, and appropriate action is determined regarding the loan portfolio and/or lending strategies and practices.
 
Construction and Development Loans
 
Management has focused over the past several years on shifting the mix of the loan portfolio away from residential construction, acquisition and development loans to a more balanced mix of commercial, agriculture, commercial real estate, and residential real estate loans. It has done this through a combination of more conservative underwriting practices on construction and land development lending, limited marketing, and aggressive resolution


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and disposal of loans in these categories. As a result, combined loan balances in the commercial construction, land and land development, and residential construction categories have declined by $68.7 million from December 31, 2009 to December 31, 2010 and by $85.8 million from December 31, 2008 to December 31, 2009.
 
After the aggressive reduction efforts of the last two years, the land development and construction loan components pose much lower concentration risk for the total loan portfolio. However, the weakness of the overall construction sector still poses risk to the remaining construction and development portfolio. Residential real estate values tend to fluctuate with economic conditions, and have been falling rapidly in many of the Bank’s markets for the last three years, although the rate of decline is generally slowing. Management plans to continue curtailing new lending in this segment, and maintaining its aggressive resolution efforts to further reduce its risk.
 
Commercial Loans
 
Although the impacts of the economic downturn are increasing risk in the commercial portfolio, management does not consider this portfolio to present a particular “concentration risk” at this time. Management believes there is adequate diversification by type, industry, and geography to mitigate excessive risk. The commercial portfolio includes a mix of term loan facilities and operating loans and lines made to a variety of different business types in the markets it serves. The Company utilizes SBA, USDA and other government-assisted or guaranteed financing programs whenever advantageous to further mitigate risk in this area. With the exception of the agricultural portfolio, there is no other significant concentration of industry types in its loan portfolio, and no dominant employer or industry across all the markets it serves. Underwriting focuses on the evaluation of potential future cash flows to cover debt requirements, sufficient collateral margins to buffer against devaluations, credit history of the business and its principals, and additional support from willing and capable guarantors.
 
Agricultural Loans
 
The agricultural portfolio represents a larger percentage of the loans in the Bank’s southern Idaho region. At December 31, 2010, agricultural loans and agricultural real estate loans totaled $87.4 million or 15.2% of the total loan portfolio. The agricultural portfolio consists of loans secured by livestock, crops and real estate. To mitigate credit risk, specific underwriting is applied to retain only borrowers that have proven track records in the agricultural industry. Many of Intermountain’s agricultural borrowers are third or fourth generation farmers and ranchers with limited real estate debt, which reduces overall debt coverage requirements and provides extra flexibility and collateral for equipment and operating borrowing needs. In addition, the Bank has hired senior lenders with significant experience in agricultural lending to administer these loans. Further mitigation is provided through frequent collateral inspections, adherence to farm operating budgets, and annual or more frequent review of financial performance. The Company has minimal exposure to the dairy industry, the one significant agricultural segment that has been under extreme pressure for the last couple of years.
 
Commercial Real Estate Loans
 
Difficult economic conditions are increasing risk in the non-residential component of the commercial real estate portfolio. However, in comparison to peers, the Company had less overall exposure to commercial real estate and a stronger mix of owner-occupied (where the borrower occupies and operates in at least part of the building) versus non-owner occupied loans. The loans represented in this category are spread across the Company’s footprint, and there are no significant concentrations by industry type or borrower. The most significant property types represented in the portfolio are office (19%), industrial (13%), multifamily (13%), health care (6%), and retail (5%). The other 44% is a mix of property types with smaller concentrations, including religious facilities, auto-related properties, restaurants, convenience stores, storage units, motels and commercial investment land. Finished condominiums comprise only 1.1% of the commercial real estate portfolio, although there are also several unfinished condo projects in the construction and development portfolio.
 
While 66% of the Company’s commercial real estate portfolio is in its Northern Idaho/Eastern Washington region, this region is a large and diverse region with differing local economies and real estate markets. Given this diversity, and the diversity of property types and industries represented, management does not believe that this concentration represents a significant concentration risk.


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Non-owner occupied commercial real estate loans are made only to borrowers with established track records and the ability to fund potential project cash flow shortfalls from other income sources or liquid assets. Project due diligence is conducted by the Bank, to help provide for adequate contingencies, collateral and/or government guaranties. The Company has largely avoided speculative financing of investment properties, particularly of the types most vulnerable in the current downturn, including investment office buildings and retail strip developments. Management believes geographic, borrower and property-type diversification, and prudent underwriting and monitoring standards applied by seasoned commercial lenders mitigate concentration risk in this segment.
 
Residential Real Estate and Consumer
 
Residential real estate and consumer loans comprise smaller segments of the loan portfolio. Management does not believe they represent significant concentration risk. While debt service ability and collateral values have declined in these segments, underwriting has generally been more conservative, with higher debt-to-income and equity requirements than found elsewhere in the financial industry.
 
Geographic Distribution
 
In terms of geographic distribution, 76% of the Company’s loans are in north Idaho, eastern Washington and southwest Idaho outside the Boise area. Although economic trends and real estate valuations have worsened in these market areas, delinquency levels and price declines have been less significant than in Boise or other areas of the country. This reflects the differing economies in these areas, generally more conservative lending and borrowing norms, and more restrained building and development activity. In particular, large national and regional developers and builders did not enter and subsequently exit these markets. The southwest Idaho and Magic Valley markets are largely agricultural areas which have not seen rapid price appreciation or depreciation over the last few years. Through aggressive loan workout efforts, the Company has reduced its exposure to the Boise area market significantly over the past year, resulting in proportionally higher loan balances in the regions outside of Boise from the prior year.
 
Classification of Loans
 
The Bank is required under applicable law and regulations to review its loans on a regular basis and to classify them as “satisfactory,” “special mention,” “substandard,” “doubtful” or “loss.” A loan which possesses no apparent weakness or deficiency is designated “satisfactory.” A loan which possesses weaknesses or deficiencies deserving close attention is designated as “special mention.” A loan is generally classified as “substandard” if it possesses a well-defined weakness and the Bank will probably sustain some loss if the weaknesses or deficiencies are not corrected. A loan is classified as “doubtful” if a probable loss of principal and/or interest exists but the amount of the loss, if any, is subject to the outcome of future events which are undeterminable at the time of classification. It is a transitional category, and once the amount of the loss is determined, this amount is charged off and the remaining balance of the loan would most likely be classified as “substandard.” The typical duration of a loan in the “doubtful” category would be one to two months. If a loan is classified as “loss,” the Bank either establishes a specific valuation allowance equal to the amount classified as loss or charges off such amount.
 
As of December 31, 2010, the risk grades range from cash equivalent secured loans (Risk Grade “1”) to “loss” (Risk Grade “8”). Risk Grades “3”, “5”, “6”, “7” and “8” closely reflect the FDIC’s definitions for “satisfactory,” “special mention,” “substandard”, “doubtful” and “loss”, respectively. Risk Grade “4” is an internally designated “watch” category. At December 31, 2010, the Company had $14.0 million in the special mention, $54.1 million in the substandard, an immaterial amount in the doubtful and $0 in the loss loan categories. At December 31, 2009, the Company had $6.7 million in the special mention, $75.6 million in the substandard, $1.6 million in the doubtful and $0 in the loss loan categories.
 
Overall, classified loans (loans with risk grades 6, 7, or 8) decreased from $77.2 million at the end of 2009 to $54.1 million at the end of 2010. The decrease reflected the Company’s efforts in resolving or liquidating problem loans during the past year, even amidst economic conditions that were still very challenging. The continued levels of classified assets reflect poor employment conditions and slow real estate markets in the Company’s market areas.


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Non-accrual loans are those loans that have become delinquent for more than 90 days (unless well-secured and in the process of collection). Placement of loans on non-accrual status does not necessarily mean that the outstanding loan principal will not be collected, but rather that timely collection of principal and interest is in question. Total non-accrual loans decreased from $18.5 million at December 31, 2009 to $11.5 million at the end of 2010. When a loan is placed on non-accrual status, interest accrued but not received is reversed. The amount of interest income which was reversed from income in fiscal years 2010, 2009, 2008, 2007 and 2006 on non-accrual and other problem loans was approximately $794,000, $1.9 million, $465,000, $161,000 and $21,000, respectively. A non-accrual 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. Other problem loans are loans that were not put in the non-accrual status but were charged off or transferred to OREO during the year.
 
Allowance for Loan Losses
 
The allowance for loan losses is based upon management’s assessment of various factors including, but not limited to, current and future economic trends, historical loan losses, delinquencies, and underlying collateral values, as well as current and potential risks identified in the loan portfolio. The allowance is evaluated on a monthly basis by management. The methodology for calculating the allowance is discussed in more detail below. An allocation is also included for unfunded loan commitments. However, this allocation is recorded as a liability, as required by bank regulatory guidance issued in early 2007.
 
Allocation of the Allowance for Loan Losses
and Non-Accrual Loans Detail
(Dollars in thousands)
 
                                 
    December 31, 2010  
    Percent of
                   
    Loans to
    Gross
          Non-Accrual
 
    Total Loans     Loans     Allowance     Loans  
 
Commercial loans
    21.31 %   $ 122,656     $ 2,925     $ 3,859  
Commercial real estate loans
    30.50       175,559       3,655       3,566  
Commercial construction loans
    3.12       17,951       540       71  
Land and land development loans
    10.59       60,962       2,408       1,910  
Agriculture loans
    15.18       87,364       779       582  
Multifamily loans
    4.59       26,417       83        
Residential real estate loans
    10.57       60,872       1,252       964  
Residential construction loans
    0.56       3,219       65       110  
Consumer loans
    2.45       14,095       613       389  
Municipal loans
    1.13       6,528       135        
                                 
Totals
    100.00 %   $ 575,623     $ 12,455     $ 11,451  
                                 
 


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    December 31, 2009  
    Percent of
                   
    Loans to
    Gross
          Non-Accrual
 
    Total Loans     Loans     Allowance     Loans  
 
Commercial loans
    19.57 %   $ 131,562     $ 4,785     $ 2,653  
Commercial real estate loans
    25.69       172,726       3,827       3,209  
Commercial construction loans
    6.78       45,581       1,671       3,135  
Land and land development loans
    13.18       88,604       2,707       5,724  
Agriculture loans
    16.40       110,256       1,390       447  
Multifamily loans
    2.69       18,067       26       135  
Residential real estate loans
    9.75       65,544       1,412       2,872  
Residential construction loans
    2.47       16,626       170       205  
Consumer loans
    2.72       18,287       539       88  
Municipal loans
    0.75       5,061       81        
                                 
Totals
    100.00 %   $ 672,314     $ 16,608     $ 18,468  
                                 
 
                                 
    December 31, 2008  
    Percent of
                   
    Loans to
    Gross
          Non-Accrual
 
    Total Loans     Loans     Allowance     Loans  
 
Commercial loans
    82.81 %   $ 636,982     $ 14,277     $ 22,783  
Residential loans
    13.51       103,937       1,653       3,491  
Consumer loans
    3.02       23,245       452       91  
Municipal loans
    0.66       5,109       51        
                                 
Totals
    100.00 %   $ 769,273     $ 16,433     $ 26,365  
                                 
 
                                 
    December 31, 2007  
    Percent of
                   
    Loans to
    Gross
          Non-Accrual
 
    Total Loans     Loans     Allowance     Loans  
 
Commercial loans
    81.07 %   $ 623,439     $ 9,965     $ 4,732  
Residential loans
    14.83       114,010       1,196       837  
Consumer loans
    3.42       26,285       571        
Municipal loans
    0.68       5,222       29        
                                 
Totals
    100.00 %   $ 768,956     $ 11,761     $ 5,569  
                                 
 
                                 
    December 31, 2006  
    Percent of
                   
    Loans to
    Gross
          Non-Accrual
 
    Total Loans     Loans     Allowance     Loans  
 
Commercial loans
    78.03 %   $ 527,345     $ 7,924     $ 1,201  
Residential loans
    16.66       112,569       1,543        
Consumer loans
    4.71       31,800       339        
Municipal loans
    0.60       4,082       31        
                                 
Totals
    100.00 %   $ 675,796     $ 9,837     $ 1,201  
                                 
 
In the table above, commercial loans for the periods 2006-2008 include commercial real estate loans, as well as residential land, subdivision acquisition and development, and builder loans, where the borrower is not a consumer.

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During 2007, the Company changed its method of calculating its loan loss allowance in line with bank regulatory guidance issued earlier that year. It continued to refine this methodology in the subsequent years with improved modeling and collateral valuation analysis. The loan portfolio is segregated into loans for which a specific reserve is calculated by management, and loans for which a reserve is calculated using an allowance model. For loans with a specific reserve, management evaluates each loan and derives the reserve based on such factors as expected collectability, collateral value and guarantor support. For loans with reserves calculated by the model, the model mathematically derives a base reserve allocation for each loan using probability of default and loss given default rates based on both historical company and regional industry experience. This base reserve allocation is then modified by management considering factors such as the current economic environment, portfolio delinquency trends, collateral valuation trends, quality of underwriting and quality of collection activities. The reserves derived from the model are reviewed and modified by management, then added to the reserve for specifically identified loans to produce the total reserve. Management believes that this methodology provides a more reasonable, reliable and verifiable reserve calculation and is in compliance with recent regulatory guidance. The Bank’s total allowance for loan losses was 2.16% of total loans at December, 31, 2010 and 2.47% of total loans at December 31, 2009. The decrease in the ratio is due primarily to the reduction in the loan portfolio and the level of classified and non-performing loans over the same period. Chargeoffs outpaced the loan loss provision in 2010 due to management’s aggressive reduction of problem credits during 2010. In addition, in the third quarter of 2010, one large commercial credit was charged off in the amount of $4.5 million for which some recovery is anticipated in future periods.
 
Management’s general policy is to charge off loans or portions of loans as soon as an identifiable loss amount can be determined from evidence obtained, such as updated appraisals or similar real estate evaluations, equipment, inventory or similar collateral evaluations, or accepted offers on loan sales or negotiated discounts. In situations where problem loans are dependent on collateral liquidation for repayment, management obtains updated independent valuations, generally no less frequently than once every six months and more frequently for larger or more troubled loans. In the time period between these independent valuations, it monitors market conditions for any significant event or events that would materially change the valuations, and updates them as appropriate.
 
The following table details loan maturity and repricing information for fixed and variable rate loans.
 
Maturity and Repricing for the Bank’s
Loan Portfolio at December 31, 2010
 
                         
Loan Repricing
  Fixed Rate     Variable Rate     Total Loans  
    (Dollars in thousands)  
 
0-90 days
  $ 31,536     $ 129,208     $ 160,744  
91-365 days
    44,036       83,429       127,465  
1 year-5 years
    120,743       122,719       243,462  
5 years or more
    39,791       4,161       43,952  
                         
Total
  $ 236,106     $ 339,517     $ 575,623  
                         
 
The Company has traditionally maintained a high level of variable rate loans as part of its overall balance sheet management approach. The significant unanticipated decrease in market rates experienced during the economic downturn and financial turmoil of the past several years impacted these loans negatively and created additional pressure on the Company’s asset yields and net interest margin. However, this approach positions the Company well for a rising rate environment, in which event the Company may experience improvement in margin.
 
Investments
 
The investment portfolio is the second largest earning asset category and is comprised mostly of securities categorized as available-for-sale. These securities are carried at fair value. Unrealized gains and losses that are considered temporary are recorded as a component of accumulated other comprehensive income or loss.
 
The carrying value of the available-for-sale securities portfolio increased 0.7% to $183.1 million at December 31, 2010 from $181.8 million at December 31, 2009. The carrying value of the held-to-maturity securities


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portfolio increased 46.4% to $22.2 million at December 31, 2010 from $15.2 million at December 31, 2009. During 2010, the Company deployed funds from reductions in the Company’s loan portfolio into the investment portfolio. In addition, market conditions caused a slight increase in the carrying value of some of the Company’s available-for-sale securities. In an environment where short rates stayed very low and the yield curve steepened on the long end, the Company sought to maintain the yield on the investment portfolio, while positioning it for higher rates in the future. In doing so, the Company generally maintained a short duration in its portfolio, but did purchase a small block of high quality longer-term municipals to maintain yield. Overall, the Company used a combination of U.S. agency debentures and mortgage-backed securities, whole loan collateralized mortgage obligations (“CMOs”), and municipal bonds to accomplish this positioning. The average duration of the available for sale and the held-to-maturity portfolios was approximately 2.9 years and 8.2 years, respectively on December 31, 2010, compared to 2.8 years and 8.5 years, respectively on December 31, 2009. The average duration differs from the investment’s contractual maturity as average duration takes into account estimated prepayments.
 
As noted above, available-for-sale securities are required by generally accepted accounting principles to be accounted for at fair value (See Note 20 “Fair Value of Financial Instruments” in the Company’s Consolidated Financial Statements for more information).
 
Active markets and readily available pricing exists for securities totaling $153.6 million classified as available for sale as of December 31, 2010. 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 $29.5 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 non-government agency guaranteed mortgage-backed securities and CMOs, a less active market existed for these securities at December 31, 2010. This is evidenced by a widening in the bid-ask spread for these types of securities and the smaller 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 December 31, 2010 measurement date.
 
In valuing these securities, the Company utilized the same independent pricing service as for its other available-for-sale securities. In addition, it utilized Federal Home Loan Bank pricing indications to derive independent valuations and used this data to evaluate and adjust the values derived from the original independent pricing service. In addition to 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 accounting guidance, 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.


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The following table displays investment securities balances and repricing information for the total portfolio:
 
Investment Portfolio Detail
As of December 31, 2010
 
                                         
          Percent
          Percent
       
    2010
    Change
    2009
    Change
    2008
 
Carrying Value as of December 31,
  Amount     Prev. Yr.     Amount     Prev. Yr.     Amount  
    (Dollars in thousands)  
 
U.S. treasury securities and obligations of government agencies
  $ 3,894       7,535.29 %   $ 51       (99.32 )%   $ 7,546  
Mortgage-backed securities & collateralized mortgage obligations (“CMOs”)
    173,957       (4.28 )     181,733       29.74       140,072  
State and municipal bonds
    27,447       80.85       15,177       (13.79 )     17,604  
                                         
Total
  $ 205,298       4.23 %   $ 196,961       19.21 %   $ 165,222  
                                         
Available-for-Sale
    183,081       0.71       181,784       23.14       147,618  
Held-to-Maturity
    22,217       46.39       15,177       (13.79 )     17,604  
                                         
Total
  $ 205,298       4.23 %   $ 196,961       19.21 %   $ 165,222  
                                         
 
Investments held as of December 31, 2010
Mature as follows:
 
                                                                                 
          One to
    Five to
    Over
       
    One Year     Five Years     Ten Years     Ten Years     Total  
    Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
    (Dollars in thousands)  
 
U.S. treasury securities and obligations of government agencies
  $ 3       0.76 %   $ 28       2.02 %   $ 3,894       2.08 %   $       0.00 %   $ 3,925       2.08 %
Mortgage-backed securities & CMOs
    458       3.90       2,836       3.58       31,492       4.24       139,140       4.06       173,926       4.03  
State and municipal bonds (tax — equivalent)
    297       3.08       708       3.77       5,930       4.04       20,512       5.12       27,447       4.83  
                                                                                 
Total
  $ 758       3.58 %   $ 3,572       3.60 %   $ 41,316       4.01 %   $ 159,652       4.19 %   $ 205,298       4.10 %
                                                                                 
 
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 risk-adjusted returns. At December 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. However, unforeseen changes in credit risk or other types of portfolio risk could cause management to change its position and sell individual securities on a case-by-case basis.
 
See Note 20 “Fair Value of Financial Instruments” in the Company’s Consolidated Financial Statements for more information on the calculation of fair or carrying value for the investment securities.
 
Fed Funds Sold & Cash Equivalents
 
The Bank held $131.8 million in excess funds at the Federal Reserve at December 31, 2010, as compared to $81.7 million in Fed Funds Sold at December 31, 2009. At December 31, 2010, excess funds were held at the Federal Reserve as opposed to Fed Funds Sold at a correspondent bank as there was a higher yield on the excess


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funds at the Federal Reserve. During 2010, the Company maintained an average balance of Fed Funds Sold and interest-bearing unrestricted cash equivalents (referred to in subsequent references as “Fed Funds Sold” for ease of reference and because the instruments are not materially different) of $101.1 million as a strategy to preserve and enhance liquidity during a period of continuing market turmoil. This compares to an average balance of Fed Funds Sold in 2009 of $43.9 million. The higher level of Fed Funds Sold maintained during 2010 resulted in a decrease in interest income and net interest income as the Fed Funds Sold yield during 2010 was at historically low levels of between 0.00% and 0.25%.
 
Deposits
 
                                 
    December 31, 2010     December 31, 2009  
Deposit Composition & Trends
  Amount     %     Amount     %  
    (Dollars in thousands)  
 
Demand
  $ 168,519       21.6     $ 168,244       20.5  
NOW and money market 0.0% to 4.65%
    327,891       42.1       340,070       41.6  
Savings and IRA 0.0% to 5.75%
    75,387       9.7       77,623       9.5  
Certificate of deposit accounts (“CDs”) under $100,000
    79,533       10.2       86,381       10.5  
Jumbo CDs
    77,685       10.0       82,249       10.0  
Brokered CDs
    40,899       5.3       54,428       6.6  
CDARS CDs to local customers
    8,919       1.1       10,326       1.3  
                                 
Total deposits
  $ 778,833       100.0     $ 819,321       100.0  
                                 
Weighted average interest rate on certificates of deposit
            1.66 %             2.52 %
Core Deposits as a percentage of total deposits(1)
            83.2 %             81.6 %
Deposits generated from the Company’s market area as a % of total deposits
            94.8 %             93.4 %
 
 
(1) Core deposits consist of non-interest bearing checking, interest-bearing checking, money market, and savings accounts, and retail certificate of deposit accounts of less than $100,000.
 
Deposits totaled $778.8 million, representing 82.4% of the Bank’s liabilities at December 31, 2010. Total deposits decreased 4.9% in 2010, largely as a result of reductions in wholesale brokered CDs and higher-priced retail CDs where the bank did not have other accounts with the depositor. Given the high level of liquid assets, the Company moved aggressively to price down its deposit portfolio and allowed brokered, collateralized and single-service deposit accounts to run off. Total transaction account deposits (demand, NOW and money market) comprise 63.7% of total deposits, a percentage that significantly exceeds peer group averages. The Company continues to emphasize growth in low-cost transaction account balances to minimize its cost of funding, enhance fee income and other cross-selling opportunities, and match its asset composition.
 
65% of the Company’s transaction accounts have been in existence for more than three years. When combined with the growth rates of the Company’s retail deposits over the past ten years, this demonstrates the Company’s ability to both grow and retain its transaction deposit customers.
 
The Company’s strong local, core funding base, high percentage of checking, money market and savings balances and careful management of its brokered CD funding provide lower-cost, more reliable funding to the Company than most of its peers and add to the liquidity strength of the Bank. Maintaining the local funding base at a reasonable cost remains a critical priority for the Company’s management and production staff. The Company uses a combination of proactive branch staff efforts and a dedicated team of deposit sales specialists to target and grow low-cost deposit balances. It emphasizes personalized service, local community involvement and targeted campaigns to generate deposits, rather than media campaigns or advertised rate specials. The introduction of new sales platform technology, web-banking enhancements, and social networking capabilities in 2010 should spur additional low cost deposit growth when the Company needs it in the future.


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The Company seeks long-term balance between loans and deposits in each of its regions, and has generally succeeded in achieving this balance, although when it enters new markets, it may emphasize one or the other depending on the specific market.
 
Business checking, NOW, money market and savings balances comprise about 42% of total non-maturity deposits, and consumer about 58%. The Company emphasizes balanced growth of both business and consumer deposits in its markets to diversify its funding sources. Consumer deposit growth is largely driven by branch marketing efforts in the communities served. Intermountain also employs specialized business services officers who target the acquisition of business deposit accounts and other fee-related services. With the exception of the secured savings program noted below, the Company is not reliant on any one depositor or small group of depositors, with the largest single depositor making up less than 1% of overall company deposits.
 
The Company currently holds $22.5 million in deposits used to secure credit cards marketed and maintained by another bank under a contractual arrangement. The contractual arrangement terminated in November, 2009 and was replaced by a transitional contract allowing the provider sufficient time to move these deposits into its own organization. This movement is not anticipated to occur until late 2012, and Intermountain is pursuing opportunities to expand its management of secured savings accounts with other potential card providers.
 
The following table details re-pricing information for the Bank’s time deposits with minimum balance of $100,000 at December 31, 2010 (in thousands):
 
         
Maturities/Repricing
     
 
Less than three months
  $ 37,655  
Three to six months
    10,316  
Six to twelve months
    27,661  
Over twelve months
    57,018  
         
    $ 132,650  
         
 
In terms of overall deposits, the Company is the market share leader in 5 of the 11 markets in which it operates and has consistently grown market share for the past ten years. See the market share information under “Competition” on page 9 of this report for more information.
 
By repricing its portfolio, the Company succeeded in lowering the 2010 interest cost on its interest-bearing deposits by 0.55%. This resulted in overall liability interest costs to the Bank being 0.22% below the average of its peer group as of December 31, 2010 (Source: UBPR for December 31, 2010). This decrease occurred amidst an environment where several stressed competitors continued to offer high CD rates in order to retain and attract additional deposits. Given the current compressed market rate environment, management believes that this improvement and its overall competitive standing positions the Company well for future periods.
 
Borrowings
 
As part of the Company’s funds management and liquidity plan, the Bank has arranged to have short-term and long-term borrowing facilities available. The short-term and overnight facilities are federal funds purchasing lines as reciprocal arrangements to the federal funds selling agreements in place with various correspondent banks. At December 31, 2010, the Bank had overnight unsecured credit lines of $35.0 million available. For additional long and short-term funding needs, the Bank has credit available from the Federal Home Loan Bank of Seattle (“FHLB”), limited to a percentage of its total regulatory assets and subject to collateralization requirements and a blanket pledge agreement. It also has a “Borrower in Custody” line set up with the Federal Reserve Bank, subject to collateralization requirements.
 
At December 31, 2010 the Bank had a $5.0 million FHLB advance at 1.49% that matures in September 2011, a $25.0 million FHLB advance at 2.06% that matures in October 2012, and a $4.0 million FHLB advance at 3.11% that matures in September 2014. These notes totaled $34.0 million, and the Bank had the ability to borrow an additional $83.6 million from the FHLB.


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The Bank has the ability to borrow up to $24.3 million on a short term basis from the Federal Reserve Bank under the Borrower in Custody program, utilizing commercial loans as collateral. At December 31, 2010, the Bank had no borrowings outstanding under this line.
 
In March 2007, the Company entered into an additional borrowing agreement with Pacific Coast Bankers Bank (“PCBB”) in the amount of $18.0 million and in December 2007 increased the amount to $25.0 million. The borrowing agreement was a non-revolving line of credit with a variable rate of interest tied to LIBOR and was collateralized by Bank stock and the Company’s headquarters building. This line was used primarily to fund the construction costs of this building in Sandpoint. The balance at December 31, 2008 was $23.1 million at a variable interest rate of 3.4%. The borrowing had a maturity of January 2009 and was extended for 90 days with a fixed rate of 7.0%. The Company negotiated with PCBB to refinance this loan into three amortizing term loan facilities totaling $23.0 million in May 2009. In August 2009, the Company sold the Sandpoint Center and paid off the PCBB borrowings.
 
In January 2006, the Company purchased land to build the headquarters building and entered into a Note Payable with the sellers of the property in the amount of $1,130,000. The note had a fixed rate of 6.65%, matured in February 2026 and had an outstanding balance of $941,000 at December 31, 2008. The Note Payable was paid off in May 2009 with the refinance of the PCBB debt.
 
Securities sold under agreements to repurchase, which are classified as other secured borrowings, generally are short-term agreements. These agreements are treated as financing transactions and the obligations to repurchase securities sold are reflected as a liability in the consolidated financial statements. The dollar amount of securities underlying the agreements remains in the applicable asset account. The majority of the repurchase agreements are with municipal customers in the Company’s local markets and mature on a daily basis, with an institutional repurchase agreement in the amount of $30.0 million maturing in July 2011. These agreements had a weighted average interest rate of 0.27%, 0.36%, and 2.00% at December 31, 2010, 2009 and 2008, respectively. The average balances of securities sold subject to repurchase agreements were $87.2 million, $82.6 million, and $102.5 million during the years ended December 31, 2010, 2009 and 2008, respectively. The maximum amount outstanding at any month end during these same periods was $105.1 million, $100.3 million, and $124.4 million, respectively. The increase in the repurchase amounts during 2010 reflected movement of municipal funds into sweep agreements as a result of changes in FDIC coverage on low interest bearing accounts, and lower rates on municipal investment alternatives. In 2006, the Company entered into an institutional repurchase agreement to reduce interest rate risk in a down-rate environment. For all of 2010, this structured agreement carried an effective interest cost of 0.00%. At December 31, 2010, 2009, and 2008, the Company pledged as collateral certain investment securities with aggregate amortized costs of $126.2 million, $125.4 million, and $114.8 million, respectively. These investment securities had market values of $128.7 million, $125.7 million, and $116.3 million at December 31, 2010, 2009 and 2008, respectively.
 
In January 2003 the, Company issued $8.0 million of Trust Preferred securities through its subsidiary, Intermountain Statutory Trust I. Approximately $7.0 million was subsequently transferred to the capital account of Panhandle State Bank for capitalizing the Ontario branch acquisition. The debt associated with these securities bears interest on a variable basis tied to the 90-day LIBOR index plus 3.25% with interest payable quarterly. The debt was callable by the Company in March 2008 and matures in March 2033.
 
In March 2004, the Company issued $8.0 million of additional Trust Preferred securities through a second subsidiary, Intermountain Statutory Trust II. This debt was callable by the Company starting in April 2009, bears interest on a variable basis tied to the 90-day LIBOR index plus 2.8%, and matures in April 2034. In July of 2008, the Company entered into a cash flow swap transaction with Pacific Coast Bankers Bank, by which the Company effectively pays a fixed rate on these securities of 7.38% through July 2013 (see Note 19 in the Company’s Consolidated Financial Statements for more information on this swap). Funds received from this borrowing were used to support planned expansion activities during 2004, including the Snake River Bancorp acquisition.
 
During the third quarter of 2009, the Board of Directors of the Company approved the deferral of 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


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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. Deferred payments compound for the TRUPS Debentures. Although these expenses will continue to be accrued on the consolidated income statements for the Company, deferring these interest payments will preserve approximately $140,000 per quarter in cash for the Company. Notwithstanding the current deferral of interest payments, the Company fully intends to meet all of its obligations to the holders of the TRUPS Debentures as quickly as it is prudent to do so. At December 31, 2010, the total deferred interest payments totaled $682,000.
 
Employees
 
The Company employed 349 full-time equivalent employees at December 31, 2010, down from 406 at the end of 2009 and 418 at the end of 2008. None of the employees are represented by a collective bargaining unit and the Company believes it has good relations with its employees. The Company reduced full-time equivalent employees during both 2009 and 2010 as part of an operating expense reduction strategy.
 
Supervision and Regulation
 
General
 
The following discussion provides an overview of certain elements of the extensive regulatory framework applicable to Intermountain Community Bancorp (the “Company”) and Panhandle State Bank, which operates under the names Panhandle State Bank, Magic Valley Bank and Intermountain Community Bank (collectively referred to herein as the “Bank”). This regulatory framework is primarily designed for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather than specifically for the protection of shareholders. Due to the breadth and growth of this regulatory framework, our costs of compliance continue to increase in order to monitor and satisfy these requirements.
 
To the extent that this section describes statutory and regulatory provisions, it is qualified by reference to those provisions. These statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to us, including the interpretation or implementation thereof, could have a material effect on our business or operations. Recently, in light of the recent financial crisis, numerous proposals to modify or expand banking regulation have surfaced. Based on past history, if any are approved, they will add to the complexity and cost of our business.
 
Federal Bank Holding Company Regulation
 
General.  The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended (“BHCA”), and is therefore subject to regulation, supervision and examination by the Federal Reserve. In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to banking. The Company must file reports with and provide the Federal Reserve such additional information as it may require.
 
Holding Company Bank Ownership.  The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares; (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.
 
Holding Company Control of Nonbanks.  With some exceptions, the BHCA also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.


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Transactions with Affiliates.  Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for payment of dividends, interest and operational expenses.
 
Tying Arrangements.  The Company is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor its subsidiaries may condition an extension of credit to a customer on either (i) a requirement that the customer obtain additional services provided by us; or (ii) an agreement by the customer to refrain from obtaining other services from a competitor.
 
Support of Subsidiary Banks.  Under Federal Reserve policy, the Company is expected to act as a source of financial and managerial strength to the Bank. This means that the Company is required to commit, as necessary, resources to support the Bank. Any capital loans a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.
 
State Law Restrictions.  As an Idaho corporation, the Company is subject to certain limitations and restrictions under applicable Idaho corporate law. For example, state law restrictions in Idaho include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records and minutes, and observance of certain corporate formalities.
 
Federal and State Regulation of the Bank
 
General.  The Bank is an Idaho commercial bank operating in Idaho, with one branch in Oregon and two in Washington. Its deposits are insured by the FDIC. As a result, the Bank is subject to primary supervision and regulation by the Idaho Department of Finance and the FDIC. With respect to the Oregon branch and Washington branch, the Bank is also subject to supervision and regulation by, respectively, the Oregon Department of Consumer and Business Services and the Washington Department of Financial Institutions, as well as the FDIC. These agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe or unsound banking practices.
 
Community Reinvestment.  The Community Reinvestment Act of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the Federal Reserve or the FDIC evaluate the record of the financial institution in meeting the credit needs of its local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions and applications to open a branch or facility.
 
Insider Credit Transactions.  Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with persons not covered above and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, the imposition of a cease and desist order, and other regulatory sanctions.
 
Regulation of Management.  Federal law (i) sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency; (ii) places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and (iii) prohibits management personnel of a bank from serving as a director or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.
 
Safety and Soundness Standards.  Federal law imposes certain non-capital safety and soundness standards on banks. These standards cover internal controls, information systems and internal audit systems, loan


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documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to its regulators, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.
 
Interstate Banking and Branching
 
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) relaxed prior interstate branching restrictions under federal law by permitting nationwide interstate banking and branching under certain circumstances. Generally, bank holding companies may purchase banks in any state, and states may not prohibit these purchases. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. Federal banking regulations prohibit banks from using their interstate branches primarily for deposit production and the federal bank regulatory agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition. As a result of the Dodd-Frank Act, prior restrictions on de novo branching by out of state banks have been removed. The Dodd-Frank Act generally permits all banks to branch into other states by opening a new branch or purchasing a branch from another financial institution, to the extent that banks chartered under the state in which the new branch is located can do so. In the past, the Interstate Act barred all financial institutions, except for thrifts, from branching into other states unless they purchased or merged with a bank located in the other state.
 
Dividends
 
The principal source of the Company’s cash is from dividends received from the Bank, which are subject to government regulation and limitations. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice or would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Idaho law also limits a bank’s ability to pay dividends subject to surplus reserve requirements. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. The Company entered into an informal agreement with the Federal Reserve and the Idaho Department of Finance, which requires the Company to obtain advance approval from the Federal Reserve and the Idaho Department of Finance prior to paying any dividends. Payment of cash dividends by the Company will depend on sufficient earnings to support them and approval of appropriate bank regulatory authorities.
 
In addition to the foregoing regulatory restrictions, we are subject to contractual restrictions that limit us from paying dividends on our common stock, including those contained in the securities purchase agreement between us and the Treasury, as described in more detail below.
 
Capital Adequacy
 
Regulatory Capital Guidelines.  Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.
 
Tier I and Tier II Capital.  Under the guidelines, an institution’s capital is divided into two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of common stockholders’ equity, surplus and undivided profits. Tier II capital generally consists of the allowance for loan losses, hybrid capital instruments, and term subordinated debt. The sum of Tier I capital and Tier II capital represents an institution’s total regulatory capital. The guidelines require that at least 50% of an institution’s total capital consist of Tier I capital.
 
Risk-based Capital Ratios.  The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk-weighted assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An institution’s risk-weighted assets are then compared with its Tier I capital and total capital to arrive at a Tier I risk-


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based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of 8%.
 
Leverage Ratio.  The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of average total assets, less intangibles. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The minimum leverage ratio is 3%; however, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, regulators expect an additional cushion of at least 1% to 2%.
 
Prompt Corrective Action.  Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from “well capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are subject to certain mandatory supervisory corrective actions. At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. During these challenging economic times, the federal banking regulators have actively enforced these provisions.
 
Regulatory Oversight and Examination
 
The Federal Reserve conducts periodic inspections of bank holding companies, which are performed both onsite and offsite. The supervisory objectives of the inspection program are to ascertain whether the financial strength of the bank holding company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a holding company or its non-banking subsidiaries and its subsidiary banks. For holding companies under $10 billion in assets, the inspection type and frequency varies depending on asset size, complexity of the organization, and the holding company’s rating at its last inspection.
 
Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of operations of the bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agency or may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examination. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised banks as frequently as deemed necessary based on the condition of the bank or as a result of certain triggering events.
 
Corporate Governance and Accounting
 
Sarbanes-Oxley Act of 2002.  The Sarbanes-Oxley Act of 2002 (the “Act”) addresses among other things, corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. Generally, the Act (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission (the “SEC”); (ii) imposes specific and enhanced corporate disclosure requirements; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; (iv) requires companies to adopt and disclose information about corporate governance practices, including whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert;” and (v) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.
 
As a publicly reporting company, the Company is subject to the requirements of the Act and related rules and regulations issued by the SEC. After enactment, we updated our policies and procedures to comply with the Act’s requirements and have found that such compliance, including compliance with Section 404 of the Act relating to management control over financial reporting, has resulted in significant additional expense for the Company. We anticipate that we will continue to incur such additional expense in our ongoing compliance.


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Anti-terrorism
 
USA Patriot Act of 2001.  The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (the “Patriot Act”). Certain provisions of the Patriot Act were made permanent and other sections were made subject to extended “sunset” provisions. The Patriot Act, in relevant part, (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; (iii) requires financial institutions to establish an anti-money-laundering compliance program; and (iv) eliminates civil liability for persons who file suspicious activity reports.
 
Financial Services Modernization
 
Gramm-Leach-Bliley Act of 1999.  The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 brought about significant changes to the laws affecting banks and bank holding companies. Generally, the Act (i) repeals historical restrictions on preventing banks from affiliating with securities firms; (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies; (iii) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; (iv) provides an enhanced framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and (v) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. Bank holding companies that qualify and elect to become financial holding companies can engage in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and securities underwriting activities.
 
The Emergency Economic Stabilization Act of 2008
 
Emergency Economic Stabilization Act of 2008.  In response to market turmoil and financial crises affecting the overall banking system and financial markets in the United States, the Emergency Economic Stabilization Act of 2008 ( “EESA”) was enacted on October 3, 2008. EESA provides the United States Department of the Treasury (the “Treasury”) with broad authority to implement certain actions intended to help restore stability and liquidity to the U.S. financial markets.
 
Troubled Asset Relief Program
 
Under the EESA, the Treasury has authority, among other things, to purchase up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions pursuant to the Troubled Asset Relief Program (“TARP”). The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase lending to customers and to each other. Pursuant to the EESA, the Treasury was initially authorized to use $350 billion for TARP. Of this amount, the Treasury allocated $250 billion to the TARP Capital Purchase Program (“CPP”), which funds were used to purchase preferred stock from qualifying financial institutions. The CPP provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. For publicly traded companies, the CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. The Company applied for and received $27 million in the CPP. As a result, the Company is subject to the restrictions described below. The Treasury made an equity investment in the Company through its purchase of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Stock”). The description of the Preferred Stock set forth below is qualified in its entirety by the actual terms of the Preferred Stock, as are stated in the Certificate of Designation for the Preferred Stock, a copy of which was attached as Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on December 19, 2008 and incorporated by reference.
 
General.  The Preferred Stock constitutes a single series of our preferred stock, consisting of 27,000 shares, no par value per share, having a liquidation preference amount of $1,000 per share. The Preferred Stock has no maturity date. We issued the shares of Preferred Stock to Treasury on December 19, 2008 in connection with the CPP for a purchase price of $27,000,000.


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Dividend Rate.  Dividends on the Preferred Stock are payable quarterly in arrears, when, as and if authorized and declared by our Board of Directors out of legally available funds, on a cumulative basis on the $1,000 per share liquidation preference amount plus the amount of accrued and unpaid dividends for any prior dividend periods, at a rate of (i) 5% per annum, from the original issuance date to the fifth anniversary of the issuance date, and (ii) 9% per annum, thereafter.
 
Dividends on the Preferred Stock will be cumulative. If for any reason our Board of Directors does not declare a dividend on the Preferred Stock for a particular dividend period, or if our Board of Directors declares less than a full dividend, we will remain obligated to pay the unpaid portion of the dividend for that period and the unpaid dividend will compound on each subsequent dividend date (meaning that dividends for future dividend periods will accrue on any unpaid dividend amounts for prior dividend periods). The Company entered into an informal agreement with the Federal Reserve and the Idaho Department of Finance, which requires the Company to obtain advance approval from the Federal Reserve and the Idaho Department of Finance prior to paying any dividends including dividends on the Preferred Stock. Under the CPP, if the Company fails to pay dividends on the Preferred Stock for 6 quarters, Treasury may appoint two members to the Company’s board of directors.
 
Priority of Dividends.  Until the earlier of the third anniversary of Treasury’s investment or our redemption or the Treasury’s transfer of the Preferred Stock to an unaffiliated third party, we may not declare or pay a dividend or other distribution on our common stock (other than dividends payable solely in common stock), and we generally may not directly or indirectly purchase, redeem or otherwise acquire any shares of common stock, including trust preferred securities.
 
Liquidation Rights.  In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, holders of the Preferred Stock will be entitled to receive for each share of Preferred Stock, out of the assets of the Company or proceeds available for distribution to our shareholders, subject to any rights of our creditors, before any distribution of assets or proceeds is made to or set aside for the holders of our common stock and any other class or series of our stock ranking junior to the Preferred Stock, payment of an amount equal to the sum of (i) the $1,000 liquidation preference amount per share and (ii) the amount of any accrued and unpaid dividends on the Preferred Stock (including dividends accrued on any unpaid dividends). To the extent the assets or proceeds available for distribution to shareholders are not sufficient to fully pay the liquidation payments owing to the holders of the Preferred Stock and the holders of any other class or series of our stock ranking equally with the Preferred Stock, the holders of the Preferred Stock and such other stock will share ratably in the distribution. For purposes of the liquidation rights of the Preferred Stock, neither a merger nor consolidation of the Company with another entity nor a sale, lease or exchange of all or substantially all of the Company’s assets will constitute a liquidation, dissolution or winding up of the affairs of the Company.
 
Compensation and Corporate Governance Standards and Restrictions under the CPP.  As a participant in the CPP, the Company is subject to compensation and corporate governance standards and restrictions under applicable legislation and Treasury regulations, which include but are not limited to (1) restrictions on bonus, incentive and retention awards to our five most highly-compensated employees, (2) restrictions on severance and change-in-control payments to our executive officers and next five most highly-compensated employees, (3) ensuring that our compensation programs do not encourage unnecessary and excessive risks, and (4) requiring the recovery or “clawback” of any incentive compensation paid to our executive officers and next 20 most highly-compensated employees if it is later determined that such payments were based on materially inaccurate financial or other performance criteria. The applicable regulations and their impact on the Company will be discussed more fully in our proxy statement for the 2010 annual meeting of shareholders, incorporated by reference into Part III of this Form 10-K.
 
Temporary Liquidity Guarantee Program.  Another program established pursuant to the EESA is the Temporary Liquidity Guarantee Program (“TLGP”), which (i) removed the limit on FDIC deposit insurance coverage for non-interest bearing transaction accounts through December 31, 2009, and (ii) provided FDIC backing for certain types of senior unsecured debt issued from October 14, 2008 through June 30, 2009. The end-date for issuing senior unsecured debt was later extended to October 31, 2009 and the FDIC also extended the Transaction Account Guarantee portion of the TLGP through December 31, 2010. Financial institutions that did not opt out of unlimited coverage for non-interest bearing accounts were initially charged an annualized 10 basis points on


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individual account balances exceeding $250,000, and those issuing FDIC-backed senior unsecured debt were initially charged an annualized 75 basis points on all such debt, although those rates were subsequently increased. We elected to fully participate in both parts of the TLGP.
 
Deposit Insurance
 
The Bank’s deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits and are subject to deposit insurance assessments designed to tie what banks pay for deposit insurance more closely to the risks they pose. The Bank has prepaid its quarterly deposit insurance assessments for 2011 and 2012 pursuant to applicable FDIC regulations, but the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in July 2010 required the FDIC to amend its regulations to redefine the assessment base used for calculating deposit insurance assessments. As a result, in February 2011, the FDIC approved new rules to, among other things, change the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets (average consolidated total assets minus average tangible equity). Since the new assessment base is larger than the base used under prior regulations, the rules also lower assessment rates, so that the total amount of revenue collected by the FDIC from the industry is not significantly altered. The rule also revises the deposit insurance assessment system for large financial institutions, defined as institutions with at least $10 billion in assets. The rules revise the assessment rate schedule, effective April 1, 2011, and adopt additional rate schedules that will go into effect when the Deposit Insurance Fund reserve ratio reaches various milestones.
 
Insurance of Deposit Accounts.  The EESA included a provision for a temporary increase from $100,000 to $250,000 per depositor in deposit insurance effective October 3, 2008 through December 31, 2010. On May 20, 2009, the temporary increase was extended through December 31, 2013. The Dodd-Frank Act permanently raises the current standard maximum deposit insurance amount to $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category. EESA also temporarily raised the limit on federal deposit insurance coverage to an unlimited amount for non-interest or low-interest bearing demand deposits. Pursuant to the Dodd-Frank Act, unlimited coverage for non-interest transaction accounts will continue upon expiration of the TLGP until December 31, 2012.
 
Recent Legislation
 
Dodd-Frank Wall Street Reform and Consumer Protection Act.  As a result of the recent financial crises, on July 21, 2010 the Dodd-Frank Act was signed into law. The Dodd-Frank Act is expected to have a broad impact on the financial services industry, including significant regulatory and compliance changes and changes to corporate governance matters affecting public companies. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Among other things, the legislation (i) centralizes responsibility for consumer financial protection by creating a new agency responsible for implementing, examining and enforcing compliance with federal consumer financial laws; (ii) applies the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding companies; (iii) requires the FDIC to seek to make its capital requirements for banks countercyclical so that the amount of capital required to be maintained increases in times of economic expansion and decreases in times of economic contraction; (iv) changes the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital; (v) requires the SEC to complete studies and develop rules or approve stock exchange rules regarding various investor protection issues, including shareholder access to the proxy process, and various matters pertaining to executive compensation and compensation committee oversight; (vi) makes permanent the $250,000 limit for federal deposit insurance and provides unlimited federal deposit insurance until December 31, 2012, for non-interest bearing transaction accounts; (vii) removes prior restrictions on interstate de novo branching; and (viii) repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, the Bank and the financial services industry more generally. However, based on past experience with new legislation, it can be anticipated that the Dodd-Frank Act, directly and indirectly, will impact the business of the Company and the Bank and increase compliance costs.


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American Recovery and Reinvestment Act of 2009.  On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law. ARRA is intended to help stimulate the economy through a combination of tax cuts and spending provisions applicable to a broad range of areas with an estimated cost of $787 billion. The impact that ARRA may have on the US economy, the Company and the Bank cannot be predicted with certainty.
 
Overdrafts.  On November 17, 2009, the Board of Governors of the Federal Reserve System promulgated the Electronic Fund Transfer rule with an effective date of January 19, 2010 and a mandatory compliance date of July 1, 2010. The rule, which applies to all FDIC-regulated institutions, prohibits financial institutions from assessing an overdraft fee for paying automated teller machine (ATM) and one-time point-of-sale debit card transactions, unless the customer affirmatively opts in to the overdraft service for those types of transactions. The opt-in provision establishes requirements for clear disclosure of fees and terms of overdraft services for ATM and one-time debit card transactions. Since a percentage of the Company’s service charges on deposits are in the form of overdraft fees on point-of-sale transactions, this could have an adverse impact on our non-interest income.
 
Proposed Legislation
 
Proposed legislation is introduced in almost every legislative session. Certain of such legislation could dramatically affect the regulation of the banking industry. We cannot predict if any such legislation will be adopted or if it is adopted how it would affect the business of the Company or the Bank. Past history has demonstrated that new legislation or changes to existing laws or regulations usually results in a greater compliance burden and therefore generally increases the cost of doing business.
 
Effects of Government Monetary Policy
 
Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.
 
Where you can find more information
 
The periodic reports Intermountain files with the SEC are available on Intermountain’s website at http://www.intermountainbank.com after the reports are filed with the SEC. The SEC maintains a website located at http://sec.gov that also contains this information. The Company will provide you with copies of these reports, without charge, upon request made to:
 
Investor Relations
Intermountain Community Bancorp
414 Church Street
Sandpoint, Idaho 83864
(208) 263-0505
 
Item 1A.   RISK FACTORS
 
Our business exposes us to certain risks. The following is a discussion of what we currently believe are the most significant risks and uncertainties that may affect our business, financial condition or results of operations, or the value of our common stock.
 
The continued challenging economic environment could have a material adverse effect on our future results of operations or market price of our stock.
 
The national economy and the financial services sector in particular, are still facing significant challenges. Substantially all of our loans are to businesses and individuals in northern, southwestern and south central Idaho,


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eastern Washington and southwestern Oregon, markets facing many of the same challenges as the national economy, including elevated unemployment and declines in commercial and residential real estate. Although some economic indicators are improving both nationally and in the markets we serve, unemployment remains high and there remains substantial uncertainty regarding when and how strongly a sustained economic recovery will occur. A further deterioration in economic conditions in the nation as a whole or in the markets we serve could result in the following consequences, any of which could have an adverse impact, which may be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline:
 
  •  economic conditions may worsen, increasing the likelihood of credit defaults by borrowers;
 
  •  loan collateral values, especially as they relate to commercial and residential real estate, may decline further, thereby increasing the severity of loss in the event of loan defaults;
 
  •  nonperforming assets and write-downs of assets underlying troubled credits could adversely affect our earnings;
 
  •  demand for banking products and services may decline, including services for low cost and non-interest-bearing deposits; and
 
  •  changes and volatility in interest rates may negatively impact the yields on earning assets and the cost of interest-bearing liabilities.
 
Our allowance for loan losses may not be adequate to cover actual loan losses, which could adversely affect our earnings.
 
We maintain an allowance for loan losses in an amount that we believe is adequate to provide for losses inherent in our loan portfolio. While we strive to carefully manage and monitor credit quality and to identify loans that may be deteriorating, at any time there are loans included in the portfolio that may result in losses, but that have not yet been identified as potential problem loans. Through established credit practices, we attempt to identify deteriorating loans and adjust the loan loss reserve accordingly. However, because future events are uncertain, there may be loans that deteriorate in an accelerated time frame. As a result, future additions to the allowance may be necessary. Because the loan portfolio contains a number of loans with relatively large balances, deterioration in the credit quality of one or more of these loans may require a significant increase to the allowance for loan losses. Future additions to the allowance may also be required based on changes in the financial condition of borrowers, such as have resulted due to the current, economic conditions or as a result of actual events turning out differently than forecasted in the assumptions we use to determine the allowance for loan losses. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses would have a negative effect, which may be material, on our financial condition and results of operations.
 
We have recently entered into an informal agreement with our regulators to take steps to further strengthen the Bank.
 
The Bank has entered into an informal agreement with the FDIC and the Idaho Department of Finance to take steps to further strengthen the Bank within specified timeframes, including, among other items, increasing capital by at least $30 million by June 16, 2010 and thereafter maintaining a minimum 10% Tier 1 Capital to Average Assets ratio, not paying dividends from the Bank to the Company without prior approval, achieving staged reductions in the Bank’s adversely classified assets and not engaging in transactions that would materially alter our balance sheet composition. Management has taken numerous steps to satisfy the conditions of the agreement, including seeking and obtaining shareholder approval to increase the Company’s authorized common stock to facilitate raising capital. The Company is actively engaged in negotiations with potential investors for a significant capital raise. However, there can be no assurance that we will be successful in raising the required capital or satisfying all of the other conditions of the agreement within the specified timeframes.


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We will pursue additional capital in the future, which likely would dilute the holders of our outstanding common stock and may adversely affect the market price of our common stock.
 
In the current economic environment, we believe it is prudent to consider alternatives for raising capital when opportunities to raise capital at attractive prices present themselves, in order to further strengthen our capital and better position ourselves to take advantage of opportunities that may arise in the future. In addition, as noted above, we have entered into an informal agreement with our primary regulators to increase capital levels at the Bank. Alternatives for raising capital may include issuance and sale of common or preferred stock, trust preferred securities, or borrowings by the Company, with proceeds contributed to the Bank. Our ability to raise additional capital will depend on, among other things, conditions in the capital markets at the time, which are outside of our control, and our financial performance. We cannot assure you that such capital will be available to us on acceptable terms, if at all. Any such capital raising alternatives likely would dilute the holders of our outstanding common stock and may adversely affect the market price of our common stock.
 
We incurred a significant loss over the last fiscal year and losses may continue in the future.
 
During the year ended December 31, 2010 we incurred a net loss applicable to common stockholders of $33.5 million, or a loss of $3.99 per share primarily due to an $11.7 million goodwill impairment charge, an $8.8 million deferred tax asset valuation allowance and a $24.0 million provision for loan losses. During the 2009 fiscal year, we incurred a net loss applicable to common stockholders of $23.6 million, or a loss of $2.82 per common share, primarily due to a $36.3 million expense for the provision for loan losses and $5.4 million in OREO expenses and chargedowns. In light of the current economic environment, significant additional provisions for credit losses may be necessary to supplement the allowance for loan and lease losses in the future. As a result, we may incur significant credit costs, including legal and related collection expenses in 2011, which would continue to have an adverse impact on our financial condition and results of operations and the market price of our common stock. Additional credit losses or impairment charges could cause us to incur a net loss in the future and could adversely affect the price of, and market for, our common stock.
 
Concentration in real estate loans and the deterioration in the real estate markets we serve could require material increases in our allowance for loan losses and adversely affect our financial condition and results of operations.
 
The current economic downturn and sluggish recovery is significantly affecting our market area. At December 31, 2010, 63.7% of our loans were secured with real estate as the primary collateral. Further deterioration or a slow recovery in the local economies we serve could have a material adverse effect on our business, financial condition and results of operations due to a weakening of our borrowers’ ability to repay these loans and a decline in the value of the collateral securing them. Our ability to recover on these loans by selling or disposing of the underlying real estate collateral is adversely impacted by declining real estate values, which increases the likelihood we will suffer losses on defaulted loans secured by real estate beyond the amounts provided for in the allowance for loan losses. This, in turn, could require material increases in our allowance for loan losses and adversely affect our financial condition and results of operations, perhaps materially.
 
Non-performing assets take significant time to resolve and adversely affect our results of operations and financial condition.
 
At December 31, 2010, our non-performing loans (which consist of non-accrual loans and loans that are 90 days or more past due) were 2.0% of the loan portfolio. At December 31, 2010, our non-performing assets (which also include OREO) were 1.6% of total assets. These levels of non-performing loans and assets are at elevated levels compared to historical norms. Non-performing loans and assets adversely affect us in a variety of ways. Until economic and market conditions improve, we may expect to continue to incur losses relating to elevated levels of non-performing assets. We do not record interest income on non-accrual loans, thereby adversely affecting our net interest income and increasing loan administration costs. When we receive collateral through foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral, which may ultimately result in a loss. An increase in the level of non-performing assets also increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of such risks. We utilize various


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techniques such as loan sales, workouts and restructurings to manage our problem assets. Decreases in the value of these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect our business, results of operations and financial condition, perhaps materially. In addition, the resolution of non-performing assets requires significant commitments of time from management and staff, which can be detrimental to the performance of their other responsibilities. There can be no assurance that we will not experience increases in non-performing loans and assets in the future.
 
Our ability to receive dividends from our banking subsidiary accounts for most of our revenue and could affect our liquidity and ability to pay dividends.
 
We are a separate and distinct legal entity from our banking subsidiary, Panhandle State Bank. We receive substantially all of our revenue from dividends from our banking subsidiary. These dividends are the principal source of funds to pay dividends on our common and preferred stock and principal and interest on our outstanding debt. The other primary sources of liquidity for the parent Company are capital or borrowings. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay us. For example, Idaho law limits a bank’s ability to pay dividends subject to surplus reserve requirements. In addition, as noted above, we have entered into an informal agreement with our regulators that prohibits the payment of dividends from the Bank to the Company without prior approval. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. Limitations on our ability to receive dividends from our subsidiary could have a material adverse effect on our liquidity and on our ability to pay dividends on common or preferred stock. Additionally, if our subsidiary’s earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, we may not be able to make dividend payments to our common and preferred stockholders or principal and interest payments on our outstanding debt.
 
In this regard, we have suspended payments on our trust preferred securities and Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Stock”). In the event that we fail to pay dividends on the Preferred Stock for a total of at least six quarterly dividend periods (whether or not consecutive), the U.S. Treasury will have the right to appoint two directors to our board of directors until all accrued but unpaid dividends have been paid. If we do not make payments on our trust preferred securities for over 20 consecutive quarters, we could be in default under those securities.
 
With the suspension of payments on our trust preferred securities and preferred stock, management projects the parent Company’s cash needs to be approximately $500,000 on an annualized basis, and that current resources will be sufficient to meet the parent Company’s projected liabilities at least through April 2011. Management would expect to satisfy any liquidity needs through borrowings or offerings of equity securities, although there can be no assurance as to the availability or terms of such borrowings or equity capital.
 
A continued tightening of credit markets and liquidity risk could adversely affect our business, financial condition and results of operations.
 
A continued tightening of the credit markets or any inability to obtain adequate funds for continued loan growth at an acceptable cost could negatively affect our asset growth and liquidity position and, therefore, our earnings capability. In addition to core deposit growth, maturity of investment securities and loan payments, the Bank also relies on alternative funding sources including unsecured borrowing lines with correspondent banks, borrowing lines with the Federal Home Loan Bank and the Federal Reserve Bank, public time certificates of deposits and out of area and brokered time certificates of deposit. Our ability to access these sources could be impaired by deterioration in our financial condition as well as factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations for the financial services industry or serious dislocation in the general credit markets. In the event such disruption should occur, our ability to access these sources could be negatively affected, both as to price and availability, which would limit, and/or potentially raise the cost of, the funds available to the Company.


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The FDIC has increased insurance premiums and imposed special assessments to rebuild and maintain the federal deposit insurance fund, and any additional future premium increases or special assessments could have a material adverse effect on our business, financial condition and results of operations.
 
In 2009, the FDIC imposed a special deposit insurance assessment of five basis points on all insured institutions, and also required insured institutions to prepay estimated quarterly risk-based assessments through 2012.
 
The Dodd-Frank Act established 1.35% as the minimum deposit insurance fund reserve ratio. The FDIC has determined that the fund reserve ratio should be 2.0% and has adopted a plan under which it will meet the statutory minimum fund reserve ratio of 1.35% by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum fund reserve ratio to 1.35% from the former statutory minimum of 1.15%. The FDIC has not announced how it will implement this offset or how larger institutions will be affected by it.
 
Despite the FDIC’s actions to restore the deposit insurance fund, the fund will suffer additional losses in the future due to failures of insured institutions. There can be no assurance that there will not be additional significant deposit insurance premium increases, special assessments or prepayments in order to restore the insurance fund’s reserve ratio. Any significant premium increases or special assessments could have a material adverse effect on the Company’s financial condition and results of operations.
 
We may be required, in the future, to recognize impairment with respect to investment securities, including the FHLB stock we hold.
 
Our securities portfolio contains whole loan private mortgage-backed securities and currently includes securities with unrecognized losses. The recent national downturn in real estate markets and elevated mortgage delinquency and foreclosure rates have increased credit losses in the portfolio of loans underlying these securities and resulted in substantial discounts in their market values. While these trends appear to have stabilized, any further deterioration in the loans underlying these securities and resulting market discounts could lead to other-than-temporary impairment in the value of these investments. We evaluate the securities portfolio for any other-than-temporary impairment each reporting period, as required by generally accepted accounting principles, and as of December 31, 2010, two securities had been determined to be other than temporarily impaired, with the cumulative impairment totaling $3.2 million. Of this $3.2 million, $0.5 million was recognized as a credit loss through the Company’s income statement for the twelve months ended December 31, 2009. For the twelve months ended December 31, 2010 an additional $0.8 million was recorded as a credit loss through the Company’s income statement. The remaining $1.9 million was recognized in other comprehensive income in 2010 and 2009. There can be no assurance that future evaluations of the securities portfolio will not require us to recognize additional impairment charges with respect to these and other holdings.
 
In addition, as a condition to membership in the Federal Home Loan Bank of Seattle (“FHLB”), we are required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB. At December 31, 2010, we had stock in the FHLB of Seattle totaling $2.3 million. The FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards. The FHLB has discontinued the repurchase of its stock and discontinued the distribution of dividends. As of December 31, 2010, we did not recognize an impairment charge related to our FHLB stock holdings. There can be no assurance, however, that future negative changes to the financial condition of the FHLB may not require us to recognize an impairment charge with respect to such.
 
Recent levels of market volatility were unprecedented and we cannot predict whether they will return.
 
The capital and credit markets have been experiencing volatility and disruption for over three years, at times reaching unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain companies without regard to those companies’ underlying financial strength. If similar levels of market disruption and volatility return, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.


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We operate in a highly regulated environment and we cannot predict the effects of recent and pending federal legislation.
 
As discussed further in the section “Supervision and Regulation” of this Annual Report on Form 10-K, we are subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly traded company, we are subject to regulation by the Securities and Exchange Commission. Any change in applicable regulations or federal, state or local legislation, or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles, could have a substantial impact on us and our operations. Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions on our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to our reputation, all of which could adversely affect our business, financial condition or results of operations.
 
In that regard, sweeping financial regulatory reform legislation was enacted in July 2010. Among other provisions, the new legislation (i) creates a new Bureau of Consumer Financial Protection with broad powers to regulate consumer financial products such as credit cards and mortgages, (ii) creates a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, (iii) will lead to new capital requirements from federal banking agencies, (iv) places new limits on electronic debit card interchange fees, and (v) will require the Securities and Exchange Commission and national stock exchanges to adopt significant new corporate governance and executive compensation reforms. The new legislation and regulations are expected to increase the overall costs of regulatory compliance.
 
Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. Recently, these powers have been utilized more frequently due to the serious national, regional and local economic conditions we are facing. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations. Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including the Federal Reserve Board.
 
We cannot predict the full effects of recent legislation or the various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets generally, or on the Company and on the Bank specifically. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock.
 
Fluctuating interest rates could adversely affect our profitability.
 
Our profitability is dependent to a large extent upon our net interest income, which is the difference between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and re-pricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our net interest margin, and, in turn, our profitability. We manage our interest rate risk within established guidelines and generally seek an asset and liability structure that insulates net interest income from large deviations attributable to changes in market rates. However, our interest rate risk management practices may not be effective in a highly volatile rate environment.
 
Fluctuations in interest rates on loans could adversely affect our business.
 
Significant increases in market interest rates on loans, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow. Conversely, decreases in interest rates could result in an acceleration of loan prepayments. An increase in market interest rates could also adversely


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affect the ability of our floating-rate borrowers to meet their higher payment obligations. If this occurred, it could cause an increase in nonperforming assets and charge offs, which could adversely affect our business, financial condition and results of operations.
 
We face strong competition from financial services companies and other companies that offer banking services.
 
The banking and financial services businesses in our market area are highly competitive and increased competition may adversely impact the level of our loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. These competitors include national banks, foreign banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors include major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers, and a range in quality of products and services provided, including new technology driven products and services. If we are unable to attract and retain banking customers, we may be unable to continue our loan growth and level of deposits.
 
We may not be able to successfully implement our internal growth strategy.
 
We have pursued and intend to continue to pursue an internal growth strategy, the success of which will depend primarily on generating an increasing level of loans and deposits at acceptable risk levels and terms without proportionate increases in non-interest expenses. There can be no assurance that we will be successful in implementing our internal growth strategy. Furthermore, the success of our growth strategy will depend on maintaining sufficient regulatory capital levels and on favorable economic conditions in our market areas.
 
Certain built-in losses could be limited if we experience an ownership change, as defined in the Internal Revenue Code.
 
Certain of our assets, such as loans, may have built-in losses to the extent the basis of such assets exceeds fair market value. Section 382 of the Internal Revenue Code (“IRC”) may limit the benefit of these built-in losses that exist at the time of an “ownership change.” A Section 382 “ownership change” occurs if a stockholder or a group of stockholders, who are deemed to own at least 5% of our common stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of recognized built-in losses we can use to reduce our taxable income equal to the product of the total value of our outstanding equity immediately prior to the “ownership change” and the federal long-term tax-exempt interest rate in effect for the month of the “ownership change.” A number of special rules apply to calculating this limit. The limitations contained in Section 382 apply for a five-year period beginning on the date of the “ownership change” and any recognized built-in losses that are limited by Section 382 may be carried forward and reduce our future taxable income for up to 20 years, after which they expire. If an “ownership change” were to occur due to the issuance and sale of our securities, the annual limit of Section 382 could defer our ability to use some, or all, of the built-in losses to offset taxable income.
 
Unexpected losses or our inability to successfully implement our tax planning strategies in future reporting periods may require us to establish a higher valuation allowance against our deferred income tax assets.
 
We evaluate our deferred income tax assets for recoverability based on all available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws, our ability to successfully implement tax planning strategies, or variances between our future projected operating performance and our actual results. We are required to establish a valuation allowance for deferred income tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred income tax assets may not be realized. In determining the more-likely-than-not criterion, we evaluate all positive and negative available evidence as of the end of each


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reporting period. In this regard, we established a valuation allowance for deferred income tax assets of $7.4 million at September 30, 2010. An additional $1.4 million valuation allowance was added in the fourth quarter of 2010. Future adjustments to the deferred income tax asset valuation allowance, if any, will be determined based upon changes in the expected realization of the net deferred income tax assets. The realization of the deferred income tax assets ultimately depends on the existence of sufficient taxable income in either the carry back or carry forward periods under the tax law. Net operating loss carryforwards, if any, may be limited should a stock offering or sale of securities cause a change in control as defined in Internal Revenue Code Section 382. In addition, as discussed above, net unrealized built-in losses, as defined in IRC Section 382 may be limited. In addition, risk based capital rules require a regulatory calculation evaluating the Company’s deferred income tax asset balance for realization against estimated pre-tax future income and net operating loss carry backs. Under the rules of this calculation and due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record adjustments to the valuation allowance in future reporting periods that would materially reduce our risk based capital ratios. Such a charge could also have a material adverse effect on our results of operations, financial condition and capital position.
 
Changes in accounting standards could materially impact our financial statements.
 
From time to time the Financial Accounting Standards Board and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be very difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements.
 
The Preferred Stock diminishes the net income available to our common stockholders and earnings per common share.
 
We have issued $27.0 million of Preferred Stock to the U.S. Treasury pursuant to the Troubled Asset Relief Program (“TARP”) Capital Purchase Program. The dividends accrued on the Preferred Stock reduce the net income available to common stockholders and our earnings per common share. The Preferred Stock is cumulative, which means that any dividends not declared or paid will accumulate and will be payable when the payment of dividends is resumed. We have deferred the payment of quarterly dividends on the Preferred Stock, beginning in December 2009. The dividend rate on the Preferred Stock will increase from 5% to 9% per annum five years after its original issuance if not earlier redeemed. If we are unable to redeem the Preferred Stock prior to the date of this increase, the cost of capital to us will increase substantially. Depending on our financial condition at the time, this increase in the Preferred Stock annual dividend rate could have a material adverse effect on our earnings and could also adversely affect our ability to pay dividends on our common shares. Shares of Preferred Stock will also receive preferential treatment in the event of the liquidation, dissolution or winding up of the Company.
 
Finally, the terms of the Preferred Stock allow the U.S. Treasury to impose additional restrictions, including those on dividends and including unilateral amendments required to comply with changes in applicable federal law. Under the terms of the Preferred Stock, our ability to declare or pay dividends on any of our shares is limited. Specifically, we are unable to declare dividend payments on common, junior preferred or pari passu preferred shares if we are in arrears on the dividends on the Series A Preferred Stock. As noted above, we have deferred the payment of dividend payments on the Series A Preferred Stock and we are therefore currently restricted from paying dividends on our common stock. Further, we are not permitted to increase dividends on our common stock above the amount of the last quarterly cash dividend per share declared prior to October 14, 2008 (which was zero) without the U.S. Treasury’s approval until the third anniversary of the investment unless all of the Fixed Rate Cumulative Perpetual Preferred Stock has been redeemed or transferred.
 
Holders of the Preferred Stock have certain voting rights that may adversely affect our common stockholders, and the holders of the Preferred Stock may have interests different from our common stockholders.
 
In the event that we fail to pay dividends on the Preferred Stock for a total of at least six quarterly dividend periods (whether or not consecutive), the U.S. Treasury will have the right to appoint two directors to our board of


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directors until all accrued but unpaid dividends have been paid. In order to conserve the liquid assets of the Company, our board of directors has approved the deferral of the regular quarterly cash dividend on the Preferred Stock, beginning in December 2009. Otherwise, except as required by law, holders of the Preferred Stock have limited voting rights. So long as shares of Preferred Stock are outstanding, in addition to any other vote or consent of stockholders required by law or our Articles of Incorporation, the vote or consent of holders of at least 662/3% of the shares of Preferred Stock outstanding is required for:
 
  •  any authorization or issuance of shares ranking senior to the Preferred Stock;
 
  •  any amendments to the rights of the Preferred Stock so as to adversely affect the rights, preferences, privileges or voting power of the Preferred Stock; or
 
  •  consummation of any merger, share exchange or similar transaction unless the shares of Preferred Stock remain outstanding, or if we are not the surviving entity in such transaction, are converted into or exchanged for preference securities of the surviving entity and the shares of Preferred Stock remaining outstanding or such preference securities have the rights, preferences, privileges and voting power of the Preferred Stock.
 
The holder of the Preferred Stock, currently the U.S. Treasury, may have different interests from the holders of our common stock, and could vote to block the foregoing transactions, even when considered desirable by, or in the best interests of, the holders of our common stock.
 
Because of our participation in TARP, we are subject to restrictions on compensation paid to our executives.
 
Pursuant to the terms of the TARP Capital Purchase Program, we are subject to regulations on compensation and corporate governance for the period during which the U.S. Treasury holds our Series A Preferred Stock. These regulations require us to adopt and follow certain procedures and to restrict the compensation we can pay to key employees. Key impacts of the regulations on us include, among other things:
 
  •  ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of Intermountain;
 
  •  a prohibition on cash incentive bonuses to our five most highly-compensated employees, subject to limited exceptions;
 
  •  a prohibition on equity compensation awards to our five most highly-compensated employees other than long-term restricted stock that cannot be sold, other than to pay related taxes, except to the extent the Treasury no longer holds the Series A Preferred Stock;
 
  •  a prohibition on any severance or change-in-control payments to our senior executive officers and next five most highly-compensated employees;
 
  •  a required recovery or “clawback” of any bonus or incentive compensation paid to a senior executive officer or any of the next twenty most highly compensated employees based on financial or other performance criteria that are later proven to be materially inaccurate; and
 
  •  an agreement not to deduct for tax purposes annual compensation in excess of $500,000 for each senior executive officer.
 
The combined effect of these restrictions may make it more difficult to attract and retain key executives and employees, and the change to the deductibility limit on executive compensation may increase the overall cost of our compensation programs in future periods.
 
Item 1B.   UNRESOLVED STAFF COMMENTS
 
Not applicable.


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Item 2.   PROPERTIES
 
At December 31, 2010, the Company operated 19 branch offices, including the main office located in Sandpoint, Idaho. The following is a description of the branch and administrative offices.
 
                     
                  Occupancy
              Date Opened
  Status
City and County
 
Address
 
Sq. Feet
    or Acquired  
(Own/Lease)
 
Panhandle State Bank Branches
                   
IDAHO
                   
(Kootenai County)
                   
Coeur d’Alene(1)
  200 W. Neider Avenue
Coeur d’Alene, ID 83814
    5,500     May 2005   Own building
Lease land
Rathdrum
  6878 Hwy 53
Rathdrum, ID 83858
    3,410     March 2001   Own
Post Falls
  3235 E. Mullan Avenue
Post Falls, ID 83854
    3,752     March 2003   Own
(Bonner County)
                   
Ponderay
  300 Kootenai Cut-Off Road
Ponderay, ID 83852
    3,400     October 1996   Own
Priest River
  301 E. Albeni Road
Priest River, ID 83856
    3,500     December 1996   Own
Sandpoint Center Branch(2)
  414 Church Street
Sandpoint, ID 83864
    11,399     January 2006   Lease
Sandpoint (Drive up)(3)
  231 N. Third Avenue
Sandpoint, ID 83864
    225     May 1981   Own
(Boundary County)
                   
Bonners Ferry
  6750 Main Street
Bonners Ferry, ID 83805
    3,400     September 1993   Own
(Shoshone County)
                   
Kellogg
  302 W. Cameron Avenue
Kellogg, ID 83837
    672     February 2006   Lease land,
Own modular unit
Intermountain Community Bank Branches
                   
(Canyon County)
                   
Caldwell
  506 South 10th Avenue
Caldwell, ID 83605
    6,480     March 2002   Own
Nampa
  521 12th Avenue S.
Nampa, ID 83653
    5,000     July 2001   Own
Payette
  175 North 16th Street
Payette, ID 83661
    5,000     September 1999   Own
Fruitland
  1710 N. Whitley
Dr., Ste A Fruitland, ID 83619
    1,500     April 2006   Lease


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                  Occupancy
              Date Opened
  Status
City and County
 
Address
 
Sq. Feet
    or Acquired  
(Own/Lease)
 
(Washington County)
                   
Weiser
  440 E Main Street
Weiser, ID 83672
    3,500     June 2000   Own
Magic Valley Bank Branches
                   
(Twin Falls County)
                   
Twin Falls
  113 Main Ave West
Twin Falls, ID 83301
    10,798     November 2004   Lease
Canyon Rim(4)
  1715 Poleline Road
East Twin Falls, ID 83301
    6,975     September 2006   Lease
(Gooding County)
                   
Gooding(4)
  746 Main Street
Gooding, ID 83330
    3,200     November 2004   Lease
OREGON
                   
(Malheur County)
                   
Ontario
  98 South Oregon St.
Ontario, OR 97914
    10,272     January 2003   Lease
Intermountain Community Bank Washington Branches
                   
WASHINGTON
                   
(Spokane County)
                   
Spokane Downtown
  801 W. Riverside, Ste 400
Spokane, WA 99201
    4,818     April 2006   Lease
Spokane Valley
  5211 E. Sprague Avenue
Spokane Valley, WA 99212
    16,000     Sept 2006   Own building
Lease land
ADMINISTRATIVE
                   
(Bonner County)
                   
Sandpoint Center(3)
  414 Church Street
Sandpoint, ID 83864
    26,725     January 2006   Lease
(Canyon County)
                   
Nampa Administrative Office
  5680 E. Franklin Road,
Suite 225 Nampa, ID 83687
    2,795     April 2007   Lease
(Kootenai County)
                   
Coeur d’Alene Branch and Administrative Services(1)
  200 W. Neider Avenue
Coeur d’Alene, ID 83814
    17,600     May 2005   Own building
Lease land
 
 
1) The Coeur d’Alene branch is located in the 23,100 square foot branch and administration building located at 200 W. Neider Avenue in Coeur d’Alene. The branch occupies approximately 5,500 square feet of this building.
 
2) In January 2006, the Company purchased land on an installment contract and subsequently began building the 86,100 square foot Sandpoint Center. The building contains the Sandpoint branch, corporate headquarters, administrative, technical and training facilities, an auditorium and community room and space for other professional tenants. The Company is currently pursuing tenants to occupy the other vacant leasable square footage in this building. In August 2009, the Company sold the building and provided financing for the purchase of the building. Due to the non-recourse financing, the transaction was accounted for using the financing method.
 
3) The Sandpoint branch drive-up is located in the 10,000 square foot building which housed the Sandpoint Branch before it was relocated to the Sandpoint Center. The square footage of the drive-up totals 225 square feet. The Company has leased out the remaining space.

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4) In December 2006, the Company entered in agreements to sell the Gooding and Canyon Rim branches, and subsequently lease them back. The sales were completed in January 2007 and the leases commenced in January 2007.
 
Item 3.   LEGAL PROCEEDINGS
 
Intermountain and Panhandle are parties to various claims, legal actions and complaints in the ordinary course of business. In Intermountain’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the consolidated financial position or results of operations of Intermountain.
 
Item 4.   [REMOVED AND RESERVED.]
 
PART II
 
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Price and Dividend Information
 
Bid and ask prices for the Company’s Common Stock are quoted in the Pink Sheets and on the OTC Bulletin Board under the symbol “IMCB.OB” As of February 28, 2011, there were 14 Pink Sheet/Bulletin Board Market Makers. The range of high and low closing prices for the Company’s Common Stock for each quarter during the two most recent fiscal years is as follows:
 
Quarterly Common Stock Price Ranges
 
                                 
    2010     2009  
Quarter
  High     Low     High     Low  
 
1st
  $ 2.60     $ 1.60     $ 5.20     $ 3.40  
2nd
    3.20       1.80       4.00       3.25  
3rd
    2.25       1.65       3.30       1.90  
4th
    2.00       1.40       3.50       2.06  
 
At February 28, 2011 the Company had 8,406,578 shares of common stock outstanding held by approximately 2,040 shareholders. As a bulletin board stock, Intermountain’s stock is relatively thinly traded, with daily average volumes totaling 2,413 in 2010 and 3,984 in 2009, respectively.
 
The Company historically has not paid cash dividends, but may do so in the future. The Company is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. These restrictions may affect the amount of dividends the Company may declare for distribution to its shareholders in the future.
 
Other than discussed below, there have been no securities of the Company sold within the last three years that were not registered under the Securities Act of 1933, as amended. The Company did not make any stock repurchases during the fourth quarter of 2010.
 
On December 19, 2008, the Company issued 27,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, no par value with a liquidation preference of $1,000 per share (“Preferred Stock”) and a ten-year warrant to purchase up to 653,226 shares of Common Stock, no par value, as part of the Troubled Asset Relief Program — Capital Purchase Program of the U.S. Department of Treasury (“U.S. Treasury”). The $27.0 million cash proceeds were allocated between the Preferred Stock and the warrant to purchase common stock based on the relative estimated fair values at the date of issuance. The fair value of the warrants was determined under the Black-Scholes model. The model includes assumptions regarding the Company’s common stock prices, dividend yield, and stock price volatility as well as assumptions regarding the risk-free interest rate. The strike price for the warrant is $6.20 per share.


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Dividends on the Preferred Stock will accrue and be paid quarterly at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The shares of Preferred Stock have no stated maturity, do not have voting rights except in certain limited circumstances and are not subject to mandatory redemption or a sinking fund.
 
The Preferred Stock has priority over the Company’s Common Stock with regard to the payment of dividends and liquidation distributions. The Preferred Stock qualifies as Tier 1 capital. The agreement with the U.S. Treasury contains limitations on certain actions of the Company including the payment of quarterly cash dividends on the Company’s common stock in excess of current cash dividends paid in the previous quarter and the repurchase of its common stock during the first three years of the agreement. In addition, the Company agreed that, while the U.S. Treasury owns the Preferred Stock, the Company’s employee benefit plans and other executive compensation arrangements for its senior executive officers must comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008.
 
Equity Compensation Plan Information
 
The Company has historically maintained equity compensation plans that provided for the grant of awards to its officers, directors and employees. These plans consisted of the 1988 Employee Stock Option Plan, the Amended and Restated 1999 Employee Stock Option and Restricted Stock Plan and the 1999 Director Stock Option Plan. Each of these plans has expired and shares may no longer be awarded under these plans. However, unexercised options or unvested awards remain under these plans. The following table sets forth information regarding shares reserved for issuance pursuant to outstanding awards:
 
                         
                Number of Shares
 
    Number of Shares
          Remaining Available for
 
    to be Issued Upon
    Weighted-Average
    Future Issuance Under
 
    Exercise of
    Exercise Price of
    Equity Compensation
 
    Outstanding Options,
    Outstanding Options,
    Plans (Excluding
 
    Warrants and Rights
    Warrants and Rights
    Shares Reflected in
 
Plan Category
  (a)     (b)     Column(a) (c))  
 
Equity compensation plans approved by shareholders
    277,792     $ 6.28        


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Five-Year Stock Performance Graph
 
The following graph shows a five-year comparison of the total return to shareholders of Intermountain’s common stock, the SNL Securities $500 million to $1 billion Bank Asset Size Index (“SNL Index”) and the Russell 2000 Index. All of these cumulative returns are computed assuming the reinvestment of dividends at the frequency with which dividends were paid during the applicable years.
 
Total Return Performance
 
(PERFORMANCE GRAPH)
 
                                                             
      12/31/2005       12/31/2006       12/31/2007       12/31/2008       12/31/2009       12/31/2010  
Intermountain Community Bancorp
    $ 100       $ 154       $ 106       $ 31       $ 17       $ 10  
SNL Index
    $ 100       $ 112       $ 87       $ 54       $ 50       $ 54  
Russell 2000
    $ 100       $ 117       $ 114       $ 74       $ 93       $ 116  
                                                             


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Item 6.   SELECTED FINANCIAL DATA
 
The following selected financial data (in thousands) of the Company is derived from the Company’s historical audited consolidated financial statements and related notes. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes contained elsewhere in this Form 10-K.
 
                                         
    For the Year Ended December 31, (2)  
    2010(1)     2009(1)     2008(1)     2007(1)     2006(1)  
 
INCOME STATEMENT DATA
                                       
Total interest income
  $ 46,049     $ 53,867     $ 63,809     $ 72,858     $ 59,580  
Total interest expense
    (10,785 )     (16,170 )     (20,811 )     (26,337 )     (17,533 )
                                         
Net interest income
    35,264       37,697       42,998       46,521       42,047  
Provision for loan losses
    (24,012 )     (36,329 )     (10,384 )     (3,896 )     (2,148 )
                                         
Net interest income after provision for losses on loans
    11,252       1,368       32,614       42,625       39,899  
Total other income
    11,024       11,991       13,932       13,199       10,838  
Total other expense
    (54,894 )     (49,630 )     (45,372 )     (40,926 )     (35,960 )
                                         
Income (loss) before income taxes
    (32,618 )     (36,271 )     1,174       14,898       14,777  
Income tax (provision) benefit
    882       14,360       80       (5,453 )     (5,575 )
                                         
Net income (loss)
    (31,736 )     (21,911 )     1,254       9,445       9,202  
Preferred stock dividend
    1,716       1,662       45              
                                         
Net income (loss) applicable to common stockholders
  $ (33,452 )   $ (23,573 )   $ 1,209     $ 9,445     $ 9,202  
                                         
Net income (loss) per share(2)
                                       
Basic
  $ (3.99 )   $ (2.82 )   $ 0.15     $ 1.15     $ 1.15  
Diluted
  $ (3.99 )   $ (2.82 )   $ 0.14     $ 1.10     $ 1.07  
                                         
Weighted average common shares outstanding(2)
                                       
Basic
    8,386       8,361       8,295       8,206       8,035  
Diluted
    8,386       8,361       8,515       8,605       8,586  
Cash dividends per share
                             
 
                                         
    December 31, (1)  
    2010     2009     2008     2007     2006  
 
BALANCE SHEET DATA
                                       
Total assets
  $ 1,005,109     $ 1,079,644     $ 1,105,555     $ 1,048,659     $ 920,348  
Net loans(3)
    563,228       655,602       752,615       756,549       664,885  
Deposits
    778,833       819,321       790,412       757,838       693,686  
Securities sold subject to repurchase agreements
    105,116       95,233       109,006       124,127       106,250  
Advances from Federal Home Loan Bank
    34,000       49,000       46,000       29,000       5,000  
Other borrowings
    16,527       16,527       40,613       36,998       22,602  
Stockholders’ equity
    59,353       88,627       110,485       90,119       78,080  
 
 
(1) Certain prior period amounts have been reclassified to conform to the current period’s presentation.
 
(2) Earnings per share and weighted average shares outstanding have been adjusted retroactively for the effect of stock splits and dividends, including the 10% common stock dividend effective May 31, 2007.


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(3) Net loans receivable have been adjusted for 2006 to move the allowance for unfunded commitments from the allowance for loan loss, a component of net loans, to other liabilities.
 
RETURNS ON AVERAGE ASSETS, COMMON SHAREHOLDERS’ EQUITY AND AVERAGE
COMMON SHAREHOLDERS TO AVERAGE ASSETS
 
                         
For the Years Ended December 31,   2010     2009     2008  
    (Dollars in thousands)  
 
Return on Average Assets:
                       
Net earnings (loss) available to common shareholders
    (3.04 )%     (2.01 )%     0.12 %
Adjusted net earnings (loss) available to common shareholders(1)
    (1.21 )%            
Return on Average Common Stockholders’ Equity:
                       
Net earnings (loss) available to common shareholders
    (67.35 )%     (31.17 )%     1.35 %
Adjusted net earnings (loss) available to common shareholders(1)
    (28.97 )%            
Average Tangible Common Stockholders’ Equity to Average Tangible Assets
    7.22 %     9.28 %     8.97 %
Average Common Stockholders’ Equity to Average Assets(2)
    4.76 %     6.95 %     8.49 %
 
 
(1) Non-GAAP ratios adjusted for Goodwill Impairment charge of $11,662,000 and Deferred Tax Asset Valuation charge of $7,400,000.
 
(2) Average common tangible equity is average common stockholders’ equity less average net goodwill and other intangible assets.
 
Management believes that adjusted return on average assets and return on average equity are meaningful measures of performance. The exclusion of the goodwill impairment of $11.6 million and the deferred tax asset valuation of $7.4 million are relevant as they represent non-cash expenses that are nonrecurring in the normal course of operations. Additionally, management believes tangible common equity and the tangible common equity ratio are meaningful measures of capital adequacy. Management believes the exclusion of certain intangible assets in the computation of tangible common equity and tangible common equity ratio provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the operating results and capital of the Company. Tangible common equity is calculated as total shareholders’ equity less preferred stock and less goodwill and other intangible assets. In addition, tangible assets are total assets less goodwill and other intangible assets. The tangible common equity ratio is calculated as tangible common shareholders’ equity divided by tangible assets. The tangible common equity and tangible common equity ratio is considered a non-GAAP financial measure and should be viewed in conjunction with the total shareholders’ equity and the total shareholders’ equity ratio.
 
The adjusted return on average assets, adjusted return on average equity, tangible common equity and tangible common equity ratio are considered non-GAAP financial measures and should be viewed in conjunction with the return on average assets, return on average equity, total shareholders’ equity and the total shareholders’ equity ratio.
 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto presented elsewhere in this report. This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For a discussion of the risks and uncertainties inherent in such statements, see “Forward-Looking Statements” and “Risk Factors” in Part 1 of this report.
 
Overview
 
The Company operates a multi-branch banking system and continues to plan long-term to operate as a community bank in both existing and potentially new markets. Given current economic conditions and short-term market uncertainties, the Company scaled back its expansion plans in 2008, and is currently focused on managing


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and growing its existing asset portfolio, preserving its capital and liquidity positions, improving operating efficiency and capitalizing on opportunities to selectively grow its core low-cost deposit base.
 
Longer term, based on opportunities available in the future, the Company plans expansion in markets generally located within the states where it currently operates, and has identified its primary short-term growth markets as Ada County in Idaho, Spokane County, Washington, and counties contiguous to its existing Idaho and eastern Washington markets. However, Intermountain currently has branches in Idaho, Oregon and Washington, which would allow for future expansion in any of these states without the purchase of another financial institution. As economic conditions improve, the Company will pursue a balance of asset and earnings growth by focusing on increasing its market share in its present locations, expanding services sold to existing customers, building new branches and merging and/or acquiring community banks that fit closely with the Bank’s strategic direction.
 
Management and the Board of Directors remain committed to building a fiscally strong, locally focused community banking organization and further increasing the level of service we provide our targeted customers and communities. Our long-term strategic plan calls for focused earnings growth through maximizing its operating efficiency and resuming managed balance sheet growth. We expect to achieve these goals by employing experienced, knowledgeable and dedicated people and supporting them with strong technology and training. Please see the “Business Strategy and Opportunities” Subsection of Item 1 on page 5 above for a more detailed discussion on the Company’s strengths and potential opportunities.
 
Recent History
 
In June 2005, the Company entered the Washington State market by opening a branch in Spokane Valley, Washington. This branch allowed the Company to enter into the eastern Washington banking market and to also better serve its existing customer base. It added a downtown Spokane location in April 2006 after the Bank was able to attract a seasoned team of commercial and private bankers. The Company now offers full service banking and residential and commercial lending from its Spokane Valley branch and Spokane downtown offices, which it operates under the name of Intermountain Community Bank — Washington. In August 2007, the Spokane Valley branch was moved to a larger facility in a growing small business and retail area. It also houses a mortgage loan center and some administrative offices.
 
Also in 2005, the Company relocated the Coeur d’Alene branch and administrative office to a combined administrative and branch office building located on Neider Avenue between Highway 95 and Government Way in Coeur d’Alene. This facility serves as our primary Coeur d’Alene office and accommodates the Home Loan Center, our centralized real estate mortgage processing department, various administrative support departments and our SBA Loan Production Center. The SBA center was initiated in 2003 to enhance the service, delivery and efficiency of the Small Business Administration lending process.
 
In March 2006, the Company opened a branch in Kellogg, Idaho under the Panhandle State Bank name. In April 2006, the Company opened a branch in Fruitland, Idaho which operates as Intermountain Community Bank. In April 2006, the Company also opened a Trust & Wealth Management division, and began offering these services to its customers. In September 2006, the Company opened a second branch in Twin Falls, Idaho, which operates as Magic Valley Bank. These new branches and divisions allowed the Company to expand geographically and better serve its existing customer base.
 
In September 2006, the Company acquired a small investment company with which it had maintained a close relationship for many years, and subsequently renamed the department, Intermountain Community Investment Services (“ICI”). Despite difficult market conditions, ICI has served the needs of its customers and increased its customer base since the acquisition. In 2009, the Company combined its Trust and ICI functions into one unit, now known as Trust and Investment Services to further integrate the services and offer customers a more comprehensive investment and wealth management program.
 
In August 2006, the Company began construction of new headquarters building in Sandpoint, Idaho, now known as the Sandpoint Center. The Company relocated its Sandpoint main branch, corporate headquarters and administrative offices to this building in 2008, with the Company occupying approximately 47,000 square feet. The remaining rentable space is being marketed to prospective tenants who provide complementary services to those of


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the Bank. In connection with the building, the Company borrowed $23.1 million from an unaffiliated bank. This loan was paid off in August 2009, through the sale of the Sandpoint Center to an unaffiliated third party. The Bank holds the master lease on the Sandpoint Center. Because the Company provided the financing for the purchase of the building on a non-recourse basis, the transaction was accounted for using the financing method.
 
As economic conditions and the Company’s credit portfolio stabilizes, its near-term focus is beginning to shift. It has spent the past several years overcoming the challenges created by the significant downturn in its markets. In 2009 and 2010, it responded proactively to the challenging economy in a number of different ways. In lending, it tightened loan underwriting standards, actively reduced concentrations of riskier loan types, significantly enhanced its credit administration and credit resolution functions, and more aggressively pursued government-guaranteed and other lower risk lending opportunities. On the deposit side, it maintained its core deposit base while simultaneously reducing its cost of funds through a disciplined approach focused on attracting and retaining low-cost transactional deposits. Intermountain also made significant efficiency gains in many areas, including reducing its workforce by 23% since 2007, and centralizing and automating more of its core deposit and lending functions. These cost reduction gains were more than offset in the past couple years by significantly increased credit costs, but as these abate, the Company’s non-interest expense should reduce significantly.
 
As 2011 begins, the Company continues to proactively manage its current credit portfolio, but is now more aggressively seeking new quality lending relationships, particularly in the agriculture, commercial and commercial real estate sectors. Management is maintaining its focus on increasing the core deposit base, but at lower pricing. It is also accelerating its cost management efforts, as management believes that strong efficiency gains are critical in the projected slow-growth environment of the near future. Responding to additional regulatory pressure on traditional income sources such as overdraft and debit card fees, management is increasing its focus on enhancing its alternative fee income activities, including trust and investment, cash management and other service fees. It is also evaluating a number of new fee income initiatives.
 
Longer-term, the Company will continue its focus on expanding market share of targeted customers in its existing markets, and entering new markets in which it can attract and retain strong employees, subject to capital adequacy levels and regulatory approval. Management believes that the economy arising out of the current downturn will present a number of new opportunities for fewer, but stronger, community banks. Its efforts are focused on positioning Intermountain to take advantage of these opportunities, particularly through the acquisition of desirable employees and customers from distressed banks and non-bank institutions. It will also look for opportunities to acquire other community banks in both FDIC- and non-FDIC assisted transactions. The Company has employed these competitive tools to grow market share over the past ten years, since it began expanding beyond its Sandpoint base. During this time period, the Company has grown from eighth overall in market share in the core Idaho and Oregon markets it serves to second, with a consolidated market share of 12.6%. The Company is the market share leader in deposits in five of the eleven counties in which it operates (Source: June 2010 FDIC Survey of Banking Institutions). The Spokane and Boise market areas represent potential future growth markets for the Company, as total market deposits in these two counties exceed by a two-to-one margin the total market deposits in the Company’s other markets. The Company has a relatively small, but growing presence in Spokane County with strong local market talent. The Bank does not have any branches in Ada County, which includes Boise, but has a number of key managers who came from or worked in the Boise area, which would allow for potential entry and expansion into this market in the future. Please see the “Business Strategy and Opportunities,” “Primary Market Area” and “Competition” Subsections of Item 1 beginning on page 5 above for a more detailed discussion on the Company’s strengths, market position and potential opportunities.
 
Results of Operations
 
Overview.  Intermountain recorded a net loss applicable to common stockholders of $33.5 million, or $3.99 per diluted share, for the twelve months ended December 31, 2010, compared with net loss applicable to common stockholders of $23.6 million, or $2.82 per diluted share, for the twelve months ended December 31, 2009. The increased loss for 2010 primarily reflected the impacts of an $11.7 goodwill impairment charge and a $7.4 million deferred tax asset valuation allowance charge taken by the Company in the third quarter. Net interest income and other income were down modestly for the year, but were offset by larger reductions in the provision for loan losses and other non-interest expenses. Fourth quarter 2010 results showed significant improvement over the prior quarter


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and the same period last year. Intermountain recorded a net loss applicable to common stockholders of $1.1 million, or $0.13 per diluted share for the three months ended December 31, 2010, compared with a net loss applicable to common stockholders of $24.7 million or $2.95 per diluted share for the third quarter of 2010 (impacted by the non-cash charges noted above) and a net loss applicable to common stockholders of $9.0 million or $1.07 per diluted share, for the three months ended December 31, 2009.
 
The annualized return on average assets (“ROAA”) was -3.04% for 2010, but excluding the goodwill impairment charge and the deferred tax asset valuation charge, it was -1.21% for the twelve months ended December 31, 2010. For 2009, the ROAA was -2.01%. The annualized return on average common equity (“ROAE”) was -67.35% and -31.16% for the twelve months ended December 31, 2010 and 2009, respectively. The annualized return on average common equity (“ROAE”), excluding the goodwill impairment charge and the deferred tax asset valuation charge was -28.97% for the twelve months ended December 31, 2010. See Item 6, Selected Financial Data for discussion of non-GAAP financial measures.
 
The annualized return on average assets (“ROAA”) was -0.25%, -9.37%, and -3.17% for the three months ended December 31, 2010, September 30, 2010 and December 31, 2009, respectively. The annualized return on average common equity (“ROAE”) was -12.39, -212.06%, and -52.55%, for the three months ended December 31, 2010, September 30, 2010 and December 31, 2009, respectively.
 
The goodwill impairment and the deferred tax asset adjustments noted above total $19.1 million and are non-cash adjustments that do not impact the Company’s current liquidity or underlying operating results. The adjustments also have no impact on the Company’s regulatory capital ratios, as they are both already excluded from the Company’s regulatory capital calculations. The goodwill impairment charge is based upon the results of the goodwill impairment analysis it completed in the third quarter of 2010. Although the lost earnings from the goodwill impairment cannot be reclaimed in future periods, the charge eliminated all of the Company’s remaining goodwill on its balance sheet, so that no further charges are possible unless the Company records goodwill as part of a future transaction. The establishment of the non-cash valuation allowance against the Company’s deferred tax assets (DTA) reflected the Company’s decision under applicable accounting rules to recognize uncertainty in its ability to generate certain levels of future taxable income, given the challenging economic times and its prior losses. The Company analyzes the deferred tax asset on a quarterly basis and may recapture all or a portion of this allowance depending on future profitability.
 
The following tables set forth reconciliations of non-GAAP financial measures discussed in this report (dollars in thousands):
 
                                 
    Twelve Months Ended
    Three Months Ended
 
    December 31     December 31  
    2010     2009     2010     2009  
 
Net income (loss)
  $ (31,736 )   $ (21,911 )   $ (626 )   $ (8,548 )
Less tax benefit
    (882 )     (14,360 )           (5,217 )
Less goodwill impairment
    11,662                    
Less deferred tax asset valuation
    7,400                    
                                 
Total loss before income tax benefit, excluding Goodwill Impairment
  $ (13,556 )   $ (36,271 )   $ (626 )   $ (13,765 )
                                 
 
Both interest expense and other operating expense, excluding the goodwill impairment, decreased significantly from 2009. Interest income also declined, reflecting a more conservative asset mix emphasizing safety and liquidity and the impact of lower interest rates, particularly on the Company’s marketable securities portfolio. Other income was down from 2009 as a result of smaller gains on the sale of securities than was recorded in 2009. Excluding the impact of these sales, the Company generally had higher fee and other non-interest income revenue than in 2009. See Item 6, Selected Financial Data for discussion of non-GAAP financial measures.
 
Most asset quality metrics continued to improve with lower levels of non-performing assets and reduced concentrations in the riskiest loan segments. The Company has been proactive in identifying and resolving its problem credits, taking write-downs early in the process and initiating dialogue with borrowers at the first sign of trouble. As a result, its loan losses over the past two years have been significant, but are projected to decline substantially in future periods.


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As of December 31, 2010, assets totaled $1.01 billion, a decrease of $74.5 million or 6.9% from the prior year, reflecting conservative balance sheet management in light of the weak economy. In 2009, assets totaled $1.08 billion, a 2.3% decrease from $1.11 billion at December 31, 2008. The Company decreased net loans receivable by $92.4 million or 14.1% in 2010, and by $97.0 million in 2009. Loan balance decreases reflect a combination of lower borrowing demand, tighter underwriting standards and aggressive management and disposition of problem assets. Total deposits also decreased by $40.5 million or 4.9% in 2010, following a $28.9 million increase in 2009, as the Company allowed higher rate brokered and other non-relationship deposits to roll off, given the high levels of liquidity on the balance sheet.
 
Net Interest Income
 
The Company’s net interest income for the year ended December 31, 2010 was $35.3 million, a decrease of $2.4 million from the prior year. The decrease in net interest income resulted from a combination of a shift in the mix of the Company’s assets to more conservative, lower-yielding assets and lower yields on its securities portfolio. Most of the negative impact on interest income from these sources was offset by decreases in interest expense on the Company’s interest bearing liabilities. The net interest margin for the year ended December 31, 2010 was 3.77%, as compared to 3.81% for 2009 and 4.50% for 2008. A volatile interest rate environment, in which rates on interest earning assets declined more rapidly and further than rates on interest-bearing liabilities produced most of the decrease in the Company’s margin during 2009 and 2008.
 
The following table provides information on net interest income for the past three years, setting forth average balances of interest-earning assets and interest-bearing liabilities, the interest income earned and interest expense recorded thereon and the resulting average yield-cost ratios.
 
Average Balance Sheets and Analysis of Net Interest Income
 
                         
    For the Year Ended December 31, 2010  
    Average
    Interest Income/
    Average
 
    Balance     Expense     Yield  
    (Dollars in thousands)  
 
Loans receivable, net(1)
  $ 632,761     $ 38,020       6.01 %
Securities(2)
    199,819       7,793       3.90  
Federal funds sold
    102,109       236       0.23  
                         
Total earning assets
    934,689       46,049       4.93 %
Cash and cash equivalents
    18,691                  
Office property and equipment, net
    41,293                  
Other assets
    47,897                  
                         
Total assets
  $ 1,042,570                  
                         
Time deposits of $100,000 or more
  $ 127,173     $ 3,065       2.41 %
Other interest-bearing deposits
    517,438       4,681       0.90  
Short-term borrowings
    69,232       2,005       2.90  
Other borrowed funds
    79,060       1,034       1.31  
                         
Total interest-bearing liabilities
    792,903       10,785       1.36 %
Noninterest-bearing deposits
    161,877                  
Other liabilities
    9,238                  
Stockholders’ equity
    78,552                  
                         
Total liabilities and stockholders’ equity
  $ 1,042,570                  
                         
Net interest income
          $ 35,264          
                         
Net interest margin
                    3.77 %
                         


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Average Balance Sheets and Analysis of Net Interest Income
 
                         
    For the Year Ended December 31, 2009  
    Average
    Interest Income/
    Average
 
    Balance     Expense     Yield  
    (Dollars in thousands)  
 
Loans receivable, net(1)
  $ 736,568     $ 43,611       5.92 %
Securities(2)
    201,709       10,079       5.00  
Federal funds sold
    50,387       177       0.35  
                         
Total earning assets
    988,664       53,867       5.45 %
Cash and cash equivalents
    18,904                  
Office property and equipment, net
    43,238                  
Other assets
    29,769                  
                         
Total assets
  $ 1,080,575                  
                         
Time deposits of $100,000 or more
  $ 142,831     $ 4,338       3.04 %
Other interest-bearing deposits
    524,901       8,001       1.52  
Short-term borrowings
    92,507       2,347       2.54  
Other borrowed funds
    62,900       1,484       2.36  
                         
Total interest-bearing liabilities
    823,139       16,170       1.96 %
Noninterest-bearing deposits
    151,640                  
Other liabilities
    3,011                  
Stockholders’ equity
    102,785                  
                         
Total liabilities and stockholders’ equity
  $ 1,080,575                  
                         
Net interest income
          $ 37,697          
                         
Net interest margin
                    3.81 %
                         


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Average Balance Sheets and Analysis of Net Interest Income
 
                         
    For the Year Ended December 31, 2008  
    Average
    Interest Income/
    Average
 
    Balance     Expense     Yield  
    (Dollars in thousands)  
 
Loans receivable, net(1)
  $ 779,854     $ 55,614       7.13 %
Securities(2)
    155,025       7,998       5.16  
Federal funds sold
    19,937       197       0.99  
                         
Total earning assets
    954,816       63,809       6.68 %
Cash and cash equivalents
    22,591                  
Office property and equipment, net
    44,372                  
Other assets
    19,295                  
                         
Total assets
  $ 1,041,074                  
                         
Time deposits of $100,000 or more
  $ 130,729     $ 5,176       3.96 %
Other interest-bearing deposits
    475,990       9,464       1.99  
Short-term borrowings
    121,055       4,385       3.62  
Other borrowed funds
    70,374       1,786       2.54  
                         
Total interest-bearing liabilities
    798,148       20,811       2.61 %
Noninterest-bearing deposits
    145,924                  
Other liabilities
    6,706                  
Stockholders’ equity
    90,296                  
                         
Total liabilities and stockholders’ equity
  $ 1,041,074                  
                         
Net interest income
          $ 42,998          
                         
Net interest margin
                    4.50 %
                         
 
 
(1) Non-accrual loans are included in the average balance, but interest on such loans is not recognized in interest income.
 
(2) Municipal interest income is not presented on a tax-equivalent basis, and represents a small portion of total interest income.
 
The following rate/volume analysis depicts the increase (decrease) in net interest income attributable to (1) interest rate fluctuations (change in rate multiplied by prior period average balance), (2) volume fluctuations (change in average balance multiplied by prior period rate) and (3) volume/rate (changes in rate multiplied by changes in volume) when compared to the preceding year.


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Changes Due to Volume and Rate 2010 versus 2009
 
                                 
    Volume     Rate     Volume/Rate     Total  
    (Dollars in thousands)  
 
Loans receivable, net
  $ (6,146 )   $ 646     $ (91 )   $ (5,591 )
Securities
    (94 )     (2,212 )     20       (2,286 )
Federal funds sold
    182       (61 )     (62 )     59  
                                 
Total interest income
    (6,058 )     (1,627 )     (133 )     (7,818 )
Time deposits of $100,000 or more
    (476 )     (896 )     99       (1,273 )
Other interest-bearing deposits
    (114 )     (3,252 )     46       (3,320 )
Borrowings
    (210 )     (329 )     (253 )     (792 )
                                 
Total interest expense
    (800 )     (4,477 )     (108 )     (5,385 )
                                 
Net interest income
  $ (5,258 )   $ 2,850     $ (25 )   $ (2,433 )
                                 
 
Changes Due to Volume and Rate 2009 versus 2008
 
                                 
    Volume     Rate     Volume/Rate     Total  
    (Dollars in thousands)  
 
Loans receivable, net
  $ (3,087 )   $ (9,440 )   $ 524     $ (12,003 )
Securities
    2,408       (252 )     (75 )     2,081  
Federal funds sold
    301       (127 )     (194 )     (20 )
                                 
Total interest income
    (378 )     (9,819 )     255       (9,942 )
Time deposits of $100,000 or more
    479       (1,206 )     (111 )     (838 )
Other interest-earning deposits
    972       (2,209 )     (226 )     (1,463 )
Borrowings
    (1,224 )     (1,440 )     324       (2,340 )
                                 
Total interest expense
    227       (4,855 )     (13 )     (4,641 )
                                 
Net interest income
  $ (605 )   $ (4,964 )   $ 268     $ (5,301 )
                                 
 
Net Interest Income — 2010 Compared to 2009
 
The Company’s net interest income decreased to $35.3 million in 2010 from $37.7 million in 2009. The net interest income change attributable to volume changes was an unfavorable $5.3 million from 2009 as the volume of higher yielding assets, particularly loans, decreased significantly, overwhelming positive volume changes in Fed Funds Sold on the asset side and in all interest-bearing liabilities. Overall, rate changes had a $2.9 million favorable impact on net interest income in 2010, as rate reductions on all interest-bearing liabilities and positive rate impacts on the loan portfolio from lower non-accrual loans offset rate reductions in the Company’s securities portfolio. The separate volume and rate changes along with a $25,000 decrease due to the interplay between rate and volume factors created the $2.4 million overall decrease in net interest income for 2010.
 
The yield on interest-earning assets decreased 0.52% in 2010 from 2009, while the cost of interest-bearing liabilities decreased 0.53% during the same period. The earning-asset yield was significantly impacted by the shift in the mix of Company assets from the higher-yielding loan portfolio to lower-yielding fixed income securities and Fed Funds Sold, as a result of conservative liquidity management, lower loan demand, and aggressive problem asset resolution. Rates paid on Fed Funds Sold remained between 0.00% and 0.25% throughout 2010, meaning that the $101.1 million in average Fed Funds Sold balances earned only minimal income.
 
The yield on the Company’s loans, at 6.01%, was up modestly from the prior year, primarily as a result of lower interest reversals on non-accrual and other problem loans than it experienced in 2009. The Bank maintained about 56% of its portfolio as variable rate loans, which were stable but at relatively low rates as market rates remained very low all year. The Bank sought to moderate this impact by continuing to maintain floors on its variable rate loans, and


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emphasizing the higher yielding commercial, agricultural and commercial real estate segments of its loan portfolio. Non-accrual loans were down from 2009, but still had an impact on net interest income, as the Company reversed $794,000 in interest income on loans placed on non-accrual status and problem loans. Problem loans include loans charged off directly or transferred to OREO. This resulted in an 0.08% decrease in loan yield over what would have been experienced without the non-accrual loans. The investment securities portfolio experienced a 1.10% decrease in yield in 2010 as spreads tightened on most fixed income securities, prepayments on mortgage-backed securities increased, and the Company maintained a short duration in its investment portfolio to position it for anticipated future higher market rates.
 
The Company lowered its interest expense by $5.4 million or 33% during 2010. Active management strategies, low market rates, and decreased competition reduced the average cost on its interest-bearing liabilities from 1.66% to 1.13% of average earning assets, while maintaining its solid relationship-based deposit base. Management focused on eliminating or reducing funding costs on wholesale sources and non-relationship deposits during 2010, while protecting its local core deposit franchise. Its cost of deposits decreased from 1.51% to 0.96% and the cost of other borrowings and FHLB advances decreased from 2.47% to 2.05%. The Company maintains 20% of its average total deposits a relatively high percentage as compared to its peer group, in non-interest bearing demand deposits, which provide a low-cost funding source in low interest rate environments but holds even more value in higher interest rate environments.
 
Net Interest Income — 2009 Compared to 2008
 
The Company’s net interest income decreased to $37.7 million in 2009 from $43.0 million in 2008. The net interest income change attributable to volume changes was an unfavorable $605,000 from 2008 as the volume of higher yielding assets, particularly loans, decreased significantly, overwhelming positive volume changes in securities, Fed Funds Sold, and borrowings. During 2009, interest rates decreased both on interest earning assets and interest bearing liabilities; however, rates continued to decrease more significantly on the asset side than the liability side. This created a $5.0 million decrease in net interest income attributable to rate variances. The separate volume and rate changes along with a $268,000 increase due to the interplay between rate and volume factors created a $5.3 million overall decrease in net interest income for 2009.
 
The yield on interest-earning assets decreased 1.23% in 2009 from 2008, while the cost of interest-bearing liabilities decreased 0.65% during the same period. The earning-asset yield was significantly impacted by management’s shift in the mix of Company assets from the higher-yielding loan portfolio to lower-yielding fixed income securities and Fed Funds Sold to enhance Company liquidity. Rates paid on Fed Funds Sold remained between 0.00% and 0.25% throughout 2009, meaning that the $43.9 million in average Fed Funds Sold balances earned only minimal income.
 
The yield on the Company’s loans, at 5.92%, was also down from the prior year, although the drop was less significant than in 2008. The Bank maintained about 58% of its portfolio as variable rate loans, which continued to drop as market rates remained very low all year. The Bank sought to moderate this impact by continuing to maintain floors on its variable rate loans, and emphasizing the higher yielding commercial loan component of its loan portfolio. High levels of non-accrual loans also significantly impacted net interest income, as the Company reversed $1.9 million in interest income on loans placed on non-accrual status and problem loans. This resulted in an additional 0.26% decrease in the yield on loans. The investment securities portfolio experienced a 0.16% decrease in yield in 2009 as spreads tightened on most fixed income securities and the Company shortened the duration of its investment portfolio to position it better for anticipated future higher market rates.
 
While the significant market rate declines in 2008 and early 2009 also reduced the Company’s interest-bearing liability costs, liability rate decreases lagged behind asset yield changes. The Company experienced pressure on its deposit rates from some distressed and deposit-starved competitors, which continued to offer higher than market rates. These market conditions particularly impacted time and higher-balance money market rates, which resulted in both smaller and later declines than in the rates earned on loans and Fed Funds Sold. The overall result was a drop of 0.65% in the interest expense rate during the year.


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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, and underlying collateral values, as well as current and potential risks identified in the portfolio. See the “Loan Portfolio” discussion in the “Item 1- Business” section beginning on page 11 of this report for additional information on asset quality, loan portfolio trends and provision for loan loss trends.
 
The provision for losses on loans totaled $24.0 million for the year ended December 31, 2010, compared to a provision of $36.3 million for the year ended December 31, 2009. Net chargeoffs in 2010 totaled $28.2 million compared to $36.2 million for 2009. The following table summarizes provision and loan loss allowance activity for the periods indicated.
 
Trend Analysis of the Allowance for Loan Losses
 
                                         
    December 31,  
    2010     2009     2008     2007(1)     2006(1)(2)  
    (Dollars in thousands)  
 
Balance Beginning January 1
  $ (16,608 )   $ (16,433 )   $ (11,761 )   $ (9,837 )   $ (8,100 )
Charge-Offs
                                       
Commercial loans
    10,603       5,037       1,486       886       283  
Commercial real estate loans
    5,610       3,194       186       8        
Commercial construction loans
    1,393       4,982       663              
Land and land development loans
    8,622       19,817       2,820       580        
Agriculture loans
    1,055       988       162       50        
Multifamily loans
    16       53                    
Residential loans
    2,019       1,598       173             9  
Residential construction loans
    101       241                    
Consumer Loans
    490       1,001       703       520       501  
Municipal Loans
                             
                                         
Total Charge-offs
    29,909       36,911       6,193       2,044       793  
Recoveries
                                       
Commercial Loans
    (628 )     (144 )     (53 )     (34 )     (8 )
Commercial real estate loans
    (311 )           (1 )            
Commercial construction loans
    (391 )     (1 )                  
Land and land development loans
    (175 )     (347 )     (198 )            
Agriculture loans
    (31 )                 (1 )      
Multifamily loans
                             
Residential Loans
    (50 )     (9 )           (10 )     (4 )
Residential construction loans
                             
Consumer Loans
    (158 )     (256 )     (229 )     (30 )     (435 )
Municipal Loans
                             
                                         
Total Recoveries
    (1,744 )     (757 )     (481 )     (75 )     (447 )
Net charge-offs
    28,165       36,154       5,712       1,969       346  
Transfers
                      3       65  
Provision for losses on loans
    (24,012 )     (36,329 )     (10,384 )     (3,896 )     (2,148 )
Sale of loans
                             
                                         
Balance at end of period
  $ (12,455 )   $ (16,608 )   $ (16,433 )   $ (11,761 )   $ (9,837 )
Ratio of net charge-offs to loans outstanding
    4.89 %     5.38 %     0.75 %     0.26 %     0.06 %
Allowance — Unfunded Commitments
                                       
Balance Beginning January 1
  $ (11 )   $ (13 )   $ (18 )   $ (482 )   $ (417 )
Adjustment
    (6 )     2       5       467        
Transfers
                      (3 )     (65 )
                                         
Allowance — Unfunded Commitments at end of period
  $ (17 )   $ (11 )   $ (13 )   $ (18 )   $ (482 )


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(1) The allowance analysis has been adjusted for the periods 2007 and 2006 to segregate the allowance for loan losses from an allowance for unfunded commitments, per new bank regulatory guidance issued in 2007.
 
(2) The detail for allowance analysis breakout categories was not available in 2006.
 
The decrease in the loan loss allowance is due primarily to the reduction in the loan portfolio and the level of classified and non-performing loans over the same period. Chargeoffs outpaced the loan loss provision in 2010 due to management’s aggressive reduction of problem credits during 2010. In addition, in the third quarter of 2010, one large commercial credit was charged off in the amount of $4.5 million for which some recovery is anticipated in future periods.
 
The weak local and national economy continued to have significant negative impacts on the Company’s loan portfolio in 2010. Credit losses were lower than in 2009, but were still at levels far higher than the Company has experienced in the past. While still elevated, losses in construction and development loans subsided in 2010, as the Company worked aggressively in 2010 and prior years to reduce the exposure in this portfolio. Reflecting national and regional trends, the Company experienced higher losses in both commercial and commercial real estate loans in 2010, as the impacts of the prolonged economic downturn cycled into these sectors during the year. Commercial loan losses were also heavily impacted by one significant relationship which was restructured in 2010, and for which the Company anticipates some recovery in future years. Losses in most other loan segments were either stable or down from the prior year.
 
Geographically, the concentration of losses migrated from southern Idaho to northern Idaho as 2010 progressed. Southern Idaho felt the impact of the recession and real estate downturn earlier and more deeply, as it had more excess real estate inventory than other areas. Northern Idaho economic impacts were tied more closely to the prolonged downturn and high unemployment rates. Real estate inventory levels are not as high in northern Idaho and eastern Washington, and the borrowers are generally more stable, longer-term residents of the area. As a result, the Company experienced lower overall default rates and lower loss rates on those loans that defaulted in the north than it did in its southern markets.
 
The Company responded to the volatile credit environment by adjusting its allowance for loan losses throughout 2009 and 2010. Generally the allowance decreased throughout 2010 as the volume of problem assets declined, and ended the year at $12.5 million or 2.16% of total loans, as compared to 2.47% at the end of 2009. At December 31, 2010, the allowance for loan losses totaled 108.1% of non-performing loans (“NPLs”), up from 87.2% at year end 2009. The higher coverage of NPLs reflects a considerable reduction in NPLs during the course of 2010 as the Company moved aggressively to resolve or liquidate these loans. After peaking at $25.1 million, or 3.43% of total loans in July 2009, the allowance declined to $16.6 million or 2.47% of total loans at the end of 2009. The 2010 ending allowance still reflected higher levels of problem assets and heightened concerns about current economic and market conditions. However, management believes that it has already incurred the most significant losses and reduced its concentrations in riskier assets, particularly its residential land and construction portfolio.
 
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 (“FAS 114 pool”), and the pool subject to a more generalized allowance based on historical and other factors (“FAS 5 pool”). The following table includes this information, (dollars in thousands):
 
                 
    December 31  
    2010     2009  
 
FAS 5 Allocation
  $ 8,235     $ 10,234  
Impaired Allocation
    4,220       6,374  
                 
Allowances for Loan Loss
  $ 12,455     $ 16,608  
                 
 
The reduction in the reserve from 2009 to 2010 reflects reductions in both the amount allocated to the impaired loan pool and the FAS 5 allocation. The Company has proactively managed its problem loans to lower the total


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number and volume of loans that are impaired. 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 of collateral 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. 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.
 
General trending information with respect to non-performing loans, non-performing assets, and other key portfolio metrics is as follows (dollars in thousands):
 
Credit Quality Trending
 
                                         
    At December 31,  
    2010     2009     2008     2007     2006  
    (In thousands)  
 
Loans past due in excess of 90 days and still accruing
  $ 66     $ 586     $ 913     $ 797     $ 87  
Non-accrual loans
    11,451       18,468       26,365       5,569       1,201  
                                         
Total non-performing loans
    11,517       19,054       27,278       6,366       1,288  
OREO
    4,429       11,538       4,541       1,682       795  
                                         
Total non-performing assets (“NPAs”)
  $ 15,946     $ 30,592     $ 31,819     $ 8,048     $ 2,083  
                                         
Classified loans(1)
  $ 54,085     $ 77,175     $ 53,847     $ 18,643     $ 10,165  
Troubled debt restructured loans(2)
  $ 4,838     $ 4,604     $ 13,424     $     $  
Total allowance related to non-accrual loans
  $ 1,192     $ 965     $ 6,856     $ 585     $ 531  
Interest income recorded on non-accrual loans
  $ 848     $ 1,126     $ 1,193     $ 270     $ 230  
Non-accrual loans as a percentage of net loans receivable
    2.03 %     2.82 %     3.50 %     0.74 %     0.18 %
Total non-performing loans as a % of net loans receivable
    2.04 %     2.91 %     3.62 %     0.84 %     0.19 %
Allowance for loan losses (“ALLL”) as a % of non-performing loans
    108.1 %     87.2 %     60.2 %     184.7 %     763.7 %
Total NPA as a % of total assets(3)
    1.59 %     2.83 %     2.88 %     0.77 %     0.23 %
Total NPA as a % of tangible capital + ALLL (“Texas Ratio”)(3)
    22.30 %     32.85 %     27.75 %     8.99 %     2.76 %
Loan Delinquency Ratio (30 days and over)
    0.55 %     1.06 %     0.90 %     0.40 %     0.15 %
 
 
(1) Classified loan totals are inclusive of non-performing loans and may also include troubled debt restructured loans, depending on the grading of these restructured loans.
 
(2) Represents accruing restructured loans performing according to their modified terms. Restructured loans that are not performing according to their modified terms are included in non-accrual loans. No other funds are available for disbursement on restructured loans.
 
(3) NPAs include both nonperforming loans and OREO.


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The $7.0 million decrease in non-accrual loans from December 31, 2009 to December 31, 2010 resulted from a combination of aggressive efforts by our special assets team to work out or liquidate these loans and chargedowns in cases where there was a collateral deficiency. This team continued to migrate properties through the collections process and made steady progress in reducing overall levels of both classified and non-accrual loans through multiple management strategies, including borrower workouts, individual asset sales to local and regional investors, and a limited number of bulk sales and auctions of like properties. NPAs fell $14.6 million from December 31, 2009, and totaled 1.59% of total assets at December 31, 2010, down from 2.83% at the preceding year end. NPAs reached their peak of $47.7 million in May 2009 and have trended down since then. The Company continues to monitor its non-accrual loans closely and revalue the collateral on a periodic basis. This re-evaluation may create the need for additional write-downs or additional loss reserves on these assets. Loan delinquencies (30 days or more past due) also declined to 0.55% from 1.06% of total loans at the end of December 31, 2009, reflecting stronger performance in the general loan portfolio. Loan delinquencies (30 days or more past due) reached their peak in April 2009 at a rate of 3.10%.
 
The following tables provide additional trending and geographical information on the Company’s NPAs:
 
Nonperforming Asset Trending By Category
 
                                         
    December 31,
    September 30,
    June 30,
    March 31,
    December 31,
 
    2010     2010     2010     2010     2009  
    (Dollars in thousands)  
 
Commercial loans
  $ 3,859     $ 4,394     $ 3,364     $ 5,282     $ 2,653  
Commercial real estate loans
    4,354       4,882       4,760       6,766       5,235  
Commercial construction loans
    69       1,662       1,931       3,858       3,133  
Land and land development loans
    3,368       7,266       11,625       12,989       14,055  
Agriculture loans
    582       934       524       250       834  
Multifamily loans
          112       112             135  
Residential real estate loans
    3,213       3,524       3,982       4,040       3,195  
Residential construction loans
    112       2       193       1,173       1,264  
Consumer loans
    389       12       28       21       88  
                                         
Total NPAs by Categories
  $ 15,946     $ 22,788     $ 26,519     $ 34,379     $ 30,592  
                                         
 
                                                         
                      E. Oregon,
                % of Loan
 
    North Idaho —
    Magic
          SW Idaho
                Type to Total
 
NPAs by location
  Eastern
    Valley
    Greater
    Excluding
                Non-Performing
 
December 31, 2010
  Washington     Idaho     Boise Area     Boise     Other     Total     Assets  
    (Dollars in thousands)  
 
Commercial loans
  $ 2,927     $ 415     $ 135     $ 352     $ 30     $ 3,859       24.2 %
Commercial real estate loans
    1,714       46       453       413       1,728       4,354       27.3 %
Commercial construction loans
    69                               69       0.4 %
Land and land development loans
    2,600       49       250       269       200       3,368       21.1 %
Agriculture loans
                157       22       403       582       3.7 %
Multifamily loans
                                        0.0 %
Residential real estate loans
    2,013       102       652       259       187       3,213       20.2 %
Residential construction loans
    112                               112       0.7 %
Consumer loans
    386       3                         389       2.4 %
                                                         
Total
  $ 9,821     $ 615     $ 1,647     $ 1,315     $ 2,548     $ 15,946       100.0 %
                                                         
Percent of total NPAs
    61.6 %     3.9 %     10.3 %     8.2 %     16.0 %     100.0 %        
Percent of NPAs to total loans in each region(1)
    3.0 %     1.3 %     2.5 %     1.2 %     9.7 %     2.8 %        
 


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                      E. Oregon,
                % of Loan
 
    North Idaho —
    Magic
          SW Idaho
                Type to Total
 
NPA by location
  Eastern
    Valley
    Greater
    Excluding
                Non-Performing
 
12/31/2009
  Washington     Idaho     Boise Area     Boise     Other     Total     Assets  
    (Dollars in thousands)  
 
Commercial loans
  $ 2,194     $ 303     $ 28     $ 128     $     $ 2,653       8.7 %
Commercial real estate loans
    3,096       1,182       399       527       31       5,235       17.1 %
Commercial construction loans
    3,133                               3,133       10.4 %
Land and land development loans
    6,568       1,153       2,337       1,122       2,875       14,055       45.9 %
Agriculture loans
                521       313             834       2.7 %
Multifamily loans
          135                         135       0.4 %
Residential real estate loans
    2,194             422       199       380       3,195       10.4 %
Residential construction loans
    1,264                               1,264       4.1 %
Consumer loans
    64       18       6                   88       0.3 %
                                                         
Total
  $ 18,513     $ 2,791     $ 3,713     $ 2,289     $ 3,286     $ 30,592       100.0 %
                                                         
Percent of total NPAs
    60.5 %     9.1 %     12.1 %     7.5 %     10.8 %     100.0 %        
Percent of NPAs to total loans in each region(1)
    5.0 %     5.19 %     4.5 %     1.7 %     9.5 %     4.6 %        
 
 
 
(1) NPAs include both nonperforming loans and OREO
 
The volume of non-performing residential land and construction assets has declined rapidly since December 2009 and no longer comprises the majority of NPAs. This reflects the Company’s aggressive effort in resolving or liquidating these assets quickly to reduce future exposure in this portfolio. NPAs are now relatively evenly split between commercial, commercial real estate, construction and development, and residential real estate loan segments, reflecting the ongoing impacts on all loan types of the challenging economy. Commercial and residential real estate NPAs increased moderately since the end of 2009, but were offset by decreases in commercial real estate and agricultural NPAs. The top 10 non-performing loans totaled $4.7 million, or 41% of total non-performing loans and the top 10 OREO properties accounted for 50% of the OREO balance.
 
The geographic distribution of NPAs generally correlates with the distribution of the overall loan portfolio, except that the percent of total NPAs in the “North Idaho -Eastern Washington region” is slightly higher than the percent of the loan portfolio in this region, and correspondingly, the percent of total NPAs in the “E. Oregon, SW Idaho excluding Boise” and “Magic Valley” regions are lower. This reflects generally stronger economic conditions in the Southwest Idaho market outside Boise as a result of its agricultural base. It also reflects aggressive efforts to reduce exposure in the “Greater Boise” area region in 2008 and 2009. The “Other” NPAs total is largely comprised of one commercial property in Nevada.
 
All NPAs are reported at the Company’s best estimate of net realizable value. 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 revalue the collateral on a frequent and periodic basis. This re-evaluation may create the need for additional write-downs or additional loss reserves on these assets.

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At December 31, 2010 and 2009, classified loans (loans with risk grades 6, 7 or 8) by loan type are as follows (dollars in thousands):
 
                 
    December 31,  
Classified Loans
  2010     2009  
 
Commercial loans
  $ 14,069     $ 11,685  
Commercial real estate loans
    15,807       12,409  
Commercial construction loans
    7,832       15,554  
Land and land development loans
    8,040       20,136  
Agriculture loans
    2,380       9,637  
Multifamily loans
          695  
Residential real estate loans
    4,477       5,433  
Residential construction loans
    277       1,165  
Consumer loans
    1,203       461  
Municipal loans
           
                 
Total classified loans
  $ 54,085     $ 77,175  
                 
 
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.
 
While still elevated, classified loans dropped by $23 million, or 29.9% in 2010. The total balance of classified loans reached a peak of $96.2 million in July 2009, and has been reduced by 43.8% since then, as a result of the workout and disposition efforts of the Company’s special assets team. As a percentage of the Company’s net loans, classified loans reached a peak of 13.9% in November 2009, dropped to 11.8% of net loans at the end of 2009, and totaled 9.6% at the end of 2010.
 
The decrease in classified loans from 2009 to 2010 largely reflects decreases in the construction and land development loan segments. These segments represented the highest loss exposure for the Company, and were a priority to resolve and liquidate rapidly. The reductions were a combination of loan sales, movement to OREO and subsequent liquidation, and writedowns. The Company also experienced decreases in classified agricultural and residential real estate loans, primarily through either upgrade of the loans or liquidation with very limited losses. 2010 was a strong year for agribusiness, creating strong performance and lowering exposure risk in this segment of the Company’s portfolio. In contrast, commercial and commercial real estate classified loans increased moderately during the year. The increase in these segments reflects the impact of the prolonged economic downturn and challenging real estate conditions throughout the Company’s market area. Unemployment rates continued at high levels, placing additional stress on businesses. This resulted in more borrowers experiencing difficulties in maintaining their ability to service the Company’s debts. At the same time, real estate and other collateral valuations remained depressed, reducing the ability of borrowers or the Bank to liquidate assets or rely on other repayment sources to cover shortfalls in the cash flow required to service their debts.
 
As with NPAs, the geographical distribution of the Company’s classified loans reflects the distribution of the Company’s loan portfolio, with higher distributions in the “North Idaho/Eastern Washington” region, and decreased levels in southern Idaho. As noted above, the Company worked rapidly to reduce its exposure in the Greater Boise area, and the other southern Idaho regions have strong agri-business components. In general, the Company believes that its loss exposure to classified loans in northern Idaho and eastern Washington will be less, because of stronger, local borrower relationships and generally higher real estate and other collateral values.
 
Local economies and real estate valuations appeared to stabilize in the latter part of 2010. However, significant improvement is not forecast for at least the balance of 2011. Based on local forecasts, full recovery is likely to occur slowly and over a multi-year period. As such, management believes that classified loans, non-performing assets, and credit losses will likely continue to decline in 2011, but remain at historically high levels as compared to the years prior to 2008. If this holds true, the Company’s allowance for loan losses would likely remain at higher levels


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than its historical experience prior to 2008 as well. Given market volatility and future uncertainties, management cannot assure nor guarantee the accuracy of these future forecasts.
 
Management continues to focus its efforts on managing down the level of non-performing assets, classified loans and delinquencies. It uses a variety of analytical tools and an integrated stress testing program involving both qualitative and quantitative modeling to assess the current and projected state of its credit portfolio. The results of this program are integrated with the Company’s capital and liquidity modeling programs to manage and mitigate future risk in these areas as well. In early 2010 and again in early 2011, the Company contracted with an independent loan review firm to further evaluate and provide independent analysis of its portfolio and make recommendations for portfolio management improvement. In particular, the reviews quantified and stratified the loans in the Bank’s portfolio based upon layered risk, product type, asset class, loans- to-one borrower, and geographic location. The purpose of the reviews was to provide an independent assessment of the potential imbedded risks and dollar exposure within the Bank’s loan portfolio. The scope of the original review included loans representing over 80% of the total loan portfolio and included specific asset evaluations and loss forecasts for the majority of the loan portfolio. The review in 2011 was slightly smaller in scope, but still comprised almost 80% of the total portfolio. The firm employed seasoned financial and commercial lending personnel to complete the individual loan reviews. Based on its evaluation of both external and internal loan review results and a comparison of the 2010 internal and external loss projections against actual losses, management does not believe that it needs to materially alter its 12-month forward loss projections. It has and continues to incorporate a number of the recommendations made by the review firm into its ongoing credit management process.
 
Other Income
 
The following table details dollar amount and percentage changes of certain categories of other income for the three years ended December 31.
 
                                                                 
                Percent
                Percent
             
    2010
    % of
    Change
    2009
    % of
    Change
    2008
    % of
 
Other Income
  Amount     Total     Prev. Yr     Amount     Total     Prev. Yr.     Amount     Total  
    (Dollars in thousands)  
 
Fees and service charges
  $ 7,133       65 %     3 %   $ 6,948       58 %     (6 )%   $ 7,394       53 %
Loan related fee income
    3,061       28       5       2,913       24       (4 )     3,029       22  
BOLI income
    368       3       2       360       3       11       324       2  
Other-than-temporary credit impairment on investment securities
    (828 )     (8 )     (57 )     (526 )     (4 )                  
Net gain (loss) on sale of securities
    349       3       (81 )     1,795       15       (18 )     2,182       16  
Other income
    941       9       88       501       4       (50 )     1,011       7  
                                                                 
Total
  $ 11,024       100 %     (8 )%   $ 11,991       100 %     (14 )%   $ 13,940       100 %
                                                                 
 
Total other income was $11.0 million and $12.0 million for the twelve months ended December 31, 2010 and 2009, respectively, with the decrease largely resulting from a $1.4 million reduction in gains on the sale of investment securities.
 
Fees and service charges earned on deposit, trust and investment accounts continue to be the Company’s primary sources of other income. Fees and service charges for the twelve month period ended December 31, 2010 totaled $7.1 million versus $6.9 million for the same period last year, reflecting additional trust, investment services, and debit card income. Increases in these fees offset a 17.2% decrease in overdraft charges, as the Company implemented new federal regulations on overdraft charges that came into effect in July 2010. The Company anticipates that further regulations arising from the Dodd-Frank Act may continue to negatively impact fee income, particularly income earned on overdraft and debit card activity. The Company is evaluating new fee structures, and implementing additional training and marketing programs to further enhance fee income through reduced waivers, increased pricing and additional cross-selling of other services to offset these potential impacts. Amidst the


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changing regulatory environment, it also continues to evaluate fees for all of its services to identify new opportunities that may arise.
 
Loan related fee income increased by $148,000, or 5.1%, for the twelve months ended December 31, 2010 compared to one year ago as a result of additional servicing income and higher mortgage lending fees. The Company has restructured its mortgage banking function to enhance origination volume and income, and continues to build its servicing portfolio to improve customer service and provide a more stable source of fee income in the future.
 
For the twelve-month period, gains on sales of securities totaled $349,000 in 2010 versus $1.8 million in the same period of 2009. The credit loss on impaired securities increased from $526,000 for the twelve months ended December 31, 2009 to $828,000 for the twelve months ended December 31, 2010, as the Company continued to experience impairments on two non-government-guaranteed mortgage backed securities.
 
Bank-owned life insurance (“BOLI”) income was relatively flat from the prior year as yields were stable and the Company did not purchase or liquidate BOLI assets. Other non-interest income increased $440,000, reflecting higher secured credit card contract income and lower loss on sales of assets in 2010. Income from the secured credit card contract is expected to increase over the next quarter based on higher pricing, then level off before potentially terminating at the end of 2012. The Company is evaluating various alternatives, including partnering with other card providers, to replace this income source in future years.
 
The decrease in other income from 2008 to 2009 of $1.9 million reflected lower fees and service charges, reduced gains on security sales and decreased secured credit card contract income in 2009, as well as $526,000 in credit loss impairment on securities.
 
Operating Expenses
 
The following table details dollar amount and percentage changes of certain categories of other expense for the three years ended December 31, 2010.
 
                                                                 
                                  Percent
             
                Percent
                Change
             
    2010
    % of
    Change
    2009
    % of
    Prev.
    2008
    % of
 
Other Expense
  Amount     Total     Prev. Yr.     Amount     Total     Yr.     Amount     Total  
    (Dollars in thousands)  
 
Salaries and employee benefits
  $ 20,950       38 %     (7 )%   $ 22,512       45 %     (11 )%   $ 25,301       55 %
Occupancy expense
    7,240       13       (4 )     7,515       15       0       7,496       17  
Advertising
    1,010       2       (25 )     1,351       3       (8 )     1,474       3  
Fees and service charges
    2,666       5       (9 )     2,940       6       48       1,990       4  
Printing, postage and supplies
    1,346       2       0       1,352       3       (6 )     1,442       3  
Legal and accounting
    1,244       2       (28 )     1,734       3       (1 )     1,758       4  
FDIC assessment
    1,892       3       (20 )     2,373       5       364       511       1  
OREO operations(1)
    3,472       6       (35 )     5,389       11       445       988       3  
Goodwill Impairment
    11,662       22       100                                
Other expense
    3,412       7       (24 )     4,464       9       1       4,412       10  
                                                                 
Total
  $ 54,894       100 %     11 %   $ 49,630       100 %     9 %   $ 45,372       100 %
                                                                 
 
 
(1) Amount includes chargedowns and gains/losses on sale of OREO
 
Operating expense for the twelve months ended December 31, 2010 totaled $54.9 million, an increase of $5.3 million over the same period one year ago. However, operating expense excluding the goodwill impairment charge for the twelve months ended December 31, 2010 totaled $43.2 million, a decrease of $6.4 million, or 12.9% over the same period one year ago. See Item 6, Selected Financial Data for discussion of non-GAAP financial measures.


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Salaries and employee benefits expense for the twelve months ended December 31, 2010 decreased $1.6 million, or 6.9% compared to the same period one year ago. During 2010, the Company implemented a restructuring plan resulting in an 8% reduction in staff by the end of April and continuing reductions for the rest of the year. Severance costs paid as part of this staff reduction totaled $561,000 for 2010. Future expense savings from the original restructuring are estimated to be approximately $600,000 per quarter, with additional compensation expense savings forecasted. Ongoing efforts to control compensation expense include centralizing and automating additional functions, reducing administrative overhead, and revamping our credit management process. At December 31, 2010, full-time-equivalent employees (FTE) totaled 349, compared with 406 at December 31, 2009 and 418 at December 31, 2008. The reductions in compensation and other benefits expense were partially offset by a $190,000, or 95.0%, increase in unemployment insurance expense from 2009.
 
Occupancy expenses were $7.2 million for the twelve months ended December 31, 2010, a 3.7% decrease compared to December 31, 2009. The decrease from last year reflects reduced rent expense and lower hardware, software, and equipment purchasing activity, as previous infrastructure investments have enhanced efficiency and reduced the need for additional purchasing activity. The Company also consolidated administrative functions during the second quarter, which allowed it to terminate leases on two formerly leased properties. Continued centralization and outsourcing efforts are anticipated to bring further improvement to this area in the near future.
 
The advertising expense decrease of $341,000 for the twelve month period compared to the same period one year ago is a result of reductions in general advertising and media expenses, as the need for broad advertising in the current market has been limited. The $274,000 decrease in fees and service charges for the twelve month period ended December 31, 2010 compared to the same period one year ago is primarily comprised of decreases in loan collection, repossession and liquidation expenses, with particularly large reductions in the latter part of this year. These expenses are expected to decline further as the Company’s credit quality continues to improve. Printing, postage and supplies remained static for the twelve month period in comparison to last year’s total, with a $6,000 decrease from a year ago. Additional outsourcing activities are expected to result in improvements in these areas over the next several months. Legal and accounting fees decreased by $490,000 in comparison to the same twelve month period in 2010 as the Company reduced expenditures on outside legal and consulting services related to loan collection and regulatory compliance. Legal fees may continue to remain high, given Company credit resolution efforts and increasing regulatory requirements, but are likely to be offset by lower consulting fees over the near term.
 
At $1.9 million, FDIC expense was down $481,000 or 20.0% from the twelve months ended December 31, 2010. Higher regular premium costs in 2010 were more than offset by the absence of any special assessments. In September 2009, the Company accrued $475,000 to pay a special assessment to the FDIC to help recapitalize the insurance fund. Given the challenged state of the banking industry, future assessments are likely to remain high, but may be partially offset by improving Company conditions.
 
OREO operations, related valuation adjustments and gain/loss on sale of OREO decreased by $1.9 million for the twelve month period over the same period last year. OREO volumes have been reduced substantially and property valuation adjustments and losses on sale are significantly lower. OREO expenses and adjustments should continue to decline from the peak reached in late 2009 as the Company reduces its OREO balances and liquidation activity subsides.
 
As noted earlier, the Company recorded an $11.7 million goodwill impairment during 2010, reducing the balance of goodwill to zero, as compared to the December 31, 2009 balance of $11.7 million. Goodwill represents the difference between the value of consideration paid and the fair value of the net assets received in a business combination. Intermountain records impairment losses as charges to noninterest expense and adjustments to the carrying value of goodwill. Goodwill is tested for impairment on an annual basis, or more frequently as events occur, or as current circumstances and conditions warrant. The Company engaged an independent consultant at December 31, 2009 to assist management in evaluating the carrying value of goodwill. The evaluation followed the two-step process for evaluating impairment required by accounting guidance. In Step 1, the Company evaluated whether an impairment of goodwill might exist at December 31, 2009. Since the Company operates in a single segment this evaluation was based on a comparison of the estimated fair value of the Company in comparison to the book value of the Company’s common equity at December 31, 2009. The results of Step 1 indicated that a potential


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for impairment did exist at the end of 2009, requiring the Company to engage in Step 2 to determine the amount of the impairment, if any.
 
The Step 2 evaluation required the Company to calculate the implied fair value of its goodwill. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. The estimated fair value of the Company is allocated to all of the Company’s assets and liabilities, including any unrecognized identifiable assets, as if the Company had been acquired in a business combination and the estimated fair value of the Company is the price paid to acquire it. The Step 2 analysis indicated that the Company’s fair value at December 31, 2009 exceeded the net fair value of its assets by an amount greater than the carrying value of its goodwill. As a result, the Company determined that no impairment existed in 2009.
 
At September 30, 2010, the Company concluded there was a triggering event related to continuing depressed economic conditions and ongoing losses incurred by the Company. As a result, Intermountain performed a goodwill impairment evaluation using current information. In completing its goodwill impairment analysis, the Company used tangible common equity multiples and core deposit metrics from recent transactions to estimate the fair value of the Company at September 30, 2010. For Step 1, the fair value of the Company was less than the common book value of the Company prior to any goodwill adjustments, indicating a potential impairment. As such, under accounting guidance, a Step 2 analysis was required. In the Step 2 analysis, the fair value of the Company’s assets and liabilities was determined, using discounted cash flows based on the cash flow characteristics of the assets and liabilities and prevailing market interest rates. The fair value of the liabilities was subtracted from the fair value of the assets resulting in the fair value of the net assets. This was then reduced by the value of the preferred stock to derive the sum of the fair value of net assets supported by common equity. Since this number was higher at September 30, 2010 than the fair value of the Company calculated in Step 1, there was no excess company value that could be allocated to goodwill, resulting in a full impairment of the Company’s goodwill. Intermountain recorded this impairment loss as a charge to noninterest expense and an adjustment to the carrying value of goodwill.
 
The Company’s efficiency ratio was 93.4% (excluding the goodwill impairment of $11.7 million) for the twelve months ended December 31, 2010, compared to 99.9% for the twelve months ended December 31, 2009. However, the quarter by quarter comparison shows continued improvement in this ratio over the past year. The ratio was 86.3% for the three months ended December 31, 2010, compared to the adjusted ratio of 86.6% for the sequential quarter and 125.0% for the three months ended December 31, 2009. The Company has been and continues to execute strategies to reduce controllable expenses to improve efficiency. However, flat asset growth, net interest margin compression and substantially higher credit-related expenses and FDIC insurance premiums have hampered efficiency gains. With economic conditions likely to remain challenging in the near future, the Company continues to lower its interest expense and is implementing additional efficiency and cost-cutting efforts. Management anticipates that as it completes the action plans developed under prior initiatives and undertakes its new plans, the efficiency and expense ratios will improve. Stabilization and improvement in economic conditions in the future should also improve efficiency, as net interest income rebounds and credit-related costs subside.
 
Income Tax Provision.  Federal and state income tax benefits totaled $882,000 and $14.4 million for the twelve months ended December 31, 2010 and 2009, respectively. The effective tax rates used to calculate the tax benefit were (2.7%) and (39.6%) for the twelve months ended December 31, 2010 and 2009, respectively. During the third quarter of 2010, Intermountain determined that the negative evidence associated with three-year cumulative loss and continued depressed economic conditions outweighed the existing positive evidence. Therefore, during the third quarter of 2010, Intermountain established a valuation allowance of $7.4 million against its deferred tax asset. Results for fourth quarter 2010 were materially consistent with expectations and as a result, the Company made no change to the net deferred tax asset of approximately $15.3 million that it expects to utilize over the next few years. As a result, due to the increase in its deferred tax assets (from operations) during the fourth quarter 2010, the Company increased its valuation allowance correspondingly by approximately $1.4 million. The fourth quarter increase in the deferred tax assets and corresponding increase to the valuation allowance resulted in no provision or benefit for quarter. The Company analyzes the deferred tax asset on a quarterly basis and may recapture a portion or all of this allowance depending on future profitability. At December 31, 2010, the net deferred tax asset totaled $15.3 million, net of a deferred tax asset valuation of $8.8 million, compared to a net deferred tax asset of $16.9 million, net of a deferred tax asset valuation of $0 at December 31, 2009. Excluding the original deferred tax asset valuation charge of $7.4 million, the effective tax rate was 20.0% for 2010.


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Intermountain uses an estimate of future earnings and tax planning strategies to determine whether it is more likely than not that the benefit of its net deferred tax asset will be realized. In developing its estimate of future earnings, two different scenarios were used and the results of the two were probability weighted and averaged together to determine both the need for a valuation allowance and the size of the allowance. In conducting this analysis, management has assumed economic conditions will continue to be very challenging in 2011, 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 elevated credit losses in 2011, but at lower levels than those experienced in 2009 and 2010, 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 late 2011, as it is able to convert some of its cash position to higher yielding instruments, and reductions in operating expenses as credit costs abate and its other cost reduction strategies continue
 
Financial Position
 
Assets.  At December 31, 2010, Intermountain’s assets were $1.01 billion, down $74.5 million from $1.08 billion at December 31, 2009. During this period, increases in investments available-for-sale and cash and cash equivalents were offset by a decrease in loans receivable. Given the challenging economic climate and the lack of quality borrowing demand, the Company continued to manage its balance sheet cautiously, limiting asset growth, reducing problem loans and shifting the mix from loans to more conservative and liquid investments.
 
Investments.  Intermountain’s total investment portfolio, including investments available for sale, investments held to maturity and FHLB stock, at December 31, 2010 was $207.6 million, an increase of $8.3 million from the December 31, 2009 balance of $199.3 million. The increase was primarily due to the net purchase of high-quality taxable municipal bonds. During the twelve months ended December 31, 2010, the Company sold $15.3 million in investment securities resulting in a $349,000 net pre-tax gain, and experienced higher prepayments on its MBS related to FNMA and FHLMC accelerating payments on guaranteed mortgages that had defaulted. The Company continued to position the portfolio to perform better in unchanged or rising rate environments by holding mostly agency-guaranteed mortgage-backed securities with strong cash flows and short durations. As of December 31, 2010, the balance of the unrealized loss on investment securities (including cumulative OTTI recognized through other comprehensive income), net of federal income taxes, was $797,000, compared to an unrealized loss at December 31, 2009 of $4.9 million. The unrealized loss for both periods was caused by the impacts of illiquid markets on the pricing of some of the Company’s non-agency backed mortgage backed securities, but was mostly offset in the recent period by unrecognized gains on many of the agency-guaranteed securities.
 
The Company currently holds two residential MBS, with an unpaid balance totaling $10.4 million that are determined to have other than temporary impairments (“OTTI”), as detailed in the table below:
 
                                         
                      Cumulative
    Cumulative
 
                      OTTI Credit
    OTTI Impairment
 
    Principal
    Fair
    Unrealized
    Loss Recorded in
    Loss Recorded in
 
Security Issuer
  Balance     Value     (Loss) Gain     Income     OCI  
 
Security 1
  $ 3,201     $ 2,066     $ 526     $ (947 )   $ (805 )
Security 2
    7,241       5,854       200       (407 )     (1,122 )
                                         
Total
  $ 10,442     $ 7,920     $ 726     $ (1,354 )   $ (1,927 )
                                         
 
In March, 2009, residential mortgage-backed securities included a security comprised of a pool of mortgages with a remaining unpaid principal balance of $4.2 million. In the year ended December 31, 2009, due to the lack of an orderly market for the security and the declining national economic and housing market, its fair value was determined to be $2.5 million at that time based on analytical modeling taking into consideration a range of factors normally found in an orderly market. Of the $1.7 million original OTTI on this security, based on an analysis of projected cash flows, $244,000 was charged to earnings as a credit loss and $1.5 million was recognized in other comprehensive income (loss). The Company has recorded additional credit loss impairments totaling $947,000, including $421,000 in 2010. However, the overall estimated market value on the security improved during this time, reducing the net non-credit value impairment to $805,000. In June 2010, the Company identified an additional residential mortgage-backed security comprised of a pool of mortgages with a remaining unpaid principal balance


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of $7.5 million. At June 30, 2010, its fair value was determined to be $6.0 million based on similar analytical modeling. Of the $1.5 million original OTTI on this security, based on an analysis of projected cash flows, $407,000 was charged to earnings as a credit loss for the twelve months ended December 31, 2010, leaving a net non-credit value impairment of $1.1 million at December 31, 2010. At this time, the Company anticipates holding the two securities until their value is recovered or until maturity, and will continue to adjust its net income and other comprehensive income (loss) 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 securities from their amortized cost at the end of each period.
 
Loans Receivable.  At December 31, 2010 net loans receivable totaled $563.2 million, down $92.4 million or 14.1% from $655.6 million at December 31, 2009. During the twelve months ended December 31, 2010, total loan originations were $267.4 million compared to $411.3 million for the prior year’s comparable period. The decrease in total loan originations reflected difficult economic conditions, muted borrowing demand in the Company’s markets, and tighter underwriting standards. As part of its Powered By Community initiative, the Company continues to market residential and commercial lending programs to help ensure the credit needs of its communities are met. In particular, it is pursuing attractive small and mid-market commercial credits, originating commercial real estate loans to strong borrowers at lower real estate prices, originating mortgage loans to strong borrowers at conservative loan-to-values, diversifying its agricultural portfolio, and expanding its already strong government-guaranteed loan marketing efforts. These efforts have been reasonably successful, but have not been sufficient to offset the substantial and intentional reduction in the Company’s land development and construction portfolios. The Company also recently introduced new SBA and mortgage lending initiatives to spur additional production in its markets, which appear to be gaining some traction.
 
The following table sets forth the composition of Intermountain’s loan portfolio at the dates indicated.
 
                                                 
    December 31, 2010     December 31, 2009     December 31, 2008  
    Amount     %     Amount     %     Amount     %  
    (Dollars in thousands)  
 
Commercial loans
  $ 122,656       21.31     $ 131,562       19.57     $ 139,443       18.13  
Commercial real estate loans
    175,559       30.50       172,726       25.69       161,628       21.00  
Commercial construction loans
    17,951       3.12       45,581       6.78       60,057       7.81  
Land and land development loans
    60,962       10.59       88,604       13.18       136,514       17.75  
Agriculture loans
    87,364       15.18       110,256       16.40       112,358       14.61  
Multifamily loans
    26,417       4.59       18,067       2.69       18,617       2.42  
Residential real estate loans
    60,872       10.58       65,544       9.75       72,301       9.40  
Residential construction loans
    3,219       0.56       16,626       2.47       40,001       5.20  
Consumer loans
    14,095       2.45       18,287       2.72       23,245       3.02  
Municipal loans
    6,528       1.12       5,061       0.75       5,109       0.66  
                                                 
Total loans receivable
    575,623       100.00       672,314       100.00       769,273       100.00  
                                                 
Net deferred origination fees
    60               (104 )             (225 )        
Allowance for losses on loans
    (12,455 )             (16,608 )             (16,433 )        
                                                 
Loans receivable, net
  $ 563,228             $ 655,602             $ 752,615          
                                                 
Weighted average yield at end of period
    6.04 %             6.15 %             6.38 %        
                                                 
 
As a result of the Company’s continued efforts to reduce construction and land development exposure, these loan categories declined an additional $68.7 million during 2010. They now represent 14.3% of the Company’s total loan portfolio and only about 30.8% of the exposure in 2008, based on dollar volumes. Commercial loans decreased as several larger problem loans were resolved in 2010 and slow demand by area businesses reduced new origination activity. Commercial real estate loans increased slightly, largely as a result of the conversion of commercial construction loans into term notes. Decreasing agricultural loans reflected very strong agricultural markets,


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reducing the need for farmers to borrow and allowing them to pay down additional debt. Most other categories were unchanged or slightly lower, continuing to reflect slow economic conditions.
 
The rapid reduction in the construction and land development portfolio has reduced the future potential loss exposure in this segment significantly. The mix of this segment has changed considerably as well, with a substantial reduction in residential subdivision loans, leaving a lower-risk portfolio of commercial land and construction loans, smaller lots owned by individual consumers, and a small number of remaining lower-priced subdivision projects.
 
The commercial portfolio is diversified by industry with a variety of small business customers that have held up relatively well during this economic downturn. As slow economic conditions continue, however, the Company has experienced a moderate increase in stress in this portfolio, including the large chargeoff on a commercial borrower discussed in the “Provision for Loan Losses” section above. Most of the commercial credits are smaller, however, and Intermountain carries a higher proportion of SBA and USDA guaranteed loans than many of its peers, reducing the overall risk in this portfolio.
 
Difficult economic conditions continue to create risk in the non-residential component of the commercial real estate portfolio. However, in comparison to peers, the Company believes it has less overall exposure to commercial real estate and a stronger mix of owner-occupied (where the borrower occupies and operates in at least part of the building) versus non-owner occupied loans. The loans represented in this category are spread across the Company’s footprint, and there are no significant concentrations by industry type or borrower. The most significant property types represented in the portfolio are office (19%), industrial (13%), multifamily (13%), health care (6%), and retail (5%). The other 44% is a mix of property types with smaller concentrations, including religious facilities, auto-related properties, restaurants, convenience stores, storage units, motels and commercial investment land. Finished condominiums comprise only 1% of the commercial real estate portfolio, although there are also several unfinished condo projects in the construction and development portfolio.
 
The following table provides additional information on the Company’s commercial real estate portfolio:
 
                                 
Commercial Real Estate by Property Types
  December 31, 2010     December 31, 2009  
    (Dollars in thousands)  
 
Condominiums
  $ 2,321       1.1 %   $ 4,504       2.4 %
Office
    38,528       19.1 %     32,265       16.9 %
Industrial warehouse
    25,911       12.8 %     29,206       15.3 %
Storage units
    6,782       3.4 %     6,984       3.7 %
Retail
    10,722       5.3 %     12,177       6.4 %
Restaurants
    6,114       3.0 %     6,028       3.2 %
Land and land development
    7,859       3.9 %     10,281       5.4 %
Other commercial
    16,562       8.2 %     19,560       10.3 %
Health care
    12,486       6.2 %     11,345       5.9 %
Religious facilities
    1,758       0.9 %     2,538       1.3 %
Gas stations & convenience stores
    5,818       2.9 %     2,712       1.4 %
Auto R/E (car lot, wash, repair)
    2,290       1.1 %     2,554       1.3 %
Hotel/Motel
    2,546       1.3 %     3,351       1.8 %
Miscellaneous
    35,862       17.7 %     29,221       15.2 %
                                 
Total Commercial real estate loans
    175,559       86.9 %     172,726       90.5 %
Multifamily
    26,417       13.1 %     18,067       9.5 %
                                 
Total Commercial real estate and Multifamily Loans
  $ 201,976       100.0 %   $ 190,793       100.0 %
                                 
 
The Bank is committed to reducing and maintaining its real estate lending concentrations to levels that are below the interagency regulatory guidelines issued in late 2007. Institutions that exceed the levels established in the guidelines are subject to greater supervisory scrutiny. These guidelines established concentration limits as measured against Total Risk Based Capital (generally, the Company’s common stock, non-cumulative perpetual preferred stock and a portion of its loan loss reserves). The first regulatory guideline establishes the limit for construction,


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land development and other land loan balances to total risk-based capital not to exceed 100%. Company totals for this category were 102.35%, 151.86%, and 183.26% for 2010, 2009 and 2008, respectively, demonstrating the Company’s significant progress toward meeting this guideline. The second guideline establishes the limit for total commercial real estate loans, defined as including the above categories plus loans secured by multifamily and non-farm nonresidential property but excluding loans secured by owner-occupied properties, not to exceed 300% of total risk-based capital. Accordingly, the Company has decreased these balances from 254.93% in 2008 to 214.29% at the end of 2009 and up slightly to 216.52% at the end of 2010. As a result, Intermountain remains below this regulatory guideline. Most agricultural markets continue to perform very well, and the Company has very limited exposure to the severely impacted dairy market. In fact, the sector has performed so well that many of its best borrowing customers are using excess cash generated over the past couple of years to reduce their overall borrowing position. Intermountain has also experienced challenges with a couple of larger cattle operations, and moved aggressively to resolve or liquidate these credits.
 
The residential and consumer portfolios consist primarily of first and second mortgage loans, unsecured loans to individuals, and auto, boat and RV loans. These portfolios have performed well with limited delinquencies and defaults, given the difficult economic conditions. These loans have generally been underwritten with relatively conservative loan to values, reasonable debt-to-income ratios and required income verification.
 
High unemployment and decreased asset values continue to challenge Intermountain’s customers and its loan portfolios. However it appears that economic conditions may be stabilizing in most of the Company’s markets, and management believes that its underwriting standards and aggressive identification and management of credit problems are having a positive impact on its credit portfolios. Losses are likely to remain elevated in 2011, but at lower levels than in 2009 and 2010, with continued improvement in subsequent years.
 
Geographic Distribution
 
As of December 31, 2010, the Bank’s loan portfolio by loan type and geographical market area was:
 
                                                         
                      E. Oregon,
                % of Loan
 
    North Idaho —
    Magic
    Greater
    SW Idaho,
                type to
 
    Eastern
    Valley
    Boise
    excluding
                total
 
Loan Portfolio by Location
  Washington     Idaho     Area     Boise     Other     Total     loans  
    (Dollars in thousands)  
 
Commercial loans
  $ 81,916     $ 9,572     $ 10,747     $ 18,865     $ 1,556     $ 122,656       21.3 %
Commercial real estate loans
    115,721       14,536       18,295       17,465       9,542       175,559       30.5 %
Commercial construction loans
    6,738       3,070       8,143                   17,951       3.1 %
Land and land development loans
    47,197       4,421       5,944       1,904       1,496       60,962       10.6 %
Agriculture loans
    1,609       7,302       16,754       59,575       2,124       87,364       15.2 %
Multifamily loans
    18,205             725             7,487       26,417       4.6 %
Residential real estate loans
    39,482       5,795       3,582       8,248       3,765       60,872       10.6 %
Residential construction loans
    2,594       287       7       331             3,219       0.6 %
Consumer loans
    7,802       1,580       1,318       2,960       435       14,095       2.4 %
Municipal loans
    4,955       1,573                         6,528       1.1 %
                                                         
Total
  $ 326,219     $ 48,136     $ 65,515     $ 109,348     $ 26,405     $ 575,623       100.0 %
                                                         
Percent of total loans in geographic area
    56.4 %     8.4 %     11.5 %     19.1 %     4.6 %     100.0 %        
Percent of total loans where real estate is the primary collateral
    70.6 %     64.5 %     59.5 %     40.2 %     85.4 %     63.7 %        


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As of December 31, 2009, the Bank’s loan portfolio by loan type and geographical market area was:
 
                                                         
                      E. Oregon,
                % of Loan
 
    North Idaho —
    Magic
    Greater
    SW Idaho,
                type to
 
    Eastern
    Valley
    Boise
    excluding
                total
 
Loan Portfolio by Location 12/31/09
  Washington     Idaho     Area     Boise     Other     Total     loans  
    (Dollars in thousands)        
 
Commercial loans
  $ 86,682     $ 11,057     $ 14,067     $ 18,090     $ 1,666     $ 131,562       19.6 %
Commercial real estate loans
    106,913       17,051       20,063       15,564       13,135       172,726       25.7 %
Commercial construction loans
    35,335       187       9,105       180       774       45,581       6.8 %
Land and land development loans
    61,329       7,434       11,403       7,342       1,096       88,604       13.2 %
Agriculture loans
    2,145       8,883       19,618       74,730       4,880       110,256       16.4 %
Multifamily loans
    9,133       135       1,078             7,721       18,067       2.6 %
Residential real estate loans
    41,614       6,904       4,136       8,399       4,491       65,544       9.7 %
Residential construction loans
    11,698       795       1,141       2,884       108       16,626       2.5 %
Consumer loans
    9,629       2,140       1,449       4,377       692       18,287       2.7 %
Municipal loans
    4,766       295                         5,061       0.8 %
                                                         
Total
  $ 369,244     $ 54,881     $ 82,060     $ 131,566     $ 34,563     $ 672,314       100.0 %
                                                         
Percent of total loans in geographic area
    54.9 %     8.2 %     12.2 %     19.6 %     5.1 %     100.00 %        
Percent of total loans where real estate is the primary collateral
    72.1 %     63.9 %     60.1 %     41.0 %     79.1 %     64.2 %        
 
As illustrated, 76% of the Company’s loans are in north Idaho, eastern Washington and southwest Idaho outside the Boise area. Although economic trends and real estate valuations have worsened in these market areas, portfolio loss rates have been lower than in the Boise area or other areas of the country. This reflects the differing economies in these areas, generally more conservative lending and borrowing norms, longer-term customers, and more restrained building and development activity. In particular, large national and regional developers and builders did not enter and subsequently exit these markets. The southwest Idaho and Magic Valley markets are largely agricultural areas which have not seen levels of price appreciation or depreciation as steep as other areas over the last few years. Through aggressive loan workout efforts, the Company has reduced its exposure to the Boise market significantly, particularly its residential construction and land development loans in this area. The “Other” category noted above largely represents loans made to local borrowers where the collateral is located outside the Company’s communities. The mix in this category is relatively diverse, with the highest proportions in Oregon, Washington, California, Nevada and Wyoming, but no single state comprising more than 36% of this total or 1.6% of the total loan portfolio.
 
Participation loans where Intermountain purchased part of the loan and was not the lead bank totaled $19.0 million at December 31, 2010. $7.1 million of the total is a condominium project in Boise that is currently classified, but is being managed very closely, and for which no loss is expected. The remaining loans are all within the Company’s footprint and management believes they do not present significant risk at this time.


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The following table sets forth the composition of Intermountain’s loan originations for the periods indicated.
 
                         
    Twelve Months Ended December 31,  
    2010     2009     % Change  
    (Dollars in thousands)  
 
Commercial loans
  $ 75,873     $ 98,549       (23.0 )
Commercial real estate loans
    24,006       33,512       (28.4 )
Commercial construction loans
    9,960       30,711       (67.6 )
Land and land development loans
    4,851       16,200       (70.1 )
Agriculture loans
    65,459       89,932       (27.2 )
Multifamily loans
    52       375       (86.1 )
Residential real estate loans
    71,757       128,466       (44.1 )
Residential construction loans
    5,843       3,528       65.6  
Consumer
    6,961       9,033       (22.9 )
Municipal
    2,660       1,033       157.5  
                         
Total loans originated
  $ 267,422     $ 411,339       (35.0 )
                         
 
2010 origination results reflect reductions in virtually all areas, as high unemployment, depressed real estate prices, and cautious borrowers reduced borrowing demand significantly. The construction and development, and commercial and residential real estate reductions reflect a combination of minimal loan demand for these types of loans and tight underwriting conditions. Potential borrowers remain very cautious about pursuing new real estate purchase, expansion or construction activities. The Company anticipates commercial, commercial real estate and residential real estate origination activity to slowly increase as the economy improves, borrowing demand returns, and customers from distressed banks seek new credit from Intermountain. Residential construction and land development originations are likely to remain constricted, given a substantial backlog of properties in its markets.
 
Office Properties and Equipment.  Office properties and equipment decreased 5.1% to $40.2 million from $42.4 million at December 31, 2009 due primarily to depreciation recorded for 2010. Reflecting efficiencies gained from prior infrastructure investments, the Company has been able to reduce its hardware, software and equipment purchases.
 
Per its original plan, the Company sold the Sandpoint Center, its Company headquarters, in August 2009 to a third party in order to reduce debt and increase the Company’s future flexibility. The building was sold for $24.8 million with financing provided by Panhandle State Bank. Because of the non-recourse financing terms offered by Panhandle State Bank, the lease is treated as an operating lease utilizing the financing method for accounting purposes. Consequently, there was no gain recognized at the time of the transaction and the building will remain on the consolidated financial statements with depreciation and interest expense recognized over the life of the lease. Panhandle State Bank executed an agreement to lease the building from the purchaser with an initial term of 20 years with three successive options to extend the lease for an additional 10 years each.
 
Other Real Estate Owned.  Other real estate owned decreased to $4.4 million at December 31, 2010 from $11.5 million at December 31, 2009. The Company continues to actively market and liquidate its OREO properties, selling seventy-five properties for $13.4 million in 2010. This more than offset the seventy-two properties totaling $8.9 million that entered OREO during the period.


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The following tables provide additional trending information about the OREO portfolio.
 
Other Real Estate Owned Activity
 
                                 
    2010     2009     2008     2007  
    (Dollars in thousands)  
 
Balance, beginning of period, January 1
  $ 11,538     $ 4,541     $ 1,682     $ 795  
Additions to OREO
    8,946       20,789       4,092       896  
Proceeds from sale of OREO
    (13,442 )     (9,830 )     (474 )     (9 )
OREO valuation adjustments in the period(1)
    (2,613 )     (3,962 )     (759 )      
                                 
Balance, end of period, December 31
  $ 4,429     $ 11,538     $ 4,541     $ 1,682  
                                 
 
 
(1) Amount includes chargedowns and gains/losses on sale of OREO
 
The remaining OREO portfolio consists of 47 properties totaling $4.4 million. At year end, OREO assets consisted of single family residences (49%), developed residential lots (23%), commercial buildings (18%), and raw land (10%). Given still elevated levels of problem loans, the Company anticipates continued migration in and liquidation out of the OREO portfolio over the next year, but has found more active markets to sell properties, reducing the anticipated loss on OREO property significantly.
 
Other Real Estate Owned Quarterly Activity
 
                                         
    Dec 10     Sep 10     Jun 10     Mar 10     Dec 09  
    (Dollars in thousands)  
 
Balance, beginning of period
  $ 6,424     $ 8,754     $ 11,538     $ 11,538     $ 14,395  
Additions to OREO
    2,365       1,653       2,467       2,461       5,785  
Proceeds from sale of OREO
    (4,042 )     (3,584 )     (4,133 )     (1,684 )     (6,992 )
OREO valuation adjustments in the period(1)
    (318 )     (399 )     (1,118 )     (777 )     (1,650 )
                                         
Balance, end of period
  $ 4,429     $ 6,424     $ 8,754     $ 11,538     $ 11,538  
                                         
 
 
(1) Amount includes chargedowns and gains/losses on sale of OREO
 
Intangible Assets.  As discussed in the Operating Expense section above, intangible assets decreased as a result of the $11.7 million goodwill impairment recorded in the quarter ended September 30, 2010 and the continuing amortization of the core deposit intangible. The Company concluded there was a triggering event that occurred in the quarter ended September 30, 2010 which required a goodwill evaluation as of September 30, 2010. This evaluation resulted in a full impairment of the Company’s goodwill during 2010.
 
Deferred Tax Asset.  At December 31, 2010, the Company’s net deferred tax asset totaled $15.3 million. The deferred tax asset included $17.0 million in net operating loss carry forwards and $7.0 million in temporary timing differences. At September 30, 2010, Intermountain assessed whether it was more-likely-than-not that it would realize the benefits of its deferred tax asset. Intermountain determined that the negative evidence associated with a projected three-year cumulative loss for the period ending December 31, 2010, and the continued depressed economic conditions outweighed the positive evidence. Therefore, Intermountain established a valuation allowance of $7.4 million against its deferred tax asset. During the fourth quarter of 2010, Intermountain reserved the full tax benefit in the amount of $1.4 million due to continuing uncertain economic conditions. See the Income Tax Provision section above for more information.
 
BOLI and All Other Assets.  Bank-owned life insurance (“BOLI”) and other assets totaled $22.4 million at December 31, 2010, down from $29.5 million at December 31, 2009.
 
Deposits.  Total deposits decreased $40.5 million to $778.8 million at December 31, 2010 from $819.3 million at December 31, 2009. The decrease in 2010 largely reflects management’s decision to allow wholesale and


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higher-rate, non-relationship deposits to run off during the year. Given its strong liquidity position, the Company focused on lowering the cost of its deposit base while maintaining its strong core relationship deposit base, and was successful in achieving this goal.
 
The following table sets forth the composition of Intermountain’s deposits at the dates indicated.
 
                                 
    December 31, 2010     December 31, 2009  
    Amount     %     Amount     %  
    (Dollars in thousands)  
 
Demand
  $ 168,519       21.6     $ 168,244       20.5  
NOW and money market 0.0% to 4.65%
    327,891       42.1       340,070       41.6  
Savings and IRA 0.0% to 5.75%
    75,387       9.7       77,623       9.5  
Certificate of deposit accounts (CDs)
    79,533       10.2       86,381       10.5  
Jumbo CDs (CDs $100,000 and over)
    77,685       10.0       82,249       10.0  
Brokered CDs
    40,899       5.3       54,428       6.6  
CDARS CDs to local customers
    8,919       1.1       10,326       1.3  
                                 
Total deposits
  $ 778,833       100.0     $ 819,321       100.0  
                                 
Weighted average interest rate on certificates of deposit
            1.66 %             2.52 %
Core Deposits as a percentage of total deposits(1)
            83.2 %             81.6 %
Deposits generated from the Company’s market area as a % of total deposits
            94.8 %             93.4 %
 
 
(1) Core deposits consist of non-interest bearing checking, money market checking, savings accounts, and certificate of deposit accounts of less than $100,000.
 
Non-interest bearing demand deposits were stable during the year and totaled $168.5 million, or 21.6% of the total deposit base, NOW and money market deposits totaled $327.9 million or 42.1% of the deposit base, up from 41.6% in the prior year. The 3.6% reduction in NOW and money market balances from the prior year end reflects planned collateralized deposit runoff and the movement of public deposits into either repurchase agreements or other investment alternatives as a result of FDIC coverage changes at year end. Transaction deposits represent the bulk of the deposit base at 63.7% of total deposits at December 31, 2010 compared to 62.1% a year ago. Jumbo and brokered deposits continued to decline both in absolute terms and as a percent of the overall portfolio reflecting the ongoing strategy to build core deposits.
 
The Company’s strong local, core funding base, high percentage of checking, money market and savings balances and careful management of its brokered CD funding provide lower-cost, more reliable funding to the Company than most of its peers and add to the liquidity strength of the Bank. Maintaining the local funding base at a reasonable cost remains a critical priority for the Company’s management and production staff. The Company uses a combination of proactive branch staff efforts and a dedicated team of deposit sales specialists to target low-cost deposit balances. It emphasizes personalized service, local community involvement and targeted campaigns to generate deposits, rather than media campaigns or advertised rate specials. The introduction of new sales platform technology, mobile banking technology, electronic statements and other online banking enhancements should spur additional low cost deposit growth when the Company needs it in the future.


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Deposits by location are as follows (dollars in thousands):
 
                                 
    December 31,
    % of total
    December 31,
    % of total
 
Deposits by Location
  2010     deposits     2009     deposits  
 
North Idaho — Eastern Washington
  $ 374,173       48.0     $ 402,620       49.1  
Magic Valley Idaho
    68,870       8.8       69,430       8.5  
Greater Boise Area
    79,697       10.2       77,291       9.4  
Southwest Idaho — Oregon, excluding Boise
    165,505       21.3       158,919       19.4  
Administration, Secured Savings
    90,588       11.7       111,061       13.6  
                                 
Total
  $ 778,833       100.0     $ 819,321       100.0  
                                 
 
The Company attempts to, and has been successful in balancing loan and deposit growth in each of the market areas it serves. While northern Idaho and eastern Washington deposits currently exceed those in the Company’s southern Idaho and eastern Oregon markets, deposits in these newer markets have been growing rapidly over the past few years. The Company’s deposit market share has grown significantly over the past ten years, and it now ranks second in overall market share in its core markets. Intermountain is the deposit market share leader in five of the eleven counties in which it operates.
 
Borrowings.  Deposit accounts are Intermountain’s primary source of funds. Intermountain also relies upon advances from the Federal Home Loan Bank of Seattle, repurchase agreements and other borrowings to supplement its funding, reduce its overall cost of funds, and to meet deposit withdrawal requirements. These borrowings totaled $155.6 million and $160.8 million at December 31, 2010 and December 31, 2009, respectively. The balance at December 31, 2010 consisted of $34.0 million in advances from the FHLB, $105.1 million in repurchase agreements, mostly to local municipal customers as part of strong customer relationships, and $16.5 million in trust preferred securities. The decrease from the prior year end resulted from repaying $15.0 million in FHLB advances, but was partially offset by increases in local municipal repurchase balances.
 
Interest Rate Risk
 
The results of operations for financial institutions may be materially and adversely affected by changes in prevailing economic conditions, including rapid changes in interest rates, declines in real estate market values and the monetary and fiscal policies of the federal government. Like all financial institutions, Intermountain’s net interest income and its NPV (the net present value of financial assets, liabilities and off-balance sheet contracts), are subject to fluctuations in interest rates. Intermountain utilizes various tools to assess and manage interest rate risk, including an internal income simulation model that seeks to estimate the impact of various rate changes on the net interest income and net income of the bank. This model is validated by comparing results against various third-party estimations. Currently, the model and third-party estimates indicate that Intermountain is slightly asset-sensitive. An asset-sensitive bank generally sees improved net interest income and net income in a rising rate environment, as its assets reprice more rapidly and/or to a greater degree than its liabilities. The opposite is true in a falling interest rate environment. When market rates fall, an asset-sensitive bank tends to see declining income. Net interest income results for the past several years reflect this, as short-term market rates fell over the past 3 years, resulting in lower net interest income and net income levels, particularly in relation to the level of interest-earning assets.
 
To minimize the long-term impact of fluctuating interest rates on net interest income, Intermountain promotes a loan pricing policy of utilizing variable interest rate structures that associates loan rates to Intermountain’s internal cost of funds and to the nationally recognized prime or London Interbank Offered (“LIBOR”) lending rates. While this strategy has had adverse impacts in the current unusually low-rate environment, the approach historically has contributed to a relatively consistent interest rate spread over the long-term and reduces pressure from borrowers to renegotiate loan terms during periods of falling interest rates. Intermountain currently maintains over fifty percent of its loan portfolio in variable interest rate assets.
 
Additionally, the extent to which borrowers prepay loans is affected by prevailing interest rates. When interest rates increase, borrowers are less likely to prepay loans. When interest rates decrease, borrowers are generally more likely to prepay loans. In the current credit markets, prepayment speeds have accelerated as borrowers refinance into lower rates, pay down debt to improve their financial position, or liquidate assets as part of problem loan work-


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out strategies. Prepayments may affect the levels of loans retained in an institution’s portfolio, as well as its net interest income. This has been the case over the past year, as Intermountain experienced rapid declines in loan volumes and resulting decreases in its net interest income. Prepayments are likely to slow in future periods as the economy improves and rates begin rising. Intermountain maintains an asset and liability management program intended to manage net interest income through interest rate cycles and to protect its income by controlling its exposure to changing interest rates.
 
On the liability side, Intermountain seeks to manage its interest rate risk exposure by maintaining a relatively high percentage of non-interest bearing demand deposits, interest-bearing demand deposits, savings and money market accounts. These instruments tend to lag changes in market rates and may afford the Bank more protection in increasing interest rate environments, but can also be changed relatively quickly in a declining rate environment. The Bank utilizes various deposit pricing strategies and other borrowing sources to manage its rate risk.
 
As discussed above, Intermountain uses a simulation model designed to measure the sensitivity of net interest income and net income to changes in interest rates. This simulation model is designed to enable Intermountain to generate a forecast of net interest income and net income given various interest rate forecasts and alternative strategies. The model is also designed to measure the anticipated impact that prepayment risk, basis risk, customer maturity preferences, volumes of new business and changes in the relationship between long-term and short-term interest rates have on the performance of Intermountain. The results of modeling indicate that the estimated impact of changing rates on net interest income in a 100 and 300 basis point upward adjustment and a 100 basis point downward adjustment in market interest rates are within the guidelines established by management. While the impacts on net income of upward 100 and downward 100 basis point market rate adjustments are also within the established guidelines, the net income increase in a 300 basis point upward adjustment is above the guidelines. Because the results indicate improvements in net interest income and net income in these scenarios, it perceives its current level of interest rate risk as moderate. The scenario analysis for net income has been impacted by the unusual current year operating results of the Company, which increases the impact of upward adjustments.
 
Intermountain is continuing to pursue strategies to manage the level of its interest rate risk while increasing its long-term net interest income and net income: 1) through the origination and retention of a diversified mix of variable and fixed-rate consumer, business, commercial real estate loans, and residential loans which generally have higher yields than alternative investments; and 2) by increasing the level of its core deposits, which are generally a lower-cost, less rate-sensitive funding source than wholesale borrowings. There can be no assurance that Intermountain will be successful implementing any of these strategies or that, if these strategies are implemented, they will have the intended effect of reducing interest rate risk or increasing net interest income.
 
Liquidity and Sources of Funds
 
As a financial institution, Intermountain’s primary sources of funds from assets include the collection of loan principal and interest payments, cash flows from various investment securities, and sales of loans, investments or other assets. Liability financing sources consist primarily of customer deposits, repurchase obligations with local customers, advances from FHLB Seattle and correspondent bank borrowings.
 
During 2010, cash provided by investing activities consisted primarily of the decrease in loans receivable and principal payments of available-for-sale investment securities offset by the purchase of additional available-for-sale investment and held-to-maturity securities. During the same period, cash used by financing activities consisted primarily of decreases in money market, NOW and savings account balances, reductions in both retail and wholesale certificates of deposits, and reductions in FHLB advances. These were partially offset by increases in local municipal repurchase agreement balances.
 
Deposits decreased to $778.8 million at December 31, 2010 from $819.3 million at December 31, 2009, with the largest decreases in brokered and retail CDs. Decreases in loan balances offset the largely planned reduction in deposits and FHLB advances, resulting in an increase of $42.3 million in the Company’s cash position at December 31, 2010 from year end 2009.
 
Securities sold subject to repurchase agreement totaled $105.1 million at December 31, 2010. These borrowings are required to be collateralized by investments with a market value exceeding the face value of


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the borrowings. Under certain circumstances, Intermountain could be required to pledge additional securities or reduce the borrowings.
 
Intermountain’s credit line with FHLB Seattle provides for borrowings up to a percentage of its total assets subject to general collateralization requirements. At December 31, 2010, the Company’s FHLB Seattle credit line represented a total borrowing capacity of approximately $120.2 million, of which $36.6 million was being utilized. Additional collateralized funding availability at the Federal Reserve totaled $24.3 million. Both of these collateral secured lines could be expanded more with the placement of additional collateral. Overnight-unsecured borrowing lines have been established at US Bank and Pacific Coast Bankers Bank (“PCBB”). At December 31, 2010, the Company had approximately $35.0 million of overnight funding available from its unsecured correspondent banking sources. In addition, up to $1.0 million in funding is available on a semiannual basis from the State of Idaho in the form of negotiated certificates of deposit.
 
Intermountain maintains an active liquidity monitoring and management plan, and has worked aggressively over the past several years to expand its on balance sheet liquidity and its sources of alternative liquidity. Given continuing volatile economic conditions, the Company has taken additional protective measures to enhance liquidity, including intensive customer education and communication efforts, movement of funds into highly liquid assets and increased emphasis on local deposit-gathering efforts. Because of its relatively low reliance on non-core funding sources and the additional efforts undertaken to improve liquidity discussed above, management believes that the Company’s current liquidity risk is moderate and manageable.
 
Management continues to monitor its liquidity position carefully and conducts periodic stress tests to evaluate future potential liquidity concerns. It has established contingency plans for potential liquidity shortfalls. Longer term, the Company intends to fund asset growth primarily with core deposit growth, and it has initiated a number of organizational changes and programs to spur this growth when needed.
 
Liquidity for the parent Company depends substantially on dividends from the Bank. As discussed more fully in “Risk Factors”, the Bank is currently prohibited from paying dividends to the parent Company without prior regulatory approval. The other primary sources of liquidity for the Parent Company are capital or borrowings. With the suspension of payments on our trust preferred securities and preferred stock and the release of some restricted cash securing an interest-rate swap, management projects the parent Company’s cash needs to be approximately $500,000 on an annualized basis, and that current resources will be sufficient to meet the parent Company’s projected liabilities at least through April 2011. Management would expect to satisfy any additional parent company liquidity needs through borrowings or offerings of equity securities.
 
Capital Resources
 
Intermountain’s total stockholders’ equity was $59.3 million at December 31, 2010, compared with $88.6 million at December 31, 2009. The decrease in total stockholders’ equity was primarily due to the net loss for the year ended December 31, 2010, partially offset by a small decrease in the unrealized loss on the investment portfolio. Stockholders’ equity was 5.9% of total assets at December 31, 2010 and 8.2% at December 31, 2009. Tangible stockholders’ equity as a percentage of tangible assets was 5.9% for December 31, 2010 and 7.2% for December 31, 2009. Tangible common equity as a percentage of tangible assets was 3.3% for December 31, 2010 and 4.8% for December 31, 2009.
 
At December 31, 2010, Intermountain had unrealized losses of $797,000 (including cumulative OTTI recognized through other comprehensive income), net of related income taxes, on investments classified as available-for-sale and $432,000 in unrealized losses on cash flow hedges, net of related income taxes, as compared to unrealized losses of $4.2 million, net of related income taxes, on investments classified as available-for-sale and $678,000 unrealized losses on cash flow hedges at December 31, 2009. Improvements in market valuations for many of its agency-guaranteed securities and some of the Company’s private mortgage backed securities produced the improvement since 2009, although illiquid markets for some of these securities continue to produce the overall unrealized loss. Fluctuations in prevailing interest rates and turmoil in global debt markets continue to cause volatility in this component of accumulated comprehensive loss in stockholders’ equity and may continue to do so in future periods.


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On December 19, 2008, the Company entered into a definitive agreement with the U.S. Treasury. Pursuant to this Agreement, the Company sold 27,000 shares of Preferred Stock, no par value, having a liquidation amount equal to $1,000 per share, including a warrant (“The Warrant”) to purchase 653,226 shares of the Company’s common stock, no par value, to the U.S. Treasury. The Warrant has a 10-year term and has an exercise price, subject to anti-dilution adjustments, equal to $6.20 per share of common stock.
 
The preferred stock qualifies as Tier 1 capital and provides for cumulative dividends at a rate of 5% per year, for the first five years, and 9% per year thereafter. The preferred stock may be redeemed with the approval of the U.S. Treasury in the first three years with the proceeds from the issuance of certain qualifying Tier 1 capital or after three years at par value plus accrued and unpaid dividends. The original terms governing the Preferred Stock prohibited the Company from redeeming the shares during the first three years other than from proceeds received from a qualifying equity offering. However, subsequent legislation was passed that would now permit the Company to redeem the shares of preferred stock upon the approval of Treasury and the Company’s primary federal regulator.
 
Intermountain issued and has outstanding $16.5 million of Trust Preferred Securities. The indenture governing the Trust Preferred Securities limits the ability of Intermountain under certain circumstances to pay dividends or to make other capital distributions. The Trust Preferred Securities are treated as debt of Intermountain. These Trust Preferred Securities can be called for redemption beginning in March 2008 by the Company at 100% of the aggregate principal plus accrued and unpaid interest. See Note 9 of “Notes to Consolidated Financial Statements.”
 
Intermountain and the Bank are required by applicable regulations to maintain certain minimum capital levels and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier I capital to average assets. Intermountain and the Bank plan to maintain their capital resources and regulatory capital ratios through the retention of earnings and the management of the level and mix of assets. Management is also exploring other opportunities to enhance capital levels. At December 31, 2010, Intermountain exceeded the minimum published regulatory capital requirements to be considered “well-capitalized” pursuant to Federal Financial Institutions Examination Council “FFIEC” regulations. However, the Bank executed an informal agreement with its primary regulators in the first quarter of 2010 which among other conditions, requires the Bank to increase its capital by $30 million by June 16, 2010 and maintain a 10% Tier 1 capital to average assets ratio. Although the Company was not able to meet the capital requirement by the June 16, 2010 deadline, management has taken numerous steps to satisfy this condition of the agreement, including seeking and obtaining shareholder approval to increase the Company’s authorized common stock to facilitate raising capital and devoting substantial time and resources to pursuing capital opportunities. The Company is actively engaged in negotiations with potential investors for a significant capital raise. However, there can be no assurance that we will be successful in raising the required capital.
 


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                Published
 
          Capital
    Well-Capitalized
 
    Actual     Requirements     Requirements  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
    (Dollars in thousands)  
 
As of December 31, 2010
                                               
Total capital (to risk-weighted assets):
                                               
The Company
  $ 76,090       11.32 %   $ 53,766       8 %   $ 67,207       10 %
Panhandle State Bank
    80,251       11.94 %     53,767       8 %     67,209       10 %
Tier I capital (to risk-weighted assets):
                                               
The Company
    67,639       10.06 %     26,883       4 %     40,324       6 %
Panhandle State Bank
    71,800       10.68 %     26,884       4 %     40,325       6 %
Tier I capital (to average assets):
                                               
The Company
    67,639       6.84 %     39,535       4 %     49,419       5 %
Panhandle State Bank
    71,800       7.26 %     39,535       4 %     49,419       5 %
As of December 31, 2009
                                               
Total capital (to risk-weighted assets):
                                               
The Company
  $ 100,553       12.52 %   $ 64,254       8 %   $ 80,317       10 %
Panhandle State Bank
    102,095       12.72 %     64,188       8 %     80,234       10 %
Tier I capital (to risk-weighted assets):
                                               
The Company
    90,442       11.26 %     32,127       4 %     48,190       6 %
Panhandle State Bank
    91,984       11.46 %     32,094       4 %     48,141       6 %
Tier I capital (to average assets):
                                               
The Company
    90,442       8.61 %     41,997       4 %     52,497       5 %
Panhandle State Bank
    91,984       8.67 %     42,431       4 %     53,039       5 %
 
Reflecting the Company’s ongoing strategy to prudently manage through the current economic cycle, the decision to maximize equity and liquidity at the Bank level has correspondingly reduced cash available at the parent Company. Consequently, to conserve the liquid assets of the parent Company, the Company’s Board of Directors decided to defer regularly scheduled interest payments on its outstanding Junior Subordinated Debentures related to its Trust Preferred Securities (“TRUPS Debentures”), and also defer regular quarterly cash dividend payments on its preferred stock held by the U.S. Treasury, 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. Under the terms of the preferred stock, if the Company does not pay dividends for six quarterly dividend periods (whether or not consecutive), Treasury would be entitled to appoint two members to the Company’s board of directors. Deferred payments compound for both the TRUPS Debentures and preferred stock. Although these expenses will be accrued on the consolidated income statements for the Company, deferring these interest and dividend payments will preserve approximately $477,000 per quarter in cash for the Company.
 
Notwithstanding the pending deferral of interest and dividend payments, the Company fully intends to meet all of its obligations to the Treasury and holders of the TRUPS Debentures as quickly as it is prudent to do so.
 
Off Balance Sheet Arrangements and Contractual Obligations
 
The Company, in the conduct of ordinary business operations routinely enters into contracts for services. These contracts may require payment for services to be provided in the future and may also contain penalty clauses for the early termination of the contracts. The Company is also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Management does not believe that these off-balance

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sheet arrangements have a material current effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, but there is no assurance that such arrangements will not have a future effect.
 
Tabular Disclosure of Contractual Obligations
 
The following table represents the Company’s on-and-off balance sheet aggregate contractual obligations to make future payments as of December 31, 2010.
 
                                         
    Payments Due by Period  
          Less than
    1 to
    Over 3 to
    More than
 
    Total     1 Year     3 Years     5 Years     5 Years  
    (Dollars in thousands)  
 
Long-term debt(1)
  $ 89,310     $ 31,188     $ 26,733     $ 5,186     $ 26,203  
Short-term debt
    80,171       80,171                    
Capital lease obligations
                             
Operating lease obligations(2)
    13,714       1,014       1,732       1,586       9,382  
Direct financing obligations(3)
    33,725       1,635       3,270       3,434       25,386  
                                         
Total
  $ 216,920     $ 114,008     $ 31,735     $ 10,206     $ 60,971  
                                         
 
 
(1) Includes interest payments related to long-term debt agreements.
 
(2) Excludes recurring accounts payable, accrued expenses and other liabilities, repurchase agreements and customer deposits, all of which are recorded on the registrant’s balance sheet. See Notes 4 and 15 of Notes to Consolidated Financial Statements.
 
(3) Sandpoint Center Building lease payments related to the direct financing transaction executed in August 2009.
 
Inflation
 
Substantially all of the assets and liabilities of the Company are monetary. Therefore, inflation has a less significant impact on the Company than does the fluctuation in market interest rates. Inflation can lead to accelerated growth in noninterest expenses and may be a contributor to interest rate changes, both of which may impact net earnings. Inflation, as measured by the Consumer Price Index, increased substantially in early 2008 fueled by higher energy and food prices, but subsided in late 2008 as energy prices collapsed and soft demand reduced inflationary pressures on other goods and services. The continuing global recession led to benign inflation and even deflation in some months of 2009 and 2010. It appears that inflation may increase moderately in 2011, and at higher rates in future years, as global demand recovers and the large U.S. budget and trade deficits may weaken the dollar. The effects of inflation have not had a material direct impact on the Company over the past several years.
 
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


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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 December 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


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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 an investment security falls below its amortized cost and the decline is deemed to be other-than-temporary, the security’s 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 December 31, 2010, residential mortgage-backed securities included two securities comprised of a pool of mortgages with a combined remaining unpaid balance of $10.4 million. Due to the lack of an orderly market for the securities, their fair value was determined to be $7.9 million at December 31, 2010 based on analytical modeling taking into consideration a range of factors normally found in an orderly market. Based on an analysis of projected cash flows, a total of $1.4 million has been charged to earnings as a credit loss, including $526,000 in 2009 and $828,000 in 2010. The remaining $1.9 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 in prior periods related 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.
 
At September 30, 2010, the Company concluded there was a triggering event related to continuing depressed economic conditions and ongoing losses incurred by the Company. As a result, Intermountain performed a goodwill impairment evaluation using current information. In completing its goodwill impairment analysis, the Company used tangible common equity multiples and core deposit metrics from recent transactions to estimate the fair value of the Company at December 31, 2010. For Step 1, the fair value of the Company was less than the common book value of the Company prior to any goodwill adjustments, indicating a potential impairment. Under accounting guidance, a Step 2 analysis was required. In the Step 2 analysis, the fair value of the Company’s assets and liabilities was determined, using discounted cash flows based on the cash flow characteristics of the assets and liabilities and prevailing market interest rates. The fair value of the liabilities was subtracted from the fair value of the assets resulting in the fair value of the net assets. This was then reduced by the value of the preferred stock to derive the sum of the fair value of net assets supported by common equity. Since this number was higher at September 30, 2010 than the fair value of the Company calculated in Step 1, there was no excess company value that could be allocated to goodwill, resulting in a full impairment of the Company’s goodwill. Intermountain wrote off all of its goodwill at September 30, 2010, totaling $11.7 million. Intermountain records impairment losses as charges to noninterest expense and adjustments to the carrying value of goodwill. As of December 31, 2010, Intermountain had other intangible assets related to acquired depository relationships of $310,000, as compared to $439,000 as of December 31, 2009. Other intangible assets consisting of core-deposit intangibles with definite lives are amortized over the estimated life of the acquired depositor relationships.


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Other 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” 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 20 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 may 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.


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At September 30, 2010, Intermountain assessed whether it was more-likely-than-not that it would realize the benefits of its deferred tax asset. Intermountain determined that the negative evidence associated with a projected three year cumulative loss for the period ending December 31, 2010, and continued depressed economic conditions outweighed the positive evidence. Therefore, Intermountain established a valuation allowance of $7.4 million against its deferred tax asset. After recording the initial valuation allowance and increasing it by $1.4 million in the fourth quarter to reflect the additional small loss and temporary timing differences, Intermountain had a net deferred asset of $15.3 million as of December 31, 2010, compared to a net deferred tax asset of $16.9 million as of December 31, 2009. See Part II — Other Information, Section 1A. Risk Factors.
 
New Accounting Pronouncements
 
“Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements” in the Notes to the Consolidated Financial Statements, which is included in Item 8 of this Report, discusses new accounting pronouncements adopted by Intermountain and the expected impact of accounting pronouncements recently issued or proposed, but not yet required to be adopted.
 
Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Sensitivity Management
 
The largest component of the Company’s earnings is net interest income, which can fluctuate widely when interest rate movements occur. The Bank’s management is responsible for minimizing the Company’s exposure to interest rate risk. This is accomplished by developing objectives, goals and strategies designed to enhance profitability and performance, while managing risk within specified control parameters. The ongoing management of the Company’s interest rate sensitivity limits interest rate risk by controlling the mix and maturity of assets and liabilities. Management continually reviews the Bank’s position and evaluates alternative sources and uses of funds. This includes any changes in external factors. Various methods are used to achieve and maintain the desired rate sensitive position, including the sale or purchase of assets and product pricing.
 
The Company views any asset or liability which matures, or is subject to repricing within one year to be interest sensitive even though an analysis is performed for all other time intervals as well. The difference between interest-sensitive assets and interest sensitive liabilities for a defined period of time is known as the interest sensitivity “gap”, and may be either positive or negative. When the gap is positive, interest sensitive assets generally reprice quicker than interest sensitive liabilities. When negative, the reverse occurs. Non-interest assets and liabilities have been positioned based on management’s evaluation of the general sensitivity of these balances to migrate into rate-sensitive products. This analysis provides a general measure of interest rate risk but does not address complexities such as prepayment risk, basis risk and the Bank’s customer responses to interest rate changes.
 
The Asset/Liability Management Committee of the Company also periodically reviews the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income (NII) and the estimated economic value of the Company to changes in interest rates. The simulation model, which has been compared to and validated with an independent third-party model and back-tested against actual results, illustrates the estimated impact of changing interest rates on the interest income received and interest expense paid on all interest bearing assets and liabilities reflected on the Company’s statement of financial condition. This interest sensitivity analysis is compared to policy limits for risk tolerance levels of net interest income exposure over a one-and two- year time horizon, given a 300 and 100 basis point movement in interest rates. Trends in out-of-tolerance conditions are then addressed by the committee, resulting in the implementation of strategic management intervention designed to bring interest rate risk within policy targets. A parallel shift in interest rates over a one-year period is assumed as a base, with reasonable assumptions made regarding the timing and extent to which each interest-bearing asset and liability responds to the changes in market rates. The original assumptions were made based on industry averages and the Company’s own experience, and have been modified based on the Company’s continuing analysis of its actual versus expected performance, and after consultations with an outside consultant. The following table


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represents the estimated sensitivity of the Company’s net interest income as of December 31, 2010 and 2009 compared to the established policy limits:
 
                                 
    2010           2009
       
12 Month Cumulative% effect on NII
  Policy Limit %     12-31-10     Policy Limit %     12-31-09  
 
+100bp
    + 5.0 to −3.0       0.09       + 5.0 to −3.0       6.09  
+300bp
    +10.0 to −8.0       3.41       +10.0 to −8.0       16.97  
−100bp
    + 5.0 to −3.0       −0.48       + 5.0 to −3.0       2.97  
–300bp
    +10.0 to −8.0       N/A       +10.0 to −8.0       N/A  
 
The model results for both years fall within the risk tolerance guidelines established by the committee, except that the positive impact on net interest income of rising rates generally exceeds the Company’s guidelines for 2009.
 
The continuing low level of market rates, and particularly the Federal Funds target range of between 0.00 and 0.25% is unprecedented. This has created significant challenges for interest rate risk management over the past several years, and is reflected in the significant reduction in net interest income during this period. Given the highly unusual current market rate conditions and the potential for rapidly rising rates at some point in the future, Company management continues to refine and expand its interest rate risk modeling, and is responding to the results by proactively managing its balance sheet. Based on the results of its continuing evaluations, management believes that its interest rate risk position is moderate and that it is well-prepared for future likely changes in market rates.
 
The following table displays the Bank’s balance sheet based on the re-pricing schedule of 3 months, 3 months to 1 year, 1 year to 5 years and over 5 years.
 
Asset/Liability Maturity Repricing Schedule
December 31, 2010
 
                                         
          After Three
    After One
             
          Months
    Year but
             
    Within Three
    but within
    within Five
    After Five
       
    Months     One Year     Years     Years     Total  
    (Dollars in thousands)  
 
Loans receivable and held for sale
  $ 165,227     $ 128,247     $ 241,957     $ 43,778     $ 579,209  
Securities
    14,773       32,905       53,614       106,316       207,608  
Federal funds sold
                             
Time certificates and interest-bearing cash
    132,693                         132,693  
                                         
Total earning assets
    312,693       161,152       295,571       150,094       919,510  
Allowance for loan losses
    (3,553 )     (2,759 )     (5,203 )     (941 )     (12,456 )
                                         
Total earning assets, net
  $ 309,140     $ 158,393     $ 290,368     $ 149,153     $ 907,054  
                                         
Interest-bearing demand deposits(1)
  $ 327,891     $     $     $     $ 327,891  
Savings deposits and IRA(1)
    59,363       8,264       7,759             75,386  
Time certificates of deposit accounts
    60,736       71,616       74,577       107       207,036  
                                         
Total interest-bearing deposits
    447,990       79,880       82,336       107       610,313  
Repurchase agreements
    105,116                         105,116  
FHLB advances
          5,000       29,000             34,000  
Other borrowed funds
    16,527                         16,527  
                                         
Total interest-bearing liabilities
  $ 569,633     $ 84,880     $ 111,336     $ 107     $ 765,956  
                                         
Net interest rate sensitivity gap
  $ (260,493 )   $ 73,513     $ 179,032     $ 149,046     $ 141,098  
Cumulative gap
  $ (260,493 )   $ (186,980 )   $ (7,948 )   $ 141,098        
                                         
 
 
(1) Includes deposits with no stated maturity.


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The following table displays expected maturity information and corresponding interest rates for all interest-sensitive assets and liabilities at December 31, 2010.
 
Expected Maturity Date at December 31, 2010
 
                                         
    2011     2012-13     2014-15     Thereafter     Total  
    (Dollars in thousands)  
 
Interest-sensitive assets:
                                       
Commercial loans
  $ 60,376     $ 18,886     $ 16,702     $ 26,692     $ 122,656  
Average interest rate
    5.50 %     6.63 %     6.33 %     6.09 %        
Commercial real estate loans
    28,140       42,771       22,548       82,100       175,559  
Average interest rate
    6.67 %     6.29 %     6.49 %     6.83 %        
Commercial construction loans
    10,401       7,320             230       17,951  
Average interest rate
    6.30 %     4.52 %     0.00 %     6.17 %        
Land and land development loans
    33,645       22,466       3,344       1,507       60,962  
Average interest rate
    6.50 %     5.82 %     6.61 %     7.31 %        
Agriculture loans
    57,355       10,981       10,568       8,460       87,364  
Average interest rate
    5.88 %     6.96 %     6.41 %     6.92 %        
Multifamily loans
    3,275       22,186       659       297       26,417  
Average interest rate
    4.28 %     5.37 %     4.89 %     7.71 %        
Residential loans(1)
    5,741       7,308       9,773       38,050       60,872  
Average interest rate
    7.87 %     6.17 %     6.54 %     6.13 %        
Residential construction loans
    2,414       805                   3,219  
Average interest rate
    6.11 %     6.41 %     0.00 %     0.00 %        
Consumer loans
    5,575       5,204       1,638       1,678       14,095  
Average interest rate
    7.71 %     7.13 %     7.68 %     7.62 %        
Municipal loans
    222       1,497       603       4,206       6,528  
Average interest rate
    5.79 %     3.69 %     4.70 %     4.85 %        
Investments
    47,678       37,101       16,513       106,316       207,608  
Average interest rate
    2.86 %     3.80 %     4.68 %     4.73 %        
Federal funds sold
                             
Average interest rate
    0.00 %     0.00 %     0.00 %     0.00 %        
Certificates and interest bearing cash
    132,693                         132,693  
Average interest rate
    0.23 %     0.00 %     0.00 %     0.00 %        
                                         
Total interest-sensitive assets
  $ 387,515     $ 176,525     $ 82,348     $ 269,536     $ 915,924  
                                         
Deposits:
                                       
Savings deposits and IRA
  $ 67,628     $ 4,541     $ 3,218     $     $ 75,387  
Average interest rate
    0.42 %     2.10 %     3.18 %     0.00 %        
NOW and money market
    327,891                         327,891  
Average interest rate
    0.48 %     0.00 %     0.00 %     0.00 %        
Certificates of deposit accounts
    132,352       52,356       22,221       107       207,036  
Average interest rate
    1.45 %     1.67 %     2.87 %     2.72 %        
Repurchase agreements
    105,116                         105,116  
Average interest rate
    0.28 %     0.00 %     0.00 %     0.00 %        
Other borrowed funds
    5,000     $ 25,000       4,000       16,527       50,527  
Average interest rate
    1.49 %     2.06 %     3.11 %     3.32 %        
                                         
Total interest-sensitive liabilities
  $ 637,987     $ 81,897     $ 29,439     $ 16,634     $ 765,957  
                                         
 
 
(1) Includes loans held for sale.


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Management will continue to refine its interest rate risk management by performing ongoing validity testing of the current model, expanding the number of scenarios tested, and enhancing its modeling techniques. Because of the importance of effective interest-rate risk management to the Company’s performance, management will also continue to obtain review and advice from independent external consultants.
 
Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The required information is contained on pages F-1 through F-61. of this Form 10-K.
 
Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
There have been no changes in or disagreements with Intermountain’s independent accountants on accounting and financial statement disclosures.
 
Item 9A.   CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Intermountain’s management, with the participation of Intermountain’s principal executive officer and principal financial officer, has evaluated the effectiveness of Intermountain’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, Intermountain’s principal executive officer and principal financial officer have concluded that, as of the end of such period, Intermountain’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by Intermountain in the reports that it files or submits under the Exchange Act.
 
There were no changes in internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Management’s Report on Internal Control Over Financial Reporting
 
Intermountain’s management, including the principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of Intermountain’s management, Intermountain conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on management’s evaluation under the COSO Framework, Intermountain’s management has concluded that Intermountain’s internal control over financial reporting was effective as of December 31, 2010.
 
The effectiveness of Intermountain’s internal control over financial reporting as of December 31, 2010 has been attested to by BDO USA, LLP, the independent registered public accounting firm that audited the financial statements included in Intermountain’s Annual Report on Form 10-K, as stated in their report which is included herein.


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Report of Independent Registered Public Accounting Firm
 
Board of Directors and Stockholders
Intermountain Community Bancorp
Sandpoint, Idaho
 
We have audited Intermountain Community Bancorp’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Intermountain Community Bancorp’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Controls and Procedures. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Intermountain Community Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Intermountain Community Bancorp as of December 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive income/ (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 and our report dated March 4, 2011, expressed an unqualified opinion thereon.
 
/s/ BDO USA, LLP
 
Spokane, Washington
March 4, 2011


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Changes in Internal Control over Financial Reporting
 
There were no changes in internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.   OTHER INFORMATION
 
PART III
 
Item 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
In response to this Item, the information to be set forth in Intermountain’s Proxy Statement for the 2011 Annual Meeting of Shareholders (“2011 Proxy Statement”) under the headings “Information with Respect to Nominees and Other Directors,” “Meetings and Committees of the Board of Directors,” “Executive Compensation,” and “Security Ownership of Certain Beneficial Owners and Management” and “Compliance with Section 16(a) filing requirements” are incorporated herein by reference.
 
Information concerning Intermountain’s Audit Committee financial expert will be set forth under the caption “Meetings and Committees of the Board of Directors” in Intermountain’s 2011 Proxy Statement and is incorporated herein by reference.
 
Intermountain has adopted a Code of Ethics that applies to all Intermountain employees and directors, including Intermountain’s senior financial officers. The Code of Ethics is publicly available on Intermountain’s website at http://www.Intermountainbank.com, and is included as Exhibit 14 to this report.
 
Item 11.   EXECUTIVE COMPENSATION
 
In response to this Item, the information to be set forth in the 2011 Proxy Statement under the heading “Director Compensation” and “Executive Compensation” is incorporated herein by reference.
 
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
In response to this Item, the information to be set forth in Intermountain’s 2011 Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” is incorporated herein by reference.
 
Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
In response to this Item, the information to be set forth in Intermountain’s 2011 Proxy Statement under the heading “Certain Relationships and Related Transactions” is incorporated herein by reference.
 
Item 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES
 
In response to this Item, the information to be set forth in Intermountain’s 2011 Proxy Statement under the headings “Ratification of Appointment of Independent Auditors” and “Independent Registered Public Accounting Firm” is incorporated herein by reference.


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PART IV
 
Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a)(1) Audited Consolidated Financial Statements
 
  •  Report of Independent Registered Public Accounting Firm
 
  •  Consolidated Balance Sheets at December 31, 2010 and 2009
 
  •  Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
 
  •  Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008
 
  •  Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2010, 2009 and 2008
 
  •  Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
 
  •  Summary of Accounting Policies
 
  •  Notes to Consolidated Financial Statements
 
(a)(2) Financial Statement Schedules have been omitted as they are not applicable or the information is included in the Consolidated Financial Statements
 
(b) Exhibits: See “Exhibit Index”


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
INTERMOUNTAIN COMMUNITY BANCORP (Registrant)
 
/s/  Curt Hecker
Curt Hecker
President and Chief Executive Officer
 
March 4, 2011
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/  Curt Hecker

Curt Hecker
  President and Chief Executive Officer, Principal Executive Officer, Director   March 4, 2011
         
/s/  Douglas Wright

Douglas Wright
  Executive Vice President and Chief Financial Officer, Principal Financial and Principal Accounting Officer   March 4, 2011
         
/s/  John B. Parker

John B. Parker
  Chairman of the Board, Director   March 4, 2011
         
/s/  Charles L. Bauer

Charles L. Bauer
  Director   March 4, 2011
         
/s/  James T. Diehl

James T. Diehl
  Director   March 4, 2011
         
/s/  Ford Elsaesser

Ford Elsaesser
  Director   March 4, 2011
         
/s/  Ronald Jones

Ronald Jones
  Director   March 4, 2011
         
/s/  Maggie Y. Lyons

Maggie Y. Lyons
  Director   March 4, 2011
         
/s/  Jim Patrick

Jim Patrick
  Director   March 4, 2011
         
/s/  Michael J. Romine

Michael J. Romine
  Director   March 4, 2011
         
/s/  Jerrold Smith

Jerrold Smith
  Executive Vice President and Director   March 4, 2011


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EXHIBIT INDEX
 
           
Exhibit No.
 
Description
 
  3 .1     Amended and Restated Articles of Incorporation(1)
  3 .2     Amended and Restated Bylaws(2)
  4 .1     Form of Stock Certificate(3)
  4 .2     Certificate of Designations with respect to Fixed Rate Cumulative Perpetual Preferred Stock, Series A (filed as part of the Amended and Restated Articles of Incorporation)(4)
  4 .3     Warrant to Purchase Common Stock of the Company dated December 19, 2008(4)
  4 .4     Form of Preferred Stock Certificate(4)
  10 .1*     Second Amended and Restated 1999 Employee Stock Option and Restricted Stock Plan(3)
  10 .2*     Form of Employee Option Agreement(3)
  10 .3*     Form of Restricted Stock Award Agreement(5)
  10 .4*     Amended and Restated Director Stock Option Plan(6)
  10 .5*     Form of Director Restricted Stock Award Agreement(5)
  10 .6*     Form of Stock Purchase Bonus Agreement(5)
  10 .7*     Amended and Restated Employment Agreement with Curt Hecker dated January 1, 2008(5)
  10 .8*     Amended and Restated Salary Continuation and Split Dollar Agreement for Curt Hecker dated January 1, 2008(5)
  10 .9*     Amended and Restated Employment Agreement with Jerry Smith dated January 1, 2008(5)
  10 .10*     Amended and Restated Salary Continuation and Split Dollar Agreement with Jerry Smith dated January 1, 2008(5)
  10 .11*     Amended and Restated Executive Severance Agreement with Douglas Wright dated January 1, 2008(5)
  10 .12*     Amended and Restated Executive Severance Agreement with John Nagel dated December 27, 2007(5)
  10 .13*     Amended and Restated Executive Severance Agreement with Pam Rasmussen dated December 28, 2007(5)
  10 .14*     Executive Incentive Plan(7)
  10 .15     Letter Agreement including the Securities Purchase Agreement — Standard Terms incorporated herein, between the Company and the United States Department of the Treasury dated December 19, 2008(4)
  10 .16     Real Estate Purchase and Sale Agreement dated as of August 26, 2009 by and between the Company, as seller, and Sandpoint Center II, LLC, as buyer(8)
  10 .17     Lease Agreement dated as of August 28, 2009 by and between Sandpoint Center, LLC and Sandpoint Center II, LLC, as landlord, and Panhandle State Bank, as tenant(8)
  14       Code of Ethics(7)
  21 +     Subsidiaries of the Registrant
  23 +     Consent of BDO USA, LLP
  31 .1+     Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
  31 .2+     Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
  32 +     Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
  99 .1+     Chief Executive Officer TARP Certification
  99 .2+     Chief Financial Officer TARP Certification
 
 
Executive Contract, Compensatory Plan or Arrangement
 
Filed Herewith
 
(1) Incorporated by reference to the Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009


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(2) Incorporated by reference to the Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed September 8, 2004
 
(3) Incorporated by reference to Exhibits 4.1, 10.1 and 10.3 of the Registrant’s Form 10, as amended on July 1, 2004
 
(4) Incorporated by reference to Exhibits 4.1, 4.2, 4.3, 10.1 and 10.2 of the Registrant’s Current Report on Form 8-K filed December 19, 2008
 
(5) Incorporated by reference to Exhibits 10.3 and 10-6 — 10.14 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007
 
(6) Incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005
 
(7) Incorporated by reference to Exhibits 10.20 and 14 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006
 
(8) Incorporated by reference to Exhibits 10.1 and 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009


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Report of Independent Registered Public Accounting Firm
 
Board of Directors and Stockholders
Intermountain Community Bancorp
Sandpoint, Idaho
 
We have audited the accompanying consolidated balance sheets of Intermountain Community Bancorp as of December 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive income/(loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Intermountain Community Bancorp at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Intermountain Community Bancorp’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 4, 2011, expressed an unqualified opinion thereon.
 
/s/ BDO USA, LLP
 
Spokane, Washington
March 4, 2011


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INTERMOUNTAIN COMMUNITY BANCORP
 
CONSOLIDATED BALANCE SHEETS
 
                 
    December 31,  
    2010     2009  
    (Dollars in thousands, except per share data)  
 
ASSETS
Cash and cash equivalents:
               
Interest-bearing
  $ 132,693     $ 83,617  
Non-interest bearing and vault
    11,973       19,572  
Restricted cash
    3,290       2,508  
Available-for-sale securities, at fair value
    183,081       181,784  
Held-to-maturity securities, at amortized cost
    22,217       15,177  
Federal Home Loan Bank of Seattle stock, at cost
    2,310       2,310  
Loans held for sale
    3,425       6,574  
Loans receivable, net
    563,228       655,602  
Accrued interest receivable
    4,360       5,077  
Office properties and equipment, net
    40,246       42,425  
Bank-owned life insurance
    8,765       8,397  
Goodwill
          11,662  
Other intangibles
    310       439  
Other real estate owned (“OREO”)
    4,429       11,538  
Prepaid expenses and other assets
    24,782       32,962  
                 
Total assets
  $ 1,005,109     $ 1,079,644  
                 
 
LIABILITIES
Deposits
  $ 778,833     $ 819,321  
Securities sold subject to repurchase agreements
    105,116       95,233  
Advances from Federal Home Loan Bank
    34,000       49,000  
Cashier checks issued and payable
    580       1,113  
Accrued interest payable
    1,406       1,211  
Other borrowings
    16,527       16,527  
Accrued expenses and other liabilities
    9,294       8,612  
                 
Total liabilities
    945,756       991,017  
                 
Commitments and contingent liabilities (Notes 15 and 16)
               
 
STOCKHOLDERS’ EQUITY
Common stock 300,000,000 shares authorized; 8,431,385 and 8,438,554 shares issued and 8,390,877 and 8,365,836 shares outstanding
    78,803       78,569  
Preferred stock 1,000,000 shares authorized; 27,000 shares issued and 27,000 shares outstanding
    25,794       25,461  
Accumulated other comprehensive loss, net of tax
    (1,229 )     (4,840 )
Retained earnings (deficit)
    (44,015 )     (10,563 )
                 
Total stockholders’ equity
    59,353       88,627  
                 
Total liabilities and stockholders’ equity
  $ 1,005,109     $ 1,079,644  
                 
 
See accompanying summary of accounting policies and notes to consolidated financial statements.


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INTERMOUNTAIN COMMUNITY BANCORP
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                         
    Years Ended December 31,  
    2010     2009     2008  
    (Dollars in thousands,
 
    except per share amounts)  
 
Interest income:
                       
Loans
  $ 38,020     $ 43,611     $ 55,614  
Investments
    8,029       10,256       8,195  
                         
Total interest income
    46,049       53,867       63,809  
                         
Interest expense:
                       
Deposits
    7,746       12,339       14,640  
Other borrowings
    1,034       1,502       1,786  
Short-term borrowings
    2,005       2,329       4,385  
                         
Total interest expense
    10,785       16,170       20,811  
                         
Net interest income
    35,264       37,697       42,998  
Provision for losses on loans
    (24,012 )     (36,329 )     (10,384 )
                         
Net interest income after provision for losses on loans
    11,252       1,368       32,614  
                         
Other income:
                       
Fees and service charges
    7,133       6,948       7,394  
Loan related fee income
    3,061       2,913       3,029  
Other-than-temporary impairment (“OTTI”) credit losses on investments(1)
    (828 )     (526 )      
Bank-owned life insurance
    368       360       324  
Net gain (loss) on sale of securities
    349       1,795       2,182  
Other income
    941       501       1,003  
                         
Total other income
    11,024       11,991       13,932  
                         
Operating expenses:
                       
Salaries and employee benefits
    20,950       22,512       25,301  
Occupancy expense
    7,240       7,515       7,496  
Advertising
    1,010       1,351       1,474  
Fees and service charges
    2,666       2,940       1,990  
Printing, postage and supplies
    1,346       1,352       1,442  
Legal and accounting
    1,244       1,734       1,758  
FDIC assessment
    1,892       2,373       511  
OREO operations
    3,472       5,389       988  
Goodwill
    11,662              
Other expenses
    3,412       4,464       4,412  
                         
Total operating expenses
    54,894       49,630       45,372  
                         
Income (loss) before income taxes
    (32,618 )     (36,271 )     1,174  
Income tax benefit
    (882 )     (14,360 )     (80 )
                         
Net income (loss)
    (31,736 )     (21,911 )     1,254  
Preferred stock dividend
    1,716       1,662       45  
                         
Net income (loss) applicable to common stockholders
  $ (33,452 )   $ (23,573 )   $ 1,209  
                         
Earnings (loss) per share — basic
  $ (3.99 )   $ (2.82 )   $ 0.15  
                         
Earnings (loss) per share — diluted
  $ (3.99 )   $ (2.82 )   $ 0.14  
                         
Weighted-average shares outstanding — basic
    8,385,615       8,360,654       8,294,502  
                         
Weighted-average shares outstanding — diluted
    8,385,615       8,360,654       8,514,836  
                         
 
 
1) Consisting of $1,529,000 and $1,751,000 of total other-than-temporary impairment net losses, net of $701,000 and $1,225,000 recognized in other comprehensive income for the years ended December 31, 2010 and December 31, 2009, respectively.
 
See accompanying summary of accounting policies and notes to consolidated financial statements.


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INTERMOUNTAIN COMMUNITY BANCORP
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
                         
    Years Ended December 31,  
    2010     2009     2008  
    (Dollars in thousands)  
 
Net income (loss)
  $ (31,736 )   $ (21,911 )   $ 1,254  
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
    6,273       2,529       (10,392 )
Non-credit loss portion of other-than-temporary impairment on available-for-sale debt
    (701 )     (1,225 )      
Less deferred income tax benefit (provision)
    (2,207 )     (516 )     4,115  
Change in fair value of qualifying cash flow hedge
    246       307       (985 )
                         
Net other comprehensive income (loss)
    3,611       1,095       (7,262 )
                         
Comprehensive loss
  $ (28,125 )   $ (20,816 )   $ (6,008 )
                         
 
See accompanying summary of accounting policies and notes to consolidated financial statements.


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INTERMOUNTAIN COMMUNITY BANCORP
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2010, 2009, and 2008
 
                                                         
                            Accumulated
             
                            Other
          Total
 
    Preferred Stock     Common Stock     Comprehensive
    Retained
    Stockholders’
 
    Shares     Amount     Shares     Amount     Income (Loss)     Earnings     Equity  
    (Dollars in thousands, except per share data)  
 
Balance, January 1, 2008
        $       8,313,005     $ 76,746     $ 1,327     $ 12,046     $ 90,119  
Cumulative effect of adopting EITF 06-4, “Accounting for deferred compensation and post retirement benefits and aspects of endorsement split-dollar life insurance arrangements”
                                  (234 )     (234 )
Net income
                                  1,254       1,254  
Equity based compensation
                      (110 )                 (110 )
Restricted stock grant
                46,264                          
Shares issued upon exercise of stock options, net of shares withheld
                50,692       124                   124  
Vesting of stock-based compensation awards, net of shares withheld
                19,615       (193 )                 (193 )
Issuance of preferred shares net of expenses
    27,000       25,138                                 25,138  
Accretion of preferred stock discount
          11                         (11 )      
Preferred stock dividends
                                  (45 )     (45 )
Issuance of common stock warrants
                      1,770                   1,770  
Net unrealized loss on investments
                            (6,277 )           (6,277 )
Net unrealized loss on hedging activities
                            (985 )           (985 )
Tax benefit associated with stock options
                      27                   27  
Other
                      (103 )                 (103 )
                                                         
Balance, December 31, 2008
    27,000     $ 25,149       8,429,576     $ 78,261     $ (5,935 )   $ 13,010     $ 110,485  
                                                         
 
See accompanying summary of accounting policies and notes to consolidated financial statements.


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INTERMOUNTAIN COMMUNITY BANCORP
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2010, 2009, and 2008
 
                                                         
                            Accumulated
             
                            Other
          Total
 
    Preferred Stock     Common Stock     Comprehensive
    Retained
    Stockholders’
 
    Shares     Amount     Shares     Amount     Income (Loss)     Earnings     Equity  
    (Dollars in thousands, except per share data)  
 
Balance, December 31, 2008
    27,000     $ 25,149       8,429,576     $ 78,261     $ (5,935 )   $ 13,010     $ 110,485  
Net loss
                                  (21,911 )     (21,911 )
Equity based compensation
                      367                   367  
Restricted stock grant
                (3,743 )                        
Shares issued upon exercise of stock options, net of shares withheld
                12,721       56                   56  
Vesting of stock-based compensation awards, net of shares withheld
                      (8 )                 (8 )
Accretion of preferred stock discount
          312                         (312 )      
Preferred stock dividends
                                  (1,350 )     (1,350 )
Net unrealized loss on investments, excluding non-credit loss on impairment of securities
                            1,528             1,528  
Non-credit gain portion of other-than-temporary impairment on available-for-sale debt securities
                            (740 )           (740 )
Net unrealized gain on hedging activities
                            307             307  
Tax benefit associated with stock options
                      3                   3  
Other
                      (110 )                 (110 )
                                                         
Balance, December 31, 2009
    27,000     $ 25,461       8,438,554     $ 78,569     $ (4,840 )   $ (10,563 )   $ 88,627  
                                                         
 
See accompanying summary of accounting policies and notes to consolidated financial statements.


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INTERMOUNTAIN COMMUNITY BANCORP
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2010, 2009, and 2008
 
                                                         
                            Accumulated
             
                            Other
          Total
 
    Preferred Stock     Common Stock     Comprehensive
    Retained
    Stockholders’
 
    Shares     Amount     Shares     Amount     Income (Loss)     Earnings     Equity  
    (Dollars in thousands, except per share data)  
 
Balance, December 31, 2009
    27,000     $ 25,461       8,438,554     $ 78,569     $ (4,840 )   $ (10,563 )   $ 88,627  
Net loss
                                  (31,736 )     (31,736 )
Equity based compensation
                      361                   361  
Restricted stock cancellations
                (7,169 )                        
Accretion of preferred stock discount
          333                         (333 )      
Preferred stock dividends
                                  (1,350 )     (1,350 )
Interest on deferred Preferred stock dividends
                                  (33 )     (33 )
Net unrealized loss on investments, excluding non-credit loss on impairment of securities
                            3,789             3,789  
Non-credit gain portion of other-than-temporary impairment on available-for-sale debt securities
                            (424 )           (424 )
Net unrealized gain on hedging activities
                            246             246  
Tax benefit associated with vesting of restricted stock
                      (4 )                 (4 )
Other
                      (123 )                 (123 )
                                                         
Balance, December 31, 2010
    27,000     $ 25,794       8,431,385     $ 78,803     $ (1,229 )   $ (44,015 )   $ 59,353  
                                                         
 
See accompanying summary of accounting policies and notes to consolidated financial statements.


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INTERMOUNTAIN COMMUNITY BANCORP
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Years Ended December 31,  
    2010     2009     2008  
    (Dollars in thousands)  
 
Cash flows from operating activities:
                       
Net income (loss)
  $ (31,736 )   $ (21,911 )   $ 1,254  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Equity based compensation expense
    361       367       (110 )
Depreciation
    3,127       3,407       3,520  
Net amortization of premiums on securities
    2,935       1,014       (179 )
Provisions for losses on loans
    24,012       36,329       10,384  
Goodwill impairment
    11,662              
Deferred tax asset valuation allowance
    8,766              
Proceeds from sale of loans
    64,287       108,791       69,771  
Originations of loans held for sale
    (59,521 )     (112,979 )     (65,181 )
Amortization of core deposit intangibles
    129       137       147  
Net accretion of loan discount
    (35 )     (100 )     (15 )
Accretion of deferred gain on sale of branch property
    (15 )     (15 )     (15 )
Gain on sale of loans, investments, property and equipment, OREO
    (2,309 )     (3,184 )     (3,818 )
Charge downs and gain on OREO
    2,958       3,962       759  
OTTI credit loss on available-for-sale investments
    828       526        
Deferred income tax benefit
    (9,649 )     (8,611 )     (1,360 )
Increase in cash surrender value of bank-owned life insurance
    (368 )     (360 )     (324 )
Change in :
                       
Accrued interest receivable
    717       1,371       1,759  
Prepaid expenses and other assets
    7,015       (10,887 )     (2,718 )
Accrued interest payable
    195       (1,064 )     (753 )
Accrued expenses and other liabilities
    (1,255 )     3,158       (2,162 )
                         
Net cash provided by (used in) operating activities
    22,104       (49 )     10,959  
                         
Cash flows from investing activities:
                       
Purchases of available-for-sale securities
    (66,820 )     (129,718 )     (78,266 )
Proceeds from calls, maturities or sales of available-for-sale securities
    15,336       59,623       68,522  
Principal payments on mortgage-backed securities
    52,370       37,550       12,932  
Purchases of held-to-maturity securities
    (7,927 )     (64 )     (7,639 )
Proceeds from calls or maturities of held-to-maturity securities
    861       2,429       1,313  
Purchase of Federal Home Loan Bank of Seattle stock
                (706 )
Proceed from redemption of Federal Home Loan Bank of Seattle stock
                175  
Loans made to customers less (greater) than principal collected on loans
    59,450       39,998       (15,747 )
Purchase of office properties and equipment
    (987 )     (1,603 )     (5,845 )
Proceeds from sales of office properties and equipment
    40             169  
Proceeds from sale of portfolio loans
                5,490  
Proceeds from sale of other real estate owned
    13,441       9,830       474  
Net change in federal funds sold
          71,450       (64,885 )
Net (increase) decrease in restricted cash
    (782 )     (2,040 )     4,059  
                         
Net cash provided by (used in) investing activities
    64,982       87,455       (79,954 )
                         
 
See accompanying summary of accounting policies and notes to consolidated financial statements.


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INTERMOUNTAIN COMMUNITY BANCORP
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Years Ended December 31,  
    2010     2009     2008  
    (Dollars in thousands)  
 
Cash flows from financing activities:
                       
Net increase (decrease) in demand, money market and savings deposits
    (14,140 )     31,445       (583 )
Net increase (decrease) in certificates of deposit
    (26,348 )     (2,536 )     33,151  
Proceeds from Federal Home Loan Bank advances
          39,000       30,000  
Repayments of Federal Home Loan Bank advances
    (15,000 )     (36,000 )     (13,000 )
Net change in repurchase agreements
    9,883       (13,773 )     (15,121 )
Principal reduction of note payable
          (23,941 )     (41 )
Proceeds from exercise of stock options
          56       158  
Proceeds from issuance of preferred stock, net of expenses
                25,138  
Proceeds from issuance of common stock warrants
                1,770  
Cash dividends paid to preferred stockholders
          (1,223 )      
Increase (decrease) in credit line
          (145 )     3,657  
Retirement of treasury stock
    (4 )     (7 )     (227 )
                         
Net cash provided by (used in) financing activities
    (45,609 )     (7,124 )     64,902  
                         
Net increase (decrease) in cash and cash equivalents
    41,477       80,282       (4,093 )
Cash and cash equivalents, beginning of year
    103,189       22,907       27,000  
                         
Cash and cash equivalents, end of year
  $ 144,666     $ 103,189     $ 22,907  
                         
Supplemental disclosure of cash flow information:
                       
Cash paid during the period for:
                       
Interest
  $ 10,590     $ 16,195     $ 20,916  
Income taxes, net of tax refunds received
  $ (7,144 )   $ 6,031     $ 3,615  
Noncash investing and financing activities:
                       
Restricted shares issued
  $     $     $ 647  
Accrual of preferred stock dividend
  $ 1,384     $ 173     $  
Loans converted to other real estate owned
  $ 8,946     $ 20,789     $ 4,092  
Line of credit converted to term debt
  $     $ 23,000     $  
 
See accompanying summary of accounting policies and notes to consolidated financial statements.


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Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization
 
Intermountain Community Bancorp (“Intermountain” or “the Company”) is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Panhandle State Bank (“the Bank”). The Bank is a state chartered commercial bank under the laws of the state of Idaho. At December 31, 2010, the Bank had eight branch offices in northern Idaho, five in southwestern Idaho, three in southcentral Idaho, two branches in eastern Washington and one branch in eastern Oregon operating under the names of Panhandle State Bank, Intermountain Community Bank and Magic Valley Bank.
 
Intermountain provides customized quality financial services and banking products to its customers through experienced, highly trained staff who are long-time residents of its local markets. Intermountain believes this philosophy has allowed it to grow rapidly in its market areas. With $1.01 billion in total assets as of December 31, 2010, Intermountain originates loans and attracts deposits from the general public through 19 branches located in Washington, Oregon, and Idaho. In addition, Intermountain also markets trust and wealth management services and fixed income and equity products, mutual funds, fixed and variable annuities and other financial products through its Trust and Investment Services Division.
 
The accounting and reporting policies of Intermountain and subsidiaries conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. The more significant accounting policies are as follows:
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Cash and Cash Equivalents
 
Cash equivalents are any highly liquid debt instruments with a remaining maturity of three months or less at the date of purchase. Cash and cash equivalents are on deposit with the Federal Reserve, and other banks and financial institutions in amounts that periodically exceed the federal insurance limit. Intermountain evaluates the credit quality of these banks and financial institutions to mitigate its credit risk.
 
Restricted Cash
 
Restricted cash represents the required reserve balances maintained to comply with Federal Reserve Bank requirements and required cash reserves for loan hedges and Trust Preferred Cash Flow Hedge held at Pacific Coast Bankers Bank.
 
Investments
 
Intermountain classifies debt and equity investments as follows:
 
  •  Available-for-Sale.  Debt and equity investments that will be held for indefinite periods of time are classified as available-for-sale and are carried at market value. Market value is determined using published quotes or other indicators of value as of the close of business. Unrealized gains and losses that are considered temporary are reported, net of deferred income taxes, as a component of accumulated other comprehensive income or loss in stockholders’ equity until realized.


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Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
 
  •  Federal Home Loan Bank of Seattle Stock.  Federal Home Loan Bank (“FHLB”) of Seattle stock may only be redeemed by FHLB Seattle or sold to another member institution at par. Therefore, this investment is carried at cost.
 
  •  Held-to-Maturity.  Investments in debt securities that management has the intent and ability to hold until maturity are classified as held-to-maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts.
 
Premiums are amortized and discounts are accreted using the level-interest-yield method over the estimated remaining term of the underlying security. Realized gains and losses on sales of investments and mortgage-backed securities are recognized in the statement of income in the period sold using the specific identification method.
 
In assessing whether a security has an other-than-temporary impairment (“OTTI”), the Company considers whether it intends to sell a security or if it is likely that it would be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses is recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the amount recorded in OCI increases the carrying value of the investment and does not affect earnings. If there is an indication of additional credit losses the security is re-evaluated according to the procedures described above. The Company recognized total OTTI on available-for-sale securities of $1.5 million in 2010, of which $828,000 was recognized through earnings as credit loss impairment and $1.1 million, representing non-credit value impairment, was recognized in OCI. In 2009, the Company recognized total OTTI of $701,000, of which $526,000 was recognized through earnings as credit loss impairment and $1.2 million, representing non-credit value impairment, was recognized in OCI. No OTTI was recognized in 2008.
 
Transfers of securities from available for sale to held to maturity are accounted for at fair value as of the date of the transfer. The difference between the fair value and the par value at the date of transfer is considered a premium or discount and is accounted for accordingly. Any unrealized gain or loss at the date of the transfer is reported in OCI, and is amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount, and will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held to maturity security.
 
Loans Held for Sale
 
Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains or losses on sales of mortgage loans are recognized based on the differences between the selling price and the carrying value of the mortgage loans sold.
 
The Company records a transfer of financial assets as a sale when it surrenders control over those financial assets to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The Company considers control surrendered when all conditions prescribed by accounting guidance are met. These conditions include whether the transferred assets are isolated beyond the reach of the Company and its creditors, the


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INTERMOUNTAIN COMMUNITY BANCORP
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
presence of constraints on the transferee or beneficial interest holders, and the Company’s rights or obligations to reacquire transferred financial assets.
 
Loans Receivable
 
Loans receivable that management of Intermountain has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance less any unearned income, premiums or discounts and an associated allowance for losses on loans. Unearned income includes deferred loan origination fees reduced by loan origination costs.
 
Loans are classified as impaired when, based on current information and events, it is probable the Bank will be unable to collect all amounts as scheduled under the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value less estimated selling costs of the collateral, if the loan is collateral dependent. Changes in these values are reflected in income through charges to the provision for loan losses.
 
Interest income is recognized over the term of the loans receivable based on the unpaid principal balance. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to make payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is then subsequently recognized only to the extent cash payments are received in excess of principal due.
 
Allowance for Losses on Loans
 
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 December 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


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Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
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.
 
Loan Origination and Commitment Fees
 
Loan origination fees, net of direct origination costs, are deferred and recognized as interest income using the level interest yield method over the contractual term of each loan adjusted for actual loan prepayment experience.
 
Loan commitment fees are deferred until the expiration of the commitment period unless management believes there is a remote likelihood that the underlying commitment will be exercised, in which case the fees are amortized to fee income using the straight-line method over the commitment period. If a loan commitment is exercised, the deferred commitment fee is accounted for in the same manner as a loan origination fee. Deferred commitment fees associated with expired commitments are recognized as fee income.
 
Other 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.
 
Office Properties and Equipment
 
Office properties and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from two to thirty years. Expenditures for new properties and equipment and major renewals or betterments are capitalized. In the case where the Company constructs a facility and the construction period is lengthy, interest expense will be capitalized and added to the cost of the facility. Expenditures for repairs and maintenance are charged to expense as incurred. Upon sale or retirement, the cost and related accumulated depreciation are removed from the respective property or equipment accounts, and the resulting gains or losses are reflected in operations.


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Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
Bank-Owned Life Insurance
 
Bank-owned life insurance (“BOLI”) is carried at the initial premium paid for the policies plus the increase in the cash surrender value.
 
Goodwill and Other Intangibles
 
Goodwill and intangible assets with indefinite lives are not amortized, but are subject to impairment tests at least annually. Intangible assets with finite lives, including core deposit intangibles, are amortized over the estimated life of the depositor relationships acquired. During the quarter ended September 30, 2010, Intermountain determined that a trigger event occurred, requiring an evaluation of the Company’s goodwill. Based on the results of the evaluation, the Company determined that 100% of the goodwill balance was impaired and recorded an $11.7 million goodwill impairment, which reduced the carrying value of the Company’s goodwill down to zero. See Note 5 to the Consolidated Financial Statements for more information on goodwill and other intangibles.
 
Fair Value Measurements
 
ASC 820 “Fair Value Measurements” 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 20 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. The Company has one derivative financial instrument that is designated as a hedge 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.
 
Advertising and Promotion
 
The Company expenses all costs associated with its advertising and promotional efforts as incurred. Those costs are included with operating expenses on the consolidated statements of income.


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Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
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 may 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.
 
At September 30, 2010, Intermountain assessed whether it was more likely than not that it would realize the benefits of its deferred tax asset. Intermountain determined that the negative evidence associated with a projected three year cumulative loss for the period ending December 31, 2010, and continued depressed economic conditions outweighed the positive evidence. Therefore, Intermountain established a valuation allowance of $7.4 million against its deferred tax asset. In the fourth quarter of 2010, the Company fully reserved the tax benefit of $1.4 million due to the continuing economic uncertainties. Intermountain had a net deferred asset of $15.3 million as of December 31, 2010, compared to a net deferred tax asset of $16.9 million as of December 31, 2009. See Note 10 to the Consolidated Financial Statements for more information on the tax provision and the deferred tax asset.
 
Earnings Per Share
 
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding increased by the additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
 
Equity Compensation Plans
 
The Company formerly maintained equity compensation plans under which the Company has granted non-qualified and incentive stock options and restricted stock to employees and non-employee directors. The Company follows guidance under ASC 718, “Stock Compensation”, using the modified prospective method, and the fair value recognition provision. The Company elected to adopt the alternative transition method for calculating the tax effects of stock-based compensation. The alternative transition method includes simplified methods to establish the beginning balance of the additional-paid-in-capital pool (“APIC pool”) related to the tax effects of stock-based compensation, and for determining the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of stock-based compensation awards that are outstanding. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of options. In addition, option valuation models require the input of highly subjective assumptions, particularly for the expected term and stock price volatility. The fair value of each restricted share is based on the fair market value at the date of grant. The Company records compensation expense based on the determined fair value.
 
Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and


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Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, valuation of investments, deferred tax assets and liabilities and valuation and recoverability of goodwill and intangible assets.
 
Business Combinations
 
Pursuant to ASC 805 “Business Combinations”, Intermountain’s mergers and acquisitions are accounted for under the purchase method of accounting. Accordingly, the assets and liabilities of the acquired entities are recorded by Intermountain at their respective fair values at the date of the acquisition and the results of operations are included with those of Intermountain commencing with the date of acquisition. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed, including identifiable intangible assets, is recorded as goodwill.
 
Reclassifications
 
Certain amounts in the 2009 and 2008 financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on total stockholders’ equity or net income as previously reported.
 
New Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2009-17,Accounting for Transfers of Financial Assets.” This standard removes the concept of qualifying special-purpose entities as an accounting criteria that had provided an exception to consolidation, provided additional guidance on requirements for consolidation, and is an update to codification topic 860. This guidance became effective for the Company on January 1, 2010, and did not have a material impact on its consolidated financial statements.
 
In January 2010, the FASB issued ASU No. 2010-06,Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.” FASB ASU No. 2010-06 requires (i) fair value disclosures by each class of assets and liabilities (generally a subset within a line item as presented in the statement of financial position) rather than major category, (ii) for items measured at fair value on a recurring basis, the amounts of significant transfers between Levels 1 and 2, and transfers into and out of Level 3, and the reasons for those transfers, including separate discussion related to the transfers into each level apart from transfers out of each level, and (iii) gross presentation of the amounts of purchases, sales, issuances, and settlements in the Level 3 recurring measurement reconciliation. Additionally, the ASU clarified that a description of the valuation techniques(s) and inputs used to measure fair values is required for both recurring and nonrecurring fair value measurements. Also, if a valuation technique has changed, entities should disclose that change and the reason for the change. Disclosures other than the gross presentation changes in the Level 3 reconciliation were effective for the first reporting period beginning after December 15, 2009 and did not have an impact on the Company’s consolidated financial statements. The requirement to present the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis will be effective for fiscal years beginning after December 15, 2010. The Company is currently evaluating the impact of adoption of FASB ASU No. 2010-06. We do not expect it will have a material impact on the Company’s consolidated financial statements.
 
In February 2010, the FASB issued ASU No. 2010-09,Subsequent Events (Topic 855) — Amendments to Certain Recognition and disclosure Requirements”. This ASU eliminated the requirement to disclose the date through which a Company has evaluated subsequent events and refines the scope of the disclosure requirements for reissued financial statements. This ASU was effective for the first quarter of 2010. This ASU did not have a material impact on the Company’s consolidated financial statements.


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Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)
 
In March 2010, the FASB issued ASU No. 2010-11,Derivatives and Hedging (Topic 815) — Scope Exception Related to Embedded Credit Derivatives.” The ASU eliminated the scope exception for bifurcation of embedded credit derivatives in interests in securitized financial assets, unless they are created solely by subordination of one financial instrument to another. The ASU was effective the first quarter beginning after June 15, 2010. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
 
In April 2010, the FASB issued ASU No. 2010-18,Receivables (Topic 310) — Effect of a Loan Modification When the Loan Is Part of a Pool That is Accounted for as a Single Asset.” This ASU clarified that modifications of loans that are accounted for within a pool under Topic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. No additional disclosures are required with this ASU. The amendments in this ASU are effective for modifications of loans accounted for within pools under Topic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively and early application is permitted. Upon initial adoption of the guidance in this ASU, an entity may make a onetime election to terminate accounting for loans as a pool under Topic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
 
In July 2010, the FASB issued ASU 2010-20,“Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This update amends codification topic 310 on receivables to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. This guidance is being phased in, with the new disclosure requirements for period end balances effective as of December 31, 2010, and the new disclosure requirements for activity during the reporting period are effective March 31, 2011. See Footnote 2 — Loans and Loan Loss Allowance.
 
In December 2010, the FASB issued ASU No. 2010-29,Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations”. ASU No. 2010-29. This ASU requires that if a public entity discloses comparative financial statements, then those disclosures of revenue and earnings of the combined entity should be as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The ASU also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. The ASU will be applied prospectively for business combinations that are consummated on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this ASU will not have an impact on the Company’s consolidated financial statements except and until the Company enters a future business combination.
 
In January 2011, the FASB issued ASU No. 2011-01,Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.” This ASU temporarily delays the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. Accordingly, the Company has not included the disclosures deferred by this ASU.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   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  
 
December 31, 2010
                                       
U.S. treasury securities and obligations of U.S. government agencies
  $ 4,020     $     $     $ (95 )   $ 3,925  
State and municipal securities
    5,251             28       (49 )     5,230  
Mortgage-backed securities & CMO’s
    175,129       (1,926 )     3,648       (2,925 )     173,926  
                                         
    $ 184,400     $ (1,926 )   $ 3,676     $ (3,069 )   $ 183,081  
                                         
December 31, 2009
                                       
U.S. treasury securities and obligations of U.S. government agencies
  $ 51     $     $     $     $ 51  
Mortgage-backed securities & CMO’s
    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  
 
December 31, 2010
                                       
State and municipal securities
  $ 22,217     $     $ 280     $ (385 )   $ 22,112  
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
 
December 31, 2010
  Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
 
U.S. treasury securities and obligations of U.S. government agencies
  $ 3,897     $ 95     $     $     $ 3,897     $ 95  
State and municipal securities
    11,713       434                   11,713       434  
Mortgage-backed securities & CMO’s
    36,338       581       14,447       2,344       50,785       2,925  
                                                 
Total
  $ 51,948     $ 1,110     $ 14,447     $ 2,344     $ 66,395     $ 3,454  
                                                 
 


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    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  
Mortgage-backed securities & CMO’s
    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 December 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
  $ 3     $ 3     $ 297     $ 301  
After one year through five years
    28       28       708       752  
After five years through ten years
    3,989       3,894       5,929       5,894  
After ten years
    5,251       5,230       15,283       15,165  
                                 
      9,271       9,155       22,217       22,112  
Mortgage-backed securities & CMO’s
    175,129       173,926              
                                 
    $ 184,400     $ 183,081     $ 22,217     $ 22,112  
                                 
 
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 December 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 or maturity date. The unrealized losses on residential mortgage-backed securities without OTTI were considered by management to be temporary in nature.
 
Investment securities are reviewed on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, the extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be at maturity, and other factors.
 
Prior to the first quarter of 2009, the Company would assess an OTTI or permanent impairment based on the nature of the decline and whether the Company had the ability and intent to hold the investments until a market price recovery. If the Company determined a security to be other-than-temporarily or permanently impaired, the full amount of impairment would be recognized through earnings in its entirety. New guidance related to the recognition and presentation of OTTI of debt securities became effective in the second quarter of 2009, with early adoption possible in the first quarter of 2009. Rather than asserting whether a Company has the ability and intent to hold an investment until a market price recovery, a Company must consider whether they intend to sell a security or if it is likely that they would be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity. For debt securities, if the Company intends to sell the security or it is likely that it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and it is not likely that it will be required to

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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
sell the security but does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the amount recorded in OCI increases the carrying value of the investment and does not affect earnings. If there is an indication of additional credit losses the security is reevaluated accordingly to the procedures described above.
 
The Company did not have any impairments on securities before 2009. Upon adoption of the new OTTI guidance in the first quarter of 2009, the Company analyzed its securities as well and determined that as of the adoption date there were OTTI impairments and such losses were credit related. There was no cumulative effect adjustment to the opening balance of retained earnings or a corresponding adjustment to accumulated OCI.
 
The following table presents the OTTI losses for the years ended December 31, 2010 and 2009.
 
                                 
    2010     2009  
    Held To
    Available
    Held To
    Available
 
    Maturity     For Sale     Maturity     For Sale  
 
Total other-than-temporary impairment losses
  $     $ 1,529     $     $ 1,751  
Portion of other-than-temporary impairment losses transferred from (recognized in) other comprehensive income(1)
          (701 )           (1,225 )
                                 
Net impairment losses recognized in earnings(2)
  $     $ 828     $     $ 526  
                                 
 
 
(1) Represents other-than-temporary impairment losses related to all other factors.
 
(2) Represents other-than-temporary impairment losses related to credit losses.
 
The OTTI recognized on investment securities available for sale primarily relates to two non-agency collateralized mortgage obligations for 2010 and one non-agency collateralized mortgage obligation for 2009. Each of these securities holds various levels of credit subordination. These securities were valued by third-party pricing services using matrix or model pricing methodologies and were corroborated by broker indicative bids. We estimated the cash flows of the underlying collateral for each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity. Assumptions utilized vary from security to security, and are influenced by factors such as underlying loan interest rates, geographic location, borrower characteristics and vintage, and historical experience. We then used a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure. These cash flows were then discounted at the interest rate used to recognize interest income on each security. We review the actual collateral performance of these securities on a quarterly basis and update the inputs as appropriate to determine the projected cash flows.
 
See Note 20 “Fair Value of Financial Instruments” for more information on the calculation of fair or carrying value for the investment securities.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.   Loans Receivable and Allowance for Loan Losses
 
The components of loans receivable are as follows (in thousands):
 
                                 
    December 31, 2010  
                Individually
    Collectively
 
    Loans
          Evaluated for
    Evaluated for
 
    Receivable     %     Impairment     Impairment  
 
Commercial
  $ 122,656       21.31 %   $ 10,698     $ 111,958  
Commercial real estate
    175,559       30.50       13,077       162,482  
Commercial Construction
    17,951       3.12       691       17,260  
Land and land development loans
    60,962       10.59       5,995       54,967  
Agriculture
    87,364       15.18       1,460       85,904  
Multifamily
    26,417       4.59             26,417  
Residential real estate
    60,872       10.58       3,276       57,596  
Residential construction
    3,219       0.56       277       2,942  
Consumer
    14,095       2.45       1,094       13,001  
Municipal
    6,528       1.12             6,528  
                                 
Total loans receivable
    575,623       100.00 %   $ 36,568     $ 539,055  
                                 
Allowance for loan losses
    (12,455 )                        
Deferred loan fees, net of direct origination costs
    60                          
                                 
Loans receivable, net
  $ 563,228                          
                                 
Weighted average interest rate
    6.04 %                        
                                 
 
                                 
    December 31, 2009  
                Individually
    Collectively
 
    Loans
          Evaluated for
    Evaluated for
 
    Receivable     %     Impairment     Impairment  
 
Commercial
  $ 131,562       19.57 %   $ 8,600     $ 122,962  
Commercial real estate
    172,726       25.69       9,707       163,019  
Commercial Construction
    45,581       6.78       7,862       37,719  
Land and land development loans
    88,604       13.18       18,060       70,544  
Agriculture
    110,256       16.40       6,604       103,652  
Multifamily
    18,067       2.69       696       17,371  
Residential real estate
    65,544       9.75       4,709       60,835  
Residential construction
    16,626       2.47       1,164       15,462  
Consumer
    18,287       2.72       318       17,969  
Municipal
    5,061       0.75             5,061  
                                 
Total loans receivable
    672,314       100.00 %   $ 57,720     $ 614,594  
                                 
Allowance for loan losses
    (16,608 )                        
Deferred loan fees, net of direct origination costs
    (104 )                        
                                 
Loans receivable, net
  $ 655,602                          
                                 
Weighted average interest rate
    6.15 %                        
                                 


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The components of allowance for loan loss by types are as follows (in thousands):
 
                         
    December 31, 2010  
          Individually
    Collectively
 
    Total
    Evaluated
    Evaluated
 
    Allowance     Allowance     Allowance  
 
Commercial
  $ 2,925     $ 744     $ 2,181  
Commercial real estate
    3,655       1,475       2,180  
Commercial Construction
    540       145       395  
Land and land development loans
    2,408       770       1,638  
Agriculture
    779       92       687  
Multifamily
    83             83  
Residential real estate
    1,252       545       707  
Residential construction
    65             65  
Consumer
    613       449       164  
Municipal
    135             135  
                         
Total
  $ 12,455     $ 4,220     $ 8,235  
                         
 
                         
    December 31, 2009  
          Individually
    Collectively
 
    Total
    Evaluated
    Evaluated
 
    Allowance     Allowance     Allowance  
 
Commercial
  $ 4,785     $ 1,893     $ 2,892  
Commercial real estate
    3,827       1,654       2,173  
Commercial Construction
    1,671       141       1,530  
Land and land development loans
    2,707       817       1,890  
Agriculture
    1,390       1,242       148  
Multifamily
    26             26  
Residential real estate
    1,412       444       968  
Residential construction
    170       31       139  
Consumer
    539       152       387  
Municipal
    81             81  
                         
Total
  $ 16,608     $ 6,374     $ 10,234  
                         


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A summary of current, past due and nonaccrual loans as of December 31, 2010 are as follows, (in thousands):
 
                                         
                90 Days or More
             
          30-89 Days
    Past Due
             
    Current     Past Due     and Accruing     Nonaccrual     Total  
 
Commercial
  $ 118,036     $ 761     $     $ 3,859     $ 122,656  
Commercial real estate
    171,633       360             3,566       175,559  
Commercial Construction
    17,880                   71       17,951  
Land and land development loans
    58,537       515             1,910       60,962  
Agriculture
    86,782                   582       87,364  
Multifamily
    26,417                         26,417  
Residential real estate
    58,481       1,361       66       964       60,872  
Residential construction
    3,109                   110       3,219  
Consumer
    13,664       42             389       14,095  
Municipal
    6,528                         6,528  
                                         
Total
  $ 561,067     $ 3,039     $ 66     $ 11,451     $ 575,623  
                                         
 
A summary of current, past due and nonaccrual loans as of December 31, 2009 are as follows, (in thousands):
 
                                         
                90 Days or More
             
          30-89 Days
    Past Due
             
    Current     Past Due     and Accruing     Nonaccrual     Total  
 
Commercial
  $ 128,720     $ 189     $     $ 2,653     $ 131,562  
Commercial real estate
    167,440       2,025       52       3,209       172,726  
Commercial Construction
    42,446                   3,135       45,581  
Land and land development loans
    79,299       3,071       510       5,724       88,604  
Agriculture
    109,788       21             447       110,256  
Multifamily
    17,932                   135       18,067  
Residential real estate
    61,628       1,020       24       2,872       65,544  
Residential construction
    16,421                   205       16,626  
Consumer
    18,199                   88       18,287  
Municipal
    5,061                         5,061  
                                         
Total
  $ 646,934     $ 6,326     $ 586     $ 18,468     $ 672,314  
                                         
 
Nonaccrual loans totaled $11.5 million at December 31, 2010 and $18.5 million at December 31, 2009. If nonaccrual loans had been accruing interest at their originally contracted terms, interest income on such loans would have been $1.9 million, $1.9 million and $465,000 for 2010, 2009 and 2008, respectively. The actual amounts included in interest income during 2010, 2009 and 2008 on such loans were $1.1 million, $1.1 million and $1.2 million, respectively. Troubled Debt Restructures (loans which had been negotiated at below market interest rates or for which other concessions were granted, but are accruing interest) were $4.8 million and $4.6 million at December 31, 2010 and December 31, 2009, respectively.
 
The allowance for loan losses and reserve for unfunded commitments are maintained at levels considered adequate by management to provide for probable loan losses as of the Consolidated Balance Sheet reporting dates. The allowance for loan losses and reserve for unfunded commitments are based on management’s assessment of various factors affecting the loan portfolio, including problem loans, business conditions and loss experience, and


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
an overall evaluation of the quality of the underlying collateral. Changes in the allowance for loan losses and the reserve for unfunded commitments during the periods indicated were as follows:
 
                 
    December 31,  
    2010     2009  
    (Dollars in thousands)  
 
Balance Beginning December 31
  $ (16,608 )   $ (16,433 )
Charge-Offs
               
Commercial loans
    10,603       5,037  
Commercial real estate loans
    5,610       3,194  
Commercial construction loans
    1,393       4,982  
Land and land development loans
    8,622       19,817  
Agriculture loans
    1,055       988  
Multifamily loans
    16       53  
Residential loans
    2,019       1,598  
Residential construction loans
    101       241  
Consumer Loans
    490       1,001  
Municipal Loans
           
                 
Total Charge-offs
    29,909       36,911  
Recoveries
               
Commercial Loans
    (628 )     (144 )
Commercial real estate loans
    (311 )      
Commercial construction loans
    (391 )     (1 )
Land and land development loans
    (175 )     (347 )
Agriculture loans
    (31 )      
Multifamily loans
           
Residential Loans
    (50 )     (9 )
Residential construction loans
           
Consumer Loans
    (158 )     (256 )
Municipal Loans
           
                 
Total Recoveries
    (1,744 )     (757 )
Net charge-offs
    28,165       36,154  
Transfers
           
Provision for losses on loans
    (24,012 )     (36,329 )
Sale of loans
           
                 
Balance at end of period
  $ (12,455 )   $ (16,608 )
Allowance — Unfunded Commitments
               
Balance Beginning December 31
  $ (11 )   $ (13 )
Adjustment
    (6 )     2  
Transfers
           
                 
Allowance — Unfunded Commitments at end of period
  $ (17 )   $ (11 )
 


F-24


Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
    Years Ended December 31,  
    2010     2009     2008  
 
Allowance for loan losses, beginning of year
  $ (16,608 )   $ (16,433 )   $ (11,761 )
Loans charged off
    29,909       36,911       6,193  
Recoveries
    (1,744 )     (757 )     (481 )
Transfers
                 
Provision for losses on loans
    (24,012 )     (36,329 )     (10,384 )
                         
Allowance for loan losses, end of year
  $ (12,455 )   $ (16,608 )   $ (16,433 )
                         
Allowance — Unfunded Commitments Balance Beginning December 31
  $ (11 )   $ (13 )   $ (18 )
Adjustment
    (6 )     2       5  
Transfers
                 
                         
Allowance — Unfunded Commitments at end of period
  $ (17 )   $ (11 )   $ (13 )
                         
 
The following table provides information with respect to impaired loans as of the year ended December 31, 2010.
 
                                         
    December 31, 2010     Year Ended December 31, 2010  
                      Average
       
    Recorded
    Principal
    Related
    Recorded
    Interest Income
 
    Investment     Balance     Allowance     Investment     Recognized  
                (Dollars in thousands)        
 
With an allowance recorded:
                                       
Commercial
  $ 2,319     $ 2,320     $ 744     $ 3,785     $ 173  
Commercial real estate
    4,383       5,088       1,475       4,804       381  
Commercial Construction
    406       407       145       425       17  
Land and land development loans
    1,786       1,786       770       2,411       120  
Agriculture
    428       463       92       1,470       46  
Multifamily
          8                   8  
Residential real estate
    1,207       1,357       545       1,303       98  
Residential construction
                      302        
Consumer
    538       594       449       394       45  
Municipal
                             
                                         
Total
  $ 11,067     $ 12,023     $ 4,220     $ 14,894     $ 888  
                                         
Without an allowance recorded:
                                       
Commercial
  $ 8,379     $ 12,362     $     $ 5,865     $ 1,021  
Commercial real estate
    8,694       11,510             6,589       901  
Commercial Construction
    285       418             3,852       36  
Land and land development loans
    4,209       7,573             9,617       575  
Agriculture
    1,032       1,885             2,560       192  
Multifamily
                      347        
Residential real estate
    2,069       2,335             2,689       204  
Residential construction
    277       363             420       54  
Consumer
    556       726             311       75  
Municipal
                             
                                         
Total
  $ 25,501     $ 37,172     $     $ 32,250     $ 3,058  
                                         

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Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    December 31, 2010     Year Ended December 31, 2010  
                      Average
       
    Recorded
    Principal
    Related
    Recorded
    Interest Income
 
    Investment     Balance     Allowance     Investment     Recognized  
                (Dollars in thousands)        
 
Total:
                                       
Commercial
  $ 10,698     $ 14,682     $ 744     $ 9,650     $ 1,194  
Commercial real estate
    13,077       16,598       1,475       11,393       1,282  
Commercial Construction
    691       825       145       4,277       53  
Land and land development loans
    5,995       9,359       770       12,028       695  
Agriculture
    1,460       2,348       92       4,030       238  
Multifamily
          8             347       8  
Residential real estate
    3,276       3,692       545       3,992       302  
Residential construction
    277       363             722       54  
Consumer
    1,094       1,320       449       705       120  
Municipal
                             
                                         
Total
  $ 36,568     $ 49,195     $ 4,220     $ 47,144     $ 3,946  
                                         
 
The following table provides information with respect to impaired loans as of the year ended December 31, 2009.
 
                                         
    December 31, 2009     Year Ended December 31, 2009  
                      Average
       
    Recorded
    Principal
    Related
    Recorded
    Interest Income
 
    Investment     Balance     Allowance     Investment     Recognized  
                (Dollars in thousands)        
 
Impaired Loans with an allowance recorded:
                                       
Commercial
  $ 5,250     $ 5,301     $ 1,893     $ 4,191     $ 322  
Commercial real estate
    5,224       5,318       1,654       3,267       348  
Commercial Construction
    444       444       141       2,916       41  
Land and land development loans
    3,036       3,191       817       9,242       188  
Agriculture
    2,512       2,511       1,242       1,593       107  
Multifamily
                             
Residential real estate
    1,399       1,399       444       991       102  
Residential construction
    603       603       31       426       45  
Consumer
    252       278       152       278       26  
Municipal
                             
                                         
Total
  $ 18,720     $ 19,045     $ 6,374     $ 22,904     $ 1,179  
                                         

F-26


Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    December 31, 2009     Year Ended December 31, 2009  
                      Average
       
    Recorded
    Principal
    Related
    Recorded
    Interest Income
 
    Investment     Balance     Allowance     Investment     Recognized  
                (Dollars in thousands)        
 
Impaired loans without an allowance recorded:
                                       
Commercial
  $ 3,350     $ 10,123     $     $ 2,006     $ 589  
Commercial real estate
    4,483       6,143             2,934       374  
Commercial Construction
    7,418       10,514             3,848       664  
Land and land development loans
    15,024       26,591             8,209       1,332  
Agriculture
    4,092       4,387             2,892       401  
Multifamily
    696       749             348       38  
Residential real estate
    3,310       3,609             2,557       205  
Residential construction
    561       571             747       48  
Consumer
    66       95             551       13  
Municipal
                      175        
                                         
Total
  $ 39,000     $ 62,782     $     $ 24,267     $ 3,664  
                                         
Total impaired loans:
                                       
Commercial
  $ 8,600     $ 15,424     $ 1,893     $ 6,197     $ 911  
Commercial real estate
    9,707       11,461       1,654       6,201       722  
Commercial Construction
    7,862       10,958       141       6,764       705  
Land and land development loans
    18,060       29,782       817       17,451       1,520  
Agriculture
    6,604       6,898       1,242       4,485       508  
Multifamily
    696       749             348       38  
Residential real estate
    4,709       5,008       444       3,548       307  
Residential construction
    1,164       1,174       31       1,173       93  
Consumer
    318       373       152       829       39  
Municipal
                      175        
                                         
Total
  $ 57,720     $ 81,827     $ 6,374     $ 47,171     $ 4,843  
                                         
 
Credit quality indicators
 
The loan and lease credit quality indicators for loans are developed through review of individual borrowers on an ongoing basis. Each borrower is evaluated at least annually with more frequent evaluation of larger or potentially risker loans or leases. The indicators represent the rating for loans or leases as of the date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:
 
Satisfactory — A satisfactory rated loan is not adversely classified because it does not display any of the characteristics for adverse classification.
 
Watch — A watch loan has a solid but vulnerable repayment source. There is loss exposure only if
repayment/collateral experience prolonged deterioration. Loans in this risk grade category are subject to frequent review and change due to the increased vulnerability of repayment sources and collateral valuations.
 
Special mention — A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification.

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Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Substandard — A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.
 
Doubtful — A loan classified doubtful has all the weaknesses inherent in a loan classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values.
 
Loss — Loans classified loss are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted. This classification does not necessarily mean that there is to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be realized in the future.
 
Credit quality indicators by loan segment are summarized as follows:
 
                                                 
    Loan Portfolio Credit Grades by Type
 
    December 31, 2010  
          Internal
    Special
                   
    Satisfactory
    Watch
    Mention
    Substandard
    Doubtful
       
    Grade 1-3     Grade 4     Grade 5     Grade 6     Grade 7     Total  
    (Dollars in thousands)  
 
Commercial
  $ 78,693     $ 26,383     $ 3,517     $ 14,062     $ 1     $ 122,656  
Commercial real estate
    113,759       43,296       2,696       15,808             175,559  
Commercial Construction
    3,921       4,976       986       8,068             17,951  
Land and land development loans
    13,825       33,688       5,409       8,040             60,962  
Agriculture
    60,508       23,199       1,277       2,380             87,364  
Multifamily
    16,455       9,962                         26,417  
Residential real estate
    46,111       10,230       54       4,477             60,872  
Residential construction
    2,497       445             277             3,219  
Consumer
    12,302       715       106       972             14,095  
Municipal
    6,528                               6,528  
                                                 
Loans receivable, net
  $ 354,599     $ 152,894     $ 14,045     $ 54,084     $ 1     $ 575,623  
                                                 
 
                                                 
    Loan Portfolio Credit Grades by Type
 
    December 31, 2009  
          Internal
    Special
                   
    Satisfactory
    Watch
    Mention
    Substandard
    Doubtful
       
    Grade 1-3     Grade 4     Grade 5     Grade 6     Grade 7     Total  
    (Dollars in thousands)  
 
Commercial
  $ 102,743     $ 16,297     $ 838     $ 11,192     $ 492     $ 131,562  
Commercial real estate
    126,455       32,399       884       12,378       610       172,726  
Commercial Construction
    9,505       27,809             8,267             45,581  
Land and land development loans
    25,903       40,615       2,325       19,392       369       88,604  
Agriculture
    73,674       25,220       1,725       9,503       134       110,256  
Multifamily
    17,228             143       696             18,067  
Residential real estate
    51,435       7,907       770       5,432             65,544  
Residential construction
    7,294       1,085             8,247             16,626  
Consumer
    16,680       1,146             457       4       18,287  
Municipal
    5,061                               5,061  
                                                 
Loans receivable, net
  $ 435,978     $ 152,478     $ 6,685     $ 75,564     $ 1,609     $ 672,314  
                                                 


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Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A summary of non-performing assets and classified loans at the dates indicated is as follows:
 
                 
    December 31,
    December 31,
 
    2010     2009  
    (Dollars in thousands)  
 
Loans past due in excess of 90 days and still accruing
  $ 66     $ 586  
Non-accrual loans
    11,451       18,468  
                 
Total non-performing loans
    11,517       19,054  
Other real estate owned (“OREO”)
    4,429       11,538  
                 
Total non-performing assets (“NPAs”)
  $ 15,946     $ 30,592  
                 
Classified loans(1)
  $ 54,085     $ 77,175  
Troubled debt restructured loans
  $ 4,838     $ 4,604  
 
 
(1) Classified loan totals are inclusive of non-performing loans and may also include troubled debt restructured loans, depending on the grading of these restructured loans.
 
Classified loans included non-performing loans and performing substandard loans where management believes that the loans may not return principal and interest per their original contractual terms. A loan that is classified may not necessarily result in a loss.
 
At December 31, 2010, the contractual principal payments due on outstanding loans receivable are shown below (in thousands). Actual payments may differ from expected payments because borrowers have the right to prepay loans, with or without prepayment penalties.
 
         
Year Ending December 31,
  Amount  
 
2011
  $ 230,710  
2012
    90,014  
2013
    69,081  
2014
    33,307  
2015
    28,747  
Thereafter
    123,764  
         
    $ 575,623  
         
 
The Company sells mortgage loans and Small Business Administration loans in the secondary market. The sales volumes and the gains on sale of loans are shown below (in thousands):
 
                         
    Years Ended December 31,  
    2010     2009     2008  
 
Loan volume sold
  $ 63,314     $ 108,165     $ 74,723  
Gain on sale of loans
    1,617       1,456       1,585  
 
The following table summarizes the detail of loans serviced for others for the periods indicated (in thousands):
 
                         
    December 31,  
    2010     2009     2008  
 
Residential real estate
  $ 116,627     $ 96,303     $ 27,260  
SBA loans
    8,557       17,509       18,645  
Commercial loans
    13,000       8,710       10,779  
                         
Total loans serviced for others
  $ 138,184     $ 122,522     $ 56,684  
                         


F-29


Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The gain on the sale of mortgage loans is included in loan related fee income on the Statement of Operations. For the periods indicated, servicing income and costs roughly equaled each other, and as a result, no servicing asset or liability has been recorded in each of the three periods.
 
3.   Other Real Estate Owned
 
Other Real Estate Owned “OREO” is recorded at fair value, less estimated selling expenses, at foreclosure. The carrying value of OREO is regularly evaluated and if necessary, the value is written down to reduce the carrying value to net realizable value. Changes in the carrying value of OREO are as follows for the periods presented:
 
Other Real Estate Owned Activity
 
                         
    2010     2009     2008  
    (Dollars in thousands)  
 
Balance, beginning of period, January 1
  $ 11,538     $ 4,541     $ 1,682  
Additions to OREO
    8,946       20,789       4,092  
Proceeds from sale of OREO
    (13,442 )     (9,830 )     (474 )
OREO valuation Adjustments in the period(1)
    (2,613 )     (3,962 )     (759 )
                         
Balance, end of period, December 31
  $ 4,429     $ 11,538     $ 4,541  
                         
 
 
(1) Amount includes chargedowns and gains/losses on sale of OREO
 
The balance of OREO decreased by $7.1 million during 2010, as the Bank worked higher levels of non-performing loans through the collection and foreclosure process. At December 31, 2010, OREO assets consisted of single family residences (49%), developed residential lots (23%), commercial buildings (18%), and raw land (10%). The Credit Risk Management and Asset Disposition groups continue to work rapidly to dispose of OREO properties through a combination of individual sales to investors, bulk sales to investors, and auction sales, generally as a last resort.
 
4.   Office Properties and Equipment
 
The components of office properties and equipment as of December 31, 2010 and 2009 are as follows (in thousands):
 
                 
    December 31,  
    2010     2009  
 
Land
  $ 5,225     $ 5,225  
Buildings and improvements
    35,770       36,168  
Construction in progress
    65       91  
Furniture and equipment
    18,815       18,018  
                 
      59,875       59,502  
Less accumulated depreciation
    (19,629 )     (17,077 )
                 
    $ 40,246     $ 42,425  
                 
 
The Company sold its headquarters building, the Sandpoint Center, in August 2009 to a third party for $24.8 million with financing provided by Panhandle State Bank. Because of the non-recourse financing terms offered by Panhandle State Bank, the transaction is accounted for utilizing the financing method for accounting purposes. Consequently, there was no gain recognized at the time of the transaction and the building will remain on the consolidated financial statements with depreciation and interest expense recognized over the life of the lease.


F-30


Table of Contents

INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Panhandle State Bank executed an agreement to lease the building from the purchaser with an initial term of 20 years with three successive options to extend the lease for an additional 10 years each. For all components of Office Properties and Equipment, total depreciation expense in the years ended December 31, 2010, 2009, and 2008 was approximately $3,127,000, $3,407,000, and $3,521,000, respectively.
 
5.   Goodwill and Other Intangible Assets
 
At December 31, 2010, intangible assets consisted primarily of core deposit intangibles (CDI), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the customer relationships associated with deposits. Prior to September 30, 2010, intangible assets also included goodwill, which represented the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method.
 
Goodwill is not amortized but is reviewed annually for impairment. Goodwill represents the difference between the value of consideration paid and the fair value of the net assets received in a business combination. The Company engaged an independent consultant at December 31, 2009 to assist management in evaluating the carrying value of goodwill. The evaluation followed the two-step process for evaluating impairment required by accounting guidance. In Step 1, the Company evaluated whether an impairment of goodwill might exist at December 31, 2009. This evaluation was based on a comparison of the estimated fair value of the Company in comparison to the book value of the Company’s common equity at December 31, 2009. The results of Step 1 indicated that a potential for impairment did exist at the end of 2009, requiring the Company to engage in Step 2 to determine the amount of the impairment, if any.
 
The Step 2 evaluation required the Company to calculate the implied fair value of its goodwill. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. The estimated fair value of the Company is allocated to all of the Company’s assets and liabilities, including any unrecognized identifiable assets, as if the Company had been acquired in a business combination and the estimated fair value of the Company is the price paid to acquire it. The Step 2 analysis indicated that the Company’s fair value at December 31, 2009 exceeded the net fair value of its assets by an amount greater than the carrying value of its goodwill. As a result, the Company determined that no impairment existed in 2009.
 
At September 30, 2010, the Company concluded there was a triggering event related to continuing depressed economic conditions and ongoing losses incurred by the Company. As a result, Intermountain performed a goodwill impairment evaluation using current information. In completing its goodwill impairment analysis, the Company used tangible common equity multiples and core deposit metrics from recent transactions to estimate the fair value of the Company at September 30, 2010. For Step 1, the fair value of the Company was less than the common book value of the Company prior to any goodwill adjustments, indicating a potential impairment. Under accounting guidance, a Step 2 analysis was required. In the Step 2 analysis, the fair value of the Company’s assets and liabilities was determined, using discounted cash flows based on the cash flow characteristics of the assets and liabilities and prevailing market interest rates. The fair value of the liabilities was subtracted from the fair value of the assets resulting in the fair value of the net assets. This was then reduced by the value of the preferred stock to derive the sum of the fair value of net assets supported by common equity. Since this number was higher at September 30, 2010 than the fair value of the Company calculated in Step 1, there was no excess company value that could be allocated to goodwill, resulting in a full impairment of the Company’s goodwill. Intermountain recorded a goodwill impairment charge of $11.7 million, reducing the balance of goodwill to zero, as compared to the December 31, 2009 balance of $11.7 million. Intermountain recorded this impairment loss as a charge to noninterest expense and an adjustment to the carrying value of goodwill.
 
As of December 31, 2010, the Company had other intangible assets related to acquired depository relationships of $310,000, as compared to $439,000 as of December 31, 2009. Other intangible assets are periodically assessed for impairment when certain triggering events occur that indicate the possibility of impairment. No impairment is considered to exist at this time.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The value of the core deposit intangibles is amortized over the estimated life of the depositor relationships. At December 31, 2010 and 2009, the net carrying value of core deposit intangibles was approximately $310,000 and $439,000, respectively. Accumulated amortization at December 31, 2010 and 2009 was approximately $1,086,000 and $957,000, respectively. Amortization expense related to core deposit intangibles for the years ended December 31, 2010, 2009 and 2008 was approximately $129,000, $136,000 and $147,000, respectively. Intangible amortization for each of the next five years is estimated to be as follows (in thousands):
 
         
Year Ending December 31,
  Amount  
 
2011
  $ 122  
2012
    116  
2013
    46  
2014
    26  
2015
     
         
    $ 310  
         
 
6.   Deposits
 
The components of deposits and applicable yields as of December 31, 2010 and 2009, are as follows (in thousands):
 
                 
    December 31,  
    2010     2009  
 
Demand
  $ 168,519     $ 168,244  
NOW and money market 0.0% to 4.65%
    327,891       340,070  
Savings and IRA 0.0% to 5.75%
    75,387       77,623  
                 
      571,797       585,937  
Certificate of deposit accounts:
               
Up to 1.99%
    152,751       80,312  
2.00% to 2.99%
    44,359       88,753  
3.00% to 3.99%
    1,312       51,158  
4.00% to 4.99%
    7,860       12,013  
5.00% to 5.99%
    754       1,148  
                 
      207,036       233,384  
                 
Total deposits
  $ 778,833     $ 819,321  
                 
 
The weighted average interest rate on certificate of deposit accounts was 1.66% and 2.43% at December 31, 2010 and 2009, respectively.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
At December 31, 2010, the scheduled maturities of certificate of deposit accounts are as follows (in thousands):
 
                 
    Weighted Average
       
Year Ending December 31,
  Interest Rate     Amounts  
 
2011
    1.45 %   $ 132,356  
2012
    1.61 %     32,337  
2013
    1.75 %     20,015  
2014
    2.70 %     16,738  
2015
    3.41 %     5,483  
Thereafter
    2.72 %     107  
                 
            $ 207,036  
                 
 
At December 31, 2010, the remaining maturities of certificate of deposit accounts with a minimum balance of $100,000 were as follows (in thousands):
 
         
    Amounts  
 
Less than three months
  $ 37,655  
Three to six months
    10,316  
Six to twelve months
    27,661  
Over twelve months
    57,018  
         
    $ 132,650  
         
 
The components of interest expense associated with deposits were as follows (in thousands):
 
                         
    Years Ended December 31,  
    2010     2009     2008  
 
NOW and money market accounts
  $ 2,434     $ 4,490     $ 5,850  
Savings and IRA accounts
    551       674       679  
Certificate of deposit accounts
    4,761       7,175       8,111  
                         
    $ 7,746     $ 12,339     $ 14,640  
                         
 
7.   Securities Sold Subject To Repurchase Agreements
 
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally are short-term agreements. These agreements are treated as financing transactions and the obligations to repurchase securities sold are reflected as a liability in the consolidated financial statements. The dollar amount of securities underlying the agreements remains in the applicable asset account of the consolidated financial statements. These agreements had a weighted average interest rate of 0.27% and 0.36% at December 31, 2010 and 2009, respectively. Approximately $75.1 million of the repurchase agreements mature on a daily basis, while the remaining balance of $30.0 million has a variable interest rate of 0.0% and matures in July 2011. The interest rate on the $30.0 million repurchase agreement reindexes quarterly and is based on 90 Day LIBOR. At December 31, 2010 and 2009, the Company pledged as collateral, certain investment securities with aggregate amortized costs of $126.2 million and $125.4 million, respectively. These investment securities had market values of $128.7 million and $125.7 million at December 31, 2010 and 2009, respectively.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
8.   Advances from Federal Home Loan Bank:
 
Panhandle State Bank, the banking subsidiary of Intermountain, has a credit line with FHLB of Seattle that allows it to borrow funds up to a percentage of its total assets, subject to collateralization requirements. Certain loans are used as collateral for these borrowings. At December 31, 2010 and 2009, this credit line represented a total borrowing capacity of $120.2 million and $121.6 million, of which $83.6 million and $69.9 million was available, respectively. The advances from FHLB at December 31, 2010 and 2009 are repayable as follows:
 
                                 
    December 31, 2010     December 31, 2009  
          Weighted Average
          Weighted Average
 
    Amount     Interest Rate     Amount     Interest Rate  
 
Due within 1 year
  $ 5,000       1.49 %   $ 15,000       3.59 %
Due in 1 to 2 years
                5,000       1.49  
Due in 2 to 3 years
    25,000       2.06              
Due in 3 to 4 years
    4,000       3.11       25,000       2.06  
Due in 4 to 5 years
                4,000       3.11  
                                 
    $ 34,000       2.10 %   $ 49,000       2.56 %
                                 
 
In September 2010, two FHLB advances matured, totaling $15.0 million. The Company did not take out any additional advances at that time.
 
Only member institutions have access to funds from the Federal Home Loan Banks. As a condition of membership, Panhandle is required to hold FHLB stock. As of December 31, 2010 and 2009, Panhandle held $2.3 million for both years of FHLB stock. The FHLB of Seattle announced that they would no longer pay dividends or redeem or repurchase capital stock until further notice. Each FHLB continues to monitor its capital and other relevant financial measures as a basis for determining a resumption of dividends and capital stock repurchases at some later date.
 
9.   Other Borrowings
 
The components of other borrowings are as follows (in thousands):
 
                 
    December 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  
                 
 
 
(1) In January 2003, the Company issued $8.0 million of Trust Preferred securities through its subsidiary, Intermountain Statutory Trust I. The debt associated with these securities bears interest on a variable basis tied to the 90-day LIBOR (London Inter-Bank Offering Rate) index plus 3.25%, with interest only paid quarterly. The rate on this borrowing was 3.55% at December 31, 2010. The debt is callable by the Company quarterly and matures in March 2033. During the third quarter of 2008, the Company entered into an interest rate swap contract with Pacific Coast Bankers Bank. The purpose of the $8.2 million notional value swap is to convert the variable rate payments made on our Trust Preferred I obligation to a series of fixed rate payments at 7.38% for five years, as a hedging strategy to help manage the Company’s interest-rate risk. See Note A and B.
 
(2) In March 2004, the Company issued $8.0 million of Trust Preferred securities through its subsidiary, Intermountain Statutory Trust II. The debt associated with these securities bears interest on a variable basis tied to the 90-day LIBOR index plus 2.8%, with interest only paid quarterly. The rate on this borrowing was


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
3.09% at December 31, 2010. The debt is callable by the Company quarterly and matures in April 2034. See Note A and B.
 
A) Intermountain’s obligations under the debentures issued to the trusts referred to above constitute a full and unconditional guarantee by Intermountain of the Statutory Trusts’ obligations under the Trust Preferred Securities. In accordance with ASC 810, Consolidation, (formerly FIN 46R, “Consolidation of Variable Interest Entities”), the trusts are not consolidated and the debentures and related amounts are treated as debt of Intermountain.
 
B) To conserve the liquid assets of the parent Company, the Company’s Board of Directors has decided to defer regularly scheduled interest payments on its outstanding Junior Subordinated Debentures related to its Trust Preferred Securities (“TRUPS Debentures”) beginning in December 2009. The Company is permitted to defer payments of interest on the TRUPS Debentures for up to 20 consecutive quarterly periods without default. During the deferral period, the Company may not pay any dividends or distributions on, or redeem, purchase or acquire, or make a liquidation payment with respect to the Company’s capital stock, or make any payment of principal or interest on, or repay, repurchase or redeem any debt securities of the Company that rank equally or junior to the TRUPS Debentures.
 
10.   Income Taxes
 
The tax effects of the principal temporary differences giving rise to deferred tax assets and liabilities as of December 31, 2010 and 2009 were as follows (in thousands):
 
                                 
    2010     2009  
    Assets     Liabilities     Assets     Liabilities  
 
Allowance for losses on loans
  $ 4,870     $     $ 6,500     $  
Investments
    523             2,729        
OTTI
    536             208        
OREO chargeoffs
    305             741        
NOL carryforward
    17,025             6,550        
Deferred gain on sale of premises
    1,079             1,079        
Deferred rent
                    231        
FHLB stock
          (74 )           (74 )
Office properties and equipment
          (1,507 )           (1,188 )
Deferred compensation
    409             392        
Core deposit intangible
    7                   (26 )
Goodwill
    287                    
Other
    366                   (60 )
                                 
Total
    25,638       (1,581 )     18,199       (1,348 )
Deferred tax asset valuation allowance
    (8,766 )                  
                                 
Total deferred income taxes
  $ 16,872     $ (1,581 )   $ 18,199     $ (1,348 )
                                 


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The components of Intermountain’s income tax provision are as follows (in thousands):
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Current income taxes (benefit):
                       
Federal
  $     $ (5,742 )   $ 1,228  
State
          (7 )     52  
                         
            (5,749 )     1,280  
Deferred income taxes (benefit):
                       
Federal
    (8,468 )     (6,949 )     (916 )
State
    (1,180 )     (1,662 )     (444 )
                         
Total deferred income tax (benefit)
    (9,648 )     (8,611 )     (1,360 )
Deferred tax asset valuation allowance
    8,766              
                         
Total income tax provision (benefit)
  $ (882 )   $ (14,360 )   $ (80 )
                         
 
The deferred federal and state tax expense includes a deferred tax asset valuation allowance of $8.8 million for the year ended December 31, 2010. The Company has recorded income tax net operating loss and tax credit carryforwards related to state tax losses.
 
A reconciliation of the income tax provision and the amount of income taxes computed by applying the statutory federal corporate income tax rate to income before income taxes for the years ended December 31, 2010, 2009 and 2008, is as follows (in thousands):
 
                                                 
    2010     2009     2008  
    Amount     %     Amount     %     Amount     %  
 
Income tax provision (benefit) at federal statutory rate
  $ (11,416 )     (35.0 )%   $ (12,695 )     (35.0 )%   $ 411       35.0 %
Tax effect of:
                                               
State taxes (net of federal tax benefit)
    (1,180 )     (5.1 )%     (1,667 )     (4.6 )%     (120 )     (10.2 )%
Goodwill impairment
    3,587       11.0 %                        
Deferred Tax Asset Valuation
    8,766       26.5 %                        
Tax exempt income and other, net
    (639 )     (0.1 )%     2       (0.0 )%     (371 )     (31.6 )%
                                                 
    $ (882 )     (2.7 )%   $ (14,360 )     (39.6 )%   $ (80 )     (6.8 )%
                                                 
 
The Company has recorded income tax net operating loss and tax credit carryforwards related to state tax losses in 2008 and 2009, as well as state and federal tax credits that cannot be used against current or prior period federal and state income The amount of deferred tax assets related to federal and state net operating loss carryforwards totaled $17.0 million at December 31, 2010 compared to $6.6 million at December 31, 2009. Intermountain used $5.9 million of the 2009 tax benefit as a loss carryback to offset taxes paid in previous years, resulting in an income tax receivable. Intermountain applied for the associated refund and received it in the second quarter of 2010.
 
Intermountain has performed an analysis of its uncertain tax positions and has not recorded any potential penalties, interest or additional tax in its financial statements as of December 31, 2010. Intermountain’s tax positions for the years 2007 through 2010 remain subject to review by the Internal Revenue Service. Intermountain does not expect unrecognized tax benefits to significantly change within the next twelve months.
 
During the third quarter of 2010, Intermountain determined that the negative evidence associated with three-year cumulative loss and continued depressed economic conditions outweighed the existing positive evidence.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Therefore, during the third quarter of 2010, Intermountain established a valuation allowance of $7.4 million against its deferred tax asset. Results for fourth quarter 2010 were materially consistent with expectations and as a result, the Company made no change to the net deferred tax asset of approximately $15.3 million that it expects to utilize over the next three years. As a result, due to the increase in its deferred tax assets (from operations) during the fourth quarter 2010, the Company increased its valuation allowance correspondingly by approximately $1.4 million. The fourth quarter increase in the deferred tax assets and corresponding increase to the valuation allowance resulted in no provision or benefit for quarter. The Company analyzes the deferred tax asset on a quarterly basis and may recapture a portion or all of this allowance depending on future profitability. At December 31, 2010, the net deferred tax asset totaled $15.3 million, net of a deferred tax asset valuation of $8.8 million, compared to a net deferred tax asset of $16.9 million, net of a deferred tax asset valuation of $0 at December 31, 2009. Excluding the original deferred tax asset valuation charge of $7.4 million, the effective tax rate was 20.0% for 2010.
 
Intermountain uses an estimate of future earnings and tax planning strategies to determine whether it is more likely than not that the benefit of its net deferred tax asset will be realized. In developing its estimate of future earnings, two different scenarios were used and the results of the two were probability weighted and averaged together to determine both the need for a valuation allowance and the size of the allowance. In conducting this analysis, management has assumed economic conditions will continue to be very challenging in 2011, 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 elevated credit losses in 2011, but at lower levels than those experienced in 2009 and 2010, 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 late 2011, as it is able to convert some of its cash position to higher yielding instruments, and reductions in operating expenses as credit costs abate and its other cost reduction strategies continue.
 
11.   Stock-Based Compensation Plans
 
The Company has historically maintained equity compensation plans that provided for the grant of awards to its officers, directors and employees. These plans consisted of the 1988 Employee Stock Option Plan, the Amended and Restated 1999 Employee Stock Option and Restricted Stock Plan and the 1999 Director Stock Option Plan. The plans provided for the grant of incentive stock options, nonqualified stock options and restricted stock awards (with respect to the employee plans) and nonqualified stock options and restricted stock awards (with respect to the director plan). Option awards were granted at a price not less than the greater of (i) the fair market value of the common stock or (ii) the net book value of the common stock at the time of the grant.
 
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, and 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 that 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.
 
During 2008, the Company granted restricted stock to its directors and employees from the 1999 Director Option Plan and the amended and restructured 1999 Employee Stock Option and Restricted Stock Plan. These restricted stock grants vest evenly over a five-year period. The Company did not grant stock options during 2010, 2009 or 2008.
 
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of options. In addition, option valuation models require the input of highly subjective assumptions, particularly for the expected term and stock price volatility. The employee stock options do not trade on a secondary exchange, therefore employees do not derive a benefit from holding stock options unless there is an appreciation in the market


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
price of the stock above the grant price. Such an increase in stock price would benefit all shareholders commensurately. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and our experience. The fair value of each restricted share is based on the fair market value at the date of grant. The Company records compensation expense based on the determined fair value.
 
Total stock-based compensation expense (benefit) recognized in the consolidated statement of operations for the years ended December 31, 2010, 2009, and 2008 was $361,000, $367,000, and ($110,000) before income taxes, respectively. Total expense related to stock-based compensation for 2010 and 2009 is comprised of restricted stock expense. The total net benefit related to stock-based compensation for 2008 is comprised of restricted stock expense, option expense and expense related to the 2006-2008 Long-Term Incentive Plan (“LTIP”). The LTIP expense was based on anticipated company performance over a 3-year period and had a 5-year vesting period. During the twelve months ended December 31, 2008, the Company reversed $640,000 in accrued incentives related to the LTIP as it appeared that asset growth and ROE targets required by the plan would not be met by the end of 2008. Of the total stock-based compensation expense during the year ended December 31, 2008, stock option net benefit was ($462,000), restricted stock expense was $348,000 and other expense related to stock options issued below market price at issue date totaled $4,000. The Company has no remaining unrecognized stock-based compensation expense related to the non-vested stock options outstanding at December 31, 2010.
 
Prior to the adoption of ASC 718, the Company presented all tax benefits resulting from the exercise of stock options as operating cash inflows in the consolidated statements of cash flows. ASC 718 requires the benefits of tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash inflows rather than operating cash inflows, on a prospective basis. This amount is shown as “Excess tax benefit from stock-based compensation” on the consolidated statement of cash flows.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Stock option transactions for all of the above described plans are summarized as follows:
 
                                         
                      Weighted
       
          Weighted
          Average
    Aggregate
 
    Number of
    Average
    Exercise Price
    Remaining life
    Intrinsic
 
    Shares     Exercise Price     Per Share     (Years)     Value(1)  
                            (Dollars in
 
                            (thousands)  
 
Balance, January 1, 2008
    487,329     $ 5.48     $ 2.79 — 13.20       3.12     $ 4,640  
Options granted
                                 
Options exercised
    (161,337 )     4.41       2.90 — 12.95               232  
Options forfeited and canceled
    (510 )     13.12       12.95 — 13.20                  
                                         
Outstanding, December 31, 2008
    325,482     $ 6.00     $ 2.79 — 13.20       3.01       50  
Options granted
                                 
Options exercised
    (12,721 )     4.41       3.70 — 4.42               7  
Options forfeited and canceled
    (58,075 )     4.51       4.42 — 12.95                
                                         
Outstanding, December 31, 2009
    254,686     $ 6.35     $ 2.79 — 13.20       2.69        
                                         
Options granted
                                 
Options exercised
                               
Options forfeited and canceled
    (17,402 )     7.38       2.79 — 13.09                
                                         
Outstanding, December 31, 2010
    237,284     $ 6.28     $ 3.67 — 13.20       1.85     $  
                                         
 
 
(1) The aggregate intrinsic value is before applicable income taxes, based on the Company’s $1.48 closing stock price at December 31, 2010, which would have been received by the optionees had all options been exercised on that date.
 
The following table presents information about the options as of December 31, 2010:
 
                                         
    Total Outstanding     Exercisable  
          Weighted
    Weighted
          Weighted
 
    Number
    Average
    Average
          Average
 
    of
    Exercise
    Remaining
    Number
    Exercise
 
Range of Exercise Price
  Shares     Price     Life (Years)     of Shares     Price  
 
$3.69 - $3.90
    60,387     $ 3.79       0.2       60,387     $ 3.79  
$4.15 - $4.83
    55,560       4.64       2.1       55,560       4.64  
$5.50 - $6.13
    77,660       5.62       2.1       77,660       5.62  
$12.12 - $13.20
    43,677       12.95       3.4       43,677       12.95  
                                         
      237,284     $ 6.28       1.9       237,284     $ 6.28  
                                         
 
During the years ended December 31, 2010, 2009, and 2008, the intrinsic value of stock options exercised was $0, $7,000 and $232,000, and the total fair value of the options vested was $0, $0 and $0, respectively.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
As of December 31, 2010, total unrecognized stock-based compensation expense related to non-vested restricted stock grants was approximately $389,000, which was expected to be recognized over a period of approximately 1.8 years.
 
Restricted stock transactions are summarized as follows:
 
                 
          Weighted
 
          Average
 
    Number of
    Grant Date Fair
 
    Shares(1)     Value(1)  
 
Nonvested shares
               
Balance, January 1, 2008
    64,295     $ 19.53  
Shares granted
    51,633       12.54  
Shares vested
    (15,256 )     18.10  
Shares forfeited and canceled
    (4,105 )     18.42  
                 
Balance, December 31, 2008
    96,567       16.06  
Shares granted
           
Shares vested
    (21,913 )     17.06  
Shares forfeited and canceled
    (1,936 )     17.79  
                 
Balance, December 31, 2009
    72,718       15.71  
                 
Shares granted
           
Shares vested
    (27,409 )     16.55  
Shares forfeited and canceled
    (4,801 )     15.91  
                 
Balance, December 31, 2010
    40,508     $ 15.12  
                 


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
12.   Earnings per Share
 
The following table (in thousands, except per share amounts) presents a reconciliation of the numerators and denominators used in the basic and diluted earnings per share computations for the years ended December 31 2010, 2009, and 2008.
 
                         
    Years Ended December 31,  
    2010     2009     2008  
 
Numerator:
                       
Net income — basic and diluted
  $ (31,736 )   $ (21,911 )   $ 1,254  
Preferred stock dividend
    1,716       1,662       45  
                         
Net Income available to commons stockholders
  $ (33,452 )   $ (23,573 )   $ 1,209  
Denominator:
                       
Weighted average shares outstanding — basic
    8,385,615       8,360,654       8,294,502  
Dilutive effect of common stock options, restricted stock awards
                220,334  
                         
Weighted average shares outstanding — diluted
    8,385,615       8,360,654       8,514,836  
                         
Earnings per share — basic and diluted:
                       
Earnings per share — basic
  $ (3.99 )   $ (2.82 )   $ 0.15  
Effect of dilutive common stock options
                (0.01 )
                         
Earnings per share — diluted
  $ (3.99 )   $ (2.82 )   $ 0.14  
                         
Anti-dilutive securities not included in diluted earnings per share:
                       
Common stock options
    237,281       251,014       68,973  
Common stock warrant
    1,431,674       560,041        
Restricted shares
    156,253                
                         
Total anti-dilutive shares
    1,825,208       811,055       68,973  
                         
 
Common stock equivalents were calculated using the treasury stock method.
 
At December 31, 2010, 2009 and 2008 there were 237,281, 251,014 and 68,973 options outstanding, respectively that were not included in the dilutive calculations above. For the year ended December 31, 2010, anti-dilutive common stock warrants increased due to decrease in the Company’s stock price at December 31, 2010 compared to December 31, 2009. For the years ended December 31, 2010, 2009 and 2008, 0, 0 and 9,000 shared performance stock awards have been included in the dilutive shares. These are related to the non-vested restricted stock awards, stock warrants and the 2003-2005 Long Term Incentive Plan.
 
13.   Stockholders’ Equity
 
On December 19, 2008, the Company issued 27,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, no par value with a liquidation preference of $1,000 per share (“Preferred Stock”) and a ten-year warrant to purchase up to 653,226 shares of Common Stock, no par value, as part of the Troubled Asset Relief ProgramCapital Purchase Program of the U.S. Department of Treasury (“U.S. Treasury”). The $27.0 million cash proceeds were allocated between the Preferred Stock and the warrant to purchase common stock based on the relative estimated fair values at the date of issuance. The fair value of the warrants was determined under the Black-Scholes model. The model includes assumptions regarding the Company’s common stock prices, dividend yield, and stock price


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
volatility as well as assumptions regarding the risk-free interest rate. The strike price for the warrant is $6.20 per share.
 
Dividends on the Preferred Stock will accrue and be paid quarterly at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. During the third quarter of 2009, the Board of Directors of the Company approved the deferral of regularly scheduled quarterly dividends on the Preferred Stock, beginning in December 2009. The shares of Preferred Stock have no stated maturity, do not have voting rights except in certain limited circumstances and are not subject to mandatory redemption or a sinking fund.
 
The Preferred Stock has priority over the Company’s Common Stock with regard to the payment of dividends and liquidation distributions. The Preferred Stock qualifies as Tier 1 capital. The agreement with the U.S. Treasury contains limitations on certain actions of IMCB, including the payment of quarterly cash dividends on the Company’s common stock in excess of current cash dividends paid in the previous quarter and the repurchase of its common stock during the first three years of the agreement. In addition, the Company agreed that, while the U.S. Treasury owns the Preferred Stock, the Company’s employee benefit plans and other executive compensation arrangements for its senior executive officers must comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008.
 
14.   Regulatory Capital
 
The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2010 and 2009, no retained earnings were available for dividend declaration without prior regulatory approval.
 
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct, material effect on the Company’s financial statements.
 
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
 
Intermountain and the Bank are required by applicable regulations to maintain certain minimum capital levels and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier I capital to average assets. Intermountain and the Bank plan to maintain their capital resources and regulatory capital ratios through the retention of earnings and the management of the level and mix of assets, and management is also exploring other opportunities to enhance capital levels. At December 31, 2010, Intermountain exceeded the minimum published regulatory capital requirements to be considered “well-capitalized” pursuant to Federal Financial Institutions Examination Council “FFIEC” regulations. However, the Bank executed an informal agreement with its primary regulators in the first quarter of 2010 which among other conditions, requires the Bank to increase its capital by $30 million by June 16, 2010 and maintain a 10% Tier 1 capital to average assets ratio. Although the Company was not able to meet the capital requirement by the June 16, 2010 deadline, management has taken numerous steps to satisfy this condition of the agreement, including seeking and obtaining shareholder approval to increase the Company’s authorized common stock to facilitate raising capital and devoting substantial time and resources to pursuing capital opportunities. The Company is actively engaged in negotiations with potential investors for a significant capital raise. However, there can be no assurance that we will be successful in raising the required capital.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table sets forth the amounts and ratios regarding actual and minimum core Tier 1 risk-based and total risk-based capital requirements, together with the amounts and ratios required in order to meet the published definition of a “well-capitalized” institution (in thousands).
 
                                                 
                Published
 
          Capital
    Well-Capitalized
 
    Actual     Requirements     Requirements  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
    (Dollars in thousands)  
 
As of December 31, 2010
                                               
Total capital (to risk-weighted assets):
                                               
The Company
  $ 76,090       11.32 %   $ 53,766       8 %   $ 67,207       10 %
Panhandle State Bank
    80,251       11.94 %     53,767       8 %     67,209       10 %
Tier I capital (to risk-weighted assets):
                                               
The Company
    67,639       10.06 %     26,883       4 %     40,324       6 %
Panhandle State Bank
    71,800       10.68 %     26,884       4 %     40,325       6 %
Tier I capital (to average assets):
                                               
The Company
    67,639       6.84 %     39,535       4 %     49,419       5 %
Panhandle State Bank
    71,800       7.26 %     39,535       4 %     49,419       5 %
As of December 31, 2009
                                               
Total capital (to risk-weighted assets):
                                               
The Company
  $ 100,553       12.52 %   $ 64,254       8 %   $ 80,317       10 %
Panhandle State Bank
    102,095       12.72 %     64,188       8 %     80,234       10 %
Tier I capital (to risk-weighted assets):
                                               
The Company
    90,442       11.26 %     32,127       4 %     48,190       6 %
Panhandle State Bank
    91,984       11.46 %     32,094       4 %     48,141       6 %
Tier I capital (to average assets):
                                               
The Company
    90,442       8.61 %     41,997       4 %     52,497       5 %
Panhandle State Bank
    91,984       8.67 %     42,431       4 %     53,039       5 %
 
Reflecting the Company’s ongoing strategy to prudently manage through the current economic cycle, the decision to maximize equity and liquidity at the Bank level has correspondingly reduced cash available at the parent Company. Consequently, to conserve liquid assets, in December 2009 the Company decided to defer regularly scheduled interest payments on its outstanding Junior Subordinated Debentures related to its Trust Preferred Securities (“TRUPS Debentures”), and regular quarterly cash dividend payments on its preferred stock held by the U.S. Treasury. 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. Under the terms of the preferred stock, if the Company does not pay dividends for six quarterly dividend periods (whether or not consecutive), Treasury would be entitled to appoint two members to the Company’s board of directors. Deferred payments compound for both the TRUPS Debentures and preferred stock. Although these expenses will be accrued on the consolidated income statements for the Company, deferring these interest and dividend payments will preserve approximately $477,000 per quarter in cash for the Company.
 
Notwithstanding the deferral of interest and dividend payments, the Company fully intends to meet all of its obligations to the Treasury and holders of the TRUPS Debentures as quickly as it is prudent to do so.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
15.   Commitments and Contingent Liabilities
 
The Company is engaged in lending activities with borrowers in a variety of industries. A substantial portion of lending is concentrated in the regions in which the Company is located. Collateral on loans, loan commitments and standby letters of credit vary and may include accounts receivable, inventories, investment securities, real estate, equipment and vehicles. The amount and nature of collateral required is based on credit evaluations of the individual customers.
 
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its banking customers. These financial instruments generally include commitments to extend credit, credit card arrangements, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
 
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, credit card arrangements, standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
 
The contractual amounts of these financial instruments representing credit risk at December 31, 2010, were as follows (in thousands):
 
         
Commitments to extend credit
  $ 144,825  
Credit card arrangements
  $ 12,802  
Standby letters of credit
  $ 12,006  
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit typically expire during the next 12 months.
 
Intermountain leases office space and equipment. As of December 31, 2010, future minimum payments under all of the Company’s non-cancelable operating leases that have initial terms in excess of one year are due as follow (in thousands):
 
         
Year Ending December 31,
  Amount  
 
2011
  $ 1,014  
2012
    939  
2013
    793  
2014
    784  
2015
    802  
Thereafter
    9,382  
         
    $ 13,714  
         
 
Rent expense under these agreements for the years ended December 31, 2010, 2009 and 2008 totaled approximately $1,119,000, $1,212,000, and $1,147,000, respectively.
 
The Company sold the Sandpoint Center, its Company headquarters, in August 2009 to a third party in a sale-leaseback transaction. Because of the non-recourse financing terms offered by Panhandle State Bank, the lease is treated as an operating lease utilizing the financing method for accounting purposes. Consequently, there was no


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
gain recognized at the time of the transaction and the building will remain on the consolidated financial statements with depreciation and interest expense recognized over the life of the lease. Panhandle State Bank executed an agreement to lease the building from the purchaser with an initial term of 20 years with three successive options to extend the lease for an additional 10 years each. At December 31, 2010, the future minimum lease payments for the Sandpoint Center and related sublease income are as follows (in thousands):
 
                 
    Sandpoint
       
    Center
       
    Lease
    Sub Lease
 
Year Ending December 31,
  Obligation     Income(1)  
 
2011
  $ 1,635     $ (89 )
2012
    1,635       (75 )
2013
    1,635       (64 )
2014
    1,717       (46 )
2015
    1,717       (32 )
Thereafter
    25,386       (59 )
                 
    $ 33,725     $ (365 )
                 
 
 
(1) Sublease income only includes income anticipated to be received under leases in effect at December 31, 2010. Additional space is available and may be subleased in the future.
 
16.   Employee Benefits Plans
 
The Company sponsors a 401(k) profit sharing plan covering employees meeting minimum eligibility requirements. Employee contributions are voluntary, and the Company may make elective contributions to match up to 50% of the employee’s contribution up to 8% of eligible compensation. The Company’s contributions to the plan for the years ended December 31, 2010, 2009, and 2008 totaled approximately $0, $321,000, and $681,000, respectively. Effective January 1, 2009 the Company decreased the contribution match from 50% to 25%. Effective January 1, 2010, the Company decreased the contribution match to 0%.
 
During 2003, the Company entered into a split dollar life insurance agreement on behalf of certain key executives. The policies were fully funded at purchase. The Company and the employee’s estate are co-beneficiaries, with each receiving a certain amount upon death of the employee. Also, as a result of the Snake River Bancorp, Inc. acquisition in November 2004, the Company also assumed a split dollar life insurance agreement with Snake River directors and key executives.
 
The Company has various compensation plans for employees. Contributions to the plan are at the discretion of the Board of Directors. Deferred compensation expense for the plans described below for the years ended December 31, 2010, 2009, and 2008 was approximately $862,000 $855,000, and $1,768,000, respectively. These various compensation plans are discussed in detail below.
 
  •  The Company has annual incentive plans for key employees. Amounts are generally paid annually within 75 days after each year end. The accrued balance at December 31, 2010 and 2009 for these plans was approximately $385,000 and $183,000, respectively.
 
  •  In 2003, the Company adopted a Supplemental Executive Retirement Plan (“SERP”). The SERP is a non-qualified unfunded plan designed to provide retirement benefits for two key employees of Intermountain. Participants will receive approximately $258,620 in annual payments for 10 years beginning at normal retirement age. Retirement benefits vest after ten years of continued service and benefits are reduced for early retirement. The disability benefit is similar to the reduced benefit for early retirement without any vesting requirements. The plan provides for a change in control benefit if, within one year of a change in


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
  control, the participant’s employment is terminated. The total amount accrued under the plan as of December 31, 2010 and 2009, was approximately $529,000 and $408,000, respectively.
 
  •  In April 2006, the Company implemented a long-term executive incentive plan, based on long-term corporate goals, to provide compensation in the form of stock grants to key executive officers. Participants were required to remain employed through the vesting period to receive any accrued benefits under the plan. At the end of 2008, the minimum threshold for payment under the plan was not met, and therefore, the Company cancelled all accruals and suspended the plan. For this stock-based compensation plan, the total adjustment to equity per ASC 718 at December 31, 2008 was $0 and the compensation expense recorded for the year ended December 31, 2008 was ($597,000). The Company had recorded compensation expense related to the long-term incentive plan through May 2008, then reversed expense totaling $640,000 in June 2008. The Company did not have a long-term executive incentive plan in place during 2010 or 2009.
 
  •  The Company has approved stock purchase agreements for certain key officers. Participants must remain employed to receive payments annually in December. The total amount paid under these agreements for 2010 and 2009 was approximately $415,000 and $508,000, respectively. Approximately $955,000 remained available to be awarded at December 31, 2010.
 
17.   Interest Rate Risk
 
The results of operations for financial institutions may be materially and adversely affected by changes in prevailing economic conditions, including rapid changes in interest rates, declines in real estate market values and the monetary and fiscal policies of the federal government. Like all financial institutions, Intermountain’s net interest income and its NPV (the net present value of financial assets, liabilities and off-balance sheet contracts), are subject to fluctuations in interest rates. Intermountain utilizes various tools to assess and manage interest rate risk, including an internal income simulation model that seeks to estimate the impact of various rate changes on the net interest income and net income of the bank. This model is validated by comparing results against various third-party estimations. Currently, the model and third-party estimates indicate that Intermountain is slightly asset-sensitive. An asset-sensitive bank generally sees improved net interest income and net income in a rising rate environment, as its assets reprice more rapidly and/or to a greater degree than its liabilities. The opposite is true in a falling interest rate environment. When market rates fall, an asset-sensitive bank tends to see declining income. Net interest income results for the past several years reflect this, as short-term market rates fell over the past 3 years, resulting in lower net interest income and net income levels, particularly in relation to the level of interest-earning assets.
 
To minimize the long-term impact of fluctuating interest rates on net interest income, Intermountain promotes a loan pricing policy of utilizing variable interest rate structures that associates loan rates to Intermountain’s internal cost of funds and to the nationally recognized prime or London Interbank Offered (“LIBOR”) lending rates. While this strategy has had adverse impacts in the current unusually low rate environment, the approach historically has contributed to a relatively consistent interest rate spread over the long-term and reduces pressure from borrowers to renegotiate loan terms during periods of falling interest rates. Intermountain currently maintains over fifty percent of its loan portfolio in variable interest rate assets.
 
Additionally, the extent to which borrowers prepay loans is affected by prevailing interest rates. When interest rates increase, borrowers are less likely to prepay loans. When interest rates decrease, borrowers are generally more likely to prepay loans. In the current credit markets, prepayment speeds have accelerated as borrowers refinance into lower rates, pay down debt to improve their financial position, or liquidate assets as part of problem loan work-out strategies. Prepayments may affect the levels of loans retained in an institution’s portfolio, as well as its net interest income. This has been the case over the past year, as Intermountain experienced rapid declines in loan volumes and resulting decreases in its net interest income. Prepayments are likely to slow in future periods as the economy improves and rates begin rising. Intermountain maintains an asset and liability management program intended to manage net interest income through interest rate cycles and to protect its income by controlling its exposure to changing interest rates.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
On the liability side, Intermountain seeks to manage its interest rate risk exposure by maintaining a relatively high percentage of non-interest bearing demand deposits, interest-bearing demand deposits, savings and money market accounts. These instruments tend to lag changes in market rates and may afford the Bank more protection in increasing interest rate environments, but can also be changed relatively quickly in a declining rate environment. The Bank utilizes various deposit pricing strategies and other borrowing sources to manage its rate risk.
 
As discussed above, Intermountain uses a simulation model designed to measure the sensitivity of net interest income and net income to changes in interest rates. This simulation model is designed to enable Intermountain to generate a forecast of net interest income and net income given various interest rate forecasts and alternative strategies. The model is also designed to measure the anticipated impact that prepayment risk, basis risk, customer maturity preferences, volumes of new business and changes in the relationship between long-term and short-term interest rates have on the performance of Intermountain. The results of modeling indicate that the estimated impact of changing rates on net interest income in a 100 and 300 basis point upward adjustment and a 100 and 300 basis point downward adjustment in market interest rates are within the guidelines established by management. While the impacts on net income of upward 100 and downward 100 basis point market rate adjustments are also within the established guidelines, the net income increase in a 300 basis point upward adjustment is above the guidelines. Because the results indicate improvements in net interest income and net income in these scenarios, it perceives its current level of interest rate risk as moderate. The scenario analysis for net income has been impacted by the unusual current year operating results of the Company, which increases the impact of upward adjustments.
 
Intermountain is continuing to pursue strategies to manage the level of its interest rate risk while increasing its long-term net interest income and net income: 1) through the origination and retention of a diversified mix of variable and fixed-rate consumer, business banking, commercial real estate loans, and residential loans which generally have higher yields than alternative investments; and 2) by increasing the level of its core deposits, which are generally a lower-cost, less rate-sensitive funding source than wholesale borrowings. There can be no assurance that Intermountain will be successful implementing any of these strategies or that, if these strategies are implemented, they will have the intended effect of reducing interest rate risk or increasing net interest income.
 
18.   Related-Party Transactions
 
The Bank has executed certain loans and deposits with its directors, officers and their affiliates. Related party loans and deposits are transacted as part of the Company’s normal course of business, and are not subject to preferential terms or conditions. The aggregate amount of loans outstanding to such related parties at December 31, 2010 and 2009 was approximately $139,000 and $226,000, respectively.
 
During the year, the balance of loans outstanding to directors and executive officers changed as follows (dollars in thousands):
 
         
    2010  
 
Balance, January 1,
  $ 226  
Reclassified
    (57 )
New
    741  
Sold
    (567 )
Repayment
    (204 )
         
Balance, December 31,
  $ 139  
         
 
Directors’ fees of approximately $226,000, $259,000, and $281,000 were paid during the years ended December 31, 2010, 2009, and 2008, respectively.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Two of the Company’s Board of Directors are principals in law firms that provide legal services to Intermountain. During the years ended December 31, 2010, 2009 and 2008 the Company incurred legal fees of approximately $3,000, $3,000, and $5,000, respectively, related to services provided by these firms.
 
In 2009, Curt Hecker, Intermountain’s Chief Executive Officer became a Director on the Board of Pacific Coast Bankers Bank (“PCBB”). The Bank utilizes PCBB as a correspondent bank and utilizes Bank Investment Group, a subsidiary of PCBB, for various management analytical reporting functions. During 2010, the Company paid PCBB and related companies $144,000 for services.
 
19.   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 (loss) 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 statement of operations 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 (loss), 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 December 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):
 
                                         
    December 31, 2010  
          Fair Value
    Receive Rate
    Pay Rate
    Type of Hedging
 
Maturity Date
  Notional Amount     (Loss)     (LIBOR)     (Fixed)     Relationship  
 
Pay Fixed, Receive Variable:
                                       
October 2013
  $ 8,248     $ (892 )     0.29 %     4.58 %     Cash Flow  
 


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    December 31, 2009  
          Fair Value
    Receive Rate
    Pay Rate
    Type of Hedging
 
Maturity Date
  Notional Amount     (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 $892,000 at December 31, 2010 and $678,000 at December 31, 2009 are included in other liabilities. The Company has deferred the interest payments on the related Trust Preferred borrowing beginning with the January 2010 scheduled remittance. As a result of the deferred interest payments, a calculation of the effectiveness of the hedge was prepared. It was concluded that although the hedge is generally effective, there is a small amount of ineffectiveness due to the delayed payments. The Company expensed $178,000 in interest expense in 2010 related to the ineffective portion of the hedge. The changes in fair value, net of tax, are separately disclosed in the statement of changes in stockholders’ equity as a component of comprehensive income (loss). Net cash flows from these interest rate swaps are included in interest expense on trust preferred debentures. The unrealized loss at December 31, 2010 is a component of comprehensive income (loss) for December 31, 2010. At December 31, 2010, Intermountain had $1.0 million in restricted cash and $190,000 in Pacific Coast Bankers Bank stock as collateral for the cash flow hedge. The following table provides a reconciliation of cash flow hedges measured at fair value during the periods indicated (in thousands):
 
                 
    Twelve Months Ended  
    December 31,
    December 31,
 
    2010     2009  
 
Unrealized loss at beginning of period
  $ (678 )   $ (985 )
Amount of gross loss recognized in earnings (loss)
    (178 )      
Amount of gross loss recognized in other comprehensive income (loss)
    (36 )     307  
                 
Unrealized loss at end of period
  $ (892 )   $ (678 )
                 
 
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 transactions by entering into offsetting derivatives executed with third parties upon the origination of a fixed rate loan with a customer. Derivative transactions executed as part of this program are not designated as ASC 815 hedge relationships and are, therefore, marked to market through earnings each period. In most cases the derivatives have mirror-image terms to the underlying transaction being hedged, which result in the positions’ changes in fair value offsetting completely through earnings each period. However, to the extent that the derivatives are not a mirror-image, changes in fair value will not completely offset, resulting in some earnings impact each period. Changes in the fair value of these interest rate swaps are included in other non-interest income. The following table summarizes these interest rate swaps as of December 31, 2010 and December 31, 2009 (in thousands):
 
                                 
    December 31, 2010     December 31, 2009  
    Notional
    Fair Value
    Notional
    Fair Value
 
    Amount     (Loss)     Amount     Gain  
 
Interest rate swaps with third party financial institutions
  $ 2,559     $ (38 )   $ 2,559     $ 57  
                                 
 
At December 31, 2010, loans receivable included ($38,000) of derivative assets and other liabilities included $0 of derivative assets related to these interest rate swap transactions. At December 31, 2010, the interest rate swaps had a maturity date of March 2019. At December 31, 2010, Intermountain had $72,000 in restricted cash as collateral for the interest rate swaps.

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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
20.   Fair Value of Financial Instruments
 
Fair value is defined under ASC 820-10 as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. In support of this principle ASC 820-10 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:
 
Level 1 inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
 
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 and liabilities measured at fair value on a recurring basis for the periods shown, 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 December 31, 2010, Using  
          Quoted Prices
             
          In Active
    Other
    Significant
 
    Fair Value
    Markets for
    Observable
    Unobservable
 
    December 31,
    Identical Assets
    Inputs
    Inputs
 
Description
  2010     (Level 1)     (Level 2)     (Level 3)  
 
Available-for-Sale Securities:
                               
U.S. treasury securities and obligations of U.S. government agencies
  $ 3,925     $     $ 3,925     $  
State and municipal securities
    5,230               5,230          
Residential mortgage backed securities (“MBS”)
    173,926             144,412       29,514  
Other Assets — Derivative
    (38 )                 (38 )
                                 
Total Assets Measured at Fair Value
  $ 183,043     $     $ 153,567     $ 29,476  
                                 
Other Liabilities — Derivatives
  $ 892     $     $     $ 892  
 


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                 
          Fair Value Measurements
 
          At December 31, 2009 Using  
          Quoted Prices
             
          In Active
    Other
    Significant
 
    Fair Value
    Markets for
    Observable
    Unobservable
 
    December 31,
    Identical Assets
    Inputs
    Inputs
 
Description
  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 December 31, 2010 and December 31, 2009 are summarized as follows (in thousands):
 
                         
    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
    (930 )     (95 )     (1,025 )
Included in other comprehensive income
    5,642             5,642  
Principal Payments
    (4,971 )           (4,971 )
Proceeds from Sales of Securities
    (2,463 )           (2,463 )
Transfers in and /or out of Level 3
                 
                         
December 31, 2010 Balance
  $ 29,514     $ (38 )   $ 29,476  
                         
 
         
    Fair Value Measurements
 
    Using Significant Unobservable
 
Description
  Inputs ( Level 3) Derivatives  
 
January 1, 2010 Balance
  $ 678  
Total gains or losses (realized/unrealized) included in earnings
    178  
Included in other comprehensive income
    36  
         
December 31, 2010 Balance
  $ 892  
         
 

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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
    Fair Value Measurements Using Significant
 
    Unobservable Inputs ( Level 3)  
Description
  Residential MBS     Derivatives     Total  
 
January 1, 2009 Balance
  $ 38,664     $     $ 38,664  
Total gains or losses (realized/unrealized)
                       
Included in earnings
    (526 )     57       (469 )
Included in other comprehensive income
    987             987  
Net accretion of premium/discount included in income
    853             853  
Principal Payments
    (7,742 )           (7,742 )
Transfers in and/or out of Level 3
                 
                         
December 31, 2009 Balance
  $ 32,236     $ 57     $ 32,293  
                         
 
         
    Fair Value Measurements
 
    Using Significant Unobservable
 
Description
  Inputs ( Level 3) Derivatives  
 
January 1, 2009 Balance
  $ 985  
Total gains or losses (realized/unrealized)
       
Included in earnings
     
Included in other comprehensive income
    (307 )
         
December 31, 2009 Balance
  $ 678  
         
 
Intermountain is required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis. The following tables present the carrying value for these financial assets for the periods indicated (in thousands):
 
                                 
          Fair Value Measurements
 
          At December 31, 2010, Using  
          Quoted Prices
             
          In Active
    Other
    Significant
 
    Fair Value
    Markets for
    Observable
    Unobservable
 
    December 31,
    Identical Assets
    Inputs
    Inputs
 
Description
  2010     (Level 1)     (Level 2)     (Level 3)  
 
Loans(1)
  $ 32,348     $     $     $ 32,348  
OREO
    4,429                   4,429  
Goodwill
                       
Net Deferred Tax Asset, net of valuation allowance
    15,291                   15,291  
                                 
Total Assets Measured at Fair Value
  $ 52,068     $     $     $ 52,068  
                                 
 
 
(1) Represents impaired loans, net, which are included in loans.
 

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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                 
          Fair Value Measurements
 
          At December 31, 2009, Using  
          Quoted Prices
             
          In Active
    Other
    Significant
 
    Fair Value
    Markets for
    Observable
    Unobservable
 
    Dec 31,
    Identical Assets
    Inputs
    Inputs
 
Description
  2009     (Level 1)     (Level 2)     (Level 3)  
 
Loans(1)
  $ 51,346     $     $     $ 51,346  
Other real estate owned
    11,538                   11,538  
                                 
Total Assets Measured at Fair Value
  $ 62,884     $     $     $ 62,884  
                                 
 
 
(1) Represents impaired loans, net, which are included in loans.
 
The loans above represent impaired, collateral dependent loans that have been adjusted to fair value. When a collateral dependent loan is identified as impaired, the impairment is measured using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals or other market-based valuation methods. If the value of the impaired loan is determined to be less than the recorded investment in the loan, the impairment is recognized and the carrying value of the loan is adjusted to fair value through the allowance for loan and lease losses. The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero.
 
OREO represents real estate which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, OREO is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents OREO for fair value adjustments based on the fair value of the real estate.
 
The goodwill amount above represents goodwill that has been adjusted to fair value. At September 30, 2010, the Company concluded there was a triggering event related to continuing depressed economic conditions and ongoing losses incurred by the Company. As a result, Intermountain performed a goodwill impairment evaluation using current information. In completing its goodwill impairment analysis, the Company used tangible common equity multiples and core deposit metrics from recent transactions to estimate the fair value of the Company at September 30, 2010. For Step 1, the fair value of the Company was less than the common book value of the Company prior to any goodwill adjustments, indicating a potential impairment. Under accounting guidance, a Step 2 analysis was required. In the Step 2 analysis, the fair value of the Company’s assets and liabilities was determined, using discounted cash flows based on the cash flow characteristics of the assets and liabilities and prevailing market interest rates. The fair value of the liabilities was subtracted from the fair value of the assets resulting in the fair value of the net assets. This was then reduced by the value of the preferred stock to derive the sum of the fair value of net assets supported by common equity. Since this number was higher at September 30, 2010 than the fair value of the Company calculated in Step 1, there was no excess company value that could be allocated to goodwill, resulting in a full impairment of the Company’s goodwill. Intermountain recorded a goodwill impairment charge of $11.7 million, reducing the balance of goodwill to zero, as compared to the December 31, 2009 balance of $11.7 million. Intermountain records impairment losses as charges to noninterest expense and adjustments to the carrying value of goodwill.
 
The net deferred tax asset valuation represents a valuation allowance that was recognized in the third and fourth quarter of 2010. Intermountain uses an estimate of future earnings, and an evaluation of its loss carryback ability and tax planning strategies to determine whether or not the benefit of its net deferred tax asset will be realized. Intermountain assessed whether it was more likely than not that it would realize the benefits of its deferred

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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
tax asset. During the third quarter of 2010, Intermountain determined that the negative evidence associated with three-year cumulative loss and continued depressed economic conditions outweighed the positive evidence. Therefore, during the third quarter of 2010, Intermountain established a valuation allowance of $7.4 million against its deferred tax asset. The Company added an additional $1.4 million valuation allowance against its deferred tax asset in the fourth quarter of 2010. The Company analyzes the deferred tax asset on a quarterly basis and may recapture a portion or all of this allowance depending on future profitability. At December 31, 2010, the net deferred tax asset totaled $15.3 million, net of a deferred tax asset valuation of $8.8 million.
 
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 $153.6 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 $29.5 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, a limited market exists for these securities at December 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 December 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 FHLB indications, which are backed by significant experience 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 the pricing service and the FHLB pricing 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.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In evaluating securities in the investment portfolio for OTTI, the Company evaluated the following factors:
 
  •  The length of time and the extent to which the market value of the securities has been lower than their cost;
 
  •  The financial condition and near-term prospects of the issuer or obligation, including any specific events, which may influence the operations of the issuer or obligation such as credit defaults and losses in mortgages underlying the security, changes in technology that impair the earnings potential of the investment or the discontinuation of a segment of the business that may affect the future earnings potential; and
 
  •  The intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.
 
Based on the factors above, the Company has determined that two securities comprised of a pool of mortgages were subject to OTTI as of December 31, 2010. The following table presents the OTTI losses for the years ended December 31, 2010 and 2009.
 
                                 
    2010     2009  
    Held To
    Available
    Held To
    Available
 
    Maturity     For Sale     Maturity     For Sale  
 
Total other-than-temporary impairment losses
  $     $ 1,529     $     $ 1,751  
Portion of other-than-temporary impairment losses transferred from (recognized in) other comprehensive income(1)
          (701 )           (1,225 )
                                 
Net impairment losses recognized in earnings(2)
  $     $ 828     $     $ 526  
                                 
 
 
(1) Represents other-than-temporary impairment losses related to all other factors.
 
(2) Represents other-than-temporary impairment losses related to credit losses.
 
The OTTI recognized on investment securities available for sale primarily relates to two non-agency collateralized mortgage obligations for 2010 and one non-agency collateralized mortgage obligation for 2009. Each of these securities holds various levels of credit subordination. These securities were valued by third-party pricing services using matrix or model pricing methodologies and were corroborated by broker indicative bids. We estimated the cash flows of the underlying collateral for each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity. Assumptions utilized vary from security to security, and are influenced by factors such as underlying loan interest rates, geographic location, borrower characteristics and vintage, and historical experience. We then used a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure. These cash flows were then discounted at the interest rate used to recognize interest income on each security. We review the actual collateral performance of these securities on a quarterly basis and update the inputs as appropriate to determine the projected cash flows.
 
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


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
significant assumptions required estimating future cash flows on these loans, and the rapidly changing and uncertain collateral values underlying the loans. Extreme volatility and the lack of relevant and current sales data in the Company’s market areas for various types of collateral create additional uncertainties and require the use of multiple sources and management judgment to make adjustments. Loans subject to nonrecurring fair value measurement were $32.3 million at December 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 December 31, 2010 totaled $4.4 million, all of which was classified as Level 3.
 
Interest Rate Swaps.  During the third quarter of 2008, the Company entered into an interest rate swap contract with Pacific Coast Bankers Bank. The purpose of the $8.2 million notional value swap is to convert the variable rate payments made on the Trust Preferred I obligation (see Note 7 — Other Borrowings) to a series of fixed rate payments for five years, as a hedging strategy to help manage the Company’s interest-rate risk. This contract is carried as an asset or liability at fair value, and as of December 31, 2010, it was a liability with a fair value of $892,000.
 
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 December 31, 2010, it was an asset with a fair value of ($35,000). 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 December 31, 2010, it was an asset with a fair value of ($3,000).
 
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 December 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.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The estimated fair value of the financial instruments as of December 31, 2010 and December 31, 2009, are as follows (in thousands):
 
                                 
    December 31, 2010     December 31, 2009  
    Carrying
          Carrying
       
    Amount     Fair Value     Amount     Fair Value  
 
Financial assets:
                               
Cash, cash equivalents, restricted cash and federal funds sold
  $ 147,956     $ 147,956     $ 104,835     $ 104,835  
Interest bearing certificates of deposit
                862       862  
Available-for-sale securities
    183,081       183,081       181,784       181,784  
Held-to-maturity securities
    22,217       22,112       15,177       15,397  
Loans held for sale
    3,425       3,425       6,574       6,574  
Loans receivable, net
    563,228       578,080       655,602       683,300  
Accrued interest receivable
    4,360       4,360       5,077       5,077  
BOLI
    8,765       8,765       8,397       8,397  
Financial liabilities:
                               
Deposit liabilities
    778,833       741,426       819,321       786,704  
Borrowings
    155,643       156,200       160,760       160,469  
Accrued interest payable
    1,406       1,406       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 and bank-specific 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.


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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.
 
21.   Quarterly Financial Data (Unaudited)
 
The following tables present Intermountain’s condensed operations on a quarterly basis for the years ended December 31, 2010 and 2009 (dollars in thousands, except per share amounts):
 
                                 
    Year Ended December 31, 2010  
    First
    Second
    Third
    Fourth
 
    Quarter     Quarter     Quarter     Quarter  
 
Interest income
  $ 11,616     $ 11,599     $ 11,737     $ 11,097  
Interest expense
    (3,197 )     (2,839 )     (2,711 )     (2,038 )
Provision for losses on loans
    (6,808 )     (4,914 )     (10,058 )     (2,232 )
                                 
Net interest income (loss) after provision for losses on loans
    1,611       3,846       (1,032 )     6,827  
Other income
    2,523       2,998       2,817       2,686  
Operating expenses
    (11,560 )     (11,277 )     (21,918 )     (10,139 )
                                 
Loss before income taxes
    (7,426 )     (4,433 )     (20,133 )     (626 )
Income tax provision (benefit)
    (3,117 )     (1,934 )     4,169        
                                 
Net loss
  $ (4,309 )   $ (2,499 )   $ (24,302 )   $ (626 )
Preferred stock dividend
    419       427       432       438  
                                 
Net loss available to common stockholders
  $ (4,728 )   $ (2,926 )   $ (24,734 )   $ (1,064 )
                                 
Earnings per share — basic
  $ (0.56 )   $ (0.35 )   $ (2.95 )   $ (0.13 )
Earnings per share — diluted
  $ (0.56 )   $ (0.35 )   $ (2.95 )   $ (0.13 )
Weighted average shares outstanding — basic
    8,372,315       8,388,128       8,390,877       8,390,877  
Weighted average shares outstanding — diluted
    8,372,315       8,388,128       8,390,877       8,390,877  
 


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                 
    Year Ended December 31, 2009  
    First
    Second
    Third
    Fourth
 
    Quarter     Quarter     Quarter     Quarter(1)  
 
Interest income
  $ 14,347     $ 14,483     $ 13,603     $ 11,434  
Interest expense
    (4,445 )     (4,271 )     (3,942 )     (3,512 )
Provision for losses on loans
    (2,770 )     (18,684 )     (3,756 )     (11,119 )
                                 
Net interest income (loss) after provision for losses on loans
    7,132       (8,472 )     5,905       (3,197 )
Other income
    3,513       2,704       3,107       2,667  
Operating expenses
    (10,773 )     (12,666 )     (12,956 )     (13,235 )
                                 
Loss before income taxes
    (128 )     (18,434 )     (3,944 )     (13,765 )
Income tax provision (benefit)
    (9 )     (7,432 )     (1,702 )     (5,217 )
                                 
Net loss
  $ (119 )   $ (11,002 )   $ (2,242 )   $ (8,548 )
Preferred stock dividend
    414       415       416       417  
                                 
Net loss available to common stockholders
  $ (533 )   $ (11,417 )   $ (2,658 )   $ (8,965 )
                                 
Earnings per share — basic
  $ (0.06 )   $ (1.37 )   $ (0.32 )   $ (1.07 )
Earnings per share — diluted
  $ (0.06 )   $ (1.37 )   $ (0.32 )   $ (1.07 )
Weighted average shares outstanding — basic
    8,348,238       8,362,402       8,365,836       8,365,836  
Weighted average shares outstanding — diluted
    8,348,238       8,362,402       8,365,836       8,365,836  
 
 
(1) In 2009, the Company reversed $1.0 million in interest income related to nonperforming and charged off loans.
 
22.   Parent Company-Only Financial Information
 
Intermountain Community Bancorp became the holding company for Panhandle State Bank on January 27, 1998. The following Intermountain Community Bancorp parent company-only financial information should be read in conjunction with the other notes to the consolidated financial statements. The accounting policies for the parent company-only financial statements are the same as those used in the presentation of the consolidated financial statements other than the parent company-only financial statements account for the parent company’s investments in its subsidiaries under the equity method (in thousands).

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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Condensed Balance Sheets
 
                 
    December 31,  
    2010     2009  
 
Assets:
               
Cash
  $ 2,163     $ 1,942  
Certificates of Deposit
          862  
Investment in subsidiaries
    80,473       107,374  
Prepaid expenses and other assets
    434       218  
                 
Total assets
  $ 83,070     $ 110,396  
                 
Liabilities:
               
Other borrowings
  $ 16,527     $ 16,527  
Other liabilities
    7,190       5,242  
                 
Total liabilities
    23,717       21,769  
Stockholders’ Equity
    59,353       88,627  
                 
Total liabilities and stockholders’ equity
  $ 83,070     $ 110,396  
                 
 
Condensed Statements of Operations
 
                         
    Years Ended December 31,  
    2010     2009     2008  
 
Interest income
  $ 1     $ 72     $ 2  
Interest expense
    (1,035 )     (1,843 )     (1,778 )
                         
Net interest income (expense)
    (1,034 )     (1,771 )     (1,776 )
Equity in net earnings of subsidiary
    (30,267 )     (19,188 )     3,371  
Other income
          673       703  
Operating expenses
    (434 )     (1,625 )     (1,044 )
                         
Net income (loss)
  $ (31,735 )   $ (21,911 )   $ 1,254  
                         


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INTERMOUNTAIN COMMUNITY BANCORP
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Condensed Statements of Cash Flows
 
                         
    Years Ended December 31,  
    2010     2009     2008  
 
Cash flows from operating activities:
                       
Net income
  $ 31,736     $ (21,911 )   $ 1,254  
Equity income from subsidiary
    30,267       19,188       (3,371 )
Depreciation
          291       296  
Other
    828       211       (161 )
                         
Net cash used in operating activities
    (641 )     (2,221 )     (1,982 )
                         
Cash flows from investing activities:
                       
Investments in and advances to subsidiaries
          3,250       (23,000 )
Sale of premises and equipment
          21,284        
Purchase of office properties
          (131 )     (210 )
                         
Net cash provided by (used in) investing activities
          24,403       (23,210 )
                         
Cash flows from financing activities:
                       
Proceeds from other borrowings
          23,000       3,657  
Proceeds from preferred stock issuance, net of expenses
                26,908  
Proceeds from exercise of stock options
          56       186  
Repayment of borrowings
          (47,086 )     (41 )
Cash dividends paid to preferred stockholders
          (1,223 )      
                         
Net cash provided by (used in) financing activities
          (25,253 )     30,710  
                         
Net change in cash and cash equivalents
    (641 )     (3,071 )     5,518  
Cash and cash equivalents, beginning of year
    2,804       5,875       357  
                         
Cash and cash equivalents, end of year
  $ 2,163     $ 2,804     $ 5,875  
                         


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